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I look forward to hearing the Minister's justification for bypassing Parliament when the Bank of England exercises the substantial powers conferred by the Bill, and I beg to move.
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Lord Davies of Oldham: I am grateful to the noble Baroness for the clear way in which she has explained her amendments. She will recognise that the Government have a common thread running through their response to all of them which is why we hope that she will feel after reflection that she is safe to withdraw them.
As the Committee will be aware, the Bank of England exercises its transfer powers by making a formal instrument rather than an order. Clause 24 sets out the procedure to be followed following the making of a share transfer instrument by the Bank of England. In particular, it sets out requirements for the Bank to provide a copy to the failing bank, to the Treasury and to the Financial Services Authority and to publish the instrument in two newspapers and on the internet.
The noble Baroness’s amendment states that the Treasury, as soon as reasonably practicable following receipt of the instrument, should lay a copy of it before each House of Parliament. We do not think that that is an appropriate procedure. The Bank of England is not directly accountable to Parliament. In general, it is highly unusual for powers to make statutory instruments that are subject to parliamentary scrutiny to be conferred on a person who is not a Minister and who cannot speak to a matter on the Floor of the House. Were the matter to be subject to parliamentary debate, a Minister would have to speak to an instrument which he was not responsible for making and for which he was not directly accountable. I am sure that parliamentary scrutiny on this basis would be regarded as being of limited utility.
There are existing mechanisms for calling the Bank of England to account in Parliament. In fact, I have no doubt that the Governor of the Bank of England would testify to the extent to which he is held to account in Parliament, not least by appearing before sittings of the Treasury Select Committee of the other place. He and his officials are frequently called before that committee, which can report to Parliament on those deliberations. The Bank of England does not make instruments for which it can be directly accountable to Parliament. There is no locus in these terms for any member of the Bank to be accountable in Parliament directly. A Minister would fulfil that role, because the instrument may have been created by the Bank but no one from the Bank could be called directly before Parliament in any parliamentary debate. The noble Baroness will recognise that we cannot accept Amendment 50.
Amendment 52 proposes a similar provision in relation to share transfer orders. These orders are, of course, statutory instruments made by the Treasury. In this case, they are subject to the negative procedure. This means that the orders will be laid before each House as soon as possible following the making of the order. The Kaupthing Singer & Friedlander transfer order, for example, was made at 12.05 pm on 8 October 2008, came into force at 12.15 pm and was laid before Parliament at 4 pm that day. I therefore hope that the noble Baroness will recognise that her anxiety is not well placed when one thinks about past action and sees the extent to which in these crises—that order was obviously made at the time to protect the public interest, which of course was the depositors—the appropriate authorities were able to act with great rapidity and be directly answerable to Parliament.
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Amendments 51 and 76 propose that share and property transfer instruments should be subject to the negative resolution procedure. Any instrument made by the Bank to effect the private sector purchaser and bridge bank stabilisation options would be subject to annulment by Parliament under this amendment. But it is already the case, under the provisions of the Bill, for share transfer orders made by the Treasury to effect the temporary public ownership stabilisation option. As I have noted, the Bank of England is an independent institution that is not directly accountable to Parliament. The Bank does not sit in either House. It may not participate directly in debates and of course it has no means of voting on any issue raised. So the Minister would undertake the debate on behalf of the Bank for an instrument which he has had no responsibility for preparing.
I have great difficulty in accepting that this is a meaningful degree of parliamentary accountability. But, as the noble Baroness enjoined the Government to do, we have taken note of the report of the Delegated Powers and Regulatory Reform Committee. I am aware that the committee recommends that the House should seek a justification, as the noble Baroness accurately reflected in her opening remarks, for the proposed absence of any parliamentary procedure for instruments relating to transfer to a private purchaser and to a bridge bank.
I hope it will be appreciated that we do not consider that it would be appropriate for instruments made by the Bank to be subject to parliamentary procedure in the same way as normal statutory instruments. I hope that I can also provide adequate justification to the House on why it is important for the Bank to have the power to make such instruments, even in the absence of parliamentary scrutiny. The Bank has substantial responsibilities for important aspects of financial stability and the Bill provides for the Bank’s responsibilities to be formalised—for example, through the addition of a statutory financial stability objective under Clause 228. Given these responsibilities, it is right that the Bank should have the tools available to protect financial stability, which is enjoined on it by the Bill.
