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Lord Morris of Handsworth: My Lords, the Minister will be aware that immigration and migration are two sides of the same coin. In the light of the figures

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offered to your Lordships’ House by the noble Lord, Lord Waddington, could the Minister tell us what has been the net figure of immigration to the United Kingdom over the past two or three years?

Lord West of Spithead: My Lords, I thank my noble friend Lord Morris for that question. In 2006, the total international migration inflow was 591,000—I am trying to do some quick maths here—and the outflow was 400,000. So the answer is 191,000.

Banking (Special Provisions) Bill

4.20 pm

Lord Davies of Oldham: My Lords, I beg to move that this Bill be now read a second time.

In the Chancellor’s Statement which I repeated in this House on Monday I set out the reasoning behind the Bill. Let me at the outset remind noble Lords why it is being introduced. It is a general Bill. However, it is being introduced now only because the powers it contains are necessary to take Northern Rock into a period of temporary public ownership. As I said on Monday, 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 since Monday. The Government guarantee arrangements which the Chancellor announced last year remain in place and will continue to do so.

Let me also 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 is also agreement that the bank’s long-term future must lie ultimately in the private sector. Even those who advocated nationalisation in the autumn did so on the basis that it could be only a temporary step—a stepping stone to return it to 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 met the three principles that we set out last year: to support financial stability, to protect depositors’ money, and to protect the interests of the taxpayer.

The Government made it clear throughout that all options, including a temporary period of public ownership, remained on the table. 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, involving a payment below the market rate to the Government for continuation of their guarantee arrangements and for the financing which we would be putting in place. A subsidy on the scale required would not provide best value for the

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taxpayer. The private sector rather than the taxpayer would secure the vast majority of the value created over the period ahead. That 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 risk in this period of market uncertainty. We have therefore made the decision we have to protect taxpayers, after having weighed up all the various competing considerations. In deciding which option was best for the taxpayer, it was clear that a temporary period of public ownership was the better option.

The Chancellor has appointed Ron Sandler as the chief executive for Northern Rock. The new board and the bank will operate at arm's length from the Government with commercial autonomy for their decisions. The Chancellor has said that he will publish shortly the framework agreement which will outline how the relationship between the Government and Northern Rock will work.

Lord Forsyth of Drumlean: My Lords, I apologise to the Minister for interrupting. I have read the debate in the other place thoroughly, but there was no mention from the Chancellor about what happened to the bid from Lloyds-TSB in the earlier part of the summer which, had it been accepted, would have avoided the run on the bank. Can the Minister say why that bid fell through? It is widely believed in the City that Lloyds was prepared to take over the bank on the basis of a loan facility being made available at a commercial rate of interest. Why did that original private sector alternative fall through? Why was it rejected?

Lord Davies of Oldham: My Lords, full consideration was given to that proposal. It did not meet all the Government’s requirements and that is why it was turned down. We are entering temporary public ownership because we have rejected bids that had undergone much longer consideration than the Lloyds proposal, which was never a firm proposal put to the Government but an outline of what might be possible. We have rejected firm bids that had involved considerable work and expenditure because they did not meet the needs of the taxpayer. The Government have borne that consideration in mind throughout. Of course, we wanted to make sure that the problems with Northern Rock did not increase financial instability, which was a danger, but at the same time any action that we took had to meet the obvious requirement of safeguarding the interests of the taxpayer.

The House will recognise that this Bill is being introduced in exceptional circumstances. We have introduced this legislation only because the Government need to take Northern Rock into temporary public ownership. I think the House will understand that it is in everyone’s interest for that to happen as quickly as possible. That will avoid any uncertainty or unnecessary delay that could destabilise the bank, allow customers and staff to know where they stand and give Ron Sandler the certainty that he needs to develop his

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business strategy for Northern Rock and to ensure that business can continue as usual and that value is protected. However, the House must, of course, have the opportunity to debate this legislation in detail and to provide scrutiny and that is why we are considering Second Reading today. The Committee stage and other stages of the Bill will be taken tomorrow.

