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I will not press the amendment today. I believe that we are expecting more from the Delegated Powers Committee fairly soon, and that will be even more interesting for the Committee to deal with. Today, I beg leave to withdraw my amendment but I should not like the Minister to think that this issue will go away.
Clause 75: Power to change law
5.30 pm
121: Clause 75, page 38, line 17, leave out “having regard to” and insert “in order to achieve one or more of”
Lord Howard of Rising: Clause 75 confers an extremely wide power, enabling Her Majesty's Treasury, by order, to disapply or modify the effect of any enactment
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The reason given for this very wide power is that there is a real and significant risk that the authorities may not be able to effect fully a transfer which could lead to serious adverse implications for the public interest through risks to financial stability, protection of depositors or the public funds. There has been some narrowing of this clause since it was first introduced, but the power is still extraordinarily wide. The phrase “having regard to” is unnecessarily broad.
Amendment 121 is modest and seeks to narrow the clause so that it is in line with the objectives of the special resolution. I shall discuss those objectives in greater detail when I speak later. In the mean time, all the amendment seeks to do is to restate how the powers can be used so that, as I have said, they are the same as the declared objectives set out in the Bill. Indeed, it would be perverse if alterations could be made to the law that were not strictly in line with the objectives of the special resolution regime. I beg to move.
Lord Davies of Oldham: With pleasure, I agree with the noble Lord. It is important to link the use of this power with the Bill’s objectives. However, I do not take the view that a change of drafting along the lines suggested by his amendment is required. First, in using or considering the use of stabilisation powers, it is of course necessary for the authorities to have regard to the special resolution objectives, so the stabilisation powers are already targeted on achieving outcomes which best meet the special resolution objectives considered in the round.
Secondly, the clause already requires the Treasury to have regard to the special resolution objectives when making an order under this provision. But the making of the order in isolation is unlikely to achieve special resolution objectives, as it is a power ancillary to the powers of the special resolution regime. It is the powers of that regime which are used to achieve its objectives and this power, which we are discussing here, makes changes to make the use of those powers more effective.
The Government consider that the existing provision best reflects the underlying importance of the objectives in this context, but reconciles that with the supporting role which this clause plays to the main powers of the regime. I hope that the noble Lord appreciates that we are thinking along similar lines as regards the importance of linking with the objectives of the special resolution regime, but that is already in the Bill. Therefore, I hope he will feel that he can safely withdraw his amendment.
Lord Howard of Rising: I thank the Minister for his remarks. If he agrees with me, then why not draft the Bill so that what it says is in line with the objectives? Support for the objectives should be as the Bill says, and the Government should not use it, as they so often do, as an opportunity to try to take wider powers than are necessary or than the Bill says. I beg leave to withdraw the amendment.
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Lord Howard of Rising: I shall speak also to Amendments 123 and 124. Amendment 122 seeks to remove Clause 75(3). That subsection allows retrospective alteration to the law. Retrospective legislation is undesirable at the best of times, but in this instance there are practical reasons as well as constitutional ones.
Much has already been said about the overwhelming importance of legal certainty in banking arrangements. The ability to legislate respectively, as set out in Clause 75(3), makes it extremely hard, if not impossible, to obtain the level of legal certainty necessary to carry out banking business. One of the reasons for London's competitive advantage in the financial services industry is the UK’s well developed legal system. However, the legal uncertainty created by the ability to alter the law retrospectively, set out in subsection (3), would be so detrimental that any flexibility gained in dealing with banks in difficulties would be overshadowed by the damage to the legal system on which banks depend. How can banks arrange their affairs in an orderly fashion if the arrangements they make can be overturned retrospectively? It makes the taking of security and obtaining a clear legal opinion on that security virtually impossible.
Comment has been made in another place that this legislation would apply only to a bank in trouble, but banks deal with each other, so action taken in using the special resolution regime could affect any bank because any bank could be counterparty to the bank falling under the regime and so be drawn into the net. In practice, the sort of situation and lack of confidence that this Bill seeks to avoid could be exacerbated, or indeed created, because any institution which has the slightest chance of coming under the special resolution regime would immediately be shunned. Healthy institutions would avoid transactions with a counterparty where there is a possibility, however remote, of that counterparty falling under a regime where the law can be altered retrospectively. It would be best if this subsection were removed from the Bill.
