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The legislation suggests that at this stage the Government appear to have learnt very little over the past three years. All that they are doing is putting in place the power to wind up investment banks without at the same time making the regulatory changes that would reduce the probability of failure and provide for orderly wind-up. We do not just need a mechanism; we need a process that ensures that the mechanism works speedily and fairly. I suggest to the Minister that these regulations, welcome though they are, are such a partial dimension of the total picture that the House will need reassurance on these wider matters.

Lord Sassoon: My Lords, this has been an interesting debate, perhaps a little more interesting because of one or two of the little side conversations that got going, and certainly more interesting than the perhaps slightly dry but very important regulations had led me to expect. I am grateful not only for all the contributions made but for the general support for the proposed regulations. The past few years have shown that investment banks can fail and can cause huge disruption, not just to investors but to the wider economy. That is why the Government are putting in place this new regime.

I said at the beginning that the regime is being developed with the input of industry experts. I should like to echo the thanks of the noble Lord, Lord Myners, for the input and help that we have had. These have been complex instruments to develop. I am also happy to acknowledge the process that has resulted in these regulations today was one that the noble Lord himself kicked off when he was in the Government. It has taken a couple of years to get the regulations right and to achieve a regime that I believe is fit for purpose.

In addition, in accordance with Section 236 of the Banking Act, the regime will be reviewed within two years of the regulations coming into force. That review will consider how far the regulations are achieving the objectives set out in Section 233 of the Banking Act and whether the regulations should continue to have effect. A copy of that report will be laid before Parliament. That goes some way to answering the questions of the noble Lord, Lord Davies of Oldham, about future-proofing, continuity and the connection to the wider regime. These are important questions, but they have been taken account of within the regime that the Banking Act sets up.

On the specific question on the future of the Financial Services Authority, I would not presume, until your Lordships' House had passed the necessary legislation that will come forward, to talk too much about what happens after the Financial Services Authority comes to the end of its life. However, in that legislation, we will take full account of all the functions, including those under these instruments, which the FSA currently covers.

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The noble Lord, Lord Myners, asked about the situation with Germany. In particular, in response to that situation, the FSA has consulted on introducing a 20 per cent cap on intra-group deposits of client money so that the scope for exposure to overseas regimes that may have some bar on the return of money is significantly reduced. Of course, as I have already indicated, we work as a Government to ensure that resolution regimes, in so far as is possible, can be made consistent on both a European and global basis.

Lord Myners: The capping of exposures may be a good thing in itself, but what happened here was that, after the collapse of Lehman brothers, the Germans effectively said, "These are no longer client assets. They will be deemed to be the assets of Lehman Brothers International". That is the core of the matter. It strikes me as quite extraordinary that a fellow European nation should have done this. To date, we have not been successful in unwinding what could only be regarded as a hostile action to the concept of client money. I welcome what has already been done, but I urge the Minister to take an interest in this and to see whether, perhaps with the FSA, we could give one more push on this subject.

Lord Sassoon: My Lords, the noble Lord, Lord Myners, knows very well the difficult background to this, as well as the fact that the German situation is, in the first instance, a matter for the courts. It is therefore difficult to go into it in much detail. That is where it principally lies, rather than being a government to government matter. As I have explained, the sensible response to cover the generality of these situations is to ensure that investment banks do not in future overexpose the intra-group excessively. That is why they have introduced the 20 per cent restriction. We will wait to see how this matter is resolved in the courts and what further lessons, if any, that leads to.

The noble Lord then asked a second question about sources of moral hazard in omnibus accounts. Again, the Financial Services Authority has certainly focused attention on this area. It has committed to enhancing the client assets source book, where regulatory failures in the general area of protection of clients' assets were very much exposed by the Lehman Brothers case. It is not the case that omnibus accounts are, in themselves, a source of hazard, as long as there is proper segregation of clients' money, which is the critical issue here.

As has been said, today is not the time to get into the questions that came up at the end of the speech of the noble Lord, Lord Myners, about bonuses, the importance of the City and so on. We will definitely come back to these things. I am grateful for the noble Lord's confirmation that he supports the Independent Commission on Banking. I very much hope that it will shed light-as Sir John Vickers's recent speech indicates it will-on all these issues. The noble Lord also referred to Project Merlin, which we are working on very hard to ensure that banks pay out bonuses that are less than they otherwise would have been and lend more than they otherwise would have done.

Lord Myners: I make one last intervention on this. Can the Minister tell us simply how the Government will find out what bonuses otherwise would have been

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and how much money would have been lent in the absence of Merlin? It seems that the Minister yesterday, in using the terms "demonstrable" and "verifiable", overreached himself in suggesting that there was a way in which the outcome of Merlin could be proved. Can the Minister, in very simple, straightforward terms, explain how he will prove these issues on bonuses and credit extension?

