In moving Amendment 129, I will also speak to Amendments 130 and 131. These are probing amendments.
We have at last progressed to Part 2 of the Bill, but I cannot yet say that the end is in sight. The amendments seek to alter Clauses 93 and 94, which set out the grounds for applying for and making a bank insolvency order. There are three grounds for applying for an order. They are set out in Clause 93(1): ground A, the inability to pay debts; ground B, the public interest; and ground C, fairness. They operate in a rather strange way, which is why I have tabled these probing amendments.
If the Bank of England or the FSA applies for a bank insolvency order under Clause 93, it has to be satisfied that either ground A or ground C applies—that is, that there is an inability to pay or unfairness. Under Clause 94, the court has the same task of being satisfied on either ground. My amendments would change that so that both grounds must be applicable. I cannot see that the Bank or the FSA should go to the court simply on grounds of fairness or that the sole criteria for the court making an order should be fairness. That implies that, if the bank were able to pay its debts, some notion of fairness could still trigger a bank insolvency. I would be obliged if the Minister would explain that and, in particular—if this is not a mistake in the Bill—what the word "fairness" means in this context.
In relation to Secretary of State applications under Clause 93(4), why does the Secretary of State have to satisfy himself only about ground B, on public interest? However, when that application gets to court, the court has to be satisfied about ground B, public interest, and ground C, fairness. Why are the Government not given the requirement to satisfy themselves on fairness before applying for an order? Doubtless, the Minister will see why I have been confused about how the grounds for applying for a bank insolvency order work. I beg to move.
I am grateful to the noble Baroness for welcoming the fact that we have moved on to the next part of the Bill. At one stage, I began to think that we might not make that this evening. I am pleased to reply to her amendment. Clause 94 sets out the powers of the court in relation to the submission of such an application, including the grounds on which the court may make a bank insolvency order.
In keeping with the UK's existing insolvency legislation, an application for a bank insolvency order may be made where a bank is insolvent or where winding up its affairs would be in the public interest or fair. The noble Baroness asked me about the meaning of the word "fair" in this context. We assume that it has the same legal meaning as the phrase "just and equitable", which is used in insolvency legislation. In all the circumstances, it will then fall to the court to decide whether it is appropriate to make a bank insolvency order.
Under Section 367 of the Financial Services and Markets Act 2000, the FSA may present a petition to wind up a bank and the court may make such an order if it is satisfied that either the bank is insolvent or that winding up would be just and equitable. It should also be noted that, under Section 359 of that Act, the FSA may apply to the court for the making of an administration order on the grounds that a company is or is likely to become unable to pay its debts. In many respects, Clauses 93 and 94 therefore preserve the current insolvency framework, with the addition that, given the important role of the Bank of England in the special resolution regime, the Bank may apply for winding up on the same grounds as the FSA.
As I see it, the noble Baroness's amendments would diverge from the current position under insolvency legislation and the Financial Services and Markets Act and would mean that a bank could not be wound up on just and equitable grounds unless it was also insolvent. Similarly, the court would be able to make a bank insolvency order only where a bank was insolvent if it also considered that winding up would be fair. A key intention behind the bank insolvency procedure, which has received wide support among stakeholders, is to adhere as far as possible to existing insolvency legislation. We seek to maintain the existing grounds on which a bank may be put into insolvency; that is, an order may be sought and made on the grounds of insolvency or on the grounds that winding up would be just and equitable.
I am sure that the Committee will agree that it would not be desirable to have an insolvency regime for banks that was more restrictive than that for companies generally, given the important public policy interest in protecting depositors and preserving financial stability. The only real change is the addition of the Bank of England into the framework. Otherwise, we are preserving the existing insolvency regime. That is the basis on which we hope the noble Baroness will feel able confidently to withdraw her amendment.
I thank the Minister for that response. Perhaps I may check one point. Is he saying that the Government have decided not to use the phrase "just and equitable", which is used in insolvency powers generally—the Minister mentioned the Financial Services and Markets Act 2000, but it is used in the Insolvency Act 1986 as well—and to replace it with the word "fair"? Have they considered whether that is the right approach if they are trying to mirror what is in place in other legislation? The word may have the same meaning but, given that the phrase "just and equitable" has been considered by the courts in relation to regular insolvency, this may not be the right way forward. Whenever different language is used, lawyers generally think that something different is intended. That aspect is confusing. Is there anything that the Minister can say to help me on this?
As the noble Baroness will see, Clause 90(8) states:
"The expression 'fair' is used in this Part as a shorter modern equivalent of the expression 'just and equitable'".
We are not making a change of any significance and our use of the term "fair" is the same as the use of "just and equitable" in other legislation.
Clause 90(8) makes it clear that the use of the word "fair" in this part of the Bill is justified,
"as a shorter modern equivalent of the expression 'just and equitable'".
We do not intend to exclude the application of any judicial or other practice related to the construction or application of the expression.
Amendment 129 withdrawn.
Amendment 130 not moved.
Clause 93 agreed.
Clause 94 : Grounds for making
Amendment 131 not moved.
Clause 94 agreed.
Clauses 95 and 96 agreed.
Clause 97 : Liquidation committee
Moved by Baroness Noakes
132: Clause 97, page 48, leave out line 39 and insert "As soon as practical—"
I shall speak also to Amendments 133 and 134, which all concern the liquidation committee provisions set out in Clause 97. In a conventional insolvency, the liquidator has to call a meeting of the creditors as soon as possible and set up a creditors committee. That is the right thing to do because the actions of the liquidator can have a bearing on the amounts ultimately yielded for creditors. However, this process is not followed in the Bill.
Under Clause 97, the liquidation committee, comprising the Bank of England, the Financial Services Authority and the Financial Services Compensation Scheme, is set up immediately. I do not challenge that point because it is clear that the payment of depositors could well be a priority in terms of timing, although I would add that I argued earlier in Committee that the transfer of banking facilities is of equal importance. However, the priority of giving depositors the ability to access their money should not be allowed to mask the fact that other creditors also have a real need to be involved in the liquidation process as early as possible. Under Clause 97, creditors do not show up on the scene until there has been a full payment resolution confirming that depositors have been substantially or fully paid out. My amendment would allow creditors to assume their natural place on the liquidation committee as early as possible, notwithstanding that the committee would initially be set up without them.
The current clause has the Bank and FSA members stepping down to be replaced by creditors. Under my amendments, they would still step down once the full payment resolution had been passed, but until that point the committee would comprise a mixture of outside creditors, the Financial Services Compensation Scheme, which may be a large creditor, the FSA and the Bank. I see nothing wrong with that, but I wonder whether the Minister does. I do not understand why the regime has to be set up to exclude creditors until the Bank, the FSA and the Financial Services Compensation Scheme have decided that they have finished their task. Depending on the kind of bank involved, the outside creditors could be even larger in value terms than those dealt with under the need to pay out depositors.
