Banking Bill — Committee (5th Day)

Part of the debate – in the House of Lords at 7:00 pm on 26 January 2009.

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Photo of Lord Myners Lord Myners Parliamentary Secretary, HM Treasury 7:00, 26 January 2009

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."