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There are a number of reasons why a power limited to banks may be insufficient. First, the activities of the bank and the rest of the group may be so inter-related that the exercise of the transfer powers only in relation to the bank may be insufficient to resolve the bank successfully. Secondly, taking action only in relation to the bank may give rise to serious difficulties with the rest of the group, which is very likely to include other financial companies that are part of, or participants in, the financial system.
In certain cases, the exercise of the transfer powers in relation to the bank may so disturb the operation of, and confidence in, the group as a whole that it leads to the insolvency of some or all of the other entities of the group. Where other group companies are dependent on the bank for its financing, the exercise of the transfer powers in relation to the bank may interfere with that funding stream and undermine market confidence in the viability of those companies
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Finally, a private sector solution may be more likely on a group-wide than a bank-only basis. This is particularly the case if other non-bank parts of the group are attractive to buyers. I note that the Bill already contains provisions that seek to address aspects of the potential difficulties related to a bank’s corporate structures, while Clauses 63 to 70, which we have just considered, impose among other things an obligation on group companies to continue to provide necessary services or facilities under the continuity obligations. However, the Treasury has concluded that the imposition of continuity obligations, while remaining a vital tool in certain cases, will be insufficient to address the full range of difficulties in all cases. Therefore, as we announced in the 2008 Pre-Budget Report, we have tabled amendments to extend the Treasury’s power to take a failing bank into temporary public ownership to include bank holding companies. As noble Lords will appreciate, the Bill already provides for the Treasury to take a failing bank into temporary public ownership.
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The powers provided by this group of amendments would be used in cases where the resolution of the bank in isolation would not by itself be sufficient to protect financial stability, public funds, or both. The Committee will appreciate that this is a significant step, although of course it is the product of extensive consultation, and I hope that I have been able to demonstrate that the powers are being introduced in a proportionate manner. We have had considerable discussions on these matters. In determining whether it is necessary to take such action in relation to a holding company, the Treasury will have to consider whether action in relation to the bank alone would suffice for the purposes specified in Clause 9. The power is also limited to the Treasury. This approach ensures that Parliament can hold the Minister exercising powers in relation to a holding company directly to account. We consider that ministerial accountability is important, given the breadth of interested parties in these circumstances.
The powers provide the flexibility for the Treasury to transfer either the topmost holding company of the deposit-taker or an intermediate holding company. This is useful in circumstances where it is not necessary to transfer the whole group. Once a holding company is in temporary public ownership, the Treasury will have a range of powers available to it in the ways we discussed when considering earlier clauses; in particular, the powers to impose limitations on partial property transfers provided for in Clauses 47, 48 and 60 will apply. In addition, the Treasury considers that, having taken a holding company into temporary public ownership, it is appropriate that it should have the flexibility to effect the full range of transfers in relation to the bank and not just the holding company. The key aims of the exercise of the power to take a holding
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In pursuance of these objectives, it may be appropriate to transfer the shares or property of banks in the group. The Treasury may effect an onward partial property transfer from a bank that is part of a group that has been taken into temporary public ownership. This approach has been adopted to provide the Treasury with appropriate flexibility to complete the resolution of each bank affected by the transfer to temporary public ownership of the holding company. However, the Government consider it appropriate to restrict the powers of the Treasury with respect to non-bank entities within the group. Therefore, the full range of onward transfer powers only applies to deposit-takers in the group and the holding company itself. This is where Amendments 116 and 117 cut in.
Clause 71 provides a transfer instrument or order to make provision about pensions. The modification to a pension scheme may be necessary to facilitate a fully effective transfer. The clause currently applies to pension schemes in which the failing bank is or was an employer. However, we have considered the matter further and the Government are of the view that it does not provide sufficient flexibility for the authorities to deal with all possible resolution scenarios involving group companies in the ways I have outlined. For example, if the Treasury takes into public ownership a failing deposit-taker which is a part of a group, the holding company may be the entity that technically employs the workers of the deposit taker and may also hold their pension scheme. It therefore may be necessary to exercise the pension power at group level instead of at the level of the deposit-taker, and Amendments 143 and 144 make consequential provisions in Part 3 in relation to the bank administration procedure as part of the expansion of the temporary public ownership tool to holding companies.
