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Clause 123

Banking Bill – in a Public Bill Committee at 10:30 am on 18th November 2008.

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overview

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

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

It is a pleasure to serve under your chairmanship, Mr. Gale, for the penultimate sitting of this Committee.

As clause 123 outlines the main features of the bank administration procedure, it might be helpful if I briefly set out some of these. This procedure may be required in the event of a partial transfer of a bank’s business to a bridge bank or a private sector purchaser. Where a partial transfer takes place, the residual bank—the part left behind—may be insolvent. In such circumstances, the Bank of England may make an application to the court for a bank administration order.

The bank administration procedure is a new and unique insolvency procedure created to deal with an insolvent residual bank following a partial transfer, although it is largely based on existing insolvency provisions, specifically the procedure of administration as set out in schedule B1 to the Insolvency Act 1986. It is designed to ensure that any essential services or facilities that cannot be immediately transferred to a bridge bank or private sector purchaser will continue to be provided for a period of time.

The Committee heard the Government’s case for the importance of the partial transfer tool within the special resolution regime when we discussed part 1 of the Bill. The Committee has also heard that the Government are engaging closely with stakeholders to put in place safeguards to allay any potential concerns over a partial transfer. We discussed these safeguards last week in our consideration of clauses 42, 43 and 55. As the Committee will be aware, we are continuing to consult on these issues, including through the expert liaison group which we have established and which one of the later amendments seeks to provide on a statutory basis. In the context of consultation, it is also worth noting that key stakeholders, including, for example, the British Bankers Association, broadly agree that if the partial transfer power is used the bank administration procedure may be necessary and is a sensible measure for the winding up of a residual bank.

Bearing that in mind, I will outline why the bank administration procedure is necessary and what it is designed to achieve. Where part of a failing bank’s business is transferred to either a bridge bank or a private sector purchaser, in accordance with clauses 10 and 11, the residual part of the bank may be left as an insolvent entity. However, it may be vital that the insolvent residual company continues to provide support activities to the commercial purchaser or bridge bank. For example, it might be impossible to transfer certain assets or service contracts as part of the initial arrangements. These items may be vital for the successful operation of the transferred business.

Under a normal administration, the administrator would have no obligation to provide support services to a commercial purchaser or bridge bank and would be required to take actions in the best interests of creditors. This could include taking immediate steps to wind up the affairs of the company, selling its assets and distributing the proceeds to creditors. Such action could threaten successful resolution of a failing bank through a partial transfer, since it may render a bridge bank unworkable or deter any commercial sector acquisition. Crucially then, the bank administration procedure will oblige the bank administrator of an insolvent residual bank to provide essential services and facilities to the transferee. To that end, the bank administrator will have unique statutory objectives: first, to provide support to a commercial purchaser or bridge bank and secondly, to rescue the residual bank as a going concern or wind up its affairs in the best interests of creditors.

By obliging the residual bank to continue to provide services to the transferee, the bank administration procedure will improve the likelihood of a successful resolution of a failing bank’s business. Once it becomes no longer necessary for the residual bank to continue to provide support services, the procedure would continue in a similar way to an ordinary administration, although to keep down costs, maximise returns to creditors and to protect the interests of creditors by providing for a full range of outcomes, some of the existing powers of a liquidator have been built into the procedure.

One of the main concerns raised by stakeholders—which the Government have addressed—is that following a partial transfer those creditors who remain in the residual bank will lose out. We have debated this before, which is why the Government have put measures to mitigate the risks in clauses 42, 43 and 55, and in the code and regulations on which we are consulting. We are continuing to discuss the subject with the expert liaison group.

The bank administration procedure also provides that the bank administrator will work on both objectives simultaneously, to protect the interests of creditors. The bank administrator will be required to ensure that essential services and facilities are supplied to the private sector purchaser or bridge bank. At the same time, he or she will be able to take action to rescue the residual bank or to wind up its affairs, provided that these do not interfere with the first objective. It might be perfectly feasible to realise some of the residual bank’s assets without prejudicing the operation of the transferred business.

Many provisions of the bank administration procedure are substantially based on the existing provisions of UK insolvency law, namely the administration provisions of the Insolvency Act 1986, as amended by the Enterprise Act 2002. The provisions will, therefore, be familiar to  companies and their professional advisers. The UK’s existing insolvency regime is widely regarded as robust and well supported. In line with the approach taken for the bank insolvency procedure, powers are to be taken in the Bill to extend the provisions of the bank administration procedure to building societies and credit unions, with necessary modifications. A power is also to be taken to adapt the bank administration procedure to deal with multiple transfers to different purchasers.

The bank administration procedure is a well designed measure, for use only in very specific circumstances, which builds on existing insolvency procedures and forms an essential part of the special resolution regime. It has been consulted on and there is substantial agreement that it is necessary. The subsequent clauses have attracted very little comment and have wide-ranging support. I hope that this brief overview debate is helpful to the Committee.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I welcome you to the Chair, Mr. Gale. The Minister might be being a little pessimistic—or optimistic—in saying that this is the penultimate sitting of the Committee. I do not know which way to look at it. I know that we are enjoying it a great deal, but I fear that we may get through the remainder of the Bill in the course of the morning. We shall see; perhaps I am being pessimistic in thinking that we will not have the pleasure of debating it this afternoon as well.

I shall make two points about the clause. I welcome the attempt to address the difficulties that we face by improving the structure of administration for failing banks. We strongly believe that administration has a large part to play. Indeed, we advocated some kind of administration structure in the case of Northern Rock. We welcome the Minister’s saying that this is appropriate. If I may, I will contrast that constructive approach with the comments made by his senior colleagues earlier this year. For example, the Chancellor of the Exchequer, in the context of Northern Rock, said:

“Administration would mean that control would immediately pass to an administrator who would look to realise the value of the company’s assets, which, under current market conditions, would amount to a fire sale.”—[Official Report, 21 January 2008; Vol. 470, c. 1208.]

