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What I find difficult about this immediate period is that the Government, who have taken a shareholding or recapitalised a number of the banks and are therefore in a position of influence and leverage in those banks, are choosing not to exercise that leverage. I go back to the point made by my noble friend Lord Barnett. We have government-appointed directors on the boards of those banks. The Government clearly have a policy in relation to the extension of credit and other banking objectives, but we have taken the self-denying ordinance that those directors and that influence will not be exerted in any way other than in the narrow commercial interests of the bank and that the arm’s-length body that will be set up to invest will quietly stand back and not exercise that influence. In this crisis situation, I do not think that we should operate with that degree of coyness and I do not believe that the punters out there will understand why we are denying ourselves that influence. The Government—that is, the taxpayer—have put a lot of money in. They have policy objectives that, by and large, the population supports in this context, so surely in this period we should use that leverage to help to secure those objectives.

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If we are successful—and, one hopes, we will be successful in getting through this difficult period—a whole range of other issues arises. We must distinguish between this Bill’s provisions for the crisis that we must get out of and its steady-state provisions; indeed, noble Lords have made various suggestions about changes to the regulatory framework under which we operate. A number of areas need to be urgently addressed in that context, but they also need a period of serious, in-depth consideration. I welcome the fact that the noble Lord, Lord Turner, as chair of the FSA, has undertaken a review of the role of that agency, which I hope is broadened to the totality of the regulatory framework.

A number of steady-state issues exist, to which some noble Lords have referred, including the structure and number of regulators. The tripartite system is well known; it is also a tripartite system for consumers, who, depending on the nature of their ordinary transactions with their banks—whether it is for credit, a mortgage, a loan or a retail banking account—have to deal with the OFT, the Banking Code or the FSA. That is confusing to consumers and quite expensive to the industry and it needs looking at. The issue of due diligence of banks and their internal and external audit provisions also needs looking at, as does the corporate governance of banks, as other noble Lords have said. The governance of banks has a huge, economy-wide implication. The role of banks’ non-executive directors is different from the role of non-executive directors in other sectors.

There are wider issues, which the Government have been good at dealing with—for example, their policies on financial exclusion, bringing more people into the banking system and how they are brought in. Mention has been made of regulating credit rating organisations. That, too, is vital. More fundamentally, we should look, as we have done in other sectors, at the unbundling of some of the services that banks provide so that they are no longer both horizontally and vertically integrated organisations. Those are all legitimate areas for review and for this House to debate and they are important areas for the Government, the regulators and the industry to address. However, they are not the business of this Bill.

This Bill gives the Government and the regulators the basis to deal with the immediate emergency crisis—as I still call it—which it might take us two years to get out of. Other issues that I and others have raised at Second Reading are probably outside the scope of the subsequent stages of the Bill. That does not mean that there cannot be improvements to the Bill as it stands, but it is important that the House should recognise that distinction in subsequent proceedings.

8.01 pm

Lord Northbrook: My Lords, I support legislation that enables the Bank of England to rescue failing banks; therefore, I give overall approval to this Bill, as do the British Bankers’ Association and my opposition Front Bench. In particular, I applaud the increase by the FSA of the deposit protection limit of the Financial Services Compensation Scheme to £50,000.

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I wish to focus on five areas of concern. Other speakers have covered them, but I think that it does no harm to emphasise them again. These concerns and suggested remedies are not especially political, but are expressed with the view of improving the Bill. After this, I wish to make some general comments on the banking crisis.

My first area of concern, as many speakers have mentioned, is Clause 4. I, like others, am concerned that the tripartite regime has still not appreciated that for any but the smallest institutions the main objective must be to put into place arrangements by which customers would have continued access to their banking facilities. As my honourable friend Mark Hoban said in another place, the priority should be “financial stability”, which would be achieved by “continuity of service”. I agree with his view that it would be vital to have amendments that help to ensure that a failing bank is,

because this will,

Bradford & Bingley, for example, comes with a £14 billion interest liability for the industry, but the use of the special resolution regime to enable the transfer of the deposit base was much preferable to insolvency and paying out compensation cheques to millions of depositors. The continuity of banking services is vital to the maintenance of consumer confidence and financial stability, as opposed to an assurance of compensation payment, even in seven days, and I believe, like the BBA, that this ranking should be expressed in the Bill.

To justify my argument for the continuity of banking services, I cite the impact assessment of the Bill, which states that in the UK 90 per cent of wages are paid directly into a bank account, approximately 98 per cent of benefits are paid into a bank account or Post Office card account, and that over 75 per cent of adults have at least one direct debit.

