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The noble Baroness, Lady Sharp, and the noble Lord, Lord Elystan-Morgan, talked about Wales. The new clause applies only to children in England. Wales is aware of the Secretary of State’s policy reasons for taking a new duty but is content at this stage not to take one itself. Wales has indicated that it does not have the immediate problems of financial propriety encountered by the Secretary of State in incurring expenditure under contracts, by virtue of Section 68 of the Government of Wales Act 2006. It therefore does not see the need to take the power at this stage.

In relation to financial propriety and contracting, the amendment will enable the Secretary of State to meet the Government’s financial propriety rules when he incurs expenditure in contractual relationships with providers in the third and private sectors. The noble Baroness, Lady Sharp, asked me to set out more fully why this was necessary and I am glad to do so. While there are powers to provide financial assistance through grants in Sections 14 and 15 of the Education Act 2002, there is no general statutory provision that provides the Secretary of State with authority to incur expenditure under contracts in relation to his children’s services activities, as there currently is for education. A general provision such as this can be construed as providing the Secretary of State with statutory authority to incur expenditure under a contract, because the provision is general in nature and silent as to how resources are to be applied for that purpose. One effect of taking the duty would be to plug the gap and remove the need for the

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department in future to seek specific legislation for a particular project related to children’s well-being that entailed expenditure under contracts. It would also reduce the number of circumstances in which the department needed to seek the Treasury’s permission to rely on the sole authority of the Appropriation Act. In particular, this would enable contracts to be let nationally to better support local authorities to deliver children’s services—for example, by providing expertise to assist in the establishment of Sure Start children’s centres, which I think would be welcomed on all sides of the Committee.

The noble Baroness, Lady Howarth, asked me whether the provision changes the legal duties of local authorities. It involves no changes in their legal duties, which will continue as they are now, and it does not make any changes to the funding regime for local authorities, including that balance between generally allocated and ring-fenced resources, which would not be subject to any change simply as a result of the amendment.

The noble Baroness, Lady Sharp, asked whether the definition of care leavers would be set out more fully elsewhere. We intend to do that. Subsection (6) of the new clause will give the Secretary of State power to make regulations in this regard. The noble Baroness raised some other, more detailed and technical issues in respect of the Barnardo’s response, to which I shall respond in writing.

On Question, amendment agreed to.

Baroness Crawley: I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.

Northern Rock

3.47 pm

Lord Davies of Oldham: My Lords, with the leave of the House, I shall repeat a Statement made in the other place by my right honourable friend the Chancellor of the Exchequer on Northern Rock. The Statement is as follows:

“I hope the House will understand that it was necessary for me to issue a statement yesterday ahead of the markets opening so that trading in Northern Rock shares could be suspended this morning. It was also essential to allow the management of Northern Rock time to tell its employees what was happening so that the bank could open as normal this morning.“As I said yesterday, the Government have decided to introduce legislation to take Northern Rock into a period of temporary public ownership. I took this decision after full consultation with the Bank of England and the Financial Services Authority. “I made the draft Bill available in the Vote Office and in the House of Lords since this morning. I did so to provide as much time as possible for right

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honourable and honourable Members, as well as the other place, to examine the provisions of the Bill. If the House agrees, the Bill will begin its parliamentary passage tomorrow. I have also arranged for the principal opposition spokesmen to be briefed by Treasury officials today. “It is important for savers and depositors to be reassured that their money remains safe and secure. Northern Rock will continue to operate as a bank on a commercial basis. It has been open for business as usual today. The Government guarantee that arrangements which I announced last year will remain in place and will continue to do so. Borrowers will continue to make their payments in the normal way. I have appointed Ron Sandler as the executive chair. He is in Newcastle today and has had meetings with the company and its employees.“The new board and the bank will operate at arm’s length from the Government, with commercial autonomy for their decisions. I will publish shortly the framework agreement, which will outline how the relationship between the Government and Northern Rock will work.“As I said yesterday, the board’s proposals will also cover the Northern Rock Foundation, which is very important to the north-east. The board will commit to guaranteeing a minimum income of £15 million per year in 2008, 2009 and 2010. This will be paid directly by Northern Rock, as now, and would be a condition of any sale if it were sold in this time. The new board will be asked to identify a long-term future for the foundation.“I shall set out the reasons for the decisions that I made and outline what the new legislation will do. Before that, let me remind the House that last September there was almost universal agreement that the Government were right to intervene to save this bank, to stop its problems spreading into the wider banking system. There was also agreement that ultimately the long-term future of this bank must lie in the private sector. Even those who advocated nationalisation in the autumn did so on the basis that it could only be a temporary step—a stepping stone—to return it the private sector when market conditions made that possible.“Throughout last autumn and from the start of this year, the Government wanted to test all the options and to give the shareholders and the management time to find a solution which was acceptable and which met the three principles that I set out last year. These were: to support financial stability; to protect depositors’ money; and to protect the interests of the taxpayer. I have said throughout that all options, including a temporary period of public ownership, remained on the table.“As the House will know, the Government had two private sector bids to consider. Each of them was tested against the option of a temporary period of public ownership to see which met our objectives and decision principles, including the best value for the taxpayer. Both proposals involved a degree of risk for taxpayers and very significant implicit subsidy from the Treasury,

