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When drafting regulations to change the insolvency regime for investment banks the Treasury must have regard to balancing the following needs and issues: first, identifying, protecting and facilitating the return of client assets; secondly, protecting the rights of creditors; thirdly, ensuring certainty for investment banks, creditors, clients, liquidators and administrators; fourthly, minimising the disruption of business and markets; and, finally, maximising the efficiency and effectiveness of the financial services industry in the UK. Noble Lords will appreciate that this list further

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confirms that the Government are contemplating regulations that could fundamentally affect the priority of claims in an administration. As a result, any order to bring in regulations that modify the insolvency regime for investment banks will be subject to parliamentary scrutiny. I will come back to that point in a moment.

The third new clause provides the detail about what the regulations must provide for and how they will work. It includes provision—if it is decided to establish a new procedure—for the regulations to set up those persons who can initiate the special procedure or who can make an application to the court for the procedure to be initiated by court order. Under current legislation there are different ways for a company to enter liquidation or administration, and this provision ensures that, should it be decided to create a standalone procedure, we can select the most appropriate way for the new procedure.

Under the new clause, the regulations may also include provision for new objectives for a new procedure and functions for an insolvency office holder. This would allow, for example, the new regime to give priority to the return of client moneys, if the review so recommended. The regulations may also include provision regarding the conditions that would need to be fulfilled before an investment bank could be put into the new regime or have any special provisions applied. Furthermore, if a new standalone regime is introduced, the regulations may provide for how this new regime would sit with existing insolvency and administration regimes, including bank insolvency and bank administration, in which the investment bank in question also runs a deposit-taking business. Additionally, the regulations may include provision for temporary or permanent moratoriums to be imposed at the onset of the new regime and provision to amend existing enactments for the purposes of the new regime. In addition, the regulations may make specific provision to deal with a number of specific issues, as provided for in subsection (6) of the new clause.

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The regulations may also confer functions on certain bodies—for example, the court, the Financial Services Authority or the Financial Services Compensation Scheme. Noble Lords will note the wide sweep of this enabling power. I repeat that the Government will know what changes to investment bank insolvency are appropriate only once the review has been completed. Let me further remind noble Lords that Parliament will have the opportunity to scrutinise any new regulations that are made under this power and that any regulations made must have regard to both the protection of client assets and the protection of other creditors’ rights.

The fourth and final new clause sets out the detail by which any regulations may be made. The clause will provide that the regulations should be made by statutory instrument and be subject to the affirmative procedure. The Treasury must consult before making any such regulations. On this point, I would remind the House that an expert sub-group of the expert liaison group will also be consulted and will provide guidance to the Government throughout this process. Finally, to provide

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comfort and certainty to the financial markets, the regulation-making power is subject to a sunset clause so that it lapses after two years, after which time it will have become clear whether it is necessary to proceed with any legislative changes envisaged.

I believe that these new clauses are necessary for the Government to provide certainty to the market that they intend to deal with the problems raised by the administration of Lehman Brothers International (Europe).

Baroness Noakes: I have Amendment 174GA in this group, which is a response to the second report of this Session from the Delegated Powers and Regulatory Reform Committee, which came out only late last week.

The committee made it clear in paragraph 20 that this sort of regulation-making power is inappropriate in normal circumstances and that more should appear in primary legislation. It pointed out in particular that the Government themselves concede that banking insolvency law is highly complex and that a significant shift in insolvency law was likely. In those circumstances, the committee believed that secondary legislation was an inappropriate mechanism and said that it was for the Government to justify to the House the exceptional circumstances that resulted in departure from this normal practice. I do not think that the Minister even tried to set out the exceptional circumstances that led to taking this power.

