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4.45 pm
96: After Clause 48, insert the following new Clause—
“Report on partial property transfers
(1) The Treasury must prepare and publish an annual assessment of the efficacy of the safeguards relating to partial property transfers under Part 1 of this Act.
(2) In preparing each assessment the Treasury must consult the Banking Liaison Panel constituted under section 10.
(3) If an assessment indicates that the safeguards are inadequate, the Treasury must make proposals for strengthening them.
(4) Each assessment published under this section must be laid before Parliament.”
Baroness Noakes: This amendment would insert a new clause after Clause 48 requiring a report or annual assessment to be made by the Treasury on partial property transfers. We have spent the past hour or so talking about these transfers and it is clear that important issues arise out of them in connection with set-off, netting and other similar transactions. Even if agreement is reached and harmony breaks out between the Treasury and the banks over the next few weeks over what the terms of the statutory instrument should be, we ought not to be in any doubt that this is difficult territory where people may not have worked out what is exactly the right answer. For example, the British Bankers’ Association is concerned that practical problems and unintended consequences may emerge which need to be dealt with. That is not to challenge the bona fides of the Treasury in conducting and responding to its consultation, but to state a fact of life about this hugely complicated area. The amendment therefore proposes an annual assessment which, although it may appear to be onerous, addresses such an important area that goes to the heart of whether or not transactions work for regulatory capital purposes, possibly actually destroying the market in the UK, that it needs to be set against the damage that could be done to our banking industry.
The amendment requires the Treasury to consult the Banking Liaison Panel, the group being brought together for the purpose of looking at secondary legislation, and, importantly, requires it to make proposals for dealing with any aspects that are regarded as unsatisfactory. We have of course included the requirement to publish the assessment and to lay it before Parliament to allow for an appropriate level of involvement should it so choose.
I hope that the Government will regard this amendment as a practical way forward. If it is accepted, it would take away some of the concerns about getting everything absolutely right either in Clauses 47 and 48 or in the first statutory instrument that will be made thereunder. At least the industry would be satisfied that there is a genuine intention on the part of the Government to keep this under positive review. I beg to move.
Lord Northbrook: I support my noble friend’s amendment because it seems eminently sensible that the Treasury should prepare and publish an annual
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Viscount Eccles: I cannot resist the thought that if such a provision is not included in the Bill, the Merits of Statutory Instruments Committee would find that this is exactly the sort of thing it would like to look at in its annual report. There is unlikely to be any more controversial secondary legislation than this.
Lord Davies of Oldham: The Government fully accept that it is crucial for the partial transfer safeguards to work effectively. That is the burden of this amendment, which calls for an annual report to assess their efficacy. We recognise that partial transfers might be invasive, and have made it a matter of the utmost priority that effective and appropriate safeguards are indeed in place. I hope that the extensive consultation carried out by the Government demonstrates our commitment to working with the industry to get those safeguards right—a key reason for establishing the expert liaison group. The Committee will know that the group is to be put on a statutory footing; the Government will, therefore, be bound to have regard to its recommendations.
Clause 10, which we considered some time ago, thus provides a mechanism for the Government to receive not annual but regular and expert feedback on what we should consider regarding these issues. Regular feedback is important, but we contend that it will be necessary to update the safeguards over time, with the feedback being crucial in indicating to the Government why they should be changed. That is the basis of the secondary legislation we are bringing forward under the Bill.
The Government consider it desirable to retain flexibility to adjust and refine the safeguards in the light of experience, particularly in the context of set-off and netting, because those arrangements have proved to be highly innovative and a challenging development. In particular, the latter has developed and evolved in a comparatively short time, illustrating that this legislation needs built-in flexibility to cope with a significantly changing environment.
Changes to the safeguard may be necessary to ensure that it continues to protect what it was intended to and that innovations do not undermine the policy aims that the special resolution regime is intended to serve. The expert liaison group will continue to advise the Government on the development of secondary legislation related to the partial transfer safeguards, but the Government consider its remit to be wider than that. Clause 10 makes it clear that the group should advise on the secondary legislation in Parts 1 to 3 of the Bill, although, as I made clear in our earlier debate, use of the stabilisation powers and compensation provisions rightly fall outside the group’s remit. It is appropriate that the Government continue to consult with the industry over the broad range of secondary legislation made under the Bill—not just on the safeguards, important as they undoubtedly are given the focus of this amendment.
On the amendment itself, the formal reporting requirement is neither desirable nor necessary. What form of assessment may be made, or may be possible, might depend on whether any resolutions are carried
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First, it may be necessary for evaluation and improvement to be undertaken more often than annually. The expert liaison group can meet on a number of occasions during the year, and report to the Government on those matters. Secondly, an assessment by market experts and industry practitioners is important. I note that the noble Baroness shares this view because a requirement for consultation with the expert liaison group forms a crucial part of her amendment.