When the Minister replies, will he deal with a technical point in relation to subsection (6)(d), which provides that the FSCS may resign from the liquidation committee? Under subsection (2), the FSCS has never been a member—the member is only a person nominated by the FSCS. I have tidied that up in Amendment 134 but the Minister may like to reflect on whether the clause as it stands is correctly drafted. I beg to move.
An important part of this revolves around the crucial importance to the Bill of objective 1, as defined in the clause. At present the bank insolvency procedure sets out a two-stage liquidation committee process. Following the making of a bank insolvency order, representatives from the Bank of England, the FSA and the FSCS must form an initial liquidation committee. This committee will oversee the bank liquidator and assist in achieving objective 1 in Clause 96(2), which is to ensure either that the accounts of eligible depositors are transferred to another financial institution or that prompt compensation payments are made to those depositors.
A key feature of the insolvency procedure is the emphasis that we are placing on dealing with eligible depositors quickly, allowing an initial liquidation committee to be formed immediately without the need for a creditors' meeting. This is crucial in achieving an early realisation of objective 1. Once objective 1 has been achieved, it is appropriate that, as in ordinary liquidation, it should fall to creditors to decide whether to form a liquidation committee. That is why Clause 97, in effect, provides for the initial liquidation committee to be disbanded once a full payment resolution has been passed.
We move on to a second phase after objective 1 has been achieved. We consider that it would be inappropriate for a meeting of creditors to be called at an earlier stage to form a liquidation committee as the amendments suggest. This would cause procedural delays when the whole emphasis is on speed; it would take time to identify and notify creditors and to make appropriate meeting arrangements. We fear that this might undermine the achievement of objective 1, on which we place, as I have emphasised, such significance.
Amendment 133 would work with Amendments 132 and 134 to allow for a liquidation committee to be made up of between three and five members, whereas the current wording of the clause refers to three or five. We are worried about four members in case there is an equal split in opinion. We have drafted the Bill deliberately to provide for an odd number of creditors on the liquidation committee—not in order to disadvantage creditors but to facilitate decision-making, as an odd number will avoid a 50:50 split and is more likely to avoid deadlock. That is the thinking behind that part of the clause.
We are satisfied that Clause 97 as it stands strikes the right balance between protecting the interests of eligible depositors and those of creditors generally. It also provides for the necessary transition at an appropriate time between the initial liquidation committee and any subsequent committee formed by creditors. The clause may appear complicated in parts—it certainly does to me, although it is probably less complicated for the noble Baroness, who is so well versed in these matters—but it is necessary for us to prescribe exactly what should happen at an appropriate time in the unique circumstances of creditors forming a liquidation committee in a bank insolvency. That is why the clause is drafted as it is and why I hope that the noble Baroness will withdraw her amendment.
The noble Baroness asked me about the FSCS resigning. The FSCS member may not be the original person nominated under Clause 97(2). Clause 98(6) is the relevant provision:
"A nominating body ... may replace its nominee at any time".
It is therefore proper for Clause 97(6)(d) to refer to the FSCS, which might be doing just that. I hope that the noble Baroness feels reassured by that response.
I thank the Minister for the latter point; I shall look at it carefully. He described the liquidation as sequential, so that first the liquidator comes along, overseen by the Bank, the FSA and the FSCS, to achieve objective 1; and once that is done, objective 2 can be done. However, Clause 96(4) states:
"Objective 1 takes precedence over Objective 2"—
nobody is arguing about that—
"(but the bank liquidator is obliged to begin working towards both objectives immediately upon appointment)".
That must be right, but the creditors are not allowed in until objective 1 has substantially been dealt with. That seems potentially to disadvantage creditors. My amendments seek not to delay dealing with objective 1, which can be started immediately with a committee that is just the inner group, but to allow objective 2 to be set in motion. Everybody knows that you have to find out who are the creditors, write to them and call a meeting, and that takes a bit of time. The process could go on some time and the creditors could join at the first natural opportunity. The creditors are put to one side under the Bill's arrangements as if they have no interest in the early stages of the liquidation. But they clearly do, because objective 2 runs from day one of the liquidation. Can the Minister explain why the creditors have to be excluded, rather than admitting them into the process a little later once the formalities have been dealt with?
We do want not to inhibit the information flow to creditors or the setting up of a position whereby they will in due course play their part. However, the achievement of objective 1 is of prime importance. We think that that can best be realised by the limited participation identified in the clause. The basis of the thinking is the primacy of objective 1.
"the bank liquidator must summon a meeting of creditors",
that does not start until there has been a full payment resolution. The process of getting creditors involved does not start even on the day when the full payment resolution is passed. They are kept out of the room not only until that is achieved; they are probably kept out for at least another couple of months. That does not seem the right approach to creditors in a bank liquidation. I remind the Minister that the creditors could have more money at stake than the depositors, who might be dealt with relatively straightforwardly.
We can all envisage that they might have more at stake; but the noble Baroness will accept the Government's reasoning behind the legislation and the primacy of the protection of depositors. We are hoping to deliver to depositors within a matter of days of the procedure being set up. It is fast because we want to deliver to depositors immediately. That is of the greatest importance. We all know how confidence ebbs away when depositors do not have access to their money. We expect that objective 1 will be reached within seven days. I am sure, therefore, that the noble Baroness will recognise that the next phase will not take months. It can be coterminous in terms of preparation. The creditors will be on the scene not in months' time but beyond the seven-day period when objective 1 is to be realised.
I hesitate to intervene but one does not like passing legislation when one simply does not understand what it means. Paragraph (e) of subsection (6) reads,
"if no individuals are elected under paragraph (b), or the resulting committee would have fewer than 3 members or an even number of members, the liquidation committee ceases to exist at the end of the meeting".
I am having trouble working out what combination of members would result in the committee not ceasing to exist at the end of the meeting. Why should it cease to exist with some combination of members and not with others, since presumably business has either finished or it has not?
I understand paragraph (e) of subsection (6) as being fairly clear. It refers to the criteria on the basis of the effective committee. We are saying that it should be three to five members, and that at least three or five members must be able to participate in order for it to have validity. We are insistent upon the odd numbers so that there should not be a point of irresolution when we are discussing a position of some urgency.
I am awfully sorry, but I did not quite catch that.
Is it the case that if there are five members, the committee continues to operate, but under any of the combinations mentioned in paragraph (e), it ceases to exist at the end of the meeting? I am not clear why sometimes the meeting continues and sometimes it does not.
We have views on the size of the committee and are indicating that we need either three members or five. I have explained the problem with four. If there are five members, but only three are available, that is the minimum number.
We believe that it is, but if I am incorrect, I shall correct myself very rapidly.
