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With one exception, which I will come to later, we were satisfied that all the delegated powers were appropriate. What deeply concerned us, however, was that all the powers in the Bill will require only the negative resolution procedure. The exercise of a power to nationalise banks or take over their assets will, particularly in the case of major banks such as Northern Rock, be extremely important and in all probability extremely controversial, as in this case it plainly is. Your Lordships’ House, and I imagine also the House of Commons, would normally expect to enjoy a level of scrutiny provided by the affirmative procedure for any order exercising those powers. Under the Bill as it now stands, however, they do not get that.

The Government’s reasoning for this is set out in paragraph 23 of the memorandum sent to the Delegated Powers Committee, which states:

That sounds very convincing. However, the memorandum completely misunderstands the position. In fact, the affirmative resolution procedure would normally be much quicker in getting certainty. If a draft order is laid before Parliament, the Government, with their control of the timetable, can get the order debated and

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approved unconditionally on the next working day. If the negative resolution procedure is used, the order, when it is made, has hanging over it for 40 working days the possibility of annulment. The annulment of an order would not undo what has already been done so it would not give full effect to the wishes of Parliament but would cause confusion and possibly chaos.

The difficulties envisaged in the Treasury memorandum can indeed be overcome. One difficulty is that in your Lordships' House an affirmative resolution order, but not a negative resolution order, is subject to a hybridity procedure, which would delay its approval. That is not given as a reason by the Treasury in its memorandum but it may well be in its mind. However, it would be simple—and has been done on a number of occasions—to amend the Bill to include in it a provision that orders made under it shall not be treated as hybrid orders, even if they technically are. Indeed, the noble Lord, Lord De Mauley, has already put down an amendment to that effect.

Another possible cause of delay is that under Standing Order No. 73 of your Lordships' House no Motion to approve an affirmative instrument can be moved until it has been reported on by the Joint Committee on Statutory Instruments, and has been laid before the House. But in the case of urgency, Standing Order No. 73 can be, and has been, suspended. More difficult problems arise if the urgent action needs to be taken during a recess. That is in practice likely to arise only during the Summer Recess. There are two ways of dealing with that. One is by making use of the power under Clause 14 to make retrospective orders backdated to the date on which the Treasury declared its intention to make the order. For example, it could be used if the Chancellor of the Exchequer published a draft order on Friday, backdated it to that date and obtained the approval of both Houses on the draft early next week. Alternatively, this problem could be dealt with by inserting into the Bill a power to make an affirmative order having immediate effect, if it is strictly necessary to do so, but lapsing after 28 days unless it has been approved by both Houses. This would be no worse than making a negative order which would remain subject to annulment for 40 days. The committee concluded that the problems of delay are at least as bad, and in many circumstances worse, under the negative procedure than under the affirmative procedure, and that the possible urgency of order-making is not a ground for deciding which procedure should be used.

Let me express the views of the committee on the specific powers in the light of that conclusion. We had no hesitation in concluding that orders made under Clauses 3, 4 and 6 should be made by the affirmative process. We also believe that provision for compensation provided by orders under Clauses 5 and 7 are likely to be contentious and need a level of scrutiny provided by the affirmative procedures.

Clause 11(1) is the only provision in the Bill where we do not think that delegation is appropriate. Clause 11(1) is extremely wide:



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It is so wide as to say that it is in effect what is usually described as a skeleton power.

Clause 11(3) provides a non-exhaustive list of provisions under the Building Societies Act 1986 that can be modified. Clause 11 is discussed in paragraphs 60 to 64 of the memorandum, which is printed as an annexe to our report. Paragraph 62 states:

It must be aware what the terms of that order are going to be. There should therefore be no difficulty in replacing Clauses 11(1) and Clause 11(3) with a single provision giving exhaustive power to modify the Building Societies Act 1986 or any other statutes that will need alteration for the purposes of the proposed new order.

