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28 Oct 2008 : Column 1546

Landsbanki Freezing Order 2008

7.48 pm

The Financial Services Secretary to the Treasury (Lord Myners) rose to move, That the order laid before the House on 8 October be approved.

The noble Lord said: My Lords, before I turn to the two instruments that we are considering this evening, I should like to say a few words of a personal nature.

It is a very great honour for me to stand before your Lordships for the first time in this House. I want to begin by thanking the whole House for the warm welcome that I have received from all sides since my introduction last week and to extend my grateful thanks to the staff of the House, who have been similarly welcoming and supportive. We are truly fortunate to be so well served.

I have always—until right now, at a safe distance—held the House in the highest respect both for the quality of its debates and for the depth and breadth of its expertise, which allow it to frame national debate and hold the Government to account so rigorously. I come from a business background, so it will take me time to familiarise myself with being “the Government”. I beg your Lordships’ indulgence while I find my feet.

I think I am right in saying that I am only the second life Peer to be a Treasury Minister, but I tread with caution in the company in which I now find myself. The House has, at the last count, four former Chancellors of the Exchequer, two former Governors of the Bank of England and three former permanent secretaries in the Treasury. There is also a host of other noble Lords with strong backgrounds in banking, accounting, finance and economics. I hope to benefit from all your Lordships’ wisdom in the exchanges ahead.

I have taken the title Baron Myners, of Truro in the County of Cornwall. I was fostered, and then adopted, by a Cornish family. I think it would be described as blue-collar. I had the benefit of a fine education, courtesy of Cornwall County Council. I was, to plagiarise the words of Senator Biden, the first in my family for a thousand years to go to university. Cornwall is a very special place to me, and to this day represents one of my two great passions in life; the other is contemporary art. My father was a fisherman and a small shopkeeper, and it was at his side that I learnt the basics of small business.

It took me some time before I realised that business was to be my metier. First, I embarked on a career as a schoolteacher in inner London. Then I was a financial journalist: ironically, 30 years ago, writing about the secondary banking crisis for the Daily Telegraph. After that, I entered the world of business and finance. I am fortunate that this career has led me to sitting on the boards of a number of major companies and financial institutions, including being a member of the Court of the Bank of England and a director of a major sovereign wealth fund. I have also, in recent years, developed an increasing interest in wider public policy and institutional matters, and my work in this respect has included chairing the Low Pay Commission and the Personal Accounts Delivery Authority and acting as a trustee of Tate.

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It is clear that a competitive business environment has a vital role to play in delivering economic efficiency, but that it is also required to act with integrity and responsibility. In my business career, I have actively promoted the benefits of good governance and effective regulation, and I will continue to do so in my ministerial post. My business career has taught me the importance of a strong banking system that inspires confidence and plays a critical role in supporting a strong economy, to the benefit of all.

In recent months, the Icelandic economy has experienced increasing difficulties. In July, the IMF’s mission to Iceland concluded that the Icelandic banking sector faced significant risks. On 29 September, the Icelandic Government acquired a 75 per cent stake in Glitnir, nationalising Iceland’s third largest bank. This was immediately followed by further rating agency downgrades for all Icelandic banks and their subsidiaries. On 7 October, the Icelandic Government passed emergency legislation in an attempt to stabilise the financial system in Iceland.

The new powers are wide-ranging and had immediate effect. The Icelandic authorities were able to take various steps, including appointing receivers to take control of the bank Landsbanki Islands and to deal with its assets. Despite repeated efforts to seek reassurances at official and ministerial level, the UK Government could not gain satisfactory clarification from Iceland of the position of UK creditors in the administration of Landsbanki. This was of serious concern, as certain statements made by the Icelandic Prime Minister indicated that while Icelandic depositors would be protected, the rights of other creditors, including those in the UK, could be prejudiced—a breach of the EEA treaty. It was also unclear whether the Icelandic Government were prepared to honour the obligations to depositors in Landsbanki’s UK branch—a requirement under the EU deposit guarantee scheme directive. Under the terms of the directive, Iceland’s share of compensation to Icesave depositors was in the region of £2.2 billion.

I turn to what brings us here today: the Landsbanki Freezing Order 2008 and the Landsbanki Freezing (Amendment) Order 2008. The first order was made on 8 October 2008, because the Icelandic Government, their authorities and Landsbanki appeared to be on the brink of action that would be to the detriment of the UK economy, including the detrimental treatment of UK depositors and consequential burdens on the banking sector. At a time when saver confidence was fragile, it was necessary to take action to help to safeguard the position of UK customers and depositors and to prevent economic damage to the UK. It was also necessary to take such action to stem the risk of any contagion in the UK financial sector as a result of Landsbanki’s financial difficulties. The order has ensured that assets that belong to Landsbanki and are controlled through its London branch remain in the UK until the freeze is lifted.