Amendments 123 and 124 propose that agreements entered into prior to any retrospective legislation are still valid. That would go some way towards achieving the legal certainty which the banking industry needs. If subsection (3) is not to be omitted from the Bill, at least these two amendments give a chance to provide some order and certainty to arrangements entered into in good faith. I am sure that the Minister, with his experience, will see the impossibility of any commercial enterprise existing in a world where agreements can be torn up at will, let alone in the banking industry where, as has already been said, legal certainty is required to avoid the need for massive increases in capital or other serious disadvantages. I beg to move.
The Deputy Chairman of Committees (Viscount Ullswater): I must advise the Committee that if this amendment is agreed to, I shall not be able to call Amendment 123 because of pre-emption.
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Lord Newby: At first sight, this is an extremely draconian clause. We have considerable concerns about it because it seems to give the Treasury blanket ability to change the law. However, having read the Treasury memorandum, it is very difficult to see how the operation of the Bill could take place without such a clause. In the case of Northern Rock and Bradford & Bingley, we have seen that the Government had to act very quickly. It was for that reason that, when the Banking (Special Provisions) Bill was going through your Lordships' House, we agreed to the negative resolution procedure. We saw the overriding need for speed in certain circumstances, which was borne out by both Northern Rock and Bradford & Bingley.
We therefore accept the rationale for the generality of the clause. Subsection (3) again at first sight looks draconian because it talks about retrospective powers, but the Treasury memorandum sets out why such powers might be needed, and I have to say to the noble Lord, Lord Howard of Rising, that I do not believe the concerns expressed by the banking industry about the subsection. We are here talking only about what happens to a bank that has completely collapsed; we are not talking about the Government being able willy-nilly retrospectively to change the basis on which the generality of the banking sector can operate.
Therefore, although we on these Benches have a general aversion to any retrospective powers, without this power and the whole clause, it would be very difficult if not impossible to effect the rest of the powers in the Bill, which I think Members on all Benches agree may be necessary.
Lord Davies of Oldham: I am grateful to both noble Lords who have spoken in this short debate, but especially to the noble Lord, Lord Newby. Save in one respect, he has already adumbrated the two main arguments that I was going to present on the issue. Of course the Government are sensitive about retrospective legislation, but it is necessity that drives our position. As the noble Lord, Lord Newby, said, provisions very similar to these in the special provisions Act were used to modify legislation to make the transfers of Northern Rock and Bradford & Bingley effective. That reflects the fact that we are not dealing with normal circumstances; we are dealing with crisis circumstances where some element of setting aside the bar on a retrospective dimension to the law is necessary.
In our discussion of the previous amendment, the noble Baroness cited the deliberations of the Delegated Powers and Regulatory Reform Committee. We pay due regard to those, but so do the Opposition. They will have noticed that the committee made no reference to the retrospection of the power when it discussed Clause 75, so it did not raise for the committee the concerns to which the noble Lord, Lord Howard, gave voice when he moved Amendment 122.
Amendments 123 and 124 are inappropriate. They would introduce considerable uncertainty into the effectiveness of the power provided by the clause, which is of great significance. A vote would involve a significant number of agreements with different parties. At the time of resolution, there is likely to be a considerable number of contracts entered into before the use of
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If we accepted the noble Lord’s amendments, those types of contract would be covered by different law to those contracts entered into after the use of the stabilisation powers. If anything would create legal uncertainty, it would be that. It would jeopardise the success of the resolution, which could ultimately put off a private sector purchaser from agreeing to buy a failing bank. The amendment is inconsistent with the common approach to change in the law. When legislation is amended, it affects all relevant activities, not just those that commence after the legislation's commencement, otherwise, if a new tax were introduced for a certain type of employee or sector, it would not apply to those employees whose contract was signed before the tax came into force. We all recognise that that does not obtain.
