I must apologise to the hon. Member for Gosport for not replying to the points he made about subsections (3) and (4) in clause 19 when he suggested that they were superfluous. With your indulgence, Mr. Illsley, I would like briefly to explain that they make it clear that the Bank or the Treasury can specify the terms and conditions of appointments. Otherwise this provision would be left to the board of directors to determine. We do not need to make the same provisions for paragraphs (a) to (c), which is why the clause is drafted as it is. I apologise for not replying to the hon. Gentleman in the right place.
In answer to the question by the hon. Member for Fareham about clause 21, I am more than happy to explain. The clause sets out certain provisions in relation to events of default. An event of default clause in a contract gives a specified right to a counterparty if a specified event occurs. For example, a contract could stipulate that a counterparty should have the right to terminate the contract if the banks credit rating changes or if there is a change of control of the bank. This clause is important since most modern contracts make heavy use of these provisions.
The transfer of securities is likely to be characterised as an event of default which would give counterparties the right to terminate or modify contractual arrangements in the event that the authorities exercise the transfer powers. Clearly, any termination of key contracts would significantly reduce the likelihood of the deposit taker being able to continue as a going concern. It could necessitate having to renegotiate contracts, potentially with new counterparties, with no guarantee that similar terms could be arranged. In extreme circumstances, for example, if the majority of the banks counterparties sought to rely on termination rights, the bank would be unable to continue its operations. In addition, the act of counterparties terminating their contractual arrangements with the deposit taker is likely to send a strong signal to the market that other counterparties should not do business with the bank. Thus, a number of counterparties closing out contracts could lead to a wider counterparty flight from the deposit taker, which would have severe consequences for the success of the resolution. Therefore, this clause allows the authorities to make provision for a shared transfer instrument or order to be disregarded in determining whether a default event provision applies; in other words, that such default event rights may be disapplied in relation to a transfer of control by way of a shared transfer order or instrument.
The powers are designed to be tailored to particular circumstances and thus, where practicable, an event of default might be modified rather than entirely disapplied. The provisions, however, could not be used to override financial collateral agreements, which are protected by the financial collateral arrangements directive and which in broad terms must be allowed to take effect in accordance with their terms.
This is an area where, in the light of further analysis and consultation, the Government have adopted a more restricted form of the powers than those taken in the Banking (Special Provisions) Act 2008, which, for example, apply to any person having a specified connection with a deposit taker or any of its group undertakings. That is an essential and proportionate provision for ensuring that a deposit taker can continue to operate, notwithstanding any change of control as a result of the powers under this part of the Bill.