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Last autumn, at the outset of this process, the Government set three clear objectives for the successful resolution of the situation: to protect taxpayers; to protect depositors; and to maintain financial stability. Those objectives have guided everything that we have done to date and will continue to guide our relations with Northern Rock as we develop our shareholder and lender relationships during this period of temporary public ownership. I can confirm that the Chief Secretary has said that we will publish a framework document that sets out the formal basis of those relationships, a copy of which will be placed in the Library of the House.

Lord De Mauley: When will the Minister publish that framework document?

Lord Davies of Oldham: The intention is to do that as rapidly as possible. I do not have the hour to hand, but in my commitment to that framework I am indicating that we treat this as a matter of importance.

Lord De Mauley: I apologise to the Committee and to the Minister, but can he confirm that it will not therefore be published before Report stage?

Lord Davies of Oldham: I probably can confirm that but, as the noble Lord has raised this, if the framework document can be delivered by that stage, I will insist that it is. He is probably right that I will be pressed to have it in the House as rapidly as that. I take the noble Lord’s point and I shall endeavour to do that.

Consistent with the Government’s three key objectives for Northern Rock, the clear strategic aim that we have set for the management is to move the bank off all forms of public support, including the guarantee arrangements, as soon as possible, while ensuring that the taxpayer is exposed only to an acceptable level of risk. The bank’s business plan, which will be developed in the coming weeks and must be agreed with the Government, needs to be directed at those aims. Ron Sandler and his team therefore are clear on what they have to do. As he stated, his priority is to develop a sustainable business plan for Northern Rock that enables

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the company to return to the private sector on a stand-alone basis as soon as possible.

We look forward to discussing and developing that plan with the new board. I can commit to keep the House fully informed as that planning work reaches a conclusion. The Government will also be committed to reporting on the future strategic direction of Northern Rock regularly to both Houses. I hope therefore that the noble Lord will think that this amendment is unnecessary. The board is clear on the strategic objectives. The framework for the relationship between the Government and the company will be made clear and a strategic plan will be communicated to the House in due course—not quite as rapidly as the noble Lord has pressed me to deliver, but there certainly will be no delay.

The noble Lord, Lord Newby, spoke forcefully on Amendment No. 5 and in principle won the support to a large extent of my noble friend Lord Desai. Of course we should set out the principles and objectives that have been laid down for the new board. I hope that that reassures the Committee that we expect the company to be managed in a prudent manner.

I take this opportunity to make some further points and to answer some of the questions that I notably failed to answer last night in my lengthy reply to the debate. I think that the whole Committee is agreed that during this period of temporary public ownership Northern Rock should be run on a commercial basis at arm’s length from the Government. The Government are not best placed to make decisions on the sort of products to offer and how they should be designed for customers. The role of the Government is to set the strategic framework within which the bank can operate by agreeing a business plan. Let me be clear: Northern Rock has been taken into public ownership only on a temporary basis. The Government are not about the business of running banks. It will be for Mr Sandler to develop a sustainable business plan for the company and to decide which financial products to offer.

I want to comment on one financial product, which was referred to several times in yesterday’s debate and in recent weeks has been raised in questions in this House and, I think, in another place. There has been concern about the 125 per cent mortgages. The noble Lord, Lord Newby, asked a specific question on that. I reiterate what I said when I answered that question, which reflects answers given in the other place. It is far from unusual for lenders to offer products of this nature and the lenders understand well the risks that they are taking on. These products are often sold on a commercial basis to individuals with appropriate credit ratings, which is why I indicated to the noble Lord, Lord Newby, that I was not entirely surprised that his personal application might have received a favourable response. That is standard practice across the industry.

It is worth noting that the problems of Northern Rock have not been a result of lending at high multiples; they arose from raising liquidity in difficult international financial circumstances. I make it clear that the Government will approve Northern Rock’s business plan and subsequent major decisions. Ron

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Sandler’s job will be to act in the best interests of the taxpayer, the consumer and financial stability. However, it would be inappropriate for the Government to interfere with the day-to-day operations of Northern Rock. It should be operated on a commercial basis and returned to the private sector as soon as is feasible.

