I beg to move Amendment 11, in Clause 1, page 1, line 11, after ‘that’, insert

‘reduces the risk of ring-fenced bodies assuming disproportionate exposure, enhances their capacity to cope with other exposure and otherwise’.

With this it will be convenient to discuss Amendment 13, in Clause 2, page 2, line 42, after ‘that’, insert

‘reduces the risk of ring-fenced bodies assuming disproportionate exposure, enhances their capacity to cope with other exposure and otherwise’.

If I may say so, Dr McCrea, your modernising approach to setting out the way in which a Committee works is refreshing. I have been in the House of Commons on and off since 1997, and I think this is the first time I have served on a Committee where anybody has actually said how the thing works. Learning by trial and error is one thing, but it is very helpful to have your exposition to guide us through the process.

Perhaps I can take the opportunity to say, because it will be useful for the consideration of the amendments, that hon. Members may wish to get the documents that are not in the Committee Room from the Vote Office. In particular, there is the most recent report but one of the Parliamentary Commission on Banking Standards, which contained its agglomerated recommendations and draft amendments. There is a useful set of tables at the back of that document that set out the rationale behind the amendments they it suggested and the Government’s response to them. Dare I say it, I also commend the Government’s own Treasury paper—I shiver when I say that—which is the response to the Commission’s first report, usefully setting out what the Commission has recommended and the Government’s response. There have been plenty of other documents in the history of the preamble to the Bill, but if Members want to follow the Committee proceedings, those are the two key sets.

Clause 1 sets the scene for some of the meatier clauses in the Bill. We are moving towards the concept of ring-fencing and the quasi-separation of retail and investment banking. That came from the accumulated recommendations of the Vickers Independent Commission on Banking, which were then taken forward by the Parliamentary Commission.

I say the clause is a preamble to the meatier clauses because it addresses changes that are essentially prerequisites for the regulators, particularly the Prudential Regulation Authority and the Financial Conduct Authority. Members will remember that the Government have taken the view that they want to separate the functions of the Financial Services Authority into those two regulators.

The PRA is essentially an adjunct of the Bank of England. In fact, it has even moved out of Canary Wharf to locate itself in nice new shiny offices right next door to the Bank of England, at great expense, just to make that point absolutely clear. It is fair to say that the PRA has been given responsibility for what is known as micro-prudential regulation. The Financial Policy Committee at the Bank of England oversees macro-prudential regulation and all the downstream, firm-by-firm, individual business conduct issues are left for the FCA to field. We will talk about the FCA in a moment.

The clause makes changes to the general objectives of the PRA. Members will recall that we have not, unfortunately, had a rewrite of financial services legislation, which might have been a laborious and difficult process. The Government have chosen, for various reasons, to amend the Financial Services and Markets Act 2000. In a set of documents that I think have been circulated to Committee members, the Government have illustrated  what a consolidated version of the 2000 Act might look like. I have not heard of a Keeling version, which is a new phrase for me, but that suggestion has been circulated. That version shows how question of continuity will be embedded in the new PRA’s overarching strategic approach. That is the issue upon which it has been felt necessary to underpin the new arrangements on ring-fencing.

The PRA will have a number of duties, and its general objective will be to ensure that

“the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the UK financial system, and…seeking to minimise the adverse effect that the failure of a PRA-authorised person could be expected to have on the stability of the UK financial system.”

Now, according to the changes set out in the Bill, its general objectives will also include

“discharging its general functions in relation to the matters mentioned in subsection (4A) in a way that seeks to...ensure that the business of ring-fenced bodies is carried on in a way that avoids any adverse effect on the continuity of the provision in the United Kingdom of core services…ensure that the business of ring-fenced bodies is protected from risks...that could adversely affect the continuity of the provision...of core services, and...minimise the risk that the failure of a ring-fenced body could affect the continuity of the provision...of core services.”

I wish I could claim credit for the amendments, but they are the brainchild of the august Parliamentary Commission on Banking Standards. In one of its reports, it helpfully set out some recommended amendments, in this case recommended amendments A and C. Inspired by the Commission’s wisdom, we have tabled those measures for the delectation of the Committee this morning as amendments 11 and 13, which you have chosen to group together, Dr McCrea.

Amendment 11 deals with the PRA objectives, and amendment 13 deals with the FCA objectives. Essentially, they would insert into the Bill the same responsibilities for those two, mirroring regulators, which would be to reduce the risk of ring-fenced bodies assuming disproportionate exposure and to enhance the capacity of such bodies to cope with other exposures.

