Clause 167: Contingency funding
Amendment 158C not moved.
Moved by Baroness Noakes
159: Clause 167, page 88, line 32, at end insert—
"(da) arrangements for institutions that have permission under Part 4 of the Financial Services and Markets Act 2000 to carry out the regulated activity of accepting deposits (within the meaning of section 22 of that Act, taken with Schedule 2 and by order under section 22) but are not incorporated in, or formed under the law of, any part of the United Kingdom;"
Amendment 159 seeks to extend the contingency funding arrangements to foreign branch banks. We discussed the position of branches of foreign banks in earlier amendments and I now come to their impact on the Financial Services Compensation Scheme.
My amendment adds a paragraph to the list of matters which contingency funding regulations may cover, so that arrangements can be made for branches of foreign banks which are allowed to accept deposits in the UK to contribute. It is clear from the Icesave example that the Financial Services Compensation Scheme had an important role to play in making sure that UK depositors received a return of their funds, both in respect of the amounts which should have been paid by Icelandic authorities and the extra amounts that were paid.
In another place the Minister was fond of defending various aspects of the Bill on the grounds of future-proofing it against problems that might arise. My amendments are not even future-proofing; they are simply dealing with situations that have already arisen and carrying those into the possible new contingency funding arrangements. If contingency funding is introduced—and we will debate that shortly—foreign banks which take deposits in the UK should be included within its scope. I beg to move.
Clause 167 provides for the creation of contingency funds for the Financial Services Compensation Scheme, and this amendment appears to be intended to ensure that contingency funds could be used to meet the expenses arising from the failure of deposit-taking firms which are incorporated outside the UK but have Part 4 permissions like UK banks. The amendment, however, would only cover banks incorporated outside the European economic area which establish branches in the UK. These banks need a Part 4 permission to open a branch here. EEA banks can establish branches here using a passport issued by the home state authorities under the relevant EC directive. They are still authorised persons but qualify for authorisation under Schedule 3 rather than by having a Part 4 permission.
I assume, therefore, that the amendment is a desire to make clear that, if pre-funding were restricted to banks and building societies, as the noble Baroness has proposed, this would not mean just UK banks and building societies. The objective is helpful but the amendment is unnecessary.
Foreign banks which have branches in the UK are authorised persons. Non-EEA banks must join the FSCS and contribute to its levies. European economic area banks which join the FSCS to top up the coverage for their depositors also have to make an appropriate contribution to any FSCS levies. Pre-funding, if it were introduced, would not change that, so the proposed addition to Clause 167 would be redundant. I therefore hope that the noble Baroness, moving what I hope is a probing amendment, will think that this is a satisfactory explanation and be prepared to withdraw it.
I want to clarify a small point. The Minister said that pre-funding would not change "that", being that foreign banks had to pay an appropriate amount into the FSCS. Is it clear that the power set up by Clause 167 will ensure that foreign banks contribute to contingency funding, if there were any, not just in relation to the payments out at the other end? That is what my amendment is designed to probe.
The noble Baroness is asking me to stray down paths on the pre-funding position as a whole that I am not currently prepared to follow. I think, however, that I can reassure her on that point.
I also speak to the related Amendment 159B, and have grouped a question on whether Clause 169 should stand part of the Bill with these amendments, for the convenience of the Committee. These are probing amendments about the investment of funds within the Financial Services Compensation Scheme. As I understand it, if contingency funding were introduced, the aim would be to amass between 1 and 2 per cent of deposits. In today's money that would amount to around £15 billion, which is a not inconsiderable sum.
My Amendments 159A and 159B amend subsection (2)(f) of proposed new Section 214A of the Financial Services and Markets Act 2000, to be inserted by Clause 167. New paragraph (f) allows regulations to deal with how funds held in the compensation scheme are to be invested, and my amendments say that any such investment must not distort existing markets; that is, the Financial Services Compensation Scheme must not use its financial muscle to become dominant in any investment market. There are many investment markets in which even this sum of money would not be noticed, but that would not necessarily be the case for all potential investment homes for the money.
I have linked these amendments to new Clause 169 because that clause allows contingency fund money to be invested in the National Loans Fund, as specifically referred to in new paragraph (f). In another place, the Minister said that this would in fact be the default option for contingency fund money. Will the Minister confirm whether that is the position? It seems to have both advantages and disadvantages. On the one hand, it is clearly inefficient for the FSCS to set up an investment management arm to manage contingency funds. If it did so, it may well run into the dangers posed by my Amendments 159A and 159B. On the other hand, however, the investment returns earned in the compensation scheme ought to be at least as good as the banks themselves would have got, otherwise that will in due course penalise the banks as they would have lost the opportunity to make their returns and they may have to put even more money into the compensation scheme at a later date.
Will the Minister explain on what terms the Financial Services Compensation Scheme would expect to lend its money to the National Loans Fund? Subsection (2) of new Section 223A of the Financial Services and Markets Act 2000, inserted by Clause 169, allows the Treasury to set terms. What sorts of terms would be set? Would they be market returns? If they are lower than market returns, how can the Government justify setting up pre-funding, taking the money and sticking it in the NLF to the disadvantage of the banks?
I appreciate the concerns expressed by the noble Baroness but hope I am able to persuade her that Amendment 159A and Amendment 159B would be unnecessary. As I hope I made clear in my last response, we have no intention of introducing pre-funding. It is not the time for doing that. However, if pre-funding were introduced our intention is that the contingency funds would be invested in the National Loans Fund, as is provided for in this clause—in other words lent to the Government as if invested in gilt-edged securities.
If pre-funding were introduced, the funds built up would obviously have to be invested somewhere until they were needed. Equally clearly, the funds would have to be invested in low-risk investments which could be turned into cash quickly and in all market conditions. The Government are the best source of such investments in sterling. The Financial Services Compensation Scheme could just buy gilt-edged securities but direct investment in the National Loans Fund is more efficient and removes the need for the FSCS to have to employ advisers and administrators to manage its investments—a point the noble Baroness acknowledged in her opening remarks.
As the funds invested in the National Loans Fund will have been lent to the Government, they will replace Government borrowing from other sources. At the end of each day, the Exchequer must borrow from the money market or place funds on deposit with the money market, depending on the net position reached after balancing outflows to finance expenditure again. Any funds from the FSCS will represent an inflow. Arrangements will be put in place to minimise the impact of these flows and ensure there will be no distortion of money markets—the burden of one of the noble Baroness's anxieties.
The purpose of new Section 214A(2)(f) is to enable the regulations to specify some of the detailed requirements for the investment with the National Loans Fund from the investor's point of view. New Section 223A(2) in Clause 169 allows the Treasury to agree terms and conditions with the FSCS from the borrower's point of view. The FSCS is an independent body so will have to contract with the Treasury like any other lender to the Government. We will need to be able to regulate both sides of the transaction but equally to keep both sides separate in our minds.
There is no intention that new Section 214A(2)(f) would be used to require the FSCS to take a different approach from that I have just set out for the investment of contingency funds. If some new approach were proposed in future, parliamentary approval would certainly be required under the affirmative resolution procedure, and we could then build in any necessary safeguards to meet concerns about distortion at that stage. I hope the noble Baroness feels I have answered the main points she addressed when she moved the amendment and that she feels able to withdraw it.
They will be part of the government funds, which will attract a rate of interest. The noble Lord will recognise that we are concerned about the urgency with which these funds might be required. They could be needed at such short notice that there are difficulties about the nature of the investment. The intention is that the Treasury would borrow at the same rate as the markets—the gilts rate. The whole point of this investment is that is has to be risk-free and pretty short term or almost immediate in realisation. The noble Lord will recognise there are constraints about the nature of the funds concerned.
As I indicated, because of the nature of the funds, they will be on a short-term rate. However, whether they can be identified is a difficult question to address. I am not sure that I have the answer to that and so shall have to write to noble Lords taking part in the Committee. Nevertheless, the noble Lord, Lord Higgins, will recognise the nature of these funds and the use to which they are meant to be put.
I may understand their nature but if one organisation makes a deposit with the other organisation, I am not clear whether there will be any public accountability to indicate that such a transaction has taken place. If the funds do attract interest, will that interest then be credited back to the organisation making the deposit?
On the second point, I can certainly reassure the noble Lord that that is the case. I merely sought to defend the fact that they would be secure short-term loans because of the nature of the funds and their potential use. On the question of whether they are identifiable, I am sorry that I cannot be more explicit but I just do not have the answer. I do not know what the nature of the accountability would be, given that these transactions can occur with some frequency, and therefore I shall need to write to the noble Lord with that detail.
The Minister has, with the help of my noble friend Lord Higgins, clarified what we are talking about in terms of deposits in the NLF attracting a short-term rate or even an overnight rate. However, that is almost certainly the wrong rate. If you had £15 billion which needed to be realised quickly, you would not keep it in a place where it attracted an overnight deposit rate; if you had it in gilts, you could realise it very quickly. It seems that the Government are set on imposing an artificial rate on the FSCS, which in effect would then penalise the banks further for having put the money up-front into the FSCS by artificially reducing the rate. This may be very convenient as a means of funding this horrendous deficit that the Government are intent on inflicting on this country, but it is not the right approach to funding the FSCS, which has to be funded by the banks. I shall consider carefully what the Minister has said. I am grateful for his responses but I am less than clear that this is a satisfactory conclusion. However, for today, I beg leave to withdraw the amendment.
Amendment 159A withdrawn.
Amendment 159B not moved.
Amendment 159C had been withdrawn from the Marshalled List.
Amendment 159D not moved.
Moved by Baroness Noakes
160: Clause 167, page 89, line 3, at end insert—
"214AA Contingency funding: power to make regulations
The Treasury may make regulations under section 214A only after it has laid before Parliament a report on the impact of a pre-funded scheme on the classes of person from whom contributions can be levied and whether contingency funding is the best way to achieve the special resolution regime objectives set out in section 4 of the Banking Act 2008.""
I shall speak also to the Question whether Clause 167 shall stand part of the Bill, and I shall start with the clause itself. I hope that noble Lords will not have mistaken my earlier amendments, which were designed to improve Clause 167, as approval of the clause. We on these Benches have grave misgivings about pre-funding the Financial Services Compensation Scheme. We agree with the British Bankers' Association that the case has not been made for pre-funding. In the US, the Federal Deposit Insurance Corporation operates in a very different banking market, with many small regional banks for which failure is not an uncommon occurrence. Banking in the UK is very much more concentrated.
The size of UK banks has an implication for the size of the contingency fund. If it were funded at around £15 billion, as I suggested in my earlier amendment and as I understand has been suggested by those who have been proposing contingency funding, that would not come anywhere near the amounts that would have been required, for example, to pay out Northern Rock's depositors, had that been necessary. A Barclays or an HSBC does not even bear thinking about in relation to contingency funding. If the contingency funding is perceived to be puny against the large banks, that will not do anything for confidence in the banking system. So we are perplexed as to why the Government have set upon this path.
The regulatory impact assessment calculated the cost to the banks of between £100 million and £200 million, but the banks believe this to be a gross understatement. The amount is considerably below the real opportunity cost to them of retaining the funds within their businesses until they are needed. I do not believe that it is the right time to introduce legislation for pre-funding, and I do not believe that even the Government would claim that the issues have been fully thought through yet. I know that the Minister will say that it is only a power and that there will be consultation followed by an opportunity for Parliament to approve the detailed regulations, but he knows full well that the affirmative procedure falls far short of the scrutiny that a Bill receives. As an order is unamendable, Parliament has only the nuclear option of refusing to pass it.
There cannot be a timing argument. It could never be the case that contingency funding was urgently required. If and when a case was properly made, the Government could take primary legislation in the ordinary way and argue their case to Parliament at that time.
We have tabled Amendment 160 as an alternative to deleting Clause 167; it requires the Government to table a report before Parliament before any regulations under proposed new Section 214A of the Financial Services and Markets Act 2000 are laid. The report should deal with the impact on the persons who will be required to contribute and whether the contingency funding is the best way to achieve the special resolution regime objectives. That will allow Parliament to initiate a debate on the issues and not simply be presented with a government fait accompli in the form of a statutory instrument.
For the reasons I have given, I believe that it is premature to take a power to set up contingency funding. I shall listen carefully to the Minster's arguments, but even if he convinces me that it is right for the Bill to contain the power, I am sure that it would be equally right for the Bill to contain the additional safeguards in terms of parliamentary scrutiny that I have set out in Amendment 160. I beg to move.
My noble friend's argument again raises a familiar point, which is that given current circumstances and the way in which the Bill was originally envisaged, there must be a danger that many parts of it will not be brought into action under secondary legislation for a long time to come, if ever, because current circumstances simply would not allow the actions envisaged in the Bill to be taken. The Government should give careful thought to this between now and Report because it cannot be a good thing to enact a Bill in circumstances where large parts of it are impractical.
Briefly, I support what my noble friends Lady Noakes and Lord Eccles have said. This is one of those places in the Bill when it would be sensible for the Government to take our arguments on board. I hope that that will be the outcome.
The noble Baroness, Lady Noakes, has previously shared with the Committee her interest in the turf. I was minded to think, listening to her contribution, that perhaps she should have her money this afternoon on the 4.10 at Wolverhampton on a horse called Cash in the Attic in terms of whether that would be the right place to have a contingency fund. However, it is a seller and an outsider so it is probably not very charitable of me to recommend that. Instead, in the mood of the Committee, I would suggest Good Spirit in the 4 o'clock at Ludlow.
Clause 167 provides for the possible future introduction of contingency funds, a method of financing for the Financial Services Compensation Scheme often called "pre-funding". I have already described how, if a very large firm such as a high street bank or building society went into default, the Financial Services Compensation Scheme would need far more money in a short time than it could realistically raise in levies from the industry or borrow in the ordinary way from commercial sources. I have also explained that the two solutions to this issue are pre-funding or access to borrowing from Government. The latter solution is already possible, and the Bill makes provision to make government lending to the Financial Services Compensation Scheme as efficient as possible.
The clause we are debating provides for pre-funding, and I have already described the detail of how it would be implemented. My colleagues in the Government and I have repeatedly said, as unequivocally as possible: first, that we will not introduce pre-funding now, when the financial sector is already under strain and, secondly, that it would not be appropriate to speculate on when we would introduce it. Given that, I believe that we should also be able to agree that now is not really the time to debate the merits of pre-funding or of a particular proposal to put it in place. That time will be when the Government come forward with a specific proposal to introduce pre-funding to the Financial Services Compensation Scheme.
There are, of course, cogent arguments for pre-funding, and they may help to address the noble Baroness's perplexity about why we would step down this path. Pre-funding could allow the costs of bank failure to be spread over a longer period of time, before as well as after any failure, and reduce the pro-cyclicality of levy payments; that is, the collection of large levies during a financial crisis. Pre-funding could therefore reduce the risk of contagion and ensure that a failed bank had contributed to the cost of its failure. That is important. The banks would be contributing ahead of any claim on the scheme, and consequently the failed bank would have made contributions towards at least some of the consequences of its failure.
We recognise there are arguments on the other side. Building up a contingency fund would put pressure on bank capital and cash flow. No one will doubt the importance of that issue at the present time. I can also see the more practical arguments of those who feel pre-funding would be unnecessary if Government give the Financial Services Compensation Scheme access to liquidity through borrowing from the National Loans Fund. I recognise the point that, in a concentrated banking system such as the UK's—alluded to by the noble Baroness—there could never be a contingency fund that would be large enough to cope with every possible failure or more than one failure at the same time. Ex-post levies and borrowing from government would still be needed.
However, these are arguments about timing and size; they are not arguments about the principle. It is surely right to recognise that there will come a time when it is right to have the debate, and the Bill allows us to do that. The Bill provides for pre-funding to be introduced only after full parliamentary scrutiny under the affirmative resolution procedure. The necessary statutory instruments will have to be laid in draft and debated in both Houses before they are made. There will be consultation beforehand involving the Bank of England, the Financial Services Authority, the Financial Services Compensation Scheme and, of course, the industry itself before any regulations are laid. I hope the Committee will see that there is no reason why this clause should not stand part of the Bill.
I see the point the noble Baroness is making with Amendment 160, but I feel that it would be unnecessary to have a requirement to produce a rather narrowly focused report before the regulations are made. Regulations to bring in pre-funding would not appear suddenly and without warning. There would be full consultation, and I am sure that process would generate far more information and material than would be found in a report. Parliament will have to debate the regulations, and there will be plenty of briefing from a wide range of sources. I am not sure that an additional report from the Treasury would help noble Lords who are considering any draft regulations. Therefore, I hope that the noble Baroness will withdraw the amendment.
Does the Minister realise that he has produced an extraordinary argument for not debating the contingency fund now? The Bill apparently allows the Government of the day to set up such a fund by statutory instrument. Parliament must now decide whether such an action might ever be appropriate. Therefore, I give full backing to what my noble friend said.
The proposal is open to the usual objection to a statutory instrument; namely, that when the measure is debated, it will not be amendable, whereas it would be if it were in primary legislation. However, I am puzzled by this. It seems that the Minister is arguing for the power to tax by statutory instrument. This has terrible echoes of the policyholder protection arrangements for pensions, whereby levies were made on final salary schemes that led to a further reduction in the number of such schemes. This sounds similar.
