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Baroness Noakes: Still dealing with the continuity obligations, we now move to what the transferee has to pay for them—or, to put it the other way round, what the transferor can receive for them. I shall speak to the seven other amendments in the group as well. They concern the arrangements for remuneration in respect

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of the provision of continuity services. In Committee in another place, the Government moved amendments to replace the original concept of “market rate” with one of “reasonable consideration”. I accept that “market rate” caused some difficulties because it might allow monopolistic pricing. Unfortunately, “reasonable consideration” has no defined meaning in commercial terms and, as drafted, leaves rather too much to the opinion of the Treasury, using its power under Clause 69, to which the Minister referred earlier, to determine what amounts to reasonable consideration. The Treasury has no natural or indeed obvious competence in the pricing of services reasonably.

My amendments address three issues: whether “reasonable consideration” is the right term; what obligations are on the Treasury and the bank to achieve reasonable consideration and other terms; and an appeal mechanism in case of disagreement as to the consideration or other terms.

Amendments 107, 109, 110 and 112 replace “reasonable consideration” with,

That phrase would apply to Clauses 63, 64, 66 and 67. This formulation is used in those clauses for determining the other provisions in the arrangements for continuity services. It seems to me that if it is good enough for determining general terms and conditions, the formulation would be right and consistent for determining consideration.

Amendments 108 and 111 would delete the words,

from Clauses 64(3) and 67(3). That would require the Bank of England or the Treasury actually to achieve both “reasonable consideration” and other arm’s-length terms. The question posed by these amendments is: why should there be any issue of reasonable practicability? The service providers want assurance that they will be dealt with on arm’s-length terms and at a proper price. Why should the authorities have any let-out from achieving that? What, in practice, is targeted by this caveat wording of,

Lastly, Amendments 113 and 114 replace the order-making power in subsection (1) of Clause 69 with a requirement for the Treasury to appoint someone independent to determine terms or price, whatever formulation is used, in the event of disagreement. I should probably have deleted subsection (2) as well, for completeness, but I do not think that that matters for the purposes of today’s debate.

There is a theme running through these clauses that the residual bank and the group companies will do what they are told on the terms they are given and for monetary consideration that the Treasury determines. These residual operations, and certainly other group companies, may well be viable businesses, with their own priorities, and it is important that they are treated fairly. These amendments are intended to be a contribution to that, and I beg to move.

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3.30 pm

Lord Myners: It is worth bearing in mind that the bank described as the residual bank is part of a failed organisation. When we talk about the fairness of the arrangements between the bank that has gone into the special resolution process—the NewCo, as referred to by the noble Viscount, Lord Eccles, and the residual bank or transfer, as referred to by the noble Baroness, Lady Noakes—we are talking about what was, prior to that, a single organisation with a single set of shareholders with interests in the totality of the organisation.

I shall speak first to Amendments 107, 109, 110 and 112. The noble Baroness has tabled a series of amendments which seek to introduce the concept of arm’s-length terms into the continuity clauses. The amendments provide that the relevant authority must ensure that consideration be paid as would be expected in arrangements concluded between parties dealing at arm’s length.

If a former group company provides a service—for example, IT support, as we mentioned earlier—to a deposit-taker that has been transferred into temporary public ownership, the continuity provision places the former group under obligations to continue to provide the service. However, it is of course appropriate that the group company receives reasonable consideration for the provision of that service.

In normal circumstances, the forces of supply and demand—the usual commercial forces—would work to determine consideration, as would be expected in arrangements concluded between parties dealing at arm’s length. If a company purchased a bank from the group, it would seek to negotiate terms for the provision of services to the bank, or put in place other arrangements. For example, an IT company might stipulate that it be allowed to shut down systems for an hour each night to carry out maintenance. If the deposit-taker did not accept this provision, the bank would take its business elsewhere or arrange the service to be provided by another company. However, clearly, the authorities would not have opportunity to enter a process of negotiation, or to seek alternative arrangements at the time of the transfer under the SRR stabilisation powers.

Once the business is transferred, it is essential that the services continue to be provided to ensure that the deposit-taker remains operational from hour one of day one. This is necessary, for example, to ensure that depositors retain access to their accounts. Therefore, the transferee would have but one choice: to continue with the same services as pre-transfer. In addition, bank systems are often highly bespoke to the particular business that they support, so it is highly unlikely that a transferee would be able to find and organise an alternative supplier for essential services at very short notice.

