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2.51 pm

Lord De Mauley moved Amendment No. 9:

(a) lay before Parliament annually a report on the impact of the competitiveness of the market in the UK of the activities of the authorised deposit-taker or of the body corporate to which property rights and liabilities have been transferred (as the case may be); and(b) report to Parliament as soon as it identifies a significant adverse effect on the competitiveness of the market in the United Kingdom as a result of the activities of the authorised deposit-taker or of the body corporate to which property rights and liabilities have been transferred (as the case may be).”

The noble Lord said: Amendment No. 9 seeks to address a major flaw that was picked up by many of your Lordships yesterday during Second Reading, and was widely covered in the press this morning. As a nationalised bank, Northern Rock will, among many other things, have access to significantly cheaper money than its competitors, and so will be able to offer better terms to customers. This unfair practice would, of course, be damaging to the operation of the whole British banking sector.

The Minister may tell me in his response that even without this amendment the Competition Commission or the EU state aid rules will be a sufficient check on such damaging behaviour. However, we are concerned about the Competition Commission’s powers over state-owned companies. Furthermore, I cannot accept that a far off and extremely broad brush set of criteria in Brussels is an adequate substitute to a nationally recognised and respected body whose remit is exactly suited to maintaining a watching brief over a nationalised Northern Rock and the impact it will have on the wider banking sector. So my amendment seeks also to give the OFT the duty to report to Parliament, not only when it identifies an adverse effect but also annually

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to reassure Parliament and the public that their legitimate fears about unfair competition are not being realised.

I hope that the Minister will appreciate the sense behind this amendment. I beg to move.

Lord Newby: We support this amendment. There has been a lot of discussion about the extent to which Northern Rock, if it were anything other than in a rapid run-down situation, would be able to operate in a non-competitive manner on the back of the government guarantees. While there have been various assurances from Ministers that that would not be the case it does seem to us, both in terms of the rest of the banking sector and the country more generally, that we need to have some assurance that this is not happening. The good thing about this amendment is that, if passed and approved, it means that the Northern Rock management would know that the OFT is on their case all the time. In this respect it will be interesting to see whether the OFT is more successful than the FSA has been in the past. But this is its area of expertise and one would expect that it would. Therefore, we support the amendment.

Lord Naseby: I, too, very much support the amendment. The problem for the Committee is that we have to work from the phrase “business as usual”. We are not working from a phrase whereby Northern Rock is being wound down, where one could perhaps be more assured, but from the phrase “business as usual”. Further, we learnt as of yesterday that Mr Sandler is thinking about employing McKinsey. McKinsey is noted for several things, not least of which is its marketing. Since Sandler himself clearly does not have any real expertise in that world, I am quite sure that he will bring in consultants on the marketing front. So we do need some safeguards.

If it is a case of business as usual, one of the areas that the Rock will have to look at is how it gets more direct deposits. A building society works on how much it can attract in as deposits and therefore how much it can lend. That does not apply to a bank. However, if I were the chief executive of Northern Rock, given the circumstances it is now in, and I was told it was business as usual, I would want to attract deposits. I have not checked today but as of yesterday Northern Rock was offering the most attractive cash ISA in the whole of the United Kingdom. I refer to the interest rate, let alone the fact it was guaranteed by the Government. It was also offering the most attractive deposit account, let alone given the government guarantee. It is wrong that that should continue. The only way we seem to be able to track what will happen at the moment is if somebody audits this. In my judgment it is not acceptable that the Competition Commission should do it. Its track record is not good and the pace at which it works is too slow. Certainly, we cannot leave this matter to Europe. That is why I believe this amendment should be supported.

Lord Lipsey: I do not have a particular view on the mechanism with which these competition issues should be addressed. However, I am puzzled by the

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strength of people’s feelings that there are real risks in this. Here we have Britain’s wonderful, internationally competitive, innovative banking sector up against an old-fashioned dinosaur nationalised industry with a badly tarnished brand image. How can anyone fail to compete with that?

