My Lords, I support legislation that enables the Bank of England to rescue failing banks; therefore, I give overall approval to this Bill, as do the British Bankers' Association and my opposition Front Bench. In particular, I applaud the increase by the FSA of the deposit protection limit of the Financial Services Compensation Scheme to £50,000.
I wish to focus on five areas of concern. Other speakers have covered them, but I think that it does no harm to emphasise them again. These concerns and suggested remedies are not especially political, but are expressed with the view of improving the Bill. After this, I wish to make some general comments on the banking crisis.
My first area of concern, as many speakers have mentioned, is Clause 4. I, like others, am concerned that the tripartite regime has still not appreciated that for any but the smallest institutions the main objective must be to put into place arrangements by which customers would have continued access to their banking facilities. As my honourable friend Mark Hoban said in another place, the priority should be "financial stability", which would be achieved by "continuity of service". I agree with his view that it would be vital to have amendments that help to ensure that a failing bank is,
"open for business the next day, even if it is rebranded, renamed or whatever" because this will,
"provide more reassurance than payments made through a deposit guarantee scheme".—[Hansard, Commons, 26/11/08; col. 813.]
Bradford & Bingley, for example, comes with a £14 billion interest liability for the industry, but the use of the special resolution regime to enable the transfer of the deposit base was much preferable to insolvency and paying out compensation cheques to millions of depositors. The continuity of banking services is vital to the maintenance of consumer confidence and financial stability, as opposed to an assurance of compensation payment, even in seven days, and I believe, like the BBA, that this ranking should be expressed in the Bill.
To justify my argument for the continuity of banking services, I cite the impact assessment of the Bill, which states that in the UK 90 per cent of wages are paid directly into a bank account, approximately 98 per cent of benefits are paid into a bank account or Post Office card account, and that over 75 per cent of adults have at least one direct debit.
My next area of concern is Clause 7, in particular subsection (3), which proposes that the second condition should be that it is "not reasonably likely" that action will be taken by or in respect of a bank that will enable it to meet its Financial Services and Markets Act threshold conditions. I believe that a higher test should be set and that the second condition should be premised on it being "highly unlikely" that the threshold conditions will be satisfied.
My next areas of concern are Clauses 47 and 48, as mentioned by many other speakers, which involve the safeguards for partial transfers. The details here are not for today's debate; they involve the protection of counterparty creditor rights in the event of a partial transfer under the special resolution regime.
The banking industry has raised with Ministers concern that the significance of these issues has still not been grasped and that there is the potential for a real detrimental effect on the willingness of banks to transact in the UK. This could have a hugely significant bearing on the competitiveness of the UK financial services and the capital position of UK banks. In addition, it believes that, as matters stand, lawyers will not be able to give clean legal opinions in support of set-off and netting arrangements and that, as a result, there could be a dramatic shift in the willingness of businesses to transact with UK banks. I believe, therefore, as many noble Lords have said,that rather than having a non-statutory code of practice, safeguards should be included in the Bill itself.
One cannot overemphasise the extent to which institutions are currently contemplating the need to unwind positions in the event of the requisite legal certainty not being delivered in advance of the Bill receiving Royal Assent. This would result in huge extra costs for the banks and would bring with it the very real prospect of international banks moving operations out of the UK and UK banks closing large parts of their business activities and being obliged to reduce their balance sheets on a large scale. What is the Government's view on this whole area, and do they plan to introduce necessary and important amendments to these clauses?
My next area of concern are Clauses 63 to 67, which would give the authorities powers in the event of a partial transfer to require the residual bank and all other group companies to provide services and facilities to the entity to which there had been a partial transfer. I believe the clauses are too open-ended and have the potential to expose other group companies to major risks. It is also important, in my view, to establish a time limit for the provision of such services—for, say, between one and three years, with a 12-month notice period after that.
My next area of concern is Clause 75. The Government have taken on board that this clause was too broad in scope and that it was unwise to build into a Bill powers to revise any aspect of the legislation with retrospective effect. However, Clause 75(3) still provides the power by which this part of the legislationcan be amended retrospectively to facilitate a special resolution. This power needs, however, further limitation and the setting of better parameters for its use. I understand that it would still be possible to overturn the safeguarded arrangements by amending contract law. In addition, as has been mentioned by other speakers, we await the report of the Delegated Powers Committee on this clause.
My next area of concern comes in Clause 167. As the noble Baroness, Lady Noakes, said, the idea of a pre-funded compensation scheme is not suited to the UK market. It simply takes away funds that could be lent to stimulate the economy. I do not believe that it would contribute substantially to UK confidence. On the other hand, Clause 170, which permits the Treasury to make loans to the Financial Services Compensation Scheme from the National Loans Fund, seems much more sensible. The recent transfer of Bradford & Bingley's retail deposit business demonstrated the value of such a facility and that prompt effective action to safeguard the interests of depositors can be taken without the existence of a pre-funded deposit protection scheme.
I go on to look at the impact assessment. The document signed by the Chancellor of the Exchequer in October 2008 claims total costs arising from the Banking Bill of only £2.2 million to £4.5 million. However, the costs of the FSA proposals for banks to marshal their customer base into a "single customer view" could be as much as £1 billion, according to an independent study to be published by Ernst & Young in January on behalf of the FSA, FSCS and the BBA. Can the Minister confirm these figures?
There also must be a cost to the FSCS of making contingency plans to issue cheques to several million customers, which would be very different in scale from making contingency arrangements to make payments to several thousand.
Furthermore, I agree that the legislation should be reviewed independently after four years, to consider its impact on the UK banking and financial system. I understand that a similar provision was included in the Financial Services and Markets Act and the Terrorism Act. All secondary legislation should be subject to an affirmative resolution and preceded by a full consultative process.
I wish to make a few general comments about the banking crisis. To blame the crisis entirely on world events is wrong. In the UK, the tripartite regime has failed to do its job properly. It replaced the previous scheme, which, as the noble Lord, Lord Bilimoria, said, worked perfectly satisfactorily. I am sorry that the noble Lord, Lord Turner, is not here to update us on what the FSA is planning to do to improve regulation.
If the tripartite regime had done its job properly, banks would have been better regulated and the banking crisis could possibly have been avoided. All this legislation would not have been necessary. As important as the banking Bill is the need to get the global and the UK financial regulatory system in better order—on that note, I wish to repeat the remarks made by the noble Lord, Lord Bilimoria, on the weaknesses of the Financial Stability Committee. This means having financial regulators who understand the subject, who may be on secondment from banks or legal firms and who are well paid.
If we do not pay the regulators well, people who might have joined them will go and join the banks instead. The regulators must understand how bank balance sheets work, and ensure that sensible ratios are kept to and off-balance-sheet vehicles are carefully monitored. The regulators also need to consider whether a Glass-Steagall type law should be reintroduced in the UK and the US, which separates investment banks from clearing banks.
Realistic levels of bank lending must take place. The Government should not have stated that they wish the banks to return to the levels of 2007. In some way the Banking Bill addresses none of the issues I have just mentioned. It is a Bill to tackle crises when they arrive and entirely fails to address major regulatory issues. As the noble Lord, Lord Williams of Elvel, said, I cannot see how this Bill could prevent future disasters.