In summary, this group of amendments is an important addition to the Bill which will allow the special resolution regime to be effected for banks that are part of complex corporate groups. I hope that I have established the rationale for why the Government have tabled amendments which seek to extend these powers in the context of the debate that we have just had about the powers in Clause 71 and the intentions of the Government with regard to pension provision, particularly in relation to the important point that the Government have no intention whatever of interfering with the accrued rights of anyone in these pension schemes. I beg to move.
Baroness Noakes: The Minister will not expect these Benches to greet any amendment which increases the scope of nationalisation even if it is accompanied by that well known word “temporary”, which has no defined meaning in the Bill.
I am not sure that the Government have made a clear case for this. Is the Minister saying that these provisions are only required for pension schemes in order to ensure that they can be properly dealt with? I
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Can he say also how many UK banks are likely to have holding companies which could get dragged into nationalisation? Is it a large number of banks? I am sure the Treasury has been passing its nationalisation slide-rule over the whole of the banking sector so there must be an easy answer. The Minister’s colleague next to him looks as if he is well aware of the answer so I am sure there is one. How many banks could have their holding companies dragged in in this way?
Amendment 126 proposes a new clause on holding companies and its subsection (4) restricts its use to holding companies which are incorporated in the UK. In practical terms, that is probably all that the Government can do, but have they considered the extent to which that may now make the UK an unattractive place for a bank to have its holding company? If that were the case, it would add to a number of other features that have accumulated over recent years of why the UK is not a good home for the holding companies of organisations. In particular, have the Government considered whether this might drive bank holding companies out of the UK? It could leave the UK bank operating in the UK but its holding company could go somewhere else. I remind the Minister of HSBC. It is currently headquartered and based in the UK. Its name is the Hong Kong and Shanghai Banking Corporation, and it was domiciled in Hong Kong. When the Chinese looked as if they were going to take over Hong Kong, it activated provisions in its articles of association and moved to New York. I am not suggesting that HSBC would look at the Bill and think about moving, although it might, but it illustrates the point that banks that operate on a global scale and their holding companies do not have real roots in territories. They can just up and move to another territory. If this clause is on the statute book, will it not encourage holding companies to move outside the UK, which is not to the advantage of the UK?
A more detailed point relates to Amendment 127. It brings in which of the powers in the earlier part of the Bill can be used in the context of the holding company. Clause 20, which we debated earlier, relates to rewriting the employment rights of directors. This amendment allows the rewriting of the employment rights of directors of the holding company and of the bank. I understand those two within the Government’s rationale for Clause 20, but I cannot understand why that clause should also apply to the directors of a bank in the same group. I do not think there is any suggestion here that the bank in the same group is a failing or failed bank, so why are the Government taking powers to reach into another bank, not the failed bank, in the way set out in Clause 20?
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Having looked at this ability to take the holding company into public ownership, I went back and looked at the earlier part of the Bill to see if it dealt adequately with everything that might come up in the context of a holding company. I shall put to the Minister some things that might not be adequately dealt with in the early part of the Bill. We are now potentially taking into temporary public ownership businesses that are nothing to do with a failed bank and are potentially viable, vibrant, saleable or whatever. There just happens to be a failed bank. On the first day in Committee, we debated the objectives of the special resolution regime that this holding company is being brought into, and the Government rejected the amendment moved by the noble Lord, Lord Newby, in relation to enterprise value and our amendments in relation to creditors. If the Government are going to go beyond taking into public ownership failed banks and grab all kinds of other activities, they ought to revisit whether the terms in which the objectives are stated in Clause 4 are robust. If the Government do not do so, we need to before Report.