I believe that the arrangements strike the right balance between the need to resolve the position of Northern Rock as quickly as possible and the need for proper parliamentary scrutiny. The Bill has been deliberately drafted so that banks or building societies could be acquired only in very special circumstances. The power to acquire them will last only 12 months. These powers are not intended to anticipate the longer term reforms on which the Government are currently consulting; rather they will in time be replaced by provisions in the proposed banking reform Bill that will seek to achieve broadly similar ends. In the mean time they provide additional scope for action, if it is needed.

As is customary at Second Reading I shall outline the crucial elements of the Bill. But first I draw the House’s attention to issues that have arisen in recent days, not least at yesterday evening’s helpful meeting with Peers when a number of issues were identified. First, I shall address Granite, Northern Rock’s securitisation programme; secondly, the legislation as it relates to building societies; thirdly, give my initial reaction to the important report of the Delegated Powers Committee of this House, which we received only today; and, fourthly, deal with concerns about the impact of Northern Rock on other banks and reassure noble Lords about the competitive impact of this.

Questions have been raised about Granite, Northern Rock’s securitisation programme. It may be helpful if I clarify the key facts about this structure. Granite is a special purpose vehicle, a trust, whose sole purpose has been to provide Northern Rock with a cost effective form of financing for its business. Northern Rock sold mortgages to Granite and used the proceeds to fund its business. The Granite vehicle funded the purchase of these mortgages by issuing bonds in the capital markets. This kind of structure is a common feature for many high street banks and building societies. No new mortgage assets have been transferred to Granite since the Bank of England started providing ongoing financial support to Northern Rock.

Secondly, as the Chief Secretary to the Treasury made clear during the Second Reading debate in the other place, Granite is an independent legal entity owned by its shareholders. Northern Rock has no shares in Granite. Granite and Granite only is liable to its bondholders under any scenario. There would be no benefit to the taxpayer in seeking to bring Granite into public ownership. The existence of Granite is no barrier to the onward sale of Northern Rock.

Thirdly, contrary to some suggestions, the Financial Services Authority advises that Northern Rock’s mortgage book is of good quality and its assets exceed its liabilities. The Government’s loan and guarantee arrangements are secured against the high-quality assets

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on Northern Rock’s balance sheet to which Granite and its bondholders have no access. The Government have not provided any guarantee arrangements for Granite bondholders.

Fourthly, it is a matter for the new management team to assess their commercial relationship with Granite going forward and to decide whether they wish to maintain the arrangement or let it run off in an orderly way to be replaced by alternative funding sources. This decision would ultimately have no impact on the taxpayers’ exposure.

Finally, Granite is a privately-owned company. Her Majesty’s Revenue and Customs has a legal obligation to maintain taxpayer confidentiality. Therefore, it will be appreciated that I am unable to offer comment on the tax affairs of named individuals or organisations. I appreciate that the House has sought further details of Granite’s structure, which are set out in the attached technical note.

Lord Barnett: My Lords, I wonder whether my noble friend will allow me to intervene. In the last published statement of the report and accounts of Northern Rock, published last January, there is a reference by the chief executive in his report to total securitisation of £40.2 billion. Does Granite have any charge on the assets of Northern Rock before the Bank of England’s charge?

Lord Davies of Oldham: My Lords, first, I emphasise that this issue regarding Granite was raised in the other place yesterday. The Chancellor of the Exchequer has written to the Liberal Democrats about the whole position regarding Granite, and he has put a copy of that letter in the Library so that we can all see exactly that position. My noble friend will recognise that I have rather a great deal to deliver in my speech, and I am conscious of the time constraints, so I hope that my noble friend will accept that reply.

Lord Higgins: My Lords, the noble Lord said at the beginning of his remarks on Granite that its sole purpose was to raise money for Northern Rock. Is it true that it was in fact set up as a charitable trust that was supposed to help disabled children? That is alleged, and I know not whether it is true. Perhaps the noble Lord could confirm that. Secondly, is it true that the audited accounts of Northern Rock included the Granite assets?