I understand that the Minister does not want to introduce the measure at the moment, because the people from whom he is raising levies would probably be in the same position as the bank that is supposed to be helped by the contingency fund. Is it proposed that levies made under this arrangement would be deposited in the National Loans Fund? That is the same as general taxation. Do the people contributing to the levy ever get it back? As I understand it, they do not. All that is happening is that a levy is being raised to put money into the National Loans Fund, which may then act—the Government could have done this anyway, out of their own resources—to compensate people under the earlier legislation. This is a strange animal and I hope that the Government will rethink it.
I take Members of the Committee back to my previous observation that the critical principle here is a contribution by the industry towards the cost of compensation, including by institutions that may in due course fail, so that the burden of their failure is not borne entirely by those who, through caution and prudent management, do not fail. There is a strong argument of equity there. The noble Lord, Lord Higgins, introduces an eloquent argument that seeks to align this with tax. I do not think that it is a tax, because contributions to the scheme will be there to meet obligations and claims on the scheme, and the existence of the scheme should be a source of comfort, reassurance and lower funding costs to the industry.
I turn to the observations made by the noble Lord, Lord Skelmersdale. I believe that the strength of this proposal is the facility to permit prefunding as and when circumstances are appropriate. As my noble friend Lord Davies of Oldham said earlier, it is not the Government's intention to suggest to Parliament that prefunding be introduced. However, I believe that the principle of creating a facility by which the industry contributes to the protection arrangement, from which the industry itself will benefit, is entirely proper and subject to parliamentary scrutiny and approval. The mechanism will exist at the right time—that clearly will be some time from now—to introduce an element of prefunding.
Finally, in response to the noble Lord, Lord Higgins, the judgment on the scale of contribution clearly should be taken only after careful consultation and full involvement from the industry. He rightly alerts the Committee to the risk that if the contribution level is fixed at too high a point, it may be a contributory factor to failure, although none of the simulations I have seen suggest that anyone is thinking it would be set at a level which could be so damaging. Although the parallel, conceptually, with the pensions' protection scheme is correct, I do not think that the issue is quite the same. In those circumstances, I would ask the noble Baroness to withdraw her amendment.
The Minister said the cardinal principle was that there should be contribution by the industry. Of course, that has underpinned the Financial Services Compensation Scheme from the outset. He went on to say that it has to be equitable by those which fail. The proportion that those that fail will contribute will be very much at the margins of the burden on the whole industry. So the Minister constructs a little principle of fairness for the institutions that fail to be set against the inequity of those banks which continue having to fund 1 per cent or 2 per cent of the deposit base—or possibly even more because no details are available—against a possibility, which may be remote, of a major payout.
The Minister says that Parliament can debate an affirmative order. He perhaps is not very familiar with the procedures of both Houses. In the other House, a statutory instrument would be programmed into a Committee, which would not be taken on the Floor of the House. There would be a time limit—perhaps an hour and a half—to debate it and it would not be amendable. In your Lordships' House, we would not be time-limited, but it would still not be amendable. We would have only the option of completely rejecting the statutory instrument. A statutory instrument is not an appropriate vehicle for proper parliamentary scrutiny. Since neither the full justification, nor the timing, nor the quantum, nor the impact of the exercise of this power is before Parliament at the moment, we have a seriously deficient proposal in this Bill.
Amendment 160 accepts the principle of the Government proceeding in that way. It is a perfectly reasonable approach of requiring the Treasury to make a report to Parliament. Perhaps the report should have covered more things—the Minister said that it was a narrow report—but at least it would allow parliamentary debate to take place outside the confines of the rules of either House in dealing with statutory instruments. I do not think that the Government are taking this issue seriously and I beg leave to test the opinion of the Committee.
I shall speak also to related Amendment 162. These amendments add another subsection to proposed new Section 214B of the Financial Services and Markets Act, introduced by Clause 168. The clause allows the Treasury to make regulations for the Financial Services Compensation Scheme, and therefore the financial services industry, to contribute payments arising in connection with the exercise of the stabilisation powers under the special resolution regime. I am far from convinced that the Financial Services Compensation Scheme should be burdened with such payments, because it goes beyond the original intention for the Financial Services Compensation Scheme. It is justified by the Government on the basis that if the authorities did not act, a failing bank may well end up facing costs on the Financial Services Compensation Scheme. If regulations are ever used, I predict that they will be a complete nightmare to operate.
My amendments, which are probing, are designed to test the limits of the contribution. They allow the Treasury to seek contributions from a private sector purchaser, or a liquidator or administrator—that is, the people who will have their hands on the assets of the failed bank. While my amendment is permissive, the intention is that the Treasury should have to justify not taking contributions from those sources before charging the Financial Services Compensation Scheme. I hope that the Minister will be able to reassure the House that the Financial Services Compensation Scheme will not simply be viewed as a convenient deep pocket for the Treasury to raid to pick up special resolution regime costs, and that all other contributors to the costs will be looked at in the first instance. I beg to move.
These amendments concern Clause 168, which provides for the FSCS funding of the SRR. I know that this matter has been the subject of much interest and debate, in the other place as well as here. Before I turn to the amendments, let me set out why the FSCS should be required to contribute to the SRR.
Intervention under the SRR will, in the vast majority of cases, be undertaken only if necessary to prevent disruptions to financial stability. This is provided for by the specific conditions of Clauses 8 and 9, without which the authorities may not act, and by the SRR objectives which govern the way in which authorities act. While undoubtedly of crucial importance to the general public interest, financial stability also directly benefits the banking sector and the financial services industry more widely. A stable financial system is an essential condition for the financial services industry to operate efficiently and competitively.
Thus, where the authorities have intervened in a firm for the purposes of preserving stability, there is a strong argument that banks and the financial services industry more widely should contribute to the cost of the intervention. The financial services industry will benefit directly from the authorities taking action in furtherance of the SRR objectives, in particular, the objective of enhanced financial stability and confidence in the banking system. Therefore, it is entirely appropriate that the sector should contribute to measures that achieve these objectives.
The second consideration is that the trigger for entry into the SRR, which we have discussed in debating Clause 7, is that the firm has either already failed its threshold conditions or is reasonably likely to do so. I have agreed to look at these provisions again to consider whether additional clarity is needed on the wording around the degree of likelihood involved, but I have made it clear that the test should be one in which the prospect of a voluntary or regulatory turnaround of the firm is remote. In other words, the SRR can be triggered only in cases in which, in the judgment of the regulator, the only alternative would have been a default that would have led to a payout under the FSCS. Therefore, but for the use of a resolution tool, the FSCS levy payers would have had to fund the cost of compensation to depositors arising as a result of the failure of a deposit-taker through the FSCS. It is entirely appropriate that the Treasury may provide that the FSCS levy payers should contribute to the costs arising from an exercise of the special resolution regime tools. I believe—or, at the very least, I hope—that the noble Baroness may have some sympathy with this proposal.
However, it is my understanding from the apparent intended purpose of the amendment that the noble Baroness is concerned that other persons, in particular a private sector purchaser or the insolvent estate, should contribute to the costs of a resolution before the FSCS is called on. I entirely agree that, in some circumstances, a private sector purchaser should be called on to contribute towards resolution costs. For example, if the private sector purchaser were acquiring some of the failing bank's assets or, at a later stage in a resolution, a bridge bank's assets, we would expect it to pay a purchase price reflecting the value of those assets. Where the authorities' intervention had led to an increase in the value of those assets, the purchase price would in most cases reflect it. The purchaser would thus have effectively contributed to the cost of the resolution through the increased price paid.
However, there are also certain circumstances where it would not be appropriate for the private sector purchaser to be required to contribute to resolution costs. For example, there may be administrative costs or additional compensation costs that a private sector purchaser would not be willing to pay, and a requirement that they do so may reduce the likelihood of a successful private sector solution. Therefore, I do not believe that the private sector purchaser should in all cases pay resolution costs before the FSCS or the authorities.
I turn to the proposal that the insolvent estate of the residual company left behind after the exercise of the stabilisation power should also fund resolution costs before the FSCS. I have a significant concern about this provision. Taking money out of the estate to fund resolution actions would lead to a smaller pot of money from which creditors and other counterparties left in the residual company would benefit. This is an outcome that we wish to avoid, as demonstrated by the "no creditor worse off" safeguard and objective 5 of the SRR, which emphasises the importance of minimising interference with property rights.
In the case of one of the more likely resolution actions—a deposit book transfer, as was carried out in the case of Bradford & Bingley—funding the resolution out of the insolvent estate would result in a de facto depositor preference regime. The Government, with the support of banks and investors in banks, have sought to avoid this outcome. Of course there will be a cap on the levy payer's contribution through the FSCS, fixed at the cost levy payers would have paid had the bank failed and the FSCS had had to pay out depositors. This cap will ensure that any recoveries which the FSCS would have been able to recover from the insolvent estate had it paid out in a normal way will be taken into account because the FSCS will not be required to pay more than it would have paid under a normal payout.
The approach taken in the Bill, whereby the FSCS may bear some of the costs of the SRR, is also consistent with the approach to the costs that the FSCS incurs when paying out depositors should a bank fail. The administrative expenses of the FSCS are not funded by the insolvency estate; these costs are borne by the levy payers.
I hope that I have provided sound arguments to support the view that, while in some circumstances the private sector purchaser may be called upon to contribute, this should not in all circumstances be the first port of call and why there are also risks in requiring the insolvent estate to be called upon before the FSCS.
In the case of requiring a private sector purchaser to contribute to the resolution costs, as I have set out, the Government are more inclined to consider funding from a private sector purchaser before FSCS funds, but I do not believe that such signalling is required in the Bill. Such arrangements will naturally form part of any commercial agreement between the parties involved and I therefore do not believe that this part of the amendment is necessary.
Finally, I recognise and agree with the intention to protect the use of the FSCS's funds which is why we have included a number of safeguards over the use of such money, including a cap and independent verification of any resolution costs. I do not believe, however, that the amendments, which the noble Baroness, Lady Noakes, described as "probing", are the right way to protect the use of such funds. Therefore, I beg her to withdraw the amendment.
I thank the Minister for setting out the Government's views. I remain concerned that the FSCS, especially once it is pre-funded, will look like a convenient pot of money to be used to pick up costs. I am not convinced that an insolvent estate should not in effect pay some of the costs alleged to that insolvency and thereby reduce the amounts available to creditors, as that is a necessary cost.
The Minister said there was a strong argument that the banking system or ongoing banks should pay. The trouble with that argument is that it actually means that consumers will pay. The banks do not pay in any real sense. The banks' shareholders do not even pay—this is just another cost which is passed on to consumers. The issue, therefore, is whether we localise the cost on to the failure or spread it over consumers. That is the only real issue between us. I would like to localise the costs where the failure occurred, even if that meant less for the creditors or the residual amounts that come out from a sale. I shall consider what the Minister has said between now and Report, and beg leave to withdraw the amendment.
Amendment 161 withdrawn.
Amendment 162 not moved.
Clause 168 agreed.
Clause 169 agreed.
Clause 170: Borrowing from National Loans Fund
Moved by Baroness Noakes
162A: Clause 170, page 91, line 24, at end insert—
"( ) A determination under subsection (3)(a) shall be made in accordance with section 5 of the National Loans Fund Act 1968, but subsection (6) of that section shall not apply."
I can be brief on this amendment, which adds a new subsection to new Section 223B of the Financial Services and Markets Act 2000, introduced by Clause 170. This clause allows the Financial Services Compensation Scheme to borrow from the National Loans Fund. We talked earlier about money going into the NLF; this is about money coming out of the fund to fund payments made by the FSCS. The Minister will be aware that the provision has been warmly welcomed by the British Bankers' Association, which believes that this is a much more appropriate mechanism for funding the FSCS than the pre-funding that has been allowed for.
To cut though the technicalities, my amendment tries to say that interest charged on the loan should cover the NLF's cost of money but should not allow the NLF to make a profit on it. In another place, the Minister said that the Treasury would want to charge a commercial rate because lending to the FSCS was, in effect, lending to the banks—but he did not specify what a commercial rate was. That rather begs the question what a commercial rate is. The Minister might like to answer that.
The FSCS will get its money from the banks by way of levies. There is no risk that the Treasury will not get the money ultimately through levies, except in extreme, Armageddon-like scenarios for the financial services industry. There is no risk to the Treasury, so no case for a risk premium for the Treasury. What the various banks could borrow will, of course, vary but, if LIBOR returns to its path at something very close to base rate, it will be difficult to justify the Treasury getting any more than that. My amendment seeks to stop the Treasury from profiteering from its financial relationship with the FSCS.
I thank the noble Baroness for the brevity with which she spoke. As I look at my daytime job in the Treasury, I have no sense that it is seeking to profiteer at the expense of the banks—quite the opposite, at times.
We have already extensively discussed the issues of funding the activities of the compensation scheme. Clause 167 allows for pre-funding, and Clause 170 allows for the Government to lend in the most administratively efficient way from the National Loans Fund.
The National Loans Fund charges interest on the loans it provides. Section 5 of the National Loans Fund Act requires the rate of interest to be set at a level which would cover the Government's cost of funds if, in order to service the loan, they were to borrow money on comparable terms to the loan they were making. I should stress that each loan or class of loans has to be priced individually in this way. The Treasury cannot take a portfolio approach and subsidise certain loans from the National Loans Fund by charging a higher interest rate on others.
Section 5(6) makes it clear that the Treasury may charge a higher interest rate on loans than the minimum that the section requires. The amendment would disapply that provision in relation to loans to the FSCS. The intention behind the amendment is that the FSCS should be able to borrow money from the Government at little more than the Government's cost of funding the loan. The Government are clear that the costs of the FSCS should be borne by the financial services industry. All parts of the financial services industry benefit from the extra confidence which the existence of the scheme provides to their customers. It follows that appropriate rates of interest should be charged on loans to the FSCS, which is ultimately financed by the financial services industry through the levies that it charges. That includes the interest on any loans that the FSCS takes out, so that those loans are really to the industry. It is right, therefore, that the interest rate should be set using the same principles that apply for government lending to bodies that operate in competitive markets.
The interest rate will, therefore, have at least to match the European Commission reference rate to avoid any suggestion that the loans amounted to state aid to the FSCS levy payers. There is also an underlying principle: the rate of interest on any loan should reflect the real risk of the transaction, which is important to ensure that the risks and exposures of the Exchequer—in other words, the taxpayer—are properly managed. I hope that the noble Baroness will, therefore, agree to withdraw this amendment.
I would be more than happy to confirm this in writing if it would help, but I believe that the NLF would charge the risk-free rate, plus a premium to reflect the risk of lending, but taking into account that the existing levying power is such that the risk of default is low.
It would be unwise for me to speculate on the precise number, but it would certainly be toward the lower end of basis points that would be applied to the extension of credit to companies in the financial services sector.
I thank the Minister for that helpful response. He has given a lot of information in his reply, which I shall consider carefully when I have read it in Hansard, but for today I beg leave to withdraw.
Amendment 162A withdrawn.
Amendment 162B not moved.
Clause 170 agreed.
Debate on whether Clause 171 should stand part of the Bill.
My reason for initiating this short debate is to look at some aspects of how the Financial Services Compensation Scheme operates for consumers, as opposed to how the banks contribute into it. We discussed one of these matters last week, on an earlier amendment that the noble Baroness proposed, when we talked about the £50,000 compensation amount.
I wish to raise two further issues today. First, there is how the scheme covers temporary high balances. The FSA aims to make proposals to deal with such balances, and those are due in the relatively near future. As many noble Lords will be aware, the issue is that many people face situations in their lifetime when they hold temporary high balances in their bank accounts—when they sell a house, for example, or receive a redundancy payout or benefit from an inheritance.
At the moment, it is impossible for customers who have such temporary high balances to cover themselves against the possibility of the bank failing. They can, potentially, spread the balance between different bank accounts once the money has cleared, but they will have to pay the lump sum into one account initially—and while it remains there, nothing over £50,000 will be covered. The FSA undertook research into that area, and found that consumers were unprepared to pay insurance to secure high bank balances, as they felt that they should not have to insure something that was supposed to be safe in the first place. We believe that the best solution would be some form of temporary 100 per cent guarantee. Of those possible solutions, one of the best options would be an automatically triggered guarantee for balances above the £50,000 limit for a specifically set time. That could be backed by an insurance policy paid for by the bank earning the interest on the large sum temporarily deposited with it. We welcome the Government's views on that proposal.
The second issue is broader. It relates to depositors in banks based elsewhere in the European economic area, but with branches in the UK. Measures proposed by the FSA do not go far enough to tackle the serious problems that apply to compensation arrangements for EEA banks operating within the UK. Currently EEA banks operate here by obtaining authorisation status with the FSA, also known as passporting. Consumers will be covered by the bank's home state compensation scheme in the event of a bank failing. If that compensation is lower than UK compensation, EEA firms can volunteer to top up their compensation limits by joining the FSCS. Thus, if the Icelandic scheme had honoured its commitments, Icesave customers should have received their first €20,000 compensation, with the rest of the balance up to £50,000 provided by the FSCS.
Different compensation limits and arrangements between countries cause confusion for consumers. It is not sufficient simply to require passporting firms to make what the FSA has described as,
"appropriate standardised disclosures to their customers".
