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However, the Government recognise the need clearly to indicate that the purpose of these clauses is not perpetually to immunise a transferee from ordinary commercial obligations. Accordingly, we have brought forward government Amendments 7 and 13 to dispel such concerns.
The noble Baroness has spoken to her Amendments 4 to 6 and 10 to 12, for which I thank her. I realise that these amendments flow from concerns that the default event provisions that I have described could have the effect of interfering with financial arrangements, such as set-off and netting, with negative consequences for risk management and regulatory capital. Noble Lords will recall that the Bill already provides protection for such arrangements in the context of partial transfers, and so, as I made clear in Committee, it is appropriate that similar protections be provided for in the context of default events.
The Government also recognise that such protection should be extended to third parties where they have entered into financial contracts with a counterparty of the bank, which are relevant for set-off and netting arrangements. But we do not think that protection for third parties should be extended to non-financial or service contracts, which, if terminated, could, for example, prevent the failing bank being able to offer continuous banking services to its customers. Nor do we think that the protections are needed in the context of “whole bank” transfers, as the market’s concerns have been expressed in the context of partial transfers.
However, the Government believe that protection for financial contracts, such as those relevant for set-off and netting, including third-party contracts, should and can be provided under the existing structures of the Bill. Therefore, providing appropriate protection does not need any changes to the provisions of Clauses 22 and 38.
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To provide protection for the types of contracts I have described above, we intend to use the enabling power under Clause 47, which allows the Government to place certain restrictions on partial transfers. Therefore, under Clause 47, we will put in place a standing order which will protect, in the event of partial transfer, the termination rights of bank counterparties and third parties in relation, broadly speaking, to financial contracts with set-off and netting arrangements. To be clear, this will protect those who contract with the residual bank, with third parties not directly related to the failing bank, and those who would be transferred to the new company following a partial transfer. I believe that this will satisfy market concerns.
However, for reasons that I listed in my introduction, the authorities believe that it is critical to provide the new company, be it a bridge bank or a private-sector purchaser, with certainty over what contracts are, or are not, being transferred. Otherwise, it will be difficult to ensure an effective resolution. In order to achieve this, we intend to have the flexibility to make conditional transfers. I will consider the details of these proposals when I speak to government Amendment 8. However, using conditional transfers will enable us to obtain a greater degree of certainty for the transferee, while fully respecting the safeguard that I have just set out. In short, the transferee will know what property has been transferred to it, without resort to close-out, within a period set out in the transfer order. The Government believe that this targeted protection balances the need for certainty in the financial markets with the authorities’ ability to effect a successful resolution. The early indication from consultation with stakeholders is that this approach will be supported.
I turn now to government Amendment 8, which provides for the conditional transfers to which I have just alluded. Its aim is to prevent counterparties closing out against the transferee simply as a result of the transfer, while preserving their transfer rights against the residual bank. I emphasise that it does not prevent the counterparty closing out, should the transferee breach the obligations that it has assumed, as I made clear earlier. An unfettered right to close out against the transferee—or new company—carries potential risks for the resolution. The new company could immediately be required to pay crystallised liabilities, creating liquidity stress. Moreover, and importantly, should a counterparty close out on such a basis, it would have acquired a better right than it had in the first place, namely the right to close out not against a failing institution, but the more credit-worthy bridge bank or private-sector purchaser. This is not the same as the termination right for which the counterparty had contracted. The Government believe that the amendment to Clause 34 provides a way to overcome this concern, and is encouraged by a positive response from stakeholders.
This amendment enables the authorities to transfer property, rights or liabilities conditionally. It could be exercised in two broad ways. First, it could provide that the transfer only ever happens if a specified condition is satisfied. Secondly, it could provide that a transfer is automatically reversed if a specified condition is satisfied. In either case, the condition could be defined as an event occurring or an event not occurring.
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The protection that I have described, which will be put in place under Clause 47, remains fully effective. However, should the counterparty wish to close out, as a result of this amendment, the authorities can ensure that the counterparty will not be able to close out against the transferee. It will, instead, close out against the residual company with which it had originally contracted. This allows for a targeted approach. I hope noble Lords will see that it is entirely appropriate that the counterparty should not be able to acquire new and superior rights to those for which it contracted. I commend this amendment to your Lordships’ House as a way of achieving this result.
Financial markets legal experts have indicated that they are satisfied that this approach meets their concerns. Therefore, the Government are proposing a package of measures that delivers protection for financial contracts with set-off and netting arrangements following a partial transfer. In addition to the broad protection already provided to financial contracts by the financial collateral directive, we believe that this will provide the legal and therefore market certainty. I can confirm that the Government intend to insert these protections in the safeguards orders that we will be laying on partial transfers at Royal Assent.
Further, these provisions target only the precise concerns put to us by the market. Therefore, the Government can still exercise their rights to prevent default events for other contracts such as service contracts or financial contracts following a full transfer. The authorities believe that this will provide sufficient flexibility to effect a resolution and certainty for any new private sector purchaser over what property it will be receiving.
