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Clause 2

Banking Bill – in a Public Bill Committee at 11:30 am on 4th November 2008.

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Interpretation: “bank”

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I beg to move amendment No. 87, in clause 2, page 2, line 28, at end insert—

‘( ) Where a stabilisation power is exercised in respect of a bank, it does not cease to be a bank for the purposes of this Part if it later loses the permission referred to in subsection (1).’.

This is a technical amendment, which makes it clear that the provisions of part 1 continue to apply to banks in respect of which stabilisation powers have been exercised, even should such banks lose their regulatory permission to accept deposits under the Financial Services and Markets Act 2000.

An example of where that scenario could be material is as follows: as we will discuss when we come to clause 57, the expression “residual bank” is used in subsection (1) of that clause to impose continuity obligations between a residual bank and a transferee. It is highly likely that a residual bank will have been placed in the new bank administration procedure, and in such circumstances the residual bank would no longer have a valid deposit-taking permission. The amendment would prevent the argument from being made that a company without a deposit-taking permission is not a bank, and hence not a residual bank within the meaning of clause 57(1).

Photo of John Pugh John Pugh Shadow Minister (Treasury)

I should like move to a wider point. There used to be a well honoured distinction between retail banking and investment banking, but that has now completely gone in legislation. May I probe the Minister  a little? Has any thought been given by the Treasury to reinstituting such a distinction in terms of which regulations may apply to which type of institution? Over time such distinctions become almost meaningless, but that is part of the problem.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. Before we go wider, the Minister made it plain, and it is clear, that this is a technical amendment. Ordinarily, I would be relaxed about having a broader debate, but it might help the Committee if we deal with the amendment and then have a stand part debate during which hon. Members may go wider. I think that is the appropriate way to proceed.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I am happy to abide by your instruction on the matter, Mr. Gale. I have explained clearly that this is a narrow technical amendment that we believe to be necessary, and I hope that the Committee will support it.

Amendment agreed to.

Question proposed, That the clause, as amended, stand part of the Bill.

Photo of John Pugh John Pugh Shadow Minister (Treasury) 11:45 am, 4th November 2008

I do not need to reiterate the remarks that I made before, but there is a strong feeling that we might need different regimes for different types of bank. If there is no capacity to differentiate types of bank in legislation, it is obviously another tool that is not in the toolbox. The legislation is clearly being introduced in response to an immediate crisis, but there must be far-thinking spirits in the Treasury who are considering what they can do to give long-term stability to the banking sector as a whole.

In America and the UK, there is some thought that some of the liberalisation that blurred distinctions between different types of bank was a mistake and part of the problem. Is the feeling in the Treasury that a bank, however it is defined, should simply have that sort of global meaning, or is there capacity to distinguish between types of bank in regulation and legislation?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I do not normally get excited about the definition bit of a Bill, but I just want to push the Minster’s thinking on that point, partly to echo the comments of the hon. Member for Southport, because he highlighted an important distinction. Subsection 1 of the clause states that

“‘bank’ means a UK institution which has permission...to carry on the regulated activity of accepting deposits”.

However, some banks that do not accept deposits—investment banks, in effect—would fall outside the scope of part 1. Elsewhere in the Bill, we have already given the Government the power to provide financial assistance to what would be called, in the context of the amendment, non-banks and financial institutions that are not deposit-taking institutions. That was set out in clauses 214 and 215, which we debated last Thursday morning, so the Bill already envisages that the Treasury could bail out an investment bank, insurance company or investment manager. Investment banks make a major contribution not only to the economy, but to financial stability, so I  am not clear why they are being excluded. It suggests that the entire bias of part 1 is to protect depositors, rather than looking at the broader perspective of maintaining financial stability, which is set out in the objectives under clause 4. I am a little concerned that the wholesale operations of banks will not necessarily be covered in part 1.

If one takes into account what happened with the collapse of Lehman Brothers in the US, one can certainly see that there has been a significant impact on the UK as people sought to unwind their trades, and hedge funds tried to work out their position. Hedge funds were examining whether their agreements were permitted, whether the transactions between Lehmans and its accounting partners would hold, whether client money counts, and a whole host of related issues. I would not want to say that it undermined financial stability, but it certainly slowed down the current working of the wholesale markets. I would have thought that some of the powers in part 1 might be of use if a wholesale bank were to face financial problems, and I am concerned that subsection 1 seems to exclude institutions that are commonly known as banks but that do not accept deposits from customers.

My second point is about subsection (3). I touched on it in the previous debate and the Minister flagged it up for more detailed discussion under clause 2. Subsection (3) defines a UK institution as one that

“is incorporated in, or formed under the law of any part of, the United Kingdom.”

The example that I used to probe the Minister on how far the regime goes the UK branch of the Icelandic bank Landsbanki. Interestingly, Landsbanki also had a subsidiary in the UK, which was dealt with differently from the branch. People—myself included—would say that although it was important for the Government to protect the interests of Landsbanki’s depositors in the UK, it was evident that the Government lacked the tools to look at the bank’s assets, which is why they had to use the Anti-terrorism, Crime and Security Act 2001 passed in the aftermath of 9/11.