Changes are needed to ensure a single point of contact for consumers to access the full amount of their compensation in their home country. The added risk, which must be addressed, is that foreign Governments will not honour their commitments to pay compensation to non-citizens.
We suggest that the Government should lobby for a change in EU regulations, making topping up compulsory for passporting EEA banks and requiring member states to act as lenders of last resort for their compensation scheme. Only then can UK citizens feel confident in placing deposits with foreign banks.
This might have seemed a rather far-fetched concern had we not had the situation with Iceland. That caused real problems and the Government had to step in and bail the banks out. We believe that now is the time for the Government to take up this issue at EEA level. We commend that proposal to Ministers.
I am grateful to the noble Lord for the points he makes on Clause 171. The clause would facilitate the speedy payment of compensation to depositors or facilitate the speedy transfer of their accounts to another bank under the bank insolvency procedure in Part 2 of the Bill. I am sure the noble Lord shares with the Government the objective of speedy restitution, particularly to certain categories of depositors. Obviously, large volumes will take longer, but the whole point of the clause is to respond as speedily as possible to the needs of depositors. I agree with him in that broad concern.
Another of the noble Lord's concerns is about temporary high balances. I agree with him that that is an important point. Experience over the past few months has ensured that the vast majority of those with resources know the nature of existing guarantees, and that to benefit from the guarantees on £50,000 they must put any greater amounts with different institutions. I appreciate the point the noble Lord makes, that because of the nature of a transaction—particularly the selling of a house—people can have a temporary high balance. I emphasise that we are consulting on this, which is rightly a matter for the Financial Services Authority. I cannot comment on the position at present, except to say that the FSA is all too well aware of exactly the point that the noble Lord has made. It has been made in many different quarters and made in another place with some force as well. He is knocking at an open door if he is seeking to bring this debate to the attention of the authorities. At this stage I do not have an immediate resolution of the point but I accept the representation.
On the European economic area branches, the Government are bound by the European directive, so the noble Lord is right that if we want to see things change we have to stiffen up the directive, which is subject to review at present. I bring to the attention of the House the obvious point that present problems with the banks are much wider than the United Kingdom. We often mention the United States at this point, but we should not underestimate the problems in Europe as well. The Government are concerned about cross-border payment. We have lobbied for a single point of contact. We accept entirely the noble Lord's anxiety that talking about passport arrangements is not enough as far as the new position is concerned. He has recommended that topping up should be made compulsory. I cannot promise that immediately. However, he makes two important points which we intend to address in consultation with regard to giving effect to them as rapidly as we can achieve.
Under Clause 173, the FSA can make banks give it all kinds of information which it can then make available to the Financial Services Compensation Scheme. There is considerable concern among the banks about the use which might be made of this provision. This is not a concern about providing information per se; it is a concern that the FSA will use this power to impose data requirements on the banks to provide information that the banks do not need for their business purposes, and the effect of that will be to impose costs on the banks on a disproportionate basis. The issue that is currently causing the greatest concern is the proposal for faster payout, which will impose significant additional costs. An independent study by Ernst & Young, which was commissioned by the FSA, the Financial Services Compensation Scheme and the British Bankers' Association, has recently reported on the costs of the faster payout proposals. Those will require banks to marshal their customer data into a single customer view, as well as a number of other systems changes. The Ernst & Young study found that the costs over the first five years just to set up and maintain this system, whether or not it was used, would be in the range of £0.9 billion to £1 billion. This contrasts with the regulatory impact assessment for the cost of the whole of this Bill—not just Clause 173—amounting to no more than £5 million.
Will the Minister say whether Clause 173 is in this Bill to support faster payout arrangements or for any other purpose? If there is another purpose, I would be grateful if the Minister would set that out. If Clause 173 is there simply to support faster payout arrangements, will the Minister acknowledge that faster payout will be very much less of an issue if continuity of banking services, for which we sought an amendment to Clause 4, is placed in the Bill as an objective of the special resolution regime? This is the way forward that the banks themselves support. They do not support the current proposals set out by the FSA, so Clause 173 is a potential problem. I look forward to the Minister's comments.
I am grateful to the noble Baroness for initiating this debate if it gives me a chance to recover from the past sins of omission that she suggested were committed from the Treasury Bench earlier in the Bill.
The intention of the clause is to allow the FSCS to obtain, in a timely fashion, the information it needs to ensure that compensation can be paid out swiftly. The noble Baroness asked whether the clause was directed towards swift payment, which is of course an important part of the thinking behind it. We need to be able to pay out swiftly and accurately to eligible claimants in the event of the failure of any institution. I am sure that the whole Committee shares in that objective.
The first subsection allows the FSA to make rules allowing it to obtain information that will assist the FSCS in carrying out its work, particularly preparing for a possible need to pay compensation even when no default is imminent. It allows the FSA to use its existing powers to require individual firms to provide information that would be of use to the FSCS. There is nothing exceptionable about that. It is an even clearer illustration of the concern over payouts for depositors.
The provisions will also enable the FSCS to undertake contingency planning and risk assessments in relation to the ability of firms to pay out in future, should it be necessary. This is an obvious, sensible contingency exercise for the Financial Services Compensation Scheme, and will also mean that requests for information from the FSA in relation to any such payout will not automatically be taken as a signal that the firm in question is in difficulty. That is important. We do not want the powers to be exercised and the search for information to take place only when crisis potentially looms. Otherwise, every search for information will cause anxiety about the difficulties of the institutions concerned. We are trying to regularise this for the needs of any Financial Services Compensation Scheme payout.
The remaining subsections allow the FSCS to obtain information directly from authorised persons or certain other persons from the time that the authorised person could be declared in default for the purposes of the scheme. They allow the FSCS to obtain information from a bank which is subject to the special resolution regime—by which time, of course, we will have got into difficult circumstances. This is to enable the calculation of the maximum amount that the FSCS would be required to contribute to the costs of the special resolution regime.
That, as all sides of the Committee will appreciate, is one of the legislative changes needed to make depositor payout more effective. The provisions in the clause are a fundamental part of the authorities' work to speed up the payment of compensation to depositors by ensuring that the FSCS has the necessary information to make preparations for payout. I am sure that the Committee agrees with those objectives. We want to ensure that information can be collected by the compensation scheme before the bank becomes insolvent. The current position is that the FSCS can get information after the bank has gone into insolvency. By definition, that involves delay in the scheme's response to real needs.
I agree with the noble Baroness on continuity and service through the special resolution regime. Clearly that is preferable, but it is necessary to have a fast payout as a backstop should the other resolution options prove unworkable. We have debated these at some length in Committee and they have problems attendant upon them. It would do nothing for consumer confidence if a fast payout proved unavailable when the institution was in difficulty.
The FSA is consulting on the single customer view; the noble Baroness is concerned about the costs that may be borne by the individual institution. The clause is directed towards faster payout but the FSA can require the single customer view under existing powers. Therefore, we are not adding to those in this clause.
The objectives of the clause are clear. I understand the noble Baroness's anxieties about the element of costs involved. The authorities will direct their search for information towards the objective of a faster resolution of a situation when things have gone wrong. That is an important priority for the Government and is why the clause needs to remain part of the Bill.
I thank the Minister for that explanation, in particular for explaining that existing powers can be used to impose a single customer view. I outlined the costs as being the best part of £1 billion and asked whether they were needed. Do the Government accept that the FSA should not go down that route if continuity of service were made an objective of the special resolution regime?
As I indicated, the FSA has not finished its consultation on this issue. This is a salient point that needs to be settled. I can give some reassurance that the points made by the noble Baroness today are important and need to be given serious consideration. Having acknowledged that the FSA will need to consult on how it operates under this clause, I have not the slightest doubt that this clause is essential. I hope the noble Baroness will feel able to accept that point.
Clause 173 agreed.
Clauses 174 to 180 agreed.
Clause 181 : Recognition order
Moved by Baroness Noakes
163: Clause 181, page 96, line 1, leave out subsection (3)
Amendment 163 would delete subsection (3) of Clause 181. This is a probing amendment. We have now reached Part 5 of the Bill, which deals with interbank payment systems. I hope we will not be detained too long, although I have tabled a few amendments to this part of the Bill.
Subsection (3) says that the Treasury must not designate an interbank payment system which is operated solely by the Bank of England. We have no problem with that since it would mean the bank would regulate itself, but it raises a number of questions. First, who provides the oversight of the systems operated by the Bank of England? The Bank of England, does not do it—quite rightly. Who does? This part of the Bill has some quite heavy oversight provisions relating to interbank payment systems, including the ability to issue penalties. Therefore, who is to check that the Bank meets the principles set out under Clause 185 or the code of practice under Clause 186? Is it the Treasury? From my limited knowledge of the Treasury's relationship with the Bank of England, I do not think it can be said that the former oversees the latter in any meaningful way, so I wonder who would look at payment systems operated by the Bank.
Secondly, what will happen if the Bank partly operates the system, as I believe is the case with CHAPS? This system will presumably be specified under Clause 181. Does it mean that the Bank will regulate itself in relation to the part that the Bank operates?
Lastly, my honourable friends in another place got quite excited about a suggestion in the Explanatory Notes, which I could not find in our version, that the Bank of England might step in and start running clearing systems. If that happens—and it is clearly a possibility—that system will presumably already have been specified. Would that lead to the Bank regulating itself in that case? These are points for clarification and I beg to move.
Part 5 involves the Government legislating to formalise the Bank of England's role in the oversight of payment systems. It is a very important section of the Bill in terms of strengthening financial stability and confidence in a financial system.
Part 5 seeks to ensure that the Bank of England has the necessary tools to ensure that payment systems are operated in a manner that minimises risks to financial stability and disruptions to business and consumer interests. In addition to providing an important tool for the maintenance of financial stability, these measures will also provide an important new statutory lever for the Bank of England to use in fulfilling its new statutory objective for financial stability, as provided for in Part 7.
Amendment 163 concerns the Treasury's power, under Clause 181, to make a recognition order in respect of an interbank payment system for the purposes of this part of the Bill. The aim of subsection (3) is to ensure that the Bill does not unintentionally capture internal systems used by the Bank of England to conduct operations in its role as a monetary authority. The amendment seeks to remove this provision, which states that such an order cannot apply to a system operated solely by the Bank of England.
I do not believe that the amendment is necessary. Although the Bank of England may provide facilities that allow transactions in interbank payment systems to be settled across its balance sheet, it is not currently an operator of payment systems within the meaning of the Bill. If the Bank were to become the operator of an interbank payment system in the future, it would conduct its operations in that field in accordance with its overall statutory responsibilities, including its new financial stability objective under Clause 228. Naturally, the Bank would apply the same principles in conducting its own operations as it would expect of others.
The risk of an operator taking insufficient account of overall financial stability considerations, which arises in privately operated interbank payment systems, would therefore not arise in connection with a payment system operated by the Bank of England. The removal of this subsection is thus unnecessary and I ask the noble Baroness to withdraw the amendment.
It is not what the Minister is saying. I suspect that the noble Baroness is very aware of that and I am grateful to her for providing me with the opportunity to clarify it, should there be any doubt. In the hypothetical example that she provided, the Bank's executive would be accountable to the Court of Directors of the Bank of England for its operation of any payment system, and the Bank, in turn, is accountable to Parliament.
I was taken rather by surprise by subsection (3) as it is not immediately apparent for whose benefit it is included. Is it to protect the Treasury or the Bank of England? What lies behind it? If the Minister says that the amendment is not needed, presumably that will be because the thinking behind subsection (3) copes with questions of whose interest is at stake, but it does not leap off the page. Will the noble Lord explain for whose benefit or protection the subsection should remain in the Bill?
Amendment 163 withdrawn.
Clause 181 agreed.
Clauses 182 to 184 agreed.
Clause 185 : Principles
Moved by Baroness Noakes
164: Clause 185, page 97, line 16, at end insert—
"( ) Before publishing principles, the Bank must consult the operators of recognised inter-bank payment systems and any other persons which, in the opinion of the Bank, might be affected by the principles."
Under Clause 185, the Bank of England may issue principles, which I understand it already does in its informal oversight arrangements. The operators have to have regard to them when operating their systems. There is a requirement to consult the Treasury but no requirement to consult the interbank settlement players or indeed anyone else. My Amendment 164 would add that.
Amendment 165 is in similar form in relation to the code of practice which may be issued under Clause 186. I hope that the Government agree that it is appropriate and necessary for the Bank to consult those who will be objects of those principles and codes.
Amendment 167 would add a new category of compliance failure to Clause 193—the failure to have regard to the principles. This is a probing amendment to find out the status of the principles and the consequences of not following, or not having regard to, the principles. I am not convinced that a failure to have regard to principles should be sufficient to trigger things such as penalties, which are then provided for, but having said that, it is important to establish what happens if an interbank payment system does not have regard to the principles. What is the role of the principles in this legislation? I hope that the Minister can explain. I beg to move.
I understand that it is proposed that the Bank will publish a set of principles with regard to the interbank payments, and so on, and before doing so will consult operators in the market. I am not clear why this is necessary to prevent destabilisation of the system. I am right at the very beginning of the argument. These are apparently elaborate arrangements for ensuring that the Bank supervises and regulates the interbank payment system. What is the danger if there are unregulated operators working a system of interbank payments?
I am grateful to noble Lords who spoke on this amendment. With respect to the principles behind Clause 185, we do not think that the Bank of England needs to be put under a specific requirement to consult. The Bank intends to adopt the internationally recognised principles developed by the Bank for International Settlements. These principles are set out in the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems. The Bank will follow those international requirements.
As the Committee would anticipate, these core principles are already used by the Bank in its current oversight regime. They are internationally accepted as important for sound, stable and well functioning financial systems, and form part of the Financial Stability Forum's Compendium of Standards. The Bank of England will also take account of other relevant internationally agreed recommendations and best practice in setting its principles, and it will work closely with operators of recognised payment systems in the undertaking of its functions under this part.
The Bank must also obtain the Treasury's approval before it publishes any principles, which ensures a degree of parliamentary accountability. It is also worth noting that compliance with the principles is not prescriptive. Recognised systems must have regard to the principles in operating, but not doing so does not constitute a compliance failure. I hope that I have covered the issue with regard to Clause 185.
Amendment 165 makes a change with regard to the codes of practice provided for in Clause 186. This was discussed in the other place and, like my honourable friend the Economic Secretary during Committee stage in the other place, I can confirm that the Bank will seek to consult with the operators of payment systems in developing codes of practice. However, the codes of practice are intended to function as a flexible mechanism to set binding standards that can be applied, as appropriate, to one or more recognised interbank payment systems as needed. They will focus on a more specific level of detail than the principles. For example, a code of practice may require certain types of system to observe specific minimum standards in relation to business continuity. However, we do not believe that it is necessary to insist on consultation in primary legislation, given that the Bank will develop relevant codes of practice by working with the payment systems concerned as appropriate, which I think was the noble Baroness's anxiety. I hope that gives her some reassurance.
Amendment 167 extends the definition of compliance failure in Clause 193 to include a failure by an operator of a recognised payment system to "have regard to" the principles. We do not think this amendment is necessary. The principles published by the Bank of England will be high-level and over-arching. All recognised interbank payment systems must have regard to those principles. However, they do not set out detailed provisions about the operation of payment systems, but instead provide guidance about good practice in operating the systems. It would not be appropriate for failure to comply with the principles to trigger a compliance failure.
In practice, if the Bank thought that a system's observance of a principle was inadequate, it would engage in dialogue with the system and monitor progress, for example via regular meetings. The Committee would recognise the seriousness of that position, and the necessity for the Bank to engage in discussions. If that proved insufficient, the Bank might use additional information-gathering powers by commissioning an independent report, which we provide for in Clause 192, to assess whether the operator is taking sufficient account of the principles. Based on this analysis, the Bank could then use its powers to issue a code of practice or directions, or to require the payment system operator to make rule changes. Failure to adhere to such measures would constitute a compliance failure, and the Bank could impose a sanction. We specify this in Clauses 194, 195 and 196. I hope that I have illustrated how the principles and code of practice are intended to work. Therefore, I reassure the noble Baroness that she can withdraw her amendments with confidence.
The noble Lord, Lord Higgins, asked what danger we are addressing with these clauses. The arrangements in the Bill replicate and formalise the existing role of the Bank, to which I referred earlier, in overseeing payment systems. The noble Lord does not need me to emphasise that payment systems are fundamental to the efficient operation of financial markets, and the Bank needs powers over them. That is what these clauses identify. I hope that I have given sufficient reassurance for the amendment to be withdrawn.
I am grateful to the Minister for setting that out. I thought earlier that he was saying that principles were high-level things that somehow needed Treasury approval, but that the worst that would happen if you were not complying with them would be that you would have a meeting, whereas breaking the code of practice, which did not require Treasury approval, could result in penalties. That seemed strange, but the Minister squared the circle when he explained the link with an independent report under Clause 192 that could take account of principles. I am therefore satisfied with the Minister's answer. I beg leave to withdraw.
Amendment 164 withdrawn.
Clause 185 agreed.
Clause 186 : Codes of practice
Amendment 165 not moved.
Clause 186 agreed.
Clause 187 agreed.
