I beg to move Amendment 29, in the schedule, page 24, line 9 at end insert—

‘( ) After subsection (3) insert—

(4) Without prejudice to the generality of subsection (3), in the case of a ring-fencing transfer scheme the court must not make an order sanctioning the scheme if it considers that it might lead to the dissolution of a company or to the transfer of liabilities owed to any persons in a manner that may prejudice the interests of those persons.”.’.

I do not think I will shock Members by saying that the concepts in the schedule seem rather dry. After the events in Cyprus and elsewhere, however, bank transfer schemes suddenly become quite interesting and relevant, so it is worth spending a little time discussing the issues. I do not want to go through the details of the schedule, because most of my questions have been satisfied, but the Parliamentary Commission on Banking Standards specifically suggested that an amendment was required. Under section 111 of FSMA, the court may make an order sanctioning the transfer scheme if certain conditions are satisfied, including that the appropriate certificates have been obtained and any authorisations required are in place. In addition, subsection (3) says:

“The court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme.”

Amendment 29, which was drafted by the Commission, would require an additional condition to be satisfied before the court sanctioned a ring-fencing transfer scheme. The amendment would prevent courts from making sanctioning orders that

“might lead to the dissolution of a company or to the transfer of liabilities owed to any persons in a manner that may prejudice the interests of those persons.”

What does that mean? It would implement paragraph 230 of the Commission’s first report, which states that safeguards are needed to prevent the creation of the ring fence from being

“used as an opportunity to shift liabilities…in an artificial way.”

The Commission felt that such safeguards were needed because the liability for conduct before the split would remain with the legal entity, which was responsible for the conduct in question. Therefore, if a company with outstanding liabilities was dissolved during the Division into a ring-fenced or non-ring-fenced set of bodies, the liabilities might also be dissolved with it. It would be a bit like trying to pursue a double glazing or car sales company that had gone into administration; the rights of consumers to pursue a problem would be affected.

Many people have voiced concerns about such problems in a consumer context, but the liabilities of a retail bank that disappeared or was transferred might be similarly affected, so the Commission thought that it was important to establish this process. If new companies are created, they will be free from the outstanding liabilities of the company of which they were previously part. The amendment would guard against banks using opportunistic tactics during the creation of the ring fence by preventing the court from sanctioning any ring-fencing transfer scheme that posed such risks. When banks implement the ring fence, they will almost certainly require the courts to sanction the scheme, so limiting the circumstances in which the sanctioning orders can be made would ensure that banks did not use the implementation of the ring fence as a smokescreen for avoiding or shifting their outstanding liabilities.

In recent times, considerable liabilities have fallen on some of the ring-fenced banks, for example, as a result of the mis-selling scandals. In such cases—whether it is  to do with the mis-selling of interest rate hedging swap products or payment protection insurance—persons who have conducted business with those banks may be due compensation, which in some cases may be significant. Because outstanding liabilities may be large, it is important that the Commission had an opportunity to raise that point, and I would be grateful if the Minister would address it.

The Commission and its representative on earth, or at least in the Committee, make a series of reasonable points. As we have discussed, the schedule relates to the powers of the higher courts to sanction a ring-fencing transfer scheme under section 111 of FSMA. To remind the Committee of the process, the company—the bank, in this case—initiates the procedure. The transfer scheme allows a bank to transfer a business, or part of a business, to another entity with the approval of the court. Any application to the court for the approval of a ring fence transfer scheme must first be approved by the regulator; in this case, that would be the PRA.

The Amendment proposed would prevent the court from sanctioning a transfer scheme if it thinks that that scheme could lead to either the dissolution of a company—a bank, in this case—or the transfer of liabilities in a way that prejudices its creditors’ interests. The hon. Gentleman is absolutely right that that must not provide an opportunity for a bank to avail itself of the ring-fencing rules to evade the responsibilities that might follow from past misconduct. In recent weeks and months we have seen examples of historic misconduct that quite rightly entails compensation and redress for those who suffered as a result of that, and it would be a perverse consequence if a move to introduce more rigour into banking standards were to give an opportunity to banks to shirk those responsibilities.

The Government’s view is that the safeguards that we have put in place should address that. I will outline those which are in the Bill already. First, the PRA’s consent is needed, and the expectation is that the PRA would refuse to sanction any scheme that was about artificially evading a bank’s responsibilities rather than a genuine implementation of the ring-fencing rules. Secondly, anyone who is adversely affected—whether creditors or, for these purposes, the mis-sold—is entitled to participate in the court proceedings. The court may approve an application only if it considers that application appropriate. It is not a rubber-stamping exercise; the court’s scrutiny is to determine whether the proposal is appropriate, so the court could refuse the scheme if it were to conclude that it was artificially avoiding liabilities, as that would clearly not be appropriate.

The amendment as proposed, notwithstanding the obvious good sense of its intent, has a couple of flaws. First, it would prevent the court from sanctioning a ring-fencing scheme if it involved the dissolution of a company; it makes it clear that

“the court must not make an order sanctioning the scheme if it considers that it might lead to the dissolution of a company”.

It is not always the case that the dissolution of a company would be prejudicial to the interests of depositors or creditors; it may be appropriate as a tidying-up exercise in a complex, multifaceted group to set up a company to close down permanently certain subsidiaries,  so an unintended consequence of the amendment is that it would be excessively restrictive in cases such as that.

Secondly, there is a lack of clarity about what “prejudice the interests” means. We would need to consider whether that meant mere inconvenience: it could be that some depositors might find it inconvenient to have to move from a branch a few doors away from their home or business to one a few streets away, but we would need to be clear that the prejudice in question is meant in a more substantial sense than that.

I say to the hon. Gentleman that we have no difficulty with the point that he and the Parliamentary Commission make about being sure that the mechanism is not used to evade the continuing responsibilities that banks have to their customers, past and present. There are a number of ways in which we can reflect on whether we can be even clearer that the safeguards are there. It could be that the PRA, for example, is invited to consider these matters explicitly when it makes its assessment of whether a scheme should be sanctioned. It could be that there are different variants around this. If the hon. Gentleman is prepared to withdraw the amendment, then later in the Bill proceedings we will consider how what is very much an agreed objective between the parties and the PCBS can be made absolutely clear and unambiguous.

The Minister has been helpful in responding thoughtfully to the points that the Commission made on this issue. He set out in an important way that he felt there are a number of safeguards to prevent the unfair shirking of these liabilities, and the PRA will act as some sort of guardian on these matters. He also said that the victims of mis-selling and the creditors will be able to participate in court proceedings. I know that is the case, but the Minister will forgive me if my heart sinks when I hear that that is a possible option. In reality, for a lot of consumers that is not a viable route for them to use. It is true that there are a number of safeguards in the current wording of the Bill, such as the appropriate choices that the courts might make. However, those safeguards are not as tight as they could be.

I very much welcome the Minister’s commitment to reflect on the points that the Commission made. He made a fair point about the drafting of the Amendment when he said that we need to elaborate on what we mean by the prejudicing of certain interests. I hope the Minister will come back at another opportunity with a way of tweaking these provisions. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule agreed to.