The width of Clause 11(1) is neither necessary nor appropriate. As I said, in effect it is a skeleton power to create new legislation with none of the detail provided for powers under Clauses 3 and 6. Any consequential amendment of the statute not listed in Clause 11 could be made under the power to make consequential amendments under Clause 12. Even if the alteration just suggested is made, the affirmative procedure here is necessary. This is a very important power whose exercise plainly needs the affirmative procedure. I note that the powers under Clause 11 are not limited to 12 months, unlike those in Clauses 3 and 6, because no sunset clause applies to Clause 11.

Finally, there is Clause 12. So far as it creates powers to modify or disapply provisions in primary legislation, these are in effect Henry VIII powers and should in accordance with usual practice be subject to the affirmative procedure.

There is nothing in the recommendations of the Delegated Powers Committee, except to that extent in relation to Clause 11, which will reduce the powers of the Government to make orders. What our recommendations will do is increase the ability of both Houses to scrutinise the orders properly, and it is plainly desirable that that should happen. The Treasury’s objection to the use of the affirmative procedure is, as I said earlier, based on a misunderstanding of how that system works. I hope that the Government will accept our report and will table amendments that will make that the procedure under the Bill. I have noted that there is already an objection to Clause 11 standing part and amendments have been tabled to Clause 13, which go somewhat further than the committee’s report.

I express the thanks of the committee to our Clerk and legal advisers for their remarkable work, which was done under great time constraints.

5.54 pm

Lord Marland: My Lords, I declare an interest as a financial backer of the management team bid, which I do not disagree with the noble Lord, Lord Lawson, is the worst option. Prior to supporting the management team, I explored whether I, with a bunch of partners, would make an offer for Northern Rock, but it was apparent that the narrow timetable that the Government established would make that impossible, and the provision of information was so inadequate that many months of due diligence would be required. In supporting the

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management team—modestly, I would suggest—it was also apparent that it did not have access to the full extent of information required. Indeed, we had to pledge on the following basis. I quote from that pledge:

In other words we were not going to get the plan until after we had committed. Lack of clarity on Granite also aptly demonstrates our problems in evaluating the plan.

I am sure noble Lords will agree that any Government who are genuinely trying to sell something should adopt a different course of action and it is my view that nationalisation was the Government’s intention from the outset, but the combination of dither and spin were the feeble methods they used to draw out their decision. Further evidence of this is confirmed by the Government’s refusal to accept an offer of £2 a share plus a £10 billion government line of credit guarantee from Lloyds TSB. The Government told Lloyds TSB that they did not have the funds to guarantee support of a £10 billion line of credit. Noble Lords should please not get their noughts in the wrong place, because I estimate that the Government are now providing a £100 billion guarantee compared with the £10 billion they were initially asked to guarantee. How good does this Lloyds TSB offer look now as the Government are about to be on the receiving end of years of litigation from Northern Rock shareholders and even the European Commission?

We are addressing a Bill to shut the gate after the horse has bolted. This Bill does not address the two major levels of regulation imposed by this Government on the finance industry that have been referred to: namely, the so-called Financial Services Authority—the thorn in the side of most businesses—which has failed, despite its endless imposition of form filling and so-called regulation, to see this £100 billion disaster coming, and the directors who, despite endless directives on the code of conduct of the role of directors, failed also to control or envisage this shambles. And, to boot, the so-called “independent” Bank of England decision-making was hijacked by the Chancellor and became neutered in this whole mess.

This Bill predicts that this event will happen all over again. It permits the Government to act like this in the next 12 months because that is the latitude we are planning to give them. It takes building societies virtually outside the scope of parliamentary accountability or day-to-day running. And—surprise, surprise—the Government do not have to return to Parliament to use powers to resolve another event of this nature.

Several questions remain unanswered. We need to know what steps have been taken by the FSA and the Treasury to investigate the books of similar companies and protect the taxpayer from a further event. We also need to know why this business was not put into administration and an orderly run-down implemented and why is it still allowed to provide finance against a flawed business model. For example, it remains the only bank prepared to offer 125 per cent mortgages. Incredible. Why is the bank run by a

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board whose members apparently have limited knowledge of the industry, but do have the significance of being trusted allies of the Prime Minister? What steps are being taken by the Government to re-establish our reputation as a competent and decisive financial industry?