I appreciate the noble Lord’s concern about any retrospective aspect to legislation. We should all be on our guard on that issue, and it is the job of the Opposition to probe when there are elements of it, but I hope that he appreciates the Government's defence of the issue and that the necessity for the clause to pass unamended is paramount.
5.45 pm
Lord Northbrook: I draw the Minister's attention to what the Delegated Powers and Regulatory Reform Committee report states on Clause 75. It states:
“We make no recommendation in relation to clause 75, but we draw it to the attention of the House, so that it might satisfy itself that the rather unusual context for which Part 1 of this Bill makes provision justifies the extremely wide power taken by the clause”.
The committee is inviting the House to consider the matter carefully.
Lord Davies of Oldham: I am grateful to the noble Lord, who is always scrupulous in his close attention to detail. He is absolutely right; he has given effect to that request from the committee. We have considered the matter and the Government have been subject to inspection and scrutiny on it, but I hope that we have also fulfilled the committee's requirement that we give adequate justification for our proposals in the clause.
Lord Howard of Rising: The Minister commented on the use of legislation in connection with Northern Rock. Can he explain how retrospective legislation was used to resolve the case of Northern Rock?
Lord Davies of Oldham: Part of the powers in the special provisions Act related to certain contracts concerning Northern Rock—I think that that is also the case with Bradford & Bingley. In the Bill, we are following previous example in those terms. That reflects the fact that, as the House will appreciate, the special powers regime—and in this case the Bill—must be able to deal with circumstances where significant and rather dramatic action has to be taken. This legislation is close to the way in which the transfer of both Northern Rock and Bradford & Bingley to the Treasury required that the shadow directorship provisions of the Companies Acts were disapplied. That followed a process not dissimilar to what we envisage in the clause. It does not quite fit the pattern of retrospection, but it does interfere with the common law.
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Lord Howard of Rising: Was that used retrospectively?
Lord Davies of Oldham: It was not used retrospectively, but it did interfere with existing law and applied differently under the special powers. Clause 75 is concerned with that broad position. Perhaps when introducing the case of Northern Rock to the argument, I should have done so more carefully by saying how it used one law to take primacy over another—the law relating to the special powers of the Northern Rock provision. I concede that it did not quite fit the same category of retrospection.
Lord Howard of Rising: I find it rather odd that the Minister should use Northern Rock as an example when, plainly, it was not. He referred to contracts coming under different parts of the law and said that a contract could be written under one part of the law, but that would then change. Actually, the amendment proposes that a contract or agreement written under the law should remain written under that law and that any subsequent changes to that law should not affect that contract.
Lord Davies of Oldham: I understand that position, but the contract is significant only in that it is effective. All I was indicating is that there is a precedent in situations in which action has to be taken, where something similar to Clause 75 obtains and it is necessary for us to apply the law in a rapidly changing situation that makes a particular demand on the authorities. As I have indicated to the noble Lord, if we were faced with a potential abuse of power, criticism would be voiced in very many quarters about it. However, we should balance what is without doubt an attribution of power to the authorities with the fact that they are dealing with an extremely difficult, and perhaps in the future often rapidly changing, situation in which they need to move with dispatch. I hope that that will satisfy the noble Lord and that he will withdraw his amendment.
Viscount Eccles: I shall intervene at this point rather than in the clause stand part debate, because the debate has ranged far and wide on this clause. My problem with it is that the Bill was intended to deal with what you might call ordinary times. Of course, banks have frequently failed, but not very close together. In the past 100 years, there have been a considerable number of bank failures, and I think we all agree that there should be a better scheme for dealing with infrequently failing banks. However, the Bill is in front of us at a time of crisis, which is colouring our view.
I read the Treasury’s memorandum to the Delegated Powers and Regulatory Reform Committee, all the while bearing in mind that the Treasury is a minimalist department that says the least that it can reasonably say to make its point. It does not say as much as it might be thinking. On this occasion, however, it wrote two and a half pages, which is a pretty long presentation. I think we would all agree with it when it says very firmly in the two and a half pages that sometimes the unexpected happens. The question then is how you structure an appropriate response.
