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DPCommittee: 1st Report

Committee (2nd Day)

4.26 pm

Clause 10: Banking Liaison Panel

Amendment 31

Moved by Baroness Noakes

31: Clause 10, page 6, line 3, after “arrangements” insert “about—


Baroness Noakes: I shall move Amendment 31 and speak to Amendment 32. Before I do so, we heard a few moments ago in the Statement repeated by the noble Lord, Lord Mandelson, that there would be an amendment to the Banking Bill. We were given no prior notification of that, which is the normal practice. Indeed, I have amendments in the Marshalled List that relate to loan guarantees. Will the Minister ensure that Members of the Committee are informed of the nature of the Government's intentions in relation to the Bill?

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My amendments seek to extend the role of the banking liaison group. They seek two new functions or roles for the banking liaison group as set out in Clause 10(1). The first of these is to monitor the special resolution regime and its impact on markets. I have talked about unintended consequences already and some form of feedback mechanism ought to be written into the Bill. The second is to recommend changes to the statutory instruments referred to in the current function of the group.

As I have already said in Committee, the introduction of this clause in Committee in another place was welcomed by the banking community, as was the setting up of the forerunner, the expert liaison group. Without wishing to look a gift horse in the mouth, it has been suggested that the terms of reference should be extended. If the initial statutory instruments will be made shortly after Royal Assent, which I believe is the intention, it is difficult to see what function the banking liaison group will have until the Treasury decides that it needs to revise some statutory instruments, which could be some time away.

I hope that the Treasury has found that the expert liaison group has been useful and has allowed the Treasury to access practical knowledge that can be useful to it. I am well aware that Treasury officials are extremely able, but they do not necessarily know everything about everything in the outside world. It would be beneficial for the Treasury if the Banking Liaison Panel were to have a more proactive role than simply responding to statutory instruments that the Treasury chooses to put before it.

That is basically what my amendment seeks to set out. I do not expect that the panel would be in constant session or would even need to meet frequently, but it would provide a standing mechanism for the tripartite authorities to tap into the views and experiences of those actually operating in the bank marketplace. I beg to move.

4.30 pm

Lord Davies of Oldham: As the noble Baroness has indicated, the panel has in a sense already been created; it is currently known as the expert liaison group and it will eventually become the Banking Liaison Panel. It is an important addition to policy development in this area and, as the Committee will know, it has already been very successful in informing the work taken forward on partial transfers as safeguards. In fact, Clause 10 was added following a request from stakeholders to provide a statutory basis for this group. Clause 10 therefore represents the Government’s continuing commitment to engagement with stakeholders on the development of the special resolution regime.

Clause 10 refers to the most pressing and important area of the special resolution regime and the primary focus of the expert liaison group’s work at present; that is the development of the secondary legislation under Parts 1 to 3 of the Bill, which underpins the special resolution regime. In particular, the current remit of the expert liaison group includes the secondary legislation that relates to safeguards for partial transfers.

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The purpose of the second half of the amendment is to allow the panel to advise the Treasury on what changes should be made to secondary legislation made under Parts 1 to 3. As it will already have been appreciated by the Committee, I agree with the intention behind this part of the amendment. It is indeed right that the panel be involved not only in the preparation of the first set of standing legislation to be made under Parts 1 to 3, but in advising the Treasury in due course as to what changes may be needed to that legislation.

We do not see the role of the panel coming to an end when the Treasury makes the first set of standing secondary legislation that underpins the special resolution regime. The panel will have a continuing and ongoing role to provide advice to the Treasury as to the appropriateness of that legislation. However, the clause is clear that this is the case and is the Government’s intention and will, subject to the passage of the Bill, become law. Therefore, this part of the amendment is not strictly necessary.

On the other parts of the amendments, the primary function of the Banking Liaison Panel should be the secondary legislation that underpins the special resolution regime. The amendment would expand this remit to the operation of the special resolution regime, including the drafting of the transfer orders, and to advise on other legislation that may be relevant to the SRR. I do not see this panel as the appropriate mechanism to advise on the operation of the special resolution regime. It is chaired by the Treasury and its purpose is to inform the development of, or to review, standing policy. It would of course be impossible to consult the panel before drafting the transfer orders, due to the likely need to act quickly and the need for confidentiality, which I am sure the House respects.