The argument just put by the noble Lord, Lord Naseby, seems to me to reinforce this point. Despite the government guarantees, Northern Rock is having to offer higher interest rates than anybody else in the market just to get the money coming in to it. So it seems to me that these fears are mostly a chimera which should be swept aside at the earliest possible moment.

Lord Baker of Dorking: I consider that comment rather na├»ve. It is able to offer the most attractive interest rates in the market only because it has two unique guarantees—one to depositors and one on any bonds that may be issued. No other lending institution in the country has that degree of security. It is very important that there should be a level playing field. My noble friend referred to what the Rock was offering compared with competitors. I believe that this morning it was still offering mortgages at 125 per cent of the value of a property. Therefore, if the property is worth £100,000, it will offer £125,000. If the property is worth £1 million, it will offer £1.25 million. Yesterday, Alliance and Leicester and Abbey National both withdrew their 125 per cent mortgages. In fact, one went further and said that it was thinking of withdrawing its 100 per cent mortgages. But with a bank that has a total and complete guarantee, it can go on doing that. Does not the Minister agree that it is improvident for a bank to be taken into public ownership still to be offering 125 per cent mortgages? Does he approve of that?

Lord Eatwell: On the issue that has just been raised, I think that the noble Lord, Lord Baker, and, indeed, the noble Lord, Lord Naseby, forget that the banking sector in the UK is supported and underwritten by the lender of last resort—the facilities of the Bank of England—and by the fact that major banks in this country are deemed too big to fail. Therefore, the competitive advantage derived by Northern Rock is much smaller than has been suggested by the exaggerated claims that we have heard from Members on the other side of the Committee. That is one reason why this amendment is unnecessary.

The other reason why it is unnecessary is that we have competent competition authorities in the OFT and in the European authorities who will be observing what is done in the UK banking sector and will operate according to their normal procedures. There is no need to gold-plate those procedures in the way that seems to be proposed here.

However, there is one issue that the Official Opposition could helpfully address. When Johnson Matthey was nationalised by the Conservative Government in 1984, it was exempted from taxation, thus acquiring a remarkable competitive advantage over all the firms with which it then subsequently competed in the 10 years that it remained in public ownership. Perhaps

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the Official Opposition will explain why they offered that extraordinary competitive advantage at that time, and are so over-excited about what is virtually no competitive advantage at this time.

3 pm

Lord Forsyth of Drumlean: Perhaps I may respond to the noble Lord, Lord Eatwell. I happily agree with him that if we were dealing with the same circumstances, the same terms would apply to Northern Rock as applied to Johnson Matthey. But Johnson Matthey was being run down. It was not continuing to trade on a business as usual basis in the market. I would have thought that the noble Lord would have known that. I am sure that he would not want to give an incorrect impression in making that comparison.

I very much support the amendment. Now that we have a change of Minister, perhaps I can ask him the question that his noble friend had begun to answer. This is a useful opportunity to do so. The noble Baroness, Lady Kingsmill, is not in her place, but yesterday she assured us that we had nothing to worry about because the European Union and the regulators would deal with these matters. If we can rely on the regulators to deal with these matters, why is it that Northern Rock is continuing to provide the very high deposit rates which my noble friend Lord Naseby referred to? It already has a competitive advantage, because the Government have guaranteed the deposits up to any limit. Were it not for the fact that we are parti pris, I would suggest to noble Lords that they should put their money into Northern Rock, because it has an absolute guarantee and it has a very high rate of interest. The Government should be worried about unfair competition, because they are competing with gilts—they are competing with the Government’s own gilt market. The Government are providing the same guarantee that applies to gilts. On gilts you can get something like 4.5 per cent, but go on to the Northern Rock website and you can sign up to an account for 6.5 per cent. The Government are competing unfairly not only with the market but with themselves.

I do not want to talk for too long about this. However, could the Minister tell us what the European Union thinks about these competition issues? It has done nothing about what has happened so far. Can he help us with the criteria that will apply to the business plan? I also return to the question, which I still hope will be answered, of why the Government turned down the opportunity for Lloyds TSB to take on Northern Rock back in September. The noble Lord, Lord Davies of Oldham, gave me an answer in a previous debate; he said it was obvious that the Lloyds TSB offer had to be rejected because it would never have got past Europe. That offer was to borrow £30 billion over two years on commercial terms and for it to be a fall-back facility. That is considerably less damaging an anti-competitive provision than was being suggested by Branson or by any of the other bids.

