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The noble Baroness asked significant questions and made the obvious comment that the fact that we are in this position indicates that a mistake has been made. That is certainly the case, but I recall some scepticism on the part of the opposition about the necessity of making provision in the Banking Bill, as it then was, to deal with the possibility of errors occurring. After all, we are all aware of the fact that this work is done in—

Baroness Noakes: Will the Minister point me to the Hansard reference where he ever said that Section 75 was going to be used to rectify errors of this nature?

Lord Davies of Oldham: Section 75 was a very important provision in the Act. I hope that the noble Baroness will rightly identify that a mistake has been made, which we clearly need to take lessons from—I emphasise that point—and recognise the wisdom of the Act being presented in such a way that we are able to make up for weaknesses, particularly against a background where we all recognise that work is done under considerable pressure. We all know that things have to be done with such dramatic suddenness, given their impact on creditors and depositors of banks and building societies: hence the necessity for prompt action. I accept what the noble Baroness has indicated, which was reinforced by the noble Lord, Lord Oakeshott, that this error should not happen at all, and certainly not often. I reassure them that the Bank and the Treasury fully discussed the causes of the error before agreeing to lay this Section 75 order. As I indicated in my opening speech, other possible commercial solutions were canvassed but were decided against.

In any future resolutions the tripartite authorities will continue to work together to ensure that all possible risks to the progress of these transactions are managed as effectively as possible. However, none of us should underestimate the challenge this work presents when one is operating under such time constraints. Of course, I accept, and recognised in my opening comments, that there is justifiable criticism when things go wrong. However, we made provision for that in Section 75. I even said at the time that parties might all have intended to achieve a particular effect, and proceeded on the basis of that intention, but an examination of the instrument may reveal that the text itself was ambiguous or even wrong. In such cases it may be entirely appropriate to correct the drafting with retrospective effect to ensure that the parties who signed up to the resolution are indeed in the position—we all recognise that this is the important point—they intended to be in when they gave their agreement. We were wise enough to appreciate that when people are working under pressure, problems—it might even be a minute technical problem—may arise, and that therefore it was necessary to have a fallback position as far as the Act was concerned.

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The noble Baroness is right that no Minister wants to be in this position so soon after the passing of the Act. It is important that the authorities can give assurances that lessons have been learnt, and I convey those assurances today.

I will come on to the points made by my noble friend Lord Kirkhill in a moment. I am all too well aware of the significance of the Dunfermline Building Society to Scotland, but I hope it will be accepted, in the terms that I have outlined, that it was necessary to take this action which was available under the Act. We hope that that action will not need to be repeated, but we are relieved that we have a framework and that the Act is constructed in such a way that we can address ourselves to problems that we become aware of subsequently.

The noble Baroness asked me a number of questions about the independence of the account. It needs to be held in the name of an independent person because both the Treasury and the Bank of England have some interest in the money, in so far as they are entitled to deduct costs. They are therefore a party to the position, so it is proper that it should be handled by an independent valuer rather than in the organisation.

The noble Baroness asked me about the proceeds from the sale of the social housing book. Consideration is to be paid by Nationwide on completion of the transaction, so it is, I am afraid, subject to commercial confidentiality at this stage. I do not ordinarily shy away from trying to answer her questions to me, but in this particular area I think she will accept my answer.

How is the sale of the bridge bank progressing? The Bank of England announced that it has selected the Nationwide Building Society as the third bidder for the social housing loans and related deposits from housing associations that are held by the bridge bank. This followed a competitive process that was conducted by the Bank of England in accordance with the code of practice issued by Her Majesty’s Treasury under the Banking Act 2009. That is the progress that is being made.

The noble Baroness asked me about valuation principles under Article 11. These are difficult areas for me to respond to immediately at this point. If she will forgive me, I will write to her on this point, not least because the degree of complexity that appears to have been identified in the notes passed to me are such that I do not trust myself to deliver them with the clarity and accuracy that she deserves.

What is happening to the Dunfermline Building Society? As my noble friend Lord Kirkhill indicated, he has a close interest in Scotland—

Lord Oakeshott of Seagrove Bay: The Minister is moving on, but I am afraid that I did not hear him answer my questions, which were pretty simple, I thought. Was this matter handled entirely in-house? I am particularly interested in the legal advice and the legal process followed by the Bank of England legal team. If it was not, were outside lawyers involved? If so, who were they, and what fee did they get? We have had the horrific revelation today that the Treasury managed to pay £22 million to Slaughter and May last year for financial advice. Was it Slaughter and May? If

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it was, how much did it receive? If the Minister does not have those facts to hand, will he undertake to write to me urgently, please?