As the Committee knows, the Bank has special expertise in the financial markets and matters of financial stability and is therefore extremely well placed to assess risks to financial stability and to assess the most appropriate course of action to resolve a failing bank. The noble Baroness has not been the only representative of Her Majesty’s Official Opposition to stress the extent to which the Bank should be greatly involved in these operations. As such, it is clear that the Government are making the Bank of England the UK’s lead resolution authority, conferring on it powers to effect the key stabilisation options. These options are the private sector purchaser tool and the bridge bank tool. In exercising these stabilisation options, the Bank must consult the other tripartite authorities, which will be engaged at all stages. The Bank’s role in this regard has been widely supported, if not directly by the Opposition, certainly by its representations on an enhanced role for the Bank. It has been widely supported by stakeholders
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However, Ministers still retain a role and the Bill provides a clear framework for how this will work. First, it will work through providing backstop mechanisms to ensure ministerial involvement in decisions concerning compliance with the UK’s international obligations under Clause 76 and the protection of public funds under Clause 78. The Bank of England may not exercise a stabilisation power in respect of a bank without the Treasury’s consent if the exercise would be likely to have implications for public funds. Secondly, reserving the exercise of a number of significant powers to ministerial procedure through the House means that neither the power to change primary or secondary legislation or take a bank into temporary public ownership is conferred on the Bank of England, because these are proper ministerial responsibilities. We have also ensured that ministerial consent is required where the Bank of England’s powers may extend beyond its financial stability remit and raise broader questions of public policy. This consent role relates to powers concerning continuity obligations between group companies and the failing bank, and powers in relation to pension schemes.
The Bank of England’s exercise of these powers will be subject also to new internal governance arrangements that will be put in place by the Bill. The Bill will formalise the Bank’s responsibility for financial stability by providing it with a statutory objective for financial stability, and by establishing a financial stability committee as a subcommittee of the court of directors, with responsibility for making recommendations to the court regarding the nature and implementation of the Bank’s financial stability strategy. One function of the new financial stability committee will be to advise on and monitor the Bank’s use of the key stabilisation options.
In summary, there are strong policy reasons for conferring the key resolution tools on the Bank of England, and alternative arrangements have been made to ensure transparency and accountability in respect of the exercise of those tools. In exercising its role as the lead resolution authority, the Bank can, and undoubtedly will, be called to account in Parliament by the Treasury Select Committee, which the Government consider an appropriate and adequate means of scrutinising its conduct, as it has been for many years.
For these reasons, I hope that the Committee is persuaded that the existing procedure for instruments is appropriate. The Government have recognised the representations from the Committee and we take the Committee’s role very seriously. However, it must be recognised that the broad structure of the resolution regime has a crucial role for the Bank, which should not be made responsible for instruments that it could not defend in Parliament.
I accept the principle of the noble Baroness’s Amendment 50. I know that she is motivated by a determination that these powers should be exercised with the greatest possible openness. We have considerable sympathy with Amendment 50, which she would probably regard as the least significant in her group of amendments,
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Baroness Noakes: Before I decide what to do with my amendments, I should like to have clarified what “considerable sympathy” means in relation to Amendment 50.
Lord Davies of Oldham: As the noble Baroness has reserved her position on many things in Committee, she will allow me this little latitude to reserve my position, while at the same time indicating that her amendment has considerable merit. We will reflect on that and I hope that when we have, she will be beaming at me rather than regarding me with suspicion, as she is at this moment.
Baroness Noakes: I thank the Minister for an extraordinarily comprehensive reply to my modest set of amendments. I do not accept that, just because the Bank is not directly accountable to Parliament, Parliament has no right to know how the extraordinarily extensive powers being set up by the Bill are exercised in practice. That is what lies behind my amendments.
