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The other point is that the confidence that banks’ customers have in the banking system as a whole is linked to whether they can place their trust in the banking system working for them when they need it—which is almost all the time. When Bradford & Bingley was dismembered in the autumn, the one good thing that the Government achieved was the seamless transfer of banking services available to Bradford & Bingley customers to Abbey Santander. It may be that, when the Bill was drafted, the importance of continuity of service was not well articulated and therefore not reflected in the drafting, which led to its being drafted as if deposits alone were the important aspects. I hope that recent experience will have brought home how important this is and the fact that it needs to be reflected in the Bill.
In addition to the benefits to all bank customers of seeking a solution which includes continuity of service, the Minister will be aware that there is a huge potential impact on the cost of action taken under this Bill if continuity of service is not achieved. The Financial Services Compensation Scheme is a critical component of this. We will not reach the clauses dealing with the FSCS for some time, but the banking industry backed up by an independent study by Ernst and Young estimated that the FSA’s consultation document on faster payout via the FSCS will cost around £1 billion over the first five years, whether or not faster payout was ever required.
Under the FSCS, faster payout would not be important if continuity of banking services were embedded as one of the objectives of the special resolution regime. There is a serous policy issue about whether one of the tripartite authorities—namely, the FSA—should be pursuing a cost-laden approach to the FSCS, which could be largely settled by making continuity of banking services an SRR objective. I know that the Government appreciate the need for the continuity of banking services and the differences between us may not be that great. In that light, I am hopeful that the Minister
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Lord Newby: This seems an eminently sensible amendment. For the reasons set out by the noble Baroness, we support it. I have nothing to add to the arguments she has made in its favour.
Lord Northbrook: I support the amendment proposed by my noble friend Lady Noakes. I point out that the impact assessment on the Bill subscribed total costs of only £2.2 million to £4.5 million to the banking reform proposals included in the Bill. That seems a very low figure.
Lord Oakeshott of Seagrove Bay: The noble Baroness makes a good point. She gave the example of utility bills being paid. When we think about what has been happening and the problems of the banks effectively in many cases cutting off supplies to business—I think that is a fair way to put it—I think the parallel is apposite. It is as if businesses were having their gas, water or electricity supply cut off without, in many cases, being able to go to an alternative supplier. Continuity of service is a very important point and I strongly support the amendment.
Baroness Turner of Camden: I have been listening to this debate as a non-expert, but as a very concerned member of the depositing public. Continuity of service is a matter of grave concern to many of us. I really do not know what I would do without my bank. Therefore, the whole idea of continuity is basic to the whole idea of security. I hope that my noble friend will consider this amendment with a view to incorporating it or something like it in the Bill.
Lord Whitty: I add my voice to the growing swell of support for the amendment. In doing so, I declare my interest as the chair of Consumer Focus. The amendment addresses exactly the kind of concerns that the ordinary consumer of banking services is worried about and which affect the viability of many small businesses. I ask my noble friend to look at this and to either accept it or come up with a similar amendment.
Lord Stewartby: I suggest to the noble Lord that he is going to have to accept this provision sooner or later; it would be very good if it were sooner.
Lord Myners: I thank noble Lords for their advice. I do not think that there is a great difference in opinion between us. It is really a matter of how the objective is delivered. I am not entirely clear whether the noble Baroness, Lady Noakes, envisaged that continuity of banking services would have as broad a definition as the noble Lord, Lord Oakeshott, appears to be suggesting, where it might be construed that continuity of service extends to a commitment to make credit available. I take the definition as being more relevant to the observation made by my noble friend, and as enlightened by the reference of the noble Baroness, Lady Noakes, to Bradford & Bingley—namely, the continued availability
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I will take into account the comments on this point that have come from all sides of the Chamber. However, I would like to set out the factors that I also will be weighing in the consideration, ones that will lead to my inviting the noble Baroness, Lady Noakes, to withdraw the amendment.