Lord Davies of Oldham: I do not have those facts to hand; part of the answer to that is that that is the responsibility of the Bank of England, but I will take steps to translate the noble Lord’s questions to the appropriate authority and seek to get an answer for him.

On Dunfermline, I have said that the Bank of England selected Nationwide building society as a preferred bidder for the social house loan. We cannot comment on the outcome of the sales process at this stage, as the commercial transaction is not complete as yet. The Bank of England will provide an update in due course: it is under an obligation to do so and will do so. The proceeds of the sale will of course be paid into the resolution fund by the Bank of England. It will be known as the Dunfermline resolution account. Any consideration received from the sale of the shares in the bridge bank, or any distributions made by the bridge bank, for example, following the sale of the business of the bridge bank or by a liquidator appointed to wind up the bridge bank, will be there. The ultimate beneficiary of the account is Dunfermline.

The Bank of England and the Treasury are entitled to be reimbursed—a point I made to the noble Baroness about their direct interest in the issue. The Treasury will need to decide whether any of those costs should in fact be recovered from the monies in the accounts. Before any costs may be recovered from the account, the cost will have to be certified by the independent valuer appointed by the Treasury to have been reasonably and properly incurred. That is the next stage.

On the question of the valuation of the commercial loan book, that will be a matter for the administrator who will be in receipt of the property should the order be passed here and in the other place. I will relay those questions to the administrator; it will be his task to respond to them. Following our exchanges, I will ensure that in due course he is made aware of them.

I was asked by the noble Baroness whether third-party compensation will be worked out on the “no creditor worse off” arrangements, how that will work and how the valuer will treat the business of Dunfermline. The valuer is required to apply the valuation principle in accordance with the Banking Act. Dunfermline entered into the insolvency procedure immediately before the time that the transfer instrument was made. This is a mandatory valuation principle that must be included in a third-party compensation order in accordance with the regulations.

The Government believe that that is the correct position as, in order to enter the special resolution regime, Dunfermline had to be failing to meet its threshold conditions. As such, a bank entering into the special resolution regime will have failed to be a going concern. As it would no longer be able to perform its regulated activities, the threshold conditions are no longer met. In this case, we have decided that it is appropriate that the independent valuer should determine which insolvency procedure Dunfermline

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would enter into, rather than specify the procedure in the order. The valuer will be able to assess for himself the treatment of any property of Dunfermline.

All in all, we believe that the “no creditor worse off” arrangements provide an entirely effective safeguard of creditor interests where the partial property transfer powers have been effected, as in this case. We believe that the provisions set out in Schedule 2 to the order will provide comfort—I know that my noble friend will appreciate this—to the creditors of Dunfermline and, more broadly, will provide an example of how the Government have met our promises about protecting the interests of creditors where the stabilisation tools are exercised. Accordingly, we reassure creditors, banks and building societies.

I cannot emphasise that point strongly enough; we discussed it at considerable length when we considered the Banking Act. We all know that the special resolution procedures and stabilisation tools exercised are difficult, are operated under intense pressure and are of the greatest importance in terms of fairness to creditors while, at the same time, preserving as far as possible the positions of the assets concerned.

I hope that the noble Baroness will feel that we have responded to that position effectively in the context of the legislation. I apologise if it looks a little as if I have gone over some old ground today, but the perspicacity of the noble Baroness and the noble Lord leading for the opposition parties during the Banking Bill meant that we looked at some of these issues with great intensity at that time, and although I thought there was a possibility of the special resolution procedures being applied, I did not for one moment imagine that we would be in this situation quite so soon.

I hope that the noble Baroness will accept that with regard to both the position that the Government adopted on to the passage of the legislation and the way that we have taken these decisions subsequently, allowing for our obvious embarrassment about the drafting mistake in one of the instruments, most of her anxieties have been allayed.

