| Previous Section | Back to Table of Contents | Lords Hansard Home Page |
What has concerned the industry is the draft statutory instrument, with its very wide carve-outs. It is difficult for the Committee to debate that draft statutory instrument, because it is not before us, but it underlies the concerns about the use to which Clauses 47 and 48 will be put. That is why I think it necessary to raise those issues. As the Minister will be aware, the industry wants to see set-off, netting and similar transactions left alone by partial transfers and completely unaffected by them. The industry is worried by the prospect of the carve-outs being made by the orders under Clauses 47 and 48. For example, the draft statutory instrument provides that foreign property is not to have protected rights. The BBA believes that the only viable way forward may be to exclude foreign property entirely from partial transfers.
There are similar concerns about the carve-outs, such as in respect of deposits, and the issue of securities. All in all, the concerns which have been fed to us about
19 Jan 2009 : Column 1449
The Government have said that some issues might be dealt with in the code of practice, but that would not be regarded as helpful. If such issues went to the heart of legal certainty, the code of practice would have absolutely no impact. We debated that in the context of Amendment 20, moved by the noble Lord, Lord Eatwell, on our first Committee day. A code of practice is not enforceable by anyone and can contribute nothing to legal opinions. Similarly, the no-credit or worse-off regulations to be issued in Clause 60 will not improve the ability to issue clean legal opinions because they fall far short of a government indemnity.
These are very difficult issues. I hope the Minister will be able to lay out the Government’s current position. I do not expect this to be resolved today. The consultation has, as I said, passed, so I hope that he can give at least a preliminary response on that basis. The industry remains extremely concerned about the way in which the Government are approaching partial transfers and the impact it will have on financial instruments and the financial services industry in the UK. I beg to move.
Lord Newby: I want to underline the noble Baroness’s last point—the industry is extremely concerned about these two clauses. For a layman like me it is almost impossible to judge whether these concerns are justified. To what extent in the ongoing discussions with the industry on the principle do the banks and the Government basically agree about what this is trying to achieve? Is the argument a technical one about whether this goes in primary or secondary legislation, or is there still a difference in principle—or at all—about how the legislation should deal with this immensely important but equally arcane issue?
Viscount Eccles: I expect that there is an issue of principle—the absolutely basic fact of splitting a bank, to use the words in the Government briefing. The trouble is that in any negotiation to consider such a matter there is no leverage on the side of the banks.
Lord Eatwell: My Amendment 80 is grouped with that moved by the noble Baroness, Lady Noakes. The dilemma we face here is that the Government have two good policies that they are trying to pursue at the same time but which have contradictory effects. One of the good policies is the ability to pursue partial transfers, which may be very important if a bank is in crisis, while the other is the Government’s declared intention to promote netting and set-off arrangements. My amendment is designed to protect such netting and set-off arrangements by using the relatively strong but not decisive expression:
“A partial transfer ... shall not undermine any ... arrangements”.
I have chosen this form of words because while close attention will need to be paid to the nature of such arrangements, it should not be absolutely prescriptive.
19 Jan 2009 : Column 1450
I am afraid that the subsections in Clauses 47 and 48 that attempt to provide some degree of legal certainty and to protect netting arrangements are quite unsatisfactory because they are all conditional on whether the Treasury “may” by order do something rather than that it “will” do something. The amendment would provide the degree of legal certainty necessary to protect set-off and netting arrangements without in turn limiting the Government’s ability to pursue partial transfers, which may also be valuable. It may be that I am trying to square a circle and we might end up with two desirable policies that unfortunately conflict with one another, and therefore I am interested to learn how the Minister will deal with the potential conflict between these two dimensions of policy.
Lord Myners: This group of amendments relates to clauses which enable safeguards to be put in place in respect of partial transfers. It may aid the debate if I first provide a general introduction to what the Government are seeking to achieve in respect of this issue. I welcome the constructive introduction given by the noble Baroness to these amendments and I share her concern that it is important to get this right. I am sure that the representations that the Government have received from the banking industry and others have also been made to Members of the Committee. We are making good progress and I hope to be able to report on that later when setting out a route to reaching a satisfactory end position.