For similar reasons, we do not believe that the panel should have a role in reviewing the drafting of a particular transfer order, even after it has been laid. It would be extremely difficult for the Government to engage in an active discussion on the effect of a transfer order for a particular organisation, as there is likely to be an active and ongoing compensation process and there may be additional litigation proceedings.

I do not think that the panel should have a statutory remit under the Bill to consider other legislation, as the amendments imply. Other groups have been set up to consider and review other legislation and I would not wish for this group to focus on such matters.

Having set out the reasons for the specific limitations of the group, and, therefore, why I shall ask the noble Baroness to withdraw her amendment, I would like to explain how the Government see the panel’s role on matters that go beyond its remit, as drafted in the Bill. When we announced the formation of the expert liaison group, we stated that it should have an ongoing remit to keep SRR powers and regulations under review, as practices in the financial markets develop over time. The panel, when it formally replaces the expert liaison group, should have that role.

It is right that we use the expertise of the panel to monitor the implications of the SRR powers on the financial markets and advise the Treasury on whether

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there should be any changes or developments in the special resolution regime. Such advice may, in the months and years to come, also touch on related matters in other legislation. While Clause 10 does not specify that exact purpose, there is nothing in the Bill to prevent it. The panel can be given tasks on other matters on a non-statutory basis. However, that is a mark of how important the Government see stakeholder input on the development of the standing secondary legislation under Parts 1 to 3, and the statutory remit of the panel should be focused in that way.

I am glad that the creation of this expert group has been widely welcomed—noble Lords have paid compliments to its work during our deliberations. The group demonstrates our ongoing commitment to stakeholder consultation, and has already made important contributions to policy on the special resolution regime. I hope that I have demonstrated why I have difficulties with the amendments. I also hope that I have provided some reassurance to the House on how we intend to use the Banking Liaison Panel in the months and years to come. On that basis, I ask the noble Baroness to withdraw the amendment.

Baroness Noakes: I thank the Minister for that helpful reply to my amendments, and I am glad to hear him say that the expert liaison group has been helpful in policy development, which was the intended focus of my amendment. The Minister went to great lengths to say that it would not be proper or practical to involve the Banking Liaison Panel in transfer orders; I completely accept that—it was not the intention of my amendment, nor did I introduce that issue in those terms.

However, it was my intention to reflect on what the Minister has said can proceed on a non-statutory basis. My question is: why would the Government not want to enshrine in statute what they have admitted is a valuable process to date, and what they say will be the process to take forward? The banking community suggested this amendment to us to reflect what the Government had said in relation to the expert liaison group, and I am mystified as to why the Minister is sticking to his “resist” brief.

I need to think about this matter again before Report, and I also have an outstanding amendment which I moved on the previous Committee day relating to the role of the Banking Liaison Panel and the code of practice. We are building up a picture of a rather restricted role being written in for the Banking Liaison Panel, which in practice might be extremely restricted if there are no statutory instruments when the Government are saying something else. I do not think that Bills should be drawn up on that basis. As I said, I shall reflect on that between now and Report, and I beg leave to withdraw the amendment.

Amendment 31 withdrawn.

Amendment 32 not moved.

Clause 10 agreed.

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Clause 11: Private sector purchaser

Amendment 33

Moved by Baroness Noakes

33: Clause 11, page 6, line 22, leave out “commercial” and insert “private sector”

Baroness Noakes: Amendment 33 replaces “commercial” in Clause 11(1) with “private sector”. I hope that it is a straightforward amendment which the Minister can accept.

The Bill uses “private sector purchaser” in the early clauses in describing the stabilisation option. When we get to Clause 11, which is the first place where it is spelt out in detail, the clause is headed “Private sector purchaser” but subsection (1) says:

“The first stabilisation option is to sell all or part of the business of the bank to a commercial purchaser”.

