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Continuity of access to banking services is implicit within the objective to protect and enhance public confidence in the stability of the banking systems of the United Kingdom and within the objective to protect depositors. As I said, this is clearly explained in the code of practice, a draft of which was made available in November.
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Let me go a step further. Avoiding a failure in which a bank closes its doors and the Financial Services Compensation Scheme pays out depositors is the fundamental raison d’être of the SRR and the guiding principle behind the whole of Part 1. The stability of the financial system, the interests of depositors, and the public finances will be better served if effective intervention can ensure the resolution of a troubled bank before, rather than after, it fails.
By its very definition, therefore, the SRR is about ensuring continuity of service to customers. The examples of bank resolution that we have seen in the past year have consistently demonstrated that point. Wherever possible, the powers in the Banking (Special Provisions) Act have been used to ensure that depositors had continuous access to their accounts, to their funds and to banking services. In the case of Northern Rock, this was achieved by public ownership; in the case of Bradford & Bingley, it was achieved via a deposit transfer to Abbey Santander; and, in the case of Kaupthing Singer & Friedlander and Heritable, it was achieved by the transfer of depositors to ING Direct. That will clearly continue to be the case under the Banking Bill. After all, what is the point in inventing a special resolution regime if you do not intend to use it to the benefit of bank depositors, the financial system as a whole and the taxpayer?
The British Bankers’ Association appears to be concerned that, without the amendment, the authorities would be minded to close down failing banks and leave it the FSCS to pick up the pieces. I am very happy to assure your Lordships that this is not the case and I hope that I have made it clear why.
I must point out one area where I differ from the BBA and where I hope that the noble Baroness agrees with me. I do not agree that the existence of the SRR means that we should not be doing all that we can to ensure that the Financial Services Compensation Scheme could, if required, pay out quickly in the event of bank failure. I agree that this will not, in most cases, be the best outcome, but we must prepare for it nevertheless.
That is why, for example, Part 2 provides for the creation of a new bank insolvency procedure and Part 4 makes some minor improvements to the legal framework in the Financial Services and Markets Act to facilitate fast payout. It is also why the FSA is consulting on the systems changes that the banking industry will need to implement if fast payout under the FSCS is to be practically possible in those cases where it is necessary.
I can appreciate that this “single customer view” is causing the BBA some concern. If adopted, the FSA’s proposals will certainly require some of the BBA’s members to invest in new systems, but it seems to me entirely appropriate that banks should be able to tell the authorities, at short notice if necessary, who their customers are and how much money they have deposited with, or been lent by, the bank. I would also have thought that a single customer view was something that a bank’s marketing and development departments would find useful.
We live in an age where banks are expected and, indeed, required to know their customers. To suggest that banks need not invest in technology that would
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Of course, the authorities will do all that they can to prevent the operational failure of a bank by using the tools in the SRR, but they will be hampered in their ability to do so if consumers do not have absolute confidence that they would be repaid rapidly in such circumstances, including those cases when the only realistic option is to close down the bank. Depositors will have more confidence in the authorities’ efforts to resolve a failing bank if they know that they will be protected come what may. In other words, not preparing for the contingency of the FSCS payout would have the paradoxical effect of making it more likely that it would have to be used.
The noble Lord, Lord Newby, queried whether the code was an obscure document which did not provide reassurance concerning continuity. The authorities are legally obliged to have regard to the code. It has been subject to scrutiny in Parliament and, with today’s amendments, will have the input of the Banking Liaison Panel. Assurances given in the code should, therefore, provide comfort to noble Lords.
I am, however, mindful of the comments made by the noble Baroness and others and I will, in the spirit of generosity that I have been urged to show, go away and reflect further on this matter and on whether we could introduce an amendment at a later stage. I shall not give an assurance that we will introduce an amendment, but I certainly give an assurance that we will give that very careful consideration.
4.30 pm
Baroness Noakes: My Lords, I thought that the Minister would disappoint me completely in his extensive reply, in which he raised a number of points. The noble Lord, Lord Newby, is right about the code of practice. There is not a legal requirement; there is a requirement only to have regard to the code. We know that the Government use that formulation to give themselves flexibility and that it creates not much more than an indication of what might be followed. If the code were legally binding, that might be a different issue, but it is not. In addition, as the noble Lord, Lord Newby, pointed out, the Bill allows the code to be changed at will. The Government cannot have it one way, for flexibility and all the other reasons, but then try to use that as an excuse for not having something in the Bill.
The Minister made much of the issues concerning the BBA. I would not have raised this issue had I not thought it reasonable to do so, because while there is a potential cost on the banking industry and, therefore, consumers, regarding the way the FSA is taking the Financial Services Compensation Scheme, the issues that I have raised go beyond that, because they are genuinely about signalling what is important. While I completely agree that getting your money back is important, one must strive to achieve continuity of
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I am grateful to the Minister for agreeing to take this away. I hope that he will table something for Third Reading, because if he does not, I shall bring back my amendment. On that basis, I beg leave to withdraw.
4: Clause 4, page 3, line 25, at end insert—
“( ) Objective 6 is to avoid the distortion of competition.”