I turn first to the issue of consultation, and I shall bring noble Lords up to date on the position. The consultation closed on 9 January. We received only 15 replies, but those in the stakeholder communities most interested in the matter have broadly welcomed the approach to the safeguards that we are establishing. Interest remains around the protection of set-off and netting, in particular the proposed carve-out from the safeguards. However, the Government are listening to concerns and a meeting is to be held with the expert liaison group this week to discuss the consultation responses. I would be happy to come back to noble Lords following that meeting, when we reconsider the Bill on Report.
As noble Lords are aware, the Government recognise that partial transfers may be potentially invasive, and they have been working extremely hard to ensure that appropriate safeguards are in place. Responding to interested parties’ concerns, the Government are putting legislative safeguards in place to protect bank creditors and counterparties in a partial transfer.
3.30 pm
As my noble friend Lord Eatwell said, there are two noble purposes here: to promote the opportunity for partial transfer and to protect the concepts and efficacy of offset and netting arrangements. It is a delicate balance to ensure that the language of the Bill can respect both those objectives. We certainly recognise the importance that market participants attach to
19 Jan 2009 : Column 1451
First, Clause 48 provides a safeguard to protect set-off and netting arrangements, on which so many bank counterparties rely. Secondly, to protect security interests, Clause 48 also provides a safeguard so that secured creditors retain recourse to their collateral. Thirdly, Clause 60, to which we will come in due course, provides a safeguard that we will provide compensation for creditors left in the residual bank—and I hope this addresses the point made by the noble Viscount, Lord Eccles—to ensure that they are made no worse off than if the whole bank had entered into insolvency procedure; that is, as if the authorities had not intervened. In addition, the code of practice will set out the types of circumstance in which the authorities would wish to consider a partial transfer.
Building on the work done so far, the Government will continue to work with interested parties to develop these safeguards, as well as the other secondary legislation. To this end, the expert liaison group has been established to prepare the secondary legislation for the special resolution regime. The group has already met on various occasions and provided valuable advice on the detailed nature of the safeguards. Last November, having first sought the group’s advice, the Government published draft statutory instruments for key safeguards. The consultation period for that document recently closed, as I have said, and we will be scrutinising those responses and finalising the secondary legislation.
The amendments in this group relate to Clause 47, so I shall describe its provisions next. It enables restrictions to be placed on the making of partial transfers through the property transfer powers. The range of ways in which the Treasury may restrict partial transfers is deliberately broad. In addition to setting out restrictions, the power provides for secondary legislation to permit conditions to be imposed before a partial transfer can be undertaken, and it can require partial transfers to include particular provisions.
Amendment 78 seeks to require the Treasury to make regulations under Clause 47 to protect contracts and arrangements that are relevant for the purposes of a firm’s regulatory capital. Put simply, the calculation of how much regulatory capital a bank needs to hold is likely to be based, in part, upon the netting and set-off arrangements that it has in place. It is therefore important that those arrangements are protected, as was noted in the November consultation document.
As I have already said, the Government are proceeding to scrutinise responses to the safeguards consultation and finalising the relevant secondary legislation. While it is important not to prejudge that exercise, I can say now that the secondary legislation to be made under Clause 48 will provide for substantial protection for set-off and netting arrangements. Such protection will cover the vast majority of contracts and arrangements relevant to regulatory capital purposes, which is important in order to address market concerns.
However, the issue of regulatory capital is extremely complex. The Government’s position is that rather than offer a general protection for regulatory capital,
19 Jan 2009 : Column 1452
The amendment tabled by my noble friend Lord Eatwell provides that a partial transfer may not undermine any pre-existing and close-out arrangements. Although I hope I have already made this clear, I should reiterate the Government’s position that protecting netting arrangements is extremely important. The noble Baroness, Lady Noakes, is right to emphasise that getting this right is critical to London and the UK remaining an important banking centre.
