I shall say more on the timing in a few moments. However, it is not necessarily abnormal for the Government to seek to pass primary legislation and then to implement secondary legislation later. We are going through the normal procedures of both Houses. On Second Reading, several Opposition Members expressed concern about the time it had taken the legislation to reach that stage. We have very good co-operation with stakeholders, and we want to continue to work with them to ensure that we get the legislation right.
Clause 42 provides the Treasury with a power to place restrictions on partial transfers. Although the Government are not proposing to place broad legislative restrictions on partial transfers, it is still beneficial to include the clause, as I shall explain. The clause provides the authorities with the means to place restrictions on the nature of the partial transfers that they may effect through use of the property transfer powers provided by this part of the Bill. The making of restrictions has the potential to provide bank stakeholders with greater certainty about how the property transfer powers will be used to effect partial transfers. That could be through a particular strict condition, or through a more general restriction on when and how partial transfers would be executed. Given the nature of the powers, stakeholder interest and the technical complexity of the issue, the Government consider it appropriate to take a power in the Bill to provide for restrictions to be made as the authorities deem appropriate. For example, if further consultation with stakeholders reveals a particular facet of partial transfers that the authorities may wish to restrict in order to provide greater certainty to the market, the clause provides the mechanism through which that can be achieved.
As I have already noted, the range of ways in which the authorities may restrict partial transfers is purposely broad. The flexibility reflects the complex range of issues likely to be generated in different bank resolutions. The Government consider it appropriate and desirable for safeguards of this nature to be provided in secondary legislation, rather than in the Bill. Any order made under such a power would need to make provision at a level of detail inappropriate to primary legislation. That reflects the complexity of bank resolutions and of the property, rights and liabilities of banks. It will be important to retain flexibility, including the flexibility to amend or add to the nature of the restrictions placed on partial transfers.
I remind the Committee that the SRR is a new legislative regime. Experience may show that partial transfers should be more or less restricted than initially thought, to respond to continuing market reaction to the powers, or to the authorities developing practical expertise in resolving banks in difficulty. At the very least, the nature of the restrictions will need to be updated in line with innovation in the financial markets. However, in view of the significance of the issues addressed by the power, and in view of the standing nature of the provision to be made, the power is subject to the draft affirmative procedure. In addition, the Government are committed to consulting fully on the key elements of the secondary legislation for the safeguard.
To that end, the Government are consulting on what secondary legislation should be made under clause 42. At this stage, we propose that the power should be used to place restrictions on reverse property transfers. The restrictions are designed to provide certainty to creditors transferred to a bridge bank that they will not be moved back to the residual bank. However, this is not a closed book. Further consultation with stakeholders may determine that further restrictions are appropriate. What is important, however, is that the authorities have the means to put the restrictions in place in an appropriate way, preserving market confidence in the use of the property transfer powers. The clause provides those means.
Clause 43 provides a key partial transfer safeguard. It provides the Treasury with the power to protect security interests and set-off and netting arrangements. The purpose is to provide protection for private law interests. Secondary legislation made under this power will describe in detail the nature of the interests to be protected and the way in which they are to be protected. The recently published consultation document provides detail on the Governments proposals.
It may help if I describe the nature of the interests that the safeguard is designed to protect. In broad terms, a security interest is a specific protection, taken by obtaining a property interest in the debtors property, against which recourse can be had in defined circumstancesfor example, in cases of non-payment. At its most basic, netting is the process whereby multiple contracts are set off against one another. However, netting also involves more complicated arrangements, utilising the basic concept of set-off to manage transactional risk.
For example, close-out netting may allow all the contractual obligations of a party to be terminated on a trigger event and reduced to a single sum, either owed or owing to the counterparty in question. Such cover is often provided under industry standard master agreements, prepared by bodies such as the International Swaps and Derivatives Association. However, counterparties also use a range of bespoke arrangements. Those arrangements are crucial to the functioning of the financial markets, and are an integral part of the way in which counterparties do business with banks. It is therefore important that we get the safeguards right, and that we strike the right balance between the protection that the market needs and the flexibility that it is desirable to retain in order to effect appropriate partial transfers.
The power in clause 43 provides a broad definition of the interests to be protected, which reflects the extremely broad range of interests that exist in that field. The interests that the power needs to address include, for example, security interests granted under foreign legal systems and complicated types of set-off and netting arrangements used in particular types of specialist markets. Protection may be given to such interests in the ways set out in subsections (2) and (3). Again, flexibility is needed to reflect the complexity of the underlying arrangements, and the ways in which protection might be provided. The draft order proposed to be made under the clause is, as I have indicated, the subject of consultation.
The protection to be afforded will, in broad terms, ensure that the integrity of the interest is respected, to the extent provided for in the order. For example, when a series of contracts are subject to a netting arrangement protected by the order, the requirement could be to transfer all such contracts or to leave all such contracts behind, as to transfer some but not all would interfere with the operation of the netting arrangement.
In line with clause 42, the Government propose that the detail of the safeguard should be set out in secondary legislation. That is for two main reasons. First, implementation of the policy will require detailed consideration of complex and varied interests in a variety of market contexts, the detail of which is appropriately addressed in secondary legislation.
Secondly, it is desirable to retain flexibility in order to adjust and refine the safeguard in the light of experience. That is particularly important in this context, because security interests and set-off and netting arrangements have proved to be highly innovative. The latter, in particular, have developed and evolved significantly over a comparatively short period of time. Changes to the safeguard may be necessary to ensure that it continues to protect what it is intended to protect, but also to ensure that innovations do not undermine the policy aims that the special resolution regime is intended to serve.
Draft orders were published in the 6 November consultation document, following discussions with the expert liaison group. The precise nature of the safeguards is subject to consultation. However, at this stage the Government propose a set of broad protections. The Government propose to protect all contracts covered under set-off or netting agreements from potential disruption caused by a partial transferapart from a set of clearly defined exceptions. The protection extends to bespoke agreements, in addition to those made under industry-recognised master netting agreements. The Government consider that the safeguard provides the market with a strong and clearly defined protection, while leaving the authorities with sufficient flexibility to carry out appropriate partial transfers.