Clause 5
Banking Bill
5:30 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
The code of practice in clause 5, which we have already referred to quite a bit today, is seen by third parties as an important part of the legislation, because it is one of the tools that would give the market comfort regarding how the powers in parts 1, 2 and 3 will be exercised. It is therefore important that the code gets it right and that there is sufficient guidance in it to enable people to predict reasonably well when and how the powers will be used. Subsection (2) of clause 5 sets out some of the guidance that will be included in the code. I will start by talking about my amendments, and then speak more generally about clauses 5 and 6 stand part.
My amendments aim to highlight some of the potential deficiencies in the code as currently drafted. Amendment No. 81 inserts some additional guidance on the context. It reads,
“how to determine whether the threshold conditions under section 41(1) of the Financial Services and Markets Act 2000 will be breached”.
The code, to be fair, refers to that. Paragraph 28 states:
“The FSA’s Handbook contains rules and guidance relevant to an authorised firm. In particular, within the FSA Handbook, the ‘COND’ Threshold Conditions contains rules and guidance on the threshold conditions. There are a range of conditions, including: legal status and location of offices; the adequacy of the firm’s resources (financial and non financial) in relation to the regulated activities which the firm carries on; and suitability issues (e.g. competent and prudent management, conducting business with integrity and in compliance with proper standards). These are set out in more detail in the FSA Handbook.”
I am not sure whether the code really provides the guidance that people need to determine whether the threshold conditions will be breached, or which threshold conditions in particular the Government are interested in. For example, one of the threshold conditions not referred to in paragraph 28 is the appointment of a claims representative. I do not know whether the breach of the appointment of a claims representative will trigger the special resolution regime. I hope it does not, but part of the problem is that we are left none the wiser in the code as to whether that is the case.
On the matter of the location of offices, I printed off the relevant section of the conditions handbook to see whether it might provide me with some more detail. It states that
“if the person concerned is a body corporate constituted under the law of any part of the United Kingdom...its head office, and...if it has a registered office, that office, must be in the United Kingdom.”
Would the fact that a FSA-regulated firm decides to change its head office and move out of the UK be sufficient to trigger the special resolution regime? It may be sufficient to remove its authorisation, but do we really want to go down the route of triggering the special resolution regime if a firm happens to change its head office?
The explanatory notes to condition 2.2 talk about how a firm’s head office might be defined. It is not defined in the Act apparently, nor in the post-BCCI directive, nor in the insurance mediation directive. The FSA handbook states:
“This is not necessarily the firm’s place of incorporation or the place where its business is wholly or mainly carried on. Although the FSA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control, that is, the location of: the directors and other senior management, who make decisions relating to the firm’s central direction, and the material management decisions of the firm on a day-to-day basis”.
I am not clear whether a breach of that threshold condition is sufficiently important for the stabilisation powers to be used. If it is important we need some guidance in the code to say why. Where the Government are coming from in the threshold conditions is not really about the location of the head office or the appointment of a claims representative—it is about the adequacy of resources. That, to my mind, is the sense of where the Government got to on Kaupthing and Heritable, but all that we know in the context of those two institutions is that the FSA judged that the threshold conditions had not been met. I do not know why the FSA made that judgment and the reason was not apparent from the Treasury’s press release on the topic.
If we are talking about adequate resources we should say so in the Bill and the code. We should give people some guidance in the code as to what it means if adequate resources rules have not been met because I think they are subjective terms. I shall give an example from the FSA’s online handbook:
“FSA will interpret the term adequate as meaning sufficient in terms of quantity, quality and availability, and resources as including all financial resources, non-financial resources and means of managing its resources; for example, capital, provisions against liabilities, holdings of or access to cash and other liquid assets, human resources and effective means by which to manage risks.”
That is a very subjective definition of the meaning of adequate resources. We do not necessarily want the FSA to be tied to a quantitative definition but we require some guidance in the code as to what the FSA would deem inadequate resources, to give a flavour of the sort of areas we are looking at. The code is currently deficient in not providing that detailed guidance, which is why I propose amendment No. 81.
On amendment No. 80, the current situation under subsection (4) is that the authorities must have regard to the code. I think the term “have regard to” is too weak. The authorities might read it, not be very interested, throw it away and not be bound by it, but it is a key part of the structure of this series of reforms and the code is seen by the outside world as an integral part of the package. Simply to “have regard to” the code is not strong enough to give the right degree of emphasis when bearing in mind the powers set out in part 1. That is why I have suggested in my amendment that the requirement should be on the tripartite authorities to comply with the code or publish an explanation of why they were unable to do so,
“in good time after their actions”.
Comply or explain is a term that is used quite often by businesses in their accounts. If something does not comply with the code, they explain why. I am suggesting that the same principle should be used in the provisions.
Some other omissions might be dealt with on a stand part basis. Paragraphs 2 to 13 of the code, which set out how the objectives in clause 4 are to be defined, do not go far enough in detail, although we have dealt with that point in the previous debate. Paragraph 29, on page 7 of the code, uses curious language that leads me to think—although I do not think this is the right interpretation—that the default tool for the Bank to exercise is the bank insolvency procedure. Paragraph 29 says:
“Under section 8 of the Act, the Bank may only exercise a resolution tool other than the bank insolvency procedure if satisfied that the exercise of the power is necessary”.
It is almost as if the Bank of England will start on the basis that it will exercise the bank insolvency procedure unless it thinks the powers in paragraph 8 that enable it to have a private sector purchaser or bridge bank are better. I assume that the default is private sector purchase, that the bridge bank is the second preferred option, and that temporary public ownership or the bank insolvency procedure rank further down the list of priorities.