Clause 4 — Special resolution objectives

Employment Opportunities – in the House of Commons at 6:15 pm on 10th February 2009.

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Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

With this it will be convenient to take Lords amendments 2 to 6.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

The amendments deal with some of the introductory clauses in the Bill on special resolution regime objectives, the content of the code of practice and the banking liaison panel. I believe that they reflect the Government's constructive response to concerns expressed in all parts of both Houses on elements of the SRR framework.

Lords amendment 1 deals explicitly with the concept of continuity of banking services within the SRR objectives as set out in clause 4. The Bill already includes, at its heart, provisions that are aimed at ensuring continuity of services. The very purpose of the stabilisation tools of the special resolution regime is to ensure that banks do not fail completely, thereby maintaining full continuity of banking services. This is already reflected in both the objectives set out in clause 4 and the draft code of practice under clause 5 that explains them. However, for the avoidance of doubt, this amendment seeks to make it clear that the SRR objectives include the concept of continuity of banking services. Hon. Members will note that this is included as part of objective 1, to protect and enhance the stability of the financial systems in the UK. To be absolutely clear, this drafting is entirely consistent with the fact that this concept also relates to the objectives to protect and enhance confidence in the banking systems and to protect depositors. I would also like to make it clear that continuity of banking services is not the only element to be considered under objective 1. The amendment therefore does not limit the scope of that objective in any way, but it now makes it explicit in the Bill that this concept is at least one of the elements that must be considered.

Government amendments 2, 3 and 4, which were brought forward from another place, add to the list of matters that the code of practice may address and the concessions that were agreed in the other place. Members in another place requested further clarification on a number of matters or expressed a desire that the code of practice should include further information, and I recall that similar expressions of interest and concern were also made in Committee in this House.

Clause 5, and in particular subsection (1), sets a broad remit for the code of practice. In response to points made in debates here and in another place, the Government have agreed that further information should be added to the code and that it is appropriate to signal that in clause 5. These amendments therefore achieve the following. First, they signal that the code can provide information about how the SRR objectives are to be understood. That follows on from an Opposition amendment in another place, but the Government's amendment goes further by explicitly signalling in the Bill that the code can include information on how the terms within all the SRR objectives are to be understood. Secondly, the amendments expressly state that the code can provide further guidance on the choice between the stabilisation options. Questions were raised in both Houses about the factors that will determine the choice of one tool over another, and the truth is that these decisions will be made on a case-by-case basis. Consequently, the code is the right place to provide significant additional information on this matter. The draft code already lists factors to be taken into account when deciding between different options and the Government believe it could include more information on that point.

The final two Government amendments in the group add further to the list of areas about which the code can give guidance: continuity obligations and compensation arrangements. Those additions were a response to two parts of the debate in Committee in another place. As I have stated during other stages of the Bill's passage, I believe that the code provides a useful addition to the architecture of the new special resolution regime. The Government have listened carefully to the points made in debates and the representations we have received, and we believe that these amendments will help provide reassurances that further information can, and should, be provided on a number of important elements of the SRR. These amendments were welcomed in the other place, and I commend them to the House.

In Committee in the House of Lords, Lady Noakes proposed an amendment to widen the remit of the banking liaison panel. As Members will know, I was keen that we set up an expert liaison panel to provide advice and assistance and to help us co-produce some of the secondary legislation. The Government agreed with the main thrust of Lady Noakes's proposal. The Government's position, which has not so far been controversial, is that it would not be appropriate for the banking liaison panel to provide advice to the Treasury on the operation of the SRR powers. For example, it would not be appropriate for the panel to advise on the drafting and placing of a transfer or associated instrument. However, I believe that we have come to a consensus that the panel's remit should include the effectiveness of the policy and the powers in general of the SRR. One concern raised in another place was to ensure that the panel will have a role in monitoring the market for unintended consequences of those new powers. The Government, therefore, tabled these amendments to meet those concerns.