Baroness Noakes: Before the Minister sits down, he made a handsome offer at the outset that Hansard would be carefully scrutinised and that those questions that were not answered would be answered separately in writing—copied, I hope, to the noble Lord, Lord Oakeshott. I think he will find that he did not answer a number of questions fully, but there is one that he did not answer at all: why there is a limitation that third-party compensation is paid only if it would have been paid under the European Convention on Human Rights. I did not hear him attempt to respond to that. Because I am being kind today, though, I am happy to have all other questions dealt with in correspondence.

Lord Oakeshott of Seagrove Bay: As I am also being kind today, I remind the Minister that I said I was mystified by the business about borrowers on the commercial loan book being eligible claimants under FSCS rules. I invite him to write to me without my having to chase him on that point.

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Lord Davies of Oldham: In the light of these questions, I shall learn to sit down more quickly. On the latter point, I will have to write to the noble Lord. On the initial point, though, the provision in paragraph 3 of Schedule 2 of the compensation order is intended to limit any compensation to be paid in respect of the turning off of termination rights, and it was included in both Northern Rock and Bradford & Bingley compensation scheme orders. We have therefore already addressed ourselves to these issues in previous orders, and I have nothing to add to that with regard to this one.

Motion agreed.

Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order 2009

Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order 2009
17th Report - Joint Committee Statutory Instruments

Considered in Grand Committee

4.58 pm

Moved By Lord Davies of Oldham

Motion agreed.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009
17th Report - Joint Committee Statutory Instruments

Considered in Grand Committee

4.59 pm

Moved By Lord Davies of Oldham

Lord Davies of Oldham: This order extends the scope of the Financial Services Authority regulation to include the sale and rent-back market. Regulation will bring important protection for consumers in this market, preventing exploitation of vulnerable homeowners and providing a means of redress for those who experience problems. Full regulation of this market will commence in June 2010, but this order introduced real protections for homeowners now by introducing an interim regulatory regime on 1 July this year.

The sale and rent-back market, sometimes referred to as the sale and lease-back market, offers homeowners the option of selling their properties at discounted rates in exchange for tenancy agreements. Sale and rent-back agreements effectively combine two transactions:

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first, individual homeowners sell their property at a discount and, secondly, they are offered an agreement to remain in the home as a tenant.

A range of stakeholders, including consumer groups and mortgage industry representatives, have raised concerns about the sale and rent-back market. The main concerns are, first, that these arrangements are often taken up by vulnerable homeowners facing repossession; secondly, that these homeowners may be entering sale and rent-back agreements mistakenly believing that these agreements offer secure tenure in the medium to long term; and, thirdly, that with increasing numbers of homeowners experiencing financial difficulty as a result of the global financial downturn, the scale of the problem is likely to increase.

I will come to the specifics of the order shortly, but it may be useful, given the context that those entering into sale and rent-back agreements are often homeowners facing repossession, if I first take a moment to set out the framework of support that the Government have put in place for homeowners during these difficult times. Statutory regulation of mortgages and credit provides homeowners with important protection and appropriate means of redress. In 2004 the Government extended the scope of FSA regulation to cover first-charge residential mortgages. The FSA’s regime requires lenders to treat their customers fairly and to treat repossession as a last resort. Regulation of other credit business is covered by consumer credit legislation administered by the Office of Fair Trading. The regime has been strengthened by the recent implementation of the Consumer Credit Act 2006.

Regulation of mortgages and credit is supported by the new mortgage pre-action protocol introduced in November last year. This set out clear guidance on what action the courts expect lenders to take before bringing a claim to the courts to help ensure that lenders have tried to discuss and agree alternative courses of action with the borrower.

The Government launched the homeowner mortgage support scheme on 21 April. This new scheme, together with changes to support for mortgage interest and the Government’s mortgage rescue scheme announced in the 2009 Budget, will help homeowners who experience a temporary income shock or lose employment, or are otherwise vulnerable, to remain in their homes. The Government have also taken action to help ensure that every household struggling with debts has access to free and impartial debt advice.

Against this backdrop of support for homeowners, the Government are proposing specific protections for those who may be considering a sale and rent-back agreement, which is the basis of this order. The action follows consideration of the sale and rent-back market by the Office of Fair Trading. In response to stakeholder concerns, in the Budget 2008 the Government asked the OFT to investigate the market and consider appropriate options to strengthen consumer protection. On 14 May last year the OFT announced that it would conduct a formal market study, working to a tight timetable in the light of concerns about this market.

