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The purpose of the clause is to put the use of public money in the proposed bank resolution or insolvency arrangements, or in the provision of financial assistance to banks, on a more regular footing. The Treasury has the power, as a matter of common law, to make loans to any person or to give them financial assistance in any form, but it has the money to make those loans or to make good on any commitment it has given only if Parliament, rightly, provides the money in estimates. The annual Appropriation Acts can give full statutory cover for expenditure on estimates, but in line with the Public Accounts Committee concordat of 1932, specific enabling legislation is normally required to enable the finance for a new service to be provided from public funds. That is what the clause provides.
Clause 215, which fits with this clause, enables the Treasury to draw money from the national loans fund to make loans to financial institutions where it needs to do so urgently to protect financial stability. Financial crises can arise at any time and it might not be possible to get an estimate approved quickly enough for the Treasury to make a loan from voted money, most obviously during a recess when Parliament is not sitting.
As originally drafted, clauses 214 and 215 provided for loans or financial assistance to be given only to UK authorised institutions that have permission to accept deposits, in other words UK deposit takers. It was realised in the light of recent events, including those surrounding the 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 where there is a failure of an overseas institution. The amendments address that limitation which, as we all know, has been shown to be actual rather than potential in the last few days.
I am curious about what the Minister is saying about the clause. Has there been any thinking as to the spread over the cost of Government capital when they make that sort of financial assistance? Is there a fix in mind? Have there been discussions about it? Will it be at the Governments cost of capitalwe are curious to know what that isor will it be at a very large spread, as we have seen recently? The cost of capital loaning to the banks is something like 10 or 12 per cent., which seems extraordinarily high, given the Governments cost of capital.
It would be an individual policy decision in a certain circumstance. Each situation might be different. The proposal is a much simpler thing. It gives cover for lending the money and puts it on a proper footing. In other words, because of the 1932 PAC concordat, where it looks as though money might need to be provided on more than one occasion, specific legislative approval is needed for that kind of process, rather than just using contingency funds. That is all the clause does. It does not talk about what the cost of capital would be. It would be wrong to think about putting any cost of capital in primary legislation, for obvious reasons.
The clause simply regularises, in accordance with the 1932 PAC concordat, as Parliament expects that if such expenditure could occur in the future, there should be specific legislative mention of it. This kind of clause appears in all sorts of bits of legislation. It is not unusual. It merely enables the potential use of money in that way to be regularised by statute. It does not go into any kind of detail about circumstances or what the cost of capital would be if such an issue were to occur.
My understanding is that that is not the case, and that there is existing cover using estimates, but contemplating such expenditure to rescue banks in trouble has not previously occurred in this way. So far, it has been covered by using the contingency funds voted by parliamentary estimates.
The combination of clauses 214 and 215 shifts the way in which we propose to cover the situation in future. First, clause 214 regularises the situation in terms of the PAC concordat by providing a particular statutory undertaking rather than relying on contingency funding. Secondly, clause 215 says that the best place from which to provide the money is the national loans fund rather than the Contingencies Fund, for reasons that we can go into when we discuss that clause. The amendments widen the capacity for using that process to non-UK deposit-taking banks, following the issue with the Icelandic banks. That is all the clauses do. They do not go into great detail about other circumstances.
There is a common law power, which means that everything that has been done to date is lawful, but because of the 1932 PAC concordat, the idea is not to rely on common law powers for ever into the future if an issue comes up that may result in such expenditure reoccurring. The PAC concordat is that if something that had not existed or been appreciated, but might require forward expenditurethe present situation is an examplethe Government will take a specific power for those circumstances, rather than simply relying on common law powers. That is a bit of a techie point, but that is all it is.
Obviously, a range of structures, national, EU and international, come into play when unexpected global events occur that affect entities with a global presence or with branches or part of the entity elsewherefor example, Landsbanki in the UKalthough they are regulated elsewhere. If the hon. Gentleman is referring to state aid, he is right: the clause is compatible with state aid. If he is referring to other EU rules, he will have to be more specific.