I assure the Committee that, as Ron Sandler has said, his business plan will need to stabilise the business and establish a solid future in which the business can be returned to the private sector. As a part of this, he will look carefully at the quality of the assets of Northern Rock. He will agree the business plan with the Treasury. The Government will look at the business plan to see that it meets the three tests of protecting the taxpayer, maintaining financial stability and protecting depositors. Operational decisions of course will be a matter for the board of Northern Rock, but I assure the Committee that the Government will consider the plan to ensure that the risk to the taxpayer is appropriate. I hope that the noble Lord will accept—

Lord Forsyth of Drumlean: I am most grateful to the Minister for giving way and I acknowledge the chastisement from the noble Lord, Lord Eatwell, in that I talked about the business plan in respect of the amendment that was about the overall strategic purpose. However, the two are linked, of course. Will this House have an opportunity to debate and discuss the business plan? When does the Minister expect that to happen?

Lord Davies of Oldham: I shall come to openness and the Government with regard to Northern Rock when I address Amendment No. 3 tabled by the noble Lord, Lord Newby. We are committed to openness on this matter, which has been reflected in our approach to date. We promptly notified Parliament of significant developments in relation to Northern Rock as they arose and will continue to do so. The Chancellor of the Exchequer has made Statements to Parliament on Northern Rock no fewer than six times in the past five months. That approach has been in addition to the normal parliamentary procedures of the approval and accountability of government expenditure, particularly the supply process, together with the laying of departmental minutes for any liabilities. Both Houses have—certainly this House has—had Northern Rock raised on numerous occasions through Parliamentary Questions.

Lord Forsyth of Drumlean: I apologise to the Minister for interrupting him again, but I asked him a straightforward, simple question. Will this House or the other place have an opportunity to discuss and debate the Northern Rock business plan and, if so, when?

Lord Davies of Oldham: If the noble Lord will show a little more patience, I shall flesh out the process of parliamentary scrutiny of the work of Northern Rock. We are committed to regular reporting to Parliament and will continue to do that in the next

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stage of development. We are already discussing with Ron Sandler and the new board the arrangements for this scrutiny. Of course there is a balance to be struck. The noble Lord, Lord Forsyth, with his considerable experience in government, will recognise that. On the one hand, given the large sums of public support for the company, it is obviously right that Parliament should be kept informed of progress, but that needs to be balanced with appropriate limits to the disclosure of commercially sensitive information. We are talking about a business, not any other kind of body.

We must all be agreed that the best way of ensuring that a company repays public support and returns to normal private sector operations at the earliest opportunity is to run the company at arm’s length from the Government in as close as possible to normal commercial conditions. I can confirm that under public ownership Northern Rock will be regulated by the Financial Services Authority. The noble Lord, Lord Forsyth, already indicated that he expected that fairly sharp insight into and scrutiny of the work of Northern Rock by the FSA.

1.30 pm

Lord Roberts of Conwy: How does the noble Lord propose to deal with the point made by my noble friend Lord Naseby yesterday about the fact that Northern Rock currently has the highest ISA rate of interest and the highest deposit banking rate in the market, thereby pinching business away from the open market with taxpayers’ funds? How do the Government propose to deal with that situation?

Lord Davies of Oldham: I had hoped that I had covered that issue to a degree yesterday. We have a later amendment that will address the issue more specifically. I assure the noble Lord that in addition to the fact that there will be scrutiny and regular parliamentary reports on the operation of Northern Rock, we are consulting the Building Societies Association and the British Bankers’ Association on the future operation of Northern Rock. We will be taking the best advice that we can get from all quarters on seeking to meet our broad objectives on the operation of Northern Rock while at the same time seeking that it should operate at arm’s length from government and be in a state to return to the private sector as rapidly as possible.

We are clear on the need to keep the House informed. We will publish shortly the framework document and set out the operating agreement between the bank and the Government. It is our intention to do that at the earliest opportunity. It will include confirmation of the Government’s strategic objectives, which are the protection of the taxpayer and the consumer and the maintenance of financial stability; the board will be expected to operate the company in a manner that is consistent with those objectives. Ron Sandler will publish his strategic business plan in due course. That will outline the strategic objectives of the company and will need to be agreed with the Government and be compliant with EU state aid rules.