Key stakeholders discussed the package last week at a meeting attended by the noble Baroness, Lady Noakes. During the meeting, we provided parties with initial drafting, which set out the protections that I have just explained. While, of course, the detail of these orders has yet to be agreed, I can report that the stakeholders appeared to believe that this broad package met their concerns.
Balancing market certainty and confidence with appropriate powers for the authorities to effect a successful resolution has been at the core of a number of our debates. I believe that these proposals find that balance and are preferable to the alternative amendments. However, I would like to thank the noble Baroness for
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Baroness Noakes: My Lords, I am extremely grateful to the Minister for setting out the position at length and for his kind words. He said that the initial view from the market participants was that this was a good way forward. I can confirm that people have said that to me and that they do support the approach, which is a constructive way forward. The Minister will also be aware that there are a number of concerns about the detail, the market participants having seen the draft of the statutory instrument only last week; and time is short. I hope that the constructive working continues to get the right solution so that these instruments are introduced at Royal Assent. My purpose in tabling the amendments was to get that statement placed on the record. I am more than grateful to the Minister for so doing. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
7: Clause 22, page 11, line 33, at end insert—
“(10) A thing is not done by virtue of an instrument or order for the purposes of subsection (8)(b) merely by virtue of being done under a contract or other agreement rights or obligations under which have been transferred by the instrument or order.”
8: Clause 34, page 17, line 5, at end insert—
“( ) A property transfer instrument may provide for a transfer to be conditional upon a specified event or situation—
(a) occurring or arising, or
(b) not occurring or arising.
( ) A property transfer instrument may include provision dealing with the consequences of breach of a condition imposed under subsection (5); and the consequences may include—
(a) automatic vesting in the original transferor;
(b) an obligation to effect a transfer back to the original transferor, with specified consequences for failure to comply (which may include provision conferring a discretion on a court or tribunal);
(c) provision making a transfer or anything done in connection with a transfer void or voidable.”
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9: Clause 34, page 17, line 5, at end insert—
“( ) Where a property transfer instrument makes provision in respect of property held on trust (however arising) it may also make provision about—
(a) the terms on which the property is to be held after the instrument takes effect (which provision may remove or alter the terms of the trust), and
(b) how any powers, provisions and liabilities in respect of the property are to be exercisable or have effect after the instrument takes effect.”
Lord Davies of Oldham: My Lords, this group of amendments responds to concerns raised by interested parties around the definitions used in Clause 48. I want to put on record the fact that the noble Baroness made a substantial contribution in Committee on these issues and has participated in subsequent meetings with parliamentary counsel, Treasury officials and the City of London Law Society, which have all helped to resolve the matter in a way that meets the interests of all sides.
It is important to use broad and flexible provisions in this power, as we noted in Committee. It is an enabling power, designed to ensure that adequate safeguards can be put in place. Breadth to put in place protective provisions is, indeed, a virtue. Flexibility is necessary so that orders made under the power can keep pace with developments in the law governing security interests and set-off and netting arrangements, which has proved to be innovative. We understand that the need for this flexibility in primary legislation is now appreciated by the City of London Law Society and other legal experts. I can confirm that we are considering changes to the secondary legislation to reflect some of the concerns regarding commercial definitions. A redrafted order, including revised definitions, has been sent to the expert liaison group, on which the relevant legal bodies are all represented.
However, there are a number of issues on which the Government accept that clarification in the Bill is desirable. Amendment 14 amends the definition of “title transfer collateral arrangements”. These involve one party transferring to another full ownership of assets. In broad terms, such arrangements are entered into to secure the performance of obligations owed by one party to the other. Such agreements may typically provide for the return of equivalent collateral when such obligations are performed. The reference is to “equivalent collateral” because the assets originally transferred may no longer exist and may have been replaced with new assets. Although we thought that the original definition, in referring to new assets, reflected this, we are aware of the anxiety over this description. As a result, the amendment in the name of my noble friend Lord Myners removes this troublesome phrase, but leaves the scope of the enabling power sufficiently broad to achieve its purpose.
Amendment 15 makes a change to the definition of set-off arrangements. It describes the breadth of different set-off arrangements that might exist. We consider that the broader formulation is more appropriate. Amendment 16 makes it clear that close-out netting
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Amendment 18 adds further provisions to the definition of arrangements, which is used as a building block for the definitions of security interests, title transfer collateral arrangements and set-off and netting arrangements. It provides broad language that makes it clear, for example, that such arrangements may operate on a bilateral or multilateral level, or involve the interposition of third parties such as clearing houses. We do not believe that the clause would have been construed to exclude these arrangements from the ambit of the power as originally drafted, but we offer reassurance through this amendment.
We have one further reassurance that we need to give, which arises out of issues brought to our attention by legal experts, including the Law Society of Scotland. Amendment 9 signals that arrangements to be protected under Clause 48 can include trusts. Stakeholders have asked us to make it clear that interests protected under Clause 48 may be created through, or comprise in part, trusts. The Government are not convinced that the change is necessary, as the terms would be construed in their commercial context. If commercial practice does make use of trusts in this context, then trusts would fall within the definitions as they stand. However, we are told that Amendment 9 offers reassurance, and we are glad to offer this where we can.