The second area that the Government ought to revisit is the code of practice issued under Clause 5. The draft code does not include anything because it was issued before the Government came up with the wizard idea of grabbing holding companies and fellow subsidiaries while taking hold of a bank. That ought to be covered in the code of practice, and I was unclear whether the way in which the code of practice was drafted in terms of taking a holding company into temporary public ownership would require the Government to cover that. It seems to me that it should. I leave those points with the Minister, but I hope he will reply to the questions I asked earlier.
Lord Newby: I have a simple question for the Minister. These provisions deal with a situation in which a holding company is taken into temporary public ownership. Is there a good reason why similar provisions are not being introduced to enable the holding company being taken into temporary temporary public ownership to be a bridge bank?
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Lord Davies of Oldham: I confirm the noble Baroness’s suspicions about my numeracy. I do not have in my head the number of banks that belong to holding companies, but it is obviously quite a number. We will provide a figure and I will circulate it to all noble Lords who have participated in the Committee. The category includes RBS and HBOS, and there are a number of others. I assure the noble Baroness that I will answer that question fully in due course, certainly before Report.
The noble Baroness made a great deal of the fact that these increased powers, which the Government are convinced are necessary in view of the problem in operating the resolution procedure, may make the United Kingdom an unattractive place for holding companies. I do not think that the United Kingdom is setting out to be an attractive place for holding companies that contain potentially failing banks. Let us remember the context of the Bill—it deals only with the
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Baroness Noakes: Does the Minister know how to differentiate, ex ante, between failing and successful organisations so that we attract the successful holding companies that have successful banks and not those with duff banks? What about the signals that that will send to mobile banks regarding where they should locate?
Lord Davies of Oldham: The Government are not going to make that decision. They will not apply the criteria for that; the banks will decide whether they come here or not. I should be exceedingly wary of giving enormous encouragement to holding companies that may contain failing banks. The noble Baroness seems to suggest that because we are addressing ourselves to this problem in forthright terms we are, by definition, rendering ourselves unattractive—quite the opposite. Guaranteeing the viability of the financial system is an absolute prerequisite for continued investment in this country, which is why the Government are pursuing this strategy.
On the more general points, the noble Baroness asked about the code of practice. It applies to the holding companies’ powers, and the draft code will need to be updated to take account of the amendments that we are introducing. The noble Lord, Lord Newby, asked about powers given to the Bank of England. Resolutions on a holding company level have the potential to affect a large number of parties, including those not part of the financial services sector. It is likely that the public interest decision of whether to intervene will involve balancing the interests of a wide variety of persons. The noble Lord will not be surprised to hear that in a democratic society we consider that government Ministers answerable to Parliament are the best placed to make these judgments. The temporary public service option has a higher public interest test for intervention than the other stabilisation options. As the noble Baroness emphasised, we preface public ownership with the crucial word “temporary”. I hear what the noble Lord, Lord Newby, says about these issues; he articulates his position with great frequency and considerable force. However, I am sure that he fully understands the Government’s position vis-Ã -vis the Bill.
I emphasise that these government amendments are the product of the consultation that we have been able to carry out and the extra time that we have been able to devote to analysing a rapidly developing situation, against a background where the legislation needs to be delivered in a limited period. The Government have been assiduous in their consultation in the months prior to the legislation. The amendments are the product of more recent developments. I commend Amendment 116 to the Committee.
Baroness Noakes: The Minister did not address two of the questions that I asked him. Perhaps I may help him by reminding him. I asked him, first, what the
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My second question was about the application of Clause 20. I asked the Minister why, in subsection (2)(a) of the proposed new clause, the Clause 20 powers apply not only to the directors of the holding company and the failed bank but to the directors of another bank in the same group, notwithstanding that that bank is not a failed bank. The Minister did not explain why the Clause 20 powers should be applied outside the context of the holding company directors, who may well be taken to have some responsibility for the failed bank that is that company’s subsidiary. I am unclear why the directors of another bank in the group are dragged into the Clause 20 provisions.
Lord Davies of Oldham: The amendments are tabled in relationship to pensions because the pensions issue raises the matter in an obviously precise form—namely, that pension holders in the individual bank may be part of the scheme that obtains across the group, which was the burden of our discussion earlier.