My next area of concern is Clause 7, in particular subsection (3), which proposes that the second condition should be that it is “not reasonably likely” that action will be taken by or in respect of a bank that will enable it to meet its Financial Services and Markets Act threshold conditions. I believe that a higher test should be set and that the second condition should be premised on it being “highly unlikely” that the threshold conditions will be satisfied.

My next areas of concern are Clauses 47 and 48, as mentioned by many other speakers, which involve the safeguards for partial transfers. The details here are not for today’s debate; they involve the protection of counterparty creditor rights in the event of a partial transfer under the special resolution regime.

The banking industry has raised with Ministers concern that the significance of these issues has still not been grasped and that there is the potential for a real detrimental effect on the willingness of banks to transact in the UK. This could have a hugely significant bearing on the competitiveness of the UK financial services and the capital position of UK banks. In addition, it believes that, as matters stand, lawyers will

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not be able to give clean legal opinions in support of set-off and netting arrangements and that, as a result, there could be a dramatic shift in the willingness of businesses to transact with UK banks. I believe, therefore, as many noble Lords have said,that rather than having a non-statutory code of practice, safeguards should be included in the Bill itself.

One cannot overemphasise the extent to which institutions are currently contemplating the need to unwind positions in the event of the requisite legal certainty not being delivered in advance of the Bill receiving Royal Assent. This would result in huge extra costs for the banks and would bring with it the very real prospect of international banks moving operations out of the UK and UK banks closing large parts of their business activities and being obliged to reduce their balance sheets on a large scale. What is the Government’s view on this whole area, and do they plan to introduce necessary and important amendments to these clauses?

My next area of concern is Clauses 63 to 67, which would give the authorities powers in the event of a partial transfer to require the residual bank and all other group companies to provide services and facilities to the entity to which there had been a partial transfer. I believe the clauses are too open-ended and have the potential to expose other group companies to major risks. It is also important, in my view, to establish a time limit for the provision of such services—for, say, between one and three years, with a 12-month notice period after that.

My next area of concern is Clause 75. The Government have taken on board that this clause was too broad in scope and that it was unwise to build into a Bill powers to revise any aspect of the legislation with retrospective effect. However, Clause 75(3) still provides the power by which this part of the legislationcan be amended retrospectively to facilitate a special resolution. This power needs, however, further limitation and the setting of better parameters for its use. I understand that it would still be possible to overturn the safeguarded arrangements by amending contract law. In addition, as has been mentioned by other speakers, we await the report of the Delegated Powers Committee on this clause.

My next area of concern comes in Clause 167. As the noble Baroness, Lady Noakes, said, the idea of a pre-funded compensation scheme is not suited to the UK market. It simply takes away funds that could be lent to stimulate the economy. I do not believe that it would contribute substantially to UK confidence. On the other hand, Clause 170, which permits the Treasury to make loans to the Financial Services Compensation Scheme from the National Loans Fund, seems much more sensible. The recent transfer of Bradford & Bingley’s retail deposit business demonstrated the value of such a facility and that prompt effective action to safeguard the interests of depositors can be taken without the existence of a pre-funded deposit protection scheme.

I go on to look at the impact assessment. The document signed by the Chancellor of the Exchequer in October 2008 claims total costs arising from the Banking Bill of only £2.2 million to £4.5 million.

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However, the costs of the FSA proposals for banks to marshal their customer base into a “single customer view” could be as much as £1 billion, according to an independent study to be published by Ernst & Young in January on behalf of the FSA, FSCS and the BBA. Can the Minister confirm these figures?

There also must be a cost to the FSCS of making contingency plans to issue cheques to several million customers, which would be very different in scale from making contingency arrangements to make payments to several thousand.

Furthermore, I agree that the legislation should be reviewed independently after four years, to consider its impact on the UK banking and financial system. I understand that a similar provision was included in the Financial Services and Markets Act and the Terrorism Act. All secondary legislation should be subject to an affirmative resolution and preceded by a full consultative process.

I wish to make a few general comments about the banking crisis. To blame the crisis entirely on world events is wrong. In the UK, the tripartite regime has failed to do its job properly. It replaced the previous scheme, which, as the noble Lord, Lord Bilimoria, said, worked perfectly satisfactorily. I am sorry that the noble Lord, Lord Turner, is not here to update us on what the FSA is planning to do to improve regulation.