One of the key issues is to ensure that the regulatory body is effective, but also that organisations can actually fail, and, if they do fail, that they can fail in a managed way. It is crucial that we do not have a system that simply props institutions up; it must allow failure, but failure in a co-ordinated manner.

Absolutely. Discussions on this issue can get quite theoretical, but it is nevertheless important to have them, as our constituents know the downstream consequences of banking failure and the financial consequences for the taxpayer that have flowed from that ever since the crisis. It is crucial to ensure that we properly define the balance between continuity and the handling of risk exposure, as well as the approach to winding down or resolving problems in banks that get into difficulty. The regulator needs clear guidance on that.

Initially, the Commission was concerned that the Bill lacked a clear objective for the role of the regulator, which left its future operation vulnerable to changing  attitudes over time. The Government responded to that concern with the change in the continuity objective that is set out in clauses 1 and 2. Andrew Bailey, now the chief executive of the PRA, said in evidence to the Commission that he thought that the Government needed to go a step further than they had in the original draft Bill, which he felt was

“a bit too enabling without specifying how the objectives work.”

He suggested having

“a better narrative regarding how the PRA’s safety and soundness and continuity objectives interact.”

Although the Bill has been improved somewhat, we are still worried that there could be a conflict between the concept of continuity and the important goals of safety and soundness. For example, is there a likelihood that at some point some risks will be ignored in furtherance of a “business as usual” approach, and that in retrospect we will see that those risks should have been tackled and rooted out? That is one of the key tensions that Andrew Bailey and others have seen.

The Vickers report, by the Independent Commission on Banking led by Sir John Vickers, said that three objectives were needed, and needed to be balanced, in the process of banking reform: first, making the resolution of troubled banks easier; secondly, insulating retail banking customers from investment banking activities; and thirdly, reducing the risk to public funds. Those were the core objectives. The Commission felt that the continuity objective as originally drafted did not adequately capture the three concepts, and recommended changes. In response, the Government agreed that

“the objectives of ring-fencing should be fully reflected on the face of the Bill”.

Since then, changes to the objectives of the PRA and SCA have been brought forward to promote the safety and soundness of the institutions that they regulate. However, the Parliamentary Commission still feels that further amendments are needed to ensure that the formulation of the continuity objective adheres more closely to the Vickers objective on ring-fencing. We agree that those amendments are needed, because the regulator needs always to think about the risk exposure of the banking system and how any overexposure may be handled and eventually resolved. An explicit reference to reducing the chances of ring-fenced retail banks getting embroiled in excessive exposure to risk is a basic principle that should be stated in the Bill. That may seem like a statement of the bleedin’ obvious, as somebody once said, but it is important that we say that we want the retail banks to be relatively boring, humdrum, safe and vanilla in their characteristics. It is really important that, having made the separation, the retail banks do not get tempted to accumulate excessive risks along the way. That is why we need to place that reference in the Bill.

It is also important to focus on how well retail banks are able to sustain themselves in a risk-exposed environment, because the banking system is interdependent and even under the ring-fenced environment those retail banks will often be doing business with other banks not just in the UK but globally. As we will discuss under later clauses, viewing some of the banking rules on a firm by firm basis is an anachronistic approach to regulation. We need to recognise that, from time to time, we need whole-system changes. That should be one of the key lessons from the financial crisis, and it is certainly one  of the key lessons from LIBOR, because all banks interrelate and do business with one another. Recognition of that is another facet of the Amendment.

I do not think that there are convincing arguments against including the statements contained in the amendments. Such arguments do not outweigh the potential advantages of putting those statements in the Bill for the regulator. For that reason, I felt that it was important to table the amendments to test the Government’s attitude on the new regulatory arrangements.

Before I speak about this set of amendments, may I put on record the sympathy of the whole Committee for my hon. Friend the Member for Carlisle, whose father died yesterday? He cannot be with us today, although he will join us for future sittings. I am sure that the whole Committee will want to send our condolences to our hon. Friend and his family.

On the matter in hand, I support, as does the hon. Member for Nottingham East, the principles and objectives of ring-fencing as recommended by the Independent Commission on Banking. The objectives that the Commission set out to improve bank resolvability, insulate vital banking services and—very importantly—curtail the possibility of taxpayer support being required are extremely important principles that are reflected in the Bill. In the Government’s response to the ICB’s report in December 2011, in the white paper in June 2012 and in the draft Bill in October, we made clear our adoption of those recommendations.