I thank the Minister for that. I continue to be mystified about why the Government want to keep the creditors out until they have achieved payment. The Minister said that it would take seven days—if it does, the creditors would not even have been notified and the meeting held, so that would not be a problem. My proposal was to involve the creditors simultaneously so that they could be involved once meetings had been held and they had been nominated, rather than excluded because the bank, the FSA and the Financial Services Compensation Scheme think that this is their toy and nobody else can play with it until they have finished. If this does not happen in seven days, and it takes a long time, for some reason, objective 2 cannot be properly overseen, and I am not sure that that is right. I will consider this between now and Report, and look forward to hearing from the Minister about normal insolvency liquidation committee practice. I beg leave to withdraw the amendment.
Amendment 132 withdrawn.
Amendments 133 and 134 not moved.
Clause 97 agreed.
Clause 98 : Liquidation committee: supplemental
Moved by Baroness Noakes
135: Clause 98, page 49, line 35, leave out subsection (7)
I can be brief with this amendment. Under subsection (7) of Clause 98, the FSA and the Bank of England retain attendance rights at the liquidation committee and other rights, even after their main task of paying out the depositors has been achieved. Since at that point the objective of the liquidation becomes the winding-up of the bank to achieve the best result for creditors, as set out in Clause 96, I cannot see what possible locus the FSA or the Bank of England could have. I do not like legislation which creates unnecessary or non-value-adding activities for public servants, so I look to the Minister to explain why the provision is necessary and/or value-adding to the process of liquidation and the achievement of objective 2 in Clause 96. I beg to move.
The provision which the noble Baroness questions gives the FSA and the Bank of England rights to take part in certain matters concerning a bank insolvency after they cease to be members of a liquidation committee; for example, to participate in legal proceedings and to attend and be heard at meetings of a liquidation committee formed by the bank's creditors.
Clause 98(7) has been included to give the Financial Services Authority the same rights in a bank insolvency as it would have in ordinary insolvency proceedings, such as liquidation or administration involving firms authorised by the FSA. The subsection therefore mirrors existing provisions of the Financial Services and Markets Act 2000. They entitle the FSA, where an authorised person enters administration or liquidation on the application of a third party, to participate in court proceedings relating to the insolvency as well as certain other rights. These include, for example, an entitlement to receive copy documents or attend meetings of a liquidation or creditors committee.
Since the bank insolvency procedure is part of the special resolution regime, and given the important role of the Bank of England in it, it is considered appropriate to give the Bank of England the same rights of participation as the FSA. Although the FSA and the Bank of England are obliged in a bank insolvency to stand down from the liquidation committee once objective 1 has been achieved, it seems sensible that, in keeping with the Financial Services and Markets Act 2000, the relevant authorities should be able to attend and be heard at future meetings. Of course, at that stage in the proceedings they will be able only to make representations, as any decisions will ultimately be made by the creditors sitting on the liquidation committee. They are not part of the decision-making process; it is a matter of copy documents and the right to attend. Similarly, Clause 98(7) gives the FSA and the Bank of England the right to participate in legal proceedings concerning a bank insolvency, but any judgments would of course lie with the court.
It is not possible to set out all the circumstances in which the authorities might wish to exercise their rights under Clause 98(7), but the provision offers flexibility which is in keeping with existing legislation. That is why I hope that we can retain it and that the noble Baroness will withdraw her amendment.
The Minister did not explain why the provision is necessary and he certainly did not explain what value-added was brought about by it, but he has trumped me with precedent in the Financial Services and Markets Act. I arrived in your Lordships' House just after that epic Bill had finished its progress here, so I am not quite word-perfect on the sections it contains. That sometimes comes back to haunt me. However, I accept what the Minister said and beg leave to withdraw the amendment.
Amendment 135 withdrawn.
Moved by Lord Davies of Oldham
136: Clause 98, page 50, line 4, at end insert "or under section 141(2) or 142(2) of the Insolvency Act 1986 (as applied by section 100 below)"
I shall speak also to government Amendment 137. The amendments add further detail to the Bill concerning the formation of a liquidation committee in a bank insolvency after the achievement of objective 1 as set out in Clause 96(2). They are minor technical amendments applying Sections 141 and 142 of the Insolvency Act 1986 to the Bill with necessary modifications. I beg to move.
Amendment 136 agreed.
Clause 98, as amended, agreed.
Clause 99 agreed.
Clause 100 : General powers, duties and effect
Moved by Lord Davies of Oldham
137: Clause 100, page 52, line 22, at end insert—
|"Section 141||Liquidation Committee (England and Wales)||The application of section 141 is subject to— (a) sections 97, 98 and 106 of this Act, (b) rules under section 411 (as applied by section 122 of this Act) which may, in particular, adapt section 141 to reflect (i) the fact that the bank liquidator is appointed by the court and (ii) the possibility of calling creditors' meetings under other provisions, and (c) the omission of references to the official receiver.|
|Section 142||Liquidation Committee (Scotland)||The application of section 142 is subject to— (a) sections 97, 98 and 106 of this Act, (b) rules under section 411 (as applied by section 122 of this Act) which may, in particular, adapt section 142 to reflect (i) the fact that the bank liquidator is appointed by the court and (ii) the possibility of calling creditors' meetings under other provisions, and (c) the omission of references to the official receiver."|
Amendment 137 agreed.
Moved by Lord Myners
138: Clause 100, page 54, line 6, after "applied" insert "to a bank liquidator"
Government amendments 138 and 139 work together and add further detail to the removal from office of a provisional bank liquidator. These amendments do not change the ways in which a bank liquidator can be removed, which are set out in the Bill. The table of applied provisions in Clause 100 details the provisions of the Insolvency Act 1986 applied to bank insolvency, with or without modification. This includes provision for the appointment of a provisional bank liquidator through the application, with modifications, of Section 135 of the 1986 Act.
At present, provision is made for the appointment of a provisional bank liquidator to lapse on the appointment of a bank liquidator. These technical amendments apply further existing provisions of the Insolvency Act 1986 concerning the removal of a provisional bank liquidator. They provide that a provisional bank liquidator may be removed by an order of the court and also ensure that a provisional bank liquidator must vacate office if he or she is no longer qualified to act as an insolvency practitioner. These are tidying-up provisions which are consistent with existing insolvency legislation.
Amendment 138 agreed.
Moved by Lord Myners
139: Clause 100, page 54, line 7, at end insert—
|"Section 172(1), (2) and (5) are applied to a provisional bank liquidator."|
Amendment 139 agreed.
Clause 100, as amended, agreed.
Clauses 101 to 128 agreed.
Clause 129 : Partnerships
Debate on whether Clause 129 should stand part of the Bill.
I have given notice that I oppose the clause standing part of the Bill, on a probing basis. For the convenience of the Committee I have grouped the debate with one on whether Clause 160 should stand part, as it is in similar terms.
