New Clause 20
Banking Bill
12:00 pm

John Pugh (Shadow Minister, Treasury; Southport, Liberal Democrat)

I beg to move, that the clause be read a Second time.

In some ways, the new clause goes to the heart of the Bill, which is about remedies for rescuing banks. We all agree that collapsing banks are not a good thing, but it is possible that their collapse may not create a threat to the economy. There must be a reason for interfering in a bank’s misfortunes, and powers are being taken in the Bill to deal with those misfortunes, but for specific purposes.

One purpose might be that the bank is just too large to be allowed to fail, and its destiny may be the main or exclusive reason for worrying about it. More significantly, people talk about the interest not just of the bank, but of the economy beyond the bank and the various clients to whom it lends. Clearly, it is possible that when a bank is rescued it may recapitalise and save itself, and then punish its clients by calling in credit or issuing new loans—the reality is confronting us at the moment.  Anecdotal and real evidence suggests that the hardening of the banks’ stance has been simultaneous with the Government’s charity to them. What we do to recapitalise banks may not achieve the objectives that Governments have in mind, and the banks may act contrary to what the Government intend.

One solution employed by the Chancellor is simply to gather bankers together and give them a good telling off. Obviously, that public pillorying will have some effect, but it may not have a radical effect or the strength that people desire. It does not by itself create an obligation. It is simply a telling off.

New clause 20 would put into the Bill an explanation of what we have in mind when we capitalise a bank, which is that to some extent the recapitalisation process should coincide with wider economic stability. If the banks receive help they must have regard to advice from the Treasury and thus do precisely what they are expected to do and what they are clearly not doing in many circumstances at present.

To give a personal critique of my own amendment, one might question whether it is tough enough because it does not create arrangements to monitor whether banks are doing what the Treasury thinks they should not be doing, nor does it create a series of penal sanctions if they fail to have regard to Treasury advice. When framing the new clause, which is entirely in place within the Bill, we were torn between two alternatives.

First, it is not a good idea for the Treasury to micro-manage the lending policy of all banks. We accept that. The Treasury, qualified though it is, is not party to all the commercial transactions that banks are involved in and ought not itself to run the banks day to day. Equally, there is clear and evident fear that something goes wrong if banks are left to their own devices. There are thus two unacceptable alternatives: micro-managing banks is bad but so is leaving them to their own devices.

The new clause tries to address both concerns as delicately as possible. One could point to the absence of sanctions and simply state in the Bill that banks can still ignore the advice just as they can ignore the Chancellor, although it is harder for them to do that. If the provision was in the legislation, it would be very much part of recapitalisation—it would be incorporated in the recapitalisation process. It would still be legally possible for banks to flout the law and to ignore the spirit of the law, but it would be harder to do if the Bill made perfectly explicit the basis on which they had received funds from the state in the first place.

I shall not press the new clause to a vote. I will listen to the Minister’s response and see if he can give a reason why we should not proceed with it. The proposal is an attempt to solve a genuine problem. A scheme will be enshrined in law; it has a definite political objective—to recapitalise banks in order to stabilise the economy—but nothing in the Bill obliges banks to consider the wider interests of the economy or to heed the advice of the Treasury, which allowed them to have the funds in the first place.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I am grateful to the hon. Member for Southport for tabling, speaking to and, to some extent, demolishing new clause 20.

John Pugh (Shadow Minister, Treasury; Southport, Liberal Democrat)

I pre-empted criticism.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I have some slightly different criticisms that the hon. Gentleman has not pre-empted. I appreciate that he tabled the new clause in a probing manner. Were he to press it to a vote we would not support it for one rather important reason. If it is necessary to raise issues of public policy, remuneration, lending or dividend policy in a bank that has been recapitalised, the place to do so is in the original agreement, be that the placing offer, the subscription agreement or whatever. It is appropriate to reach agreement at that point, rather than to claim subsequently, notwithstanding agreements that have been reached, that there is a provision that banks must have regard to Government policy, whatever it might be. That would create an enormous degree of uncertainty, make recapitalisation through the process the Government used last month very unattractive for banks and do nothing for the long-term situation. Those things should be addressed at the time recapitalisation is agreed, when there is agreement between the parties.