The OFT published its report on 15 October. Its market study found that the potential for severe consumer detriment in connection with sale and rent-back

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agreements is unlikely to be addressed through the existing framework of consumer protection, other Government initiatives to help homeowners in difficulty under way at the time of reporting, or by industry self-regulation of the sale and rent-back market. The report recommended that the sale and rent-back market should be regulated by the FSA. At the 2008 Pre-Budget Report, the Government confirmed their intention to consult on this, including extending the scope of FSA regulation.

We published the consultation on 6 February. It sought views on three options: maintaining the existing framework, self regulation and FSA regulation. The consultation also invited views on the proposal for the FSA to put in place its regulatory regime via a two-stage approach. This would involve an interim regulatory regime which would take effect as soon as the statutory changes came into force and a full regulatory regime at a later date, following a full consultation and cost-benefit analysis by the FSA. Alongside the consultation, the FSA published a consultation on an interim regulatory regime so that it would be ready to introduce consumer protection swiftly, if asked. Both consultations closed on 1 May, and the Government published a summary of responses to their consultation on the second of this month. Alongside this, the Government laid before Parliament the order that we are looking at today.

Following consultation, the Government consider that extending the scope of FSA regulation to include sale and rent-back agreements is the most appropriate way of ensuring consumer protections in the sale and rent-back market. We consider that a two-stage approach to introducing regulation, including the use of an interim regime, represents an appropriate and proportionate way of balancing quick action to protect consumers with the rights of firms already conducting business in the market.

The order we are debating introduces regulation of sale and rent-back agreements by this two-stage process. Interim regulation will commence on 1 July this year. At the end of the summer, the FSA will consult on rules for its full regime, which will come into force in June next year. Under the interim regime, firms will need to meet FSA threshold conditions, including the requirement to have adequate resources and to be run by fit and proper people. Firms will also have to comply with the principles for businesses and meet a number of systems and controls and conduct of business rules. That is the second stage of the process. The first stage is for almost immediate implementation, provided that the Committee considers the order to be acceptable. I beg to move.

Baroness Noakes: I thank the Minister for introducing the order, to which we will not object. The Government asked the OFT to look at the sale and rent-back market and have based their solution on the advice from the OFT. They have consulted, so they cannot be faulted on those grounds. However, I have to say that I have a tinge of regret that we are unleashing the full might of the FSA’s regulatory powers on a relatively new market, which is of indeterminate size but is certainly highly fragmented, and about which—as the OFT study revealed—we know relatively little. My concern is that the costs,

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which are estimated at £8,000 on a one-off basis and £20,000 per year thereafter, may well deter providers of sale and rent-back products.

The Treasury impact assessment is based on 1,000 providers and 5,000 transactions a year—that is, on average, five transactions per provider. If you have to recoup in year one both the set-up and the ongoing costs, you have to recoup more than £5,000 per transaction on average. We have to bear in mind that these transactions concern relatively small amounts and certainly involve homes lower down the valuation scale.

I do not doubt that there have been circumstances in which owners of property have entered into unwise transactions, possibly induced by purchasers to sign up to terms which were unduly favourable to the purchaser and unfair to the owner of the property. However, it is clear from the OFT report that sale and rent-back products can in fact be a suitable response for some people, especially those who are already over-borrowed but who place a high value on remaining in their own home. These are not people who would benefit from the mortgage protection schemes and the like to which the Minister referred. Their problems are too deep-seated to be dealt with by those sorts of protections.

The impact assessment has an impossibly wide range of costs and benefits of the regulatory solution in the order—between net costs of £953 million and benefits of £1,327 million. The Treasury is to be commended for its honesty in revealing the wide range of potential outcomes, but this underlines—for me, at least—the difficulties that we have in justifying a regulatory solution. I instinctively fight shy of a regulatory solution if another solution can be found. I accept, though, that on the basis of the work that is done by the Treasury, no satisfactory self-regulatory system seemed to be available. There is evidence that some consumers have been harmed by sale and rent-back products, but precious little evidence, anecdotal or otherwise, to weigh in the balance on the other side.

My final set of questions to the Minister concerns the future of regulation. We constantly add regulated activities to the FSA, but I do not think that we ever take them away. Will he say whether the Treasury and/or the FSA believes it appropriate to look at the regulated activities that are accreting in the FSA to see whether they continue to be justified over time?

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