Clause 71 — Pensions

Employment Opportunities – in the House of Commons at 7:30 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 consider Lords amendments 50, 59, 60, 70 and 71.

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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 provide for the extension of the provisions on temporary public ownership to bank holding companies. Hon. Members who served in Committee will remember that I first raised that matter then; I now return to the matter as the Government have laid the amendments in the other place. I hope that hon. Members will forgive me if I set out the issues in a little detail, as we did not have the opportunity to discuss them first in this House.

During the course of developing and consulting on this Bill, the authorities have continued to consider the question of how best to resolve different types of failing banks. The events of autumn last year made it apparent that, in some cases, exercising a power conferred by the special resolution regime in relation only to the bank in a financial group may be problematic. Specifically, acting on the bank alone may not be sufficient fully to achieve the resolution objectives, particularly that of protecting and enhancing the stability of the UK's financial system. The starting point for this issue is that banks often form part of complex corporate groups. The company within the group with the deposit-taking permission—the bank—may not be the ultimate parent company within the group. In such circumstances, therefore, as originally drafted the SRR powers could not have been exercised against the parent company, but only in respect of the bank within the group.

There are a number of reasons why a power limited to banks may be insufficient. First, the activities of the bank and the rest of the group may be so inter-related that the exercise of the transfer powers only in relation to the bank may be insufficient to resolve the bank successfully. Secondly, taking action only in relation to the bank may give rise to serious difficulties within the rest of the group, which is likely to include other financial companies that may be relevant for stability purposes. In certain cases, the exercise of the transfer powers in relation to the bank may so disturb the operation of and confidence in the group as a whole that it leads to the insolvency of some or all of the other entities in the group. Wherever such entities in the group are financial institutions, their failure may impede the achievements of the SRR objectives. In addition, the failure of other entities in the group may give rise to difficulties in the continued operation of the bank given the interconnectedness of the group. Finally, a private sector solution may be more likely on a group-wide than on a bank-only basis.

I should like to note up front that the Bill already contains provisions that seek to address aspects of these potential difficulties. In particular, we have an obligation on group companies to continue to provide necessary services or facilities—"continuity obligations"—to the bank following an exercise of the transfer powers. However, the Treasury concluded that the imposition of continuity obligations, while remaining a vital tool in certain cases, may be insufficient to address the full range of difficulties outlined above. Therefore, as I signalled in Committee and on Report, amendments to extend the Treasury's power to take a failing bank into temporary public ownership to include bank holding companies were tabled in another place.

Let me set out how these amendments work. Lords amendments 59 and 60 provide new clauses that allow the Treasury to take a holding company into temporary public ownership. As with any stabilisation option, there are significant conditions that must be met before the power may be exercised. A bank holding company may be taken into temporary public ownership only if the Financial Services Authority is satisfied that a bank in the group satisfies the general conditions set out in clause 7. In addition, the Treasury must be satisfied that it is necessary to take action for the purposes specified in the conditions for temporary public ownership set out in clause 9.

In determining whether it is necessary to take such action in relation to the holding company, the Treasury will have to consider whether action in relation to the bank alone would suffice for the purposes specified in clause 9. I should also point out that, as with any stabilisation power, the exercise of the holding company temporary public ownership tool would be governed by the SRR objectives provided in clause 4 and subject to the code of practice provided for in clause 5, to which the authorities must have regard. I should also note that the power is limited to the Treasury. This approach ensures that Parliament can hold the Minister exercising powers in relation to a holding company directly to account. The Government consider that ministerial accountability is important given the breadth of interested parties that the holding company power may affect.

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Photo of Peter Bone Peter Bone Conservative, Wellingborough

I am trying to follow carefully what the Minister is saying. In circumstances where a large group, say a supermarket chain, has a banking sector and the bank needs to go into temporary public ownership, does that mean that the Government could end up owning a supermarket?

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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

No. I shall go on to explain that in more detail.