I do not believe that the amendment is necessary as both the second and third objectives, as set out in the Bill, implicitly include the concepts of access to deposits and ensuring continuity of banking services. If there is any doubt regarding this, the draft code of practice, which was published in November 2008 under the title Special Resolution Regime: Safeguards for Partial Property Transfers, makes this explicitly clear. The term,
refers to the crucial role that public confidence has in maintaining the stable and efficient operation of financial services and markets. The confidence of the general public is of particular significance in maintaining stability in a banking system based on a fractional reserve model, whereby banks’ deposit liabilities exceed the liquid assets they hold at any one time. The Committee knows that confidence is critical to banking. The code goes on to state that public confidence has a number of dimensions. For example, it refers to the expectation that, first, deposits will be repaid in accordance with their terms; secondly, normal banking services will be continuously available; thirdly, problems, or perceived problems—and this takes me back to the point I was making earlier in response to an observation from the noble and learned Lord, Lord Mackay—in one bank or building society will not extend to other banks; and fourthly, if a bank or building society fails, systems exist to protect the interests of depositors.
There is further discussion within the document, in the sections of the code relating to the objective of depositor protection—of the need for continuity of service and rapid access to funds—to which I refer Members of the Committee. Copies are available on the Treasury website or from the Bill team, which is standing by to help Members of the Committee with any inquiries they might have.
Returning to the matter in hand, an explanation of the meaning of terms referred to in the SRR better fits in the code of practice than in the Bill. I therefore invite the noble Baroness to withdraw the amendment but, in so doing, I assure her that I will take it away and give the matter further consideration.
Baroness Noakes: I thank the Minister for that reply, and all other Members of the Committee who have taken part in this relatively short debate. It may have been short, but the importance of the issue has been well set out. I know that all the Minister’s speaking notes are designed to say “I ask the noble Baroness to withdraw her amendment”, and am pleased to see that the Minister has managed to modify that in responding to this one.
The Minister referred to the explanations in the code, to which I referred in my introduction. I was aware that the issues were dealt with in the code, which is why I said that we were not far from the Government
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There is an issue of what we mean by “banking services”. The Minister referred to them in terms of having access to one’s assets. Of course, a conventional banking relationship might have an overdraft. It is just as important to an individual that an overdraft within an agreed limit is not immediately disturbed, because that is just as disturbing to household finances as the removal of a positive balance. The same is true for small businesses; I do not know where you draw the line before getting up to large businesses with large lines of credit and so on. The issue is not just about individuals and positive balances. The examples that the Minister read out from the code were about positive balances, and we must think about this in a broader sense.
I heard the Minister say that he would take this away and think about it. I genuinely hope that he will, because it is important to have this issue properly reflected in the Bill in words that everybody feels comfortable with. It is also important to get my earlier point, on whether the FSCS might be overengineered in the absence of a continuity of service objective, positively recorded early in the Bill. I have great pleasure in withdrawing the amendment for today, but we will return to this issue one way or another.
11: Clause 4, page 3, line 21, at end insert—
“( ) Objective 3A is to protect and safeguard the value of the enterprise.”
Lord Newby: The amendment would add a further objective to be taken into account when contemplating using the special resolution regime: to protect and safeguard the value of the enterprise. This would in no way undermine or reduce the significance of the objectives already in the Bill, but it is important that we do not lose sight of those other stakeholders affected when the special resolution regime is brought to bear: the shareholders and the creditors.