The Delegated Powers Committee went on to recommend that, even if the Government persuaded the House, the power to make regulations and any regulations made should cease two years after Royal Assent. As the committee said, that would cover any emergency situation, if the Government genuinely needed emergency legislation; it would also give the Government sufficient flexibility to bring forward primary legislation for proper parliamentary scrutiny, if they so wished. Amendment 174GA deals with that recommendation, including the saving for bank insolvency procedures already entered into before the end of the two years.

The Minister said several times that there was proper opportunity for parliamentary scrutiny. The affirmative procedure simply does not provide that. I have told the Committee more times than I care to remember that there is no opportunity to amend secondary legislation. The kind of legislation which the Government contemplate making by order is very extensive and is exactly the sort that both Houses of Parliament ought to consider on a line-by-line basis.

The secondary legislation procedure is inadequate, and by a long margin. That is why—although we see that the Government might need to move quickly—there has to be a case for considering, on a proper time scale, whichever permanent solution is put forward to deal with this matter. I am not denying that there is an issue, and for the first time today I am not even challenging what the solutions might be. It is simply that there has to be a proper mechanism at some stage for Parliament to play its full part in the making of such complex, far-reaching law.

Lord Newby: I support the amendment tabled by the noble Baroness. If the Bill as a whole is being done in a rush, these amendments have clearly been done, if

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not in panic—because the Government fear something terrible happening in the very near future that they cannot necessarily predict—then with us being asked to adopt measures that we would normally throw out. They do not come within a mile of what would normally be acceptable to the Committee or, indeed, to Parliament.

It seems to me that the Delegated Powers and Regulatory Reform Committee proposal makes the best of a bad job, and it is difficult to see why the Government should not accept that. Two years, whether the powers have been adopted or not, should be long enough for the Government to get their act in order, decide exactly what they want to do and bring forward substantive legislation. I strongly urge the Minister to take this amendment seriously and to accept it.

Lord Northbrook: I support the amendment tabled by my noble friend Lady Noakes, and I repeat what the Delegated Powers Committee said in paragraph 20:

“Under normal circumstances we would recommend outright that such broad and significant powers are inappropriate, and that substantially more provision should be set out in primary legislation. In the current situation it is for the Government to satisfy the House that exceptional circumstances justify this departure from the balance between primary and subordinate legislation which the House would usually expect”.

Since 1997, there have been too many circumstances in which the Government have left so much to secondary legislation. In this new clause, they are asking for powers that are too broad.

Lord Myners: I am aware that the Delegated Powers Committee has stated that it believes these powers, if permitted, should be limited by stronger time-limiting provisions. I understand that Amendment 174GA would implement that approach. Under my amendment, however, as I have said, the Government have provided that the power to introduce new regulations will lapse after two years if not used. That is to avoid the market uncertainty that might be caused if the potential to make a new insolvency regulation at short notice existed, unused, over a longer period.

Noble Lords will appreciate, however, that, if new regulations are made under the affirmative procedure, it will be necessary to keep the enabling powers in the Act to keep the regulations in operation and to allow any necessary further amendments to be made. The Government intend that any new regulations would be permanent, and I emphasise that we would consult widely to ensure an effective long-term solution, although the regulations could, if necessary, be subject to further modification in time, subject to the affirmative procedure.

The limitation that the Delegated Powers Committee has recommended, which would involve both the enabling power and any regulations made under it being guillotined after two years, would breed serious market uncertainty about the insolvency regime that the market would operate under in the near future. Furthermore, there is no guarantee that in the early part of 2011 parliamentary conditions would be such as to allow the Bill to go through Parliament. Therefore, the two-year deadline would mean that, in order to have a Bill ready for an available parliamentary slot, the Government would have to draw one up in parallel with drafting the

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regulations under the enabling power. There would be no time to test the new regulations out and to learn lessons from how the new insolvency regime was operating before making the new Bill.

I realise that the Delegated Powers Committee’s concerns are significant. The noble Baroness, Lady Noakes, and the noble Lords, Lord Newby and Lord Northbrook, have spoken with strength of conviction on this point. Therefore, I can commit to considering this again and returning to the issue. I hope, on that basis, that the noble Baroness will not press her amendment.