As far as Parliament is concerned, any amendment to the secondary legislation in relation to safeguards will be subject to the draft affirmative procedure. Therefore Parliament will have an opportunity to scrutinise and debate the provisions of the safeguards. I hope the noble Baroness recognises that, through her amendment, she has pressed the Government on the nature of the reporting on these developments, which will take place much more frequently than annually, and that Parliament will also play its part with regard to the orders. Surely that is the basis on which the Government should act on what we propose in the Bill. I hope that the noble Baroness will feel able to withdraw her amendment.
Lord Northbrook: At the risk of rehashing an earlier debate, it seems that under Clause 10 the panel can advise the Treasury but there is no necessity for the Treasury to take a blind bit of notice of its advice. Would it not be better and more useful for the assessment to be laid before Parliament? This would create more clarity on how the operation of the system is working.
Lord Davies of Oldham: The Treasury would act in a foolish way if it ignored what the expert liaison group offered to it, particularly as the group will be on a statutory basis, with clearly defined rights and powers, and there will be an obligation on the Government to consult with it and listen to it. However, the final position as far as Parliament is concerned is that the provisions of the safeguards will be scrutinised and debated when the affirmative orders are laid. We will have both a flexible and more frequent forum within which experts can express opinions to the Treasury about developments and necessities in the field, and Parliament will act properly in regard to the orders.
Baroness Noakes: I thank my noble friend Lord Northbrook for his participation in the debate. I agree with him that it would be a good thing to have a public report on these issues, and I shall think about that before Report. In particular, I will think about the role that the Banking Liaison Panel can play in that and whether that is an adequate substitute, which I think is the burden of the Minister’s response.
That will take me back to the wording of Clause 10, which we discussed earlier when we talked about the remit of the Banking Liaison Panel. Clause 10 states:
“The Treasury shall make arrangements for a panel to advise the Treasury about the exercise of powers to make statutory instruments”.
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Between now and Report, will the Minister consider whether the wording of the remit of the Banking Liaison Panel adequately reflects that the consultation will not only be about the exercise of powers but include the effect of existing statutory instruments after they have been drafted and have been through the normal processes? This will be a retrospective look at how they work and it may not be easy to reconcile that with consulting about the exercise of powers.
We raised earlier the need to reflect the more dynamic role that the Government are saying the Banking Liaison Panel should have but I am not sure that that is accurately reflected in the wording.
Lord Davies of Oldham: I undertake to take that point on board.
Baroness Noakes: I am grateful to the Minister for that. On that basis, I beg leave to withdraw the amendment.
97: Clause 49, page 24, line 26, at end insert—
“(5) The exercise of a third party compensation order will be based on the principle that the Treasury should indemnify counterparties for any loss suffered by them if their netting and close-out arrangements are undermined by the exercise of the stabilisation powers.
(6) After a stabilisation power is exercised with respect to a particular bank, counterparties should be allowed to close-out their own hedged and other positions with respect to that bank in order to determine their losses and to make a claim for compensation from the Treasury.”
Lord Eatwell: The amendment attempts to come at this vexed question of netting and transfers, especially partial transfers, from a different direction; namely, that of compensation arrangements. These provisions would ensure suitable compensation for those who have netting or set-off contracts associated with a bank that is then the subject of a special resolution regime—compensating them for any losses that they may suffer as a result of the implementation of the special resolution regime. The idea is that, instead of dealing with the difficult issue of clean legal opinion, we say, “Okay, we might not be able to proceed in that direction, but we can provide a compensation regime that will provide comfort and cover some of the uncertainty with which we are struggling and that unfortunately we seem to have introduced while pursuing the laudable objective of developing the special resolution regime”. These two provisions deal with the problem through the compensation route. I beg to move.
Baroness Noakes: The contribution of the noble Lord, Lord Eatwell, is interesting. One point raised by lawyers who have looked at this is that, if there was an
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Lord Blackwell: I have sympathy with the amendment proposed by the noble Lord, Lord Eatwell, not just for equity reasons, but because, if there is speculation that a bank might be taken into the special resolution regime, it is important that people do not close down positions in advance, thereby precipitating a need to take action. Is the Minister saying that it would be appropriate to compensate counterparties as if the alternative was that nothing had happened and that the bank had continued trading? Presumably in many cases, the Government are intervening only because the alternative would be that the bank goes into insolvency. Clearly, when a bank goes into insolvency, there are procedures by which counterparties can settle their claims legally. One would not want them to get more compensation from the Government than they would in the alternative situation. If one accepts this principle, is there a way of wording this that would require the Government to compensate counterparties only if they could make a case that they were put in a worse position by the Government’s action than they would have been by an insolvency action?
Lord Davies of Oldham: I am grateful to all noble Lords, but on this occasion I am most grateful to the noble Lord, Lord Blackwell, who has pointed out some obvious government reservations about the proposal and our anxiety about the extent of what the noble Baroness called for. I refer to the blanket indemnity that the Treasury would be expected to provide, in circumstances where a whole range of actions, including the speculation referred to by the noble Lord, might take place while these activities were going on.
