Select Committee on Merits of Statutory Instruments Twenty-Ninth Report

Instruments drawn to the special attention of the house

The Committee has considered the following instruments and has determined that the special attention of the House should be drawn to them on the grounds specified.

A.  Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2008 (SI 2008/2645)

Summary: This Order introduces an additional public interest consideration into the process for the regulatory consideration of mergers under the Enterprise Act 2002, namely that of maintaining the stability of the UK financial system. The Order, which was laid on 7 October, has been made with specific relevance to the proposed Lloyds TSB Group plc/HBOS plc merger. The Secretary of State is unable to make decisions on that merger until Parliamentary consideration of the Order has been completed. When the Order is debated the House will have the opportunity to debate the effect of the significantly changed circumstances since the laying of the Order - particularly the re-capitalisation arrangements for HBOS and Lloyds TSB - on the policy underlying the Order, and the speed with which Parliament is being invited to amend the provisions governing mergers in the 2002 Act.

This Order is drawn to the special attention of the House on the ground that it gives rise to issues of public policy likely to be of interest to the House.

1.  The Department for Business, Enterprise and Regulatory Reform (DBERR) have made the Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2008 ("the Order") under sections 58(3) and 58(4) and 124(2) and 124(4) of the Enterprise Act 2002 ("the 2002 Act"). An Explanatory Memorandum (EM) and Impact Assessment have also been provided.

2.  The EM explains that the 2002 Act provides for the regulatory consideration of all mergers and acquisitions by the competition authorities on the basis of a merger's effects on competition in the relevant market. The 2002 Act also provides that the Secretary of State may intervene in any merger which, in his view, raises concerns relevant to a public interest consideration that has been specified in the 2002 Act or that he believes should be so specified. Before this Order, two public interest considerations were specified in the 2002 Act: national security; and plurality, quality and standards in the media. This Order introduces a third consideration: maintaining the stability of the UK financial system.

3.  Where the Secretary of State intervenes in a merger in this way, the Office of Fair Trading (OFT)[1] must provide a report to him, within such time as he may specify; and the Secretary of State must then take decisions on whether to refer the case to the Competition Commission or to clear the merger.

4.  DBERR explain that, since the coming into force of the 2002 Act, the power to intervene in mergers on public interest grounds has arisen seven times: five times on national security grounds in respect of mergers in the defence sector; once on media plurality grounds; and now once on the basis of this new consideration.

5.  In a press release of 7 October[2], DBERR state that on 18 September the OFT issued an Invitation for Comments inviting submissions on the proposed merger; and that the OFT must deliver its report to the Secretary of State by 24 October.

6.  In the EM, DBERR say that the Order is being proposed in the light of "the extraordinary stress in the financial markets and, specifically in the case of the proposed Lloyds TSB Group plc/HBOS plc merger, to provide for careful and urgent consideration of financial stability as part of the overall public interest assessment relating to the proposed transaction". The Department stress the urgency of the case because the Secretary of State is unable to make decisions on the proposed Lloyds TSB/HBOS merger until Parliamentary approval is received for the Order.

7.  The Order was laid before Parliament on 7 October. Its laying thus preceded the announcements made by the Chancellor of the Exchequer about financial support to the banking industry, notably on 8 and 13 October. The Order is scheduled for debate on 16 October. The House will then have the opportunity to debate the efffect of the significantly changed circumstances - particularly the re-capitalisation arrangements for HBOS and Lloyds TSB - on the policy underlying the Order, and the speed with which Parliament is being invited to amend the provisions governing mergers in the 2002 Act.

B.  Landsbanki Freezing Order 2008 (SI 2008/2668)

Summary: This Order freezes funds in relation to Landsbanki, an Icelandic bank which has been placed into receivership in Iceland. The Icelandic Government have announced a guarantee of all depositors in Icelandic branches, but overseas depositors have not been covered by the guarantee. By means of this Order, the UK Government are taking action to ensure that Landsbanki assets are not transferred from the UK until the position of UK creditors becomes more clear.

This Order is drawn to the special attention of the House on the ground that it gives rise to issues of public policy likely to be of interest to the House.

8.  HM Treasury (HMT) have made the Landsbanki Freezing Order 2008 ("the Order") under sections 4 and 14 of and Schedule 3 to the Anti-terrorism, Crime and Security Act 2001 ("the 2001 Act"). An Explanatory Memorandum (EM) and Impact Assessment (IA) have also been provided.

9.  The power to make a freezing order under the 2001 Act is exercisable (amongst other circumstances) where HMT reasonably believe that action to the detriment of the UK's economy (or part of it) has been or is likely to be taken by persons who are the government or resident of a country or territory outside the UK[3].

10.  The Order freezes funds in relation to Landsbanki, an Icelandic bank which has been placed into receivership in Iceland. This development has been of concern to those UK depositors who have placed savings in Icesave, a UK-based branch of Landsbanki, and Heritable Bank, a UK-based banking subsidiary of Landsbanki.

11.  In the IA, HMT explain that, while the Icelandic authorities have announced that Landsbanki has been placed into receivership, they have given no indication as to how overseas creditors will be dealt with. The Icelandic Government have also announced a guarantee of all depositors in Icelandic branches, but overseas depositors have not been covered by the guarantee.

12.  HMT state that this exclusion on grounds of nationality is discriminatory and unlawful under the rules governing the European Economic Area. As announced in the statement on financial stability which the Chancellor of the Exchequer made on 8 October[4], the UK Government are taking action to ensure that Landsbanki assets are not transferred from the UK until the position of UK creditors becomes clearer. HMT stress that the UK authorities are seeking to work constructively with the Icelandic authorities to ensure a speedy resolution.