Of course the Committee will not expect the company to publish any commercially sensitive information but

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the document will include the overarching strategic direction of the business. As I emphasised, Ministers will continue to keep Parliament informed on progress through, for example, the regular—at least six-monthly—update reports to be placed in the Libraries of both Houses. We will expect Northern Rock in temporary public ownership to be run in a prudent manner, which is the burden of one of the noble Lord’s amendments. I assure the Committee that the Government will ensure that there is no inappropriate risk for the taxpayer when considering the business plan.

My right honourable friend the Chancellor has already explained that, having assessed all the alternatives for the future of the business against those objectives, he does not consider administration to be in the best interests of the taxpayer. In order to comply with state aid rules, the company will be subject to growth constraints. That will be entirely consistent with the Government’s view of a company that has had to rely on government support to keep it afloat. We do not expect the company to return to the aggressive strategy of recent years that has proved so unsustainable. I hope that noble Lords will recognise the strength of the Government’s response to the amendments and I hope that the noble Lord, Lord Newby, will withdraw his amendment.

Lord Newby: I thank all noble Lords who have spoken in the debate. I say to the noble Lord, Lord Whitty, that my concern is not that as a result of the Northern Rock nationalisation young couples or anyone else will find it difficult to obtain mortgages. We are still in a situation where many mortgage lenders are lending imprudently. In any event, the share of the market that Northern Rock had and will have in future means that there is a lot of the market to go to if you are looking to take out a mortgage.

The noble Lord, Lord Forsyth, stressed the desirability of producing a business plan or at least some indication of the basis on which Northern Rock should be managed going forward. It is a major shortcoming of the way in which the Government have dealt with the issue that such a statement has not been produced by now. Noble Lords will recall that Ron Sandler was appointed in a shadow capacity before Christmas to look at Northern Rock. No doubt people in the Treasury have been working night and day since then. The kind of broad statement of principles that we are seeking could have been produced by this point. The fact that we do not have one, even though we are now promised one in the near future, is a great shame.

In Amendment No. 3, we asked for regular reports to the House. The noble Lord has gone a considerable way towards meeting that requirement. On our second amendment, I will read carefully what the noble Lord said, because he said an awful lot. I think that the word “prudent” appeared, but I am not sure how often the word “risk” appeared and what other words appeared around it. It may be that between now and Report we have the chance to look at that in more detail and decide what we want to do at that stage. At this stage, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.



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Lord Oakeshott of Seagrove Bay moved Amendment No. 4:

The noble Lord said: This is a simple and straightforward amendment, which calls for a take-on independent audit if I may put it that way, as at the date of Royal Assent—which I hope is today but might be tomorrow—of what the taxpayer has bought. When we buy any business, as the Labour Member Mark Todd pointed out—I heard his speech in the Commons the other night—we like to find out what we have bought. There are important reasons why there needs to be an independent audit by a firm of auditors which is not associated with the previous regime.

As I mentioned yesterday, quoting the distinguished banking analyst Sandy Chen at Panmure Gordon, there are serious concerns in the City about the last interim report—the audited report from Northern Rock as at 30 June last year—and whether the auditors had done their job properly. Did the FSA do its job properly when it looked through some of the funny pieces of paper—the CDOs, SIVs and so on that Northern Rock was then holding? Was the bank even solvent at that stage? Those questions will need to be examined seriously. They should not be examined by the auditors who were responsible for those figures. The noble Lord, Lord Eatwell, was kind enough to give me a little preview of what he was going to say, and one cannot rely on the Financial Services Authority in this respect. It has blatantly failed in its regulation of Northern Rock, and we would not be here today if it had done its job properly. The authority itself has some serious questions to answer. There should be an independent audit commissioned by and reporting to the Bank of England—effectively the banker for the taxpayer, which is lending the money—which we can all see.

It would be a gross dereliction of duty if we did not insist on this because there could well be a very substantial claim for negligence against the auditors of Northern Rock, from which the taxpayer could obviously benefit substantially. That is why it is important. Perhaps the Minister could confirm that the year-end audit of Northern Rock as a public company up to 31 December, which would normally have appeared at the end of January, is in train. That is all well and good, but that audit clearly was of the public company as at 31 December and is therefore a quite separate process from a proper, independent audit of the bank on the day we all buy it.