I am grateful to my noble friend Lord Eatwell for his constructive approach to this issue. He referred to it as a vexed question. I know what he means: as an academic, he means that it is a challenging question for him and a vexed question for the Government. There is no doubt that it is a difficult area, which is why I am grateful for his proposals. We have been working closely with interested parties to ensure the appropriate protection for such arrangements and during those discussions interested parties have told us that the best way of ensuring legal certainty in the market on this matter is to protect set-off and netting requirements through a legislative restriction on disrupting those arrangements, which has been the Government’s approach to the Bill. That is why we are putting in place the secondary legislation that will give effect to the powers conferred by Clause 48, and I am confident that we can use this approach to allow the authorities sufficient flexibility to undertake partial transfers while assuaging market concerns regarding netting and set-off.
The powers that we exercise to provide a safeguard also allow the Treasury to set out the remedy for a breach of the safeguard. The authorities are currently
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The order that will implement that policy will be subject to a debate in both Houses. As we mentioned on the previous amendment, the first exercise of these powers will be under the 28-day procedure, which will enable the safeguard for set-off and netting to come into force simultaneously with the commencement of provisions relating to the special resolution regime. Any changes made thereafter can be only through the draft affirmative procedure, so we are ensuring full parliamentary scrutiny of these developments.
The Bill already has in place arrangements for the assessment of compensation for third parties who suffer a compensatable interference in their property rights by way of the Third Party Compensation Scheme Order in Clause 59, a matter that I have no doubt will be the subject of considerable debate when we reach that point. Where a person suffers a compensatable interference in his property rights contrary to Article 1 of Protocol 1 of the European Convention on Human Rights, which provides that every person is entitled to the peaceful enjoyment of his possessions, provision for compensation must indeed be made. In accordance with that, the assessment of any compensation due must be conducted in accordance with the principles of fairness. The Government believe that the procedure for the determination of third party compensation—for example, through the appointment of an independent valuer—is compliant with the requirements of Article 1 of Protocol 1 and would provide adequate compensation for the purposes of Article 6. Further than that, the Government are seeking to protect all set-off and netting contracts, with the exception of specific carve-outs on which we are consulting.
We believe that this is the right approach to providing market confidence regarding partial transfers. I am grateful to my noble friend for raising the issue. It gives the Government the opportunity again to assert how important these issues are and how much we are bound with regard to compensation. However, I bear in mind the point made by the noble Lord, Lord Blackwell, that, in circumstances where significant actions can be taken in the market, the Government have to be circumspect about just how blanket their commitment to compensation would be. It is on that basis that the Government, having considered these matters, prefer the proposals in the Bill rather than the amendment that my noble friend has so helpfully proposed. I hope that he will feel able to withdraw it.
Lord Eatwell: I am grateful to noble Lords who have taken part in this short debate. I am especially grateful to the Minister because he has provided me with the verb that I was searching for in Amendment 80. Noble Lords may remember that my problem was the wording “shall not undermine”. The Minister tells me
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Turning to Amendment 97, I take the point made by the noble Lord, Lord Blackwell. He is absolutely right. The compensation should not be greater than that which would be encountered in insolvency. I recognise that this is a significant criticism of the amendments as I have tabled them. What the debate has made clear to me is that perhaps some of this compensation route is an appropriate way of dealing with this difficult problem. We need to look at the compensation route in alliance with the other ways that we are attempting to deal with it. Given that the Minister has said that those considerations will continue, and given, especially, his incredible generosity in correcting Amendment 80, which I will now introduce on Report in the Government’s own language, I beg leave to withdraw the amendment.
Clause 54 : Independent valuer
98: Clause 54, page 26, line 2, at end insert—
“( ) An order must provide for the criteria against which a person is to be regarded as independent for the purposes of appointment as an independent valuer.”
Baroness Noakes: Amendment 98 adds a new requirement for the independence of an independent valuer to be defined in an order. I had expected that the term “independent valuer” would be defined in some way in the Bill but could find nothing. Independence is of course a term of art, not science. It varies according to the context. It therefore may be difficult to define on an ex ante basis, but ought not to be difficult to define when coming to an individual order. What do the Government have in mind? Will it always be the case that the valuer is independent of the tripartite authorities; that is, the Bank of England, the Treasury and the FSA? Does the valuer have to be independent of any person who could benefit from a compensation order? In the case of widely held securities, how is that to be interpreted if the valuer is, say, a partnership or a company? Will the interests of the valuer’s partners or fellow directors, their spouses or other family members, be taken into account?
How rigorous will the Government be in establishing independence? Does the valuer have to be independent of the bank concerned, or the property or shares being valued, or does that apply to all commercial relationships that might have been entered into between the valuer and the bank or property at some point in the past? Is there a period over which it is to be calculated? Are there to be any de minimis limits? I hope the Minister
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If the Minister will not accept my amendment, will he set out for the record how independence is to be established? It may even assist the Committee if the Minister sets out what rules for independence were set for the Northern Rock valuer and what is proposed for the Bradford & Bingley valuer, who I believe will be appointed in the near future. I beg to move.
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