Baroness Noakes: I am grateful that the Minister will consider the matter again. He said in definite terms that the Government intended to introduce permanent legislation under the power. He must think again about that. He proposes to introduce significant legislation by statutory instrument in a way that I cannot contemplate ever having happened in the past. The Minister made some excuse about market conditions affecting legislation going through Parliament. We simply do not understand that. We have demonstrated on more than one occasion that it is perfectly possible to get emergency legislation through quickly but with proper scrutiny. The Minister should be in no doubt that this is one of the most important things that we have discussed because, as the Minister is aware, we regard the recommendations—this is a very clear recommendation from the Delegated Powers Committee—as having a special status in the House.

Amendment 174E agreed.

Amendment 174F

Moved by Lord Myners

174F: After Clause 227, insert the following new Clause—

“Investment banks: Regulations: details

(1) Investment bank insolvency regulations may provide for a procedure to be instituted—

(a) by a court, or

(b) by the action of one or more specified classes of person.

(2) Investment bank insolvency regulations may—

(a) confer functions on persons appointed in accordance with the regulations (which may, in particular, (i) be similar to the functions of a liquidator or administrator under the Insolvency Act 1986, or (ii) involve acting as a trustee of client assets), and

(b) specify objectives to be pursued by a person appointed in accordance with the regulations.

(3) Investment bank insolvency regulations may make the application of a provision depend—

(a) on whether an investment bank is, or is likely to become, unable to pay its debts,

(b) on whether the winding up of an investment bank would be fair, or

(c) partly on those and partly on other considerations.

(4) Investment bank insolvency regulations may make provision about the relationship between a procedure established by the regulations and—

(a) liquidation or administration under the Insolvency Act 1986,



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(b) bank insolvency or bank administration under Part 2 or 3 of this Act, and

(c) provision made by or under any other enactment in connection with insolvency.

(5) Regulations by virtue of subsection (4) may, in particular—

(a) include provision for temporary or permanent moratoria;

(b) amend an enactment.

(6) Investment bank insolvency regulations may include provision—

(a) establishing a mechanism for determining which assets are client assets (subject to section (Investment banks: Definition));

(b) establishing a mechanism for determining that assets are to be, or not to be, treated as client assets (subject to section (Investment banks: Definition));

(c) about the treatment of client assets;

(d) about the treatment of unsettled transactions (and related collateral);

(e) for the transfer to another financial institution of assets or transactions;

(f) for the creation or enforcement of rights (including rights that take preference over creditors’ rights) in respect of client assets or other assets;

(g) indemnifying a person who is exercising or purporting to exercise functions under or by virtue of the regulations;

(h) for recovery of assets transferred in error.

(7) Provision may be included under subsection (6)(f) only to the extent that the Treasury think it necessary having regard to the desirability of protecting both—

(a) client assets, and

(b) creditors’ rights.

(8) Investment bank insolvency regulations may confer functions on—

(a) a court or tribunal,

(b) the Financial Services Authority,

(c) the Financial Services Compensation Scheme (established under Part 15 of the Financial Services and Markets Act 2000),

(d) the scheme manager of that Scheme, and

(e) any other specified person.

(9) Investment bank insolvency regulations may include provision about institutions that are or were group undertakings (within the meaning of section 1161(5) of the Companies Act 2006) of an investment bank.

(10) Investment bank insolvency regulations may replicate or apply, with or without modifications, a power to make procedural rules.

(11) Investment bank insolvency regulations may include provision for assigning or apportioning responsibility for the cost of the application of a procedure established or modified by the regulations.”

Amendment 174F agreed.

Amendment 174G

Moved by Lord Myners

174G: After Clause 227, insert the following new Clause—

“Investment banks: Regulations: procedure

(1) Investment bank insolvency regulations shall be made by statutory instrument.