If the tripartite regime had done its job properly, banks would have been better regulated and the banking crisis could possibly have been avoided. All this legislation would not have been necessary. As important as the banking Bill is the need to get the global and the UK financial regulatory system in better order—on that note, I wish to repeat the remarks made by the noble Lord, Lord Bilimoria, on the weaknesses of the Financial Stability Committee. This means having financial regulators who understand the subject, who may be on secondment from banks or legal firms and who are well paid.

If we do not pay the regulators well, people who might have joined them will go and join the banks instead. The regulators must understand how bank balance sheets work, and ensure that sensible ratios are kept to and off-balance-sheet vehicles are carefully monitored. The regulators also need to consider whether a Glass-Steagall type law should be reintroduced in the UK and the US, which separates investment banks from clearing banks.

Realistic levels of bank lending must take place. The Government should not have stated that they wish the banks to return to the levels of 2007. In some way the Banking Bill addresses none of the issues I have just mentioned. It is a Bill to tackle crises when they arrive and entirely fails to address major regulatory issues. As the noble Lord, Lord Williams of Elvel, said, I cannot see how this Bill could prevent future disasters.

8.12 pm

Lord Oakeshott of Seagrove Bay: My Lords, as my noble friend Lord Newby said—and as both the opening speakers summed up pretty well—we support the purposes of this Bill. However, as the noble Baroness, Lady Noakes, said, there is some way for this Bill to travel.

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We are concerned about the wide regulation-making powers in Clause 75 and will be addressing that in more detail in Committee.

This is a timely Bill. I had a stark reminder of that earlier in this debate, while popping out to the Peers’ lavatory, when a highly respected Peer came up to me, because he had heard me speaking the other day during the Queen’s Speech debate—I will not say who he was or the name of the bank—and asked whether the £100,000 or so he had in a leading British bank was safe. I checked to make sure that he was talking about a deposit, rather than a shareholding, and said that it was and that I was sure of that. I can understand why he asked, particularly as this was one of the banks which are all over the newspapers today, being one of the mugs taken for a ride by Mr Madoff. It is an extraordinary state of affairs—the noble Lord, Lord Whitty, put it pungently and well—that banks have let themselves get into this sort of situation with this sort of shyster.

Let me declare my interests as I should, not just as a pension fund manager for the past 30 years but, in this context, as a director of a subsidiary of Close Brothers Plc, which is a British bank. I thank the noble Lord, Lord Selsdon, for declaring some more of my past—that I was previously a director of Warburg Investment Management, where, I like to think in those far-off days, we more or less invented spread betting. However, at least there, we used to do it with our own money, knew the risks that we were running and paid out with a smile. I was lucky enough to be recruited to Warburg’s by Sir Siegmund Warburg. Working for Roy Jenkins, he gave me an introduction to Lord Rothschild and to Siegmund Warburg. It may well be, had I taken the job at Lord Rothschild’s, that later I would have been competing with the noble Lord, Lord Myners.

It has been an interesting debate. I was most struck by the speech of the noble Lord, Lord Whitty, who spoke up for the consumer or the punter, if I can put it that way. The problem we have is that banks are effectively on strike. Whatever they say, almost all of them are closed to new business lending. I say this, not just having heard the anecdotal stories that we all hear from banks, but also from a good deal of knowledge from inside those banks. The people who are in those banks—decent people, in the lending teams—are finding it heartbreaking that they have to cut back all the time. They are under extreme pressure to cut back their loans.

We are not just talking here about small or shaky companies. Mainstream, large British companies are under pressure the whole time to reduce the risk-weighted assets and claw money back. Frankly, the recapitalisation of the banks is not working. Following on from the noble Lord, Lord Whitty, I ask the Minister if he will respond on the narrow way in which the Treasury seems to be regarding the function of UK Financial Investments Limited. I looked up, and have here, a role specification for the position of a non-executive director with UK Financial Investments Limited, which describes the overarching objective as being,

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However, this aim seems to be focused on trying to get the taxpayers’ money back as soon as possible, which is not the reason why £37 billion is being put into these banks by the taxpayer. Would the noble Lord, Lord Myners, look at that again?

The first appointment I believe to have been made to this body is a former investment banker from Merrill Lynch. It seems to me and many others that the people representing the Government on this body—and indeed we believe that there should be directors on the boards of the nationalised banks—should have a proper spread of business and consumer public experience. It should not be such a narrowly drawn remit.

There were a number of themes in the debate. One, in particular, was mentioned by four speakers: the noble Lords, Lord Blackwell, Lord Williams of Elvel, Lord Whitty and Lord Northbrook, all referred to the Glass-Steagall Act and whether banks should have been allowed to be involved in such gambling and active investment banking. Barclays Capital would be the most obvious and extreme example. We on these Benches think that that should be considered very seriously by the Government and the country. It is a very worth while and important point.