Clause 188 : Directions
Moved by Baroness Noakes
165A: Clause 188, page 97, line 37, at end insert—
"( ) An inter-bank payment system, its officers or servants and members of its governing body shall not be liable in damages for anything done or omitted to be done when such act or omission occurs in accordance with a direction given by the Bank of England under this section."
Amendment 165A adds a new subsection to Clause 188, so that if an interbank payment system does or does not do something in accordance with a direction given by the Bank of England under Clause 188, it will not be liable for damages. The amendment has been suggested by the Payments Council, an independent industry-led body that brings banks and users together to discuss strategic issues in relation to payment systems.
The council accepts the need for the Bank to be given powers, in Clause 188, to instruct an interbank payment system to act, even if the rules of that system preclude this, as might be the case with a bank that is being dealt with under the special resolution regime. It is normal for a bank in financial difficulties to be excluded from a payment system, and the Bank may want to overrule that. The concern that has been expressed relates to possible actions by creditors of the failing or failed bank against the payment system; for example, for allowing retail depositors to withdraw their money, potentially disadvantaging the main body of creditors. How does the Minister see the position of interbank payment systems that are the subject of a direction? If there is any risk to the payment system in complying with the direction, how will it be protected? I beg to move.
I am grateful to the noble Baroness for the way in which she introduced her amendment, and for the fact that she accepts that the power given to the Bank of England is important. The Bank will make a direction to the operator of an inter-bank payment system only where it is necessary in the interests of protecting the stability of or confidence in the UK financial system, or to protect business or other interests in the UK. I would have been shocked if the concept of the power had been challenged in a direct way and I am relieved that all sides of the Committee endorse that position.
In undertaking its formal oversight role in accordance with this part of the Bill, the Bank will work collaboratively with the operators of payment systems. It will communicate regularly in order to ensure that recognised payment systems are being operated in a way that minimises deficiencies and the likelihood of disruptions to inter-bank payment systems that could give rise to financial instability or other concerns. The Bank will give directions only in the event that other informal and formal regulatory tools are ineffective or where action is urgent because it is necessary to avert a particular risk.
As in the case of the intervention powers of other authorities—for example, the FSA's powers to give directions to the managers of authorised unit trust schemes—it is inappropriate to exempt the operators from liability in damages as a result of those directions. The payment system in question will have been recognised as having systemic or system-wide importance, including for business or other interests across the UK. Therefore, any directions with which the Bank may ask a system to comply will ultimately be preventive in order to seek to ensure that the system is not running unnecessary risks that could threaten financial stability. I hope that I have established the significant purpose of this clause and indicated how the Bank will operate its power under this clause in consultation and fully in accord with the seriousness of the potential difficulty that might arise—namely the Bank's enhanced role in protecting the stability of or confidence in the UK financial system, or to protect our business or other interests. I hope the noble Baroness feels that I have justified the clause enough to enable her to withdraw the amendment.
I thank the Minister for his response but he did not deal with the point that I raised. He described issuing a direction in the context of a payment system being important to financial stability, but my point concerned a failing bank which needs continued access to the payment system for continuity of banking services, or something like that. The rules of a payment system are usually to chuck out someone who is financially a bit dodgy—that would be the normal practice—but the Bank is saying, "No, you can't apply your normal rules. We want you to continue to take this failing bank in order to keep things going". My point was to ask whether the operators should at that stage have an indemnity in doing something that, under the terms of their rules, they would not normally want to do. We are not talking about a payment system that is itself threatening financial stability, and which will therefore take whatever pain the Government want to impose on it. We are talking about a payment system that is happy to comply with whatever is necessary but which is also concerned about the consequential impacts of claims against it by other parties. The Minister did not address that point.
I think that the Minister also said that there were no equivalent provisions in the Financial Services and Markets Act. It is my understanding—I do not have the chapter and verse as I do not have the Act with me—that there were similar situations within the Financial Services and Markets Act where indemnities were provided. I am sorry to press the Minister on these points but they have been raised with me by the Payments Council. I wonder whether he can help.
I disagree. We do not think that it is appropriate to extend the FSA's powers to give directions to the managers of authorised unit trust schemes to exempt the operators from liability in damages as a result of those directions. After all, the power to give directions is to ensure that the system is being operated in a way that does not threaten financial stability or disrupt markets.
We do not intend to use the power in the way that the noble Baroness suggests as it would involve a more limited operation with regard to potential creditors. We are talking about a significant failure in the system, in which case talk of indemnity is misplaced. I alluded to the Financial Services Authority's powers in this area because those do not exempt operators from liability in damages as a result of directions which the authority may give. I am sorry if I have not been entirely clear but we may have been at cross-purposes over the nature of these powers. I am seeking to explain that these powers would operate at a more substantial and significant level than in the instance given by the noble Baroness. In such circumstances, indemnity would not be appropriate.
I hear what the Minister says, and I shall not go into the question of the Government using those powers in the context that he described. Is he saying that the Government would not use these powers to instruct a payment system to keep within that payment system a bank that would be required to leave the system under the terms of that system? I gave the example of a bank that failed to satisfy financial conditions and would therefore be deprived of ongoing membership—which I understand is a normal term of payment systems. Are the Government saying that these direction powers would not be used in such an instance? It is that kind of instance that is causing the problem.
The noble Baroness is right; I withdraw that point. I have been dealing with so many debates on clause stand part that I misconstrued the argument.
I was seeking to emphasise the level of the powers within the clause and explain why the clause is essential. The noble Baroness has raised an important point but it is not four-square with the way in which the Bank of England would intervene at this level. I realise that that may not be a satisfactory response, so I shall write to the noble Baroness. If I do not convince her, the issue will undoubtedly be raised again.
The Minister correctly identifies the fact that he has failed to deal with the amendment to my satisfaction. As he will be aware, the time between now and Report is almost non-existent as we are operating way outside the normal intervals. I am not sure that writing to me will be helpful unless there is a very rapid response tomorrow, which would be helpful. I will need to consult those who raised the point with me; the Payments Council regarded it as a serious point. I will almost certainly have to return to this on Report.
The noble Baroness has not yet withdrawn her amendment, so I am not tardy. I shall ensure that I reply to her immediately.
Amendment 166 amends Clause 189(1). Clause 189 is headed "Role of FSA", but the first two subsections describe what the Bank should do in relation to the FSA and not what the FSA should do. I have proposed the deletion of subsection (1) for a different reason. It says:
"In exercising powers under this Part the Bank ... shall have regard to any action that the FSA has taken or could take".
Does that mean that the Bank will have to make itself omniscient about what the FSA does and, even harder, what the FSA might do? I am sure that the Bank should have regard to anything that the FSA tells it, and my amendment allows for that. It might also be reasonable for the Bank to have regard to anything that it happened to know about the FSA's actions. But I do not think that it is reasonable to impose on the Bank some kind of all-knowingness about what has happened or might happen in the FSA. I beg to move.
I am delighted to do my best to resolve the noble Baroness's anxieties yet again. However, I do not think that her anxieties in this regard are well founded. While the Bank of England will be the sole regulator of recognised inter-bank payment systems, the FSA will continue to be the regulator for recognised clearing houses and investment exchanges. Some of these recognised clearing houses and investment exchanges may themselves run inter-bank payment systems embedded within their operations. These embedded payment systems may be recognised by the Treasury by an order under this part.
The danger is that that could lead to dual regulation, which is why this clause makes provision to try to avoid that. That is the objective of the clause. Subsection (1) requires the Bank to have regard to any action the FSA has taken, or could take, with regard to an embedded system. Amendment 166 seeks to add a new constraint in that the FSA must notify the Bank of any action that it has taken or could take. We do not think that that is useful. It presupposes that the Bank and the FSA cannot or do not communicate fully with one another in performing their respective regulatory functions, but that is not the case. The Bank and the FSA already communicate with one another in respect of embedded payment systems, and the formalisation of the Bank's role will not undermine this communication.
In addition to the existing channels of communication, and in order to formalise the arrangements when dealing with such systems, the Financial Services Authority and the Bank will set out a memorandum of understanding on how to deal with regulatory issues connected with embedded payment systems. That will ensure that there is full communication between the two authorities. To facilitate this, they intend to meet on a regular basis to share views on issues concerning embedded payment systems.
The Government took the opportunity to table an amendment on Report in the other place to elucidate further the delineation of roles between the FSA and the Bank of England. Subsection (2) now specifies that the Bank of England must consult the FSA before taking action in respect of an embedded payment system. Subsection (3) now specifies that if the FSA gives the Bank of England notice that it is considering taking action on an issue that affects an embedded payment system, the Bank may not take action without the FSA's consent or unless the notice is withdrawn.
This is designed—as I am sure the Committee will agree—to ensure that there is no duplication between the regulatory functions of the Bank. That is the purpose of the clause. The Bank will be fully aware of the FSA's responsibilities as published in the FSA handbook. It will be working with the FSA and maintaining regular dialogue in the case of embedded payment systems. I share the noble Baroness's view that this is an area of real concern. This memorandum of understanding will further consolidate their working relationship. I hope the Committee will agree that the Government have done all that they should, both in my response today and in the amendment moved in the other place, to ensure that this position is clear. I hope I have thereby allayed the noble Baroness's anxieties and that she feels able to withdraw her amendment.
I thank the Minister for that response. Those who believe that banking supervision should be returned to the Bank of England would find much in what the Minister has said to support that position. He has described the most convoluted arrangements around a relatively minor part of the activities of each organisation, just to overcome both organisations dealing with it. The Minister has dealt with the points that I raised, but he has also highlighted some of the absurdities of the position that we now find ourselves in. I beg leave to withdraw the amendment.
Amendment 166 withdrawn.
Clause 189 agreed.
Clauses 190 to 192 agreed.
Clause 193: Compliance failure
Amendment 167 not moved.
Clause 193 agreed.
Clause 194 agreed.
Clause 195: Penalty
Debate on whether Clause 195 should stand part of the Bill.
I have given notice that we oppose Clause 195 standing part of the Bill because it gives the Bank a completely untrammelled power to levy penalties for a compliance failure. Furthermore, it creates an incentive for the Bank to levy penalties because the penalty is paid to the Bank. For the convenience of the Committee, I have grouped this with Clause 219 stand part, as that clause concerns an identical provision in Part 6, which deals with banknotes.
I have no problem with penalties for compliance failure, as that is an accepted part of regulation, but I do not believe that it is proper for the Bank to be given an unlimited power of penalty-raising. In other parts of the legislative sphere we can find multiple turnover limits which apply to penalties under competition law. The FSA is required under its statute to set out and publish a scheme of how it will apply penalties. There is absolutely no guidance in this clause, and no requirement for the Bank to do anything such as set out a scheme. Indeed, an operator may fare better by being prosecuted under Clause 196 because at least that system imports rules about fines from the criminal justice system.
As I mentioned earlier, I also have a problem with any penalty being paid to the Bank. Why should the Bank be enriched by a large penalty? I can see that it would want to recover its costs from dealing with a recalcitrant system operator, but what public policy is served by the Bank profiting from its activities?
There is a general sense that if there is a compliance failure, it is compliance failure as much by the regulator as by the bank committing what is deemed to be an offence. I share my noble friend's surprise that the penalty is in no way specified. It simply says that the Bank may require payment of a penalty in respect of a compliance failure. However, we have no idea at all, as far as I can see, what the scale of that penalty might be. In almost any penalty imposed by legislation, some limit is set on it. Why have the Government simply given the Bank of England an open cheque to impose penalties on banks or transfer systems, and then have it enforced as a debt payable to the Bank?
I am grateful to both noble Lords who have spoken to this amendment. The Government regard Clause 195 as playing a crucial role in the new regulatory regimes for both inter-bank payment systems and the issuance of Scottish and Northern Irish banknotes as set out in Parts 5 and 6 of the Bill. In Part 5, Clause 195 gives the Bank of England the power to impose—as the noble Lord, Lord Higgins, has drawn attention to—a financial penalty on the operator of a recognised inter-bank payment system that has committed a compliance failure, as defined in Clause 193. This power to impose a financial penalty is intended to act as a deterrent against the non-compliance of operators of recognised payment systems with the obligations under Part 5. It reinforces the need to comply with, for example, provisions of codes of practice or directions intended to ensure that systems are not being operated in a manner that could present a threat to financial stability, and to ensure the robustness of payment systems of systemic or system-wide importance. I am sure the Committee recognises the public interest in both those objectives.
In Part 6, Clause 219 provides that banknote regulations may enable the Bank of England to impose a financial penalty on an authorised issuing bank that has breached the banknote regulations. This is an important enforcement tool for cases where the breach is not so severe that it warrants withdrawal of an authorised bank's issuing rights, which is a power that could be used in the most extreme case, yet warrants the imposition of a penalty to ensure compliance with regulation rules that are necessary to offer note-holders protection.
Clauses 195 and 219 share an underlying purpose. Although the specific details may vary, I would like to discuss the imposition—which the noble Lord, Lord Higgins, was particularly concerned about—of a penalty in general terms which are applicable to both parts, as the grouping of these two issues into this single debate suggests. I am grateful for that grouping. The power to impose a financial sanction is intended to act as a deterrent and enforcement tool, underpinning the new regimes provided for in the Bill. I give way.
The Minister is being very interesting, but it might speed up the Committee stage if he answered the single point that I raised, which was about unlimited penalties and whether the Bank should raise them. I do not think that either I or my noble friend Lord Higgins has queried whether penalties are an appropriate part of the system of regulation. Indeed, I specifically said that I accepted that.
I am grateful to the noble Baroness because she has sharpened my argument and, I hope, shortened my contribution. The Financial Services Authority has the right to impose these penalties, but both it and the Bank of England, as in this case, have to be proportionate in dealing with the compliance failure. We want the clause to be in this form so that it offers the regulator flexibility in determining the appropriate penalty, having regard to the circumstances in each case. There will be different potential breaches, so it is difficult to be specific in primary legislation, as I am being pressed to be at this stage.
The Bank would impose financial penalties in proportion to the seriousness of the compliance failure or regulation rule breach and to the ability of the system operator or authorised bank to pay. Any public authority would need to act reasonably in setting the penalty. I indicated earlier the constraints on the Bank, which apply also to the FSA in different circumstances. The purpose of the penalty clause is to give the power to impose a financial penalty, but the authorities must act reasonably and in proportion to the compliance failure. Failure to do so would be subject to challenge.
Noble Lords are pressing for a tariff of penalties in primary legislation whereas we are dealing with a range of potential difficulties that give rise to the need for compliance. I am not able to give a range in those terms, nor would it be reasonable for the Government to attempt to do so in primary legislation. The clause gives the power—the necessity of which I hope is not being denied—in the understanding that the authorities have to act reasonably when they invoke the penalties. That is the best that I can do for the noble Baroness on this amendment.
I am puzzled by the Minister's reply. Some of his remarks seemed not to be related to Clause 195 at all; it is, after all, a very simple clause of only a few lines. Can he tell us of any other provision in primary legislation where there is no limit whatever on the penalty which the Bank of England or any other body can impose? I have difficulty in thinking of any other part of the law where the penalty is totally unspecified. He spoke about it being done in primary legislation but, unless I am mistaken, that is the only place where this matter is dealt with. The clause is not subject to any further specification by way of statutory instrument or anything else. The whole thing is set out in primary legislation but is totally unlimited and will be enforced by the Bank as a debt. I simply do not understand. Have the Government any idea of what the scale of such a penalty might be? The Minister seemed to say that the penalty would depend on the ability to pay of the person not complying. That seems an extraordinary way to do it. One would expect a penalty to be imposed if there is an offence, but not that it will be imposed on the basis of whether someone can pay. We do not say in any other part of the law that we are going to have a penalty and that the fine for a speeding offence, for example, will depend on the ability of the person to pay. I find it quite objectionable that one should give an unlimited penalty power to the Bank of England in primary legislation with no qualification in secondary legislation.
I hope that I can be a little more helpful to the noble Lord, because he is on to an important point. I tried to emphasise that the FSA publishes guidance on the level of penalties, but the FSA's powers are unlimited in the primary legislation governing it, the FSMA.
I was coming to that. In view of the strength of the representations made, we will consider whether the Bank of England should publish a policy on a payments system and compliance failure penalties. We will return to the issue on Report to clarify the matter further. I seek merely to identify that it is entirely right that we should seek to resist the concept outlined by the noble Lord, Lord Higgins, that an order of offences and their respective penalties should be in the Bill. We have difficulties with the concept. However, we will certainly return to it because I understand the dissatisfaction expressed both by him and by the noble Baroness, Lady Noakes.
Will the Minister consider giving some notice about non-compliance and an opportunity to put it right? One of the Committee's difficulties is that we do not know, because we have not been given any examples, what non-compliance might be, how quickly it might occur and how difficult it would be to put it right, all of which are matters that the Government are in a much better position than I am to consider. The Minister mentioned a remedy. Is it judicial review?
If the authorities acted unreasonably that would be the ultimate position. However, the noble Viscount's friends on the Back Benches and the Front Benches are pressing us to indicate our thinking about the range. I maintain that the Bill as drafted is right and justified and gives powers that are not different from those that the FSA already enjoys in similar circumstances. I have conceded that at Report stage we will need to flesh out a little more what might be published by way of guidance or a policy on the payments system. I hope that noble Lords will think that I have gone as far as I can.