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involving a payment below the market rate to the Government for continuation of the guarantee arrangements and for the financing we would be putting in place. “Each proposal had its pros and cons. The Virgin proposal, for instance, would have brought a new brand and management. However, the taxpayer would only have seen any share of the private sector's return if the value of the business to its investors had reached at least £2.7 billion. The board's proposal would have involved a similar level of subsidy, but it had other disadvantages compared with Virgin—it would bring in less new capital and the business would be dependent for longer on government guarantees for new retail deposits. A subsidy on the scale required would not provide best value for the taxpayer; the private sector rather than the taxpayer would secure the vast majority of the value created over the period ahead. This would be a poor reflection of the balance of risk borne by the two sides.“By contrast, under public ownership the taxpayer will secure the entire proceeds from the future sale of the business in return for bearing the risks in this period of market uncertainty. That is why we made the decision that we did. Therefore, we have made the decision we have to protect taxpayers, after weighing up all the various competing considerations. In deciding which was the best option for the taxpayer, it was clear that a temporary period of public ownership was the better option.“I shall go through the contents of the Bill in more detail at Second Reading tomorrow. We have deliberately drafted the Bill to ensure that a bank can be acquired only in certain tightly defined circumstances, and that power will last for only 12 months. I have already announced a consultation which will lead to permanent legislation to deal with situations such as this in future. The Bill potentially applies to a range of financial institutions. I want to make it clear that the Government have no intention at present to use the Bill to bring any institution other than Northern Rock into temporary public ownership. The Bill also provides for appropriate compensation for shareholders. As I explained on 21 January, that is on the basis that all financial assistance provided by the Bank or the Treasury, including the guarantee arrangements for depositors, was withdrawn and that no further public financial assistance, apart from ordinary market assistance from the Bank, would be provided to the deposit-taker. I believe that this is fair to both shareholders and to the taxpayer. “The Bill also makes provision for transfer of the bank, or parts of it, into the private sector. “Let me remind the House that, following the problems that started in the United States last summer, Northern Rock was unable to raise the billions of pounds it needed to stay in business. We were right to save the bank. We were right to do everything that we possibly could to find a private-

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sector buyer on terms that were acceptable to the taxpayer. Because of current market conditions, we are right, now, to take over this bank on a temporary basis because that is what is in the interest of the taxpayer.“There were choices to be made. We could have let the bank go under. But the risks to the wider financial system, for savers and the general public, were not acceptable. Having made the decision to save the bank and maintain financial stability and protect savers, we are now taking this decision to protect the taxpayer”.

I commend the Statement to the House.

3.56 pm

Lord De Mauley: My Lords, I thank the Minister for repeating this Statement on Northern Rock. I wish that I could say that I welcomed it, but I do not. I am sorry for the Minister for having to read it, as, indeed, I am sorry for the Chancellor, who is out of his depth and a puppet for a failed Prime Minister—a Prime Minister who created the conditions for the failure of Northern Rock in the first place.

This Statement is the third that we have had from the Government since the crisis began attempting to justify the Government’s handling of the Northern Rock fiasco and the wider effects that their policy has had on the United Kingdom’s financial services industry. We have gone from bad to worse. This Statement marks the final nail in the coffin for the Government’s reputation for economic competence. Government dithering and delay over the past five months have led to a complete failure of their policy. We now face the first nationalisation of a bank in modern times.

We on these Benches are opposed to the nationalisation of Northern Rock. In particular, we are opposed to the methods by which the Government wish to achieve that. Noble Lords will have seen the 17-clause Bill, published today, to allow the nationalisation of any bank or building society in the United Kingdom. The Government intend to allow just 20 hours of scrutiny on this Bill across both Houses of Parliament. With £100,000 million of taxpayers’ money committed to Northern Rock, that comes out at £83 million a minute.