The term “private sector” is very clear and has a clear reference point. So far as I can see, “commercial” is not given a particular meaning in the Bill, so we must try to see what it might be in ordinary interpretation. It is pretty clear that “commercial” is not synonymous with “private sector”. We may not have the full range of nationalised industries that existed before my party embarked on privatisation in the 1980s but there are still many examples of bodies that operate from within the public sector on wholly or partly commercial lines. Of course, the Government have added to their number recently by acquiring Northern Rock and Bradford & Bingley’s residual business and, more recently, by taking control of the Royal Bank of Scotland, which I believe has been classified to the public sector.

We agree with the Government that the first stabilisation option should be a transfer to a private sector purchaser but we do not think that this option is appropriate in order, say, to transfer a failing bank to one of the other banks that is now in public ownership, which would be commercial but not private sector. However, that is what Clause 11 would allow if the wording remained. If the Government want to increase the number of failing banks in public ownership, they should be prepared to use the powers in Clause 9 and meet the slightly tougher conditions set out there or, indeed, introduce separate legislation.

I expressed the hope that the Minister could accept the amendment and I hope that I am not mistaken. I beg to move.

Lord Davies of Oldham: I shall not be able to able to accept the amendment but I hope that my explanation will be a little more benign than the noble Baroness suggested it might be if I were in conflict with her on this. Of course, I understand her point that there is a discrepancy between the clause’s title and its wording. The title is a signpost; it indicates the area that is covered. Legislative primacy obviously relates to what is specified in the clause, where we are concerned with—

Baroness Noakes: I hope that the Minister is not going to rest his argument on the difference between the heading and the substance of the clause. “Private sector purchaser” is used in the text of the Bill from Clause 1 onwards.

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4.45 pm

Lord Davies of Oldham: The noble Baroness seeks to pre-empt me, but I am not going down that path. I was merely giving background to the fact that it looks as if there is a discrepancy so I will indicate the nature of the difference between the two positions. I was establishing that we needed precision in the clause, which is the issue that takes legislative primacy. That will be the law of the land, not the clause heading.

The heading is there for signpost purposes. The phrasing is drawn widely to ensure that a range of transfers is possible, subject to the need to meet the public interest. For example, a healthy deposit taker in which the Government are a shareholder may be in a position to take on the business of a failing bank, or the commercial operation of a foreign state may be prepared to do the same. We would not want Clause 11 to prohibit that, so it refers to a “commercial purchaser” to take account of situations in which the transferee may not be totally private-owned. I hope that the Committee will recognise that the clause uses the heading “Private sector purchaser” rather than “commercial purchaser” for that sole reason. It is an issue not of discrepancy but of identifying what the clause is about and then being precise in the way in which it is meant to reach its objectives. Its objectives must be wider than might be suggested if we talked only in terms of a commercial purchaser.

Lord Higgins: I think that I am right in saying that the title of a clause has no legal significance, but none the less I am not clear whether the Government’s objective is to have a clause that is about a commercial purchaser but whose heading is “Private sector purchaser”, which is not the same. There seems to be some confusion in the drafting. If their objective is to extend the possible range of purchasers beyond those in the private sector to what may be governmental purchasers, the heading—if it has legal significance—is inconsistent. The Minister’s argument would suggest that the heading was inappropriate.

Lord Davies of Oldham: I hoped that it was not. In its details, the clause has to hit the objectives that we have for it, which cover more accurately the issue of the commercial purchaser because of the potential range. We are dealing with circumstances which none of us can foresee with great accuracy, but the role of the legislation is to make the public interest realisable against all foreseeable circumstances as best we can, and we certainly should not limit the legislation by drafting it too narrowly. The importance of the clause is in the phrase that it uses—“commercial purchaser”—in its crucial aspects. I shall not go to the stake over the question of the heading of a clause, but we regarded it as indicating broadly what the clause was about, and that is why it stands. If there is considerable anxiety about the wording and it is thought that it will cause great confusion, of course I will take away those representations and think about them before Report, but we should compare this with the issues that confront us in the Bill. I think that I have presented why the clause reads as it does and I therefore have great difficulty in going much further.

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Lord Mackay of Clashfern: I certainly agree that this is a very small matter by comparison with the other issues involved in the Bill. Nevertheless, it is right to get it right. If the clause states “commercial” as its essence, why not put that in the clause title to avoid any possible confusion?