Amendment 17 relates to the treatment of trusts under the property transfer powers. Stakeholders have questioned whether property that a bank holds on trust for beneficiaries would fall within the definition of property, rights and liabilities under Clause 33. We believe that property held in trust would be included under the broad definition, but we are told that in Scotland there is some doubt as to whether a reference to “property” will be interpreted to include property that a person holds in trust. The amendment will allow us to stipulate how property held by the bank in trust is to be held after the transfer. This allows the effects of the resolution, as it relates to trust property, to be made clear in the property transfer instrument, enhancing legal certainty and allowing a more refined and proportionate approach.
These amendments are a direct response to the concerns of stakeholders on how trusts are treated and, I believe, allow the authorities to act proportionately on a case-by-case basis by being specific on how each resolution can affect trusts. In seeking to meet the concerns of financial markets participants, I should also say a few words about the noble Baroness’s amendment, but it is appropriate that she should have a chance to speak to it, and I shall respond briefly after she has spoken. I beg to move.
4.45 pm
Baroness Noakes: My Lords, as the Minister has said, I have Amendment 19 in this group, but I should like first to speak on the government amendments, which are the product of the Treasury’s willingness to listen to the concerns of those who will be operating in financial markets and dealing with the implications of
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The Minister explained the way in which these modifications work and how the statutory instruments will be developed. I do not need to remind him that a lot is riding on the final version of the statutory instrument and it being made immediately after Royal Assent in order not to destroy legal certainty at that point.
Some substantive issues raised by the market participants remain. I am sure that the Minister will be aware of a joint letter from the British Bankers’ Association and the London Investment Banking Association last week setting out their concerns. I hope that when speaking again to the amendment, the Minister will update the House on plans for laying the statutory instruments and, more importantly, between now and when they are laid, say what the Government plan to do to work with stakeholders to allay the remaining concerns, which are not small. Some important issues that people want dealt with remain. It would be a shame if the excellent co-operation that has characterised the way in which the Bill has been developed and the draft statutory instruments discussed were spoiled at a late stage by rushing the measure through. I say that to encourage the Government to engage in constructive dialogue.
My Amendment 19 asks for an annual report on partial transfers. I tabled it in response to very big concerns about whether this Bill would completely disrupt market practice and the attractiveness of London for the financial services industry. To some extent those concerns have been allayed by the constructive way in which the Government have sought to ensure that the statutory instruments will do what is necessary to ensure that there are no unintended market or regulatory capital impacts from the types of transaction that have been referred to. To that extent, I shall not move my amendment. In reaching that judgment, I have been particularly encouraged by the way that the Government widened the terms of reference of the Banking Liaison Panel in Clause 10, which allows the panel a wider say in the workings of the Bill beyond the narrow definition in the earlier draft of the Bill. Wedded as I am to transparency, I can see that in this instance the Banking Liaison Panel is probably the right place to keep this matter under review, and I hope that it will.
Lord Eatwell: My Lords, I moved a number of amendments in Committee dealing with the issues addressed by the Government’s amendments to Clause 48. They have responded to the difficulties regarding the impact of partial transfers on netting arrangements. Like the noble Baroness, Lady Noakes, I look forward to learning how the statutory instruments ensuring that those netting arrangements, which are enormously important in improving transparency in markets in the future and reducing complexity, are to be brought forward. I support the government amendments, which have addressed important concerns.
Lord Davies of Oldham: My Lords, I am grateful to the noble Baroness for her response to the government amendments and also to my noble friend. Both made
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One of the great advantages of the substantial consultation that was carried out throughout the drafting of this legislation and its development over the past year is that we are in a position to make commitments of promptitude on secondary legislation. We will continue to work with the Expert Liaison Group on the detail of these draft orders before they are finished and made on commencement of Part 1 on 20 February. I give the noble Baroness our assurance on that and agree with her that for the Expert Liaison Group to become the Banking Liaison Group is a proper forum for that.
My honourable friend the Economic Secretary indicated that the process should be as open as possible. He said that he was committed to seeking the Expert Liaison Group’s views on whether its minutes should be published. He did not meet with a totally positive response. The group did agree that high level summaries of the discussion and the conclusions could be usefully made public, so there will be openness in that respect. I hope that that is sufficient to assure the noble Baroness that we intend to proceed on the basis of openness. We intend to check with the group whether it thinks that any specific advice that it gives to the Government should be made public. If it does, we will commit the Treasury to publishing it and providing a copy to Parliament.
Clause 38: Termination rights, &c.
Amendments 10 to 12 not moved.
13: Clause 38, page 19, line 21, at end insert—
“(10) A thing is not done by virtue of an instrument for the purposes of subsection (8)(b) merely by virtue of being done under a contract or other agreement rights or obligations under which have been transferred by the instrument.”
Clause 48: Power to protect certain interests
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