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Clause 77

Banking Bill – in a Public Bill Committee at 1:15 pm on 13th November 2008.

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Overview

Question proposed, That the clause stand part of the Bill.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

This point might seem rather trivial to the Minister, but I would like to know why in subsection (1) the procedure is described as insolvency. The normal procedure is either liquidation or administration, so insolvency seems to be a new term invented for the purposes of the Bill to describe the process. Indeed, it becomes clear in subsection (2)(b) that the order appoints a “bank liquidator,” and that term is used thereafter fairly regularly. Indeed, clauses 86 to 89 deal with the process of bank liquidation.

I am not sure why the Government have chosen to introduce the word “insolvency.” Someone rather crudely suggested that, given that these things are normally matters for the Department for Business, Enterprise and Regulatory Reform, the Treasury was a little more lax in its language, but knowing the Minister’s dual role, I am sure that he would not have allowed that to happen. It would be helpful to know why “insolvency” was used in this case rather than the more traditional liquidation.

Photo of Peter Viggers Peter Viggers Conservative, Gosport 1:30 pm, 13th November 2008

I should like to probe the thinking behind the clause. My understanding is that in some jurisdictions a failed bank is subject to the general corporate insolvency laws, as is the case in this country. I understand that there are special regimes in other countries, including Italy, Norway, Canada and the United States. The Government’s principal reason for bringing in a special regime, as stated in the explanatory notes, is that depositors who are eligible claimants under the terms of the FSCS are paid out promptly when a bank fails. As I understand it, the Government intend that to be the main thrust of the proposed new insolvency regime. Then there are some other objectives which were listed in the Government’s consultative document earlier this year. The first is that depositors might be deprived of access to their accounts at very short notice if there is no special regime. The second is that no objectives exist around the fast pay-off of  depositors. The third is the likely destruction of any residual franchise value. The fourth is the risk of contagion to other banks.

I can see why the Government gave consideration to the creation of a special regime. However, I draw to the Minister’s attention the fact that the majority of correspondents to the January 2008 consultation felt that wholesale changes to current insolvency provisions were not required to ensure rapid payments to eligible FSCS claimants. Several parties suggested that any new procedure should be closer to liquidation than the creation of a new regime. But the Government have proceeded to create this new regime.

To what extent has the Minister consulted with other international bodies responsible for bank supervision in order to try to ensure that the globalisation of banks is reflected by a similarity of treatment? To what extent has he had discussions with the responsible bodies in our European colleague countries, with responsible bodies in the United States and in other countries that are becoming increasingly important in a globalised market? While these provisions for a new regime in the United Kingdom are before us, I should like to know a bit about the Government’s thinking in arriving at this conclusion and putting these proposals before us. In particular, can the Minister tell us about any discussions he has had to try to ensure that our regime does not stand alone, but is carefully co-ordinated and preferably made similar to those of other countries?

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

The clause introduces part 2, which sets out a new insolvency procedure for banks, based on existing liquidation provisions. I should like to respond directly to the question posed by the hon. Member for Fareham about the use of the term “insolvency” here. We use it because the draftsman thought that it would be a more natural, modern term in this context than liquidation.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Why, then, is the draftsman inconsistent later in this part of the Bill? Clauses 86 to 92 are headed “Process of bank liquidation”, which seems a very archaic use of words.

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

I suspect that the answer is that insolvency can involve liquidation and administration too. We would need to refer to existing law. In due course the draftsman may put words into my mouth so that I can respond further.

I want to respond the point made by the hon. Member for Gosport about the importance of the existing insolvency law. There has been extensive consultation between the Government and insolvency practitioners in this area. We believe that we have the right sort of balance in terms of ensuring a fast payout procedure, while having a system of law with which insolvency practitioners are already familiar. The fact that there has not been a flood of suggested amendments to the clauses from those outside who follow these matters shows that there is strong consensus in this area.

The Government’s objective is to ensure effective protection for depositors and to minimise the impact of a bank failure, while also providing for the orderly winding up of the affairs of a failed bank in the interests of its creditors generally. I shall set out the thinking  behind the clause. In doing so, I hope to provide an overview for future debates on the bank insolvency procedure, which is established in part 2 of the Bill. The procedure will enable prompt FSCS payments to be made to eligible depositors or their accounts to be transferred to another institution. It will also provide for the winding up of the affairs of a failed bank in the interests of creditors as a whole.

The point about allowing depositors fast access to their funds in the event of a bank failure is an important one. As my hon. Friends on the Treasury Committee noted, it is not just the level of FSCS compensation payout that is important—the speed of payout is also vital. The Chairman of the Committee, referring to moves to raise the compensation limit to £50,000, stated:

“It is far more important that banks be able to identify who their insured depositors are, and that the FSCS be able to process compensation claims quickly.”

Making fast payout to depositors is indeed crucial. For depositors of UK banks to have confidence in the system, they need to be sure that the payment will be made quickly, and that they will be able to access their deposits quickly. Measures to enable depositors to access their funds quickly are important for their own sake, but also to build confidence in the banking system as a whole, and for the maintenance of financial stability.