The Parliamentary Commission on Banking, and some of the distinguished figures from whom it took evidence, made some further recommendations. Andrew Bailey, to whom the hon. Member for Nottingham East referred, expressed some concerns and made some direct recommendations about the continuity objective of the PRA. In response to that, we have made the continuity objective part of the safety and soundness objective of the PRA as a whole. Its prominence is clear, and that integration was Dr Bailey’s suggested way of getting around any potential conflict between these objectives. We followed his sensible advice on the matter.

There is a broad consensus on what ring-fencing should do. Based on the PCBS’s advice, we have amended the Bill before its introduction to clarify that the PRA’s continuity objective is very much part of its general objective. The amendments that the hon. Gentleman has rightly tabled reflect some further suggestions from the Parliamentary Commission, and I am happy to consider the debate on them. There is no objection in principle to them, but I will set out some of the concerns we have at the outset, on which I will reflect during the debate. Hon. Members may have their own views.

The proposed amendments to both the PRA’s objective and the FCA’s objective would insert the words

“reduces the risk of ring-fenced bodies assuming disproportionate exposure” into the Clause. The question is who defines what “disproportionate” means. The danger is that, far from clarifying the objective and making it more certain and dependable, the Amendment raises a question to which the answer may not be obvious. It would presumably not be the PRA that determined what disproportionate exposure would be, because we are talking about the PRA’s governing objective and one would assume that someone other than the PRA would decide that. It is  not clear, however, who would define the objective of the regulator, or, at least, who would determine what the word “disproportionate” meant, if the amendment is agreed.

There is a similar question around the use of the word “exposure”. It prompts the question of, “Exposure to what?” It may be that it is not possible to specify what it means. Amendment 11 would amend proposed new paragraph (c)(i) in clause 1(2)(b), which relates to the internal policies of banks, but proposed new paragraph (c)(ii) in clause 1(2)(b) deals with external threats and ensures that the business of ring-fenced bodies is protected from risks that could affect the continuity of provision. “Exposure” implies exposure to things outside the bank. If that is the case, the appropriate place to locate an amendment of this type is new paragraph (c)(ii), which states that the PRA must

“ensure that the business of ring-fenced bodies is protected from risks (arising in the United Kingdom or elsewhere) that could adversely affect the continuity of the provision in the United Kingdom of core services”.

There is no ambiguity in that sub-paragraph. It is clear that any risks that could adversely affect the provision of core services are a matter for the PRA to act against. The current wording of new paragraph (c)(ii) means that if the PRA is required to protect the ring-fenced body from such external risks, their exposures, however defined, must be part of that objective already. Given that that is an absolute requirement, the need for the word “proportionate” is overtaken as a harder test in the current draft of subsection (2) than would be implied by the amendment.

I am happy to consider the contributions of Members on this matter. There is no difference of principle between us, but on looking at the intentions behind the PCBS’s report, we think that the test for the PRA to ensure that external exposures are taken into account is addressed explicitly and in a more exacting way in new paragraph (c)(ii).

Before we go any further I should like to join the Minister, as I am sure all Members would, in extending our sympathy to the hon. Member for Carlisle. We send him our good wishes.

I join you, Dr McCrea, and send the Opposition’s sympathy to the hon. Member for Carlisle.

The Minister was very thoughtful in his response, in a way intimating that he could see why the amendments had been tabled and that he would take them away to chew over. I wonder whether I should apologise at this stage to the PCBS, which relied on the Opposition to table these amendments and on me in particular, with my hon. Friend the Member for Kilmarnock and Loudoun. Somehow we have added the stain of the unclean to the amendments, which has deterred the Government from simply accepting them, merely because they have been tabled by the Labour party. I do not think that should deter the Minister. It would be quite useful in future if we have these big commissions for at least one member of that commission to serve on the Committee considering the Bill. I always find it slightly peculiar that they go to  all the trouble of dreaming up a whole set of amendments, then rely on those of us who have not been party to the discussions to table them.

Perhaps I should confirm immediately for the record that the fact that the hon. Gentleman has tabled recommendations from the PCBS in no way diminishes them in our eyes. Whether they are the product of his own reflections or come from others, we will be open-minded in this Committee. When I say that we are unconvinced that these amendments are necessary, it is not because the hon. Gentleman moves them, it is a genuine reflection, forensically, I hope he would concede, of our view that they do not add anything that is not in the Bill. He is experienced enough to know that, when it is possible and appropriate to agree with suggestions, the convention is that they are taken away and checked by the similarly expert parliamentary draftsmen. I hope the Commission and the Committee will accept my assurances that we intend to approach this constructively.