Lord Davies of Oldham: My Lords, as I have indicated, there is a letter in the Library that spells out all the aspects regarding Granite, but I will emphasise the most significant point that the noble Lord has addressed and which is of concern. Granite has no claim on the assets of Northern Rock. What we are dealing with in this Bill is the position of Northern Rock, with Granite being entirely separate from that situation. As I have indicated, the assets of Northern Rock are greater than the liabilities incurred by the taxpayer. I realise that I am foreshortening—

Lord Marlesford: My Lords, before the noble Lord leaves the world of mineralogy, could he tell us about another SIV which I understand is part of Northern Rock; Dolerite?

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Lord Davies of Oldham: My Lords, as this speech is going to take quite a long time, I might be able to answer that question by the time I get to the end. At the moment I cannot reply to the noble Lord. He will have to show a degree of patience.

Lord Newby: My Lords, I am sorry to interrupt the noble Lord but he referred to a letter which allegedly has been sent to the Liberal Democrats. As I am about to speak in this debate, it would be extremely helpful if this letter could be produced, because it is no use putting in the Library a letter of which I am unaware or sending it to someone else when we are having a debate here and now. Could he, one of his colleagues or an official possibly bring a copy into the House while the debate is going on?

Lord Davies of Oldham: My Lords, that seems an entirely reasonable request. When I indicated that the letter had been sent to the Liberal Democrats, I must say that the name of the noble Lord, Lord Newby, was the first that sprung to mind. If he has not received it, then of course I will take the most urgent steps to ensure that he does. I realise the urgency of that.

Lord Higgins: My Lords, I apologise for persisting, but is it true, as was alleged, that the Granite assets appeared in the accounts of Northern Rock?

Lord Davies of Oldham: My Lords, I cannot answer that question directly, but I have given the noble Lord a clear indication that the Government are dealing with Northern Rock; they are not dealing with Granite, which is entirely separate from Northern Rock and has no claim at all on the assets of Northern Rock. I cannot go further than that and I intend if I may, with the leave of the House—

Earl Ferrers: My Lords, this is actually quite important, because my noble friend said in his question that Granite appears as an asset of Northern Rock. He wanted to know whether or not that is the case. I can see that the noble Lord has difficulty and has referred to a letter that he wrote which was placed in the Library but which no one seems to have received. Perhaps it might be a good idea to suspend the debate while people get sight of that letter, if it is so important.

Lord Davies of Oldham: My Lords, I am taking steps to remedy the position with regard to the letter, I hope in very good time. I hope that the noble Earl will recognise that we have a fairly lengthy debate ahead of us. I am giving assurances that this debate and this Bill revolve around the institution, as far as the immediate issues are concerned, of Northern Rock, and Granite has no claim on its assets. We are dealing with Northern Rock and its assets—that is the issue of exposure to the taxpayer. Everything that we debate on this Bill will revolve around those issues.

Other issues have been raised. Concern has been expressed that the Bill provides powers to deal not just with Northern Rock but with building societies,

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which, as noble Lords know, are subject to a very different legislative regime from that for banks. We are seeking powers in the Bill to modify building societies legislation to facilitate the giving of certain financial assistance by the Bank of England to building societies, just as the Government can for banks. Those provisions are in Clause 11. The Chancellor has been clear throughout that although we have no current plans to apply the Bill to other institutions, at present we lack the powers to act effectively if a building society were to run into difficulties. This clause represents sensible contingency planning.

Another feature, which I indicated a few moments ago, is the report from the Delegated Powers Committee, whose reports are taken with justifiable seriousness by the House and the Government. It was only a short while before I came into the Chamber that I was able to read the report. It is an important committee; the House respects its work and its report is a serious one. It is critical in ensuring that powers to introduce laws through delegated powers, which generally do not get as much scrutiny in this House as other legislation, are appropriate. That is the work of the committee. I want to inform the House that I have read the report and that we believe that there is a case for being able to move quickly by making orders and regulations using the negative procedure—which is what we propose in the legislation. But we have just received the report and I give this undertaking—that we will consider the recommendations very carefully and, of course, act accordingly.