On Amendments 51 and 76, I accept that the inability of the bank to argue its case makes the negative resolution procedure on share transfer orders potentially not quite right. However, there are examples where Ministers produce statutory instruments to obtain approval for documents which they have not themselves prepared. One example that comes to mind—it is not on all fours with this case, but it is an example—is the Audit Commission’s code of practice, which has to be put to Parliament under the affirmative resolution procedure. Although the Secretary of State does not prepare that document, he has to put it before Parliament. So we are not in unprecedented territory, although we do not need to argue that point. I take the Government’s assurance that they will always inform Parliament as rapidly as possible and that Amendment 52, while nice, is not necessary.
That leaves Amendment 50, on informing Parliament. The Minister has offered the parliamentary accountability of the Bank of England through the Treasury Select Committee in another place. That is the only way in which the Bank has any effective accountability to Parliament. It depends on the Bank fitting in with the Treasury Select Committee’s timetable and the topics that it wishes to examine. It is not about Parliament generally, and certainly not about your Lordships' House.
The Minister expressed sympathy and said that he would consider between now and Report whether, as I believe, there is a case to be made for Parliament being informed. That is the mechanism for Parliament to decide what it wishes to do. The Treasury Select Committee in another place might wish to examine the issue, or your Lordships' House or another place might wish to initiate some other kind of debate on
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I am a little encouraged by what the Minister has said. I think that we should return to this on Report, and I would prefer it if he produced an amendment. With that, I beg leave to withdraw the amendment.
Clause 26 : Supplemental instruments
Baroness Noakes: I shall speak to the other five amendments in the group as well. They all address the same issue as it arises in Clauses 26 to 31. Those clauses deal with supplemental share transfer instruments, supplemental share transfer orders, onward transfers, reverse share transfers, bridge bank share transfers and bridge bank reverse share transfers. I am sure that these are all essential powers to deal with how to put right things that are not right in the first attempt. I could have drafted similar amendments to Clauses 42 to 46, which deal with the equivalent powers for property transfers, but it was tiring enough going through the various permutations for share transfers.
My amendments focus on the provision in Clauses 26 to 31 that Clause 7 and either Clause 8 or 9, as appropriate, do not apply to those clauses. Clause 7 requires the FSA to be satisfied about the threshold conditions; Clause 8 requires the Bank to be satisfied about various things such as financial stability or the protection of depositors; and Clause 9 requires the Treasury to be satisfied to a slightly higher level. These conditions are necessary to trigger the stabilisation powers under Clause 7 and then for the Bank to exercise its private sector purchaser and bridge bank powers under Clause 8, or for the Treasury to exercise its temporary public ownership powers under Clause 9.
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Various conditions have therefore to be satisfied for the stabilisation powers to be initiated and for the initial share transfers or property transfers to be made, but that is not the case when it comes to all the variants set out in the clauses to which I have referred. I have proposed the deletion of the subsections on a probing basis. The Minister in another place explained in Committee that, if the initial action had stabilised the bank, the conditions could not be met at a later stage. That may well be the case, but the new powers are therefore set to apply in a void. As the Bill is
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Does the Minister think it satisfactory that these powers are not constrained by words, for example, that link back to the initial exercise of the stabilisation powers? The Bill disapplies the strong constraints applied to the initial powers, but with absolutely no replacement other than general principles of administrative law.
I have not sought replacement wording at this stage—as I have said, my amendments are probing for today—but I urge the Minister to look again at whether the removal of the framework that exists for the initial transactions is correct or whether it should be supplemented by some other framework to guide the exercise of the powers that come up in the later clauses. I beg to move.
Lord Myners: Once the Bank of England or Treasury has made an initial share transfer, they have a number of types of share transfer instrument available to them. These amendments relate to supplemental, reverse and onward share transfer instruments and orders. It may aid the debate if I briefly describe each of the transfers.
The first type is supplemental transfers. Once an initial transfer has taken place, the authorities may undertake supplemental transfers, which provide for further things to be transferred; for example, a supplemental property transfer may follow an initial property transfer, providing for further property to be transferred from the failing bank.
The second type is reverse transfers. Once an initial transfer has taken place, the authorities may also undertake reverse transfers. In a reverse property transfer, for example, property may be transferred back to the failing bank.