The second order simply makes a few minor, technical changes to clarify the order. It does not change its substance. The order freezes only funds relating to Landsbanki. Furthermore, as envisaged by the 2001 Act, the order gives the Treasury the power to license exceptions to the freeze. Granting licences is an integral

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part of the Treasury’s ongoing role in relation to the freezing order, particularly in minimising potential harmful consequences while providing the necessary safeguards. The Treasury’s approach has been to publish general licences and guidance to deal with industry concerns. It granted a general licence the day after the order was made. This dealt with the concern to allow the London branch to continue its commercial finance operations, on which a number of UK businesses depended for their cash flow. This licence also confirmed a broad range of transactions that were permitted, including allowing third parties to set off and net out arrangements where Landsbanki was the counterparty. A further licence was granted on 13 October to reassure a wide range of market participants who might otherwise deal with frozen funds. The Treasury has also published extensive guidance to assist people who may be affected by the order or licences, and it will continue to grant licences and offer guidance as appropriate.

The principles behind the licence granted by the Treasury are that the London branch is not to repatriate funds back to its head office in Iceland or elsewhere in its banking group, but the core commercial financing business is allowed to continue. Business customers can continue to deal with the funds in their accounts, and other financial institutions and third parties are given protection under the licence for a wide variety of dealings with frozen funds.

Since the order was made, the Government have continued to negotiate with the Icelandic authorities to agree a mechanism whereby the Icelandic Government can honour their obligations to UK depositors and ensure the fair treatment of UK creditors. In particular, the Bank of England has provided a short-term facility of up to £100 million for the London branch of Landsbanki. This was made available on 13 October to help to ensure an orderly wind-down for Landsbanki that will maximise the return to UK creditors.

The freezing order was made under a power in the Anti-terrorism, Crime and Security Act 2001. This Act includes a broad range of provisions and is not only about countering terrorism. The power enables the Treasury to make a freezing order where the Treasury reasonably believes that action to the detriment of the UK economy, or part of it, has been or is likely to be taken by a foreign Government or a resident of a foreign country or territory. I emphasise that the UK’s action was not taken on the basis of anti-terrorism provisions in the Act. The action was deemed necessary because the Icelandic Government could not clarify the position of UK creditors in the administration process and there was therefore a threat to UK economic interests. Their actions also appeared to be in breach of Iceland’s obligations under the EEA treaty, so we also alerted the European Commission to our concerns and our decisions.

On 9 October 2008, the administrators of Landsbanki transferred its domestic assets to a new entity, New Landsbanki. The London branch of Landsbanki Islands was left in old Landsbanki. This action appeared to support previous concerns about Iceland intending to favour its own creditors.

The Government believe the order to be a necessary and proportionate measure to protect the assets of UK customers of Landsbanki and to safeguard vital

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UK economic interests. The Treasury considers that the freezing order should remain in place until the Government have successfully agreed with the Icelandic authorities a mechanism whereby the Icelandic Government can honour their obligations to UK depositors and ensure the fair treatment of UK creditors. As such, I commend the order to the House. I beg to move.

Moved, That the order laid before the House on 8 October be approved. 28threport from the Joint Committee on Statutory Instruments, 29threport from the Merits Committee.—(Lord Myners.)

8 pm

Baroness Noakes: My Lords, it is my privilege to follow the maiden speech of the noble Lord, Lord Myners. A maiden speech is an important rite of passage in your Lordships’ House. The noble Lord has nicely demonstrated the qualities that he will bring to our deliberations. As he told us, he started out as a teacher and a journalist. I am sure he will find that the dual skills of dealing with an unruly class and a way with words will stand him in good stead.

The noble Lord is principally known for his outstanding career in the City, including being chief executive of the fund manager Gartmore and, more recently, as a mainstay of many FTSE boards. He is perhaps best known to Members of your Lordships’ House as the author of reports for the Treasury on equity investment and, more recently, as chairman of the Personal Accounts Delivery Authority, which the noble Lord will find is still the subject of the Pensions Bill, which is keeping us busy even this week. He and I share a common history in membership of the Court of the Bank of England. I look forward to putting that shared knowledge to good purpose with him when the Banking Bill is scrutinised here in the next Session.

As well as welcoming the noble Lord to this House for the qualities that he will bring as an individual, we welcome him as a Treasury Minister. It is an important role, and it has been nearly 20 years since we had a full-time Treasury Minister in your Lordships’ House. I know that the whole House will join me in welcoming the noble Lord in both his personal and his ministerial capacities.