Given that the deposit-taker would not be able to take advantage of substitute service providers, a former group company that supplies services is likely to be in a position of relative power and could seek to charge “ransom” rates. This is because the deposit-taker would have no choice but to accept the terms of the provider, given the absence of alternatives. For this reason, the Government consider that the phrase “reasonable

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consideration” strikes the right balance between the consideration that a service provider should rightfully receive and mitigating the risk of “ransom” conditions being imposed. Clause 69 provides that the Treasury may by order specify matters which are to be or are not to be considered in determining what amounts to reasonable consideration. I hope that I have suitably justified the Government’s position on this issue.

Amendments 108 and 111 seek to remove the phrase “so far as is reasonably practicable” from subsection (3) of the relevant clauses. This subsection relates to specific continuity obligations for share and property transfers. It imposes a duty on the relevant authority to aim to preserve or include provision for reasonable consideration, and other provisions that would be expected in arrangements concluded on an arm’s-length basis. The amendment would remove the qualification to that duty; namely, that the duty does not arise where it would not be reasonably practicable. Of course, it is the authorities’ intention to provide such things in all situations. However, there may be circumstances which result in it not being practicable. This reflects the fact that the continuity obligations have not been, and cannot be, concluded in the manner of ordinary contractual arrangements. A bank will normally make provision for its servicing arrangements in a deliberate and planned way, anticipating the future needs it will have for required services and facilities.

By contrast, the continuity obligations are designed to ensure that required services and facilities continue to be provided, following a transfer compelled by statute. In such circumstances, it may not be reasonably practicable to provide for the terms of such contracts to be on wholly commercial terms because there may not be any legitimate commercial analogue for the circumstances of the banking business following the transfer. I should also make it clear that the phrase “so far as is reasonably practicable” does not provide the relevant authority with a right to ignore commercial terms.

I shall now turn to Amendments 113 and 114, which seek to change the nature of Clause 69, whose purpose is to provide that the Treasury may by order specify matters which are to be, or are not to be, considered in determining what amounts to reasonable consideration, or arm’s-length provisions. The order is intended to be a standing piece of secondary legislation, not bespoke for a particular resolution. The purpose is to set out provisions which would not be suitable for primary legislation but which would aid clarity about how the Treasury may seek to determine what amounts to reasonable consideration or arm’s-length provisions.

Amendments 113 and 114 change subsection (1) of the clause so that the Treasury may appoint a person to determine what amounts to reasonable consideration in the event of dispute, instead of providing for the matters that are or are not to be considered in assessing what amounts to reasonable consideration. It is true that other parts of the Bill, most notably in respect of the compensation clauses, provide for independent valuation and for independent valuers to be appointed. However, the Government consider that the circumstances in which compensation takes place are different from the environment of a continuity obligation.

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The existing power is an order-making power which allows the Treasury to specify matters which may be taken into account in assessing the consideration to be paid. The purpose is to provide commercial certainty as to the factors that may be taken into account and to ensure that a ransom is not paid. Any determination as to the consideration paid is, of course, subject to judicial review. Therefore, while it is not explicit in the Bill, there is a mechanism that could be put in place for the independent evaluation of the reasonableness of the determination as to consideration. Therefore, I hope that the noble Baroness feels able to withdraw her amendment.

Baroness Noakes: Before I consider what to do with my amendment, will the Minister explain the difference in Clause 64(3) between paragraphs (a) and (b)? As I understood the Minister, the formulation of “reasonable consideration” was appropriate with regard to money, but somehow “arm’s-length” terms was the correct formulation for everything else. If we have a potentially monopolistic provider, why are not paragraphs (a) and (b) both on reasonable terms rather than market terms? If you can ascertain arm’s-length terms for one set of conditions, you can do it for price, or vice versa—or, you cannot do it for both. There is a mismatch in the Government’s own drafting, in that they apply a different standard to price compared to the other terms, which may be more important than price, in practical terms, for the residual organisation providing the services. Yet the Government have set up a completely separate way in which to determine those two sets of terms. Can the Minister explain the difference?

