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9 Feb 2009 : Column 973

15: Clause 48, page 24, line 32, leave out from “which” to end of line 33 and insert “two or more debts, claims or obligations can be set off against each other,”

16: Clause 48, page 24, line 36, at end insert “actual or”

17: Clause 48, page 25, line 21, at end insert “or trusts;”

18: Clause 48, page 25, line 24, at end insert—

“(d) involve any number of parties;

(e) operate partly by reference to other arrangements between other parties.”

Amendments 14 to 18 agreed.

Amendment 19 not moved.

Clause 75: Power to change law

Amendment 20

Moved by Lord Goodlad

20: Clause 75, page 39, line 42, leave out “or desirable”

Lord Goodlad: My Lords, I am advised that, procedurally, it is expected that I should say very few words about this extremely significant debate. The Minister made a detailed and eloquent speech explaining the Government’s decision. He received no support from anyone in the Chamber and opposition from the Back Benches of the Labour Party, the Cross Benches and the Liberal Democrat Party. The Front Benches of the Conservative Party and the Liberal Democrat Party were silent on the matter, which is, according to taste, welcome, disgraceful or sinister.

I am content not to press the amendments tabled in my name and those of other noble Lords in the hope that the Government will, at Commons consideration of Lords amendments, consider adjusting Amendment 22, so that the Treasury can make orders with retrospective effect only if it considers that doing so is exceptionally in the public interest. In deference to the noble Lord, Lord Williams of Elvel, whose expertise on Third Reading procedure is not exceeded by anybody and who has a batting average in first-class cricket of more than 25, I shall not move the amendment.

Amendment 20 not moved.

Amendment 21 not moved.

Amendments 22 to 24

Moved by Lord Davies of Oldham

22: Clause 75, page 39, line 44, at end insert “(but in relying on this subsection the Treasury shall have regard to the fact that it is in the public interest to avoid retrospective legislation).”

23: Clause 75, page 40, line 3, leave out second “or”

24: Clause 75, page 40, line 4, at end insert—

“, or

(c) amend any provision of an instrument or order made in the exercise of a stabilisation power.”

Amendments 22 to 24 agreed.

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Clause 103: General powers, duties and effect

Amendment 25

Moved by Lord Davies of Oldham

25: Clause 103, page 60, line 38, in column 3 insert—

“Anything done by the bank in connection with the exercise of a stabilisation power under Part 1 of this Act is not a gratuitous alienation for the purpose of section 242 or any other rule of law.”

Lord Davies of Oldham: My Lords, government Amendments 25 and 26 are technical provisions that make modifications to the way in which Sections 242 and 243 of the Insolvency Act 1986 are applied to the bank insolvency procedure. These provisions, which deal with gratuitous alienations and unfair preferences, apply only to Scottish insolvencies and are similar in effect to Sections 238 and 239 of the Insolvency Act 1986, which deal with transactions at an undervalue and preferences with respect to insolvencies in England and Wales.

Under the amendments, Sections 238 and 239 of the 1986 Act are applied to the bank insolvency procedure, with modifications, so that anything that has been done by a bank in connection with the exercise of a stabilisation power under Part 1 of the Bill cannot be challenged as a transaction at an undervalue or a preference. Sections 242 and 243 are currently applied to the bank insolvency procedure without modification and the amendments are therefore needed to ensure that these provisions are applied in a similar way to their counterparts in England and Wales.

The words,

are included in the modifications because, in Scotland, common law can also be used to challenge a transfer or transaction considered to be a gratuitous alienation or unfair preference. The need for these modifications to ensure a consistent approach has recently been brought to our attention by the Law Society of Scotland, to which the Government are grateful. I beg to move.

Amendment 25 agreed.

Amendment 26 agreed.