Lords amendment 5 provides the panel with a broadly defined purpose to advise the Treasury on the effect of the SRR on both the banks that are potentially subject to it and the wider financial services markets. In addition to this broad purpose, Lords amendment 6 also provides the panel with a statutory remit to advise the Treasury on the code of practice. It also provides that the banking liaison panel should advise the Treasury on the exercise of the power to change law under clause 75—on which we had considerable debate in the Committee stages—with the exception of cases where the exercise is carried out in connection with, or to facilitate, a particular use of a stabilisation power.

The Government's decision to establish the expert liaison group has been welcomed by interested parties, and the group has already provided invaluable advice. I hope that when it is re-constituted as the banking liaison panel, it will continue with this good work. The Government amendments proposed today will ensure that this work is given a firm and broad statutory basis, and I commend them to the House.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister said in his concluding remarks on the previous group of amendments that the Government were prepared to listen, but sometimes they do not listen immediately and it can take a while for the message to sink in. I was struck by Lords amendment 1, proposed by Lord Myners, which would add a reference to

"the continuity of banking services" to the objectives, because in Committee in this House I introduced an amendment to incorporate the continuity of banking services into one of the objectives of the special resolution regime. It therefore seems that the message eventually sank in that it is important to make sure that there is a reference to the continuity of banking services in those objectives. This is an important matter, and I wish to consider it briefly.

One of the contrasts in how different events have been handled over the past few months is in terms of the continuity of banking services. Depositors with some of the Icelandic banks—such as those who found their accounts flipped across from Kaupthing or Landsbanki to ING—will have seen the continuity of services in action, in that they were able to access their money almost immediately. However, those depositors who were not with the internet banking arm of those two Icelandic banks had to await payment through the Financial Services Compensation Scheme, and it took several weeks for them to receive their money. Clearly, if we want to give people confidence in the financial system, the fact that we can demonstrate that there is continuity of service is an important way of responding to their concerns. That would help in giving depositors a sense of confidence in how problems will be handled in future. I am therefore glad that there will be a reference to the continuity of banking services in the objectives.

One feature of this debate, which we have now been having since autumn last year, is the banking reform package that has been proposed. It has three elements: the Bill that is before the House today, the secondary legislation that will be brought forward at the appropriate time, and the code of practice. The package needs to be looked at altogether. The Bill gives significant powers to the Government, secondary legislation will implement them, and the code of practice is important in giving confidence to the banks and other financial institutions and their advisers about how the powers will be used in practice. They can take comfort from the code as to how the powers will be applied in future. We spent a great deal of time in Committee discussing the code of practice. The Minister ensured that we saw a draft of it then, and I was grateful to him for doing so. Lords amendments 2, 3 and 4 are important in that they increase the comprehensive nature and coverage of the code of practice to ensure that the objectives themselves are understood. The Bill's original drafting said that the code could provide guidance on

"how to achieve the special resolution objectives".

Lords amendment 2 inserts the word "understood" into the provision to ensure that there is a clear link between the objectives in the Bill and the way in which the Government will seek to achieve them once it is enacted.

As the Minister pointed out, significant debate took place in Committee about the stabilisation options and what preference there would be in terms of their use. I tabled an amendment in Committee ranking those options in order of preference, with a private sector solution coming first, a bridge bank second and temporary public ownership or nationalisation as the final preference. Although he listened to my proposal, he rebuffed it on that occasion. We wanted to help people understand how the stabilisation options would work and what factors the Government would bear in mind when considering which option to use to deal with a bank crisis.

Lords amendment 4 inserts more specific guidance on clauses 63 and 66, and on the compensation clauses—those are welcome additions to the remit of the code. Continuity of service is a very important concept in protecting consumers. Clauses 63 and 66 look at continuity of service in a different way, by imposing service obligations on contractors or other suppliers where there has been a share or property transfer, which is part of the means by which the stabilisation options are put into practice. There was concern as to how those provisions would work, and the fact that they are to be included in the code of practice helps in establishing that.

