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Clause 86

Banking Bill – in a Public Bill Committee at 1:45 pm on 13th November 2008.

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Objectives

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

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The clause is important because it sets the two objectives for the liquidator. The first is about the depositors and ensuring that the liquidator works with the FSCS to ensue that

“as soon as is practicable each eligible depositor...has the relevant account transferred to another financial institution, or...receives payment from (or on behalf of) the FSCS.”

The second objective is

“to wind up the affairs of the bank so as to achieve the best result for the bank’s creditors as a whole.” and subsection (4) makes it crystal clear that

Objective 1 takes precedence over Objective 2”.

That creates a situation in which the interests of one group of creditors take precedence over the interests of other groups. A depositor preference is being built into this regime. We might find that the liquidator, to fulfil objective 1, incurs additional costs to the detriment of achieving objective 2. That particularly applies to the administration procedure in part 3, but it also applies here. For example, the liquidator might need to keep the branch network open for two or three weeks to enable payments to be made to depositors. Running a branch network is an expensive business—rent has to be paid, staff have to be employed, there are computer costs and so on. Those costs will be not be borne by the depositor group, but by the creditors, who will find that their dividend or distribution on liquidation is lower as a consequence. Will the Minister comment on that?

This is a move away from the traditional way that administration and liquidation work. The creditors would normally rank pari passu, but here there is one subset of creditors—the depositors—who are given preferential treatment over the others, to the detriment of other creditors.

Linked to that is a point that has been raised with me by some lawyers. The Minister was right in his remarks on the previous clause. There has not been a flurry of commentary on part 2 or part 3 of the Bill, but that does not mean that there is total satisfaction. There is great dissatisfaction with it. The credit institutions reorganisation and winding-up directive 2001—I am sure that we are all intimately familiar with it—enables the same legal process and procedures for winding up a credit institution to apply in all the then EU states, but now European economic area states.

The process is a formality. That directive is predicated on treating creditors collectively and applying the same treatment. The Minister referred to the special insolvency regimes for railways, water and electricity. Yes, there are special cases to ensure that there is a transfer of functions, but in those situations all creditors are treated equally, whereas in this situation one group of creditors will have preference.

Concern has been expressed that the action taken by our good friend Iceland was not deemed to be consistent with the directive because it was seen to be of a regulatory nature. The concern expressed to me is that objective 1 could suggest—and there is a stronger argument for this in part 3—that the procedure is not necessarily about insolvency, but is principally a regulatory issue. I would be grateful for the Minister’s confirmation that he believes that the bank insolvency process is entirely consistent with the directive. I hope he can satisfy the Committee on that point.

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 gives the bank liquidator specific objectives and he or she will be expected to start working towards the achievement of both objectives as soon as the proceedings commence.

I will briefly explain the background. A bank liquidator’s first objective as specified in the clause is to work with the FSCS in the initial stages of the proceedings. The liquidator has two options: to ensure that the accounts of eligible depositors are transferred to another financial institution, thereby providing those depositors with continuity in banking services, or to work with the FSCS to ensure that those depositors receive prompt compensation payments to enable them to rearrange their financial affairs and meet day-to-day living expenses.

The authorities remain committed to a target of seven days, providing the depositors of a failed bank with at least a proportion of their deposits and the balance within the following few days, though we recognise that this is a challenging target. A bank liquidator’s second objective is to wind up a failed bank through realising its assets and distributing the proceeds to the bank’s creditors.

Although the legislation provides for objective 1 to take precedence over objective 2, as the hon. Member for Fareham suggests, it is very clear from subsection (4) that a bank liquidator is obliged by the clause to start working towards achieving both objectives as soon as he or she takes office.

In our view, only an insolvency practitioner who has sufficient resources available to make sure that both objectives can be successfully achieved would be appointed as a bank liquidator. So, while some staff are working towards achieving objective 1, others will be carrying out functions as they would in a normal liquidation, for example gathering information from directors, identifying and protecting the assets of a failed bank for the benefit of all its creditors, dealing with enquiries from creditors and so on.

Given the size and complexity of UK banks, it is likely that more than one insolvency practitioner, perhaps from different firms where necessary, will be appointed as bank liquidators. That is called a joint appointment and is provided for by the application of section 231 of the Insolvency Act 1986 in clause 90 of the Bill. This is common practice in complex or high profile insolvencies and will ensure that sufficient resources are available to protect depositors, while conducting the proceedings in the best interests of the failed bank’s creditors as a whole.

I appreciate the points raised by the hon. Gentleman. There has been some concern from stakeholders that, because the bank liquidator’s primary objective is to work with the FSCS, this may lead to depositor preference, with other creditors losing out. I will respond to those concerns directly and put it on the record that the bank insolvency procedure does not introduce depositor preference.

The statutory order of priority of creditors remains unchanged. Payment to depositors will be made by the FSCS, not from the assets of the failed bank. The FSCS will continue to rank as an unsecured creditor alongside the claims of other ordinary creditors. It is also important to note that under clause 110, any compensation payments to eligible depositors will be made by the FSCS.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister has clarified that, but in the context of clause 86(2)(a), as depositors are flipped over into another institution, they will be replaced as creditors by the FSCS.

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

Yes, that is my understanding. We are not introducing depositor preference. The difference is that we want to pay out fast to depositors. That is the purpose of the measure, and what the Treasury Committee wanted us to do.

As I have described, the bank liquidator is also obliged to wind up the affairs of the company from day one in the best interests of creditors as a whole. As we can discuss, if necessary, in relation to clause 87, in a normal winding-up, a liquidation committee would not even be formed until a month or two into the proceedings. Given that we are aiming for eligible depositors to be paid within seven days, and that the liquidator will be working on both objectives at once, realistically, in comparison with a normal insolvency, there will be no delay in the start of winding-up in the interests of all creditors.

These objectives and the other provisions in part 2 mean that when a bank fails, the interests of both eligible depositors and other creditors will be protected. The key purpose is to ensure fast pay-out, without disadvantaging other creditors, and certainly without introducing depositor preference. I am happy to clarify that.

Question put and agreed to.

Clause 86 ordered to stand part of the Bill.