We will come to the issue of creditors on Amendment 13 tabled by the noble Baroness, Lady Noakes, but my concern with this amendment is for the banks’ shareholders. Of everybody involved in this saga, it is, in a way, easy to have little sympathy for the shareholders. One is necessarily worried about the overall banking system, the depositors and their ability to continue their ordinary day-to-day activities, as we have just discussed—it is crucial that the banks continue in operation—but the position of the shareholders is also important. In considering this, it is important to think about who the shareholders are. In much popular discussion of shareholders there is a view that they are fat cats who have nothing better to do than speculate left, right and centre. However, as we know, shareholders, not least in banks, and very often pension funds, are individuals who see a low-risk investment in a bank—as they see it—as part of their individual pension pot. Therefore, if you look at in those terms, it is very much
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It may seem a bit perverse to talk about preserving the value of a bank which by definition is in difficulties and without this special resolution procedure is likely to go bust anyway. That is the only basis on which the special resolution regime is brought into action in the first place. However, the extent to which there is a residual value in the bank at the point when it goes into the special resolution regime can vary dramatically depending on the point at which action is taken by the authorities to put it in the special resolution regime. The obvious example is Northern Rock. If the Bank had facilitated the transfer of Northern Rock to Lloyds TSB in late August, early September 2007, there would have been a residual value for the shareholders. Now there is none. We are not talking about a theoretical issue here; it is a matter of practical significance. Including this amendment in the Bill would put pressure on the authorities to move quickly when they fear that the SRR may be needed in order to protect these assets. At the moment, the authorities want to act before the bank goes bust and before the queues start, but there is no particular pressure on them to move quickly and to have any regard at all to shareholder interests. That is the purpose of the amendment. I hope very much that the Minister will feel able to accept it.
5.30 pm
Lord Higgins: Thinking back to the Northern Rock episode, I believe there was some problem at the time for the Governor of the Bank of England with regard to European legislation. It turned out that he was prevented from doing what he would like to have done by the way in which the implementation of that European legislation was carried through this House rather than the form in which it originated in Europe. That brings me to a point which is worth making and was made by the noble Lord, Lord Newby, a moment ago. To some extent it is related to the whole issue of property rights, which is picked up in objective 5. Clause 4(8) states:
“Objective 5 is to avoid interfering with property rights in contravention of a Convention right (within the meaning of the Human Rights Act 1998)”.
But, surprisingly, Clause 4(9) states:
“The order in which the objectives are listed in this section is not significant; they are to be balanced as appropriate in each case”.
Am I wrong in thinking that it is not possible for the provisions of the Human Rights Act, and in particular the European Convention which it reflects, to be balanced against these other objectives, and that the provisions of the Human Rights Act and the European Convention, which is an international convention, would be bound to prevail in any case?
Lord Howard of Rising: Before speaking to this amendment I must declare an interest in both Bradford & Bingley and Northern Rock. As an investor my natural instinct is to encourage the protection of enterprise
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Another caveat to enterprise value, if it ends up being included in the Bill, is that without a clear definition of what precisely is meant by the expression, there is always the possibility that lawyers might find different forms of enterprise value for which compensation could be looked for from the taxpayer. If the Minister accepts the amendment, I urge him to include a suitable definition of “enterprise value”.
In summary, these Benches support the amendment. However, I hope that the comments which have been made will be considered when looking at it.
Lord Myners: I await with trepidation to receive Hansard to discover how inadequately I answered the question of the noble Lord, Lord Lamont. However, I am much more confident that I can correctly answer the question of the noble Lord, Lord Higgins; namely, that we cannot undermine our legal commitments and obligations under the relevant directive.
I am grateful to the noble Lord, Lord Howard of Rising, for asking about a definition. If I was challenged to define “temporary”, I am certainly even more challenged to define “enterprise value”. As it is customarily used in business and finance, the enterprise value of a company usually comprises a number of elements, including the market capitalisation of the equity of the institution; that is, the market value of the shares in issue, and the market value of debt financing and other liabilities. This concept is much easier to apply to a non-financial institution in which the vast majority of the enterprise value lies in debt instruments rather than equity. It is extraordinarily difficult to interpret this concept of enterprise value as customarily used in business to give effect to the amendment proposed by the noble Lord, Lord Newby. As he took the opportunity to digress a little to talk about the plight of bank shareholders, I hope that I might do likewise. Certainly from my perspective that is sometimes more appealing than reading the notes prepared for me telling me that I should reject the noble Baroness’s amendments, from which I am occasionally willing to deviate.