Lord Eatwell: My Lords, the noble Lord referred to the board. Could he confirm that Mr Sandler, who happens to be a member of my college, is an banker with considerable experience in the industry and is, indeed, highly qualified for the role that he has taken?

Lord Marland: My Lords, Mr Sandler’s main experience was generated in running or in trying to convert Lloyds, which is not a retail empire. In my experience, he has no experience of running a retail mortgage business.

5.59 pm

Lord Stewartby: My Lords, I do not know whether I am the only one of your Lordships who came to this debate not only to participate but to learn a good deal about the situation, but I find that I now have more questions in my mind than I started with. I want to pick up on one or two points that have been raised and I apologise for any repetition.

It is almost 50 years since I began an apprenticeship in the City, where a senior manager with a lot of experience took me aside to give me a little private tuition in what he described as the main principles of good banking. The one that sticks in my mind most clearly went as follows: “Borrowing short but lending long, don’t be surprised if it all goes wrong”. In the intervening 49 years, it has quite often gone wrong, but never in remotely such a cataclysmic and spectacular way as in the case of Northern Rock, which is an object lesson in the perils of dodgy funding. We have to see what lessons we can draw from the experience that Northern Rock and the whole marketplace have gone through.

I wanted to know what the taxpayer has actually bought, or is about to buy. I asked the Minister yesterday whether he could enlighten us but, having listened to the discussion about whether Granite is or is not part of the Northern Rock corporate group, I am completely unsure what I think about any assurance given on the value of its assets. I am sure that the Minister spoke in good faith, but it was not clear. If he would like to clarify that when winding up, it would benefit many of us.

The next point has also been made, but I must emphasise it. Why the haste? We are dealing with important legislation at very short notice and with much of the documentation necessary to understand it still not in our hands. We do not know how the Government’s relationship with Northern Rock is to be carried out. We have had a delay of five months since the storm broke back in September and now we suddenly have the opposite—a mad rush to legislate before anyone has had time to understand the background or to read the documents produced. I may have missed a lot but it seems to me on reading through the documents that we are legislating for a very technical process and that such detailed

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processes are not best legislated for without time and consideration to see what we are actually providing for. It is no good to have letters distributed to us during the debate when other documents and memoranda have not appeared. That is a terrible way in which to treat this House. Quite apart from the need of the House to do its job properly, it is also necessary in our constitution for Parliament to have long enough to consider complicated legislation that will have a widespread effect on important parts of the economy.

I want to revert briefly to the Lloyds TSB approach in September. It is difficult to understand what caused the Government to give Lloyds a brush-off. They have spent five months that they now justify as being necessary to explore all avenues of a private sector transaction, yet when there was one—and, on the information that has been given, it did not seem to have any impossible conditions—it does not seem to have been given the same sort of reception. It would be helpful if the Minister could tell us what made the Lloyds approach unacceptable. We have had some press speculation about it, but that is not enough, as by bringing in a major banking name that proposal could have avoided many of the practical problems of managing the Northern Rock business and greatly assisted in retaining the good reputation of the City and its supervision and regulation.

Lord Lawson of Blaby: My Lords, the Minister addressed that briefly in his opening speech when he said that Lloyds had not made a firm offer. It did not make one, of course, because its tentative approach was brushed aside.

Lord Stewartby: My Lords, that is exactly the point. I used to run around the corridors for my noble friend Lord Lawson in the 1980s, when we were dealing with banking matters. I am glad to have him putting me right on that point, but it is true that nobody had put forward a formal offer at that stage. There were strong indications of interest but no formal offers, and that of Lloyds TSB was no different.

I do not know whether any of your Lordships have approached a crossroads where traffic jams are frequent and read that notice saying, “Do not enter the box until your exit is clear”. Well, we are being asked to enter this box without an idea of where the exit is, let alone whether it is clear—or where it leads to. When I listen to Mr Sandler comment, at least as reported, that he wants Northern Rock to compete vigorously and that this is only a temporary arrangement, I wonder how that will happen if the bank is to be run in a sensible, responsible way while not falling foul of the competition restrictions.