Maiden speeches are not times for controversy, but when a Minister makes a maiden speech on government business it is difficult to avoid that entirely. So I must now turn to the orders, which the Minister has introduced so comprehensively. I am afraid that we are now on to business as usual. Let me say at the outset that we support the Government in taking action to protect the interests of UK depositors in Landsbanki. If both the initial order and the amending order, which was tabled last week, are what are needed to achieve protection, they have our complete support.

Questions have been raised about whether the Government were over-hasty. On 8 October, on the radio, the Chancellor of the Exchequer said that the Icelandic Government had “no intention of honouring” their UK obligations. But the Icelandic Government have released the text of the telephone conversation between the Chancellor and the Icelandic

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Finance Minister which shows that this did not appear to be quite the truth. Will the Minister clarify on what basis the Chancellor made his statement? If the Icelandic Government were still seeking a way to honour their obligations, was the initial order appropriate?

Last Saturday, it was reported in the Times that a potential IMF rescue package will go ahead without any special provisions being made for UK claims. Only a few days earlier, the Treasury was briefing that the IMF deal was dependent on sorting out UK claims. There was also talk of the Government possibly lending the Icelandic Government up to £3 billion in order to help them to repay UK savers. Has that now gone away? What is the current status of the IMF negotiations? Will the Minister say whether and to what extent the UK’s position is being protected in those negotiations?

What are the financial implications for UK taxpayers? The freezing order will, I assume, have to be lifted at some stage, which will mean that the assets will pass to the administrator or liquidator of Landsbanki. What will happen then? The Government will have bankrolled the repayment of deposits to UK retail depositors, not all of whom are the liability of the Financial Services Compensation Scheme. If Landsbanki’s assets are insufficient to pay all its creditors, we will not get all our money back. How much taxpayer money is thought to be at risk? What sequence of events is now expected to bring this to a conclusion? How long will it take to sort out?

The Minister will be aware that the Icelandic Government and the citizens of Iceland are deeply offended by the use of anti-terrorism legislation to freeze their assets, as well as some of the Government’s language that has been used around this. Iceland has repeatedly said that it should not be tarred with a terrorism brush. When the Anti-Terrorism, Crime and Security Act 2001, one of the many pieces of rushed legislation to which we have become accustomed in the past 10 years, was considered in your Lordships’ House, we sought to confine those powers to terrorism. But that was rejected by the Government. Eventually the Government conceded a review of the legislation, which was led by my noble friend Lord Newton of Braintree. He recommended that the non-terrorism powers clearly in the anti-terrorism Act should be in mainstream legislation so that anti-terrorism powers could be clearly marked as such. The Government refused to do that.

The result is that, in order to achieve the protection of UK depositors, the Government have used legislation which carried the stigma of terrorism. On reflection, do the Government not think that it would be better if a more neutral legislative home for these powers was sought? Earlier this year, the Government took sweeping powers to deal with failing banks in the Banking (Special Provisions) Act, but clearly those powers did not equip them to handle the activities of all foreign banks operating in the UK.

As I mentioned, we will shortly have the pleasure of scrutinising the Banking Bill which is currently in Committee in another place. Will the provisions of that legislation be adequate to deal with situations such as Landsbanki in future? Or do the Government

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intend to continue to rely on the provisions of anti-terrorism legislation? I hope that the Government will not bypass this legislative opportunity to secure direct powers to deal with all potential threats to our financial system.

I think that the best that can be said of the freezing order procedure is that it has been an inelegant one. Others have passed harsher judgments. Early on the morning of 8 October, the Government issued one order, but the detailed text was not available until much later in the day, which was not helpful. The following morning they issued a general licence which corrected some of the defects of the original order. Four days later, on 13 October, they issued a second general licence which revoked the first licence but reinstated much of its contents. It has been put to us that the second licence is,

That was followed by a “clarification” issued on 17 October which purported to deal with what is and is not “frozen funds”, but I am told that these assertions are difficult to reconcile with the wording of the order itself.

Lastly, on 20 October, the Treasury issued another order which, according to the Explanatory Memorandum, makes,

If that description of “minor” is correct, I fail to see why the Treasury felt that it should disapply the usual 21-day rule for laying such instruments.

The impression which this has left in the financial community is of a poorly thought out sequence of events and lack of preparation. More importantly, the first order brought the markets in repos, swaps and derivatives involving Landsbanki to a halt, and this has challenged the credibility of the use of English law as the governing law in these global transactions. That in turn may well have long-term implications for the UK’s pre-eminence in the global financial services industry.