Clause 129 is an order-making power for the bank insolvency procedure to apply to partnerships. Clause 160 is in identical form for the bank administration procedure. I have one simple question for the Minister. Does this enable an order to cover limited liability partnerships? These are separate legal entities under the Limited Liability Partnerships Act 2000 and, therefore, not within the normal legal meaning of partnership any more.
Clause 129 allows the Lord Chancellor, with the agreement of the Secretary of State and Lord Chief Justice, to modify the provisions of the bank insolvency procedure for banks that are partnerships rather than limited companies. Clause 160 replicates this provision for the bank administration procedure. I should add that Clauses 129 and 160 do not apply to Scottish partnerships, which have a different legal structure from English and Welsh partnerships and are provided for separately under Clauses 130 and 161. These provisions mirror Section 420 of the Insolvency Act 1986, which allow the Lord Chancellor, with the concurrence of the Secretary of State or the Lord Chief Justice, to make orders in relation to the law dealing with insolvent partnerships. Indeed, Clauses 129(2) and 160(2) make it clear that the procedure to be followed in relation to any order is the same as that set out in Section 420 of the 1986 Act. I was rather hoping that if any questions were asked in connection with the Insolvency Act 1986 I would be helped by the noble Lord, Lord James of Blackheath, who I acknowledged yesterday is almost certainly the world's leading expert on that particular legislation, but I see that he is not in his place, so I will soldier on.
The primary reason for such an approach is that partnerships have different characteristics from limited companies and their own unique insolvency provisions. It may therefore be necessary to amend provisions of the bank insolvency procedure or the bank administration procedure for any banks that are set up as partnerships rather than as companies. In addition, setting out legislation for banks that are insolvent partnerships in a separate order will provide greater transparency for users of the legislation. As these clauses simply replicate the provisions of existing insolvency law in making legislation to deal with insolvent partnerships, Clauses 129 and 160 should stand part of the Bill.
I should like to have the opportunity of writing to the noble Baroness in answer to her question on limited liability partnerships.
The noble Baroness has established such a formidable reputation in my mind that I would not for one moment wish to give an answer were I not 100 per cent confident that I was correct. I have failed against that standard on several occasions in this Committee, but I aspire at all times to improve.
Clause 129 agreed.
Clauses 130 to 134 agreed
Clause 135: Objective 1: supporting private sector purchaser or bridge bank.
Moved by Lord Myners
140: Clause 135, page 69, line 18, after "supplemental" insert "or reverse"
This group of government amendments contains three technical amendments to the provisions for the bank administration procedure. Amendment 140 ensures that objective 1 of the bank administration procedure—to support the private sector purchaser or bridge bank—includes a reference to reverse property transfers, as well as to supplemental property transfers. Reverse property transfers were introduced in Committee in the other place, and this amendment is consequential.
Amendment 141 concerns the removal of a provisional bank administrator and is similar in effect to Amendment 139, which we have just debated in relation to the bank insolvency procedure.
Amendment 142 adds some important additional provisions of the Insolvency Act 1986 concerning procedures for disclaiming onerous property and the powers of the court in relation to disclaimed property.
Table 2 in Clause 142 applies to the bank administration procedure a large number of the provisions of the Insolvency Act 1986, including, with modifications, Section 135. This allows for the appointment by the court of an insolvency practitioner as provisional bank liquidator between the submission of a bank administration application and the making of a bank administration order.
To provide consistency with the existing insolvency legislation, the amendment additionally applies certain provisions of Section 172 of the Insolvency Act 1986 which mean that a provisional bank liquidator can be removed by an order of the court and that a provisional bank administrator must vacate office if he or she ceases to be qualified to act as an insolvency practitioner. These are sensible provisions to adopt. Table 2 also applies, with modification, Section 178 of the Insolvency Act 1986 to the bank administration procedure.This gives a bank administrator the power to disclaim onerous property.
To make sure that the power to disclaim onerous property can work in practice in the bank administration procedure and to allow others who may be affected by the issue of disclaimer to claim an interest in such property, Amendment 142 also applies, without modification, Sections 179 to 182 of the Insolvency Act 1986. These sections deal with important aspects relating to the power to disclaim onerous property and should have been applied at an earlier stage in the Bill but were regrettably overlooked. I ask noble Lords accept these minor and technical amendments.
Amendment 140 agreed.
Clause 135, as amended, agreed.
Clauses 136 to 141 agreed.
Clause 142 : General powers, duties and effect
Amendments 141 and 142
Moved by Lord Myners
141: Clause 142, page 77, line 49, at end insert—
|"(h) Section 172(1), (2) and (5) apply to a provisional bank administrator."|
142: Clause 142, page 78, line 31, at end insert—
|"Section 179||Disclaimer of leaseholds|
|Section 180||Land subject to rentcharge|
|Section 181||Disclaimer: powers of court|
Amendments 141 and 142 agreed.
Clause 142, as amended, agreed.
Clauses 143 to 148 agreed.
Clause 149 : Property transfer from temporary public ownership
Amendments 143 and 144
Moved by Lord Myners
143: Clause 149, page 82, line 36, after "bank" insert "(or a bank's holding company)"
144: Clause 149, page 82, line 38, after "bank" insert "(or from another bank which is or was in the same group as the bank)"
Amendments 143 and 144 agreed.
Clause 149, as amended, agreed.
Clauses 150 to 164 agreed.
Moved by Lord Wedderburn of Charlton
145: After Clause 164, insert the following new Clause—
"164A Remuneration committee
(1) The Treasury may by order (a "remuneration order") make provision concerning a remuneration committee in consequence of and in furtherance of this Part and of Part 1 of this Act.
(2) An order under this section—
(a) shall be made by statutory instrument, and
(b) may not be made unless a draft has been laid before and approved by a resolution of each House of Parliament.
(3) Before making a remuneration order, the Treasury shall consult—
(a) the FSA, and
(b) the Bank of England.
(4) A remuneration order may amend or modify the effect of an enactment passed before the commencement of this Act.
(5) A remuneration order shall enable the Treasury to appoint a person (with his consent) to sit as a full member of the remuneration committee of a bank, notwithstanding any provision in its constitution.
(6) Any person appointed under this section shall enjoy the immunity of an agent under section 234(2)(a) of this Act, save for the general duties of a director under Chapters 2 and 3 of Part 10 of the Companies Act 2006.
(7) In this section, "remuneration committee" means—
(a) in the case of a quoted company, any committee or body which prepares or drafts a remuneration report under sections 420 and 421 of the Companies Act 2006 (duty to prepare, and contents of, directors' remuneration report) intended to be presented to the shareholders' meeting as the directors' remuneration report under section 439 of that Act (quoted companies: members' approval of directors' remuneration report);
(b) in the case of an unquoted bank, any committee or other body which prepares such similar information and material regarding remuneration as shall be specified by the order;
(c) in the absence of any such committee or body, the board of directors itself."