What possible justification is there for such a flagrant disregard of parliamentary scrutiny? In the past, this House has, with reluctance, agreed to hasten legislation dealing with Northern Ireland or terrorism, but where is the terrorism angle here?

Given that this policy has been five months in the making and that a large Bill is ready, what is the conceivable case for acting in this way? There is no problem about managing Northern Rock; Mr Sandler is already in there. There is no market sensitivity; the facts are out there. Indeed, the only thing that is likely to trouble the markets internationally are the immense bank-grabbing powers in the Bill. What the Government are proposing will double the taxpayers’ liability to Northern Rock from £55 billion to £110 billion, and will place responsibility for the eventual repayment of this liability, as well as the

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ongoing running of Northern Rock’s mortgage book, in politicians’ hands. How can they possibly justify such an expansion of the taxpayers’ liability and such a blow to the United Kingdom’s reputation abroad?

Can the Minister confirm that the Bill gives the Government power to alter any Act of Parliament applying to banks in the United Kingdom by order? Can he confirm that it gives the power to backdate regulations applying to banks and building societies? Why has the Treasury flung so much money at this company when with, say, Equitable Life, it slunk past on the other side of the road? What is the difference between one financial institution with an over-ambitious business plan and another?

The Government have failed to explain how they intend this nationalisation to proceed. They claim that it will be temporary but give no timeframe for how long they expect the bank to be in public ownership. With such a huge public liability the Government must undertake to publish full accounts to Parliament every quarter. We should see immediately an audit of the assets and liabilities and the advice provided by Goldman Sachs. After all, we taxpayers will own all the assets, we will bear all the liabilities and we are paying for the advice.

There is no credible explanation of how nationalisation will affect the running of Northern Rock. The Chancellor has made great claims of arm’s length government and business as usual but has glossed over the inevitable distortion that a nationalised bank will have in a competitive banking system. It is even unclear whether to continue in this way will be legal under EU law. Indeed, is this proposal compatible with EU rules on state aid? Why do the Government expect the European Commission to allow these proposals without providing for a run-down of Northern Rock’s lending and deposit-taking operations? How will the Prime Minister respond to criticism from the EU of protectionism and state subsidisation—the very crimes he has accused it of? If the Government tell the EU Commission that Northern Rock was fundamentally viable, why should that argument not be used against them in litigation by shareholders?

How can Ron Sandler continue business as usual when the business model has been shown to have failed? Will Northern Rock continue, with government assistance, to offer 125 per cent mortgages, 0.5 per cent bonuses for existing savers and 6.49 per cent savings rates? If so, will it not be arguable that it has an unfair advantage over its competitors, and what will the consequences be? Will the Government really manage to keep at arm’s length if Northern Rock starts to foreclose on mortgages? How will they respond when their direct appointee sends in the bailiffs, forecloses on mortgages and sacks staff?

There is nothing in the Bill to stop the Government from directing every aspect of Northern Rock’s business and they have said nothing in this Statement or elsewhere about the details of how Northern Rock strategy is to be decided. The Government must allow proper parliamentary scrutiny of the running of Northern Rock to ensure that public assets are handled responsibly.

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The Minister stated that the framework agreement would be published shortly. Does this mean before the Bill is debated here or will the details of this nationalisation be decided at the Government’s convenience after the Bill has been rammed through? Does anyone believe there will not be a hotline burning between the Prime Minister and Mr Sandler?

There are two other small issues. Northern Rock currently sponsors Newcastle United—hardly a winner either, right now. Will “UK taxpayer” be put on the lads’ shirts next week? Will the Minister assure us that taxpayers will not be sucked into sponsoring football? In view of the public concern over expenses in another place, will the Government now require all Ministers to register any loans or savings accounts they have with Northern Rock?

I again put forward our preferred solution for Northern Rock. As my honourable friends in another place have repeatedly stated, instead of reverting to Labour practices of the 1970s, the Government should set up a Bank of England-led reconstruction. Such an administration would not extend the taxpayer’s liability and certainly would not make the taxpayer responsible for paying back the wholesale depositors who enjoyed a premium to take the risk of investing in Northern Rock. Instead, the Bank of England, as a court-appointed special protective administrator, would be responsible for running down Northern Rock in an orderly way, protecting both depositors and the taxpayer. As under a normal administration, shareholders’ rights would be suspended until these creditors were repaid, and would eventually own whatever value was left if Northern Rock were to exit the administration. Administration would keep politicians away from the management and protect the United Kingdom’s reputation abroad. Indeed, it is mystifying why the Government are not taking this route. The Government intend to implement administrative provisions for future crises. Why are they not pursuing this route for the current one?

