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Clause 25

Banking Bill – in a Public Bill Committee at 2:15 pm on 6th November 2008.

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Supplemental instruments

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. 92, in clause 25, page 11, line 23, at end insert ‘—

(a) provides for the transfer of securities which were issued by the bank before the original instrument and have not been transferred by the original instrument or another supplemental share transfer instrument;

(b) ’.

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenient to discuss the following: Government amendments Nos. 93 to 95.

Government new clause 10—Reverse share transfer.

Government new clause 11—Bridge bank: reverse share transfer.

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

The group of amendments and new clauses provides for additional flexibility to be introduced to the share transfer powers relating to supplemental transfers, which are already provided for in the Bill, and also reverses transfers, which are the subject of the new clauses in the group. A similar group of amendments have been tabled in relation to the property transfer powers. Those will be debated when we reach clause 39.

While it is envisaged that the vast majority of any supplemental and reverse transfers will be made in relation to property, the amendments replicate those provisions for the share transfer powers. However, they are not, of course, being introduced simply for the purpose of consistency; there may be circumstances in which that added flexibility is needed. It may help the Committee if I provide a brief introduction to the concept of supplemental share and reverse share transfers.

Recent events have clearly demonstrated that resolution interventions may need to occur with extremely short notice. In such situations, the due diligence undertaken may only be preliminary. Further work may reveal additional details about the nature of securities or, indeed, the business that has been transferred. Supplemental transfers provide for further transfers of securities from the holders of securities to the relevant transferee. Reverse transfers provide for securities to be moved back from a transferee to the original holders of the securities. To take control of the bank, securities that confer control rights will need to be transferred. Such securities may not be limited simply to ordinary voting shares, but may include securities such as preference shares and hybrid equity-debt securities, which may confer control rights in certain contingencies. In circumstances where an extremely swift transfer of ownership of a bank is required to protect financial stability, it might not be possible to have an exhaustive list of all the securities of the bank at the time of transfer. Moreover, in general it is difficult to foresee exact circumstances that may come to pass, so there is a need for flexibility. That particularly applies given the complexity of institutions to which the powers are intended to apply.

Many banks have extremely complex capital structures, involving a broad range of different classes of security, including forms of security bespoke to the bank in question. It is worth noting that the powers may not necessarily always be used to effect an actual transfer of securities. Instead, they may be used to make provision in connection with a transfer that has already been made. For example, a supplemental order may provide simply for the conversion of securities, as permitted by clause 18, or make incidental and consequential provision, as permitted by clause 22. I accept that it would be desirable for such supplemental and reverse transfers not to be required. However, for the reasons that I have given, it is prudent to include the provision to ensure that the stabilisation powers are suitable for dealing with the broadest range of circumstances.

I shall now turn to the specific provisions of the amendments. Amendment No. 92 permits supplemental share transfer instruments to effect a further transfer of securities to a commercial purchaser. An example of the circumstances in which that may be necessary is where further due diligence reveals that a person has a class of security other than ordinary shares which nevertheless confers on that person some form of right actually or contingently to control the failing bank. Therefore it may be necessary to transfer that class of security in order for the Bank of England to secure the full control of the deposit taker for a commercial purchaser.

New clause 10 provides that the Treasury may make reverse share transfer orders. A reverse share transfer order may be made in two circumstances: first, following the transfer of a failing bank to temporary public ownership in accordance with clause 12; and secondly, following an onward share transfer to a publicly-owned transferee—a company wholly owned by the Bank of England—the Treasury or a nominee of the Treasury. As with all other forms of transfer, the Treasury must consult with the Bank of England and the FSA before making the order.

New clause 11 makes similar provision in relation to the Bank of England and bridge banks. The clause provides that the Bank of England may make bridge bank reverse share transfer instruments. Such instruments may be made following the transfer of a bridge bank’s securities to a publicly owned transferee.

Amendments Nos. 93, 94 and 95 make technical clarifications. Amendments Nos. 93 and 94 make it clear that a supplemental share transfer instrument may transfer any securities of a failing bank that have not previously been transferred from their original holders. Amendment No. 95 makes it clear that an onward share transfer from temporary public ownership may transfer all the securities of the bank that have been transferred by share transfer orders or issued after the original transfer. This provides the Treasury with the flexibility to change the bank’s capital structure before it is sold, for example, by simplifying the nature of its securities.

Finally, I would like to make two general points about the provisions of the supplemental and reverse transfer clauses. First, members of the Committee will note that the general and specific conditions of SRR intervention do not apply to supplemental and reverse transfer instruments and orders. It would not be appropriate for further transfers to be subject to these conditions, as the initial transfer may have stabilised the bank such that it no longer is, for example, failing to meet its threshold conditions. Instead, these powers are needed to give full and proper effect to a resolution where these conditions have already been satisfied at the stage of the first transfer. Of course, where these further transfers interfere with property rights, the authority concerned must still be satisfied that the action is proportionate to the public interest aim pursued.

Secondly, a general restriction has been placed on the powers to make reverse transfers of securities. That is that such transfers should not be possible following a transfer of securities to a private sector purchaser. That restriction is achieved through exclusion—that is to say, no provision has been made that would confer a power to effect such a transfer.

The Government do not consider it appropriate for the authorities to have this flexibility. The securities will have been acquired by the private sector purchaser as part of a commercial deal. The existence of statutory powers to reverse the transfer which formed part of that deal, without reference to the private sector purchaser, is likely to introduce an element of risk which a purchaser may not be content to take. That could reduce the likelihood of agreeing the transaction. Therefore, in the interests of enhancing the chances of a private sector solution, the Government are not including that power in the provisions.

Recent experience of resolving failing banks has clearly demonstrated the need for flexibility. It has also shown that transfers may occur extremely swiftly, with only limited time available for detailed analysis of the banking business being transferred. For these reasons the Government consider it necessary to amend the provisions of the Bill. Of course, I accept that it would have been desirable to include these provisions initially; but that was not possible. It would have been wrong to rush through these changes before introduction of the Bill without a full analysis. Such an analysis has now been undertaken, and we have concluded that these powers are necessary.

Amendment agreed to.

Clause 25, as amended, ordered to stand part of the Bill.