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Clause 42

Part of Banking Bill – in a Public Bill Committee at 4:30 pm on 11th November 2008.

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Photo of David Gauke David Gauke Shadow Minister (Treasury) 4:30 pm, 11th November 2008

I welcome you back, Mr. Hood. It is a pleasure to serve under your chairmanship. Before we adjourned earlier today, my hon. Friend the Member for Wellingborough raised an issue that I endorse. He said that it would be helpful, when discussing the issue of partial transfers, if the Government would give the Committee the benefit of their experience of the partial transfers that have already occurred under the existing regime of the Banking (Special Provisions) Act 2008—that is, in respect of Bradford & Bingley, Kaupthing and Heritable.

Another issue addressed in the Treasury consultation paper on safeguards for partial property transfers published last week relates to security interests, which are the interests the lender has in the property collateral of the party to whom they have lent on a secured basis. This has been an area of concern, in that the provisions could result in disruption and make it difficult for the security holder to enforce security, which would set London banks at a competitive disadvantage.

The special resolution regime consultation proposed the transfer of all liabilities to the new company with the related collateral or not at all. Concerns have been raised that the proposal may limit flexibility from the Government’s perspective because of floating charges. The Government have clearly considered how floating charges should be addressed and, as I understand the position, they have decided not to go for maximum flexibility but to provide some certainty and security. We welcome that, but I should be grateful if the Minister could confirm the approach set out in the consultation paper and elaborate for the Committee’s better understanding the Government’s thinking in that area.

I understand that the safeguard will restate the legal requirement to respect the integrity of security interests covered by the financial collateral directive. Will the Minister give the Committee some guidance as to whether it should be the financial collateral directive or the regulations made under it for the purposes of UK law—the Financial Collateral Arrangements (No. 2)  Regulations 2003? I believe that they are wider than the directive. It would be helpful to know whether any consideration was given to using the regulations rather than the directive as the basis for these provisions. Were any considerations given to the use of secondary legislation referring to regulations rather than the directive? The draft statutory instrument refers to the directive rather than the regulations.

Another issue has come up with regard to structured finance. Again, the Government are keen to ensure that there is no disruption to structured finance arrangements and we welcome that. There is nothing on that point in the draft order, which seems to be at an early stage, so it is difficult for the Committee to discuss the provisions at great length or in detail, although we welcome the principles guiding the Government’s action.

As I stated this morning, it is vital that the safeguards in place as a consequence of clauses 42 and 43 are effective, to protect the competitive position of London banks. However, I should like to highlight one area where we are not in a position to assess the status of the proposed legislation and proposed secondary legislation—enforcement. What happens if things go wrong? If a transfer falls within a class prohibited by the order—currently the draft restriction of partial transfers order—what will happen? We have to look at regulation 6(5) of the draft order, which at the moment merely states in square brackets:

“The steps are to remedy the breach identified in the notice.”

Perhaps the Minister can provide some clarification about exactly what steps will be taken to remedy any breach, because that is important and it is necessary to ensure that partial transfer takes effect to produce a result that is not incompatible with the relevant safe harbours, which we spent some time discussing this morning. If something is in a safe harbour, it is important that it is properly protected and that the harbour is safe.

That is another example of our being somewhat short of details. The document published last Thursday is helpful; there is some indication of movement in the right direction in the view of industry bodies that have been concerned about the proposals, particularly the idea of moving away—in the context of netting the set off—from master netting agreements to incorporate bespoke agreements, which seems to have a lot to be said for it. However, there are still a large number of areas where the drafting is at an early stage or non-existent, which makes it difficult for the Committee to debate the provisions as effectively as we should do.

The matter is at the heart of the concerns raised by outside bodies about the competitiveness of the UK banks, yet we are having to consider it without knowing where we shall end up, because the key parts are not clauses 42 and 43—no amendments of any substance have been tabled or proposed for those clauses—but relate to secondary legislation that is at draft stage. Although things have moved considerably since the first meeting of the expert liaison group on 31 October, the document, from which I have quoted at some length today, was published only last Thursday so industry groups may not have had an opportunity to digest all its finer detail and to convey their thoughts to Committee members.

I return to a point made by my hon. Friend the Member for Gosport at the beginning of the stand part debate: whether the Government should consider the  proposal made by the London Investment Banking Association, among others, that the provisions relating to partial transfers be implemented at a later date to ensure that we get them right and that we do not fall into some of the difficulties that the Government themselves recognise. I raise the matter not in an attempt to push the Government into a corner—far from it—but to urge the Minister at least not to rule out that possibility, because although we are debating something important today, it is not clear what we shall end up with.

I do not want overly to anticipate our debate on clause 65. However, outside bodies are looking for assurances about greater certainty in this area, and clause 65, which enables the Government to change the statute by statutory instrument, undermines that certainty. That has to be taken into account when we consider the package as a whole.

The Government are moving in the right direction, although concerns remain about the provisions we have, and even greater concerns about those we do not have. I therefore urge the Minister to do all that he can to address them, or at least to be prepared to take this aspect of the Bill in a steadier way, without jeopardising the implementation of the Bill as a whole, so that we get this area of legislation right.