The noble Lord, Lord Newby, said that he sometimes had difficulty expressing sympathy for shareholders of failed banks. However, he was also absolutely right to point out that those shareholders are in most cases institutional investors and that the funds are used to provide our pensions, protection and insurance and to meet future needs. The media may well have an image of shareholders as fat cats, speculators and hedge funds but that simply is not the case. No doubt we shall discuss Equitable Life later this week. I am reminded that Lord Penrose, who produced a report on it, said that the members of that society were the authors of their own misfortune.
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I say to the noble Lord, Lord Newby, that I think there is a parallel to some extent here, in that there is a challenge to the owners of banks as to whether they were appropriately engaged in asking questions about what the banks were doing, why they were increasing their leverage and why they were accepting progressively lower returns on assets. Did they have a good appreciation of the risks associated with the products that they were creating and purchasing? Did they have a good grasp of the overall impact of the remuneration arrangements that they had set in place and the possibility for those remuneration arrangements to have dysfunctional consequences as far as the shareholders were concerned? While I have sympathy for shareholders in respect of what has happened, there are some important questions to be asked about how institutions conduct their own engagement with companies and how they relate to boards of directors.
I do not believe that a core objective of the SRR should be to protect enterprise value in terms of measuring the value of a firm. When a failing bank enters the SRR, the stabilisation options in the Bill are deployed because the authorities believe that they are necessary in the public interest. At this point, the wider public interest of financial stability, depositors’ interests and the protection of funds may well outweigh the commercial interest of the bank. This need to balance the public interest in exercise of the SRR tools against the interest of the bank itself and its creditors is implicit in objective 5—to avoid interfering with property rights in contravention of the convention rights. This objective ensures that any interference with the rights of the company and its creditors must be in the public interest and that the interference must be proportionate.
Therefore, I reassure noble Lords that a number of specific features of the SRR will operate to safeguard and protect the value of the failing bank. The Bill is designed so that the stabilisation options of the SRR can be applied before the insolvency threshold has been reached. This has been specifically designed to allow the authorities, in pursuing a successful resolution of a failing bank, to preserve residual value that may remain in the business.
I draw the attention of noble Lords to Clause 58, to which amendments have been tabled. The clause introduces the bank resolution fund. This fund, which is compulsory for a bridge bank but optional when taking a bank into temporary public ownership, is designed to ensure that the proceeds of any resolution, minus deductions necessary adequately to safeguard public funds, whether actually applied or put at contingent risk, must flow back to the failing bank.
If the Bank of England or the Treasury put in place a bank resolution fund, the resolution fund order may place a duty on the authorities to maximise the proceeds available for distribution subject to meeting the special resolution and bridge bank governance objectives. This mechanism should also help to achieve the result that the noble Lord, Lord Newby, is looking for in the amendments. I ask him to consider withdrawing the amendment.
Lord Higgins: I shall intervene for a moment, because I am not entirely happy with the noble Lord’s answer. On the front page of the Bill, he states:
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“In my view the provisions of the Banking Bill are compatible with the Convention rights”—
that is, the rights under the human rights convention. Accordingly, Clause 4(8) states that one of the objectives is,
Clause 4(9) states that the objectives “are to be balanced”. I cannot quite see how you would balance something which, in terms of the noble Lord’s provision at the front of the Bill, appears to be absolute.
5.45 pm
Lord Myners: I suggest to the noble Lord, Lord Higgins, that in circumstances where objective 5 is relevant, it clearly cannot by definition be subordinated to the other objectives.
Lord Newby: I am grateful to the noble Lord for giving me such a full reply. This is probably not the time to have a full debate on how shareholders exercise their power, but I think that the noble Lord would agree that the theory of shareholder power is very far apart compared to the practice. Shareholders do not necessarily in reality have the information that they need, or the ability to question management on an ongoing basis, in a way that would allow them to exercise judgment as he would wish. In the case of Northern Rock, for example, it would appear that not just shareholders but the FSA went for months without realising what was going on. To expect an individual shareholder to have such a close knowledge of what is happening to a body in which they have invested, and then to be able to exercise any authority over it, is a pipe dream rather than reality.
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