Lord Myners: My interpretation is that Clause 64(3)(a) relates to the core provision of continuity. Any other provisions going beyond that would be on an arm's-length basis. That is to say that there are certain issues where the transferee bank would absolutely require a continued service from another group company as part of the transfer. It might elect to receive other services from another part of the transferor and those would be negotiated on a commercial arm's-length basis.

Baroness Noakes: Perhaps the Minister has read too much into subsection (3). Subsection (3)(a) refers to “provision for reasonable consideration”. It does not refer to core services or anything like that. Subsection (3)(b) refers to “any other provision”. If we take the provision of IT services, which is the example that the Government have used today and in another place, there are terms about price, but group companies might have all sorts of other important terms in a service level agreement, such as speed of turnaround, access to processing, updating and all the things that go with the provision of a facility. What is the difference between price and all those other provisions? If you can determine one on arm’s-length terms, why cannot you determine price on arm’s-length terms? They are two different streams in one; this is not about core services.

Lord Myners: Other terms may take a wide variety of forms and do not amount simply to a reasonable price, as the noble Baroness suggests. Here, the requirement is qualified by a practicability requirement. The essential difference is the qualification on practicability.

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Baroness Noakes: The Minister takes me to my second question, before I determine what to do with the amendment. When he spoke earlier, he emphasised that,

applied only to paragraph (b) of the provisions, whatever they are. He made a distinction between that and paragraph (a), which is about price. The Minister has said that again, which may be fine, but it is not what the Bill actually says. The Bill applies the qualification,

to paragraphs (a) and (b). Therefore, again, the Minister has given me a slightly confused message and I wonder whether he can explain it.

Lord Myners: The Minister is giving slightly confused messages because he is being given a slightly confused message. Perhaps I may beg the indulgence of the noble Baroness on this point; if she will withdraw her amendment I will certainly seek to give an absolutely precise answer to her question and allow that to inform her position on Report.

Baroness Noakes: I thank the Minister. That just leaves Amendments 113 and 114, which relate to whether or not there should be some kind of independent mechanism to substitute for the Treasury’s judgment. When I hear Ministers saying, “Of course, there’s judicial review”, I always hear the sound of barrel scraping. No good justification can be put forward, so we fall back on the claim, “We have good old judicial review, which everyone knows is the most accessible and flexible of remedies available”. That will not wash.

I will consider what to do about Amendments 113 and 114 when I have had the chance to consider the other issues that the Minister is going to look at between now and Report. I feel that these clauses are weighted against what the Minister described as part of a failed organisation. Yes, that may be true, but these may be viable businesses that are part of a failed organisation; that is, they may have an ongoing life on their own, unrelated to the failed bank. We need to reflect a balance here—that is the purpose of my amendment—and not simply treat the residue as something that can be pushed around, shoved and told what to do.

3.45 pm

Lord Stewartby: Can the Minister give me an assurance? Looking at all these clauses on continuity obligations, I ask myself what would happen if the particular services were outsourced, or partly outsourced. I imagine that the Government will have considered the point and, I presume, will have satisfied themselves that that is covered by the Bill. However, it is difficult to think through the practical process that would apply in these cases. I would like the comfort of the Minister telling us that the Government have been conscious of this matter and are now content with the way in which it has been addressed.

Lord Myners: The noble Lord, Lord Stewartby, addresses a question that reflects the reality of complex financial institutions. We have already addressed the issue of an essential service being provided to a banking subsidiary by another arm of the group. The noble

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Lord also refers to outsourcing arrangements in which a critical dependency is secured from an unaffiliated, unrelated entity. Those contracts would follow on with the transferee institution, so nothing in the Bill places at risk critical dependencies that are covered by an external third-party or non-related supplier. The noble Lord, Lord Stewartby, is right to seek assurance on that, given the reality of how many of our larger banking organisations are now structured.

Amendment 107 withdrawn.

Clause 63 agreed.

Clause 64 : Special continuity obligations: property transfers

Amendments 108 and 109 not moved.

Clause 64 agreed.

Clause 65 agreed.

Clause 66 : General continuity obligation: share transfers

Amendment 110 not moved.

Clause 66 agreed.

Clause 67 : Special continuity obligations: share transfers

Amendments 111 and 112 not moved.

Clause 67 agreed.

Clause 68 agreed.

Clause 69 : Continuity obligations: consideration and terms

Amendments 113 and 114 not moved.

Clause 69 agreed.