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As has been said in this debate, the examples given in the two and a half pages are, frankly, unconvincing, because Northern Rock and Bradford & Bingley were both cited. However, the Treasury found its way through both of those without the benefit of a Clause 75, so we could repeat the terms of the 2008 Act and not get into Clause 75. There is the possibility that it might need to do something that meant that the ombudsman’s powers to protect consumers were not prejudiced by a failing bank and the orders that followed. Then there is the disapplication of the 2006 Act to bridge banks. Bridge banks are the most significant feature of this Bill, and I should have thought that the possibilities that relate to bridge banks would have been thought through.
My noble friend quoted the point made by the Delegated Powers and Regulatory Reform Committee. In making that comment, the committee was I think also conscious that a Bill that was originally intended for ordinary times was being brought forward in a time of crisis. The crisis has led to alternative actions. I suppose that if the Act existed, the FSA might have decided that the Royal Bank of Scotland should be taken into the special resolution regime. Is it really likely that at any time when there is a major problem, as there is today, the powers in Clause 75 would be confidently used? Surely, as has happened, another solution would be found in times of crisis. The case for this very wide power is unconvincing, and I firmly believe that the Treasury could find its way, as could the Bank of England, without the benefit of this clause. It might take a little more due diligence in each case, and possibly slightly more time, but I am sure that it would find its way through without the benefit of this clause, which should be withdrawn.
Lord Higgins: Parliament is always extremely reluctant to give the Executive powers that can be exercised retrospectively. I still have a little difficulty envisaging how these retrospective powers might be used. The Minister appeared to refer to Northern Rock and Bradford & Bingley, and then, I think, recanted and said that they were not an example of a retrospective use of the powers. Will he give us an example of how these powers might be needed and might be used? Another point relates to an individual working in a bank who has taken decisions on the basis of the law at the time. If the law is changed retrospectively, could the individual find that he has committed a criminal offence? Parliament has always been very reluctant to do anything that makes people liable criminally. Can the Minister be sure that individuals will not be affected in the way that I have described?
Lord Lyell of Markyate: I apologise for taking part in the debate now, not having been at the whole debate for medical reasons. I raise one point for clarification. The Explanatory Notes say that if these powers have to be used in an emergency—in other words, if they are brought into effect before there is an affirmative resolution, which is one of the protections against the use of these retrospective powers—they lapse if they are not affirmed at the end of the 28 days. Will the Minister make it clear—I hope he can—that if they lapse, they will never have been effective?
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Lord Davies of Oldham:As the noble Viscount, Lord Eccles, was frank enough to confess to us, we have gone slightly wider than the amendments and on to the validity of Clause 75. I am obliged to reiterate the obvious point that there is bound to be some conflict between the public interest objectives of resolving the difficulties of a bank in severe financial distress on the one hand, and the provisions of legislation that are designed to work in relation to a normally functioning business on the other.
Clause 75 is linked to the special provisions of the regime, and reflects the fact that the authorities are acting in the difficult circumstances of a failing bank. We are not looking for general retrospective powers; we are seeking only to facilitate the use of one of the stabilisation options. The scope of the powers might be severely constrained unless we had the ability to ensure that the action taken under those provisions had some paramountcy. That is why the clause is drafted in the way that it is.
The noble and learned Lord, Lord Lyell of Markyate, asked me a specific question, but, in more general terms, where an entirely new regime is introduced in an area which is already populated by a complex and interrelated body of primary and secondary legislation and common law, new laws may come which contain powers that are not dissimilar to those under Clause 75. For example, the Safeguarding Vulnerable Groups Act 2006 and Section 148 of the Criminal Justice and Immigration Act 2008 reflect the fact that the legislation coming in is bound to affect in direct terms already existing legislation. All we are seeking with regard to this clause is exactly that position. There is not a great deal of retrospective quality to it, although it contains a retrospective element. But the necessity of the authorities to be able to act—
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