I fully agree with the underlying purpose of my noble friend’s amendment. However, the Government consider that there are significant benefits in partial transfers. These have been demonstrated by a number of recent resolutions, particularly in relation to Bradford & Bingley plc. This is why the Government have proposed a strong set of protections for set-off and netting, but subject to limited tailored exceptions which will ensure that partial transfers can still take place in appropriate cases. The amendment, which provides that all netting and close-out arrangements must be protected without exception, would potentially prevent any partial transfers. But, as I have said, the Government agree with the general principles expressed by my noble friend that protecting set-off and netting arrangements is extremely important and we are putting in place detailed secondary legislation under Clause 48 to do just that. Draft orders have been published for consultation and the Government are currently scrutinising responses. I hope that this will reassure noble Lords.
The noble Baroness, Lady Noakes, asked what safeguards the Government will introduce under Clause 47. She is right that the main safeguards will be made under the power in Clause 48. In Clause 47, the Government intend to use the power to provide a clear protection for counterparties which have been transferred to a bridge bank or private sector purchaser so that they have certainty that they will not be transferred back to the residual company. Details of this were provided in the consultation documents at paragraph 5.19 onwards. I hope that my noble friend also will not press his amendment.
Baroness Noakes: I thank all noble Lords who have taken part in the debate and the Minister for the spirit in which he approached his reply. We are perhaps not very far apart.
The noble Lord repeated what is contained in other documents and other communications—that the “no creditor worse off” regulations and the code of practice somehow contribute to the certainty required in this area—but the clear opinion of the lawyers dealing with this is that neither the code of practice nor the “no creditor worse off” regulations will contribute one jot to legal certainty and therefore are not part of the framework necessary to create it. We need clean legal
19 Jan 2009 : Column 1453
It is most disappointing that the Government are not prepared to back their clear statement in the consultation document that they have no intention of upsetting anything that is necessary for regulatory capital purposes. They are not prepared to reflect that clear commitment in legislation, which is what my amendment seeks to do—although not necessarily in very good words—and I urge them to think again.
I will quote from an organisation with which we have been in touch—I thought that we would be debating this amendment last week and took a briefing in the afternoon. The organisation said:
“As matters stand, there remains significant doubt about whether the Government have appreciated fully the potential consequence of their proposals and as a result, there remains”—
this is in the banking community—
- “considerable unease over the possibility that an inability to attract clean legal opinions in support of longstanding setoff and netting arrangements may significantly impact regulatory capital and the underlying economics of completing transactions within the UK. This in itself could significantly impact liquidity and place further constraints on the ability of banks to lend”.
This is something that we will discuss later this afternoon, and is not something that we want to achieve. It is such an important area and it is a pity that we will have no discussions before Report, because the issue is still open on whether the Bill has enough in it to justify the reliance on secondary legislation that the Government want. It will be difficult to decide whether the Bill goes far enough and we can rely on that secondary legislation. If the Minister can communicate before Report with members of the Committee who have an interest in this matter, that will help a more efficient process at Report stage.
Lord Myners: If the noble Baroness will give way, I would be delighted to respond positively. The issue of legal certainty is clearly an important test that we strive to pass. The representation that the noble Baroness read was also reflected in at least one response to the consultation document. My officials advise me that we are making good progress. We have found the responses to the consultation helpful, and we think that the gap is narrowing. I am as committed as the noble Baroness is to achieving the right outcome, so we will ensure an appropriate arrangement to inform the noble Baroness and other noble Lords interested in this matter on progress.
I, too, had believed that we would get to this amendment last week. However, the noble Baroness will recognise that these are important amendments and it is critical that we spend time on them, while also recognising that we have a great deal more work to do in Committee. I invite the noble Baroness, and my noble friend, to withdraw their amendments.
Viscount Eccles: The Minister referred to the responses that were due on 9 January. The questions were specific, and there was a draft Statutory Instrument covering the subject that we have been discussing. When will the responses be published?
19 Jan 2009 : Column 1454
Lord Myners: I will provide the noble Viscount, Lord Eccles, with a reply in writing, or perhaps later in Committee I will have the opportunity to provide the information that he seeks.