A group may contain entities that are not directly involved in the financial services sector, so the decision to resolve a bank on a group basis will involve balancing the interests of a range of parties against the public interest in resolving the difficulties caused by the failing bank. It is the Government's view that Ministers are best placed to make that judgment. Once a holding company is in temporary public ownership, the Treasury will have a range of powers available to it to transfer on the shares and property, rights and liabilities of the holding company.

This approach has been adopted in order to provide the Treasury with appropriate flexibility to complete the resolution of each bank effected by the transfer to temporary public ownership of the holding company. All the limitations on partial property transfers provided for in clauses 47, 48 and 60, and secondary legislation made under them, will apply. I am happy to confirm, for example, that the netting arrangements will be protected in line with the order made under clause 48. Furthermore, the Government consider it appropriate to restrict the powers of the Treasury with respect to non-bank entities within the group. Therefore, the full range of onward transfer powers apply only to deposit-takers in the group and the holding company itself. We have adopted this position in order to minimise commercial uncertainties arising from the taking of these powers.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 7:45 pm, 10th February 2009

I am grateful for the Minister's comments, which clarify the Tesco point raised by my hon. Friend Mr. Bone, which I was going to mention in my speech. The Minister referred to onward transfer powers being available only in relation to the interests of the holding company and the banking subsidiary. Does that mean that where there are other financial services businesses in that group, such as insurers and fund managers, there will be no onward transfer powers in respect of those entities?

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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

My understanding of the situation is that that is correct. Let me explain in a bit more detail.

As I outlined, the Treasury may take a holding company into temporary public ownership only under the purposes set out in clause 9—that is, if it is

"necessary to resolve or reduce a serious threat to the stability of the financial systems of the United Kingdom" or

"necessary to protect the public interest" where financial assistance has been provided. "Necessary" is a high test, and as part of that test the Treasury will have to consider whether resolution of the deposit taker would meet the specific conditions set out in clause 9. It is possible to address the purposes specified in clause 9 by taking action in relation to the deposit taker. It would not be necessary to take action in relation to the holding company. That emphasises that action in relation to the holding company is very much a last resort.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Going back to the use of onward transfer powers for the holding company and the licensed deposit taker, if a group is a broadly based financial services group, as many of the deposit takers in this country are, what process will be used to leave, say, the insurer or the fund manager in the ownership of the original shareholders if the holding company has been subject to an onward transfer process?

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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

I explained that "necessary" is a high test. The second point to make is that the Treasury will also have regard to the SRR objectives, which ensure that the objectives in exercising the power in relation to holding companies include protecting and enhancing the stability of the financial systems of the UK, protecting and enhancing public confidence in the stability of the banking systems of the UK, and protecting depositors—areas with which we are very familiar. Action could be taken only where the Treasury has considered whether exercise of the powers in relation to holding companies would further those objectives. That narrows the context of what we are talking about. Thirdly, by limiting the tool to temporary public ownership, a higher public interest test must be satisfied, which we previously debated.

The application of the safeguards will always depend on the facts of the case. However, in the light of those safeguards it is highly unlikely that it would be possible for the Treasury to take a holding company into public ownership where the holding company does not have a close connection with the operation of the bank or where the primary activities of the holding company are not related to financial circumstances. Onward transfer powers apply only to banks in the group and the holding company, not to other non-financial institutions. I hope that that helps to clarify the matter.

Let me briefly turn to the other amendments in this group. Clause 71 provides for a transfer instrument or order to make provision about pensions. A modification to a pension scheme may be necessary in order to facilitate a fully effective transfer. The clause applied only to pension schemes in which the failing bank is or was an employer. However, following consideration, the Government are of the view that it does not provide sufficient flexibility for the authorities to deal with all possible resolution scenarios involving group companies. Therefore, Lords amendments 49 and 50 allow the pensions power in clause 71 to take effect at a group level, instead of at the level of the deposit taker.

Finally, Lords amendments 70 and 71 make consequential provision to part 3 of the Bill in relation to the bank administration procedure, as part of the extension of the temporary public ownership tool to holding companies.