We are in danger of becoming a conversation—one Member stands up, then the Minister stands up, then another Member stands up and so on—which is not the normal way of going about it. We greatly appreciate the Minister's enthusiasm but our progress would be a little more orderly if he perhaps waited until everyone had had their say.
The idea that the Bank of England will decide what the penalties ought to be seems the wrong way of going about it. We ought to be given an explanation of what the offences are likely to be and the consequences of non-compliance, and then fit some sort of limit. As the provision stands—I welcome the fact that we will come back to it on Report; the House will certainly need to do that—we have no idea whether the Government envisage penalties of £1 million, £1 billion or £1 trillion. We have not the remotest idea of what size they think the penalty might need to be to ensure compliance in an important matter.
It is, however, possible that the noble Lord would be stretched in identifying what the misdemeanour might amount to—whether it was something of catastrophic significance for the financial system or something more marginal. We are providing for penalties that deter. I am sure that the noble Lord will accept that.
I accept the noble Lord's upbraiding about this becoming a conversation. That is not my wish. It is merely a reflection of the fact that when I have given what seems to me a conclusive and accurate answer, a little dispute crops up, generally from two sources, namely the noble Lord, Lord Higgins, and the noble Baroness, Lady Noakes. I am not complaining about that. I had not anticipated that the noble Viscount, Lord Eccles, was coming into the debate. I owe him a sincere apology. He asked me two questions. It is true, as the noble Lord, Lord Higgins, suggests, that I was almost involved in a conversation, although Committee stages do have the benefit of some flexibility. I agree with him entirely: I should seek to be more comprehensive and more conclusive and I will do my best.
The noble Viscount, Lord Eccles, asked me about appeals. Part 5 can be appealed to the Financial Services and Market Tribunal but Part 6 would have to be the subject of judicial review. He also asked me about a warning notice. Clause 198 says that before imposing a sanction it must issue a warning notice and consider representations before publishing the decision notice and imposing a penalty. There is therefore some notice—I am referring to Clause 198—and I hope I have succeeded in ending the conversation.
We must draw this debate to a close. However, we will raise the issue again on Report even if the Minister does not. I shall merely remark that to hear a Minister express shock and horror at the possibility that a statute might actually specify a penalty leaves me aghast. I will, however, leave that for Report.
Clause 195 agreed.
Clauses 196 to 199 agreed.
Clause 200: Fees
Moved by Baroness Noakes
168: Clause 200, page 102, line 4, at end insert "which reflect the costs incurred by the Bank in carrying out its functions under this Part"
I hope that we will not be detained as long with this amendment, which amends subsection (1) of Clause 200. This clause allows the Bank of England to raise fees for its regulatory activities, although I understand that it has no plans to change its current practice, which is not to charge for informal oversight. If Clause 200 is brought into effect, my amendment would ensure that the Bank would recover only its costs of operating the oversight of interbank payment systems and could not enforce some form of pricing which would leave it with a profit which could cross-subsidise its other activities.
I am aware that the Treasury has to approve fees under subsection (2) but, if a move to charging fees were in the context of some broader changed financial system for the Bank, the Treasury might end up having to pay for some of the things that the Bank does and it may end up with costs on the Treasury's vote. These things are conveniently bypassed at the moment with the Bank's financing system by way of cash ratio deposits. If there were a change with the Treasury having to pay for some things on its own vote, it would have an incentive to ensure that the Bank made as much profit as possible to achieve cross-subsidy.
I hope the Minister will therefore see this as a reasonable amendment to protect the financial interest of the interbank payment systems operators. I beg to move.
I am grateful that the noble Baroness recognises that the Bank does not currently intend to charge fees for its routine oversight of payment systems. That practice will continue. This clause future-proofs the legislation against the potential eventuality that the Bank's overall funding model might change. It shows that the Bank could continue to resource its oversight activity in such an event. Where the Bank incurs exceptional expenses in relation to its oversight activities—for example, due to the engagement of an expert to carry out an inspection, which we provide for in Clause 179—the Bank would aim to recover those costs from the system concerned rather than through imposing a general levy on all operators. That is a proper and just way of going about it. The scale of fees would be set by the Treasury by regulations to ensure fees are proportionate and can be challenged under judicial review if considered disproportionate or unreasonable. The clause is there to future-proof the position against a changing situation, and I hope that the noble Baroness will consider that the Government have been judicious in thinking ahead in these terms and that the clause is indeed necessary as it stands.
The Minister has not replied to the point I raised, which is whether or not the fees, when set, should be cost-based. He gave one example of a high cost where someone was appointed and the particular operator would pay. That sounded fine. The issue behind my amendment, however, was about whether the fees would be cost-related. The Minister did not answer that point.
To answer straightforwardly, yes, they will be cost-related.
We oppose Clause 203 standing part of the Bill, in order to understand what is intended by it. It is headed "Saving for informal oversight", though it refers not to informal oversight but to "having dealings". That is not the most elegant of terms but it implies contractual or other relationships rather than oversight. Will the Minister say what sort of "dealings" the Government are seeking to legitimise with this clause?
Can the Minister also say way why the clause is necessary? I searched the Financial Services and Markets Act for an equivalent provision in relation to the FSA. I could find nothing in the FSMA which said that the FSA can have dealings with the bodies it subjects to formal regulation. If the FSA does not need to have statutory cover for informal dealings with its regulatees, why does the Bank? As usual, the Explanatory Notes gave no additional insight, so I was forced to table this clause stand part. I look forward to enlightenment.
I hope to enlighten the noble Baroness on the objectives of the clause. Clause 203 ensures that nothing in Part 5 prevents the Bank of England maintaining its ability to carry out informal, non-statutory oversight in the case of non-recognised payment systems. Secondly, it ensures that in its dealings with recognised interbank payment systems, the Bank is not limited to the provisions in Part 5. The purpose of the clause, therefore, is to ensure that the provision of a statutory role for the Bank of England in oversight of recognised payment systems does not limit its ability to continue to engage with both recognised and non-recognised payment systems on a non-statutory basis, which is the basis on which it works at present. The Bank will need to engage with non-recognised systems—for example, to assist with its assessments of new or potential candidate systems for recognition.
Although there are no weaknesses in the existing arrangements, the authorities have been working since early last year on developing a clearer and more robust framework for the oversight of payment systems. This includes the need to take into account the potential for payment systems' characteristics and importance to change over time, or for wholly new payment systems to develop and take on systemic importance. I seem to have repeated myself on many occasions, but this Bill seeks to deal with a future of potentially rapid changes to our financial systems. Given the importance of payment systems in the financial systems and, therefore, to wider financial stability and consumer protection, it is sensible to formalise the Bank's role as regulator of this sector, but this does not preclude the need for it to also continue its role of informal oversight. That is the basis of the clause.
The noble Baroness raised the issue of the Financial Services and Markets Act. The FSA does not require a similar provision in that Act because it does not exercise informal or non-statutory oversight in the same way as we envisage, under Part 5, that the Bank of England will operate with regard to payments systems. So there is a difference in the roles between the FSA and the Bank of England in those terms, which is why we have this clause. I hope that the noble Baroness accepts the position.
It is in circumstances in which the Bank is in action but not necessarily operating under all the formal structures that we have in Part 5. The noble Baroness is all too well aware that the Bank has an oversight position now; within the framework of that oversight circumstance, we want that to continue.
The present position has no statutory backing. The Bank to date has chosen to oversee the main wholesale and retail payment systems in the UK and to participate actively in the co-operative international oversight system. It holds regular, usually quarterly, formal meetings with individual systems and is otherwise in frequent contact with them, monitoring their performance and investigating incidents as they arise. Through that analysis, the Bank proposes appropriate actions to mitigate risks arising in the systems. It publishes its finding and assessments in an annual payment systems oversight report, but it has no powers to ensure that risk-mitigating systems are employed.
We expect the Bank to continue its activity, but the Committee will recognise the importance of the fact that the Bank is doing it on a non-statutory basis, which is why it has no direct statutory powers. Under the framework of this Bill, the Bank's position is considerably strengthened and given a statutory basis. That is the reason for the clause.
Clause 203 agreed.
Clauses 204 to 212 agreed.
Clause 213: Banknote rules
Moved by Baroness Noakes
169: Clause 213, page 106, line 1, leave out subsection (2)
We have now got to Part 6, for which we must rejoice. In moving Amendment 169, I shall speak also to Amendment 170.
I have tabled these amendments in response to the Delegated Powers and Regulatory Reform Committee's first report of the current Session, which we have already debated in part in this Committee. The Delegated Powers Committee pointed out that the power in Clause 212 for the Treasury to make regulations about banknotes is very wide indeed. We could, if we were so inclined, object to it on the basis that the Government should be more specific about what they want rule-making powers for. But I shall not pursue that line and recognise that at least the Government have conceded that regulations should be subject to the affirmative procedure.
The Delegated Powers Committee pointed out that the arrangements for the allocation of provisions between regulations under Clause 212 and rules under Clause 213 are unsatisfactory. Under Clause 213, regulations can allow the Bank of England to make rules about banknotes, also on a very wide basis. In particular, Clause 213(2) says that regulations can provide that rules can do anything that regulations could do, thus neatly circumventing parliamentary control, because rules so issued would not be subject to any parliamentary process.
The Committee recommended at paragraph 11 that,
"the power in clause 213 to make banknote rules should be narrowed, at the least to remove the power for banknote rules to impose unlimited penalties".
For today's Committee, I propose the removal of Clause 213(2) in Amendment 169. I invite the Government to accept that the regulations cannot confer that degree of power on the Bank of England's rules or, alternatively, to come up with some other restriction of the power. As an alternative, I have also tabled Amendment 170, which amends the financial penalty in Clause 219 so that rules cannot apply a penalty. There would be other ways in which to deal with this issue.
I hope that the Minister will accept the DPRRC's recommendations and either accept my amendments or undertake that the Government will return with their own amendments.
I am grateful to the noble Baroness and will seek to answer the noble Lord's question in a moment, but not get into conversation style. This is an important amendment, as it draws attention to the contribution and representation of the Delegated Powers and Regulatory Reform Committee on this matter. As this Committee appreciates, the Government take the report from that committee very seriously indeed.
As the noble Baroness said, the Delegated Powers and Regulatory Reform Committee noted in its report that,
"the arrangements for the allocation of provisions between regulations and rules seem unsatisfactory", and recommended that,
"the scope of the power in clause 213 to make banknote rules should be narrowed, at the least to remove the power for banknote rules to impose unlimited penalties".
This recommendation is implemented by this group of amendments.
I apologise for the fact that this is a slightly lengthier contribution than we have had for most of this afternoon, but I take this opportunity to explain exactly how it is envisaged that the banknote regulations and rules will fit together. As the noble Baroness said, we have accepted that the draft regulations that we have circulated will be subject to affirmative procedure. Not all parts of the regulations are complete and further work will no doubt be needed before they are in a position to be consulted on formally. But I hope that the sight of even a draft set of regulations informs this debate. The intention is that the appropriate level of parliamentary scrutiny will be observed. That is why we have indicated that we expect that the affirmative resolution will be employed for the regulations. I hope to show that the amendments are therefore unnecessary.
Clause 213 provides that the banknote regulations may require or permit the Bank of England to make banknote rules about any aspect of the treatment, holding or issuing of banknotes by authorised banks. In practice, the regulations will not require or permit the rules to do everything that they themselves may do; there will be a natural division of appropriate responsibilities between the Treasury and the Bank. The regulations may delegate to the banknote rules anything that the regulations are permitted to do under primary legislation, subject to them being approved. This offers the capacity to make detailed provision, as appropriate, in either banknote regulations or the banknote rules. In both circumstances, this offers greater flexibility and scope to make detailed provision than would be appropriate for inclusion in primary legislation. I am sure that the Committee will accept that argument.
It is important for the Bank to have flexibility, within the remit of the regulations approved by Parliament, to make changes to its rules in order to adapt to changing or particular circumstances. It is envisaged that banknote rules will be largely focused on operational aspects of the new framework, rather than the underlying principles of banknote issuance. For example, under regulation 9 of the draft indicative regulations as circulated, banknote rules must set out the procedure that an authorised bank must follow for the purpose of ceasing the issue of banknotes.
As a further example, the banknote rules may set out detailed provision for the note exchange programme, as set out in regulation 13 of the draft regulations, which can be tailored as appropriate to the practicalities of exchanging a particular issuing bank's notes. We could not think of such detailed provision being set out in primary legislation for cases where the Bank of England is best placed to determine what it needs in particular circumstances, as the procedure will have to be tailored to circumstances such as the number of notes in issue, or the locations at which holders of those banknotes will be able to exchange them, and so on.
I reassure the Committee that the banknote regulations and rules are intended to complement each other, not to provide duality or duplication, and, categorically, that Clause 213(2) is not intended to provide a means by which the need for parliamentary scrutiny can be circumvented. It is important for the Bank of England to have additional freedom—within the remit of the Parliament-approved regulations—to make and modify detailed banknote rules, adapt to changing or particular circumstances and capture operational detail. Not all such detail can be comprehensively pre-empted in primary legislation or statutory instruments.
On the specific aspect of financial penalty, the Bill provides that the banknote regulations may enable the Bank of England to impose a financial penalty on an authorised bank that has breached the banknote regulations or rules. That is an important enforcement tool for cases where the breach may not be so severe as to warrant withdrawing an authorised bank's issuing rights, yet does warrant imposing a penalty in order to ensure compliance with regulations and rules that are necessary to offer protection to noteholders. The imposition of a penalty will, of course, be subject to judicial review, ensuring that the Bank imposes such penalty as is fair, reasonable and proportionate.
The Government intend that the imposition of a penalty is to be governed by the parameters of the regulations, which, as the noble Baroness indicated, are to be subject to the draft affirmative procedure and therefore receive parliamentary scrutiny. We recognise the Delegated Powers Committee's important recommendations and we are looking particularly at this clause, and others on which it has commented, to consider whether further changes are needed. I hope that the broad position that I have outlined in defence of the clause meets with the agreement of the Committee, and that the noble Baroness will feel able to withdraw her amendment.
The Minister has put up a spirited defence of the clause. We were seeking not to challenge the possibility of the Bank of England making rules in appropriate circumstances, but to ensure that the recommendations of the Delegated Powers Committee were given effect. It is not enough for the Government to say, "Well, our draft regulations don't give the Bank a power to make penalties by its rules, so that's an end of it". I thought the Minister was saying that at one point, but he ended by saying that the Government were considering what to do about the Delegated Powers Committee.
The House expects the Government to follow that committee's recommendations. There have been very few instances where the Government have ignored those recommendations, which is why we have a Delegated Powers Committee. Unfortunately, one instance involved the Treasury, which probably makes it think it can do what it likes with that committee's reports. I must, then, signal in the most uncertain terms to the Minister that we would expect the Government to honour the terms of the Delegated Powers Committee—particularly on this, where it is no answer to say, "We currently don't intend to do what the Bill would allow", when the plain fact is that the primary legislation is deficient. The Minister said that the Government are considering it. They have very little time to do so, but we will certainly return to this on Report. I beg leave to withdraw.
Amendment 169 withdrawn.
Clause 213 agreed.
Clauses 214 to 218 agreed.
Clause 219: Financial penalty
Amendment 170 not moved.
Clause 219 agreed.
Clauses 220 to 224 agreed.
Tabled by Baroness Noakes
171: After Clause 224, insert the following new Clause—
"Guarantees for lending by banks
"The National Loan Guarantee Board
(1) The Treasury shall establish a National Bank Loan Guarantee Board (referred to in this Part as "the Board") which is to have the function conferred on it by section (Function of the Board).
(2) The Treasury will appoint to the Board representatives of—
(a) the Treasury;
(b) the Bank of England; and
(c) the FSA.
(3) The Board will be chaired by a representative of the Treasury"
I tabled Amendments 171 to 173 in order to debate my party's proposals for a national loans guarantee scheme, which my honourable friend George Osborne launched last year to deal with the critical shortage of credit for business. The Government trashed our proposals at the time, then, two weeks ago, announced a pale shadow of them—the Government's scheme being smaller, less bold and more bureaucratic.
Last week, the Government announced a further package of measures affecting the banks and lending. We do not know whether they will work—the financial markets seem less than clear on that—and we remain concerned about credit in general, and in particular for those businesses that the measures announced do not wholly cover. We believe, then, that a national loans guarantee scheme ought to be introduced by the Government. However, in view of the constraints on the Committee today, I shall not be pursuing this and, accordingly, I shall not be moving Amendment 171.
Amendment 171 not moved.
Amendments 172 and 173 not moved.
Moved by Lord Myners
173A: Clause 225, page 110, leave out line 32
Before turning to the amendments, I will take a moment to summarise the purpose of Clause 225 and explain the amendments that have already been made to the original clause in another place. The purpose of Clause 225 is to put the use of public money in the proposed bank resolution or insolvency arrangements, or in the more general provision of financial assistance to banks and their customers, on to a proper footing.
The Treasury and other government departments have powers derived from statute or common law to do various things including, for example, to provide guarantees or indemnities, or to make loans. They have only the ability to spend money to make good on these commitments if Parliament provides the money. This is usually done through estimates approved in the annual appropriation Acts.