Lord Eatwell: I, too, welcome the Minister’s commitment to discussion on these matters prior to Report. By the time that we get to Report, things may have moved on too far. I understand that we are working to a strict timetable, but such discussions would probably facilitate the timetable rather than inhibit it.
In his comments on my amendment, the noble Lord said, somewhat to my surprise, that it would prevent partial transfers. I did not think it was as prescriptive as that. However, I have been searching for a suitable verb to reduce that probability. Maybe “shall not undermine” does not work. However, a suitable verb in the clause would facilitate an improvement in legal certainty. I am grateful to the Minister for his comments and for his consideration of these matters.
Baroness Noakes: I think we have got as far as we can today. Anything the Minister can provide Members of the Committee with between now and Report would be most useful to our ability to handle this well at that time. I beg leave to withdraw the amendment.
Viscount Eccles: Before seeking to achieve certainty and the removal of a degree of flexibility with this amendment, I want to draw attention to the complexity of partial transfers, which is the matter under consideration. Orders as envisaged by Clause 47 are needed only because there is the possibility of partial transfers. Paragraph 1.14 of the special resolution regime is relevant to assessing whether you can make a general order. It says that the property transfer powers provide the authorities with the flexibility to split a bank. This option would most likely be used for the purposes of transferring the good part of a failing bank’s business into a new company, either as private sector purchaser or a bridge bank. In either case a residual bank, a “resco”, would be left behind, containing any untransferred assets and liabilities.
The following paragraph then quotes Bradford & Bingley, but I do not think paragraph 1.14 applies to that company. The case of Bradford & Bingley was much more like a temporary transfer into public ownership, not a transfer into a bridge bank. There was a private sector purchaser that purchased the good assets while the bad assets, or the less good assets, were brought into public ownership, whereas in the case of a bridge bank my understanding is that it would be the other way around—that is to say, the
19 Jan 2009 : Column 1455
In considering orders under this clause, it is important to understand whether the Government are committed to this different policy—indeed, as I see it, this reverse of the Bradford & Bingley policy—of taking the good assets into a bridge bank and leaving the bad assets in the existing, now residual, bank. That leads to a second question, as it leaves the shareholders with the task of dealing with the bad assets as there is no transfer of shares into a bridge bank, while the bridge bank, in the ownership of the Bank of England, has the good assets. In my submission, that brings greater complexity, and it is by no means certain that the costs will be lower; in fact, it is highly likely that the costs might eventually turn out to be higher. If and when you split a bank, although the Minister sought to reassure me earlier, I do not see how you can ever tell whether the shareholders in the residual bank will be better or worse off than they would have been had the bank been left whole. I do not understand how anyone could be sure what the outcome would have been if the bank had not been split, and therefore how you know whether people are worse off as a result.
I would like to be assured that the Bank of England has argued for this approach of taking the good assets into a bridge bank and leaving the less good ones behind. If it has so argued, what arguments has it put forward? I cannot believe that these would have rested on the expression “less expensive”. If it is decided to proceed with partial transfers, is there anything which could be called “general” about the order? I have sought to leave out the words which envisage the possibility of a general instrument. Indeed, the draft instrument, which is in the papers before us, looks quite specific. It will be an additional reassurance in the difficult area of legal certainty if the orders under partial transfer—if indeed they go ahead—are made specific and not left open to the possibility of also being general. I beg to move.
Lord Higgins: I once saw on television an advertisement for an organisation called confused.com. I am not sure whether I ought to apply to it. I do not wish to delay the Committee, but can the Minister give me a simple explanation of this point? As I understand it, it is the Government who will be making partial property transfer orders. I am not clear on why they feel as though they might also need to make an order restricting the making of partial property orders. No doubt there is a simple explanation.
The Minister said earlier that he thought—indeed, that he was convinced—that the matters dealt with in this complicated part of the Bill were best dealt with by statutory instruments. Of course, the long-standing traditional argument against that is that they are not amendable. Is there any reason, other than urgency, why the Minister thinks that we ought to have this done by statutory instrument, rather than by part of the Bill at a later stage in our proceedings?
| Next Section | Back to Table of Contents | Lords Hansard Home Page |