Lord Howard of Rising: My Lords, the amendment is to ensure that in the event of the powers of the special resolution regime being used, a bank which comes under the regime will not take unfair advantage over the competition. When this matter was debated in Committee, we did not have the benefit of the arguments in favour of ensuring continued competition in the banking sector which were put so ably by the noble Lord, Lord Whitty, in support of his amendment. Although Members of the Committee were not so sure about remedies suggested by the noble Lord, there was strong agreement with the thrust of his argument that competition is essential to ensure that there is no disadvantage to consumers from creating overpowerful institutions.
If Her Majesty’s Government are forced to use the proposed legislation, there is clearly a danger that the number of banks will be reduced and that another superpowerful bank may be created. Together these could have a severe effect on competition, so it is only right that there should be a requirement to avoid distorting competition.
The Minister pointed out that not only was he a supporter of strong competition between banks, but that the Office of Fair Trading had responsibilities under Parts 4 and 6 of the Enterprise Act 2002. However, as the noble Lord, Lord Borrie, pointed out, in the case of HBOS and Lloyds Bank the Government overrode the express view of the Office of Fair Trading, so there must be some doubt about the effectiveness of that organisation in these circumstances. Another reason is that Clause 75 allows laws to be amended by order, except for those in this Bill, so the Enterprise Act could easily be overridden.
If the Minister really is keen on maintaining a competitive, if oligopolistic—a splendid word used by the noble Lord, Lord Whitty—banking sector, I am sure he will accept this amendment and include in the Bill a requirement to avoid the distortion of competition. I beg to move.
Lord Myners: My Lords, this is another area where I think that there is very little difference between the Opposition and the Government in terms of the goal that we seek to achieve, but there is a difference of opinion as to whether there is a need for that to be
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In Committee, I provided a number of reassurances on how the Government treat competition, referring to the important role of the Competition Commission, the Office of Fair Trading and the FSA. I also drew attention to the SRR code of practice, which includes guidance on the management of publicly owned banks, requiring them to be run in a conservative manner.
In addition, during the debate on the amendment of my noble friend Lord Whitty, I described how the OFT and Competition Commission have an active role in monitoring and investigating movements that have implications for competition within a specified market. This includes the OFT’s ability actively to investigate markets that do not appear to meet the needs of consumers.
Therefore, to reiterate what I said in Committee, we should be satisfied that the competition authorities will continue to keep relevant markets under review in order to protect the interests of UK consumers and the British economy.
Finally, I again draw attention to the fact that a banking business transferred to a private sector purchaser, a bridge bank or a bank in temporary public ownership will continue to be regulated by the FSA in the same manner as other financial services providers.
Rather than repeat those arguments further, I should like to reflect on a matter raised during the Committee debate by the noble Lord, Lord Howard of Rising, in connection with the merger of Lloyds and HBOS, a subject to which he referred again this afternoon. With the greatest respect, I do not agree with the noble Lord’s assessment of this matter. My noble friend the Secretary of State for Business, Enterprise and Regulatory Reform considered the matter and gave regulatory clearance on the basis of the public interest. In coming to this decision, my noble friend, as well as considering representations from the authorities, also considered representations from the parties to the proposed merger and interested third parties.
The fact that the merger went ahead does not mean that competition was ignored. Rather, proper process was followed and competition issues were considered. I repeat, therefore, that there are structures and systems in place in other legislation—in particular, the Competition Act and Enterprise Act—to ensure that distortion of competition is avoided.
In Committee, the noble Lord, Lord Howard, requested that my assurances on the points that he raised should occasionally “have a practical result” in the Bill. I am afraid that in this instance they should not. I do not agree that the protection of competition within the financial and other markets that already exists in other legislation needs to be duplicated in this Bill. The special resolution objectives set out the broad purpose of the SRR and therefore the matters to which the authorities must have regard when undertaking action under the SRR.
There is, as noble Lords will have noticed, one exception to this: objective 5, relating to the avoidance of interference with property rights. This is not of
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As the noble Lord has pointed out, a number of consequences of action under the SRR may result in an effect on competition. I do not believe that this is of the same magnitude as the direct effect of the Bill’s powers on property rights. Further, and at the risk of repeating myself, a significant body of English and EU law already works to protect competition matters. This is an important matter, which is why I have endeavoured to be reassuring. But for the reasons I have set out, I urge the noble Lord to withdraw his amendment.
Lord Howard of Rising: My Lords, I thank the Minister for his remarks. However, his endeavours have not been very successful as I am not reassured. He mentioned the FSA, but the FSA is not responsible for competition; as far as I know, that is the Office of Fair Trading. If competition issues were considered equally, they were overwritten in the case of Lloyds and HBOS. That overriding and the potential of a very large bank to ride roughshod over other people are addressed by this amendment. With the best will in the world, the Minister, despite his strong effort, has not been convincing. I accept that we shall not go further with this today, so I beg leave to withdraw the amendment.
5: Clause 4, page 3, line 27, at end insert—
“( ) In addition to the objectives set out in this section, the relevant authorities shall also have regard so far as it is practicable to the interests of creditors and shareholders.”