I have been advised that it is procedurally proper for me to move the amendment even though my noble friend Lady Turner spoke most persuasively to it in moving Amendment 38, as did my noble friend Lord Borrie and, with some qualification, the noble Lord, Lord Newby, who adverted to it favourably. Indeed, the Minister said that he spoke against it with some qualification, and even mentioned that other members of the Front Bench were not unfavourably disposed towards it. I add—without breaching the normal conventions of the Committee—that Members of the House of Lords on all sides have mentioned to me how favourably they see the merits of the amendment, which would give the Treasury the power to appoint a person to the remuneration committee which normally provides the proposals for remuneration, in the broadest sense, of directors of banks and companies.
The history of this matter was not adverted to during previous discussion on the amendment, when I was unable to be in Committee for medical reasons. We are not discussing cardboard figures. We are discussing directors and top executives, who have the genes of their predecessors, because of the errors that were made in irresponsible business models, and the outlook and behaviour that has been so scandalous in the continual rise of top executives' pay in companies and banks throughout the system.
When I wrote on this matter in 2003, I was amazed to find the multiples by which directors' pay had exceeded the pay of others employed by banks and other companies. That fact deserves to be mentioned in the Bill. It is a Bill about banks, but banks do not do anything; bankers do things. Banks are an abstraction. If nothing is said in the Bill about the way in which the remuneration of top executives has exceeded the most depressed feelings of commentators, it will be noticed by those who look to this House and the other place to defend their interests. The matter has been mentioned in the most authoritative textbook on company law, by Professor Gower, edited by Mr Davies. It states that the remuneration committees represent,
"a classic case where the risk of mutual backscratching arises: directors may not scrutinise too closely the remuneration of a fellow director in the expectation of similar treatment when their cases are considered".
The key to that is that directors sit as non-executive directors on a multiplicity of companies, which gives rise to that phenomenon. It is no answer to the simple proposition I mentioned to invoke the plea that my noble friend Lady Ford invoked on the previous occasion at col. 1270 of Hansard, when she said that she refused to recognise the description of the noble Lord, Lord Newby, of the "charmed circle" that constitutes the membership of these committees being the basic reason for the phenomenon. Unless something is said in the Bill, it will be presumed that this House and another place do not care about that phenomenon, and that a Banking Bill can be put through without bothering about that history.
The Minister said that he thought it was not necessary to add anything to the Bill to bring about the result I am discussing. My noble friend Lord Borrie, who supported the amendment, said that it was a "modest" amendment in the context of what had happened. The noble Lord, Lord Newby, said that there was a "general problem" of directors paying themselves excessively, even when the relevant enterprise underperformed. He is right. Therefore, I ask the Minister to accept that some noble Lords on the Front Bench were right to agree that this amendment is needed. The Bill needs to say something explicit about the phenomenon and what is to be done about it. If there is no intervention of the public interest voice in remuneration committee proposals, there is no way—this has been shown clearly—of preventing this phenomenon building and feeding upon itself and entering the same old spiral next time round. My noble friend Lord Borrie said that it was a most modest amendment in the light of the scandalous behaviour that had taken place.
The aim of my noble friends in government—in the face of what might be called industrial action by bankers in not lending even to one another in an excess of modesty and not lending to enterprises of small, medium and even large business, when that is the normal function of banking—must be to point out that the record in the rapacious activity of top executives of banks and of other companies is such that the Bill must explicitly make a point of pointing the way to prevention rather than cure. Once the remuneration committee has proposed the requirements which in the Companies Act are required for a quoted company—the amendment would apply whether or not a company was quoted—it is impossible for anyone to intervene to prevent the spiral getting started again. Even in quoted companies, the shareholder's vote is merely advisory. I formally move Amendment 145, in the hope that the Minister can give us some more beneficial advice on the matter.
I put my name to the amendment, although I referred to it in speaking to the paving amendment on the previous occasion. My noble friend Lord Wedderburn drafted the amendment and was anxious to be able to speak to it.
These are not ordinary times; we are facing possible disaster. I speak as an ordinary depositor and, as such, I really am afraid. The media stories scare me; I want the protection of the Government. For that reason, I support the Bill. Many people feel as I do; one has only to read the correspondence in newspapers to see the sort of comments that people are making: "What should I do? Should I take out all my money? Should I leave it under the mattress?", and so on. It is essential that confidence be restored, and I support what the Government are doing, but public money should mean public accountability, as I said on a previous occasion.
The amendment, which is a reasonable one and which is very modest, as my noble friend said, endeavours to meet the criticisms that have been made from time to time about the very large sums that have been paid to senior executives, sometimes in situations where they are responsible for the decisions that have landed us in the problems that we now face. A number of people are going to be hurt by this crisis, including the depositors whose interests will be diminished, down to zero possibly. They will lose money that they had been saving for their retirement and they will not be able to replace it. Then there are employees who will become unemployed.
In those circumstances, it is not reasonable for people to be seen to be walking away with very large sums of money. The amendment is modest, and I hope that the Government will be prepared to consider it, in view of the explanation that has been given by my noble friend in support of it.
I do not think that there can be any doubt that there is very widespread public concern about the way in which many of those who have been responsible, on bank boards and elsewhere, for the situation in which we now find ourselves have been in receipt of very great remuneration indeed. The amendment proposed by the noble Lord, Lord Wedderburn, reflects the public concern that is felt outside.
I suppose when the history of this period is written, there will be analysis of how this situation came about. I do not think that there can be any doubt that, in particular, institutional shareholders have perhaps not exercised as much influence as they may, particularly in pension funds and others. The situation has been largely uncontrolled, for the reason that the noble Lord mentioned, particularly with regard to interlocking directorships and so on.
This seems to be an appropriate amendment for us to consider, but, as the noble Lord has said, it is very modest, given that it only proposes the appointment of a director on the remuneration committee. That would certainly not give that person a decisive voice in any sense, although it may be influential. It is not at all clear what would happen if, having made his views known to the effect that remuneration might be excessive, his advice was ignored. None the less, the amendment is a step in the right direction and the noble Lord is right to say that, while the vast bulk of the Bill is concerned with highly technical and extremely important issues, it would be wrong for this aspect of the matter not to be considered.
Perhaps I may ask the noble Lord whether he realises how much I value his experienced view on this extraordinary phenomenon in our social life and how right he is that a public voice on the remuneration committee would not be the same as a veto. Nevertheless, a public voice speaking in the public interest on the remuneration committee would draw to the public's attention the way in which a company's organs decide on the matter and would do a great deal to enhance the confidence of people who, without such an expressive amendment, would not have the confidence that my noble friends on the Front Bench and I would want the public to have in our Labour Government, which is the only Administration likely to deal at all with this problem.