The noble Baroness asked why other directors are dragged into the provisions. The issue is authority in relation to a failing bank. We need to be able to ensure that the management of all deposit-takers can be changed if necessary to achieve the special resolution regime objectives. I share the view of the noble Baroness that the crucial objective is protecting financial stability and depositors. The powers are necessary to ensure thorough examination of management so that the management necessary to operate within the framework of the special resolution regime is present.
I emphasise again that our problem with using just the word “bank” is that a very large number of deposit-takers in the United Kingdom—I apologise to the noble Baroness; I cannot put a precise figure on it, but she will know that it is not one that I would obviously have in my head—are part of complex group undertakings. We are consulting on the additional powers necessary to deal with these groups if they should get into severe difficulties. A Banking Bill that dealt just with banks and not with holding companies in circumstances where the financial difficulties may go beyond the single deposit-taker would indicate that the legislation could not meet its objectives of bringing security to the financial situation, so it is important to ensure that the resolution tools work for all banks.
As financial markets and firms continue to develop, and consolidation within the industry continues to occur, it is important to ensure that the authorities have the appropriate powers available. Transferring the whole of a group, if the Treasury considers that transferring the deposit-taker alone would not adequately resolve the threats to financial stability, is likely to be the effective way in which to
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Of course, we recognise that this has the potential to be invasive, so any decision to extend the resolution tools to group companies needs to be accompanied by the appropriate safeguards. That is the basis of some of the past discussions that we have had on the Bill and, undoubtedly, of further discussions that we will have as we progress.
Baroness Noakes: I hear what the Minister says about using the power. The power is restricted; it is not really about whether or not pensions cause a problem—that might have been a red herring that the Minister introduced. The power can be used only if the holding company needs to be taken into public ownership for the purposes of conditions A and B in Clause 9. It is not actually about continuity obligations at all; it is only about financial stability.
I am still mystified about why other directors of banks within the group have to be affected by the Clause 20 powers. There is no suggestion that any other bank in the group has a financial impact of that sort, otherwise it would have been sucked into the powers in Clauses 7 to 9. I still do not understand why the good bank in the group is tainted by the bad bank. Will the Minister explain that?
Lord Davies of Oldham: The Government are seeking the necessary flexibility to envisage those situations that have not obtained thus far but may do. With a holding company with a failing deposit-taker in its framework, it is right that the authorities should examine the nature of the direction and policies pursued. After all, the holding company might hold another deposit-taker. Of course, it will be necessary to examine the implications of the failed institution that is going into the special resolution regime and what impact it has on the group, as well as the effect that the holding company has on deposit-takers in its framework.
I shall not convince the noble Baroness that these powers are necessary unless she accepts the fact that the authorities should not make provision solely for a bank taking a deposit that belongs to a group when some of the direction and policy of the bank may relate to influences beyond its own directors; it might even have directors in common with the holding company. There would be no option but to examine that kind of situation. That is all that the Government are seeking in these terms.
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116A: Clause 71, page 36, line 30, at end insert “, and
(c) the persons affected by the procedures under this section shall receive a statement setting out their pension position within six months of any transfer orders or instruments made as set out in subsection (1)(a) to (c)”
Viscount Eccles: I will again be brief and return to a small issue about pensions and pension schemes. I propose to add at the end of Clause 71 a short paragraph that gives individuals the right to be provided with information. It typically takes a long time to resolve the splitting of a pension scheme and its assets and to achieve a situation in which individual members know exactly where they stand. In this case, the tripartite authorities would be starting a process for reasons that they considered to be advantageous to themselves and the public interest. Therefore, they need an obligation to report on the results of their decision in a timely fashion. That would provide a reasonably early opportunity for representations to be made by members of a scheme or schemes and their representatives, particularly if they are uncertain about whether equity is being achieved. I beg to move.
Lord Davies of Oldham: The noble Viscount, Lord Eccles, raises an important point about ensuring that pension scheme members are kept informed, but I do not think that his amendment is necessary.
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