As a matter of law, the annual appropriation Acts can give full statutory cover for expenditure in estimates, but it is a long-established convention that there should always be specific enabling legislation to enable the finance for a new service to be provided from public funds. Clause 225 would provide that statutory cover. However, the original clause only provided for financial assistance to be given to UK authorised institutions, which have permission to accept deposits; in other words, UK deposit takers.
It was realised, particularly in the light of the events last year surrounding Icelandic banks, that such a limitation could make it more difficult to protect the interests of UK consumers or safeguard the interests of UK taxpayers when an overseas institution fails. It was also realised that the original clause would not provide cover for assistance to be given to financial institutions, which were not themselves deposit takers—for example, bank holding companies that were not themselves authorised persons. Amendments made in the other place dealt with these issues, and the government amendments I have tabled will address two further issues that have arisen more recently.
Amendments 173A and 173E will provide statutory cover for expenditure incurred in connection with schemes run by government departments other than the Treasury. The amendments will provide statutory cover for schemes where the financial assistance being provided will facilitate the activities of the bank or financial institution and provide a benefit to a third party—such as customers of banks or other financial institutions—or to the wider economy. This will provide statutory cover for any expenditure incurred in connection with schemes such as the Homeowners Mortgage Support Scheme, which was announced by the Prime Minister on
Before turning to Amendment 174, let me say that I appreciate the concern that the scope of the powers to grant financial assistance could be too broad. Moreover, I can see why the noble Baroness, Lady Noakes, thinks there should be an explicit link to objectives such as financial stability or market confidence. However, let me assure your Lordships that the powers to provide financial assistance—though they look broad on the face of the Bill—will always be subject to rigorous tests and safeguards. Any Government would want to subject the giving of financial assistance to the most careful scrutiny for value for money and affordability and it will always be necessary to comply with obligations in Community law, which restrict the giving of state aid.
I turn now to the additional safeguards proposed in the noble Baroness's amendments. I am concerned that Amendment 174, which seeks to link the provision of financial assistance for purposes not connected with the special resolution regime to objectives similar to those of that regime, could prove unduly restrictive in a way that she might not have intended. The amendment would seem to rule out precisely the kind of scheme the Government's amendments I have just mentioned would allow. For example, we could not operate the Homeowners Mortgage Support Scheme. This scheme will encourage lenders to enable ordinary hard-working households that experience a redundancy or significant loss of income to reduce their monthly payments to a more manageable level, by deferring a proportion of the interest payments on their mortgage for up to two years. I hope the noble Baroness would agree that it is desirable, but I am not sure we could argue that the scheme passed any of the three tests put forward in her amendment. For one thing, homeowners are not, in that capacity, depositors.
Equally, we could not run the Working Capital Scheme announced by my noble friend Lord Mandelson. This scheme would tackle the current constraints on bank credit available for lending to ordinary-risk businesses with a turnover of up to £500 million per annum. The noble Baroness's friends in this House welcomed the scheme.
I am also not sure that we could say that the scheme was necessary by reference to the stability of financial systems, the maintenance of public confidence in the stability of banking systems or for the protection of depositors. I am sure that we could develop other examples, but the real point is that it may be difficult to justify an individual scheme against the criteria proposed in the amendment. However, the scheme may be highly desirable when seen against the background of other schemes or initiatives. The whole can be greater than the sum of its parts.
Amendment 174 would diminish the flexibility available in devising and implementing schemes. It could constrain our ability to deal with future crises—including crises where the three objectives set out in the amendment were at issue.
Amendments 173F and 174AA would introduce a sunset provision into the financial assistance clause. We can debate the merits of sunset provisions in general when we discuss Amendment 208 tabled by the noble Lords, Lord Newby and Lord Oakeshott, so I shall confine my remarks to the implications of these amendments. They would mean that the extended definition of financial assistance, introduced by government Amendment 173E, would last for only two years after Royal Assent. As I have just explained, government Amendments 173A to 173E will put the provision of financial assistance by government departments to bank customers rather than to banks themselves on a proper footing.
The effect of the amendments would therefore be that expenditure under schemes covered by the extended definition of financial assistance could not be incurred after two years after Royal Assent. If the schemes are guarantee schemes—and both the Homeowners Mortgage Support Scheme and the Working Capital Schemes are—they might never really get off the ground.
Expenditure is not incurred when a guarantee is given but when it is called, so the guarantees on the scheme could only be given for defaults in the two-year period that occurred before February 2011. It would not be long before giving such guarantees would be almost pointless.
More generally, I am, of course, delighted that the noble Baroness, Lady Noakes, has such confidence in the Government's plans for tackling the current crisis that she thinks it will be over in less than two years. We certainly expect our measures to bear some fruit in that time, but it would be wrong to assume that all these measures could be discontinued in a fixed, short period such as two years.
As I said, some measures may necessarily require expenditure after two years even if they are closed to new entrants in that time. Others may need to run for longer periods in any case. So fixing a time limit now would simply be an unnecessary hostage to fortune.
Government Amendments 174A and 174B address a different issue regarding the provision of financial assistance. As your Lordships will know, the Treasury has arranged to support the UK banking sector. These arrangements include the Credit Guarantee Scheme for new interbank lending introduced in October 2008, and the Asset Protection Scheme and the guarantee scheme for asset-based securities, announced on
Normally, this would be effected by securing parliamentary approval for an estimate. However, the expenditure might be needed at any time, including during a recess when estimates could not be obtained. Also, it would be very damaging for confidence—and lead to all sorts of unhelpful speculation—if the Treasury were to seek an estimate including estimated amounts of money to cover the expenditure just in case any liabilities arose under these schemes. Amendments 174A and 174B address this issue by proving for direct access to the consolidated fund, without an estimate in cases where the funds are required urgently, and providing for parliamentary reporting with suitable safeguards for commercial confidentiality and for maintaining market confidence.
Amendment 174C would have the effect of making adjustments to the definition of "a financial institution" subject to the draft affirmative rather than to the negative procedure. I recognise the point that there ought to be parliamentary scrutiny of important changes to the scope of a scheme to provide financial assistance, but I am not convinced that the affirmative procedure would be necessary or appropriate in this case.
The power in Clause 227 is to provide clarity and certainty in the difficult cases that may arise at the margins of the definition of "a financial institution". It is not intended to be—and indeed could not be—used to make something that was not properly a financial institution into a financial institution for the purposes of Clauses 225 or 226. The power is therefore likely to be needed in cases where genuine doubt has arisen about the status of a particular institution. We may have to move quickly in those cases to dispel that uncertainty. We could not be confident of doing that with the affirmative procedure where debates in Parliament would be required. Of course, Parliament would still be able to call a debate on any order made under this clause to hold the Treasury to account on any change to the definition of "a financial institution" that it makes.
I hope that the noble Baroness, Lady Noakes, will agree not to move her amendments and I beg to move my amendment.
I have tabled Amendments 173F and 174AA as amendments to the Government's Amendments 173E and 174A, as the Minister has explained. I also have Amendments 174 and 174C in this group. In addition to speaking to my amendments, I shall be raising some questions on the amendments to which the Minister has just spoken.
The Minister's Amendment 173C allows an unspecified Secretary of State to give financial assistance in the extraordinarily wide terms now allowed by new subsection (1A), introduced by Amendment 173E. Presumably, this covers all Secretaries of State, so the power is very wide indeed. More broadly, it is conventional for the Government to seek specific statutory cover for expenditure rather than rely on the Appropriation Act. To that extent, both Clause 225 and the government amendments are in line with that expectation. What is not expected is that the statutory power should be taken in a wholly unconstrained way, which is what the clause allows, particularly after the Government's amendments.
In another place there was a discussion about whether Clause 225 should be restricted to some kind of financial stability context. Expenditure in paragraph (a) of subsection (1) is so constrained because of the references to Parts 1 to 3 of the Bill but neither paragraph (b) nor paragraph (c) has any words restricting it. My Amendment 174, which was tabled before the Minister tabled his later amendments, sought to limit the use of those powers in paragraphs (b) and (c) on the same basis as the Bank of England would use its stabilisation powers as set out in Clause 8. In relation to the use of these powers the Minister said to the Public Bill Committee in another place:
"Obviously there has to be a systemic risk".—[Hansard, Commons, 30/10/08; col. 209.]
The Bill does not say this and I believe that the Minister has given a description this evening in his introduction which runs counter to the assurance given in another place. I ask the Minister to address this point specifically in his response. Is he saying that what the Minister said to the Committee in another place now no longer holds?
The Council of Mortgage Lenders has expressed concerns about the workability of the homeowner mortgage support scheme that the Government intend to use this new broad power for, to give financial assistance. The CML believes that there should be proper parliamentary scrutiny for the scheme, accompanied by a proper regulatory impact statement. This will not happen if this clause is used to legitimise that scheme. In effect, the Treasury will do whatever it wants to do, completely outwith the scrutiny of Parliament. We can see that in these difficult times the Government may need to bring forward various schemes which are designed to support individuals and businesses. We are not sure that the Bill is the right place for this, but on balance we accept that the public interest is served by ensuring that the schemes that the Government have recently announced are put on a proper footing to proceed.
Accordingly we do not seek to oppose Amendments 173E and 174A, but my Amendments 173F and 174AA, as the Minister explained, seek to limit their use to two years. This is very limited sunsetting and not like the general sunsetting of this Bill to which the Minister referred, which we do not support. The two years mentioned in my amendments are intended to allow the Government to do whatever is necessary and give enough time for more specific statutory authorities to be put in place if, for any reason, expenditure needs to continue on a more permanent footing. The Minister gave an example of potentially needing to continue payments outside a two-year period. We understand that it would be appropriate to have the power now but a more specific version of the power should be placed in an appropriate statute if there were a long-term requirement for expenditure, rather than seeking to hide it within something which was originally designed for financial stability and systemic risk.
We also have a concern with one aspect of Amendment 174B. We obviously have no problem with allowing for emergency access to the Consolidated Fund but we firmly believe in transparency and parliamentary accountability and we were genuinely astonished at the contents of new subsection (6) to Clause 225, which seems to allow the Treasury to completely dispense with a notification to Parliament if the Consolidated Fund is raided under Clause 225. Can the Minister say whether there is any precedent for this power to keep Parliament in the dark on a permanent basis? I could not recall one.
Amendment 174C is slightly different. The power in Clause 225 refers to giving financial assistance to a bank or other financial institution and Clause 227 allows the Treasury to say what is or is not a financial institution. There is no apparent requirement for the institution treated as a financial institution to have any connection with finance or banking. Can the Minister say whether the Treasury could use Clause 227 to specify, say, that Jaguar Land Rover or Corus was a financial institution in order to give it some financial assistance? Indeed, can the Minister say what an "institution" is? Its use in statute appears to be confined to charities, higher education and criminal justice, apart from uses in connection with "financial institution" or "credit institution", and it does not appear to have been used hitherto as synonymous with "person", which is what one might have expected.
My Amendment 174C concentrates on parliamentary procedure and says that the order-making power should be subject to the affirmative procedure if this power in Clause 227 is capable of designating almost any kind of organisation as a financial institution. That is an extremely wide power and emphasises how very broad Clause 225 could be made. For that reason we wish to seek the affirmative procedure as opposed to the negative procedure in relation to any relevant order made under Clause 227.
These are pretty wide-ranging powers which masquerade under extremely bland parliamentary drafting. At first sight, apart from it being difficult to understand what the government amendments are getting at, you would not gather that the homeowner mortgage support scheme, for example, would be covered by these powers. They raise a general issue with which we have been grappling: the need for the Government to move quickly to deal with exceptional circumstances, and the need for adequate parliamentary scrutiny. As the Committee will know, sympathy on these Benches has, broadly speaking, been with the Government. I am not saying that we are departing completely from that on these amendments, but the noble Baroness has raised a number of issues on which we await the Government's response.
The concerns raised by the Council of Mortgage Lenders about what happens next, the extent to which consultation will take place, what further scrutiny there will be of the homeowner mortgage support scheme and whether it will have a sunset clause demonstrate the general point that these are significant powers which, unless the Government take the situation seriously, can be exercised almost in secret. Unsurprisingly, given our later amendment, I have some sympathy with the noble Baroness's proposal for a two-year sunset clause. However, the thought of having a two-year sunset clause on one small bit of the Bill demonstrates why you need either a sunset clause for the whole Bill or no sunset at all. In reality, it is difficult for a Government to bring forward a Bill amending just one aspect of what we have here.
I have considerable sympathy with the comments of the noble Baroness on proposed new subsection (6) in Amendment 174B. The Treasury might well think it necessary on public interest grounds to keep quiet about a whole raft of things that the public would legitimately feel that they had a right to know. Can the Minister explain the circumstances in which he envisages that being required? Equally, can he explain why the Treasury is resisting Amendment 174C on affirmative resolution? During the passage of the Banking (Special Provisions) Act 2008, we supported the need for speed in nationalising a failing bank. However, the kind of schemes that we are talking about here do not have the same kind of urgency. The homeowner mortgage support scheme is announced and must then be worked up. It almost certainly could not be legislated for at quite the same speed—and almost certainly would not need to be—as a bank that was suddenly collapsing. We will listen carefully to what the Minister said on that amendment.
These are remarkable powers. It is quite difficult to comprehend at first sight exactly what is involved, although the Minister helpfully tried at the beginning to set out how the procedure for making such moneys available is carried out.
However, if I understand the Minister correctly, it is proposed that the normal estimates and Appropriation Act procedure should be abandoned completely. It appears from Amendment 174B that the Government have that in mind. In those circumstances, I am not clear how Parliament can exert control. It would be helpful if the Minister spelt that out in general terms.
Proposed new subsection (5) in Amendment 174B gives me particular concern, saying that where money is paid out,
"the Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid)".
All this will have happened without any parliamentary control at all. I am not clear on what the justification for that could conceivably be.
Another thing, among many, that I am not clear on is the situation for the giving of guarantees, and when they are likely to be called. Again, is there to be any parliamentary control at all, either on the giving of the guarantees or on the releasing of money under them?
The noble Baroness, Lady Noakes, mentioned some words used in the other place with reference to "systemic risk". The problem is that the noble Baroness's amendments limit the systemic risk to the banking and financial system. The government amendments are intended to allow schemes with wider scope, so as to avoid vicious circles of banks damaging the economy and, in turn, damaging banks.
I am not in a position to know what was in the mind of my colleague in the other place when he made that remark. I can, however, help the Committee by explaining the situation as I see it. There is a linkage between the financial system and what the media occasionally call "the real economy". To regard the two as entirely dislocated from each other is to pose the risk of increased systemic risk. Although it would be wrong for me to put words into the mouth of my colleague in another place, that linkage between the financial system and non-financial institutions, the non-financial part of the economy, was entirely consistent with addressing a systemic risk to the financial system. In that respect, there is consistency between what I have said and what my honourable friend in the other place said.
The noble Baroness raised the definition of "institution". "Institution" would clearly not include manufacturing companies.
Questions were raised about the comments of the Council of Mortgage Lenders. I welcome the comments of the noble Baroness on public-interest considerations, which I am sure will be appreciated by those who will benefit from the Homeowners Mortgage Support Scheme. She asked about parliamentary scrutiny and the impact assessment. Parliamentary scrutiny of the Homeowners Mortgage Support Scheme will take a range of forms: adjournment debates, parliamentary Questions and ministerial correspondence. An impact assessment will be published once negotiations with the lenders have concluded. Until the scheme's design is finalised, we cannot publish an assessment of costs and benefits, but will do so at the appropriate time.
The noble Baroness also raised questions about—
I had not realised that the Minister was going to move on so swiftly from institutions. He said that an institution could not be somebody in the manufacturing sector. I asked him what could and could not be in the term "financial institution", and he said what could not. What would and could be included in the term?
I am happy to come to that in a moment but should like to carry on addressing the comments the noble Baroness made on proposed subsection (6) in Amendment 174B. I was asked whether I was aware of any precedent for the removal of the requirement to report to Parliament. I am not aware of any direct precedent. The key issue here is to avoid systemic risk. The noble Baroness has tabled an amendment on transparency and I will return to this issue in that debate.
The noble Lord, Lord Newby, expressed sympathy with much of what the Government are doing in helping businesses, people and homeowners as a result of the consequences of the global credit crisis. For that, I express the Government's appreciation. I believe that I have answered the questions on proposed subsection (6) of Amendment 174B.
The noble Lord, Lord Higgins, asked a number of questions, but I am afraid that I missed the penultimate one. If he can remember the order in which he asked the questions and is kind enough to help me, I will endeavour to answer him. Following that, he asked about parliamentary control of the giving of guarantees. I have already addressed that question in respect of the comments made by the Council of Mortgage Lenders on parliamentary accountability.
I will endeavour to be even more helpful to the noble Baroness on the term "financial institutions". This provision allows the Treasury to inject clarity at the edges where there may be some doubt as to whether a particular institution is a financial institution. It would not allow the Treasury to specify something as a financial institution when clearly it is not. For example, it could not specify Jaguar Land Rover or Corus Steel as financial institutions. Yet the hybrid nature of many financial institutions and the ever-present sense of innovation in the financial services sector may give rise to doubts as to whether an institution qualifies as a financial institution. Accordingly, the Government believe it appropriate to have such powers to make judgments on definition.