Lord Howard of Rising: My Lords, Amendment 5 gives recognition to the interests of creditors and shareholders. This is a more modest amendment than those discussed in Committee. At that time, the Minister pointed out that objective 5 set out in Clause 4(8), referring to the Human Rights Act, gave adequate protection so an amendment to include the protection of creditors was not necessary. Up to a point, as the Minister said, the special resolution regime is designed for the protection of depositors, and the protection of creditors is not a primary objective. That being the case, there is a danger that creditors, especially small creditors, may end up being accidental casualties, as the authorities pursue the primary objective of this legislation. Similarly, shareholders may also suffer disadvantages, in particular, with the power included in the legislation for the Government to acquire holdings and/or other group companies of a bank. In this case, the line between what is a failing bank and other interests of that corporation or group may not be clearly defined.
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I do not agree with the Minister’s arguments in favour of this power, but if it is included in the Bill, there is a danger that, as with creditors, as was pointed out earlier, the interests of shareholders could become overlooked or trampled on in pursuing the primary objective of protecting depositors. If the powers included in the Bill become law, it would be only reasonable that there should be recognition that creditors and shareholders also have rights. Those rights will not disappear just because a bank is in trouble, even if creditors and shareholders have to take their turn behind depositors. As commented on earlier, this amendment is modest and would in no way impede the protection of depositors and the banking system. However, it would help to draw attention to the fact that there are other interests as well as those of depositors. I beg to move.
4.45 pm
Lord Newby: My Lords, this amendment in essence incorporates an amendment that stood in my name in Committee, so I should like to associate myself with it. No one doubts that the position of the depositors in situations where a bank might be failing is the first priority. But, as I argued in Committee, the dilatoriness with which the Government obtained a solution to the Northern Rock situation and moved towards nationalisation harmed the interests of creditors and shareholders significantly. There was no evidence at any point that the Government took their interests into account. Therefore, while not wishing to detract from the importance of the position of depositors, this amendment, modest as it is, has much to commend it.
Lord Myners: My Lords, this amendment would require the authorities to have regard to the interest of creditors and shareholders as far as is practicable. I believe that this amendment is unnecessary and confuses the approach we have taken to specifying the objectives to which the authorities must have regard in acting under the provisions of this part of the Bill.
I fully appreciate what motivates the noble Lord’s concern that the authorities should have regard to the interests of creditors and shareholders. But the Bill already requires this to the appropriate extent. First, under the European Convention on Human Rights, the Government must demonstrate that any interference with anyone’s property rights, including shareholders and creditors, is justified. This is a fundamental legal requirement, with which the Government would have to comply, regardless of the provisions of this Bill. But we have done what is necessary to demonstrate compliance with the requirements of the convention in primary legislation. This is clearly signalled by objective 5 in Clause 4.
In concrete terms, under Clause 7, the Bill limits the circumstances in which intervention can take place and, under Clauses 8 and 9, creates a strong public interest justification before stabilisation powers can be exercised. Under Clauses 49 to 59, further provision is made by putting in place compensation mechanisms to assess compensation for any compensatable interferences with property rights. In addition, and
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I am not sure what the amendment would add to this. As I have explained, the European Convention on Human Rights requires that we take into account creditors’ and shareholders’ interests in the design of the powers and the actions taken under them. For this reason I urge the noble Lord to withdraw his amendment.
Lord Howard of Rising: My Lords, I thank the noble Lord, Lord Newby, for his support for the amendment. I do not see how the amendment could be construed as confusing. The Minister repeated the same arguments and I am afraid that they are no more convincing this time around than they were the last time. Compensation will never be quite the same as giving someone or something proper consideration in the first place. Compensation is a remedy for something that has been done that should not have been done. It would be much better for provision to be in place for the action not to happen in the first place. That may sound rather convoluted. If consideration had been given in the first place, there would be no need to claim compensation. For that reason, it would be desirable to include that in the Bill. I beg leave to withdraw the amendment.
6: After Clause 4, insert the following new Clause—
(1) Whenever the special resolution regime is used, the relevant authorities will ensure that they make public full and transparent information on a timely basis about their actions and the consequences or likely consequences of their actions.
(2) If the relevant authorities think it necessary on public interest grounds, they may delay making information public under subsection (1).”
Baroness Noakes: My Lords, this amendment takes up the theme of transparency which I shall pursue at various points in the Report stage. It deals with transparency about the use of the special resolution regime and seeks to insert a new clause after Clause 4 requiring the authorities to be transparent. In Committee, my noble friend Lord Howard of Rising moved a more specific amendment which focused on the Treasury presenting a report to Parliament about the way in which the relevant authorities had used their powers under this part. The Minister made his usual defence that lots of information is available to allow Parliament to call the Government and the other relevant authorities to account, and he offered a critique of the precise terms of that amendment. On reflection, it focused too closely on Parliament and allowed the Minister to divert into the mechanisms of parliamentary accountability, most of which, I should point out, look good on paper but are relatively weak in practice. The issue is transparency.
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