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As I am sure the Committee is aware, major financial firms do not tend to operate as single legal persons. Instead, they are organised as groups, generally with a single ultimate parent company and any number of subsidiaries, which may be organised into distinct sub-groups. Corporate entities within those groups are connected through shareholdings but are likely to be connected in other ways as well. Bank holding companies may have hundreds of subsidiaries. Members of the Committee should note that Northern Rock was an unusually simple bank in terms of corporate structure, in that the holding company was the deposit taker and the bank had very few subsidiaries. There is no general rule about how banks organise themselves or, in particular, where they locate their systems. Some banks systems are split between subsidiaries; others are all located in the holding company or a particular subsidiary. For example, the holding company may employ all the groups employees or a specialist subsidiary may provide IT services to the whole group.
As we have discussed before, the scope of the special resolution regime is restricted to deposit takers and does not include other financial institutions such as investment banks. I have said that the Government are considering what powers are needed in relation to other firms, but they do not generally consider it appropriate to extend the scope of the resolution regime beyond the deposit-taking class and that includes other non-deposit-taking firms in the financial group in which the deposit taker sits. However, we recognise that there are arguments for extending the scope that need to be considered in due course.
It is possible that the deposit taker may not be operational on a stand-alone basis. It may require the provision of essential services from other companies within the group, such as IT systems. If that is the case, removing it from the group will not lead to an effective resolution, as the deposit taker will no longer be able to function without the provision of those intragroup services. The aim of the pre-insolvency tools is to preserve continuity of banking services. That aim cannot be met without a functioning bank. Therefore, specific provisions are needed to deal with such a situation. The Government consider that the most appropriate solution for successfully resolving deposit takers that form part of a group of companies is to take powers to place general and special continuity obligations upon group companies of the failing bank. Those obligations will be restricted to ensuring that services and facilities continue to be provided to businesses transferred.
This group of amendments comprises a collection of generally technical amendments to the continuity obligations. In broad terms, the amendments do two things. First, they provide the authorities with the flexibility to remove a general continuity obligation that has arisenin some circumstances it may be appropriate for that to occur. The provisions of the special continuity clauses already provide for the termination of the special continuity obligation, therefore new clause 18 brings the positions of the two types of obligation in line with each other. Secondly, they make changes to the consideration that must be paid to service providers. If a former group company provides a service, for example IT support, to a deposit taker, an appropriate amount should be paid for it. There is a difficulty, however, in characterising an appropriate amount in terms of a market rate.
In normal circumstances, the forces of supply and demand would work to determine the market rate and it is likely that in normal circumstances such a rate would be an appropriate amount to pay. For example, the deposit taker could solicit bids, through a tender process, for the provision of a particular service, and following an open competition, could select the service provider that offered the best combination of product and price. Such a process is clearly not suited to the circumstances surrounding the resolution of a failing bank; we have already discussed the fact that action needs to be taken urgently. Once the business is transferred, it is essential that services continue to be provided to ensure that the deposit taker remains operational from day one. That is necessary to ensure that depositors retain access to their accounts, for example. There is likely to be insufficient time for a transferee to arrange for new servicing arrangements. There will be one choice: to continue with the same services as pre-transfer.
In addition, bank systems are often highly bespoke to the particular business that they support, so it is highly unlikely that a deposit taker would be able to find and organise an alternative supplier for essential services at short notice. Given that the deposit taker would not be able to take advantage of substitute service providers, a former group company that supplies services is likely to be in a position of relative power. That position could be used to charge a ransom rate, because the deposit taker would have no choice but to accept that rate, given the lack of alternatives.
For that reason, the Government have tabled amendments to remove references to market rate and market terms. We propose instead that service providers should be paid a reasonable consideration. Government amendments Nos. 122 to 127 provide for that. In addition, new clause 17 provides that the Treasury may, by order, specify matters that are to be or are not to be considered in determining what amounts to reasonable consideration.