13.  On 13 October, in his statement on financial stability[5], the Chancellor of the Exchequer said that the Government were working with the Icelandic authorities to facilitate claims by UK charities and local authorities on their deposits held at these Icelandic banks; and that the Bank of England was providing a short-term secured loan of up to £100 million to Landsbanki, to help maximise returns to UK creditors.

C.  Heritable Bank plc Transfer of Certain Rights and Liabilities Order 2008 (SI 2008/2644)

Transfer of Rights and Liabilities to ING Order 2008 (SI 2008/2666)

Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008 (SI 2008/2674)

Summary: These three Orders, which HM Treasury have made under the Banking (Special Provisions) Act 2008, are intended to help maintain the stability of the UK financial system by dealing with the impact on UK depositors of the difficulties affecting Icelandic banks.

These Orders are drawn to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.

14.  HM Treasury (HMT) have made these three Orders under powers conferred by the Banking (Special Provisions) Act 2008 ("the 2008 Act")[6]. An Explanatory Memorandum (EM) and Impact Assessment (IA) have been provided in the case of each Order.

15.  The Heritable Bank plc Transfer of Certain Rights and Liabilities Order 2008 (SI 2008/2644) was laid and brought into force on 7 October. Its purpose was to transfer the retail deposits of the Heritable Bank ("Heritable") into a period of public ownership in order to be able to pay out retail depositors in an orderly manner. It achieved this by transferring those deposits to Deposits Management (Heritable) Ltd, a company wholly owned by the Treasury for the purposes of the 2008 Act. Heritable was a UK-based banking subsidiary of the Icelandic bank, Landsbanki, which has been placed into receivership in Iceland.

16.  The Transfer of Rights and Liabilities to ING Order 2008 (SI 2008/2666) was laid and brought into force on 8 October. It transferred the retail deposits held by Deposits Management (Heritable) Ltd (as a result of SI 2008/2644) to ING Direct N.V, a company incorporated in the Netherlands ("ING Direct"). The relevant IA states that the Order transfers Heritable's deposit book to ING Direct, and explains that "the Government has considered a number of options and, having weighed up the various competing considerations, has assessed this to be the best solution for protecting depositors and ensuring retail consumer confidence." In a press release of 8 October, HMT have said that ING Direct is working to rapidly ensure that it is business as normal for all customers[7].

17.  The Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008 (SI 2008/2674) was also laid and brought into force on 8 October. It transferred the Kaupthing deposit book of "Edge" accounts to a publicly owned company followed by an immediate transfer of retail deposits of Kaupthing to ING Direct, in order (as HMT state in the EM) to "provide protection and continuity of business for depositors." Kaupthing Singer & Friedlander (KSF) was a UK-based banking subsidiary of the Icelandic Kaupthing Bank. In a separate press release of 8 October, HMT have said that the Financial Services Authority, which regulates KSF, had determined that KSF no longer met its threshold conditions, and was likely to be unable to continue to meet its obligations to depositors[8]. This press release also confirmed that, following the transfer, ING Direct was working to rapidly ensure business as normal for all customers.

18.  On 13 October, the Chancellor of the Exchequer made a written statement about the impact of these transfers on the Contingencies Fund[9]. This explained that the Financial Services Compensation Scheme (FSCS) had paid out approximately £3 billion to enable retail deposits held in Heritable and KSF and covered by the FSCS to be transferred to ING Direct; and that the FSCS had financed its payout through a short-term loan from the Bank of England, which would be replaced with a loan from the Government after a short period of time. As regards retail deposit amounts not covered by the FSCS, the statement added that HMT had made a payment to ING Direct, amounting to approximately £600 million; and that, pending Parliamentary approval for additional provision in a Supplementary Estimate, urgent expenditure estimated at £600 million had been met by repayable cash advances from the Contingencies Fund.

19.  We report separately on the Landsbanki Freezing Order 2008 (SI 2008/2688) which freezes funds in relation to Landsbanki. We believe that the House will be interested to see that the Government have in parallel made use of powers under the Banking (Special Provisions) Act 2008 to seek to secure the continued stability of the UK financial system against the impact of difficulties affecting Icelandic banks.

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1   In the case of a media merger, the Office of Communication (OFCOM). Back

2   See: http://nds.coi.gov.uk/environment/fullDetail.asp?ReleaseID=380619&NewsAreaID=2&NavigatedFromDepartment=True  Back

3   The powers are provided in Part 2 of the 2001 Act, entitled "Freezing Orders". It should be noted that Part 2 contains no explicit reference to terrorism. Back

4   HC Hansard, 8 October 2008, col. 279 Back

5   HC Hansard, 13 October 2008, col. 541 Back

6   SI 2008/2644 Heritable Bank plc Transfer of Certain Rights and Liabilities Order 2008 has been made under sections 6, 12, 13(2) of, and Schedule 2, to the 2008 Act; SI 2008/2666 Transfer of Rights and Liabilities to ING Order 2008 under sections 6, 8, 12 and 13(2) of, and Schedule 2 to, the 2008 Act; and SI 2008/2674 Kaupthing Singer & Friedlander Limited Transfer of Certain Rights and Liabilities Order 2008 under sections 6, 8, 12, 13(2) of, and Schedule 2 to, the 2008 Act. Back

7   See: http://www.hm-treasury.gov.uk/press_101_08.htm  Back

8   See: http://www.hm-treasury.gov.uk/press_102_08.htm  Back

9   HC Hansard, 13 October 2008, col. 24WS Back