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7 pm
Baroness Noakes: I want to place on the record that I am extremely disappointed with the Government’s attitude in relation to these amendments. By their own admission, some of the powers that they are taking are unprecedented. The Minister has agreed to take away and look again at the tiniest part of his amendments. If the amendments are agreed, we, for our part, do not accept their full effect. I explained that we could understand why, given the current economic circumstances in the country, certain powers might need to be taken, but our approval of the amendments today should not be taken as an indication that we do not wish to pursue further the issues that I have already raised with the Minister and to which he has not responded satisfactorily. We will return to these matters on Report.
173C: Clause 225, page 110, line 34, at beginning insert “by the Treasury, or by the Secretary of State with the consent of the Treasury,”
Amendments 173B to 173D agreed.
173E: Clause 225, page 110, line 37, at end insert—
“(1A) For the purpose of subsection (1)(b) expenditure is incurred in respect of financial assistance in respect of banks or other financial institutions if it is incurred in respect of an activity, transaction or arrangement, or class of activity, transaction or arrangement, which is expected to facilitate any part of the business of one or more banks or other financial institutions; and for that purpose it does not matter—
(a) whether or not that is the sole or principal expected effect of the activity, transaction or arrangement, or
(b) whether the sole or principal motive for the activity, transaction or arrangement is (i) its effect on banks or other financial institutions, (ii) its effect on the economy as a whole, (iii) its effect on a particular industry or sector of the economy, or (iv) its effect on actual or potential customers of banks or other financial institutions.”
Amendment 173F (to Amendment 173E) not moved.
174A: Clause 225, page 110, line 38, at end insert “(and an order under that section may restrict or expand the effect of subsection (1A)).”
Amendment 174AA (to Amendment 174A) not moved.
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174B: Clause 225, page 111, line 3, at end insert—
“(4) Expenditure which could be paid out of money provided by Parliament under subsection (1) shall be charged on and paid out of the Consolidated Fund if the Treasury are satisfied that the need for the expenditure is too urgent to permit arrangements to be made for the provision of money by Parliament.
(5) Where money is paid in reliance on subsection (4) the Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid).
(6) If the Treasury think it necessary on public interest grounds, they may delay or dispense with a report under subsection (5).”
Clause 225, as amended, agreed.
174BA: After Clause 226, insert the following new Clause—
“Transparency: report to Parliament on financial assistance
(1) The Treasury shall prepare and lay before each House of Parliament a monthly report in respect of—
(a) financial assistance paid out under subsection (1) of section 225,
(b) loans made under section 226,
(c) guarantees, indemnities or similar arrangements which may result in amounts being paid out under subsection (1) of section 225.
(2) A report for a month shall show the transactions entered into under each of paragraphs (a) to (c) of subsection (1) during that month together with the totals made or outstanding as at the end of the month.
(3) The reference in subsection (2) to totals made or outstanding means—
(a) in relation to loans, the amount of principal and accrued interest which has not been repaid,
(b) in relation to guarantees, the gross amounts of the guarantees, indemnities or similar arrangements which might be payable,
(c) in any other case, the amount paid or committed on a cumulative basis.
(4) The Treasury shall ensure that the report contains sufficient detail to enable Parliament to understand the actual and potential commitment of public money to financial assistance and the Treasury may summarise the individual items which fall to be disclosed in a report in whatever way they consider appropriate in order to assist Parliament in that regard.
(5) If the Treasury consider that certain information should not be disclosed in a report on public interest grounds, a report—
(a) may omit that information until such time as the Treasury consider that the public interest is no longer affected, and
(b) must contain a statement that the Treasury has not disclosed information in accordance with this subsection.
(6) A report shall not be required for any month in respect of which there have been no material changes since the last report made under this section.”
Baroness Noakes: This amendment introduces a new clause after Clause 226. The new clause is about giving information to Parliament about financial assistance provided for under Clauses 225 and 226.
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We have debated transparency on several occasions during this Committee, and I raised the issue of disclosure about banks taken into public ownership and disclosure about what UK Financial Investments is doing. I can say only that recent events have made those issues even more important, and I shall return to them on Report.
Amendment 174BA deals with another aspect of transparency; namely, transparency about the amounts paid out under the financial assistance powers in Clause 225, which, as we have just seen, are now to be drafted on a very much more extensive basis than was considered in another place. We have had bank rescue package No. 1 and now bank rescue package No. 2. We have had the Mandelson small firms loans package, which will be dealt with under Clause 225, as well as the homeowner support scheme. We do not know what else may end up being done under the cover of this extremely wide power in Clause 225 as amended.