The second part of that amendment relates to the important issue of compensation. The Bill gives the Government significant powers to vary the rights of creditors—people who have entered into a borrowing or lending relationship with the bank or the shareholders, or with suppliers. Normally, suppliers would be able to enter into a contract whereby if there is a significant change in the person with whom they are contracting, they would have an option to terminate the contract, but that goes against the thread running through this Bill of minimising disruption to the financial system and ensuring continuity of service. It is important for suppliers to know what will happen when these powers are invoked, and it is right that that exercise is reflected through the code of practice.

On Lords amendments 5 and 6, the Minister at an early stage identified the importance of expert advice and guidance on this Bill. This House is dealing with complex and wide-ranging powers in this Bill, and it was right to ensure the liaison panel's involvement in its evolution over the past few months. I know that a number of discussions have taken place between the Treasury and the members of that panel about the Bill and the secondary legislation. The ongoing engagement between the Treasury and the various experts is welcome, and we are pleased to see the extension of the group's remit. We want things such as the impact of the special resolution regime on banks, their customers and the financial markets to be examined, because the purpose of the code, the panel and so on is to ensure that this legislation does not damage the UK's financial markets, but strengthens them. The best way to do that is to ensure that there is proper engagement with outside interest groups, and Lords amendments 5 and 6 put the panel's future involvement on a statutory basis.

I wish to press the Minister on one aspect of the panel. My hon. Friend Mr. Gauke asked whether the minutes of the panel would be published—whether there would be some more transparency about its deliberations and contributions to the formation of legislation, and its future role. The Minister said that he had no specific objection to this, barring concerns about market sensitivity, and would go away to reflect.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury 6:30 pm, 10th February 2009

My view is that this is a matter for the banking liaison panel—if it wants to publish its minutes in full or in a truncated version, it should be allowed to do so.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Minister for that response. It shows a degree of openness, and that is important in ensuring that there is proper transparency in the arrangements and that people are fully aware of the market view of some of the issues associated with the impact of the Bill. His response shows, again, that the Government have been prepared to listen on this, and I welcome those remarks and the amendments in this group.

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Photo of John Redwood John Redwood Conservative, Wokingham

Lords amendment 1 invites us to modify special resolution objective 1, as set out in clause 4. The Bill invites us to approve five objectives. That seems rather a lot to me. When I examine the objectives carefully, I see that objectives 1 and 2 are similar. Objective 1 is

"to protect and enhance the stability of the financial systems of the United Kingdom."

Objective 2 is

"to protect and enhance public confidence in the stability of the banking systems of the United Kingdom."

That is a sort of spin-age version of objective 1. I put it to Ministers that the spin would take care of itself if there were stable, confident and inspiring financial systems—that would indeed inspire public confidence. No spin strategy will inspire confidence if the systems are rotten. Perhaps objectives 1 and 2 amount to the same thing and could be merged, and could then take the added strain of Lords amendment 1. It states that

"the reference to the stability of the financial systems of the United Kingdom includes...a reference to the continuity of banking services."

As my hon. Friend said that that proposal emerged from an idea of his, I shall be careful in what I say about it, but I seek clarification on the Government's phrasing. I am happy if the provision refers to the need to carry on lending to people and companies, particularly those in the United Kingdom. I do not wish too much of that business to be interrupted by whatever changes need to take place in the banking system because of the imaginary crisis that we are hypothesising. I am obviously happy if this is just another way of saying that we want deposit protection; indeed, one of the objectives is, rightly, to protect depositors—that would be the main purpose for which one would undertake these interventions. However, the provision may refer to the continuity of the banking services as supplied by the failing bank, and that is not what we should be providing for at all. Perhaps the provision needs tweaking to make that clear, as I am sure that my hon. Friend did not want to see that type of continuity.