Can the Minister explain why Europe would not agree to that but is prepared to agree to this, which is a whole quantum leap of additional competitive threat to the existing private sector operators in the

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banking market? We need to have clarity on where the Government believe that the competition rules will apply and on what the European Union’s view is. In the absence of that clarity—which I do not expect to get even with a new Minister—the importance of this proposed new clause is paramount, and I very much support it.

Lord Bach: The amendment seeks assurances that Northern Rock will not be able to compete unfairly with other banks in the retail, savings and banking market. In responding to this short but interesting and important debate, I propose to do two things. First, I hope to reassure noble Lords that this will not be so and that we will not approve a business plan that does so. Secondly, I will address the specific proposal made in the amendment that would require the Office of Fair Trading to produce an annual report and to notify Parliament if it identifies any problems.

I will attempt to assure the Committee that there will be no adverse competition impacts. As explained elsewhere, the bank is in receipt of public support and aid is subject to EU state aid restrictions. Clearly, the interpretation of those laws is a matter for the Commission, but we would be extremely surprised if the Commission interpreted those rules in such a way as to allow a bank to expand its business aggressively on the back of public support. The requirement for prior approval of the European Commission and the Commission’s ability to hold Northern Rock to conditions imposed on approval is, we argue, an important and reasonable constraint on Northern Rock’s business plan.

As has already been said, we intend to submit a restructuring plan to the Commission by 17 March. This will need to reassure the Commission that Northern Rock does not abuse its position. Moreover, like any other company, Northern Rock will be subject to UK competition law in the normal way, including the Competition Act 1998 and the Enterprise Act. That also provides an important check on Northern Rock’s business model. I want to reassure the Committee that my right honourable friend the Chancellor of the Exchequer has asked officials to have urgent meetings and discussions with the British Bankers’ Association, the Building Societies Association and others, to reassure them of the position.

Even if all that was not the case, let me attempt to offer three further points of what I hope will be reassurance to the Committee. First, Ron Sandler, the executive chairman, has already made it clear that he is acutely conscious 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 which the Government have set for the management is to move the bank off all forms of government support, including government guarantees, as soon as possible. The bank’s business plan, which must be agreed with the Government, needs to be directed at that aim. A business plan that was 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

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the aims that we have set out for management, because it would not be sustainable.

Thirdly, let me attempt to reassure the Committee on how the financing of Northern Rock will operate. At present, Northern Rock is subject to the same interest rate premium arrangements and is paying for government guarantees in precisely the same way as Northern Rock paid for those facilities in the private sector. It has not had overnight access to some different source of financing. In future, financing arrangements and fee arrangements for guarantees will need to be put in place that are consistent with the business plan and the requirements of the EU. It is too early to speculate sensibly on what those will be, but clearly we expect to be able to demonstrate both to competitors and to the European Union that the bank is operating in a way that does not distort the market.

I have spent a little time attempting to explain to the Committee the safeguards that we have put in place. Let me move on to the amendment. It would, where an institution has been the subject of a transfer order under Clauses 3 and 6, require the Office of Fair Trading to conduct an annual report on the impact on competitiveness and, secondly, a report to Parliament as soon as it identifies a significant adverse impact on competition as a result. Largely for the reasons that I have already stated, we do not think that such an amendment is necessary, but again in an attempt to reassure the Committee, I will say that the Office of Fair Trading is an effective watchdog that oversees competitiveness in UK markets. It has wide powers, including powers to investigate whether any market in the UK is distorted by unfair competition. It does not need specific new powers to report on the competitiveness of the banking market; it can do so in any event. My officials have spoken to the Office of Fair Trading, and I can now say to the Committee that it has proposed that it will publish an annual report assessing any competitive implications of Northern Rock’s business on the banking market.

