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I remind the Committee that with this we are taking the following: Government amendment No. 89.
Amendment No. 80, in clause 5, page 4, line 3, leave out have regard to the code and insert
comply with the code or publish an explanation of why they were unable to comply with the code in good time after their actions,.
Clause 5 stand part
Amendment No. 82, in clause 6, page 4, line 11, leave out and.
Amendment No. 83, in clause 6, page 4, line 14, at end insert , and
(d) those persons whom it considers to have relevant knowledge of those matters..
Amendment No. 85, in clause 6, page 4, line 17, at end insert
only after complying with the requirements set out in subsection (1)..
Amendment No. 84, in clause 6, page 4, line 18, at end add
(5) The code shall not come into force unless it has been approved by a resolution of each House of Parliament..
Clause 6 stand part.
I welcome you to the Chair, Mr. Illsley, for todays proceedings.
We had quite a full debate on this group on Tuesday afternoon and I want to reflect a little on the Ministers response to it. Before I do so, I should like to refer to the comments that my hon. Friend the Member for Gosport made about who should pull the trigger. He made them in the context of the debate about the code and we will pick up on that in clause 7. My hon. Friend and I share the same viewpoint on this. For a variety of reasons we believe that the best body to pull the trigger is not the Financial Services Authority but the Bank of England.
My hon. Friend gave a clear elucidation of those reasons on Tuesday. If we concentrate on the efficiency of the regulatory system, there is a danger that we forget about its effectiveness. The responsibilities of the tripartite authorities are so clearly delineated in each others minds that sometimes there is no overlap or any form of check or scrutiny or engagement in other aspects of their arrangements. That is why giving the Bank of England the power to pull the trigger will give it a much greater role in the supervision of the banking system.
We need to get the balance right. We do not want to have two regulators, but we need to ensure that there is an effective check and there is no risk of regulatory forbearance by one regulator. My partys policy is that the Bank of England should pull the trigger but, as the Minister knows, in the interests of passing the Bill speedily, my right hon. Friend the Member for Witney (Mr. Cameron) indicated that we would not be pursuing this matter now. We will leave this one for another time. It is very much on our agenda to look at this.
I want to go back to the Ministers remarks on Tuesday afternoon and to focus on two points. The first is about flexibility. We appreciate the need for flexibility in the code and the way in which the powers are operated. The Minister talked about flexibility in the context of making a statement on the use of powers and my amendment on comply or explain. I understand the point he makes, but there is a risk attached to flexibility that we need to bear in mind. The code is being put out to consultation today and will be redrafted. If it is too vague or opaque, or the need to comply with it is too lax, it will undermine confidence in the way in which it is meant to circumscribe the exercise of powers in the Bill. I will come back to the comments made by the hon. Member for South-East Cornwall about the benefits of that circumscription.
The second point is on the threshold conditions. The Minister indicated that the FSA, in the light of the Bill, will look again at the threshold conditions to ensure that the two things dovetail. When will the FSA consult on a revision of the threshold conditions? Will there be fewer conditions? I mentioned a couple of the conditions on Tuesday. Will the adequate resources condition be the key condition in the context of the Bill, and how much guidance will the FSA give on the conditions? One concern is that too much opacity on how the conditions can be met or, indeed, breached, will undermine confidence in the use of powers in the Bill.
I should like to go back to the central purpose of having the code in the Bill and why the code is important. The Bill includes some quite invasive powers: it gives the tripartite authorities powers to interfere with the rights that creditors and investors would normally enjoy. For example, it gives the tripartite authorities the right to take control of the bank and to transfer part of its assets into a bridge bank. The code is meant to provide confidence to creditors and investors about how the powers will be exercised. Increased uncertainty about that means that there is high risk in the eyes of investors and creditors. Higher risk means an increase in the cost of capital, which will make it harder for banks to raise capital, which will have an impact on the wider economy. If the cost of capital of a bank increases, so will the cost of the loans it makes to households and families.
I believe that the Government recognise that, which is why they have accepted that it is important that the code sets out the limitations on the exercise of powers in the Bill. However, to give confidence to the sector, the code needs to be explicit about the circumstances in which, and when, the powers will be exercised. The Government must therefore produce a much more detailed code if they are to allay any fears about the use of the powers. They need to provide clear guidance to the tripartite authorities rather than produce a rewrite of the explanatory notes, and to set out, in the context of clauses 10, 11 and 12, the hierarchy of the stabilisation options, and what is the preferred option.
Not only the code but the threshold conditions need to be more specific to avoid the sense that they can be used in an arbitrary fashion. The Government will argue that they need flexibility; that an overly restrictive code will constrain the freedom of action. However, if the use of invasive powers in the Bill is perceived to be unconstrained, markets will make their own judgments on whether they should invest in British banks. If the code as redrafted does not provide significantly greater detail on how and when the powers will be used, there will be demand for the constraints to be in the Bill rather than the code.
The Government need to reflect on the tension between flexibility and reassurance. At the moment, the code errs on the side of flexibility. If that continues, the cost of capital will rise, and families will pay the price through higher interest rates. Moving forward, the Government need to think carefully about how the code should be redrafted to give confidence to banks and their investors and creditors. Certainly, conversations that I have had in the past few days with external parties suggest that the code as currently drafted does not do the job that people expected it to do.
It is a pleasure to welcome you to the Chair for this sitting, Mr. Illsley. I spoke at some length on the proposed amendments to clauses 5 and 6 on Tuesday afternoon, and I do not intend to do so today.
I should like to say two things in response to the hon. Gentleman, the first of which is on his point about the FSA and the need to explain the situation. The FSA is looking at the guidance on threshold conditions, not the conditions themselves, and plans to consult on it in December. However, as I made clear earlier, I can confirm that adequate resources and management suitability are key conditions for assessment of the trigger.
There are always decisions about what to put in primary legislation and what is more naturally secondary legislation or required in codes of practice. Those decisions are fairly straightforward in many instances, but in others they are matters of judgment, with fine distinctions. We always have debates about those issues.
I welcome the hon. Gentlemans general support for the Bill and I note his comments on the code. As he says, we are consulting on it, starting today, and also consulting on the secondary legislation. We have been working closely with the expert liaison group and others to ensure that we get the details of the secondary legislation right. I do not think that there are any differences on intention or principle other than on who exercises the trigger. There is genuine willingness on both sides of the Committee to have legislation and a code of practice that does the job that we all want it to do. With those brief comments, I hope that we can move on.
I welcome the Ministers remarks. It will be important for the Bills progress through the other place, where their lordships will be looking carefully at the revised code and how it interacts with the powers, to get the balance right. My main concern is that the balance between the constraints, which the code imposes on the exercise of powers, is not right. I recognise the tension between primary and secondary legislation and the code. I, and others, would be more comfortable, if the code was beefed up, but people will make their views known clearly through the consultation process. I beg to ask leave to withdraw the amendment.