Lord Higgins: The Minister said that he will take the matter away to look at it. I therefore do not want to delay the Committee more than one more moment, but if he has in mind that the purchaser might include, for example, sovereign wealth funds, it would seem that the heading as it stands is not right.

Lord Davies of Oldham: I always listen to what the noble Lord, Lord Higgins, says, but given that he follows the noble and learned Lord, Lord Mackay, in his representations I will certainly think about it.

Baroness Noakes: The Minister has not set my mind at rest on how the Government might seek to use the concept of private sector purchaser. He has agreed to take the matter away, so we must let him consider it before Report but I do not think that it is simply a question, as my noble friend and my noble and learned friend may have suggested, of changing the heading to Clause 11. The issue starts in Clause 1(3), which states:

“The three ‘stabilisation options’ are—

(a) transfer to a private sector purchaser”.

The Bill may be spinning a line that that is about selling on to a private sector purchaser. We have had discussions on other parts of the Bill about whether it is using language that is open and honest. We may well have come across another example of that. When the Minister goes back to discuss it, I hope that he will not just discuss changing the heading to Clause 11, but discuss being honest about language throughout. Then we may have a more honest debate on the content but, for today, we have probably done it justice and I beg leave to withdraw the amendment.

Amendment 33 withdrawn.

Clause 11 agreed.

Clause 12 : Bridge bank

Debate on whether Clause 12 should stand part of the Bill.

Viscount Eccles: Clause 12 is very important. It sets out the scheme for the second stabilisation option, that of a bridge bank. To date, at Second Reading and so far in Committee, we have not had much discussion of exactly what a bridge bank would be and how it would operate. “Bridge bank” is a new term of art. There is no such institution today, so we may rightly expect a full explanation of how a bridge bank will operate.

First, we must hope that bridge banks will be few and far between; indeed, it would be best if the Bank of England were never subjected to the challenge of owning and managing a failing bank across a bridge to re-enter the private sector, whether in part, in parts, or in whole. However, from experience to date, it would not be right just to think in terms of Northern Rock or Bradford & Bingley, both of which might have been bridge bank candidates. Their business model turned out to be unworkable in current market conditions,

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but their businesses were not in themselves complicated. Things could be very different if, for example, no private sector solution, enabled with funds from the recapitalisation scheme, were successfully put together for a bank such as Halifax Bank of Scotland.

Under the Act, a bridge bank, 100 per cent publicly owned by the Bank of England, would come into existence if option 1, triggered by the FSA, had not produced a rapid solution. I will not dwell on the threshold trigger, except to say that despite yesterday’s reassurances from the noble Lord, Lord Davies, the FSA handbook to which he referred is difficult to navigate and subjective in its approach to threshold conditions. The 2000 Act is faulty because it has given the FSA mixed and uncertain objectives. Nevertheless, when the trigger has been pulled, then, as the October regulatory impact assessment of the Bill says, the Bank of England can take,

This continuity of service to the public is the best available justification for what would otherwise be seen as over-hasty public ownership.

The regulatory impact assessment goes on to say that depositors would have access to their money and that the Bank of England would gain time to achieve a transfer or transfers to the private sector. However, there is a draconian price to be paid. The Bank of England effects its ownership by laying instruments under the Act, subject to no parliamentary procedure. The Delegated Powers and Regulatory Reform Committee has drawn attention to the Bank of England’s wide-ranging powers, and a government reply is awaited.

From here on, matters become more complicated. As Clause 12(3)(a) says, the Bank of England will need objectives—not too many, one hopes—as it facilitates sales to one or more private sector purchasers. In theory, especially if the failing bank were large, there could be a considerable number of purchasers, and over what period might they be expected to purchase? Paragraph 72 of the code says:

“It is envisaged that a bridge bank will typically exist for less than one year: it is intended to be a short-term operation”.

However, the code has already said, in paragraph 60:

“However, in situations where there is expected to be a lengthy period of time prior to a sale, the Bank shall”—

do certain things. Just as we have had a discussion of “temporary”, we could now discuss “lengthy”.

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