The Minister was doing so well that I felt born again, renewed and reinvigorated. At last I was a genuine citizen, a player even in this legislative process. But then he fell back on the usual, “Oh well, we are not going to accept anything at the Committee stage anyway. We are going to ask for these things to be withdrawn.” “Come on, Minister,” is what I would say to him. “Show that you are an independent, free-thinking, albeit junior Minister, and accept the occasional Opposition Amendment, tabled with the support of the Commission. Go back and tell the Chancellor. You are a free thinker.” It is important occasionally for plucky up and coming Ministers to show that they have that free spirit.

My hon. Friend has been a Minister, and I have been a Government Whip. Does he predict that the amendments might return on Report, miraculously converted into Government amendments?

I would prefer the amendments to be accepted in Committee, but history suggests that that will not happen. We digress, however.

The Minister took issue with several aspects of the amendments. He relied on the age-old device of simply questioning the word “disproportionate” and asking who would define it. It is clear that the PRA would define it. I disagree with the argument that that is externalised from the PRA’s capability. The amendments would ensure that the PRA discharges

“its general functions…in a way that seeks to ensure that the business of ring-fenced bodies is carried on in a way that reduces the risk of ring-fenced bodies assuming disproportionate exposure.”

I believe it is clear that the PRA must determine and define that for itself, so the Minister’s argument is not particularly strong.

This is a genuine question. Why does the hon. Gentleman think that the amendments, especially the word “disproportionate”, strengthen the already explicit statement that the PRA must ensure that ring-fenced bodies are

“protected from risks…that could adversely affect the continuity of the provision in the United Kingdom of core services”?

How would the introduction of the word “disproportionate” do anything other than weaken that test?

First, the continuity of core services is slightly different from the capacity to cope with exposure to risk. If the Clause included the concept of disproportionate exposure, the PRA would have more latitude to interpret the legislation and to ensure that retail banks behave better. That was the Commission’s objective.

The Minister said that the PRA “must ensure”, but the wording in the Bill is

“in a way that seeks to ensure”,

which is very different. Why does my hon. Friend think that the Minister believes that the amendments would lead to a more externalised judgment than would the current drafting?

My hon. Friend has pointed out a flaw in the Government’s initial rebuttal of the amendments, although the textual disagreements between the Government and the Opposition are not major ones.

Having sat on Bill Committees with the hon. Gentleman for several years, I know that progress will probably be quite slow. Of course, we must scrutinise the Bill Clause by clause and consider the meaning of individual words, but whether banks behave well will depend, ultimately, on whether they follow the spirit of the law, and on the culture of banking. That is a key area that we should consider, even though it is not part of the Bill. We can debate the details—indeed, we will probably do so until late in the evenings—but we must bear in mind that this should be about banks following the spirit of the law, rather than about individual words.

I take the hon. Gentleman’s point that we should consider both the letter and the spirit of the law. We want to discuss the spirit of the law, but right now we are discussing the letter. For that purpose, we need to finalise the questions that remain about the amendments from the Commission. The Minister has tried to distinguish between internalised risks for the bank and externalised risks—between new paragraphs (c)(i) and (c)(ii)—but that distinction should not be drawn in respect of disproportionate exposure. Obviously those exposures are from external actors, but they are also internalised within the banks themselves, so that is a bit of a red herring of an argument. However, I will allow the Minister the latitude and flexibility to consider the issues that I have raised, so I am “happy” to withdraw the Amendment. If the Government can find a version of it with which they are satisfied, that will obviously be preferable. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move Amendment 12, in Clause 1, page 1, line 18, after ‘services,’, insert

‘in particular by securing the orderly handling of circumstances in which ring-fenced bodies have encountered or may encounter financial difficulties,’.

With this it will be convenient to discuss Amendment 14, in Clause 2, page 3, line 6, after ‘services,’, insert

‘in particular by securing the orderly handling of circumstances in which ring-fenced bodies have encountered or may encounter financial difficulties,’.

It is a pleasure to serve under your chairmanship this morning, Dr McCrea. Like my hon. Friend the Member for Nottingham East, I was grateful to you for setting out how the Committee would proceed.

The hon. Member for Reading West suggested that progress would perhaps be slow at various points. Those of us who have served on a number of Bill Committees with my hon. Friend the Member for Nottingham East know that if progress is slow, it is because we are scrutinising both the letter of the law, line by line, and its spirit. That is what is required of Committees.