I take the opportunity to advise the Committee that the Government will table further technical amendments to clauses 57 to 60 on Report. Those will amend the provisions to ensure that they work in situations in which different parts of a banks business are transferred to different transferees, and in which some or all of a bank is transferred to an onward transferee. It is crucial that we get the detail right and that continuity obligations can work in the widest range of potential resolution scenarios. We tried to prepare the amendments in time for the Committees scrutiny, but that has not been possible. I apologise to the Committee for that, but I wanted to draw hon. Members attention to those additional technical amendments so that they do not come as a surprise. I should also inform hon. Members at this stage that the Government are considering whether further reserve powers are needed to deal with banking groups where the holding company is not an authorised deposit taker.
The continuity obligations that I have just described provide measures to allow the authorities to deal effectively with circumstances in which transferring the deposit taker out of a group may not allow for an effective resolution of the deposit taker. There may also be situations in which transferring just the deposit taker in a financial group, while successfully resolving that firm, could create a further threat to financial stability. Such circumstances may arise if there are other parts of the group in financial difficulty whose failure would pose a risk to financial stability. They could also arise if the transfer of the deposit taker led to the failure of the group within which it sits, which is most likely if the bank provides essential services to other parts of the group. That could create a separate risk to financial stability, particularly where the other group companies are financial firms.
In such circumstances, the most appropriate solution may be for the authorities to seek to resolve the group as a whole, rather than focusing on the deposit taker alone. The Government have been considering whether such a power is necessary and have come to recognise that it may well be. We will continue to keep that under review in the immediate short term and will introduce further amendments if necessary. As I have said in a number of contextsfor example, when we discussed investment banks last week and in the debate on foreign branchesthe Government continue to keep under review options for action in respect of financial institutions other than deposit takers. The work on group holding companies is part of that process. Returning to the amendments at hand, I hope that they will be incorporated into clause 57 and other areas of the Bill as appropriate.
We appreciate some of the difficulties with the Bills original wording. Indeed, the London Investment Banking Association highlighted in its written evidence on the Bill some of the difficulties with regard to clause 57(4) and (6) working together. I can see that, to some extent, the Government are seeking to address that concern. I also note that this is work in progress, in that further technical amendments are to follow.
However, I have an instinctive suspicion of the term reasonable consideration. I can see the difficulties created by the use of market rate, but with regard to reasonable consideration, the consideration tends to be what two parties reach agreement on. The idea that a third party can determine what is reasonable in an abstract way could cause difficulty in a range of contexts. Will the Minister elaborate on how reasonable consideration will be reached? I have a slight concern about the amendments, but we do not intend to oppose them, and subject perhaps to that further clarification, I raise no particular objections.
The authorities will work with the service provider to calculate the appropriate consideration to be paid. New clause 17 provides that the
Treasury may by order specify matters which are to be or not to be considered in determining...what amounts to reasonable consideration.
As a starting point, it is envisaged that authorities will examine how much the deposit taker was paying for the service before the transfer. That should be a good proxy for the subsequent discussions.
What is clause 57(3) intended to achieve? It states:
The duty under...the continuity obligation...may be enforced as if created by contract between the residual bank or group company and the transferee.
If there is a deemed contract, will it be possible for the courts to imply terms or to apply the doctrines of frustration, or fundamental breach or set-off to that contract? If the subsection is merely a mechanism for determining the quantum of damages due between the parties for breach of obligation, should it not say so? That deemed contract approach can be found in a number of places in the Bill, but it is not entirely obviouscertainly we have received representations on thiswhy a deemed contract is required, given that a remedy would exist in any event in the tort of breach of statutory duty. I made a similar point earlier, but will the Minister provide clarification?
My understanding is similar to that which I expressed earlier. Subsection (3) provides for the obligation to be enforced as a contract; normal contractual considerations would therefore apply. I hope that that provides the hon. Gentleman with his clarification.