It is also important that this independent audit should look into and explain simply the position of Granite. Frankly, a lot of nonsense was spoken by the Treasury and the Minister to my noble friend Lord Newby and me last night. I want to ask a simple question. Northern Rock has something like £100 billion worth of assets, of which just under half, £45 billion, are in Granite, and we know that the assets in Granite are all high-quality secured mortgages because they have to be under the terms of the trustee. We are

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then left with £55 billion of which we know £8 billion is in unsecured loans, a lot of them the top slice of those pernicious “together” mortgages. If £8 billion out of the £55 billion left to the taxpayer is in unsecured loans, surely there is no way that the quality of the Granite portfolio can be similar to the quality of the rest of the Northern Rock portfolio. That is so obvious that I am surprised that the Treasury or anyone else tries to pretend otherwise.

Moreover, I remind noble Lords that £8 billion is five times the shareholders’ funds in Northern Rock in the last published accounts. So we will want to see from the independent auditor a full and frank explanation of exactly how Granite works, the economic and commercial reality of the relationship, not these weasel words, this legal fiction. We need a proper setting-out of the contracts between Northern Rock and Granite, realistic scenarios on how fast the mortgage book runs down, as well as, frankly, the prospect of various rates of house prices falling, which is the realistic assessment of the City and is mine too. That should form part of an independent audit.

Those points are pretty clear and I would be amazed and surprised if the Minister could give any reason why we should not protect the taxpayer’s investment in this way. I beg to move.

Lord De Mauley: I share completely the demand of the noble Lord, Lord Oakeshott, for an independent audit. Among many other things, it should unearth the information so many noble Lords have been demanding on Granite. We also need a full review of the loan book. Amendment No. 10, tabled in my name and grouped here, is a simple one and seeks to make good on a government commitment to the recommendations laid out in the 2001 report in the name of the noble Lord, Lord Sharman, entitled Holding to Account. The National Audit Office’s audit of public bodies provides Parliament and the public with impartial, accurate information about how public money is committed and spent, and as the Sharman report pointed out, such information contributes to accountability, transparency and public confidence.

While no one is suggesting that the NAO should audit Northern Rock, there is a clear need for the Comptroller and Auditor-General to have the powers to go into such a company to appropriate evidence for its audit of the Treasury. The C&AG already has the right to investigate and report on the accounts of a large number of non-governmental bodies which receive government funding. This amendment would simply add any nationalised bank and building society to that number. I hope very much that the Minister will continue to support the basic principles of the Sharman report and accept this amendment. In so doing, the Government will provide the public with the much-needed reassurance that their money is being appropriately spent on Northern Rock by the Treasury.

1.45 pm

Lord Forsyth of Drumlean: I strongly support the amendment and agree with all the points made by the noble Lord, Lord Oakeshott, and by my noble friend. However, I would like to make one observation in

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respect of the requirement to audit. The noble Lord said that it is a good idea to find out what you are buying. I would say that it is a good idea to find out what you are buying before you make the purchase. In these circumstances, we will find out what we are buying after we have paid the money—although of course we do not know what the money is going to be. Looking at the test in the Bill, I suspect that it will be a very small sum indeed—almost zero, I should think.

Clearly it is sensible that we should have a proper audit, so I want to ask the Minister one question: was an accountant’s report prepared for each of the bidders at an early stage? We had Mr Branson and various others. I find it difficult to believe that an accountant’s report was not prepared which set out the assets. Was such a report produced, and if so, why can it not be made available to us?

Lord Davies of Oldham: I am grateful to all noble Lords who have addressed the Committee on these amendments, which suggest two alternative institutions to take responsibility for auditing—the Bank of England and the National Audit Office. Of course I agree with the principle behind the amendments. There certainly should be clear, independent auditing arrangements in place for Northern Rock. The Government’s proposal, however, is that the audit should be conducted in the normal fashion for private sector companies. We have already confirmed our intention that Northern Rock should be subject to the requirements of the Companies Acts 1985 and 2006. This will mean that the company’s annual report and accounts must be independently audited by a professional firm and filed with the register of companies for public access.


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