My amendment simply asks for a monthly report on the amounts spent or lent under Clauses 225 and 226, and a balance sheet at the end of each month. I recognise that monthly reporting can be onerous but the plain fact is that things are moving so fast at present that Parliament needs to keep track of what is happening, and monthly seems to be a reasonable frequency. So that this does not become an onerous requirement on a long-term basis, subsection (6) of my proposed new clause does not require a report if there have been no material changes since the previous report.
The Minister will doubtless tell me about existing processes for accountability to Parliament. I do not dispute that there are some such processes but they are not predicated on urgent and frequent action on an unprecedented scale. We live in unusual times and may need to take unusual actions. That is how the Government have been justifying their unusual actions, but they have not accompanied them with proper accountability to Parliament to reflect the unusual nature of the things that they are doing.
My intention is that the report will capture all the amounts paid or payable under the various bank rescue packages and other schemes now being announced. Perhaps the Minister will say whether all the Government’s financial assistance payments for the current crisis will be made under the authority of Clauses 225 and 226. For example, under what authority was the £37 billion paid out in the first bank rescue package? My clause would not cover those payments or commitments and it may need to be modified to that extent. I hope that the Government will not resist a further, indeed modest, amount of parliamentary scrutiny. I beg to move.
Lord Newby: The noble Baroness raises a very important point, although I am not sure that monthly accounting is absolutely the right way forward. However, I believe that the Treasury Select Committee in another place has asked the Government to produce timely information and to consolidate information about the financial consequences of all the various packages and initiatives that we have had over the past six months. I think that that would be to the benefit of Parliament, and no doubt to the benefit of the Government, if they were able to do so. Can the
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Lord Higgins: I support my noble friend’s amendment, which seems to be virtually the minimum that one might reasonably ask for. The trouble is that, even in advance of Royal Assent being given to the Bill, at the moment it is terribly difficult to get any comprehensive idea of what amounts the Government have committed, whether by way of direct financial assistance or guarantees. In advance of the amendment, or something like it, being accepted, is there not a case for the Government to take action to report regularly to Parliament so that we have a running tally of what is happening following successive proposals by the Government? At the moment, it is extremely difficult to get any idea at all of the orders of magnitude involved.
Lord Myners: I recognise the important point that the noble Baroness makes, and I assure her that the Government take transparency and openness very seriously. Indeed, government Amendment 174B already requires the Treasury to report to Parliament when the Consolidated Fund is accessed directly under the emergency procedure that I explained a short while ago. The noble Baroness’s amendment would go further in providing for regular reporting of financial assistance given under Clause 225, whether or not the emergency procedure was used, and of loans from the National Loans Fund made under Clause 226.
However, there may be some difficulties with what the noble Baroness proposes. Some thought may need to be given to whether the Treasury should report on other departments’ schemes. There is also the danger—it is always a danger with provisions of this kind—that prescribing too many detailed requirements will produce an unhelpful straitjacket which limits the usefulness of the reports produced.
The noble Baroness asked about the authority under which the subscription of £37 billion in bank capital was made. This was made under Clause 225. It is possible for departments to incur expenditure as long as the provisions providing authority have received a Second Reading. The noble Lord, Lord Higgins, asked about reporting on what has already been done, and may well be done in the future. I understand the concerns raised and I will take it away as I should like to look further into the subject and return to it on Report. I hope that that will satisfy the noble Baroness and that she will feel able to withdraw the amendment.
Baroness Noakes: I am grateful to the Minister. It will be extremely constructive if he looks at the issue before Report and returns with an amendment that meets the spirit in which he is taking it away and the spirit with which it was tabled.
The noble Lord, Lord Newby, rightly raised the Treasury Select Committee report that came out late last week and which focused on the need to keep track
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Clause 227 : “Financial Institution”
174D: After Clause 227, insert the following new Clause—
(1) In this group of sections “investment bank” means an institution which satisfies the following conditions.
(2) Condition 1 is that the institution has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on the regulated activity of—
(a) safeguarding and administering investments,
(b) dealing in investments as principal, or
(c) dealing in investments as agent.
(3) Condition 2 is that the institution holds client assets.
(4) In this group of sections “client assets” means assets which an institution has undertaken to hold for a client (whether or not on trust and whether or not the undertaking has been complied with).
(5) Condition 3 is that the institution is incorporated in, or formed under the law of any part of, the United Kingdom.
(6) The Treasury may by order—
(a) provide that a specified class of institution is to be or not to be treated as an investment bank for the purpose of this group of sections;
(b) provide that assets of a specified kind, or held in specified circumstances, are to be or not to be treated as client assets for the purpose of this group of sections;
(c) amend a provision of this section in consequence of provision under paragraph (a) or (b).”