How will the powers in the Bill affect a branch in the UK? Branches undertake significant banking activities, and the Financial Services Compensation Scheme website will list all deposit-takers that are branches of overseas banks. That will indicate how important the matter is. In a slightly different area of financial services, rules have been developed for businesses operating in the UK with headquarters overseas, to enable the branch arrangement to become more familiar. However, how Landsbanki was dealt with raises the broader question of how we manage the affairs of branches where there is financial collapse, which links to my point on investment banks. One investment bank that springs to mind—a major player in London—is a branch of its parent and is, therefore, not incorporated in the UK.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

My hon. Friend makes an important point. In essence, the issue is that under the investment services directive, prudential regulation for passported institutions is performed by the home state regulator, not the host nation. At the moment, therefore, the FSA and the Bank of England do not have a role in regulating prudential supervision for such branches. It would be interesting to know what, if anything, is changed by the Bill.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My hon. Friend makes an important point. There is a distinction between the conduct of business rules, which would cover a branch operating in the UK, and prudential supervision. We could end up with the curious situation of a financial services sector in the UK that had become so internationalised that although the FSA regulated the conduct of business, it could not say a great deal about prudential regulation because there was a series of branches. If branches are excluded from the Bill, the Government will have few tools with which to protect the UK financial system when its stability is threatened.

It is important that the Minister elaborates in his reply how the Bill affects those branches, and what other tools are available to safeguard the interests of depositors in branches. As the Landsbanki example demonstrates, there seems to be a lack of alternatives, other than the freezing order under the 2001 Act. I do not want to debate that—we did so last Monday in a Committee on Delegated Legislation—but it is a good example of the limitations of the Bill and why the Government need to make clear which tools in the Bill can and cannot be used in respect of a branch.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

Clause 2 sets out the definition of a bank for the purposes of the Bill. A bank is defined as a UK institution that has a regulatory permission granted by the FSA under the Financial Services and Markets Act 2000 to accept deposits. If such an institution gets into serious difficulties, the authorities will have the option of using the stabilisation powers of the special resolution regime set out in part 1 where that is justified in the public interest.

The definition of a bank does not include a building society or a credit union. They have their own particular legal characteristics and the provisions of the special resolution regime need to be modified accordingly. Clauses 71 to 75 set out how the special resolution regime is applied to building societies and clause 76 allows it to be extended to credit unions. The Treasury will also by order add to the exclusions from that definition of a bank, which may be necessary to refine further the precise scope of institutions that may be subject to the SRR and to take account of future developments.

Two key points were raised by hon. Members. First, I shall respond to the hon. Member for Southport’s point that the legislation does not differentiate types of bank. That is not true. The Bill clearly applies only to deposit-taking institutions. It does not apply to investment banks without deposit-taking permissions, which are completely different. I hope that makes the situation clearer.

Photo of John Pugh John Pugh Shadow Minister (Treasury)

I accept that and I am grateful for the clarification, but I think the Minister would accept that under subsection (1) it is a necessary condition that a bank takes deposits. A big bank may do lots of other things as well, so under the definition of a bank one might find banks that are straightforward, traditional banks such as the Co-operative Bank, and others where deposit-taking is a very small, almost incidental, aspect of their business. Their real money may be made elsewhere and they function in most respects as investment banks.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I understand the point that the hon. Gentleman is making but we consulted widely on the point about investment banks, and it was clear that the  Bill and the SRR could not apply to non-deposit takers. The Treasury is considering which steps to take in the case of other types of institution and we will consult more widely. There is clearly a significant issue.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Can the Minister explain why it is not appropriate to apply these powers to investment banks?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

This is an area where we believe that further work is needed. All the consultation that has taken place to date has been on the basis of the Bill as it stands and to extend it would be a significant change. Extending the SRR to investment banks may help to protect financial stability if a failure were to occur but we believe such action would have a significant number of downsides. The risks of such an approach might include the fact that the tools might not be the most appropriate for non-deposit-taking financial institutions. The SRR, including the infrastructure, objectives, powers and some of the tools, has been designed with an emphasis on depositor protection as well as being part of financial stability. The cross-border nature of the largest and most systemically important non-deposit-taking institutions suggests that the national approach on its own might not be enough. That applies to some extent to any deposit-taking multinational but the issue is far more acute for investment banks.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

This almost falls into that great “Yes Minister” thing of being too difficult. We are a global financial centre and, yes, there is a range of multinational institutions based in the UK, some of which are deposit-takers, some of which are investment banks. One criticism of the previous arrangements was that there appeared to be no measures in place to deal with the collapse of Northern Rock. That had a detrimental impact on London’s relative standing among global financial centres. We are a global international centre, yet the Government have shied away from thinking through the consequences of the impact of the collapse of a multinational investment bank in the UK. The Government have missed an important opportunity to think that through and to recognise London’s pivotal role in international financial services.