I thank the hon. Lady for clarifying that, but may I say that I hope we will not get to the Committee’s last sitting with large chunks of the Bill not having been examined? That has happened in the past when the hon. Member for Nottingham East, and indeed the hon. Lady herself, have been going through Bills.

Order. I therefore think it is important that we do not waste time talking about past Committees and that we instead get on with the business of this Committee, which is to scrutinise the Bill.

Thank you for that clarification, Dr McCrea. We have tabled several new clauses, and we will of course seek to get to them. Those who have served on Bill Committees with me will know that, if we can deal with amendments in a few words rather than speak at length and still scrutinise the Bill properly, I believe that that is the correct way to proceed.

On that note, I turn to the amendments. They arise as a result of recommendations made by the Parliamentary Commission on Banking Standards. We have already heard about the importance of the role of the Banking Commission in ensuring that we have amendments to consider in Committee, and I echo the comments of my hon. Friend the Member for Nottingham East about the Government’s role. It is important to hear what they have to say, and as he suggested, I hope that we have a listening Minister here. It would certainly break the mould if we had a Minister who listened enough to acknowledge that an Opposition Amendment—and the Banking Commission—had merit. There may also be an opportunity for him simply to accept some of our amendments rather than reconsider matters elsewhere.

The amendments relate to the objectives of the Prudential Regulation Authority and the orderly handling of the risk difficulties facing the ring-fenced banks. It is clear from the Banking Commission’s report that it feels that amendments are needed to ensure that the formulation of the continuity objective more closely adheres to the Vickers objectives on ring-fencing. That aim has run through all the debates and discussions on the Bill. The question is how we can take the principles and objectives of the Vickers report and ensure that they are crystallised in the letter of the law. We all understand and have talked about what the spirit of the law ought to be.

The amendments correspond to the Commission’s proposed amendments B and D. They are intended to make the Bill more explicit about the need for the retail banks to be overseen by regulators who will help with the orderly handling of circumstances in which they might encounter financial difficulties. That relates to the point that my hon. Friend the Member for Telford made in an Intervention. We are not saying that there will not be circumstances in which difficulties arise or banks fail for one reason or another, but in those circumstances there should be a correct and proper process of oversight.

We, as well as the Commission, take the view that the amendments are needed on the face of the Bill for a number of reasons. As I have already outlined, they would better achieve the goals set out by the three Vickers principles for ring-fencing; in particular, they explicitly set out the role of the regulators in the resolution process. The regulators are tasked with making it easier to sort out retail banks that get into trouble, rather than simply leaving it to what has been described as a market-oriented insolvency situation.

The orderly handling of those difficulties is also needed to promote public trust and confidence. That is something we should all have in mind during scrutiny of this Bill because many members of the public looking at the technical issues will want to know not only whether the legislation has been strengthened, but also whether the culture will change. That has already been mentioned during the discussion this morning. It will be very important, and should also form part of the implied assurances undertaken by the regulatory process.

I look forward to hearing what the Minister has to say in response to these points on the amendments. I recall points that he made in relation to earlier amendments, and if these amendments are not drafted in exactly the terms that the Government would wish to see or if they are not located in the right place in the Bill, I hope he will outline that in his comments. I also hope he will give us an assurance that if the Government agree with the principle and with what the Commission has said—even if they do not agree with the fine-tuning of the amendments—they will table suitable amendments at a later stage. I therefore look forward to the Minister’s response.

I can start with that assurance. Certainly, if there are any amendments—whether advanced on behalf of the Commission or from elsewhere in this Committee—that we agree with and think sensible, but which have some deficiency in the wording, I make a commitment to bring them back at a later stage.

The amendments, which the hon. Lady has said reflect the views of the Commission, address the really important issue of supporting the resolvability of ring-fenced banks. The hon. Member for Telford quite rightly made the point that the provisions of the Bill are designed not to ensure that no bank ever fails, but to ensure that when a bank does fail, it can do so safely, without affecting the continuity of core services and without causing taxpayers to have to contribute their own resources to it. We just need to look at the events in  Cyprus this week to see how important it is to have these robust arrangements put in place, in which people can have confidence in advance, to avoid the kind of uncertainty and negotiations that have taken place in this country and others before and are happening in Cyprus as we speak. The objective of making it easier to deal with failing banks without recourse to the taxpayer was, of course, an objective given to the House by the Vickers Commission and we totally agree with it.