None the less, it is helpful that the new clause has been tabled and that we have an opportunity to debate it, because it highlights some of the Government’s difficulties in the area. When the announcement was made on 8 October and confirmed on 13 October, much was said about lending policies, for example, and about returning to 2007 levels. The Government appeared to be in a complete muddle about what that actually meant, so we and others pursued the matter and eventually reached the position that availability of loans would be at 2007 levels, but not the volume of loans. That certainly was not clear initially and the announcement was spun by the Prime Minister and the Chancellor to suggest that we would be forcing banks to lend at 2007 levels. We should at least have some clarity on that point.

This morning the Government published a written ministerial statement on the bank recapitalisation scheme, and three points are salient to new clause 20. Paragraph 3 states:

“If the Government is to provide capital, the issue will carry terms and conditions that appropriately reflect the financial commitment made by the taxpayer, including in relation to dividend policy, remuneration, lending policy and wider public policy issues.”

As I understand it, the statement relates to future recapitalisations and not to those that have already occurred. Reference was made in the statement to RBS, Lloyds and HBOS, which have already participated.

I do not know whether paragraph 3 is an admission that, in essence, with regard to previous recapitalisations, the Government have not properly addressed the wider public policy issues, and that the terms and conditions reached previously have not fully addressed that point—the issue the hon. Member for Southport sought to address. Do the Government feel that they sufficiently achieved their objectives in reaching terms and conditions with RBS, Lloyds and HBOS to enable them to achieve their wider public policy concerns? I detect an admission of failure in paragraph 3.

Paragraph 4 appears to indicate a change in policy on the price the Treasury is prepared to pay. Paragraph 5 is interesting because it appears to indicate a change of  approach for the coupon for preference shares. That has attracted a good deal of controversy, and concern that the level of 12 per cent. for the original recapitalisation was proving burdensome. The reference to “prevailing market conditions” suggests that the coupon may be at a somewhat lower level.

It might be helpful for the Committee if the Minister clarified precisely what the written ministerial statement is about in the context of debate about what has already occurred with regard to banks rescued under a recapitalisation scheme and whether the Government have sufficiently achieved their public policy objectives, particularly in the context of the confusion over lending. I am sure that the Committee would be grateful for further clarification from the Minister.

Ian Pearson (Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)

I understand that the purpose of the new clause is primarily to stimulate debate and probe the Government. Technically it would apply to the Banking (Special Provisions) Act 2008, the recent recapitalisation scheme and any stabilisation powers under the Bill, and would require them to have regard to any policy statement by the Treasury. Although banks will have regard to policy statements by the Treasury and other Departments, commercial institutions must be able to make decisions on a commercial basis.

If a bank gets into difficulties, the authorities will want to take action under the special resolution regime to preserve or enhance financial stability, or to protect public funds. We have recently taken such action, but it is not designed to replace normal commercial decision making. It would not be in the long-term interests of the sector or its consumers if the authorities were allowed to override all commercial decisions. I believe that we have the right mechanisms to ensure that the Government have sufficient influence as may be necessary in specific circumstances.

If we take a bank into temporary public ownership under the special provisions Act, we have the powers of a sole shareholder to exercise control over the company. An example of that is the competitive framework agreed between the Government and Northern Rock. Similar mechanisms will apply to banks taken into temporary public ownership or transferred to a bridge bank under the stabilisation powers in the Bill, and the Bill provides for further provisions regarding the management of banks under public control to be put into the code of practice.

We have the power to set the terms on which banks that have been recapitalised can obtain recapitalisation funding. As part of the recapitalisation, the Government have agreed a range of commitments with the banks supported by the recapitalisation scheme. The hon. Member for South-West Hertfordshire seemed to suggest that it had been a muddle. I entirely refute that. He will be aware of the conditions that have been imposed on banks accessing the recapitalisation scheme—those conditions have been published. It is important that over the next three years banks maintain the availability of competitively priced lending to home owners and small businesses at 2007 levels, and actively market it. The hon. Gentleman will also be aware of the conditionality on the remuneration of senior executives, the support for schemes to help those struggling with mortgage payments to stay in their homes, and the right for the  Government to agree with boards both the appointment of new independent non-executive directors and the dividend policy, which was also part of the conditionality.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

There are conflicting reports about the dividend policy. The written ministerial statement says that the completed documents are available in the Library. Will it not be possible to redeem preference shares until after five years, and will dividends not be payable on ordinary shares until the preference shares have been addressed?