I pay tribute to my former colleague in the investment management industry, the noble Lord, Lord Smith of Kelvin, who made a very thoughtful and penetrating contribution from his great experience and recent knowledge. As other noble Lords have said, we greatly look forward to his contributions to our debates.

As always, the noble Lord, Lord Bilimoria, made a very interesting speech, highlighting the conflicts of interest faced by credit rating agencies and how we can deal with that. I agree that the business model is fundamentally flawed in the way that they are remunerated by the wrong side of the bargain, as it were.

As so often happens, my noble friend Lord Smith of Clifton made a powerful and hard-hitting speech, saying more in eight minutes than some other speakers did in 15 or 16. He said that there should be a sunset clause and made a powerful point about the proper representation of women on the boards of our banks. I look forward to the Minister’s reply.

The noble Lord, Lord Eatwell, made a speech with which we on these Benches strongly agree. We were struck by his suggestion of a joint financial stability committee acting as a bridge between the Bank and the Financial Services Authority. We support that suggestion and hope that he will press it in Committee; if he does, he will have our support. In his wide-ranging speech, the point about systemic risk being ubiquitous in markets was particularly well taken. Given the chains of transactions that are taking place, and following on from Lehmans, there are still many worries in the market about whether transactions will settle. We are far from being out of the woods yet.

The noble Lord, Lord Peston, made a very wise speech, focusing, rightly, on greed. We all know that greed and fear are what move markets, and there has been a great deal too much greed recently. To sum up how he started, it was a case of truth being stranger than fiction. If any of us had ever written a novel about what has happened, it would have been thrown straight into the trash can.

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This has been a good debate, with some interesting contributions which we have greatly enjoyed. The noble Lord, Lord Lipsey, talked about ambiguity, paradox and contradiction, but there was nothing like that in his remarks. We were very taken with what he said about the Financial Services Compensation Scheme.

I have already thanked the noble Lord, Lord Selsdon, for revealing some of my misspent youth, and it was interesting to share his reminiscences. The noble Lord, Lord Northbrook, made good points about set-off arrangements, which we shall deal with in detail in Committee. We have had representations from the British Bankers’ Association and from banks.

It has been an interesting and productive debate to some extent. We have talked more about general banking matters, which the Bill cannot address, but there are detailed points of amendment. To get the banks lending again is vital and we must do anything we can in the Bill and bring pressure to bear to achieve that. Let us be under no illusion: if the banks do not start lending—as much to big and medium-sized businesses, particularly those which are backed by private equity, many of which are in grave difficulties—millions and millions more people will become unemployed. There will be a real black hole of failure. Individually, each bank may, from its own point of view, be taking decisions that are understandable but collectively they are doing completely the wrong thing. Only the Government can get the banks to lend again together; if they do not, the country faces a very bleak future.

8.23 pm

Lord Howard of Rising: My Lords, I, too, congratulate the noble Lord, Lord Smith of Kelvin, on his maiden speech. His experience and the insight that it brings will be a welcome addition to this House.

As my noble friend Lady Noakes said, we on these Benches have offered our assistance and support to ensure that the Bill is enacted in a timely fashion. I very much hope that the Minster will respond in a similar spirit of co-operation and good will by listening carefully to the comments made during this debate.

It is almost inevitable that enacting a complex piece of legislation against a deadline will result in alterations being needed as the Bill progresses through Parliament and quite possibly after it has become law. Indeed, Her Majesty’s Government have already proposed changes since the Bill was first introduced. Many of the comments made today have been of a technical nature with the aim of ensuring that the legislation works properly and that future problems arising from unforeseen consequences are avoided. Therefore, it is important that the Government fully consider these points.

My noble friend Lady Noakes has, as usual, made many sensible suggestions. They all merit the Minister’s attention, but in particular I draw his attention to the remarks on set-off and netting arrangements, a subject also referred to by the noble Lord, Lord Eatwell, and others.

It is essential that the banking and financial services industries operate against a background of absolute certainty where the legality of their arrangements is concerned, as my noble friend Lord Northbrook mentioned. In a litigious world, it is impossible to

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cope with the vast amounts of money involved without there being cast-iron certainty for all legal arrangements. Without that certainty, large parts of banking business carried on in London will go elsewhere. Parliament should be assisting the proper management of the industry rather than creating difficulties. As we have all seen in the past few months, banking is difficult enough without introducing laws that cast doubt over the conduct of normal everyday banking business.

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