If a bank starts to get into trouble, we need a change, and perhaps a dramatic change. One of my worries about this process, as teased out by the amendments, is that that might not be achieved in the most obvious or cheapest way. The three stabilisation options are: transfer to a private sector purchaser, transfer to a bridge bank or transfer to temporary public ownership. There should be a fourth option, which should be tried first, in which the central bank would act as the banker to the failing bank and make short-term loans, with many strings attached, including management change, cost reductions and adoption of a different business model—all the things that would normally be tried before deciding that a bank was finished. The problem is clearly bad management, and the first thing to do, before lending the bank more money, is to demand a strengthening of, or a change in, the management.

My worry is that the system laid out in amendments 1 to 6, buttressing and changing the special resolution regime, will be soft on bankers and soft on bankers' bonuses. We should not be soft on those things when top bankers run banks badly and then seek some form of public assistance or intervention. We need a system that will allow us to remodel failing banks and take tough action to tackle failing management—obviously by agreement with the shareholders, as they are private sector banks. That would be a better approach than moving immediately to one of the three stabilisation options.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

The special resolution regime will apply when a bank is clearly failing. The right hon. Gentleman should rest assured that many steps would be taken before determining that a bank was failing and the threshold conditions had been met. The issues that he is talking about do not need to be part of the Bill, because it is about stabilisation of a failing bank. The actions that he is referring to will have been taken—or at least considered and evaluated—before that point is reached.

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Photo of John Redwood John Redwood Conservative, Wokingham

That is a helpful intervention and I am reassured a great deal by it. The model of the intelligent central bank and the generation of management change can often represent a better and cheaper way forward and should be tried before these rather more draconian steps under the SRR.

I would also appreciate some reassurance that "continuity of banking services" does not mean continuity of management, management practice, management bonuses and bad practice in failing banks. Those factors need to be changed as quickly as possible to limit the damage. If continuity means that the brand and the management must carry on, that could perpetuate a situation like the one that we have at the moment in which never has so much been spent by so few to so little effect. Huge sums of money are tipped into the big bad banks, and if change is not generated quickly enough at the top, the taxpayer is lumbered as a lot of money goes into the banks to no immediately apparent good effect. It is estimated that £1 trillion will be spent on fixing the banks, but we could fix an awful lot in Britain if we spent that sum on something other than banks. That is why resentment is building up.

We need to ensure that we try the easy steps first before we move on to the wider regimes. It would be sensible if the objectives were slimmed down a bit. They should obviously include protecting public funds and depositors. They also include the general aim of financial stability. The continuity requirement should mean preserving a worthwhile business, not necessarily preserving a management style or brand. In the case of Northern Rock, the Government had good intentions when they nationalised it, although I thought that there were many cheaper and easier ways to save it. The first reaction on nationalisation was to put it in run-off, so far from preserving its contribution to the system, it ran down its mortgage book and sacked its staff—not perhaps what the Minister's colleagues expected from nationalisation. If we accept the amendments, it would be easier in the future to try to create continuity, and that would be welcome, because it is ridiculous to nationalise something and then run it down and sack the staff. The business should continue trading in one form or another, although it needs quick management change, a change of culture, a different approach to risk and, perhaps, to marketing and branding. However, it is a waste of money just to close it all down.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury 6:45 pm, 10th February 2009

I welcome the comments from the hon. Gentleman, who supported the amendments. The right hon. Gentleman posed several questions, most of which were explored intensively in Committee in both Houses, as I am sure he would appreciate. He raised the issue of continuity, which is one of the key considerations in dealing with a failing bank. We are talking about continuity in terms of providing a continuous service for customers. For individuals, that will mean ensuring that they can have their monthly salary paid and write cheques as usual. Continuity of banking services for businesses is also important. We need the SRR objectives and the amendments will add value to the Bill.

Lords amendment 1 agreed to.

Lords amendments 2 to 6 agreed to.

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