Mr. Newmarkrose—

Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

I thank the Minister for giving way. My hon. Friend the Member for Fareham makes an important point. I am curious to know what representations the Minister has had from the investment banks, which are all based in the UK, and what feedback he has had about what the Government propose.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

There is widespread support for the measures in the Bill, particularly the definition in the clause. The Bill focuses on deposit-taking institutions.  It is quite right for the Committee to point out that investment banks are in a different category. Most are not deposit-taking institutions and to that extent would not be covered by the Bill. As I have indicated there are potential downsides if we try to include investment banks in the Bill. It is an issue on which the Treasury is doing further work, together with the tripartite authorities. We want to ensure that we take all the action that is necessary to give people confidence that the overall financial system is in safe hands.

Photo of Colin Breed Colin Breed Shadow Minister, Treasury

We understand that. The aim is to protect depositors. However, there are wider issues, the widest or perhaps most appropriate of which is the fact that most of the problems for depositors have been caused not by the deposit-taking and normal banking business of those institutions, but by the very activities of aspects of the bank that are not included in these regulations. Therefore, there is a real case for considering how the regulations can be moved into the investment banking side and perhaps even for the real disaggregation of those activities so that they can be separately regulated.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

The hon. Gentleman makes a fair point and it is something that we will want to consider. Investment banks are represented on the liaison group. They agree that the SRR should focus on deposit-takers, but there is clearly an issue for the future, which we are considering.

The second point raised by the hon. Member for Fareham concerns our limitations with regard to branches. As I outlined in the earlier debate, we need to be clear that the SRR can apply only to UK-incorporated banks. Under European economic area law, prudential regulation of EEA branches is for the home state regulator who is responsible for taking the lead on resolving difficulties with EEA banks. The powers of the host state regulator are therefore limited. Even if we sought to take powers to apply the SRR to EEA branches, the UK authorities could act on those powers only in highly circumscribed ways. Many of the SRR powers—for example, share-transfer powers, which have been developed for use in relation to shares and securities as defined in UK law—would have to be completely redesigned to be applicable to EEA branches.

The approach that we have taken is consistent with the principles of home state regulation of EEA branches. However, the Committee should also note that the remit of the Financial Services Compensation Scheme extends to branches of banks from other EEA states, which have joined the top-up arrangements, as per the directive. Of course, the FSA works closely with other regulators within the EEA to resolve difficulties with EEA firms operating in the UK.

Our experience with the Icelandic branches has demonstrated the importance of ensuring that home state regulation is effective. We need to hold further discussions about that in international forums. A college of regulators has also been proposed, but we need to ensure that people putting money into a branch of a foreign bank feel sufficiently assured that their money is safe, and to ensure that it is made clear which authority is regulating a bank or building society when people are investing their money.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister has touched upon the distinction between branches regulated through home/host arrangements and UK-incorporated subsidiaries. More than anyone appreciated, the Landsbanki situation revealed the growing gap for consumers between branches and UK-incorporated businesses. Some measures in the Bill would enable a wholesale transfer, for example, of accounts from one bank to another, as happened with Bradford & Bingley. I am not clear from the Bill and from the Minister’s explanation whether that type of facility would have been available to the depositors of Landsbanki as a branch. I suspect that it would not have been, so depositors will have to understand that there are two levels of protection and that it will be much easier for them to get continuity of service and to have instant access to their money if a UK bank is in trouble, because the safeguards do not exist with foreign-owned branches. Icesave depositors could be waiting until the end of the month to get their money. How do the Government or the FSA intend to communicate the important differences between a UK-incorporated bank and a branch of a foreign bank?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

An important issue of investor awareness and information is being raised, which we have all suddenly become far more aware of over the past few months. It has always been the case that a person investing in the Isle of Man is investing in a separate tax jurisdiction with a separate regulatory regime. I do not think that the situation has been made as clear as possible to individual investors, whether they are investing in a branch of an Icelandic bank or in a UK subsidiary of an Icelandic bank. There needs to be greater clarification in the marketplace, which, I am sure, the Financial Services Authority, which regulates those matters, is addressing.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

I am grateful to the Minister for accepting an intervention just before he finishes. From what he is saying, I understand that there will be a compulsion or a health warning on foreign subsidiaries in this country—it is a very good idea—which says, “Certain aspects of your investment are not protected by British regulations”. Is that what the Government are proposing?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury

I certainly want to use that sort of language. Investors should be aware of the regulatory regime and the deposit protection measures that apply to any bank in which they consider putting their money. I hope we all accept that general principle. We need to ensure that there is clarity of information in the marketplace, which is perhaps not there to a sufficient extent at the moment.

Several hon. Membersrose

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. The Minister has wound up the debate.

Question put and agreed to.

Clause 2, as amended, ordered to stand part of the Bill.