As a preface to my remarks about the amendments before us, the structure of this Clause is important in how it reflects the Vickers Commission’s recommendations. We touched on this in an earlier set of amendments, but in clause proposed new paragraph (2)(c), we effectively have three sub-headings. Proposed new sub-paragraph (i) deals with the internal affairs of the banks, ensuring that the business of ring-fenced banks is carried on in a way that avoids an adverse effect on the continuity of services. Proposed new sub-paragraph (ii), as we discussed earlier, deals with external risks, ensuring that ring-fenced activity is protected from such risks arising in the United Kingdom or elsewhere. New sub-paragraph (iii) deals with resolution—the safe resolvability of banks. It states that the authority should

“minimise the risk that the failure of a ring-fenced body could affect the continuity of the provision in the United Kingdom of core services.”

There is a clarity to the structure of the Bill; it is there for a reason and it is important to respect it. My hon. Friend the Member for Reading West is absolutely right that we should consider the spirit as well as the letter of the law, but one thing we should bequeath to practitioners and regulators who will make use of what I hope will become an Act of Parliament is a resistance on our part to the temptation to add curlicues and additions to the wrong parts of the Bill. That could end up confusing the clear structure of the Bill and the clear statement that it makes. That point applies to the amendments, as I shall explain.

I look forward to hearing the Minister’s explanation about why he feels as he does about “curlicues”, to use his term. Has he thought about the time the Commission took to consider the issue and the fact that it proposed the amendments? Presumably, the Commission did not see the amendments as unnecessary, but as something that gave greater clarity rather than causing any confusion.

I have respect for the Commission, which is why I said earlier that it might want to respond to my response to its response to my response to its original response. If the Commission intended something not captured in the Amendment, I will be happy to consider that. There is no difficulty about the principle of what the Commission recommends—that it should be clear that banks should be resolvable without recourse to the taxpayer.

Let me address precisely why, so far, I am not convinced that the amendments are necessary. As I said, the resolution objective is captured in new sub-paragraph (iii), relating to the PRA and FCA—specifically, that the PRA should seek to

“minimise the risk that the failure of a ring-fenced body could affect the continuity of the provision in the United Kingdom of core services.”

The amendments would amend new sub-paragraph (ii) rather than new sub-paragraph (iii); the former, as I have explained, is about the external risks rather than resolution per se. I would be interested to hear from the hon. Member for Kilmarnock and Loudoun, or any other hon. Member with an insight into the mind of the Commission, about why it proposed the amendment not to the resolution provisions in the Bill but to the external risks provisions.

However, wherever it is, the amendment would add the notion of orderly handling. Let us pause to consider that. No one in the Committee could object to the concept that the resolution of a bank should be handled in an orderly way. However, the word “orderly” is a little vague. In a world where we need real clarity about what is intended and what will be interrogated later, we should pause before simply accepting the amendment just because the Commission has suggested it. We should know a little more about why it thinks the amendment necessary and whether “orderly” is the mot juste to capture what it has in mind.

The PRA has asked for clear objectives. It has expressly said that it did not want a set of objectives that it was forced to interpret in the face of what inevitably would be lobbying by vested interests from all sides. It has asked that the terminology be clear and unambiguous from the outset.

Proposed new paragraph (c)(iii), which deals with resolution, requires the PRA to act in such a way that the continuity of core services is protected if a ring-fenced body fails. If this objective is enacted by Parliament and becomes an objective of the PRA, then if the continuity of core services has been protected, it seems to me to follow that it must have been handled in an orderly way. Moreover, the amendments refer to:

“securing the orderly handling of circumstances in which ring-fenced bodies have encountered or may encounter financial difficulties”.

This may again seem pedantic—and this is my personal study and weighing-up of the Bill—but it seems to me that it is not the circumstances of a bank’s prospective failure that concern us. Those circumstances could be a macro-economic shock, a bad lending decision or some other ill, but it is the bank’s failure that must be handled in an orderly fashion, not its response to the circumstances.

I am more than happy to listen now to the contributions of Members who may be able to clarify some aspects of the Commission’s intention in terms of where this particular amendment should properly be located, or whether this question of orderly resolution is not fully captured by the requirement to secure the continuity of services. Having reflected on it, my feeling is that these provisions are in the Bill. It may be possible to make some more progress here, but if I have missed something in response to the hon. Lady then I finish where I began. If there is something specific that I do not think divides us, I am very happy to come back at a later stage and reflect that.