We do not believe that the clauses do anything to put us into conflict with EU rules. The point is technical and narrow, and ensures that our expenditure is properly and specifically accounted for, rather than being subject to common law, which is what the then Government arranged with the PAC in 1932.
Clause 214 is not unique. Its provisions appear in other legislation where a possible circumstance has been identified in which expenditure might have to be made. In such a case, the usual rule is to make proper legislative provision for it, which is what the clause does. It is nothing more or less than that.
I have introduced the amendment and we have talked a bit about the clause as well, but I am happy to answer any further questions that hon. Members may have.
May I make a plea to the Minister? As hon. Members will recollect from our proceedings on the Finance Bill, when Government amendments were tabled, they were occasionally accompanied by explanatory notes, which assisted Members from all parties who were perhaps not privy to the thinking of Treasury officials. The Minister has acknowledged the technical and, indeed, techie nature of the measure, so is it possible to provide such notes for some of the Government amendments?
I turn now to the amendments and new clause 3. The original drafting made explicit the group of institutions to which financial assistance could be provided: UK authorised institutions and institutions that were deposit takers. I understand the point the Minister made about non-UK institutions, but I do not know the precise legal status of ING, to which the retail deposits of, I think, Kaupthing and Heritable were transferred. I had assumed that if ING Direct was an incorporated limited company in the UK, it would have already have been picked up under subsection (2)(b). However, if it was a branch of the Dutch parent would it, on that basis, fall outside subsection (2)(b)? I would be grateful for clarification about the contrast in status between branches and UK subsidiaries of overseas entities.
I could understand the position if the amendments were limited to deleting UK; the Ministers explanation would stack up quite well and I would be happy to move on. However, I am concerned that the way in which the amendments have been drafted means that they go beyond banks. Amendment No. 28 refers to
bank or other financial institution.
On that basis, it could be an investment bank, which may not be a deposit taker in the strict definition of subsection (2)(b) or it could be an insurance company, an investment manager, an insurance broker or even an independent financial adviser. I am not sure how widely drawn
bank or other financial institution is or why the Government believe it is necessary to have such a broad definition in the Bill. The breadth of clause 214 is extended by new clause 3, which gives the Treasury the power by order to
provide that a specified institution, or an institution of a specified class, is or is not to be treated as a financial institution for the purposes of section 214 or 215.
I understand that would work on a case by case basis, so I am not sure why the Government might want to decide, or have the power to decide, to exclude a specific category of institutions from the definition of
bank or other financial institution.
It would be helpful if the Minister could clarify that point because I am not entirely sure whether the measure gives the Government much wider powers to give assistance to financial institutions that are beyond the scope of the Billfor example, to an insurance company.
Reports in the papers during recent weeks have suggested that there is some concern about the solvency of insurance companies. I do know whether the powers are sufficiently broad to enable Government financial assistance to be given to insurance companies, not withstanding the narrow scope of the Bill. Will the Minister explain why the terms have been drafted so widely and what the relevance of the power in new clause 3 is? Will she confirm that the financial assistance will not be used for any purpose beyond the limits set out in the Bill?
On the hon. Gentlemans point about explanatory notes for amendments, we are happy to try to provide them if the Committee feels that they are of assistance. We will get on with that for future aspects of the Bill, so I hope that is helpful.
The hon. Gentleman asked why there was such a broad definition in the Bill, and why the original drafting had been expanded by the amendments. It is partially because events have demonstrated that our original drafting was too narrow for us to achieve the aim, for systemic reasons, of stabilisation of particular institutions, which is what the Bill is about. Simply, the Landsbanki events demonstrated that the provisions as originally drafted were too narrow.
The hon. Gentleman asked where the bank ING was incorporated. He was rightit is incorporated in the Netherlands, so, but for the amendments, it would fall outside the provisions of subsection (2). The original drafting of the Bill would have made it harder for us to handle the situation that occurred. To be clear, however, we do not have any plans to provide financial assistance to INGjust in case anyone gets the wrong idea about that.
I take on board the Ministers comment about ING, but we could have dealt with that issue by just removingwell, not just removing; that makes it sound far too simplethe provision that relates to UK authorised financial institutions and using a broader definition of authorised financial institutions. The measure before us, however, would go further than even deposit takers.