I do not intend to repeat the speech that I made before, but the big issue that the amendment raises about excessive remuneration is not confined to any bank that might virtually collapse and be brought into this regime. It is a common problem. The big issue that is being discussed in the City by a number of investor bodies is how shareholder power can be brought to bear against boards that make excessive payments. We had an early example of this a few days ago with Bellway, when a resolution was passed at the AGM voting down remuneration packages. Whatever you do in terms of the occasional bank that may come under the ambit of the Bill, the key thing is to bear down on excessive remuneration across the board. We are beginning to see a shareholder revolt. That will be the only way in which there will be more sensible levels of remuneration among the spread of businesses across the sectors.
I am certainly not unsympathetic to the concerns that lie behind the amendment. However, without trying to scotch the amendment in any sense, I point out that this is an exceedingly difficult process to provide for by statute. An amendment such as this would not function along the lines that its sponsors would like to see. As has been pointed out, there can be some public interest appointment to a remuneration committee but, if there is no statutory back-up to what that person does or how the remuneration committee acts in the light of the contribution from that source, the chances of the amendment being converted into the sort of action that its sponsors would like to see are not very great. I do not say that in a negative sense at all. I say it merely to point out that, in terms of corporate governance and process, it is an immensely complicated business to provide the sort of outcome that is sought. However, I would not wish to discourage people from working at it and, in either this or another context, coming up with something that is a little more likely to be effective in practice.
I am very pleased to see that my noble friend's health has improved and that he is here to speak to his amendment. He has no doubt read Hansard. I think that he would have greatly enjoyed the discussion that we had last Wednesday. It was lively and well informed, and it reflected a sincere interest in the subject, as well as some relief from the tedium and detail of other parts of the Bill.
I do not intend to deal with this matter in great detail now, as time is pressing and the arguments have already been presented to the Committee. A number of noble Lords spoke to the amendment in our earlier session, raising important points about a range of issues, including the role of non-executive directors and other matters.
I made three points in response to my noble friend Lady Turner and I shall set them out again briefly for the record. First, where the temporary public ownership or bridge bank tool has been used, the Government already have substantial powers in the Bill over executive remuneration. It is therefore not necessary to have an explicit provision in the Bill empowering the Treasury to appoint to a remuneration or similar committee.
Secondly, where a bank is privately owned, remuneration is a matter for the bank itself; I shall return to that in a moment. Generally speaking, pay for directors and employees must be a matter for the banks in question, as it is for any company. This applies where the private sector purchaser/stabilisation option has been used. I should add that, as the regulator, the FSA has said that it will take remuneration structures into account in its risk assessments of financial institutions with, to quote its words, "increased intensity". I commend and support that decision by the FSA.
Thirdly, where a bank is in receipt of considerable public funds, these come with conditions attached, including over executive remuneration. The banks that are participating in the recapitalisation scheme have agreed to restricted remuneration for senior executives both for 2008, for which the Government expect no cash bonuses to be paid to board members, and for remuneration policy going forward. The statement on the Government's asset protection scheme, which the Chancellor of the Exchequer published yesterday, makes it clear that conditions will apply to the scheme, including in relation to remuneration policy.
My noble friend alerts the Committee to important concerns about executive remuneration. There is no obvious reason why the remuneration of the highest paid appears to have grown at such a fast rate compared with that of other people in corporations. It is not evident that there has been either a diminution of talent, which would be seen as a supply constraint, or an increase in demand. Therefore, it is right that the scepticism expressed by my noble friend about the processes by which decisions are made should be expressed in the pursuit of understanding. There is a risk that, to some extent, we have ownerless corporations in which decisions about remuneration are made in a vacuum because of the failure of the owners or their fiduciaries, the institutional investors, fully and properly to engage on issues of remuneration.
I have spoken on this subject in other venues. I have engaged with institutional investors and put the challenge to them that the very difficult situation that our banks are experiencing, along with banks elsewhere in the world, must raise some questions about the responsibilities of the owners. I ask my noble friends Lord Wedderburn and Lady Turner of Camden to draw some strength from the fact that views are being expressed in the Committee that are consistent with the anxieties that lie at the heart of the amendment. However, I do not think that this Bill is the right place to pursue this matter.
My noble friend Lady Turner said that she was scared. I would like to reassure her that, as a retail depositor with a British bank, she can, I believe, feel secure that our commitment to maintain the stability of the British banking system means that her anxiety should not trouble her greatly. The actions that we have taken are designed precisely to ensure confidence in the stability of the banking system and to ensure that retail depositors do not feel scared. I urge the noble Lord to withdraw his amendment.
I am grateful to those who have spoken to the amendment and I am grateful to the Minister. One thing that my research in the area of company law, which includes banks, has shown since I began it in 1958 is that the owners, as the Minister calls them, are quite incapable of adequately restraining the demands of top executives in our banking and company structures. That has to be approached by adequate regulation. The one area that the Government and others have always refused to put within regulation is the pay and remuneration of those responsible for many of the irresponsible business models that have brought us to the crisis alluded to by my noble friend Lady Turner of Camden.
It is quite wrong to say that this Bill is not the place to bring up the problem. This Bill is the place because it is the Bill that is before the House and it is the Bill that is in the public mind. The public, who affect the figures of the opinion polls, will be the first to notice if no explicit mention is made in the Bill of the problem that they know exists and which they know has been part of the problem: people granting to themselves particular rewards for inexplicably absurd and irresponsible behaviour. If my noble friends on the Front Bench and my right honourable and honourable friends in another place want the opinion polls to respond well to this legislation and other legislation like it, they have to put a clause into the Bill explicitly to deal with the problem. I am grateful to the Minister for what he has said about the merits of the amendment and its objectives, but I hope that he will respond more favourably on Report than he has in Committee.
Amendment 145 withdrawn.
Clause 165 agreed.
Amendments 146 to 156 not moved.
Clause 166 agreed.
Amendment 157 had been withdrawn from the Marshalled List.
Moved by Baroness Noakes
158: Before Clause 167, insert the following new Clause—
After section 213 of the Financial Services and Markets Act 2000 (compensation scheme) insert—
"213B Compensation payable to depositors
(1) Each depositor will be entitled to receive from the scheme manager in respect of each bank brand a sum which is the lower of—
(a) the deposit protection amount; and
(b) their gross balance held by the person.
(2) The "deposit protection amount" is £50,000.
(3) The Treasury may by order amend the figure in subsection (2).
(4) The Treasury may by order either in general or specifically determine what constitutes a bank brand.
(5) An order under this section may not be made unless a draft statutory instrument containing such an order has been laid before, and approved by a resolution of, each House of Parliament.""
We are making phenomenal progress. We have now reached Part 4, which concerns the Financial Services Compensation Scheme. We have several topics to debate, although perhaps not all this evening.