May I say, Dr McCrea, what a pleasure it is to serve under your chairmanship. This is subject to the one qualification that the monstrous calumny that you are a moderniser is squashed. I have always had confidence that if there was one party in Parliament in which I had a number of soulmates, it was the Democratic Unionists, who are  proper old-fashioned-isers rather than modernisers. Having made that point, I come to the Amendment, which I find quite attractive. It seems to me that it is trying to bring to the United Kingdom the approach followed in America by the Federal Deposit Insurance Corporation, whereby if a bank fails, the depositors who are protected are immediately moved to another bank with almost no loss of service. The advantage of that is that small banks can fail, and the failure of small banks is actually rather important to reduce moral hazard and ensure that the financial system has genuine underlying stability. This is because knowing that the whole business can fail reduces the amount of risk that will be taken in, for example, a Northern Rock circumstance. What we currently have—or had at the time of the banking crisis—is a feeling that nobody at all could fail.

It may be impossible to come to any answer to the “too big to fail” question. It may always be the case that Governments have to prop up the biggest banks if they get into real trouble, and therefore the need is to regulate away from that real trouble. In a United States context it seems to be possible to allow dozens and dozens of small banks to fail without threatening the underlying financial stability. Having said that, I think the Minister’s point, that the amendment should come not in new sub-paragraph (ii) but in new sub-paragraph (iii), looks to be correct. I am not absolutely certain of this, but it is a very convincing argument.

On a straight reading of new sub-paragraph (iii), a ring-fenced body could affect the continuity of the provision of core services in the United Kingdom. This seems to me to mean not the core services provided by the individual institution but those in the United Kingdom as a whole. Therefore, small banks, where the continuity of their services affects only their customers and not the core of the United Kingdom, are not really covered by new sub-paragraph (iii). I would like to indicate a broad sympathy with this amendment. I think the basic idea, the model from the United States, is one that we could beneficially follow. It might actually help us to set up more small banks to produce more competition, and get away from the model of a small number of big banks upon which the whole economy is dependent. It would then ensure that those small banks can, if necessary, have an orderly transition into other banks if they fail, with the protection of the depositors up to whatever limit the Government decides to set.

Thank you, Dr McCrea, for letting me talk. I think that it is quite interesting that that is how insurance companies tend to work in this country, but I do not actually understand this Amendment. I am sorry, but I do not like to look at something that I do not understand. It is probably because I am new to Parliament and do not properly understand parliamentary language, so forgive me, but it does not seem to make any sense. I obviously do not want to say anything disrespectful, or anything that might imply that it has not been thought seriously about, but it seems to me to be saying

“in particular by securing the orderly handling of circumstances”

—I am not sure how you can handle those—

“in which ring-fenced bodies have encountered or may encounter financial difficulties”.

I thought that this Bill was about banks that have encountered financial difficulties. By definition, we are dealing with institutions that have had financial difficulties, otherwise none of these clauses would be necessary. Therefore, we already have institutions with financial difficulties, so I am not sure why we should be inserting a Clause about it. I apologise if I am misunderstanding, but I would like to hear why we need to insert a provision about an institution having financial difficulties when that is what the Banking Reform Bill is all about.

I assure the hon. Gentleman that it would not be disrespectful to honourably say that one does not fully understand the Amendment.

I was about to look for a particular piece in the Banking Commission report which perhaps would have assisted the hon. Gentleman, but we may have the opportunity to do that later in the process. It has certainly taken me some time since coming to this place, having served in another Parliament, to understand the procedures and processes and the ways in which these Committees operate, so I am sure the hon. Gentleman will enjoy this particular Bill as his first outing. Sometimes it does us no harm to be asked what particular things mean.

I was slightly perturbed to hear the hon. Member for North East Somerset suggest that he was attracted to some of the wording that had been put forward because, although he and I may not always agree on things, I respect his views. I began to wonder if somewhere along the line we had got it wrong, given that the hon. Member seemed to be beginning to support it. He did, of course, then go on in his characteristic style to explain why—not withstanding the attraction to the principle—he felt that the Amendment might be better located elsewhere. We were asked to think about what was in the mind of the Commission when it decided to suggest this amendment in the place that it is. I would hesitate to say that I could get inside the mind of the Commission, which has done such a huge amount of work on this, but I believe that it had good reason to suggest that further strengthening of the Bill was required. Once again, perhaps slightly unfortunately, we have heard from the Minister that, notwithstanding the principle—he said he had no difficulty with the principle of what we were trying to achieve here—he was not convinced about where the amendment would be inserted.