I can see that the noble Lord, Lord Higgins, is ready to remind me of his unanswered question.
I am grateful to the noble Lord. I do not think he has covered my initial question. Are we totally abandoning the traditional form of approval of expenditure when the sums involved are likely to be large? One can see the need for urgency in certain circumstances. but if the House of Commons is sitting I am not clear why it would not be possible to deal with this as a matter of great urgency in 24 or 48 hours. This would of course be totally without precedent. The problem arises when the House is not sitting. With the kind of sums likely to be involved if we are dealing with systemic risk, there would be a strong argument for recalling Parliament.
The clauses effectively overrule all the traditional ways in which Parliament and our democratic system keep control of expenditure. It would seem from Amendment 174B that the Treasury simply decides that the expenditure is needed and says it is too urgent for Parliament to exercise any control—even after the event. That would clearly be a stable door and horse-bolting situation. None the less, to include a provision for the matter coming before Parliament the moment it has occurred would be desirable.
The question which the noble Lord did not realise I asked is on Amendment 174B. It says,
"the Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid)".
I do not see why that is the case. It is extraordinary that not only is there no apparent control in the event but, when the report has been submitted, it need not specify to whom or in respect of what the amount has been paid. That is an incredibly wide-ranging provision. I do not see the need for it.
Like the noble Lord, Lord Higgins, I do not understand why, if something is urgent under proposed subsection (4) of Amendment 174, it then also has to have anonymity under proposed subsection (5). There may be circumstances in which anonymity, secrecy or delayed release of the information is justified but it should not apply in every case in which the urgency condition has been invoked.
In recognising that these are measures which may be required in an emergency, in which financial stability is at risk and important measures need to be taken to stabilise the economy and the financial system, we are setting out appropriate measures which are suited to respond in the way that urgency requires.
I want to place on the record that I am extremely disappointed with the Government's attitude in relation to these amendments. By their own admission, some of the powers that they are taking are unprecedented. The Minister has agreed to take away and look again at the tiniest part of his amendments. If the amendments are agreed, we, for our part, do not accept their full effect. I explained that we could understand why, given the current economic circumstances in the country, certain powers might need to be taken, but our approval of the amendments today should not be taken as an indication that we do not wish to pursue further the issues that I have already raised with the Minister and to which he has not responded satisfactorily. We will return to these matters on Report.
Amendment 173A agreed.
Amendments 173B to 173D
Moved by Lord Myners
173B: Clause 225, page 110, line 33, at beginning insert "by the Treasury"
173C: Clause 225, page 110, line 34, at beginning insert "by the Treasury, or by the Secretary of State with the consent of the Treasury,"
173D: Clause 225, page 110, line 37, at beginning insert "by the Treasury"
Amendments 173B to 173D agreed.
Moved by Lord Myners
173E: Clause 225, page 110, line 37, at end insert—
"(1A) For the purpose of subsection (1)(b) expenditure is incurred in respect of financial assistance in respect of banks or other financial institutions if it is incurred in respect of an activity, transaction or arrangement, or class of activity, transaction or arrangement, which is expected to facilitate any part of the business of one or more banks or other financial institutions; and for that purpose it does not matter—
(a) whether or not that is the sole or principal expected effect of the activity, transaction or arrangement, or
(b) whether the sole or principal motive for the activity, transaction or arrangement is (i) its effect on banks or other financial institutions, (ii) its effect on the economy as a whole, (iii) its effect on a particular industry or sector of the economy, or (iv) its effect on actual or potential customers of banks or other financial institutions."
Amendment 173F (to Amendment 173E) not moved.
Amendment 173E agreed.
Amendment 174 not moved.
Moved by Lord Myners
174A: Clause 225, page 110, line 38, at end insert "(and an order under that section may restrict or expand the effect of subsection (1A))."
Amendment 174AA (to Amendment 174A) not moved.
Amendment 174A agreed.
Moved by Lord Myners
174B: Clause 225, page 111, line 3, at end insert—
"(4) Expenditure which could be paid out of money provided by Parliament under subsection (1) shall be charged on and paid out of the Consolidated Fund if the Treasury are satisfied that the need for the expenditure is too urgent to permit arrangements to be made for the provision of money by Parliament.
(5) Where money is paid in reliance on subsection (4) the Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid).
(6) If the Treasury think it necessary on public interest grounds, they may delay or dispense with a report under subsection (5)."
Amendment 174B agreed.
Clause 225, as amended, agreed.
Clause 226 agreed.
Moved by Baroness Noakes
174BA: After Clause 226, insert the following new Clause—
"Transparency: report to Parliament on financial assistance
(1) The Treasury shall prepare and lay before each House of Parliament a monthly report in respect of—
(a) financial assistance paid out under subsection (1) of section 225,
(b) loans made under section 226,
(c) guarantees, indemnities or similar arrangements which may result in amounts being paid out under subsection (1) of section 225.
(2) A report for a month shall show the transactions entered into under each of paragraphs (a) to (c) of subsection (1) during that month together with the totals made or outstanding as at the end of the month.
(3) The reference in subsection (2) to totals made or outstanding means—
(a) in relation to loans, the amount of principal and accrued interest which has not been repaid,
(b) in relation to guarantees, the gross amounts of the guarantees, indemnities or similar arrangements which might be payable,
(c) in any other case, the amount paid or committed on a cumulative basis.
(4) The Treasury shall ensure that the report contains sufficient detail to enable Parliament to understand the actual and potential commitment of public money to financial assistance and the Treasury may summarise the individual items which fall to be disclosed in a report in whatever way they consider appropriate in order to assist Parliament in that regard.
(5) If the Treasury consider that certain information should not be disclosed in a report on public interest grounds, a report—
(a) may omit that information until such time as the Treasury consider that the public interest is no longer affected, and
(b) must contain a statement that the Treasury has not disclosed information in accordance with this subsection.
(6) A report shall not be required for any month in respect of which there have been no material changes since the last report made under this section."
We have debated transparency on several occasions during this Committee, and I raised the issue of disclosure about banks taken into public ownership and disclosure about what UK Financial Investments is doing. I can say only that recent events have made those issues even more important, and I shall return to them on Report.
Amendment 174BA deals with another aspect of transparency; namely, transparency about the amounts paid out under the financial assistance powers in Clause 225, which, as we have just seen, are now to be drafted on a very much more extensive basis than was considered in another place. We have had bank rescue package No. 1 and now bank rescue package No. 2. We have had the Mandelson small firms loans package, which will be dealt with under Clause 225, as well as the homeowner support scheme. We do not know what else may end up being done under the cover of this extremely wide power in Clause 225 as amended.
My amendment simply asks for a monthly report on the amounts spent or lent under Clauses 225 and 226, and a balance sheet at the end of each month. I recognise that monthly reporting can be onerous but the plain fact is that things are moving so fast at present that Parliament needs to keep track of what is happening, and monthly seems to be a reasonable frequency. So that this does not become an onerous requirement on a long-term basis, subsection (6) of my proposed new clause does not require a report if there have been no material changes since the previous report.
The Minister will doubtless tell me about existing processes for accountability to Parliament. I do not dispute that there are some such processes but they are not predicated on urgent and frequent action on an unprecedented scale. We live in unusual times and may need to take unusual actions. That is how the Government have been justifying their unusual actions, but they have not accompanied them with proper accountability to Parliament to reflect the unusual nature of the things that they are doing.
My intention is that the report will capture all the amounts paid or payable under the various bank rescue packages and other schemes now being announced. Perhaps the Minister will say whether all the Government's financial assistance payments for the current crisis will be made under the authority of Clauses 225 and 226. For example, under what authority was the £37 billion paid out in the first bank rescue package? My clause would not cover those payments or commitments and it may need to be modified to that extent. I hope that the Government will not resist a further, indeed modest, amount of parliamentary scrutiny. I beg to move.
The noble Baroness raises a very important point, although I am not sure that monthly accounting is absolutely the right way forward. However, I believe that the Treasury Select Committee in another place has asked the Government to produce timely information and to consolidate information about the financial consequences of all the various packages and initiatives that we have had over the past six months. I think that that would be to the benefit of Parliament, and no doubt to the benefit of the Government, if they were able to do so. Can the Minister tell us what the Government plan to do in response to that request and whether, in view of the exceptional circumstances in which we now find ourselves, the normal, rather staid principles of parliamentary accounting can be supplemented by additional, more periodic, statements, even if they do not go quite as far as the noble Baroness wishes?
I support my noble friend's amendment, which seems to be virtually the minimum that one might reasonably ask for. The trouble is that, even in advance of Royal Assent being given to the Bill, at the moment it is terribly difficult to get any comprehensive idea of what amounts the Government have committed, whether by way of direct financial assistance or guarantees. In advance of the amendment, or something like it, being accepted, is there not a case for the Government to take action to report regularly to Parliament so that we have a running tally of what is happening following successive proposals by the Government? At the moment, it is extremely difficult to get any idea at all of the orders of magnitude involved.
I recognise the important point that the noble Baroness makes, and I assure her that the Government take transparency and openness very seriously. Indeed, government Amendment 174B already requires the Treasury to report to Parliament when the Consolidated Fund is accessed directly under the emergency procedure that I explained a short while ago. The noble Baroness's amendment would go further in providing for regular reporting of financial assistance given under Clause 225, whether or not the emergency procedure was used, and of loans from the National Loans Fund made under Clause 226.
However, there may be some difficulties with what the noble Baroness proposes. Some thought may need to be given to whether the Treasury should report on other departments' schemes. There is also the danger—it is always a danger with provisions of this kind—that prescribing too many detailed requirements will produce an unhelpful straitjacket which limits the usefulness of the reports produced.
The noble Baroness asked about the authority under which the subscription of £37 billion in bank capital was made. This was made under Clause 225. It is possible for departments to incur expenditure as long as the provisions providing authority have received a Second Reading. The noble Lord, Lord Higgins, asked about reporting on what has already been done, and may well be done in the future. I understand the concerns raised and I will take it away as I should like to look further into the subject and return to it on Report. I hope that that will satisfy the noble Baroness and that she will feel able to withdraw the amendment.
I am grateful to the Minister. It will be extremely constructive if he looks at the issue before Report and returns with an amendment that meets the spirit in which he is taking it away and the spirit with which it was tabled.
The noble Lord, Lord Newby, rightly raised the Treasury Select Committee report that came out late last week and which focused on the need to keep track in particular of these open-ended commitments that are being entered into. That was an element of the report specified in my amendment. I hope that the Minister will focus not only on payments but on commitments. With that, I beg leave to withdraw the amendment.
Amendment 174BA withdrawn.
Amendment 174C not moved.
Clause 227 agreed.
Moved by Lord Myners
174D: After Clause 227, insert the following new Clause—
"Investment banks: Definition
(1) In this group of sections "investment bank" means an institution which satisfies the following conditions.
(2) Condition 1 is that the institution has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on the regulated activity of—
(a) safeguarding and administering investments,
(b) dealing in investments as principal, or
(c) dealing in investments as agent.
(3) Condition 2 is that the institution holds client assets.
(4) In this group of sections "client assets" means assets which an institution has undertaken to hold for a client (whether or not on trust and whether or not the undertaking has been complied with).
(5) Condition 3 is that the institution is incorporated in, or formed under the law of any part of, the United Kingdom.
(6) The Treasury may by order—
(a) provide that a specified class of institution is to be or not to be treated as an investment bank for the purpose of this group of sections;
(b) provide that assets of a specified kind, or held in specified circumstances, are to be or not to be treated as client assets for the purpose of this group of sections;
(c) amend a provision of this section in consequence of provision under paragraph (a) or (b)."
The amendment inserts the first of four new clauses that will allow the Government to introduce regulations to bring about changes to the insolvency regime for investment banks in the UK. The Committee will have noted that this power will be exercised only if, after a review, such changes are deemed necessary. The remainder of the government amendments on this topic will be covered in the next debate.
I turn first to the rationale for the Government's introduction of amendments relating to investment bank insolvency. The Committee may be aware that various issues have been raised by the administration of Lehman Brothers International (Europe). Essentially, these problems stem from the complex ways in which client money was held and used by that company while operating as a broker-dealer. This has caused delays in allowing the administrator to identify and return these funds to clients. There are fears that these problems have reduced market confidence in UK insolvency procedures. This has potential implications for the attractiveness of the UK, and the City of London in particular as a place to conduct prime brokerage business with potential knock-on consequences for UK competitiveness in general.
In response to these concerns, the Government announced in the Pre-Budget Report that an in-depth review would be carried out by the Treasury to look at whether there are shortfalls with existing insolvency law regarding investment banks which hold client assets. This review will also consider whether any new legislation is needed. The review will focus on: whether the statutory purpose of administration as provided in the Insolvency Act, which requires administrators to act in the general interest of creditors as a whole, presents problems in the case of institutions which hold client assets; the procedure for an administration of a complex investment bank; and the treatment of client assets and arrangements for the continuity of brokerage accounts.
If the review concludes that legislative changes are needed, the amendments that we are debating here today will allow the Government to make regulations to create a new insolvency regime for investment banks, either through specific modifications to general insolvency law, or to establish a stand-alone procedure for investment banks. The new powers will be set out in the four new clauses to the Bill. It should be noted that the review may find that no changes are necessary. Banking and insolvency law is highly complex. Developing an insolvency scheme where the emphasis lies on the return of client assets rather than simply on maximising the return for all creditors would be a significant departure from UK insolvency law, and such a move could have unpredictable consequences for the market. It may be that many of the problems relating to client assets and other issues are simply inherent in the large and complex trades in which investment banks engage.
The Government will, as part of the review process and in conjunction with the tripartite authorities, explore whether there are alternative approaches available. For example, changes to regulatory rules as they apply to UK investment banks may be a more appropriate route to delivering better protection for client assets in the event of an investment bank becoming insolvent. Parliament will have the opportunity to scrutinise any changes that the Government may propose, as provided for explicitly in these amendments.
I turn to the detail of the government amendments to be introduced in this group. The first new clause sets out the scope of the enabling power which will allow the Government to make regulations to change the insolvency regime for investment banks For this purpose, and for this purpose alone, we have needed to define which institutions are "investment banks". They are defined—again I highlight the fact that the definition is purely for the purposes of these new clauses relating to insolvency—as institutions incorporated or formed under UK law, having permissions under Part 4 of the Financial Services and Markets Act 2000 to carry on the regulated activities of safeguarding and administering investments, dealing in investments as principal, or dealing in investments as agent.
Subsection (3) of the new clause provides that for the regulations to apply, the institution must be holding client assets when it becomes insolvent. It also provides that an order, subject to the affirmative procedure, may be made to alter the extent to which the definition captures a particular institution or class of institutions. Such an order could prevent the regulations from applying to an institution that would otherwise have been defined as an "investment bank"; for example, an institution whose investment business plays such a peripheral part to its main business that it would be counterproductive to apply the new insolvency regime. Or it could bring other institutions into the definition of investment bank, such as those institutions holding permission for a regulated activity not on the list set out in this new clause if the review concludes that this is necessary.
The new clause will also provide for the Government to define—again by order subject to the draft affirmative procedure—that certain types and classes of assets held in certain circumstances, may or may not be treated as client assets for the purposes of the insolvency regime regulations. For example, the clause could allow those former client assets that had been rehypothecated to be classed as client assets for the purpose of the regulations if it is felt by the Government to be appropriate, after taking into account other factors such as the rights of general creditors. Noble Lords will appreciate that this level of flexibility is necessary as the appropriate scope of any changes to be made to the insolvency regime will become clear only when the review I alluded to earlier has been completed. I should also note that a subgroup of the expert liaison group has been set up to advise the Government on policy options in this area. It is made up of experts representing the most relevant industry areas that have a stake in this process.
I am aware that amendments have been tabled to this amendment. It is my understanding that the amendments tabled by my noble friend Lord Williams of Elvel are intended to introduce a debate on the much wider public policy question of whether policy makers should insist on investment banking being split from commercial banking. He will correct me if I am wrong. It is the so-called Glass-Steagall issue, which is named after long-standing American legislation, now repealed, that had that effect. I believe that that is the intention of the amendment tabled by the noble Lords, Lord Newby and Lord Oakeshott, but I am sure that they will correct me if I am mistaken on this point. I understand that the final amendment in this group is more narrowly focused on the scope of my amendment, so our debate will cover that.
While I look forward to a debate on the wider issue of whether investment banking should be split from commercial banking, I must remind my noble friend Lord Williams that the purpose of the definition of investment banks set out in this new clause is purely and exclusively to provide a definition for the purposes of the insolvency procedure enabling power in these new clauses. Therefore, any attempt to change the definition here would apply to investment banks in that regard only and would not address the wider questions that I believe are the intended purpose of his amendments.
At this point, it may be appropriate for me to give way to my noble friend and other noble Lords who have tabled amendments to my amendment to enable them to speak to them.
Amendment 174DZA had been retabled as Amendment 174DE.
Amendment 174DA (to Amendment 174)
Moved by Lord Williams of Elvel
174DA: After Clause 227, line 10, at end insert—
"(d) underwriting the issue of securities, or
(e) taking deposits for the purpose of the regulated activities."