Amendment 158 would insert a new clause before Clause 167. The new clause would set out in statute what compensation should be paid to depositors under the deposit protection scheme. There are two elements to the proposed new clause. First, it sets out that the compensation limit is to be increased to £50,000 and that the amount may be amended by the Treasury by order. At present, the power to set the compensation limit is set by the FSA. During autumn 2007, the FSA was slow to respond to calls, notably from my party, to increase the compensation limit to £50,000. There are of course arguments for increasing it even further, given that there is a substantial minority of private depositors who account for a disproportionate amount of total deposits, although I will stick with the current limit of £50,000, on which there is some agreement.
The Minister may say that the FSA can do it, so why should we put it in the Bill? I have a simple answer to that. The decision to increase the limit is as much political as technical, as the events of the past 18 months have shown. A political decision should be made by the Government and put to Parliament for approval. It was wrong that Parliament was completely on the sidelines in that debate and that the Government were not in the driving seat, if I may mix my metaphors. Although the FSA can currently do it, that is the wrong location for the power, as recent history has shown.
The second and important element of my amendment relates to deposits being calculated on a bank brand basis. At present, the Financial Services Compensation Scheme relates only to legal entities, so if a depositor holds a deposit in more than one bank in a group, his compensation limit is restricted to the one limit of £50,000. A depositor who investigates the legal ownership of banks can work out that he needs to spread his money around to avoid legal groupings, but many investors are not that sophisticated. Recent events, such as Lloyds TSB and HBOS, Bradford & Bingley and Abbey/Santander have restricted the number of legal groups, although not the number of brands.
Consumer groups, led by Citizens Advice and Which?, are firm in their view that the scheme should operate on a brand basis. I hope that the Minister can agree. I should say that my amendment would probably need further refinement to be clear what is meant by a "bank brand", so for the purposes of today's debate my amendment is probing, but I hope that the Minister will respond positively so that we can at least deal with this aspect when we come back on Report. I beg to move.
I am grateful to the noble Baroness for tabling the amendment because it covers in part issues that we proposed to raise in debate on Clause 171 stand part. There was a question about where to put our focus in dealing with the compensation scheme. We should perhaps have grouped our amendment with this one.
I agree with several aspects of the amendment. First, I absolutely agree with the noble Baroness that this should be a matter not for the FSA but for Parliament. The FSA was dilatory beyond measure in increasing the limit to £50,000. It seemed that the Treasury either could not or would not exercise much influence on it to do that. We also agree with the principle that the £50,000 should apply to a brand. Given that there is such a concentration of ownership now and so many brands, I wonder how many people realise exactly which brand is owned by which bank.
The FSA's view on compensating by brand is slightly odd in that it seems to accept the principle of doing this, but claims that amendments to the deposit guarantee schemes directive mean that a fully harmonised approach to the level of coverage is likely to be imposed across the EU, which would rule out such a change. It goes on to say that it will return to the topic should there by any changes to the EU legislative framework. We are rather surprised by this, because the directive simply requires the European Commission to report on harmonisation by the end of this year. No proposals have been made, and the consultation on the matter has yet to be published. The FSA needs at this point simply to get on with it, stand up for UK consumers, make the necessary changes now, and then lobby for them to be allowed under any new rules that may emerge from the EU in the future.
Two other issues arise from the compensation scheme, which I wanted to refer to in the Clause 171 stand part debate. I suggest that, given the lateness of the hour, I will do so at that point.
Part 4 makes a number of changes to Part XV of the Financial Services and Markets Act 2000, which provides the legal framework for the Financial Services Compensation Scheme. That framework also allows the Financial Services Authority to deal, in its rules, with most features of the compensation scheme.
As described by the noble Baroness, the amendment would put the headline compensation limit into the Financial Services and Markets Act 2000 on a per brand basis and would allow that limit to be changed by the Treasury in an order made under the affirmative procedure. It would also allow the Treasury to define by order what constituted a bank brand. The FSA's rules can already deal with these matters. Indeed, the FSA has recently published a consultation paper, which discusses, among other matters, paying compensation on a per authorised entity or a per trading-name basis.
The effect of the amendment would not be desirable. The FSA rule-making procedures are better suited for making such changes. As was demonstrated in September 2007 and October 2008, FSA rule-making procedures need not be a barrier to making rapid changes to the Financial Services Compensation Scheme rules, which the affirmative procedure clearly would be. It is also worth recalling that the Financial Services Compensation Scheme is also responsible for compensating insurance policyholders and customers of investment firms when these businesses are in default and unable to pay claims. It would be rather inappropriate simply to put matters relating to deposit-taking in the primary legislation.
When the FSA announced an increase in the deposit compensation limit last October, it also launched a consultation exercise on the compensation limits in other areas, so there is real merit in allowing the FSA to follow a consistent and co-ordinated approach across a broad range of financial products. That is particularly important, given the essential mutualisation that lies behind the funding of this scheme.
Part 4 therefore covers only the matters that cannot be dealt with under the existing provisions in the Financial Services and Markets Act. The changes in this part therefore need to be considered alongside other changes that are proposed for the scheme. As I said, the FSA is consulting on changes that can be made under the FSMA. As well as further discussion about providing protection by trading name or brand, the consultation includes discussion of the proposals for a move to gross compensation payment, proposals for simplifying eligibility criteria proposals for placing information requirements on firms to ensure that there can be a single customer view, and proposals for improving consumer awareness.
Last October, as well as raising the headline limit for deposit compensation to £50,000, the FSA announced consultation on dealing with temporary high balances, on changes to the way in which recoveries from a failed firm are calculated, and on the compensation limits for other types of investment. Part 4 should be, and is, limited to making those changes to the overall framework in which the Financial Services Compensation Scheme operates that only primary legislation can do.
Members of the Committee should rest assured that there is plenty more going on at the right levels to improve the arrangements for depositor protection in the UK. It would be neither sensible nor desirable to cherry-pick certain items and highlight them in the way proposed. I therefore ask the noble Baroness to withdraw the amendment, and, if it is pushed to a vote, I ask your Lordships to reject it.
The Minister will not be aware that he is entering my favourite time of night for seeking the opinion of the Committee, but I want to put his mind at rest that I shall not be doing so tonight. He has resisted our perfectly reasonable amendments, which were based on the premise that these are political issues which should be in the hands of Parliament and not within the hands of the FSA. I do not think he has really answered that point. In fact, he said that the affirmative procedure would be a barrier. I do not think that the Government of the day have ever found the affirmative procedure to be a significant barrier.
The other points he raised were about other matters and not about the deposit protection scheme. But it is the deposit protection scheme about which there is so much interest. I do not have any fundamental problems with leaving the FSA to deal with those aspects of the compensation scheme that are not about deposit protection. But, in the public mind, as we have known over the past year and a half, deposit protection is extremely important and hugely confusing to people, as we first found out around the original definition of partial loss sharing and the lower limit.