Lord Sassoon: My Lords, when we have a Project Merlin outcome to announce, the noble Lord will no doubt have every opportunity to cross-question me on these matters. I also note, just in case noble Lords missed it, that the noble Lord committed himself to that being his final intervention. He is certainly well below his batting average for interventions in my closing remarks but we will see whether he holds to it. I shall try not to provoke him. The only further thing that I wanted to say in response to the noble Lord was that, despite what I just said about banking and unfinished business on bonuses, I very much echo what he said about the importance of the City. Extraordinarily skilled work is done by many experts across the financial and business services in the City, and the City adds great value to the UK economy; we should not forget that.

I will respond to a couple of the points raised by my noble friend Lady Maddock. The supplier proposal adapts existing provisions in insolvency law, specifically within the Insolvency Act 1986. We are trying to ensure that, in the case of investment banks, those critical suppliers without whom the resolution of the investment bank cannot take place-the positions cannot be closed out-continue to supply. When we talk about 28 days, it is important that the supply is paid for but it is a question of whether it is paid for within the 28 days. The supplier can stop supplying if any charges in respect of the supply remain unpaid for more than 28 days, if the administrator consents to the termination, or if the supplier has the permission of the court. In that context, the definition of hardship will be left to the judgment of the court.

As regards the bar date, the critical protection is that sufficient time has to be allowed for publicity to be given to the fact that the investment bank has gone into special administration. There has to be sufficient time for affected clients to calculate and submit their claims and for practical difficulties in establishing claims to be sorted out. Therefore, I believe that there are sufficient protections in the regime.

The noble Lord, Lord Davies of Oldham, asked me a number of questions. I hope that I have dealt with the future-proofing and questions around the Financial Services Authority. Consumer protection will be fully taken into account in the architecture that we will propose to replace the Financial Services Authority. Central counterparties and the regulation of over-the-counter derivatives is an area which falls within the general heading that I addressed: namely, that we must work to achieve international and global solutions. I see some nodding and shaking of the head from the Benches opposite. That indicates that these things are not easy. We need to have a regime in place that is safe and appropriate for the markets in the UK, but equally we need to ensure that we have something consistent

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within the EU and the G20 framework as mechanisms which could provide safe solutions that might work against free investment flows. We have to ensure that this is not one of those issues where protectionism comes to the fore under the cloak of providing safe solutions. I absolutely take the point that the settlement of transactions is ongoing business in which the Government take an active part.

As regards how living wills fit with this new regime, recovery and resolution plans are again a core part of both our and the G20 authorities' response to the "too big to fail" problem and will be required of all systemically important financial institutions. That is the critical definition in that context. It is not a question of an arbitrary definition that splits investment banks from other banks in the way that the noble Lord suggested might be the case.

On the protection of client assets, it is worth remembering that the FSA has set up a new client asset unit, which is a centre of excellence and expertise within the FSA, in further recognition of the important issues raised by the lessons learnt from Lehman. That further stresses the fact that although these instruments being put in place today are critical, they are in many respects only a part of a wider construct.

The first point that the noble Lord raised, but the last one which I should address, concerns the definition of fairness. The relevant provision is based on existing provisions in the Insolvency Act 1986 and the Financial Services and Markets Act 2000. "Fair" is the modern term for the previously used "just and equitable". While I do not profess to be an expert on these matters, I am assured that the term "fair"-its use is based on a lot of case law defining "just and equitable"-is well defined under court rulings and will be well understood by those administering the special administration regime.

That has been a long response to a short but important debate.

The Archbishop of York: I did not clearly hear the noble Lord's answer to the question of the noble Baroness, Lady Maddock, about the bar. Who will determine what sufficient time is? How would I know that as a client? Who will determine that it is sufficient?

Lord Sassoon: I thank the most reverend Primate for pressing me on that. The critical thing, as I said before, is not that some arbitrary time is laid down, because that will relate to the complexity of the individual administration case. The objective has to be for the administrator to fulfil his objectives. The principal objective that we are looking for is the return of the money as quickly as possible. That will be the objective that the administrator will be looking to fulfil, subject to these safeguards that I have tried to explain to make sure that absolutely everything is being done so that those with money at risk are informed and have time to calculate their claims. A date cannot be fixed in a way that applies to all circumstances, because, if so, there would be a backstop date that might disadvantage people in a simple administration.

Motion agreed.

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Investment Bank (Amendment of Definition) Order 2011

The Investment Bank (Amendment of Definition) Order 2011
12th Report Joint Committee Statutory Instruments

Motion to Approve

5.36 pm

Moved By Lord Sassoon

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Motion agreed.

House adjourned at 5.37 pm.

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