The final type is onward transfers, which are designed to effect a swift onward transfer from a publicly owned bank. The Bank may make an onward transfer of property or securities from a bridge bank. The Treasury may do the same from a bank in temporary public ownership.
I turn to the specific amendments in the group. Amendments 53 to 59 would remove provisions that perform two main functions. First, they exclude the general and specific conditions of the SRR from applying to supplemental, onward or reverse transfers. Secondly, they provide that all the attributes which apply to initial transfers apply to supplemental, onward or reverse transfers, including the procedural requirements governing the making of the instruments and orders to effect them. However, I note that Amendment 60, which we are due to debate shortly, and also laid by the noble Baroness, Lady Noakes, reintroduces the requirement for the exercising authority to send a copy of instruments and orders to various persons.
In order for the authorities to effect a share transfer of a failing bank, the general and specific conditions set out in Clauses 7 and, as appropriate, Clauses 8 and 9 apply. The general conditions are that a bank is failing or likely to fail to meet its threshold conditions
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Before the Bank of England can exercise the powers to transfer a bank to a private-sector purchaser or a bridge bank, it needs to be satisfied that the exercise of the powers is necessary, having regard to the public interest in the stability of the financial systems of the UK, the maintenance of public confidence in the stability of the banking systems of the UK or the protection of depositors. A higher test is used for full public ownership of a bank. The Treasury can only take a bank into temporary public ownership when it is satisfied that it is necessary to resolve or reduce a serious threat to financial stability, or to protect the public interest where the Treasury has provided financial assistance in respect of the bank for the purpose of resolving or reducing a serious threat to financial stability.
These are high hurdles. The fact that the conditions will have been met for the initial intervention gives the authorities warrant to take the necessary steps to resolve the bank. It is neither necessary nor desirable, nor efficient, for each stage of the bank’s resolution to have to meet these various sets of conditions again. For example, following the transfer of a failing bank into temporary public ownership, the Treasury would act to stabilise the bank. In due course, should the Treasury consider that the time is right to transfer the shares in the bank to a private-sector purchaser by way of an onward transfer order, it would be inappropriate for the general conditions to apply, as the bank would have been stabilised.
A supplemental, reverse or onward transfer is one stage of the authorities’ intervention to protect the public interest in resolving a failing bank. Given this, it is not appropriate for the making of relevant instruments and orders to be subject to repeat testing against these conditions. Of course, the authorities still must have regard to the special resolution objectives and the provisions of the code of practice. Any order which interferes with property rights will need to be proportionate to the public interest pursued, in order to ensure the compatibility of the action with the European Convention on Human Rights.
The noble Baroness asked whether the powers could be used without constraint. I believe that this is not the case. The exercise of these powers does not take place in a void. There are many constraints: first, the special resolution objectives of Clause 4; secondly, the code of practice of Clause 5; thirdly, the legislative safeguards provided, for example, in Clause 48; fourthly, the European convention rights; and, fifthly and finally, the need of the authorities under the convention to act reasonably and proportionately. Under those circumstances, I suggest to the noble Baroness and Members of the Committee that, while well articulated, the reasons for this set of amendments do not sustain close examination. I encourage the noble Baroness to withdraw her amendment.
Baroness Noakes: I thank the Minister for that comprehensive response. I tabled the amendments in this group to ask what constraints there might be. The
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Lord Myners: I believe that the noble Baroness is correct.
Baroness Noakes: With the greatest respect, belief is not quite good enough. Is it the Government’s view that that is the case? If that is the case, I can see the point. If it is not clearly and unambiguously the case, I cannot see that it is necessary.
Lord Myners: I am encouraged by my colleagues to believe that I was correct in believing that the noble Baroness was correct. I therefore give a clear and affirmative answer: yes.
Baroness Noakes: I am grateful. If that is the case, it at least roots those provisions, which appear to be rootless, in something relatively well defined. I will consider what the Minister has said about the various other ways in which the powers work and may be subject to outside constraints. For the time being, however, I beg leave to withdraw the amendment.
Clause 27: Supplemental orders
Clause 29: Reverse share transfer
Clause 30: Bridge bank: share transfers
Amendments 57 and 58 not moved.
Clause 31: Bridge bank: reverse share transfer
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