Yes, the definition of financial institutions is broad; it could include banks, building societies, holding companies, investment firms and investment banks; but, given the complex nature of relationships in particular examples, flexibility is needed so that powers exist to react appropriately if a circumstance involves different forms of arrangements that fall outside the original, narrow drafting of the Bill. That is why we have tabled the amendments. We have to be flexible. If, for reasons of stabilisation, there were a need to direct assistance, the amendments would mean that we had the power to direct it where it was needed.
Am I right, therefore, in assuming that if it was decided, for whatever reasons, that Standard Life, which has a banking subsidiary and is owned by an insurance company, were to acquire the deposits of another licensed deposit taker, the amendments would enable assistance to be given to the parent company; whereas, under the previous rules, we would not have been able to assist the parent company but could have assisted the banking subsidiary?
I do not want to get into using particular examples or names, for rather obvious reasons. We are not talking about existing institutions that are in difficulty, so I do not want to use the hon. Gentlemans phraseology with respect to particular institutions. However, he is right in essence: the provision is about the flexibility to deal with a circumstance that may present itself in a particular instance where there are different arrangements. We do not want to predict them in advance, but we want to have the power to direct assistance and not allow too narrow a definition of financial institution. It would defeat the overall object of the Bill, which is, in certain difficult instances, that assistance be directed where it solves the problemthat, I suppose, is the simplest way of putting itand the amendments would do so. The power could not be used to bring things that are clearly not financial institutions within the scope of the clause, so we will not be rescuing plumbing companies. The difficulty, however, is that there is no clarity about what a financial institution is, and of course what one is may change or evolve. For example, we have recently seen the emergence of those who issue e-money. Such evolution of financial arrangements will continue.
The amendment will give us the scope to direct financial assistance where it is needed to solve a problem. We are not specifying particular problems. Systemic problems may emerge that have not been anticipated and do not fall within the narrower wording in the clause. The amendment will give us the flexibility to direct assistance where it is most needed. Otherwise, we may suddenly find that the arrangements that have evolved do not fit the powers.
I am grateful for the Ministers explanation. I am beginning to understand the proposals. She mentioned people providing e-money. I guess that is the type of institution referred to in new clause 3, which will give the Government powers to specify a group of institutions as financial institutions. The obvious definition would be financial businesses that are not regulated by the Financial Services Authority, which could fall within the scope of new clause 3.
The idea is to have a broad power that is future-proof in its scope of financial institutions, not to spread the powers beyond that. However, the measures must cope with the innovation that we see happening all the time, which is often technology-assisted. That underpins the amendments. I give the assurance that this is not a power to go off into other areas of the economy or to deal with different types of companies. It is trying to capture where this issue may focus if there is a rearrangement or evolution of financial systems. That is often accompanied by technological innovation, which introduces things like e-money. That would not have been picked up by the original drafting of the Bill, but it may need to be if we are talking about systemic risk and the ability to move in and protect depositors.
I think the answer is that e-money is regulated by the FSA regulatory framework. That may change in the future; the idea of regulatory frameworks is that they can evolve if the things that they are regulating evolve. Part of the difficulty is that we are trying to pass legislation that is to some extent future-proofed to deal with a fast-moving and innovative part of the global economy. That is why the proposals will broaden the scope of financial institution. I do not want to give examples because such things may not exist yet. The structure of companies that may have to be dealt with in a future credit shock may not yet exist, but we want to give enough scope under these powers for the Treasury and the authorities to deal appropriately with a future systemic problem.
In response to the hon. Gentlemans specific question, I shall have to write to him with details because he has been so innovative that we do not quite know the answer, but I am happy to let him have an answer in writing, if he is concerned.
Can the Minister confirm for the sake of clarity that, notwithstanding the broadening of the scope in respect of institutions that can receive financial assistance, they can only receive it under the Bill in connection with parts 1 to 3 and that it will not go wider than the terms of the Bill?