Lord Naseby: My problem with the statement that the OFT will publish an annual report is that the Minister keeps saying that this is a very short-term move. What on earth is the use of a report in a year or more—the business plan is a month away, so it will possibly be 13 months—when there will have been a total abuse of the market in the interim?

Lord Bach: If the Office of Fair Trading is looking at this, it is likely in any event that it will do so after the abuse has taken place, whether it does so in two months or in 13 months. The OFT will not in the first instance stop any abuse. That is why I have tried to explain to the Committee the various courses that we have taken. When the OFT reports—I cannot give the Committee a date on which it would, as that is a matter for the OFT—it would point out any abuses and by doing so make sure that they would not occur again. I am telling the Committee that the noble Lord’s noble friend on the Front Bench is proposing something with which we largely agree.



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Lord Lyell of Markyate: I am slightly surprised that the Minister should say that. The Office of Fair Trading frequently starts to investigate and take action in anticipation of an abuse that may take place, in order to guide an institution away from that abuse. The OFT does not always wait until after the event.

Lord Bach: I accept what the noble and learned Lord says, of course. His experience of the OFT is greater than mine. However, the Office of Fair Trading is what the noble Lord, Lord De Mauley, has asked for in this amendment and we are happy to concede on that, if that is the appropriate word. I may not have hoped for raptures from the Committee, but I had hoped at least for an acknowledgement that the Government were going some way towards agreeing with the noble Lord in his amendment by saying that the OFT will publish an annual report assessing any competitive implications of Northern Rock’s business on the banking market. Therefore, I give the noble Lord that commitment, which I hope is what he needs, and argue that his amendment, for which we are grateful, is unnecessary.

Earl Ferrers: I am sure that it was inadvertence by the noble Lord rather than discourtesy, but he failed to reply to the questions asked by my noble friends Lord Baker and Lord Forsyth; I, too, raised the issue yesterday. If Northern Rock is continuing to provide mortgages of 125 per cent while two firms that were doing that yesterday have stopped, is that not wrong and is it not unfair competition?

Lord Bach: I apologise to the Committee for not answering that question. I did not intend to be discourteous; I was just careless. There has been debate in the House on the 125 per cent mortgages, which are known as the together project. It is far from unusual for lenders to offer products of this nature and the lender well understands the risks it is taking on. These mortgage products are offered on a commercial basis to individuals with appropriate credit ratings, as is standard practice across the industry. It is worth noting that Northern Rock’s problems have not arisen as a result of lending at high multiples; its problems have been around raising liquidity in what have turned out to be extremely difficult financial circumstances. That is all that I want to say on the 125 per cent mortgages.

Lord Forsyth of Drumlean: It may be all that the Minister wants to say, but it does not answer the question. It is wrong to say that such mortgages are common in the market when everyone else has withdrawn them. It is not an issue of how Northern Rock got into trouble; it is an issue of how Northern Rock behaves when it is receiving a subsidy from the taxpayer that is anti-competitive and unfair for its rivals in the marketplace. That is the issue.

Lord Bach: I absolutely appreciate that.

Lord Desai: Before my noble friend answers, let me say that the implication of what the noble Lord said is that, as of yesterday, there is a distance between

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Northern Rock and Alliance & Leicester and others. Until yesterday, all were offering 125 per cent mortgages. Today is one day later—and that is what we are complaining about. Maybe tomorrow, on its own calculation, the management of Northern Rock will stop providing such mortgages. We either have to let Northern Rock behave as a commercial bank at arm’s length from the Government or we dictate what it can do. If noble Lords opposite want to bring back the old horrors of nationalised industries, it is up to them. When they get into power, they can do that. We do not want to do that.

3.15 pm

Lord Christopher: Perhaps I may ask my noble friend two questions. My understanding is that Northern Rock has already withdrawn the 125 per cent mortgages. That was reported by the financial press yesterday. Could my noble friend tell me whether there is any material difference between the arrangements that he has described and those for National Savings, which, of all organisations, could compete unfairly if it was allowed to do so? Secondly, has anyone analysed the potential problems for other financial organisations of the consequences of this amendment? In principle, I am not hostile to its objective to ensure fair competition.


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