A fourth issue about which concern has been expressed is that Northern Rock will be able to compete unfairly with other banks in the retail savings and banking market. Let me assure the House that this will not be so: we will not approve a business plan that would provide for unfair competition. The bank is, of course, in receipt of public support. As the House knows, that aid is subject to EU state aid restrictions. Clearly, interpretation of these laws is a matter for the European Commission, but I would be surprised if the Commission interpreted these rules in such a way as to allow a bank to expand its business aggressively on the back of public support. That is a clear, important and reasonable constraint on the business plan that Northern Rock will develop. As I have explained, we intend to submit a restructuring aid plan to the Commission shortly, which will need to reassure it that Northern Rock does not abuse its position.

Lord Naseby: My Lords, the Minister says that this bank may not expand its business, yet it has 20 per cent of the mortgage market. Having done that, it has found itself bankrupt. Now, the constraint in going to Europe is that that is post-event. What worries the rest of the banking sector and the building society movement is that this bank will continue to trade as it does today: with the highest ISA rate of interest and the highest deposit banking rate in the market, thereby pinching business away from the open market with government funds—the taxpayers’ funds.

Lord Davies of Oldham: My Lords, all of those facts will be clear to the European Commission. It is also the case that our own competitive authorities

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have a direct interest in this matter, and I want to assure the House that the Government will not approve a business plan from Northern Rock—and nor will one be submitted—unless it meets the obvious constraints that I have outlined, with Northern Rock not taking advantage of a privileged competitive position.

In addition, I want to emphasise—

Lord Campbell of Alloway: My Lords, that is not, as I hope that the noble Lord will agree, what the Government will approve. What my noble friend just said is relevant to whether there has been a fundamental distortion of competition within a financial service in this country. It is not a precedent for the Government to give an assurance; this is a matter for the Commission and for the European Court of Justice. There will be, if it so finds, fines and orders for compensation; those will all have to be paid, not by the Government but by the taxpayer.

Lord Davies of Oldham: Well, my Lords, it is clear that the future position of Northern Rock will be subject to the judgment of the European Commission, as the noble Lord has indicated, and that of our own competition authorities. Let me add a further dimension: the Chancellor has asked officials to have urgent meetings and discussions with the British Bankers’ Association—

Baroness Kingsmill: My Lords, I know from my personal capacity that the European Commission is looking at this deal very closely and with a particular view to ensuring that the state aid rules are enforced to avoid any unfair competition. We also have a powerful and strong financial services sector here, which is also watching like a hawk. It will be among the first to raise complaints if it sees any likelihood of any risk to competition. Speaking as a former competition regulator, I see no risk or harm to competition in these arrangements. I reassure the House that the state aid rules will make it very certain that there will be no possibility of any unfair competition by these arrangements.

Lord Davies of Oldham: My Lords, the House will appreciate the authority with which my noble friend speaks on this matter. She greatly reinforces my humble attempt to identify the importance of the European Commission’s position. I also emphasise that our own competition laws are not negligible. I am grateful to my noble friend. My third point is that we are asking officials to have urgent meetings and discussion with the British Bankers’ Association, the Building Societies Association and others to reassure them on that position.

Even if all those factors were not the case, I could offer three further points of reassurance. First, Ron Sandler has already made it clear that he is acutely aware of competition issues and has no intention of running the bank in a way that abuses its present, temporary state ownership. Secondly, the clear strategic aim that we have set for the management is to move the bank off all forms of government support, including government guarantees, as rapidly as possible. The bank’s business plan, which must be agreed with the

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Government, needs to be directed towards that aim. A business plan built on abusing the present temporary government support, which in turn reflects the present distorted state of financial markets, would clearly not be consistent with the aims that we have set out for the management, because it would not be sustainable.

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