(2) Investment bank insolvency regulations may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.

(3) The Treasury must consult before laying draft investment bank insolvency regulations before Parliament.



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(4) If the power to make investment bank insolvency regulations has not been exercised before the end of the period of 2 years beginning with the date on which this Act is passed, it lapses.

(5) An order under section (Investment banks: Definition)(6)—

(a) shall be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.”

Amendment 174GA, as an amendment to Amendment 174G, not moved.

Amendment 174G agreed.

Amendment 174H

Moved by Lord Davies of Oldham

174H: After Clause 227, insert the following new Clause—

“Banking (Special Provisions) Act 2008: Compensation: valuer

Without prejudice to the generality of section 12 of the Banking (Special Provisions) Act 2008 (consequential and supplementary provision), it is declared that the power under section 9 of that Act to make provision for the appointment of a valuer includes power to replicate, or to make provision of a kind that may be made under, section 55(1) to (3) of this Act.”

Lord Davies of Oldham: Amendment 174H in the name of my noble friend Lord Myners provides for an amendment to the Banking (Special Provisions) Act 2008. The proposed amendment clarifies the provisions of that Act with respect to the ability to make provision, by order, to give information-gathering powers to the independent valuer.

The Northern Rock valuer has recently written to the Treasury requesting powers to allow him to obtain information from third parties, where such information is necessary for him to be able to determine the amount of any compensation due to former shareholders. As much of the information the valuer might request could be considered confidential by third parties, those third parties may be unwilling to provide that information in the absence of legislative powers to require such information from them.

Given the independent valuer’s experience to date in this regard, the Government now believe it is appropriate to grant him additional powers to obtain information relevant to his valuation work.

An amendment is needed because the Banking (Special Provisions) Act 2008 does not—unlike this Bill—give the Treasury express powers to provide for the independent valuer to have information powers of this kind. The Treasury of course would provide for this under an order under the affirmative procedure. That will ensure that an appropriate level of compensation, if any, can be determined in a timely fashion.

Without these additional powers, there is a risk that it may not be possible for the independent valuer to arrive at an accurate valuation of Northern Rock. The same situation would be likely to arise with the independent valuer to be appointed in respect of Bradford & Bingley. I hope, therefore, the Committee will agree that this amendment is essential to ensuring the necessary legislative basis for the provision of powers to the independent valuers of banks resolved under the Banking (Special Provisions) Act. These powers are necessary

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to the conduct of their work, thus ensuring a swift response to former shareholders and that any compensation due is determined without unnecessary delay. I beg to move.

9.15 pm

Baroness Noakes: We understand that this amendment is necessary because the Northern Rock valuer is unable to obtain the information that he requires to carry out a valuation. One’s first thought is that perhaps he should have thought of that before signing up for the job. More seriously, giving retrospective powers is a bit unusual. I hope that the Minister can explain a little more what this is about.

Can the Minister assist the Committee by outlining in what areas the valuer has sought information which is essential to his valuation, in the case of Northern Rock, but which has been denied to him? What persons or types of person have refused to co-operate with the valuer? There is usually a good reason for people refusing to give information. Can the Minister enlighten the Committee on what has been going on and can he also say what this might mean for the timetable for the Northern Rock valuation? I emphasise that we do not normally give retrospective powers of this nature. The Minister justified this on some wide and unspecific grounds of needing to line up this legislation with last year’s legislation. That is not good enough; there has to be some specific cause.

Lord Newby: In moving his amendment, the Minister used the phrases “swift response” and “timely evaluation”. My understanding is that it took the Government the best part of eight months to appoint a valuer in this case. This seems extraordinary, given the general view that there is nothing to be valued anyway. Can the Minister explain the timetable? Why did it take so long to appoint a valuer in the first place? I do not think a valuer was appointed until November or possibly October, but certainly very late. Also, what are the Government’s current expectations about the process going forward?


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