That is a reasonable question. Under the powers in the Bill, assistance can be provided other than in connection with a special resolution regime for reasons of economic and systemic stability. One of the most obvious examples of that is the guarantee the Chancellor gave to depositors with Landsbanki, which is not in the special resolution regime. However, some of those powers are required in future to ensure that Landsbanki depositors can be covered, so it is not only about matters within the scope of parts 1 to 3.
for any purpose in connection with Parts 1 to 3 of this Act.
Parts 1 to 3 deal with the special resolution regime, stabilisation powers, bank administration and bank insolvency, but I do not think that the guarantee given to depositors with Landsbanki and the other Icelandic banks is covered by subsection (1)(a).
That is true, but clause 214(1)(b) goes beyond the special resolution regime, as the hon. Gentleman will see if he looks at it. It refers to
a UK authorised institution (other than in respect of loans made in accordance with section 215).
Subsection (1)(b) takes the powers slightly wider than the hon. Gentleman suggested. However, that is for the general good, for protecting depositors and thereby for safeguarding financial stabilitythat is the connectionbut not only, necessarily, within the insolvency situation of particular banks.
I am grateful to the Minister for drawing my attention to subsection (1)(b). I am not trying to be difficult, but paragraph (b) would be fine if the definition was related to licensed or authorised deposit takers. However, the change in the definition of a UK authorised institution to include a bank or other financial institution gives the Government powers to give any financial institution money, not necessarily in connection with parts 1 to 3. That makes the scope wider than I had anticipated, given the nature of the Bill. I am not sure what safeguards there are to prevent a Government from using the provision to give financial assistance to any financial institution. There is no natural or obvious limit in the clause, given the breadth of definition that we are now introducing in the Bill.
I do not think that the hon. Gentleman is trying to be difficult. He is right to probe the issues. He asks why the definition is wider than the scope of parts 1 to 3 of the Bill. I ask him to bear in mind what we are trying to do with the Bill, which is to have a system that can be preventivethat allows earlier intervention to prevent more of a systemic breakdown, if that is appropriaterather than having to wait until a bank has entered the special resolution regime, for example. It may not always be appropriate to wait until something has collapsed to provide financial assistance; it may be appropriate to offer assistance at an earlier stage of the process to ensure that we prevent damage that might happen if we are prevented by law from intervening earlier.
For instance, it might be appropriate to offer assistance to prevent a company from entering the special resolution regime, or to support a bank to stabilise it. The guarantee offered to depositors in certain institutions and the recapitalisation scheme itself are recent examples of action that stabilises before a collapse can happen. Therefore, we think that it would be wrong to wait until the bank entered the special resolution regime to be able to provide assistance to it, and that is for preventive reasons.
I do not think that any Government would want to go around injecting capital into banks for charitable purposes. It is done to prevent a systemic collapse and there are safeguards against the improper giving of money to financial institutions.
The measure is an enabling power. It does not mean that it will be appropriate to give assistance to financial institutions willy-nilly, or just because we wake up one morning and decide that it might be a good idea. It has to be for the reasons that we have all discussed during our debates on the Bill and indeed during the passage of the Banking (Special Provisions) Act 2008.
We also have to put it on the record that we need to ensure that we get value for money for the money that we give, so the clause is about ensuring that regular parliamentary powers apply to money that is given, rather than using common law, and the powers go wider than perhaps the hon. Gentleman had thought and also perhaps wider than our original drafting, simply because of the fact that lessons have been learned recently. The clause is about acting in a timely fashion to prevent a worse situation happening, which can sometimes mean acting proactively before a crisis erupts in its full form.
Having given those reassurances, I hope that the hon. Gentleman will be happy with the amendments.
Actually, I think I can help the Minister. I appreciate the point that she is making about wanting to ensure that we can give financial support before the special resolution regime is invoked or before insolvency or administration. That is entirely reasonable.
I just wondered whether in subsection (1)(b) the financial assistance could be restricted to deposit-taking institutions, so that the paragraph would read, in respect of, or in connection with giving, financial assistance to or in respect of a bank or other deposit-taking institution. I want to get round the issue about when it is a UK branch or a UK-incorporated company. So, effectively one can give financial assistance in respect of a deposit-taker in the UK, but that financial assistance can be provided to a bank or other financial institution. So we are trying to restrict the circumstances in which the money can be given but broaden the people who the money can be given to.