Clause 230: Transparency: financial assistance

Amendment 27

Moved by Baroness Noakes

27: Clause 230, page 116, line 33, leave out “227” and insert “229”

Baroness Noakes: My Lords, I can be brief on this amendment. Just before I moved my amendment on Report to insert Clause 230 into the Bill, my noble friend Lord Eccles pointed out a typing error in relation to the clause reference in subsection (1)(b) of the new

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clause. The Minister will recall that the House voted in favour of my amendment. I had hoped that behind-the-scenes processes would correct this before the Bill was reprinted, but that did not happen. The advice of the Public Bill Office was that it would be safer if I tabled this amendment to make it absolutely clear that the House, in approving my amendment, intended to refer to Clause 229, not Clause 227, in paragraph (b). I am sure that the House will not want to confuse the other place when the Bill is sent there later today. I beg to move.

Lord Davies of Oldham: My Lords, I certainly do not want to confuse the other place and I agree with the noble Baroness.

Amendment 27 agreed.

5 pm

Clause 232: Definition

Amendment 28

Moved by Lord Davies of Oldham

28: Clause 232, page 117, line 25, leave out paragraph (a) and insert—

“(a) provide that a specified class of institution, which has a permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity, is to be treated as an investment bank for the purpose of this group of sections;

(aa) provide that a specified class of institution is not to be treated as an investment bank for the purpose of this group of sections;”

Lord Davies of Oldham: My Lords, I will also speak to Amendments 29 and 31 and comment on the opposition amendment. All the amendments in the group relate to the powers in the Bill to make investment banks insolvency regulations.

The Delegated Powers Committee expressed extreme concern about the scope of these powers. I am pleased to see the noble Lord, Lord Goodhart, in his place, not that I ever doubted that he would be there. His committee expressed concern about the scope of the powers proposed in the clauses relating to investment banks. The committee recommended that the power, and any regulations made under it, should be sunsetted after two years. The amendment of the noble Baroness is along these lines.

We discussed these concerns with the noble Baroness, Lady Noakes, and indicated to her that it has not been possible to devise a suitable response to the Delegated Powers Committee’s sunset recommendations that would not have what we regard as undesirable effects in market impact and policy. The Government, as indicated in earlier debates, are firm on this matter. The noble Baroness indicated that she understood some of the Government’s great reluctance, because normally the Government are concerned to respond positively to the committee’s proposals. She even hinted that she would consider withdrawing her amendment, subject

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to the Government making a strong case and committing to holding a fully independent review within two years of any regulations being made under the power. She also suggested that the Government’s case would be considerably more robust if they were able to place stakeholders’ concerns with the sunset provisions on the record.

The London Investment Banking Association wrote to our officials in appropriate terms on 6 February. Accordingly, we are eager to emphasise the remarks made in Committee, with regard to the difficulties surrounding the administration of Lehman Brothers Europe. In particular, the Government are concerned that the clients of Lehman Brothers have had difficulties in securing an expeditious return on their assets, following the failure of that firm. That is no small matter. Where clients are unable to access assets that they believe they rightfully own, this has the gravest implications for market confidence and the effectiveness of the legal arrangements, including those relating to insolvency, which support the UK system.

The House will be aware that a major source of the UK’s competitive advantage in this area is the certainty that we provide by the relevant legal regimes that we have. Ineffective operation of insolvency arrangements in relation to investment banks and client assets could have obvious financial stability implications. If it impacts on the ability of clients to meet their own obligations to third parties, this may have particular relevance in the case of the hypothecated assets where recovery may be very difficult and challenging.

It is no exaggeration to say that a single failure could then lead to further failures unless issues surrounding asset recovery can be addressed with expedition. The Government need to take action over these concerns. I was grateful that the amendments which gave rise to these provisions were accepted in Committee. The sheer complexity of the challenges that have emerged since the failure of Lehman Brothers and its UK subsidiary defy simple solutions to this issue. The House will understand that the application of insolvency procedures to an investment bank, or any other large complex financial institution, is complicated and challenging. To consider ways of revising such procedures is even more so. For this reason, the Government have sought the advice of an expert panel with regard to the concrete steps that need to be taken to address these challenges. The panel, the establishment of which was announced in the Pre-Budget Report, is to consider how regulations may best be made which enable the unencumbered return of client assets without creating substantive externalities or negative consequences. The provisions of Clauses 232 to 235 provide the Treasury with the powers necessary to make any changes that may be required as a result of this review. They are necessarily broad for the simple reason that it would be impossible for the Government to prejudge the conclusions of the expert panel, particularly in a complex case.