There has also been some discussion about nobody having any objection to orderly handling, but perhaps this was a bit vague. What we have tried to do here, and what the Banking Commission had in mind, was to try to ensure that, at every possible stage, this wording would not only give additional strength to the Bill but send a message to the public—this has been raised in a number of interventions—that gives them confidence and trust, and ensures that, when financial institutions get into difficulty, all circumstances are looked at, whether macro-economic or closer to home. Customers and those who have resources in banks would then be confident that everything possible would be done not only to address those issues but to ensure that whatever happened would be done in an orderly fashion and would not cause them particular problems.

I heard what the Minister said in relation to the placing of such an amendment. I will try to tempt the Minister. Even if he cannot say at the moment whether he would seek to bring this amendment back and insert it in another sub-paragraph, will he give an assurance that he will look favourably on the principle—he seems to agree with it—and perhaps table an amendment either in new sub-paragraph (iii) or elsewhere that would achieve the same purpose? I would like to hear what he has to say on that before I decide how to proceed with this matter.

This Committee is establishing itself already as one in which anything is possible: the Democratic Unionist party describes itself as a modernising force; my hon. Friend the Member for North East Somerset finds himself in full agreement with the Labour Front-Bench Members; and my hon. Friend the Member for Eastleigh describes words that Lord Lawson and others have committed themselves to as not making any sense—he is a braver man than me. I think that we will have an entertaining time over the next few weeks.

Let me address the points made. It has been clearly communicated that there is a unity of purpose: we all absolutely agree that it is important for banks large and small to be able to fail while the provision of services to customers continues, but with no consequences for taxpayers. That is why new sub-paragraph (iii) as drafted refers to protecting the continuity of services.

May I make the point to the Minister, following on from the hon. Member for North East Somerset, that it is not always about smaller banks failing and being swallowed by larger institutions; it is really important that larger banks can fail in an orderly manner and be divided up into smaller banking organisations. We should not see this as a conveyor belt to increase the size of banks and financial institutions; it ought to be possible to go the other way as well.

The hon. Gentleman is absolutely right. A problem we face in this country is that there are too few banks and they are over-concentrated, with negative consequences for competition. The arrangements that we put in place should not, therefore, lead to an inevitable further concentration of banking into larger and larger groups if, in the future, a bank—large or small—were to fail. That is absolutely the Bill’s intention, and I am sure that that is the intention of the movers of the Amendment, and indeed the Commission, which is why we have specified the protection of the provision of services in the Bill rather than the protection of the institutions themselves. That is the point that we want to get across.

I said that this was turning out to be an unusual and surprising Bill Committee, so let me add a further note of novelty. As is tradition, I have a note from my officials with advice that says, “resist this amendment”. Let me turn away from my officials and say that, having listened to the contributions from my hon. Friend and the Opposition Members, if it is possible, as I think it may be, to locate in the right Clause of the Bill—I think that this particular resolution clause is the one—a more explicit assurance that the clause deals with the importance of continuing core services if a bank were to fail in future, I dare say the ingenuity of my officials and  possibly of members of the Banking Commission themselves may enable us to find a form of words that satisfies Members that we have put in place something that addresses that.

It is indeed a very unusual Committee already. I am surprised and very pleased to hear the Minister give those assurances. Having been a Minister myself in another Parliament, I remember well the notes that used to appear in front of me all the time basically saying, “Resist absolutely everything”, and telling me to repel any Opposition amendments. In the words that officials might use, I think the Minister has made some brave decisions already this morning. The Whips and others will now be panicking and wondering what will come later. On this occasion, I am glad to have tempted the Minister so far. He may find himself pulled back on some kind of rope later on in the day. I hope not. I will take his assurances in the spirit in which they were given. I look forward to his tabling an appropriate Amendment, in an appropriate place, at an appropriate point in the future. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Yes, this is certainly a novel Committee, hearing my party described in the manner it has been. I will try, as Chair, to lead myself from the other side of that and be a stabilising force for good.

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

I will not take up a great deal of the Committee’s time because we have had some healthy exchanges. We should, however, put on record how important the Clause is. We have had assurances from the Minister and we have already seen how exciting a Financial Services (Banking Reform) Bill Commons Committee stage can be. That has perhaps been a surprise to all of us. It just shows, Dr McCrea, what your modernising approach can do to permeate a different culture and a different approach. That change in culture and approach is something we want to see in the banking sector and throughout financial services. Again, that is why the report from the Commission is so important.

I noted a couple of points that my hon. Friend the Member for Nottingham East made at the outset. He said that retail banks should be boring, safe and humdrum. We also want to ensure that retail banks can operate in that context. We have had a good debate and discussion on the ways in which the clause can be improved. I have no objection to the clause standing part of the Bill. I look forward to making similar progress on the next set of clauses and amendments.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.