The Prime Minister, two days later, said:

“Let me just tell the House what administration means. It means a fire sale of the assets, it means closing down the company and it means the Government losing billions of pounds. It is the worst possible solution and the Conservatives are not only guilty of inconsistency, but guilty of putting the stability of the economy at risk.”—[Official Report, 23 January 2008; Vol. 470, c. 1490.]

Now we find that the Government recognise that administration for a financial institution does not necessarily put the economy at risk, cost the Government billions, and lead to mass unemployment and a plague of locusts. Indeed, I asked the Minister at the beginning of these Committee proceedings whether administration means a fire sale of assets to which to he replied:

“It is not right to say how the administrator would want to pursue its duties. The administrator would certainly have objectives for ensuring the supply of essential services and either rescue it as an ongoing concern or wind up its affairs. It would normally want to do that in the best possible way. If it can rescue the bank, it will want to do that and, if it is to wind up its affairs, it will want to do that in a responsible and appropriate manner.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 8, Q12.]

The Minister puts it very well; that is what administrators do. Some of his colleagues appeared to be confused about the difference between administration and liquidation. Clearly, administration does not mean a fire sale of assets. It is one of the useful and necessary tools that need to be available to the authorities in the case of a failing bank, and we therefore welcome the inclusion of part 3. We will make one or two comments on it during the proceedings, but—as the Minister says—it has not produced many comments from outside bodies. We have debated other parts of the Bill at great length, but that will not be necessary with part 3.

Another general observation, which could have been made about other parts of the Bill but which could help here, is that the Government have in mind—as the Minister has stated and as appears in the Bill—that when a financial institution runs into difficulties some of the assets will be transferred to a bridge bank, or straight to a private sector purchaser, and that will be the good bank. The residual bank is the bad bank. We have debated what toxic assets are, and agreed that the issue with a bad bank is often uncertainty rather than its being all that terrible. The Bill, particularly in part 3, makes it clear that the residual bank is the bad bank.

In our debates, the Government have argued for as much flexibility as possible in the Bill. However, the concern has been raised with us that the Bill to some extent closes down one area of flexibility in that, in simplistic terms, the residual bank will always be the bad bank and the good assets will be transferred out. Is it not conceivable that the easiest route would be for the residual bank to be the good bank, and for some of the bad assets to be transferred out? It is possible to imagine circumstances in which transferring assets to a bridge bank would trigger an event of default, or in which regulatory permission might be required. It might be difficult to transfer the good assets, and it would possibly be better to transfer the bad ones and leave the good ones in the residual bank. That has not been the experience so far; that route was not taken with Bradford & Bingley. The residual bank would perhaps normally become the bad bank, but the Government seem to have closed off the alternative route. Tabling amendments to address that would be hugely complicated and would, I suspect, create difficulties even for the Treasury. None the less, it would help the Committee if the Minister could explain why the Bill has closed off that route. Does he consider it highly unlikely that it would ever be useful to retain the good assets in the residual bank and transfer the bad ones out?

In conclusion, we support the need for a bank administration power. We will raise one or two points in the course of the proceedings, but I hope that we can make reasonably quick progress today.

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 10:45 am, 18th November 2008

That was fantastic. I thought when the hon. Gentleman started criticising the Chancellor and Northern Rock that we might get a chance to talk politics rather than debate the technical details of the Bill. Alas, it was quite ephemeral and he went on to the technical comments.

Partial transfers are important; there is a world of difference between putting a whole bank and putting part of a bank in administration. I strongly believe that  the actions we took with Northern Rock and Bradford & Bingley, which were opposed by the Conservative party, were the right ones. They benefited depositors and will prove beneficial to creditors too. I contrast what we did there and what we are proposing in the BAP, with the actions that the Conservative party took when it opposed the Banking (Special Provisions) Act 2008, opposed what we did on Northern Rock and opposed what we did on Bradford & Bingley. That is probably the end of the politics. I give way to the hon. Gentleman and then I am sure we will revert to discussing the BAP.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

Let me prolong the pleasure of discussing politics for a moment. If the distinction the Minister is making is between a partial transfer and then administration of part of a bank compared with administration of the whole of the bank, would he not agree with his initial statement to the Committee that an administrator would act in a “responsible and appropriate manner”, whether it is the whole of a bank or part of a bank? That is what administrators do. They do not engage in fire sales.

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 agree that it is the responsibility of administrators to act in a fair and responsible manner. Let me move on to address the point that the hon. Member directly raised about transferring out parts of a bad bank and the specific issue of whether the residual company could be the good company. I want to make two points. Certainly there are powers in the legislation to have multiple transfers. Those could be transfers of good assets. They could possibly be transfers of bad assets as well. Certainly the Bill provides for flexibility.

With regard to the specific points, I do not think that it would meet the Government’s policy objectives to leave good assets under the control of the original owner once the bank has failed its threshold conditions. However, it is certainly perfectly possible that a decision could be taken to take the whole of the bank into temporary public ownership and then bad assets could be transferred out using the onward transfer powers. That would be a conceivable scenario.

As the hon. Gentleman notes, part 3 has attracted relatively little attention from outside commentators because they have recognised that it is a necessary part of what we are trying to achieve. We shall come on to some technical amendments, which have been tabled largely in response to some of the outside comments and also on areas where we need to improve drafting to make things clearer. Otherwise, this clause is in very good shape and is widely welcomed.

Question put and agreed to.

Clause 123 ordered to stand part of the Bill.