It may reassure the House if I clarify a few points regarding the powers that the Government are taking in these clauses. The powers are precautionary in so far as they will not be used without a clearly identified need

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to do so, and, notwithstanding the concern which noble Lords articulated in previous discussions on the Bill about their scope, they will be targeted if deployed.

However, the breadth of the powers that the Government are taking has of course attracted the attention of the Delegated Powers Committee, chaired by the noble Lord, Lord Goodhart. It would have been far preferable if I had been able to come to the House with more detailed proposals, as I am sure the noble Lord, Lord Goodhart, will soon emphasise in debate on the matter, and I agree with many of the committee’s concerns about the wide scope of this provision.

I should have preferred to have been in a position to present for scrutiny to this House a detailed set of legislative provisions, rather than simply the powers outlined in the clauses. However, I have not been able to do so, and the noble Baroness, Lady Noakes, has tabled an amendment which seeks to implement the recommendation of the Delegated Powers Committee. She has proposed a sunset clause which provides that any regulations will cease to have effect after two years. I welcome the amendment because it gives me the chance to explain the Government’s purpose.

As I indicated, we respect the work of the Delegated Powers Committee and we have great difficulty when we are not in accord with it. However, a sunset clause would simply not work; worse, it might do even greater damage than if the Government took no action at all. The inclusion of a sunset clause of the sort proposed would have major policy implications, all of them totally undesirable. It would create legal uncertainty as to the type of insolvency procedure which would be applied to any client asset. If Firm A were to commit assets to Firm B under the new regulations, it would know that the regulations would expire in the very near future. It would therefore have no knowledge of the insolvency procedure that would be applied in future should the firm holding its assets fall into insolvency.

Firms would find it unacceptable to face that kind of major uncertainty over what would happen to their assets in the event of a default. They would have no way of accurately gauging their counterparty risk, and their potential exposure would most likely be a multiple of their equity capital. The House will recognise that this could result in a substantial increase in the cost of funding as firms’ creditworthiness declined as a result of the ambiguity that would arise. These cost and risk implications would almost certainly prove unacceptable to the great majority of financial firms for as long as other jurisdictions offered any form of legal certainty with regard to the recovery of assets.

Those are not just the views of the Government. We recently received a letter from the London Investment Banking Association, which indicated that there are grave concerns in the City with regard to this amendment. I start by pointing out that it was in response to concerns expressed by LIBA that the Government inserted the sunset provision in Clause 235(4), which provides for the lapse of the enabling powers if they have not been used after two years.

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Perhaps I may quote from the letter that we received from the London Investment Banking Association:

“One of the points that we stressed at the outset was that a sunset clause should be included in the order-making power so as to make clear that the power would lapse if, in the event, it was determined that investment bank insolvency regulations were not needed. Our reason for this was that our Members considered it to be essential not to give the impression to counterparties that the UK framework is now in a permanent state of transition”.

We have addressed this concern with the provisions in Clause 235(4). However, LIBA goes on to note in respect of the noble Baroness’s amendment:

“Our concern about proposed paragraph (4A)—which would appear to require that any insolvency regulations made would automatically lapse (except in the case where they applied to an ongoing insolvency)—is that it would have the same result that we were trying to avoid. And since, under Clause 235(4), a sunset clause has been included requiring the 233 powers to lapse if they have not been exercised, we can see no advantage in including the paragraph that the amendment would introduce”.

Even if all these problems could somehow be avoided, the proposed sunset amendment could still cause harm. I have grave concerns about the effect on international perceptions of the predictability and dependability of UK law, which is one of the City of London’s key advantages, and the reputation of the UK as a financial services centre. That could lead to substantial damage to the City in a period when it is already facing serious challenges. I do not need to spell out the dangers for the UK economy more widely.