Ian Pearson (Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)

I do not have an immediate answer. I understand that dividends cannot be paid until the preference shares have been paid off. I think that for tier 1 capital purposes, preference shares have to be held for five years. Presumably, it would be up to the banks to come back with a refinancing arrangement that would be acceptable to the Government. However, I imagine that we would have no objection if preference shares were paid off earlier, as long as adequate tier 1 capital was available in the banks concerned. I shall consider the point that the hon. Gentleman has raised, however, and if I can provide further clarification, I shall.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I intervened partly to enable the Minister to provide that further clarification. I asked the question because there have been conflicting reports, and the uncertainty is not helpful. If the Minister can provide clarity this morning, it will be welcome.

Ian Pearson (Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)

I am not sure that I can provide further clarification this morning, but I shall bear in mind the hon. Gentleman’s comments and see whether I can provide it very soon. As I said, my understanding is that normally preference shares should be held for five years, and that has been agreed. Future transactions might take place whereby somebody could take over the preference shares and ensure sufficient tier 1 capital. However, I shall get back to the hon. Gentleman about that.

The recapitalisations that have been taking place and have already been announced are consistent with paragraph 3 of the written ministerial statement to which the hon. Gentleman referred. I have just received some helpful clarification from officials who confirm what I was saying: the Treasury will permit and, indeed, encourage early repayment of the preference shares it holds at a price equal to 101 per cent. of par during the first six months following closing and funding of the equity offer, and thereafter at a price to be negotiated based on prevailing market conditions. Such repayment would be subject to FSA approval. I hope that provides the hon. Gentleman with clarification.

As Members will be aware, the Chancellor recently announced the creation of United Kingdom Financial Investments Ltd—UKFI—to manage the Government’s interests in the recapitalised banks and, in due course, Northern Rock and Bradford & Bingley. He reconfirmed our commitment to managing the Government’s investments on a commercial, arm’s length basis and not to interfere with day-to-day management decisions.  The mechanisms that we have put in place ensure that the relationship between the banks and the Treasury is appropriate for the conditions in which we find ourselves.

I hope that the hon. Member for Southport will find my answers sufficient for him not to press new clause 20 to a Division, but if he does, I invite my hon. Friends to vote against it.

John Pugh (Shadow Minister, Treasury; Southport, Liberal Democrat)

I hope I did not give the impression that I moved the new clause simply as a debating point. We are in a serious situation. How often do we hear, during Treasury questions and on other such occasions, that the banks are not passing on the money to those who ought to get it, including businesses that require credit lines to remain open? We all know that we need to do something about the situation. Clearly, a simple telling-off from the Chancellor will not be sufficient. The toolkit that Ministers have outlined is not working, otherwise the telling-off would not have been necessary, so we need to find other measures.

I was suggesting a light-touch but flexible measure. Perhaps it is too light, but it certainly allows for flexibility in legislation. That was what I was thinking of when I framed it in that way, rather than the suggestion from Conservative Members that the agreement gets hammered out at the start, so that the banks know exactly what the legal conditions on their future lending policy are. I am attracted to that alternative, but there is a weakness in it.

We are talking about emergency situations in which bankers who have moved serious sums of money need a reasonable view of where the future of their bank lies. If there is protracted negotiation not only about the sum being lent to them, but about what they are to do with every pound that they are given, that might lead to the bank failing because the process is not concluded in time.

There might be a cross between the Conservative suggestion and my proposal that enables us to amend the legislation earlier, so that we can incorporate economic objectives more rigidly and more formally into the legislation. However, there is a vacuum and, therefore, a clear need to do something. Having heard a critique of my new clause and the suggestion that it may need toughening up, I shall go away and think about how it could be toughened up.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

Is the hon. Gentleman not worried that his new clause, even without toughening up, would create such uncertainty that banks would try even harder not to accept Government funds and, as Barclays Bank has done, seek finance from alternative sources? That is the route that the hon. Member for Twickenham (Dr. Cable) was so cross about.

John Pugh (Shadow Minister, Treasury; Southport, Liberal Democrat)

That would be a concern if every bit of Treasury advice on every subject that crossed the Chancellor’s mind had been incorporated and taken into account by the banks. The new clause says

“for the purposes of this section”.

