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I start by noting that Clause 48 does not provide the actual safeguard. It is, as I said, an enabling power, providing the Treasury with the power to make appropriate safeguarding secondary legislation. There is a risk that, in seeking greater detail in the clause and in using technical terminology, the opposition amendments may unduly narrow the scope of the enabling power.
Perhaps it would help if I gave an example of this. The opposition amendments would introduce terminology relating to the law of England and Wales, and Scotland, into the definition of security interests. The Government, by contrast, think it preferable to describe security interests in the generic terms alluded to in my introductory remarks. This approach ensures that the potential scope of protection of Clause 48 can include English security interests, but also security interests granted under other legal systems. The use of domestic terminology in the amendment may imply—an unintended consequence, I am sure, but one that illustrates my wider point—an intention to exclude foreign law security interests from the security interests that may be protected under Clause 48.
The noble Baroness, Lady Noakes, asked about Scottish law. There is, of course, considerable interest in this Bill in Scotland, as elsewhere in the United Kingdom. The benefit of using broad and generic terms in the clause is that that enables the broadest range of interests to be protected, including those under Scottish and, indeed, foreign law regimes. Greater precision can, if necessary, be used in the order made under the clause. We are aware of the issue with Scottish trust law and are considering it further, but we are grateful to the noble Baroness for raising it in debate. We will certainly introduce further amendments if that proves necessary to address the particular requirements of Scottish trust law.
In reciprocity to the constructive way in which the noble Baroness has presented these amendments, I would be more than happy to offer a meeting between industry lawyers, including those to whom she referred, Treasury legal advisers and parliamentary counsel to discuss Clause 48, if that were considered helpful. These are highly technical provisions and I think that all noble Lords are agreed that it is important that we
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The paragraph that Amendment 85 would omit makes it clear that netting arrangements include what is known commercially as “close-out netting”. This is an important type of netting arrangement. Following a trigger event, a party under a close-out netting arrangement is entitled to close out all outstanding contracts subject to the netting arrangement, calculate a sum—for example, related to profit or loss—in respect of each and then work out a net sum either owed or owing.
One of the principal characteristics of close-out netting is that it permits netting in respect of contracts that have not fully run their course—for example, where both parties have not yet finished performing their obligations under the contract and no actual debt is owed or owing at the time of the trigger event. That is why the definition refers to theoretical debts. That form of netting is important. For example, it is used in the master agreements of the International Swaps and Derivatives Association. The omission of that definition would suggest that Clause 48 was not intended to be capable of being used to protect that form of netting.
The noble Lord, Lord James, asked a series of complicated questions about a theoretical example. I am aware that what I say at the Dispatch Box can be relied on by the courts as indicating the Government's thinking. It would be unwise for me to seek to address at the Dispatch Box the technical questions that he raised. Instead I offer to address them, if I can, in writing, so that he can have the benefit of that explanation and the words that I used immediately prior to my statement to reach a conclusion on whether he wants to table his amendment again on Report. On that basis, I invite him not to move his amendment.
Lord James of Blackheath: I greatly appreciate that information. When drafting that response, will the noble Lord bear in mind that my great concern is that the Government should not create a two-structure law society where the Government have control of the law in one way through the Bill but the Insolvency Act 1986 dictates a different set of standards for everyone else?
Lord Myners: I will certainly ensure that that is taken into account. I respect the fact that the noble Lord is probably the world's greatest living expert on the Insolvency Act 1986, and I shall approach the drafting of my response to his question with considerable care and some trepidation.
Viscount Eccles: Does experience arising from Northern Rock, which has now had a certain run, and with Bradford & Bingley, with a much shorter run, throw some light on the need to make the Bill so much more complicated than the Northern Rock Act, which relied on itself and the existing body of legislation? As the Minister just reminded us, the clause is an enabling
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Lord Myners: I suggest to the noble Viscount, Lord Eccles, whose considerable knowledge relating to mortgage lending and whose interest in the matter I acknowledge, that the circumstances in which a bank may be placed into a special resolution regime are multiple. We must seek to ensure that we have as many options open to us as necessary successfully to address that situation.
The Bill provides a permanent framework to deal with banks in difficulties, building on and refining the temporary tools introduced by the Banking (Special Provisions) Act, to which my noble friend Lord Davies of Oldham referred a few moments ago. In preparing the permanent replacement to that special provisions Act, the Government have sought to refine and develop its provisions. That has followed extensive consultation with interested stakeholders, including the tripartite authorities.