Lord Myners: The amendment inserts the first of four new clauses that will allow the Government to introduce regulations to bring about changes to the insolvency regime for investment banks in the UK. The Committee will have noted that this power will be exercised only if, after a review, such changes are deemed necessary. The remainder of the government amendments on this topic will be covered in the next debate.
7.15 pm
I turn first to the rationale for the Government’s introduction of amendments relating to investment bank insolvency. The Committee may be aware that various issues have been raised by the administration of Lehman Brothers International (Europe). Essentially, these problems stem from the complex ways in which client money was held and used by that company
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In response to these concerns, the Government announced in the Pre-Budget Report that an in-depth review would be carried out by the Treasury to look at whether there are shortfalls with existing insolvency law regarding investment banks which hold client assets. This review will also consider whether any new legislation is needed. The review will focus on: whether the statutory purpose of administration as provided in the Insolvency Act, which requires administrators to act in the general interest of creditors as a whole, presents problems in the case of institutions which hold client assets; the procedure for an administration of a complex investment bank; and the treatment of client assets and arrangements for the continuity of brokerage accounts.
If the review concludes that legislative changes are needed, the amendments that we are debating here today will allow the Government to make regulations to create a new insolvency regime for investment banks, either through specific modifications to general insolvency law, or to establish a stand-alone procedure for investment banks. The new powers will be set out in the four new clauses to the Bill. It should be noted that the review may find that no changes are necessary. Banking and insolvency law is highly complex. Developing an insolvency scheme where the emphasis lies on the return of client assets rather than simply on maximising the return for all creditors would be a significant departure from UK insolvency law, and such a move could have unpredictable consequences for the market. It may be that many of the problems relating to client assets and other issues are simply inherent in the large and complex trades in which investment banks engage.
The Government will, as part of the review process and in conjunction with the tripartite authorities, explore whether there are alternative approaches available. For example, changes to regulatory rules as they apply to UK investment banks may be a more appropriate route to delivering better protection for client assets in the event of an investment bank becoming insolvent. Parliament will have the opportunity to scrutinise any changes that the Government may propose, as provided for explicitly in these amendments.
I turn to the detail of the government amendments to be introduced in this group. The first new clause sets out the scope of the enabling power which will allow the Government to make regulations to change the insolvency regime for investment banks For this purpose, and for this purpose alone, we have needed to define which institutions are “investment banks”. They are defined—again I highlight the fact that the definition is purely for the purposes of these new clauses relating to insolvency—as institutions incorporated or formed under UK law, having permissions under Part 4 of the Financial Services and Markets Act 2000 to carry on
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Subsection (3) of the new clause provides that for the regulations to apply, the institution must be holding client assets when it becomes insolvent. It also provides that an order, subject to the affirmative procedure, may be made to alter the extent to which the definition captures a particular institution or class of institutions. Such an order could prevent the regulations from applying to an institution that would otherwise have been defined as an “investment bank”; for example, an institution whose investment business plays such a peripheral part to its main business that it would be counterproductive to apply the new insolvency regime. Or it could bring other institutions into the definition of investment bank, such as those institutions holding permission for a regulated activity not on the list set out in this new clause if the review concludes that this is necessary.
The new clause will also provide for the Government to define—again by order subject to the draft affirmative procedure—that certain types and classes of assets held in certain circumstances, may or may not be treated as client assets for the purposes of the insolvency regime regulations. For example, the clause could allow those former client assets that had been rehypothecated to be classed as client assets for the purpose of the regulations if it is felt by the Government to be appropriate, after taking into account other factors such as the rights of general creditors. Noble Lords will appreciate that this level of flexibility is necessary as the appropriate scope of any changes to be made to the insolvency regime will become clear only when the review I alluded to earlier has been completed. I should also note that a subgroup of the expert liaison group has been set up to advise the Government on policy options in this area. It is made up of experts representing the most relevant industry areas that have a stake in this process.
I am aware that amendments have been tabled to this amendment. It is my understanding that the amendments tabled by my noble friend Lord Williams of Elvel are intended to introduce a debate on the much wider public policy question of whether policy makers should insist on investment banking being split from commercial banking. He will correct me if I am wrong. It is the so-called Glass-Steagall issue, which is named after long-standing American legislation, now repealed, that had that effect. I believe that that is the intention of the amendment tabled by the noble Lords, Lord Newby and Lord Oakeshott, but I am sure that they will correct me if I am mistaken on this point. I understand that the final amendment in this group is more narrowly focused on the scope of my amendment, so our debate will cover that.
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