Do the Government expect further bank failures to justify the immense powers that they are taking? What is this Bill but Mr Tony Benn’s dream Bill of the nationalisation of banks, which went into old Labour’s infamous programmes of 1976 and 1983? What place does nationalisation have in a modern Britain?

4.05 pm

Lord Newby: My Lords, smugness is a particularly irritating character trait, and therefore I will avoid the temptation to say too loudly, “We told you so”, about the need to nationalise Northern Rock. It has taken the Government more than three months to get where they ought to have got to in the autumn, but they have now taken the right decision. Public ownership must be preferable to a bad private sale that left the risks and liabilities with the Government and the profits with the private bidder.

I fear that the Conservatives appear to have a very poor grasp of history when it comes to banking sector nationalisation. Can the Minister confirm that the last nationalisation of a privately-owned bank occurred in 1994, when the National Mortgage Bank was nationalised by the Conservative Government, who paid the private

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owners the princely sum of £1 in compensation? Does the Minister agree that in reality there is no third way between private and public ownership? Does he agree that the Conservative proposal that the bank be run down by the nationalised Bank of England is simply nationalisation by another name?

If the Tories find themselves fulminating angrily to cover their lack of a realistic policy for Northern Rock, the Government still have plenty of difficult issues to answer themselves. First, what steps are they proposing to take to establish the quality of the underlying assets to be taken over? Will the Government insist on a full independent audit of the Northern Rock loan book? Will they accept that we can have no faith in the FSA to be the sole arbiters of the strength of that loan book? What instructions have the Government given Mr Sandler about the commercial policies that Northern Rock must now adopt? Can we have an assurance that the imprudent lending policies that played such a part in Northern Rock’s demise will stop and that in future the bank will adopt a more prudent lending policy? Will he ensure that such a principle is embodied in either the primary or secondary legislation that will come forward in the next few days?

When, as they must, the Government submit Northern Rock’s business plan to Brussels, can the Minister give an assurance that Parliament will be given sight of it so that we can be reassured that taxpayers’ money is being adequately safeguarded? Have the Government yet made any estimate of the contractions in Northern Rock’s operations that are likely to be required and the number of jobs involved? We recognise that this decision by the Government will bring considerable pain to shareholders. When the Government talk about “appropriate compensation” do not the tests of appropriateness in fact mean that no compensation will be paid at all?

We were pleased to hear that some measures were being taken to safeguard the situation of the Northern Rock Foundation. How have the Government arrived at the figure of £15 million rather than any other figure? How in reality do they intend to safeguard the position of the Northern Rock Foundation when the bank returns to private ownership?

Many Northern Rock stakeholders have been alarmed in recent days by indecision on the one hand and on the other hand being unsure of the consequences of the decision that has been taken. Can the Government give an assurance that adequate effort and energy are being used to ensure that staff, depositors and mortgage holders in Northern Rock are adequately informed about the situation and are reassured that their personal circumstances will not be adversely affected in the very near term?

In our view belatedly, the Government now have the opportunity to repay the taxpayers’ loan, to recoup any costs through a profitable sale in better market conditions in due course and to provide a positive future for the bank. We on these Benches will support the legislation when it comes to your Lordships’ House later this week, but equally we want to ensure that the Government’s stewardship of Northern Rock is more effectively exercised in the future than it has been over the past six months.

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4.09 pm

Lord Davies of Oldham: My Lords, I am grateful to both noble Lords, although I am slightly more grateful to the noble Lord, Lord Newby, than to the noble Lord, Lord De Mauley, who I understand of course is substituting for the noble Baroness, Lady Noakes, who we all regret cannot be with us today, due to injury.

The noble Lord, Lord De Mauley, substituted for detailed analysis a huge amount of rhetoric, which ill befits the situation. After all, some of the rhetoric could have been devoted to identifying just what the Conservative Party thinks its policy should be on Northern Rock, rather than taking every opportunity to be critical without at any stage advancing a position other than what seems to be the very worst of all—that the Government should allow Northern Rock to go into administration. That result would mean that the shareholders had absolutely nothing in return and, for taxpayers, would mean much less security with regard to the contributions made and undertakings given to Northern Rock that need to be safeguarded. That is the burden of the Government’s position.

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