In summary, this group of amendments is an important addition to the Bill that will allow the special resolution regime to be effective for banks that are part of complex corporate groups. I hope that I have demonstrated the strong rationale for taking these powers. The matter was debated in the Lords, and we are happy to concur with their views on it.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful for the time that the Economic Secretary spent discussing the matter because it is important. It was not aired in the Bill's earlier Commons stages, as the amendments were introduced in the House of Lords.

Part of the problem stems from the fact that clause 2 defined banks quite tightly as entities authorised to accept deposits, and we will come to that when we discuss a later group. The clause almost envisaged a situation in which a bank was a stand-alone entity, or one where the bank was both a licensed deposit-taker and the holding company of a banking group. The amendments reflect the complexity of corporate structures in the UK, and they reflect the complexity of financial services groups, where a range of activities can be undertaken by a bank.

The Economic Secretary presented a cut-and-dried process whereby the holding company and the deposit-taker would be subject to a transfer order, and where they are ring-fenced, in a way, from the rest of the group. Although he sought to reassure the House on the standards that would be applied before using such powers, I was less confident that the Treasury had thought through the process by which the powers would be used in practice. I cannot say that the Treasury believes that the powers will be used, because that would imply that it knows something we do not, but it must think through their implementation more carefully.

Other issues will emerge. In the other place, Lord Davies of Oldham talked about situations in which a different entity could employ the people who work in the bank. A pension scheme could be shared across a number of different bank companies, and one of the amendments in the group deals with pension schemes. Within these entities, there may well be service companies that are integral to the functioning of the bank, and simply to say that transfer powers will be applied only to the holding company and the banking company might not be the best solution to the problem, although the continuity of service provisions in the Bill will help to deal with property and employees.

It may not be as easy as the Economic Secretary thinks to segregate the holding company and the banking company as legal entities. At the same time, I understand the need to give reassurance to the integrated financial services companies about what will happen if part of their empire suffers problems. It would be unfortunate if an impression were given that the whole group will be sucked into public ownership if one part of it suffers problems.

My hon. Friend Mr. Bone was right to raise the point about Tesco, which was mentioned in the House of Lords. A number of banks are part of different sorts of business entities, most of which will be part of a financial services company. Given the way in which supermarkets have moved into the financial services sector, we will end up with situations in which a bank, depending on how it has organised matters, could be part of a supermarket group. It is important to give some assurance about how the powers will be used. I understand why the Economic Secretary would try to avoid giving the impression that the Government can run Tesco, but it is not straightforward to say that the Government will only take on the bank and the holding company on the basis of there being an onward transfer power.

I would like to touch on two more issues. The powers for holding companies also apply to the powers under clause 20, which relate to the ability of the authorities to terminate the service contracts of directors, and to vary their contract terms. We touched on this matter in Committee when we discussed whether the powers enabled the Government to intervene to prevent bonuses from being paid to bank directors. I will not rehearse those arguments, but in a case where one of the directors on the board of a holding company is responsible for the insurance division, could the Government terminate his or her contract using the powers in clause 20? There is a danger that the broad powers that apply to directors who are not related to the banking activity but are in the holding company could have an adverse consequence on their job security.

The other issue was raised in the other place, and the Economic Secretary dealt with it today, but not directly. Will financial services end up redomiciling the location of their holding company? The Bill currently allows a UK-incorporated holding company to be taken into temporary public ownership. A banking group may decide, in order to safeguard its other interests and to avoid uncertainty, to redomicile its holding company outside of the UK so that only its UK activities would be affected. I wonder whether there is a risk, as we saw when HSBC considered changing its domicile last year for tax reasons, that the banks' reconsideration of where their headquarters should be based might be accelerated. If they move them outside the UK, that would be detrimental to the this country's interests. That might be an unintended consequence of the proposal, but it depends on the extent to which the proposal impacts the non-banking activities of those groups.

I would be grateful if the Economic Secretary gave us some reassurance on how far the Government have gone with the process of thinking about the implementation of the powers and how they will affect integrated financial services companies. Will the powers in clause 20 that can be used to vary directors' contracts have unintended consequences, and will the changes have an impact on the competitive position of the UK as a place for financial services businesses to be headquartered?