The special resolution regime provides a clear framework for the exercise of these powers, including clearly stated objectives, conditions for entry into the special resolution regime and a code of practice providing further guidance to the authorities in exercising these powers. The SRR includes new tools to deal with failing banks, including the bridge bank, two new insolvency procedures—the bank insolvency procedure for fast pay-out to depositors and the bank administration procedure to make partial transfers effective. We will come to these procedures later. The essence of the Bill is to anticipate the possibilities and to ensure that we have the necessary response mechanisms available to us in order to achieve outcomes consistent with the Bill’s objectives.
4.30 pm
Baroness Noakes: I thank all the noble Lords who have taken part. In respect of the intervention made by my noble friend Lord Eccles, we accept that this Bill has a much more sophisticated approach than the 2008 Act. It specifically allows for a bridge bank, which is where we start to get into partial transfers. My party urged that bridge bank facility from the outset, so we support the concept; it is the practical application of it that is causing the difficulty.
I am glad we have a shared interest in getting this right. The issue is going to be whose drafting is better to achieve the purpose that we are settled upon. The Minister kindly invited me to be thrown to the wolves. That could describe a meeting of Treasury lawyers and City lawyers. As far as I am concerned, the most useful way forward is that the Treasury talks to the banking community. If the banking community remains concerned, then I must raise those concerns with the Minister. I do not believe that there is anything that I personally can add to the resolution, but I think it is very important that, as a matter of urgency, those discussions are continued.
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The Government are saying they want something as broad as possible and the lawyers in the City are saying they want something that adequately describes the sorts of documents that they deal with every day of the week and uses that language. The Minister did not respond to the point that the City of London Law Society is particularly concerned about, which is conforming the wording to the Financial Collateral Arrangements Regulations and the Financial Markets and Insolvencies (Settlement Finality) Regulations. If there is any ambiguity about whether they are fully covered, that would cause problems. So I hope the Minister will instruct his officials to look at that aspect. He did not mention it when he responded. That is an addition to the issue of whether it involves broad language or narrow language. Whether we can do a positive read-across to European legislation is also very important.
Lord Stewartby: Before my noble friend withdraws her amendment, can the Minister respond to the queries I raised?
Lord Myners: I thought I had answered the query that the noble Lord, Lord Stewartby, raised. From recollection, the noble Lord gave two possibilities and I believe it was the second of the two possibilities, but I apologise if I cannot remember with complete clarity which they were. The noble Lord obviously remembers and I will be delighted to rely on his clear recollection.
Let me also say that I will absolutely make sure that the point made by the noble Baroness about conformity of language receives careful and serious consideration.
Baroness Noakes: I am grateful to the noble Lord. I beg leave to withdraw.
83: Clause 48, page 23, leave out lines 16 and 17 and insert—
“(aa) “title transfer collateral arrangements” are arrangements under which Person 1 transfers assets to Person 2 on terms providing for Person 2 to transfer those or other assets if specified obligations are discharged,”
86: Clause 48, page 23, line 20, leave out “includes,” and insert “are arrangements under which a number of claims or obligations can be converted into a net claim or obligation and include,”
87: Clause 48, page 23, line 23, at end insert—
“or to be converted into a net debt, and
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(d) “protected arrangements” means security interests, title transfer collateral arrangements, set-off arrangements and netting arrangements.”
Baroness Noakes:I shall also speak to Amendment 92. These are probing amendments to explore the consequences of no statutory instrument being made under Clause 48 or of such an instrument being delayed.
Under Clause 48, it is left to the Treasury’s discretion as to whether the Treasury makes an order that restricts the partial property transfers to deal with the problems of set-off and so on. In another place, the Minister undertook to discuss with his officials whether this formulation should be mandatory, especially in view of the huge importance attached to it in the financial community. I could find no trace of that being discussed further, which is probably not surprising as the Report stage in another place was very truncated: hence I have tabled a conventional “may”-to-“shall” amendment—Amendment 88—to tease this out further.
There is considerable unease among the banks about there being any delay between the Act and the related statutory instrument coming into force. This is on top of the concerns about the content of the instrument, which we have already debated. The concerns relate more to the paragraph 2.16 commitment in the November White Paper to protect contracts relevant for regulatory capital, which we debated in our discussion on an earlier amendment, and to the fact that, if there is no certainty about an acceptable statutory instrument being available immediately after Royal Assent, there will be a period of great uncertainty for banks and their customers. I have already mentioned today that it is understood that some banks are already devoting considerable time and effort to planning the unwinding of positions in case adequate legal certainty is not available. This could involve considerable cost and could, in extremis, push international banks towards relocating their operations outside the UK.