Why would the hon. Gentleman want to limit assistance in that way when doing so would mean that the powers of intervention might not be able to cope with a particular instance? We obviously cannot anticipate when assistance will need to be given to protect UK depositorsLandsbanki is an obvious example.
I appreciate my hon. Friends willingness to take examples and apply them. If a major insurance institution that provides important support to deposit takers found itself in difficultywe can recognise straight away one such institution across the pond that was the focus of Government interventionwould not some flexibility to respond to another financial institution that is not a deposit taker but is intimately connected with the support of deposit taking be an important requirement in the Bill?
My hon. Friend, as he often does, has got straight to the point. I apologise if I have been waffling around it. The hon. Member for Fareham asked whether we should limit those powers to deposit-taking institutions, but recent experience shows that other types of institution can also get into difficulties. My hon. Friend is right in the sense that AIG, the largest insurer in the world, had to be bailed outwe can use that example because the Fed did it. It is especially appropriately in the current climate that we take powers that enable us to provide assistance to other institutions.
I would like to reassure the hon. Gentleman that we have no immediate plans to provide money to insurers or investment companies, but we think it prudent in the current circumstances to take powers that are wide enough to cope with any systemic situation that might occur, rather than narrowing them. I emphasise that that is in the context not only of the Bill, but of the need for proper value for money through appropriate Government expenditure. No Government want to have to put money into a private sector company, but some are so important to the economy and the world financial system that, if needs be, they must be supported. The hon. Gentleman is trying to narrow those powers and limit their potential use, even though we hope that they will not have to be used often, if ever again. He is wrong to think that narrowing them in the current circumstances, considering the interconnectedness of the financial systems, is the right thing to do at this time.
I appreciate the Ministers comments. Importantly, the debate has established that the Government are looking for powers to give financial assistance to any class of financial institution that could pose a threat to financial stability. I might not quite have understood the Ministers opening remarks, but that is quite an important power, and that needs to be acknowledged when looking at the matter.
In essence, that power will give the Government the opportunity to provide financial assistance to any financial institution, regardless of whether it is an authorised deposit taker or is helping to stabilise an authorised deposit taker. It could be used to provide financial assistance to a company such as AIG, if we had such a company in the UK. It could be used to provide financial support to an AIG-type institution, even if it is not a deposit taker. It is just now that I have got to that point. The breadth of the power that the Government are seeking goes way beyond the original wording of the Bill.
Obviously, there has to be a systemic risk. The hon. Gentleman is right about insurers that are bound up in systems that may, in the end, lead to deposit-taking institutions after following a trail of instability back to a particular place. It may be the case that in certain circumstances a power to stabilise such an organisation is appropriate.
To try to be helpful, perhaps the focus therefore should not be on defining more closely the institutions that one might assist but the purpose that one would follow in assisting. We may come to this when we discuss financial stability in broader terms shortly, but perhaps a sharper definition of the purpose for intervening in the marketplace in this way might be of more assistance than querying the institutions that might be assisted.
Yes, but given that we have the Banking (Special Provisions) Act 2008 and are now seeking to replace those powers with a more permanent statutethat is what this Committee is doing this morningthe context is clear. I re-emphasise that there are limits on the power to spend value-for-money state aid and propriety limits. In the context of the Bill, we are discussing systemic risk, where the consequences of allowing something to fail are much greater because of its systemic importance than the consequences of intervening to save it.
The hon. Member for South Derbyshire made a valid point about purpose. I am not sure that the purpose is as clear as it could and should be. In her responses to interventions, the Minister clarified the breadth of the power, but this is a Banking Bill, not a financial stability Bill. If there were some way of linking the use to which funds under clauses 214 and 215 could be used for the purpose of the financial stability objective, which is the context for the Bill, it would be helpful in giving people a clear view as to the purpose for which and circumstances in which the money could be used.