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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

I shall respond directly to the hon. Gentleman's points. First, on clause 20, the situation in relation to directors is unaltered since our discussions in Committee. Secondly, I wish to stress as strongly as I can the Government's view that there is absolutely no reason for bank holding companies to consider domiciling outside the UK as a result of the Bill.

Thirdly, although one or two of my hon. Friends might like to think that we were slipping in some clauses that will allow us to nationalise the UK's high street, we are not doing anything of the kind. We are recognising that many UK deposit takers are complex group undertakings. That is why we have considered whether additional powers are necessary to resolve any substantial difficulties that those groups get into, and why we introduced the relevant amendments in the other place.

The hon. Gentleman suggested that we had not necessarily done all our homework, but we have continually looked long and hard at whether the powers that we are taking are appropriate and necessary. As he knows, substantial contingency planning has taken place. He is right that it might be difficult to isolate the bank within a group, which is precisely why we need the ability to take a holding company into temporary public ownership. We could then stabilise the whole group and resolve the situation so that it goes out of public ownership, using onward transfer powers for a fast onward sale of the bank or the whole group.

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Photo of Peter Bone Peter Bone Conservative, Wellingborough 8:00 pm, 10th February 2009

To use the example of Tesco again, I believe that the Minister is saying that if the holding company were taken into public ownership, the Government would be in charge of the supermarket section of it, even if only for a brief period.

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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

I have been trying to stress that we are putting in place a series of tests and restrictions. We must recognise that deposit takers are complex group undertakings, which is why we need the power to take a bank holding company into temporary public ownership in certain circumstances. Mr. Hoban asked how that would work in practice and how the powers would be exercised in detail. All circumstances are different, and the exercise of the powers would depend on the nature of the institution affected. He will be aware of the incredible amount of thought that would go into taking such decisions and the close contact that there would be between the tripartite authorities in deciding whether the threshold conditions had been triggered. The powers would be exercised only through one stabilisation tool—temporary public ownership—rather than through the bridge bank or private sector purchaser tools. That sets a very high test for intervention, as he knows.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Minister for his comments, but we discussed the power to make the onward transfer of a bank, licensed deposit taker or holding company. However, the Minister talks about taking a group into temporary public ownership, which means its holding company, banking activities and non-banking activities. His comment that the whole group would go into temporary public ownership reinforces my concern that a group might seek to structure its activities or ownership so as to avoid that prospect, notwithstanding the safeguards that he has mentioned.

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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

I understand the hon. Gentleman's point, but the proposals in the amendments strike the right balance and provide a high level of assurance about the Government's future actions. As we have repeatedly said during the Bill's passage, we hope that we will never have to use the powers in question, because we do not want banks to fail. However, we need powers to address the issue of bank holding companies. Our stabilisation objectives might not be met effectively if we retained only the power to act on a licensed deposit taker such as a bank. I believe that the hon. Gentleman accepts the general thesis that those powers are required, and I hope that the House will agree to the amendments.

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Photo of Colin Breed Colin Breed Shadow Treasury Minister

This is a complicated matter, and it seems to me that one advantage of having a financial services organisation within a large group such as a supermarket is that most people believe, rightly or wrongly, that the organisation has the strength of that group behind it. Perhaps that is one factor that gives them the confidence to use that organisation. The Bill might encourage such groups to take banking operations out of the group, because they do not want the Government interfering. An unintended consequence may therefore be that such financial organisations, licensed deposit takers and so on are taken out of groups, becoming stand-alone bodies and therefore having much less potential strength.

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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

I appreciate the hon. Gentleman's concerns, of which we have been aware. In our consultations about whether it was right to take this power, we talked to a number of institutions and, I hope, allayed their concerns. I do not foresee that companies will want to restructure simply as a result of the power that we are taking in respect of bank holding companies. I therefore believe that his fears are unwarranted, but we will need to ensure that all the provisions that involve complex detail are kept under continual review.

Lords amendment 49 agreed to.

Lords amendment 50 to 53 agreed to , with Commons privilege waived in respect of Lords amendments 51 to 53.

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