It may be convenient for the Committee if I speak to the whole of the group rather than just to the initial amendment. My noble friend has been kind enough to say that I wish to raise a debate about the principle of investment banks and commercial banks, and he is right. In introducing this new definition of investment banks, he said that it was for the purposes of insolvency legislation only. Parliament is perfectly entitled to rewrite the definition and the basis on which it is intended.
I would like my noble friend to address the problems that I addressed on Second Reading. First, it is very difficult to see how the taxpayer could compensate investment bankers who have been dabbling in securities. It is easy to see how we can compensate commercial banks—high-street banks—with taxpayers' money, but I find it difficult to see how the taxpayer could properly compensate people who have lost money dabbling in what I would call something of a casino. The recent takeover of Merrill Lynch by the Bank of America, in which Merrill Lynch exposed some extraordinary losses, has made that point.
Secondly, although I do not want to repeat all that I said on Second Reading, I want to reiterate that commercial banking and investment banking involve different skills. I have been involved in both, and I know that. It may be time to get back to a bit of sense whereby commercial bankers say that they are commercial bankers who do not dabble in securities and investment bankers say that they run securities businesses and do not go on to the high street collecting deposits from the public.
My amendments address the question of the definition of an investment bank. Amendment 174DA relates to underwriting securities, Amendment 174DB addresses foreign investment banks which may or may not be incorporated under UK law, and the other two amendments make it clear that a bank as defined under Clause 2 cannot wholly or partially own an investment bank, so that the two operations are completely separate.
I recognise that my drafting is not perfect and that it would require time, effort and study to get from where we are now to where I would like to be. I therefore have a good deal of sympathy with Amendment 203, tabled by the noble Lord, Lord Newby, which requires a review after a period of time. However, if my noble friend is saying, as he did on Second Reading, that the Bill is meant to be a permanent Act for the regulation of the banking industry—and I do not think that we will get another Banking Bill for a few years—then it needs to include a provision to enshrine the principle that investment banks and commercial banks are different animals. We should make provision to that effect.
The Minister is right that the amendment tabled by my noble friend Lord Oakeshott and me is designed to raise a broader public policy debate about bank regulation. It covers not just banks covered by the Bill but the entire banking system. A number of things have become clear during the banking crisis: there was mismanagement of the banks; many bankers were grossly over-rewarded; and those bankers had no sense of the broader community around them. We know all those statements to be true because the noble Lord, Lord Myners, made them in his interview at the weekend.
We know that there have been major regulatory failures; we saw it in relation to Northern Rock and we have seen it now more generally. Banks were behaving recklessly; their accounts were almost meaningless because they were propped up by toxic assets and the FSA was not on top of it. As I understand it, in regulating the banks the FSA divides itself into wholesale and retail divisions, and Barclays has to date been regulated by the retail bit of the FSA, despite the fact that the major risks facing Barclays come from the wholesale banking side of the bank. I also understand that Standard Chartered is regulated entirely by the wholesale team, despite the fact that outside the UK it has major retail deposits.
That demonstrates the failure of the current regulatory regime. There is now widespread recognition, including by the FSA and the Government, that there needs to be a fundament review of the regime and reform in the way that the banks are regulated. The current plans have a number of features. There is to be a review of remuneration and capital adequacy rules, and we are moving into an interesting phase in which there is a sort of planning agreement—I am sure that the Government would not want to use that phrase; they are calling it a lending agreement—under which the Government will provide support for the banks in various ways if they can reach an agreement on the quantity and type of lending made available across the country.
In the spring, the Government will publish proposals for the regulatory framework of the banks, together with the FSA's review. My Amendment 203 suggests a direction under which that regulatory framework might operate. It takes as its starting point the fact that banks, at least in terms of their deposit-taking activities, are de facto utilities. That is the clear implication of the lending agreement framework, and of the other steps that the Government have taken. Further action may be required to keep the sector afloat. This means that the banks cannot be treated like any other enterprise.
Despite all the talk during the passage of the Bill of arm's-length dealings with the banks, the Government are now intervening in the core business strategies even of those banks in which they do not yet have a shareholding. The proposal in Amendment 203 is that the Government contemplate separating investment banking from deposit-taking, either entirely or in a clearly segmented holding company. Such a move—in the spirit of, but not exactly replicating, the Glass-Steagall Act—would insulate the element of a bank's activity that most affects individuals and overall bank stability from the more risky practices engaged in by investment banks.
This proposal has wide support from a range of commentators and from the OECD, which a couple of weeks ago in its twice-yearly review on trends in financial markets said that, as a result of regulatory and governance failures, inherently risky investment banking businesses had been able to raise capital too cheaply, leading to a build-up in debt that contributed to the current financial crisis. The OECD said:
"These businesses benefited from a too low cost of capital and, commensurately, they became too large ... as a consequence. When embedded inside a financial conglomerate like Citi or a European universal bank like UBS, excessively large investment bank segments put those entire institutions at risk".
There are two approaches that one could adopt. One is advocated by the noble Lord, Lord Williams. The other is to allow deposit-taking and investment banking to be undertaken by a single holding company, but as separate legal entities. I have no preference between the two. In either case, with a clear segregated structure, it would be much easier to have the appropriate level of regulatory regime for each type of banking activity.
There are a number of arguments against it. The bankers argue that it is extremely complicated and costly and puts the clock back. In one sense, that is exactly what it seeks to do. Some people argue that it would be costly to consumers because, in the past, investment banking profits have subsidised the retail banking side. That is fine when the flow goes in that direction. However, when the investment banking side collapses, as it has, the argument no longer applies. It certainly does not apply at the moment. It is also argued that it goes against what is happening with some banks in the US, where Merrill Lynch has been taken over by Bank of America, and Bear Stearns by JP Morgan. However, Citigroup moved in the opposite direction just last week when it in effect adopted the proposal of the noble Lord, Lord Williams, and split the investment and deposit-taking sides of its activities.
None of these arguments undermines my basic premise. Greed, vanity and recklessness have brought the big UK clearers to their knees, in considerable measure through their over-risky investment banking activity. The Government are undertaking a review of the framework of the banking sector, and the amendment would require them to look at the case for separating investment banking from deposit-taking. I commend it to the Minister and to the Committee.
Amendment 174DE is an old fashioned amendment compared with the debates we have just had, because it is an amendment to the Government's amendment. I propose the deletion of subsection (6) of the Minister's new clause, introduced by Amendment 174D, which gives the Treasury the broad power to say what an investment bank is and what client assets are. However, if the Government cannot define what an investment bank and client assets are, they are not ready to bring forward a power of such magnitude. It requires Parliament to take too much on trust about the final outcome of the legislation. However, as I say, this is an old fashioned intervention.
I rise to support the amendment of my noble friend Lady Noakes. Surely conditions 1, 2 and 3 in subsections (2), (3) and (5) of the proposed new clause are sufficient definition. I do not see why the Treasury needs this wider order, particularly in subsection (6)(a), to specify the class of institution to be treated or not treated as an investment bank.
I have listened with interest to the amendments proposed by noble Lords. I start with those proposed by my noble friend Lord Williams of Elvel. I will set out why I believe that the scope of the investment bank insolvency regime regulations are best expressed by the Government's proposed new clause, without the changes proposed by my noble friend.
The first amendment adds to the list of regulated permissions that an institution needs to have, under Part 4 of the FSMA 2000, in order to be defined as an investment bank for the purposes of the scope of this enabling power. I believe that the intention of the noble Lord was to ensure that the definition of "investment bank" included a sufficiently wide list of activities to capture all relevant institutions. However, I again remind noble Lords that this definition of investment bank only has a bearing on the scope of the regulations that could be made under the new enabling power to introduce a new insolvency regime for such institutions.
I believe that the amendment I have tabled is more appropriate for two reasons. To be brought into the scope of the new insolvency regulation-making power, an institution must satisfy certain conditions. Condition 1 is predicated on the permissions for regulated activities under the FSMA, which are clearly defined and therefore unambiguous. The first activity featured in my noble friend's amendment,
"underwriting the issue of securities", forms part of the regulated activity—
"dealing in investments as principal"— included in condition 1, and is therefore already covered. The second activity,
"taking deposits for the purposes of the regulated activities", is incidental to other regulated activities and does not need to be covered.
Secondly, my amendment will include a provision under which the Government can change the scope of any regulations that may be introduced, subject to parliamentary approval. Again I remind the House that this flexibility is necessary, as the Government's review may identify other institutions that should or should not be subject to the regulations. I believe that this observation addresses the closing comments of the noble Baroness, Lady Noakes, on the definition of an investment bank. I will come to client assets in a moment.
The second amendment tabled by my noble friend intends to expand the scope of the regulations. Again, I believe that the intention of the noble Lord was to ensure that the definition of "investment bank" was sufficiently wide. However, I again remind noble Lords that this definition of investment bank only has a bearing on the scope of the regulations that could be made under the new enabling power to introduce a new insolvency regime for such institutions. I believe that the effect of the noble Lord's amendments would be to expand the scope of the definition of investment banks to all entities that carry out such business in the UK, including UK branches of foreign investment banks, so that any new UK insolvency regulations would also apply to such institutions. It is not the Government's intention to provide for this.
With regard to branches of EEA firms, under EC law the UK Government cannot interfere with the insolvency arrangements of an institution whose home state is not the UK. In relation to the branches of non-EEA firms, the Government do not wish to interfere with the arrangements that the home country may make to deal with an insolvent parent and that parent's UK branch. Members of the Committee should also note that the rest of the Banking Bill does not apply to UK branches of foreign banks for similar reasons.
The last two amendments tabled by my noble friend Lord Williams seek to ensure that the definition of "investment bank" could not apply to an institution that also takes deposits within the meaning of Clause 2 or that has a deposit-taker as a parent. Again, I believe that my noble friend's intention was to spark a debate on whether investment banks should also be, or be associated with, regulated deposit-takers—commercial banks. However, I remind the Committee that this definition of "investment banks" only has a bearing on the scope of the regulations that could be made to introduce a new insolvency regime for such institutions. As such, the effect of my noble friend's amendments would be to prevent the insolvency regime regulations applying to an investment bank that was also, or associated with, a deposit-taker.
I assure my noble friend that not only do I have a view but I expressed it at Second Reading and will do so again in a moment, if he would have some patience. The Government believe that the scope of the regulations should be able to coexist with other insolvency procedures that might be applied to a deposit-taker—for example, the bank insolvency procedure—and that institutions holding a permission under the FSMA to accept deposits should not be automatically excluded from the scope of the new insolvency regime.
There are of course considerations to be made as to how any special insolvency regime for investment banks would fit alongside such schemes as the bank insolvency procedure under Part 2. But the regulation-making power in government Amendment 174F will allow us to make provision as to how such schemes will work together. In short, the Government believe that this flexibility should be retained for the enabling power, as an investment bank could also have a deposit-taking business. Indeed, several such banks are in existence. If the review recommends that the new insolvency regulation should be drawn up for the insolvency of investment banks, it is likely that we would want to bring such institutions into their scope.
Having discussed my noble friend's amendments and the specific effect that they would have on the Government's intended policy in this area, I will now return to the wider debate on the so-called Glass-Steagall issue. The question is whether there is a case for splitting the business of banking between its utility functions, such as deposit-taking on one side, and its more speculative investment functions, which could be loosely referred to as investment banking, on the other.
Amendment 203, tabled by the noble Lord, Lord Newby, proposes a new clause that would require the Government to produce a report that examines this question and to report within the year. Members of the Committee will appreciate that this question is one part of the wider debate that policy-makers around the world are having on an ongoing basis on the appropriate form that financial service providers, and particularly those institutions that act as intermediators of capital, should take in the future in the light of the financial instability that we have experienced throughout the world in recent months and years.
I assure the House that the Government, along with their international partners, will consider the policy questions posed, along with many other questions and possible solutions related to the goal of reaching a more stable financial system. However, I do not believe that this goal is best served by requiring the Government to have a period of one year in which to respond on one specific point. I believe that this question is best addressed as part of the wider work I have just mentioned and that the timetables of any announcements should rightly depend on the progress made with the UK's international partners.
The noble Lord, Lord Newby, suggested that the response of others to his amendment and those of my noble friend Lord Williams might be that we were putting the clock back or, perhaps I may suggest, trying to put the toothpaste back into the tube. The noble Lord, Lord Newby, pointed to Citibank, which appears to be splitting its utility function from its investment bank, although there was little specificity in its announcement and it is not entirely clear how far it would intend to go. But that is juxtaposed with the fact that the Bank of America has only recently concluded the acquisition of Merrill Lynch. Goldman Sachs and Morgan Stanley have gone the other way and have registered as bank holding companies, having previously been investment banks.
The noble Lord, Lord Newby, mentioned the interview I gave to the Times, as reported on Saturday. As I have previously said in this House, there has been mismanagement of the investment banking arms of a number of our major banks, which, in part, is due to an absence of appropriate supervision and the consequences of asymmetrical incentive schemes. The FSA in its very forthright and honest response to the collapse of Northern Rock admitted to a number of shortcomings in its own regulatory engagement with that institution. The FSA's new chairman, the noble Lord, Lord Turner, is carrying out a fundamental review of regulation and the operation of the FSA.
In parallel to that, we are in discussions with the G20 countries and the Financial Stability Forum to see what lessons can be learnt as a consequence of the failures that we have seen. Clearly, it would not be acceptable simply to say, "This has all been rather unfortunate, but let us put that behind us and move on". There is a clear need to recognise that we need a series of responses across intergovernmental bodies, regulation, supervision and institutional shareholder engagement.
It is also worth pointing out that the investment banking arms of hybrid or diversified banking institutions were not only, as the noble Lord, Lord Newby, indicated, for some time apparently subsidising the commercial and retail banking arms—I say "apparently" because one has to say that possibly some of the profits that were reported were somewhat illusory or at least slipped away, although not always before large bonuses had been paid to those who claimed responsibility for generating those profits—but developed new methods of managing risk and pricing risk, which were of value to the banks' commercial and private retail customers. We simply somehow morphed into a situation in which these generally beneficial consequences of these larger organisations went to a situation where the investment bank became the dominant force within the organisation. International co-operation, improved regulation and, very importantly, improved supervision—including effectiveness of boards of directors and remuneration—and risk management processes are capable of offering significant progress.
Does the Minister agree that my noble friend Lord Williams and the noble Lord, Lord Newby, might draw some comfort from the Group of Thirty report published last week, which suggested that there should be a separation of commercial banking and investment banking, particularly given that the committee which produced the report was chaired by Mr Paul Volcker, whose position in the new American Administration suggests that he will have a significant influence on the development of regulatory structures in the future?
Inasmuch as prevailing on the noble Lord, Lord Turner, is not seen as an intrusion on his independence, I shall seek to convey to him the fact that his appearance in the House will always be welcome and appreciated, particularly his contribution on matters relating to financial regulation. As I said, it is quite possible that he will include this in his report, but I wait to see whether that is the case.
The noble Lord, Lord Newby, raised questions about the internal operation of the FSA in connection with the regulation of Barclays and Standard Chartered. I am afraid that I am not in a position to comment on that.
The other amendments in the group relate more specifically to the scope of the amendment I propose. I appreciate noble Lords' concerns that the enabling power the Government are taking is wide and I note the concerns on this point expressed by the Delegated Powers Committee. I note the earlier observations of the noble Baroness, Lady Noakes, on the Delegated Powers Committee and I certainly would not wish to gain a reputation in the House for not taking that committee with the seriousness with which I know it is taken by other Members of the House.
We appreciate that this is clearly not ideal. However, the Government would not have framed their amendment in the way that they have if they thought that it was avoidable. As I mentioned earlier, there is considerable market pressure for this issue to be looked into. There is a risk that important financial services activity such as prime brokerage may migrate to other jurisdictions which may be perceived to offer competitive advantages to counterparties in obtaining client assets speedily in an insolvency situation. I have received a number of representations on this point, as I believe have other Members of the House. A move of business away from the UK would weaken the UK institutions even further at this difficult time.
The Government would have preferred to take more time over this issue but, given the risks that I have just outlined, they feel that it is necessary to move quickly. The review that we have announced will show the market that the Government are serious in looking into this issue, and the enabling power we intend to take will show the market that we have taken an adequate power to make changes in a relatively short time. Other options, such as conducting a review and following it with primary legislation, were considered. However, the lack of parliamentary time and the sheer length of time a Bill takes to become law militated against this approach.
Again by acting quickly and by dealing with the issue in primary legislation, the Government have clearly signalled their intention to resolve the potential difficulties faced by the brokerage market in the UK. Bearing this in mind and given that, unavoidably, the review into the operations of UK insolvency law on investment banks has yet to happen, we risk taking powers with insufficient scope if we do not draft our enabling power widely. A narrow scoping power might allow the Government to make the changes they may need to make, but this fact might cause the market to have less confidence that the Government are serious about addressing this issue in a short timescale. Therefore I ask that noble Lords support the Government in taking this wider power.
I can, however, commit to the House that we will further consider the noble Baroness's amendment and the report of the Delegated Powers Committee to assess whether there is a way in which the flexibility the Government require can be reconciled with a more limited and workable reduction in the scope of the power. We hope to be able to return to this issue on Report. For all these reasons, I hope that noble Lords will consider not pressing their amendments.