Can the Minister say whether the Government now believe that, two orders, two general licences and one clarification later, all the angles have been covered? Is the Treasury planning to review the effectiveness of its actions so that it learns lessons in case we are unlucky enough to find ourselves in this position again? Will the Minister reflect on the accountability of the Executive to Parliament and whether it is adequate? Before either House of Parliament had considered the first order, a second order varying it was laid, and in the mean time it had been considerably varied by two general licences for which there is no parliamentary scrutiny. There has also been a document of clarification which, according to some, clarifies nothing and certainly has no parliamentary scrutiny. The Treasury website sets out all this information, but the Minister can see that the sequence of events poses challenges to parliamentary accountability.

I am sorry to burden the Minister with so many questions on his first outing at the Dispatch Box, but these are important issues and I look forward very much to hearing his response.

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Lord Newby: My Lords, I join the noble Baroness in welcoming the Minister both to this House and to his new job. We are particularly pleased to have a proper Treasury Minister in our midst—not that the noble Lord, Lord Davies, was in any sense improper, but at times I felt that he was dealing with our questions with one hand tied behind his back because he was not of the Treasury, as it were. We are glad that the noble Lord, Lord Myners, will be able to take our concerns back to the Treasury with even greater speed than was possible with the noble Lord, Lord Davies.

I will not repeat the long list of achievements of the noble Lord in the City, but just two or three stood out for me. I note that he makes much of his Cornish upbringing. I can only assume that he has imbibed some of the liberal principles with which we associate that county and brings them to all his work in Parliament. He also mentioned contemporary art, and I see that he was chair of the trustees of the Tate Gallery. It says he that he “is” a trustee of Glyndebourne. I do not know whether he has been allowed to keep that on or has had to give it up as well, but I hope that the noble Baroness and I are not so assiduous that we keep him from both those enjoyments of life.

I turn to the legislation. As the noble Baroness has said, a number of questions have been raised, not least by my colleagues last week in debates on the Counter-Terrorism Bill about whether it was appropriate for this action to be taken using a piece of legislation called the Anti-Terrorism, Crime and Security Act. To most people, that sounds as though it relates to anti-terrorism, crime and security, but this action does not. I accept entirely that there are powers in the Act that can justify it, but at the very least it has given the impression that the Government have pushed the boundaries of what the legislation was intended to cover. Whether or not that is the case, it has obviously created difficulties in our relations with Iceland and caused confusion more generally. I have not heard it put in quite the way the noble Baroness did; her proposal was that the section of the Act used to justify these orders would be better placed outside the anti-terrorism Act and put into a separate piece of legislation. Indeed, the provisions look as though they were parachuted into the Act from somewhere else, or added using scissors and paste. The Act does not flow, as it were, and Section 4, which was used to justify these orders, looks completely out of place.

8.15 pm

I have a more general question about the legislative route taken. At the same time as the Government were instituting these orders, they were taking powers under the Banking (Special Provisions) Act for Kaupthing. In that case, they arranged for the retail deposits of Kaupthing to be shifted across to ING Direct while putting the bank into administration. Can the Minister explain why that route was chosen with Kaupthing and its retail depositors, but a similar procedure was not adopted for Landsbanki and the Icesave depositors? The great advantage for retail depositors with the Kaupthing route is that they have had access to their accounts all the way through. Equally, why was the remainder of the Kaupthing bank put into administration under the Banking (Special Provisions) Act rather

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than its assets being frozen? I am not suggesting that there is anything to hide here, but they are completely different routes and it would be useful to be given an explanation for it because I have not seen any so far.

The Minister spoke at some length about the licensing provision and the noble Baroness voiced perfectly understandable criticisms about the way that was brought about. I have just one question on that: have representations been made by any sector of Landsbanki account holders saying that they should have been beneficiaries of a licensing provision, but have still found their assets frozen when they feel that they should legitimately have access to them at this stage?

The noble Lord said a little about the timetable and the process going forward. I accept that we are at a point where things are progressing quickly and it is difficult to be totally precise. However, can he confirm that the Government have made a commitment that individual retail depositors will get all their money back and not just £50,000? I have read a number of suggestions to that effect. On the other bodies with deposits in Landsbanki—the local authorities, charities and businesses about whom there has been much discussion—can the Minister give us any sense of the likelihood of them getting a significant proportion or the majority of their deposits back? I realise that it may be impossible at this stage, but if he were able to say something, it would reassure many people.

We are not discussing the Kaupthing situation because the legislation under which the orders were made meant that they were passed using the negative resolution procedure, but as the Minister will be aware, the situation in respect of Kaupthing depositors, particularly in the Isle of Man, is causing considerable concern, not least because many of those involved were ignorant about the fact that their deposits were actually Isle of Man deposits. I shall come back to that point in a second.

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