My Amendment 92 is an attempt to deal with this uncertainty. It says:
“Until an order has been made under this section a partial property transfer shall have no effect on security interests, set-off or netting arrangements”.
That is, those arrangements cannot be unpicked by a partial transfer unless a statutory instrument under Clause 48 is already in place, setting out how they are to be dealt with.
I do not pretend that the wording of the amendment is ideal, but we need to find a way of giving certainty to the banking community. The Government will say that they will use the accelerated statutory instrument procedure set out in Clause 249, which we will come to if we ever get to that clause. However, that does not mean that a satisfactory statutory instrument will be produced and it does not guarantee that a period of uncertainty will be avoided. We need to find a solution in the Bill to this problem. I beg to move.
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Lord Davies of Oldham: I am grateful to the noble Baroness for introducing her two amendments. As she rightly said, the first amendment was tabled in Committee in the other place, and the Economic Secretary undertook at that stage to consider the point that it raises. There has been considerable consideration of the issue, and the Government were not unaware that the matter might be raised when the Bill came before your Lordships’ House. Once this point had been identified in the other place, we gave considerable thought to it, but we do not think that a change to the drafting is appropriate.
Clause 48(2) provides for a range of things to which the safeguarding order may relate. Indeed, there are four paragraphs to the subsection, and it may turn out that one of them is not used in any order that is made. Clause 46, inevitably, is drawn in broad terms so as not to constrain the degree and nature of protection that may be provided by the secondary legislation that may be made under it. I emphasise the Government’s commitment to making this secondary legislation and to providing the adequate protection that it will contain. I hope that the consultation document makes clear intent with regard to the safeguards that the draft orders need to embrace.
The Government’s continued work with the expert liaison group provides further evidence of our determination to provide accurate secondary legislation under what is recognised in the clause to be an enabling power. We of course agree with the noble Baroness that the secondary legislation is of great import. I hope that she agrees that we are approaching this with the greatest seriousness and the fullest consultation on how we intend to proceed.
Amendment 92 relates to what may happen until an order is made under Clause 48 and is in place. It is the Government’s clear intention to have these safeguards in secondary legislation in place at the same time as the relevant property transfer powers in the Bill come into force. The provisions of the secondary legislation will be coterminous with the activation of the property transfer powers of the Bill.
The consultation period on the document providing draft safeguards has just finished and the Government are working with the expert liaison group to finalise the order. On the procedure for ensuring that the orders are in place in time, I remind the Chamber that the Bill was amended in the other place to ensure that these essential pieces of secondary legislation can, if necessary, be put in place at short notice.
The noble Baroness referred to Clause 249; she looks forward to reaching it as enthusiastically as I do. It provides that these instruments are put in place via the 28-day affirmative procedure instead of the draft affirmative procedure; in other words, they become immediately valid and implementable unless they are withdrawn by resolution of Parliament within the 28-day period. This applies only to the first time that the powers are exercised.
I hope that it is clear that the secondary legislation will be put in place at the time that the provisions to which they relate come into force. The noble Baroness will appreciate that we have thought long and hard
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Baroness Noakes: I thank the Minister for that reply. I understand the Government’s rationale in respect of “may” or “shall” in my Amendment 88, in the particular in relation to the way in which Clause 48(2) is drafted. I see that that my amendment is not appropriate there.
The Government ought not to object to my Amendment 92. If they are in earnest about getting the statutory instrument out coterminously with Royal Assent, no problem would arise. If for some reason the statutory instrument were delayed—there could be many reasons for that; for example, continuing discussions with the parties about it—my amendment would provide a failsafe mechanism which would otherwise not be necessary. It would apply only to deal with legal certainty in that period. I emphasise that a period of uncertainty because the statutory instrument is not in force could cause banks to unwind a whole series of transactions. That would be most unfortunate.
I regard Amendment 92 as something to be considered further between now and Report. That will depend partly on progress in producing a statutory instrument that is acceptable to all parties. If there is any doubt about that, I may wish to return to the issue. As I have said, legal uncertainty during what might be only a transitional period could be as damaging as legal uncertainty in the whole area. With those comments, I beg leave to withdraw the amendment.
89: Clause 48, page 23, line 26, leave out “security interests or set-off or netting” and insert “protected”
90: Clause 48, page 23, line 29, leave out “security interests or set-off or netting” and insert “protected”
91: Clause 48, page 23, line 33, leave out “security interests or set-off or netting” and insert “protected”
94: Clause 48, page 23, line 43, leave out “security interests or set-off or netting” and insert “protected”
Clause 48, as amended, agreed.
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