In response to comments by the hon. Member for Gosport, I shall talk briefly about how the new bank insolvency procedure has been developed. An established feature of the UK insolvency system is the existence of special insolvency regimes for industries where failure poses unique challenges—for example, water, energy and rail. Those special regimes are based on provisions of the Insolvency Act 1986. Like those special insolvency regimes, the bank insolvency procedure is a unique process. However, it is based largely on existing provisions in UK insolvency law and practice, particularly relating to the compulsory liquidation of companies. It is worth emphasising the point that, during our consultation process, stakeholders constantly referred to the strength of the existing insolvency regime in the UK, noting its advantages over other insolvency regimes internationally.

The Financial Markets Law Committee put it very well in its response to the April consultation paper:

“The existing corporate insolvency laws in England and Wales...provide for one of the most versatile and effective insolvency regimes in the world. They are often used as a model for jurisdictions improving or developing their laws.”

That is a fairly comprehensive endorsement; other stakeholders made similar points about the insolvency provisions. They were anxious, therefore, that the Government should not make substantial changes. Bearing that in mind, we are confident that our approach is the right one.

The bank insolvency procedure builds on the strength and effectiveness of the UK’s existing insolvency regime, closely following existing insolvency law and practice. It will be familiar to companies and their professional advisers. We have not changed the statutory priority order of creditors. Consistent with existing special insolvency regimes, it is a court-based procedure, which means that it can be commenced only by a court order, and the whole process will be subject to the overall supervision of the court. That will ensure transparency,  legitimacy and compliance with the Human Rights Act and provide a forum for dispute resolution. Many other provisions remain substantially the same as existing insolvency law, as we shall note when we come to the relevant clauses.

As with the existing special insolvency regimes, the bank insolvency procedure has some specific features to reflect the unique challenges of winding up a bank, and the Government’s specific objectives of protecting depositors and maintaining financial stability. As I have mentioned, the key difference from normal insolvency is that as well as providing for the winding up of a bank’s affairs, the process will enable prompt FSCS payments to eligible depositors, or else allow for a bulk transfer of their accounts to another institution. To that end, the liquidator of the bank will have specific statutory objectives: to work with the FSCS to enable prompt payouts to eligible depositors or to facilitate the bulk transfer of accounts to another institution; and to wind up the affairs of the failed bank in the interests of creditors as a whole. The authorities and the FSCS will have a key role in the early stages of the proceedings to oversee and work with the bank liquidator to ensure that those objectives can be met.

I have used the word “liquidator”. Let me explain. The word “liquidation” has to be used later in the Bill, because it is the technical, legal term. In the overview clause, we can be looser, more familiar and clearer with the readers, but we have to be precise when it comes to the details of the Bill.

Clause 77 outlines the bank insolvency procedure in broad terms. A bank enters the process by court order, appointing a bank liquidator. The bank liquidator aims to arrange for the bank’s eligible depositors to have their accounts transferred or to receive compensation from the FSCS. To achieve that, the bank liquidator will work with the initial liquidation committee, made up of the authorities and the FSCS. When that is done, the bank liquidator winds up the bank. To carry out those functions, the bank liquidator has the powers and duties of a liquidator in normal insolvency as applied and modified by clauses that we shall discuss subsequently.

I hope that by giving a lengthy introduction to clause 77, I have set out clearly the Government’s thinking and the principles that were applied in framing the subsequent clauses. They have been consulted on to a very large extent and have the broad support of insolvency practitioners.

Photo of Peter Viggers Peter Viggers Conservative, Gosport

While listening to the Minister’s careful explanation of the clause, I wondered whether liquidation insolvency is a one-way street. If a liquidator were to be appointed and found that he was in a position to manage the bank out of its current difficulties, would he have the powers to do so? Would he have the powers of a manager as well as of a liquidator?

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

My understanding is that we are talking about a bank insolvency procedure in relation to which decisions have already been taken that the bank has failed to all intents and purposes and is not viable as a business. It is in those circumstances that a court order is made and liquidators are appointed. It has gone past the stage when there is any realistic prospect of life in the body, as I understand it, so the role of the liquidator is to—

Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

In that case, why do we have clause 101, which refers to a liquidator who thinks that administration would achieve a better result? That provision exists in the Bill. The Minister’s answer was clear, but I wonder how it applies to clause 101, which allows administration as a legitimate objective, not just liquidation.

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

I am about to stand corrected. My understanding was obviously far from perfect, because I am advised that bank liquidation can end in a number of ways. I suspect that the way I was describing is the most likely, but if rescue is possible, it is certainly possible to convert to administration to assist a rescue. I hope that answers the questions asked by the hon. Member for Gosport.

I hope that by giving a broad introduction to clause 77 and the bank insolvency procedure, I have clearly set out our thinking. I stress that the area has been widely consulted on and there is broad support from the insolvency profession for what we are doing.

Question put and agreed to.

Clause 77 ordered to stand part of the Bill.

Clauses 78 and 79 ordered to stand part of the Bill.