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

This Clause gives effect to the schedule, which provides for ring-fencing transfer schemes. Such schemes allow a bank to transfer its business from one legal entity to another in order to comply with the ring fence. Currently, as we know, banks’ activities are commingled. Ring-fencing is designed to separate out retail deposit-taking and trading in investments and place them in separate divisions. That could involve moving retail businesses out of the existing body, or it could involve moving investment businesses out, or possibly both, and creating new bodies, as we have discussed on previous occasions. It is up to the Bank to respond to the requirement to ring-fence. There are a number of ways in which it can do that.

Part 7 of FSMA provides a mechanism, which requires the approval of the court, for transferring all or part of the business of banks, without requiring the approval of all those affected. For example, part 7 would allow a deposit book to be transferred—in the case of a merger or takeover—from one institution to another without the approval of every depositor.

I do not know whether it is reasonable to comment on the schedule at this point, Mr Bone.

Please keep it brief.

I will keep it brief. The schedule adds another special case to the transfer scheme: a ring-fencing transfer scheme. It uses the established procedure, including opportunities for the regulator or anyone to make representations to the court, but it adds a veto to the PRA, which must approve an application to the court for a ring-fencing scheme. The PRA would be expected to use that veto if the move were incompatible with its new continuity objective to provide for the continuity of core services. For example, it could veto an artificial mix of business lines, which could mean that the business was unviable if separated.

With the leave of the Chair, I would like to talk about the schedule and the Clause simultaneously. It is difficult because clause 7 facilitates the schedule to the Bill and we will be discussing an Amendment to the schedule in the next group. It is slightly awkward when we have a clause that facilitates the schedule. The Minister set out quite helpfully what that schedule entailed. Obviously, the business transfer scheme arrangements are being changed to ensure that the ring-fencing provisions will be consistent with and can build on the existing rules.

I have some specific questions on the details of the ring-fencing transfer scheme that go beyond the amendment we are to discuss. The Minister said that the PRA would now have a set of powers to supervise the process. I shall be grateful if the Minister will set out the sort of questions the PRA will ask the transferee ahead of any court sanctioning arrangement.

I also ask the Minister to put an explanation on the record, for the sake of future circumstances in which this set of transfers might apply; it is difficult to envisage  what and when they might be. Will he reassure the Committee that a court-based transfer process is the right one? Moving to a legal and judicial context to oversee some of these transfer arrangements brings the advantages of independence and authority. However, there have been criticisms in other business transfer cases of the sometimes cumbersome, expensive and slow nature of a court process.

Given the inherent uncertainties and slowness of a court process, will the Minister reassure the Committee that he balanced other options for transfer arrangements, and explain why the court arrangement is considered the right one? Perhaps he could also reassure the Committee about the duration of the process. Given the centrality of banking and the retail banking system to the economy and many consumers, a long-drawn-out process might cause anxieties in the market and beyond.

What factors have been taken into account when considering risk representations from people who might claim that they are suffering an adverse effect from a transfer? How will those be made in a court process? Those are some of the concerns. I can imagine a transfer process going on and a lot of people having concerns. Are they all expected to be represented in court, or will there be some other facility for those representations to be made? I assume that that would be through the PRA, as a conduit towards the court process. However, it would be useful to get a sense of those arrangements.

My final question on the schedule is how will the operation of reclaiming funds change under the reforms? The Minister will be aware that in recent years there have been a number of changes to the dormant bank account arrangements. If retail banking services are being transferred from one institution to a brand new one, individuals may discover years later that they have dormant accounts and wish to go through the reclaiming process. That would be a key downstream consequence of any transfer arrangement. It would be useful for the Minister to set out how that particular transfer scheme will not necessarily cut across the rights of long-standing account holders to go through a reclaim process for dormant funds in banks or building societies that might be subject to transferred arrangements.

The hon. Gentleman raises the criteria that the PRA might consider in exercising its veto. Consistent with the establishment of the PRA as a body with broad powers to scan the radar for risks to financial stability in the UK banking system, the provision has been drafted not to be too prescriptive and to identify very particular grounds on which the PRA might object to a proposed ring-fencing transfer scheme. I think that that is the right approach.

We have debated the innovative capacity and tendency of the banking sector in this Committee, as have Members on the Floor of the House, and it is an issue to which these concerns particularly apply. That is one of the reasons for the PRA veto. It would be of concern if some novel device were proposed that affected the future contribution of the bank to financial stability. So the right approach is to enable the PRA to assess each scheme on its merits and to make, as it were, a bespoke  assessment of whether any features of the scheme would contribute to financial instability, rather than to constrain it in anticipation of certain grounds that may be sensible now but could be overtaken by events.

I have given the example that, given that the point of ring-fencing is to allow the continuity of services, it is conceivably and theoretically possible for a bank to put into a ring fence such a mix of business lines that the organisation would not actually be viable, free-standing and independent. That is a matter of judgment on the part of the PRA, which has the ability to exercise such judgment under the Clause.

We chose to use the courts to facilitate the transfer process, in order to use as far as possible the existing provisions of FSMA. As the hon. Gentleman knows, many, if not most, of the provisions in the Bill are amendments to FSMA. Clause 7 is such a provision. There is an established procedure for changing arrangements in banks by application to the courts. That has worked relatively successfully since it came into effect in the 2000 Act; there have been no particular concerns.

The courts have the ability to take into account the potential consequences for third parties—be they depositors or people who may be exposed to other parts of the bank’s activities. One of the advantages of the courts determining such matters, rather than the regulator, is that anyone affected by the consequences of transfer can make representations to and be heard in court. That procedure has been successful to date. There is of course an additional route—people can make representations to the PRA. That is a second way in which they can make any concerns known.

Quite apart from the pragmatic reason for using provisions that are currently available and have been tried and tested, there is an important reason of principle. These matters may affect the property rights of individuals in terms of where their money is held. It could be transferred from one body that they have chosen to invest in to another. So it is reasonable that, given the engagement of such property rights, the courts should be the final arbiter of such matters. In assessing claims, the courts can hear representations where individuals feel that they have been unreasonably affected by the provisions. Part 7 of FSMA is designed to minimise vexatious claims, and third parties need to give notice to the courts of their proposed representations. As I said, it has proved to be a reasonably effective regime to date.

Will the Minister deal with the point about how dormant accounts will be treated? I would be grateful if he could elaborate.

Given the use of FSMA, the arrangements for dormant accounts are provided for in the regulations. The rights of account holders, whether the accounts are active or dormant, will continue in exactly the same way as they do now and the right to access to accounts, should the holders discover that they exist in future years, will be preserved.

Question put and agreed to.

Clause 7 accordingly ordered to stand part of the Bill.