I do not think that the Minister has answered our points on this issue and I think that we will want to return to it in some form on Report. This probably goes to the heart of one of the most important areas of how the Financial Services Compensation Scheme will work for people, which is an issue for Parliament to determine. I beg leave to withdraw the amendment.
Amendment 158 withdrawn.
Amendment 158A had been withdrawn from the Marshalled List.
Clause 167 : Contingency funding
Moved by Baroness Noakes
158B: Clause 167, page 88, line 28, leave out from first "the" to end of line 29 and insert "contributions payable by banks and building societies"
In moving Amendment 158B, I shall speak also to Amendments 158C, 158D and 162B. The first three of these amendments amend Clause 167 and the last amends Clause 170. These arrangements ensure that the contingency funding arrangements for the Financial Services Compensation Scheme are confined to banks and building societies. As the Minister has just said in response to the previous amendment, the compensation scheme covers many other kinds of financial service provider. Those which are not banks and buildings societies are extremely concerned to ensure that they do not get called on to pay compensation in respect of failed banks and building societies. They are extremely concerned about having to pick up part of the tab from the current slew of compensation being processed through the Financial Services Compensation Scheme. They are doubly concerned at the possibility that they might have to pay in advance of any compensation payments in order to the allow the FSCS to build up a contingency fund.
This is a position of basic equity as between different financial products and service providers. The costs of the Financial Services Compensation Scheme are inevitably borne, ultimately, by customers, but they might initially be paid for by service providers. What is the justification for requiring the customers of, say, insurance or investment management products to bear the costs of bank failure? It goes without saying that the ABI and the IMA have concerns with this, as do other groups of financial service provider which are within the net of the Financial Services Compensation Scheme. I beg to move.
As the Committee will be aware, the principal function of the FSCS is to pay compensation to eligible complainants if financial services firms are in default and unable to meet claims. The Banking Bill will also allow the scheme to contribute to the costs of the special resolution regime, which we will debate later. But to do these things, funds are needed, and it is clear that under the current pay-as-you-go model of the FSCS, if a very large firm went into default—say a bank or building society—the scheme could not realistically levy sufficient moneys from the industry or raise funds by borrowing in the ordinary way from commercial sources. Two solutions have been put forward for the problem: borrowing money from the Government to be paid back through future levy payments, or building up funds in advance.
The FSCS is already able to borrow from the Government, and as I shall describe later, the Bill makes provision to make government borrowing administratively more efficient. However, Clause 167 allows for the second of the solutions, the setting up of contingency funds in advance of need, through a process commonly known as pre-funding. That is the issue before us. The Government know that now is not the right time to introduce pre-funding. My noble friend Lord Myners at Second Reading, my right honourable friend the Chancellor of the Exchequer at Second Reading in the other place, and my honourable friend the Economic Secretary to the Treasury at every stage of the Bill in the other place, have all made it quite clear that we do not propose to introduce pre-funding at this time.
Amendments 158B and 158C would ensure that levies to build up contingency funds could be collected only from banks and building societies, and in combination with Amendment 159D, which as the noble Baroness has explained is intended to prevent cross-subsidisation within the FSCS, the overall effect would be that contingency funds built up through pre-funding could be used only to meet the expenses arising from the failure of banks and building societies. A further effect of Amendment 159D might be that there would have to be separate contingency funds for banks and for building societies. This looks inflexible to us and is therefore unnecessary and undesirable. The Bill already allows for different funds to be established for different purposes, and for different persons to contribute to the different funds. We place great emphasis on this flexibility and we have no intention of bringing forward pre-funding in the near future. The time is clearly not right, nor would it be appropriate to speculate on when it would be right. We do not know what changes the future may bring and therefore we need flexibility.
In the future, the nature and structure of the financial services industry may be completely different, and we have all become accustomed to rapid change in this sector. We should not tie down our options in primary legislation which may become outdated in two, five or 10 years' time. Future problems, should they arise, may be confined to banks and building societies, but equally they may not. As I have said, Clause 167 already allows for the creation of more than one fund. It is therefore possible to bring in contingency funds for one type of financial services firm built up with levies raised from that type of firm and not for other types. There could be separate funds for banks and building societies, but I do not see why we should set out to prejudge the issue now.
The Bill confers a flexible power to bring in pre-funding at the right time and in the right way. This flexibility would be exercised subject to full parliamentary scrutiny. The necessary statutory instruments will have to be laid in draft and debated in both Houses before they are made. There would be consultation beforehand involving the Bank of England, the Financial Services Authority, the Financial Services Compensation Scheme and the industries concerned before any such regulations were drafted.
I turn now to Amendment 162B. Clause 170 allows the public sector to make loans to the FSCS in what is administratively the most efficient way, by making loans from the National Loans Fund. The amendment would have the effect of restricting those firms which could be called on to contribute towards the cost of repaying loans from the National Loans Fund to banks and building societies. However, any type of firm could be in default, and loans from the National Loans Fund might be needed to finance the compensation payable. Flexibility is also important in this area and we should not tie our hands too much when we cannot anticipate what future circumstances might arise.
I hope, therefore, that the noble Baroness will accept that the Government have drafted the clause on the basis of the necessary flexibility and that she will not press the amendment.
I thank the Minister for his response to the amendments. I will not get into whether or not the affirmative procedure is the best way of scrutinising a contingency funding arrangement if one is ever introduced. Let me just say for the time being that we do not think that it is.
This is a banking Bill that is being introduced in response to what has happened in banking. It is not an opportunity for the Government to completely rewrite the Financial Services Compensation Scheme, which is what they are doing. In so doing, under the guise of flexibility, they are exposing all kinds of financial services providers to the risk that the way in which pre-funding is introduced will operate adversely to them. That is what they are concerned about and they do not see why any of these changes should affect them. A case has not been made for pre-funding for insurance or even for banking, as has been strongly put forward by a number of individual and collective players in the banking industry. We know that the FSA and the Bank of England want to do this because they are on record as saying so. For the Minister to say that this is not the right time is disingenuous because we know that those parties will be waiting for the first lull in which to get it introduced.
But we can debate that later. For these purposes, if it is going to be introduced, it should be introduced for banks and building societies because that is where the problem that has led to this Bill has come from and not anything else. The Minister said at one stage that the problem with one of my amendments is that the banks and building societies might be treated separately. Perhaps they should be treated separately as the risk profile of banks and building societies is inevitably quite different given the different funding powers that they have, for example.
We will not get much further on the amendment tonight. I shall leave it by saying that I am wholly unconvinced by what the Minister has said in connection with this clause. We have a long way to go in our debates in Committee on the Financial Services Compensation Scheme and contingency funding, in particular, and I shall save further comments for later groups of amendments. I beg leave to withdraw the amendment.
Amendment 158B withdrawn.