Clause 70 : Continuity obligations: termination

Amendment 115

Moved by Baroness Noakes

115: Clause 70, page 36, line 3, at end insert—

“( ) The continuity authority shall ensure that compensation is payable to the person on whom the obligation is imposed if that person suffers financial loss because of the nature, extent or timing of a notice given under subsection (1).”

Baroness Noakes: The amendment sticks with the continuity obligations. It would add a new subsection to Clause 70, which allows the Bank of England or the Treasury to terminate a continuity obligation by giving notice. I ask first why this clause is necessary. If the correct arm’s-length terms have been determined under Clauses 64 or 67, they should have dealt with the discontinuance of the obligations. That would be a normal part of any arrangements for the provision of ongoing services and what commercial contracts for the provision of services would be expected to contain.

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Contracts such as IT service contracts contain notice periods and, where appropriate, predetermined compensation terms related to the notice, especially where short notice periods are involved. Let us take the provision of IT services, which we have discussed and which is probably the classic example under these obligations. The residual bank or group company will have staffing matched to the services that it is required to deliver under the continuity obligations. If, say, half of those services are no longer required because the transferee has made its own arrangements, which I think everybody thinks is the right way to go, there will be staff to get rid of and perhaps property to dispose of or other costs related to that discontinued activity. Those things will all involve costs. If short notice is given, those costs could be significant.

My Amendment 115 would mean that, when notice is given, the Bank or the Treasury ensures that the residual bank is compensated for the consequential costs of termination. Obviously, the longer the notice, the less the cost is likely to be, but even then there could well be a cost. I invite the Minister to say whether or how the Clause 70 termination powers are constrained—by operation of the other provisions of the Bill or otherwise—so that the result is fair for the residual bank and, indeed, for other group companies that might be involved in this service provision, and whether the Government expect the arm’s-length terms covering termination provisions to cover the circumstances that I have described. If that is not covered by the existing expectation of the way in which the clauses allow terms to be set, I urge him to consider carefully my amendment to Clause 70, or something similar. I beg to move.

Lord Davies of Oldham: We consider that Clause 70 provides the authorities with the necessary flexibility to remove a general continuity obligation that has arisen. I agree with the noble Baroness that in some circumstances—there may not be very many—it may be appropriate for this to occur. This will happen when adequate arrangements have been put in place under special continuity powers or ordinary contractual arrangements. Therefore, the obligation will be terminated against a background where a considerable measure of agreement about the future has been reached. Nevertheless, we need to provide for the continuity obligation to be terminated.

However, it is the Government’s view that compensation should not be required if a general continuity obligation is terminated, because the service provider will no longer be under an obligation to provide the service. I should make it clear that if a continuity obligation is terminated, there is absolutely nothing to prevent a service provider from coming to a normal commercial arrangement with the bank for the service that it wishes to provide. However, we do not think it appropriate that compensation should be due if the obligation is terminated and the service is no longer continued. The implications of that would be in effect to provide a subsidy to the provider. This would scarcely make a great deal of sense if, for example, the bank could obtain the service at a lower price from another provider. While I wish to defend the need for a provision in the Bill to terminate a general continuity obligation, I

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agree with the noble Baroness that this may not occur too often. However, when it does occur, a case cannot be made out for effectively giving a subsidy to the provider when the bank could potentially obtain the service elsewhere. That is the basis of the provision.

Baroness Noakes: I hear what the Minister says, but I shall take him back to my example of IT services. If one has arm’s-length IT service provision, because the service provider has to gear up in hardware, software and people, it is usually the case that those contracts, if they are on arm’s-length terms, contain terms dealing with duration and termination, because termination means that there are some dead costs often left behind and/or that there are excess facilities. We are not necessarily talking about tradable services; I understand that the continuity provisions are about bespoke services much more than about tradable services. You can go out and get a new provider for tradable services—for example, office cleaning—but these services tend to be interwoven and specific. If you had outsourced them—if, instead of a group company providing them, there was an outsourced provider—that contract would almost certainly have provisions covering termination, or certainly termination ahead of the anticipated term. That was the issue that I was seeking to probe and the Minister did not quite answer that aspect of it for me.

Lord Davies of Oldham: That may have been because I was concentrating on what I regarded as a more germane point. There was a hint in the amendment of an unfair commitment of funds in terms of a potential subsidy to a provider in circumstances for which we cannot envisage the justification.

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