Even if these broad economic costs were acceptable, we should have regard to the potential implications for firms, including those that these provisions are intended to benefit. If we adopted a sunset clause as proposed, firms would be required to adapt to a new regime when the regulations laid under this Bill came into force and again when they are sunsetted, when firms would be required to adapt to whatever replaced them. This would increase the adaptation costs for investment firms. The Government’s objections to a sunset clause would, unfortunately, apply regardless of the time period attached to it, since the issue of legal uncertainty would continue to apply irrespective of the time horizon. Any proposals for a five-year, or even a 10-year, sunset clause would therefore also be subject to the grave difficulties I have described.

I say with regret that the Government feel strongly that the proposed sunset provision cannot be accepted. However, the Government are nevertheless committed to addressing the concerns of the Delegated Powers Committee and of the House. First, we are making changes to the scope of the provisions, as laid out in Amendments 28 and 29. The amendments are designed to reduce the extent of the order-making power provided for in Clauses 232 to 235. They limit the power in such a way that the Treasury may bring only institutions that already hold Financial Services and Markets Act Part IV permissions into the scope of any new insolvency regime. Noble Lords will be aware that firms to which the Financial Services Authority has granted FSMA Part IV permission are all authorised financial firms. In Committee, the noble Baroness, Lady Noakes, expressed particular concern about the breadth of the definition of investment banks included in the Government’s original provision on this point. This amendment seeks to address her concerns directly. As

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a result of the amendment, there is no possibility of the Government applying the regulations more widely than is necessary with regard to non-financial business, for example.

Secondly, in lieu of a sunset provision, we have also tabled amendments to ensure that this House and the other place shall have the opportunity to consider expert views on any regulations the Treasury may lay under these powers. I think it only right and proper that the Government take all possible steps to ensure appropriate scrutiny of these provisions. Therefore, Amendment 31 requires that within two years of the Treasury making any investment bank insolvency regulations, the Government must establish an independent review of any regulations that have been made. This review shall be independent, expert, and impartial. The review will consider whether the regulations have been effective in identifying, protecting and facilitating the return of client assets. It will look at whether, in drafting the regulations, the Treasury has paid due attention to protecting creditors’ rights and ensuring legal certainty for all relevant stakeholders: creditors, clients, administrators and the investment banks themselves. That is critically important, and we will ensure that the impact on the firms and persons who may be affected by the regulations is subject to full consideration.

5.15 pm

The review will also consider how effective the regulation has been in minimising any disruption of business and the markets and maintaining the UK as a global centre for financial services. The review will produce a report which must be laid before this House and the other place, and noble Lords and Members of the other place can then determine whether they want to deliberate on its findings. The review may also consider whether it is appropriate for the regulations to stand or whether the Government should return to Parliament with necessary primary legislation. The reviewer, in his or her consideration of those matters, may feel it helpful to engage with noble Lords or Members of the other place, as well as insolvency experts and other market practitioners.

I hope that the establishment of that review will go some way to addressing the concerns identified by the Delegated Powers and Regulatory Reform Committee and of this House in earlier discussion of the Bill. In the current circumstances, I hope that the House can appreciate why the Government are unable on this occasion to proceed along the lines suggested by the committee and in the amendment tabled by the noble Baroness. I hope that the new provisions that the Government have proposed will alleviate the concerns raised; that I have justified the reasons for the Government's action; that the noble Baroness will feel able in due course to withdraw her amendment; and that the House will feel able to support the government amendments.

Baroness Noakes: My Lords, as the Minister explained, I tabled Amendment 30 in this group, which would implement the clear recommendation of the Delegated Powers and Regulatory Reform Committee. It stated

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that it would not normally have accepted such a power being put in legislation but that, exceptionally, if the House were convinced that such a power was necessary, it should be accompanied by full sunsetting: that is, of both the regulation-making power and the regulations themselves. That is what my Amendment 30 would do.

We must remember that this is highly complex law dealing with important issues of rights in insolvency. I am sure that the general feeling of the House is that the right way to scrutinise that is through primary legislation, because it is only through primary legislation that we have the opportunity to scrutinise on a line-by-line basis. As the Minister is aware, secondary legislation is fundamentally non-amendable.

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