That means strictly for the purpose of recapitalisation. There would not be uncertainty because decrees could be issued on interest rates and so on. As long as we narrow the scope of the Treasury advice that is relevant to the legislation, we can produce an improved new  clause which, I hope, Members will see on Report. For now, I beg to ask leave to withdraw the motion.

Ian Pearson (Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)

On a point of order, Mr. Gale, I wish to thank you, Mr. Hood and Mr. Illsley for the excellent and expeditious way in which you have chaired the Committee. I also thank the Clerks, Mr. Sandall and Mr. Hillyard, for their contribution. I thank the hon. Members for South-West Hertfordshire and for Fareham, from the official Opposition, for the constructive way in which they dealt with proceedings. I also thank the hon. Members for Southport and for South-East Cornwall, from the Liberal Democrats, for the way in which they presented their proposed amendments. I thank my colleagues and all members of the Committee for the 17 sittings that we have undertaken to scrutinise the Bill.

The Bill is an important piece of legislation and it is right that it has undergone such thorough scrutiny over recent weeks. As we progress to Report, I believe we have improved the Bill where necessary. In the light of some of the contributions made during these proceedings, I have endeavoured to think again, and Government amendments will be tabled on Report to reflect the debates in Committee. It simply remains for me to thank you and your colleagues again, Mr. Gale. I wish the Bill well as it moves forward.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

Further to that point of order, Mr. Gale. I join the Minister in thanking you, and your co-Chairmen, Mr. Hood and Mr. Illsley, for the way in which you have supervised our proceedings over the 17 meetings. I am sorry that we have not made the 18th this afternoon, although that might be a relief to all those involved. I also thank the Clerks, Mr. Sandall and Mr. Hillyard, for their help, on which Opposition Members rely in order to get amendments into a form capable of being debated.

This is the first time that I have taken part in a Bill with evidence taken at the start. One of the joys of being Treasury spokesman is that one misses out on such things on the Finance Bill. The evidence session helped to set the framework for debate in Committee and highlighted some of the important issues, which we were then able to discuss.

As well as thanking my hon. Friends for their work, I want to highlight the extent to which the Committee  benefited from the expertise brought by the four members of the Treasury Committee, who have wrestled with the issue for 18 months and continue to do so. Their expertise, interest and experience contributed enormously to the proceedings. The Minister and the Exchequer Secretary engaged in extremely constructive debate. The Minister shed light on the operation of the Bill and we have taken away thoughts that we will seek to explore again on Report. It has been a constructive process. I know from talking to outside parties that they appreciated the efforts of the Committee and the Minister in particular to set out in detail how the Bill will work in practice.

John Pugh (Shadow Minister, Treasury; Southport, Liberal Democrat)

When selected to serve on the Committee, I thought the Bill might be dull. It has not always been fascinating, but it has been highly technical and important. It has been a sharp learning curve for me. I was helped by the tenor of the meetings, which has been measured and thoughtful throughout, for which all Members—experts and non-experts—should take credit. There are those in the room who are expert—certainly more so than I am. Credit must also be given to the Chairmen, who have kept us going in a businesslike and totally fair way. The Clerks, too, have been very helpful and efficient and deserve our sympathy because they have endured every one of the 17 meetings, as has the Minister.

Stewart Hosie (Spokesperson (Economy; Home Affairs; Treasury; Women); Dundee East, Scottish National Party)

I, too, thank you, Mr. Gale, your co-Chairs and the Clerks. It is worth putting on the record that when representing a minority party on Committees, I sometimes do not make a huge contribution. Once those on the Conservative Front Bench have read out briefing notes from outside bodies and those comments have been picked up by the Liberal Democrats, there tends to be little left for me to say. However, I hope the contribution has been useful, and when we get to Report and beyond, there may yet be some amendments and changes that can improve the Bill still further.

Roger Gale (North Thanet, Conservative)

As the Committee has been hopelessly out of order for the past five minutes or so, let me compound the situation by adding my own thanks to the Officers of the House, the constabulary and those others without whom our work would be impossible. May I also express my thanks to the Committee for the exemplary courtesy and good humour with which these proceedings have been conducted? The Chair appreciates it, and I only wish the general public had the opportunity to see and appreciate it. It is not widely reported, but it is a very good thing.