On competition, it has not been mentioned that there is now an inherent problem, because this is the one deposit taker that has a 100 per cent guarantee on its deposits. All other deposit takers—banks and building societies—are subject to the compensation scheme and its limitations. The starting point is thus unequal competition, which can only get more unequal.



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I have been trying to think what the new management at Northern Rock should do. The answer that I have come to is that it should do the opposite of what it has been doing for several years, because it has been wildly irresponsible on both sides of its balance sheet. In its lending, it had that frenetic binge in the first half of last year when, as has already been mentioned, it had 20 per cent of all new mortgage business in the marketplace. Such a huge increase in assets is a warning sign, which ought to have been picked up. The FSA was uncomfortable but did not reach a point much beyond that. Although I was once a board member of the FSA, I do not remember its having its eyes closed. If Northern Rock is going, in nationalised condition, to go hard at new mortgage business, it will increase the risks for the taxpayer—that is where it all comes back to.

On the funding side, it is no good trying to rely on money markets and securitised debt. What is needed for a proper housing finance business is a natural pool of individual savers. My noble friend Lord Lawson will recall that, in our Building Societies Act 1986, we insisted that, in order to qualify as a building society, you had to have the bulk of your resources from individual depositors and not by running off to the money markets or by getting involved with some tortuous sorts of fancy paper. It will be very difficult to return Northern Rock to a saleable condition as a corporate entity in anything like its existing form. We will just have to see how that goes, but none of us should be under illusions that this is just a tidying-up job and then we can float it off and everyone will have forgotten about it. It will not be like that. We should avoid all the behaviour that led the company into such trouble.

We really ought to have had a chance to examine these matters in much greater detail. When I listened to the noble Lord, Lord Goodhart, on the question of the negative and affirmative resolutions, I realised how little I know about all that. There are plenty of other points in the Bill with which we will have to try to deal in the very short time available. We are plunging into a risky, difficult and complex situation without knowing where we are going. That is not a course of action that I recommend to your Lordships.

6.10 pm

Lord Bilimoria: My Lords, when I first started my business, I was introduced to a well known businessman who told me something that I will never forget. He said, “Young man, empires are built on trust”. What we have before us today is the result of the breakdown of trust—a breakdown of trust from the global banking system to a breakdown of trust at all levels.

We have heard today that most observers refer to the summer of 2007 as the start of this crisis. It was then that the word “sub-prime” entered common usage, exported from the United States, and it was then that we became aware of the troubles at Northern Rock. It has been reported that the first warning that the Governor of the Bank of England received from the Financial Services Authority regarding the potential impact of the global credit squeeze on Northern Rock

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was in a telephone conversation in August 2007. As we have heard, that warning came far too late.

What most people overlook is that the warning signs appeared much, much earlier than that summer. As we have just heard, early in 2007, Northern Rock was roaring ahead. In the first six months, there was an increase of 50 per cent compared with the year before. As we have heard, it was issuing 20 per cent of all the new mortgages in this country. In fact, even earlier than that, two years ago in 2006, the FSA had classified Northern Rock as a,

It has come to light that the FSA did not plan an impact assessment for Northern Rock until January 2009. Maybe I have misread this—I do not know whether I am missing something here—but how could the FSA justify a delay of three years before scheduling a high-impact review of Northern Rock? In the globalised world in which we live, things move pretty quickly. The old saying that the United States sneezes and we catch a cold is true. What is more, if a bank is pursuing an especially aggressive policy, as was Northern Rock, surely one would expect rigorous supervision. Let me quote a professor from the Cass Business School at City University, Geoffrey Wood. He said that,

Then, at the end of June last year, Northern Rock finally admitted that it had serious problems. Instead of taking decisive action, the FSA relaxed the technical requirements on the bank, allowing it to free up more assets. Then came the global credit crunch and the rest is history.

I have often said this, but I will say it again: one of the best moves that the Government made in 1997, after they came to power, was to grant the Bank of England independence through the formation of the independent Monetary Policy Committee. Since then, the Bank has had the ability and the wherewithal to set interest rates and control inflation on a proactive and reactive basis month by month. That move has been instrumental in providing our country with the stability that has made our economy the envy of Europe.


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