Banking Bill

Public Bill Committee, 4 November 2008.

Roger Gale (Conservative, North Thanet)

Good morning. This is the ninth sitting of the Committee and we now come to discuss clause 1.

Clause 1

Ian Pearson (Labour, Dudley South)

It is a pleasure to serve under your chairmanship, Mr. Gale. As you are aware there are good reasons why we have only now reached clause 1, but it is the meat of the Bill in terms of the special resolution regime. I shall take a limited amount of time to set the scene because clause 1 gives us a good overview of the framework of the regime tools.

The clause sets out the broad purpose of the SRR, which is to address a situation in which all or part of the business of a bank has encountered or is likely to encounter financial difficulties. It outlines the tools at the authorities’ disposal under the SRR. The special resolution regime includes the three stabilisation options: transfer to a private sector purchaser, to a bridge bank and to temporary public sector ownership. As the Committee will hear when we consider clauses 13 to 24 and 30 to 38, the stabilisation options are exercised through the stabilisation powers, which effect the transfer of shares and other securities or property, rights and liabilities by operation of law. Those stabilisation powers include the onward and supplemental transfer powers set out in clauses 25 to 29 and 39 to 41.

Clauses 42, 43 and 55 provide for a package of safeguards relating to the exercise of partial property transfer powers, which, as Members are aware, proved of particular interest to stakeholders during the public consultation process. I draw attention to the safeguards here because the Government will be issuing a consultation document on them, as I indicated in my letter to Committee members last week, as well as the draft code of practice, which the Committee has seen, on Thursday of this week.

I have established an expert liaison group of banking sector practitioners, including legal and insolvency experts, to advise the Government on the development of the safeguards. The group held its first meeting last Friday, and the consultation document that we publish on Thursday will reflect its views on the Government’s proposals. It will also have a key role in continuing to advise the Government through the process of consultation and beyond. Yesterday I tabled a new clause on the position of the liaison group, and we will debate that in due course.

Mark Hoban (Conservative, Fareham)

It will be helpful to Committee members if the Minister sets out who the members of the expert liaison group are.

Ian Pearson (Labour, Dudley South)

I will circulate the names of the members of the group to the Committee.

Returning to the overview of the SRR, part 1 of the Bill includes provisions on compensation, incidental functions, the role of the Treasury and how the regime applies to building societies. The special resolution regime also includes the bank insolvency procedure and the bank administration procedure, which the Committee will consider when we come to parts 2 and 3. The special resolution regime outlined in clause 1 is at the heart of the Bill; it establishes a permanent and credible framework for authorities to resolve a failing bank. The SRR provides the authorities with the tools to deal with banks in financial difficulty in a manner that supports the public interest in financial stability, confidence in the banking system and depositor protection.

In most situations, normal regulatory interventions or voluntary action by the management of the bank can resolve an individual bank’s difficulties. However, bank failures will sometimes occur and can damage confidence, disrupt financial markets, harm depositors and generate significant costs to businesses and to the economy as a whole. Bearing that in mind, it is worth taking a couple of moments to outline the background to the development of the special resolution regime and the genesis of this part of the Bill.

The recent period of sustained disruption in global financial markets, starting in the United States in the summer of 2007, has had a widespread impact on financial markets, firms and economies across the world. In the UK, the most visible consequence of that has been the financial difficulties faced by a number of financial institutions, including Northern Rock plc.

In summer 2007, Northern Rock found itself unable to finance its activities, due, among other things, to a business model that was heavily reliant on funding from the wholesale money market. In the light of those severe difficulties, the Government took action to maintain financial stability, while protecting consumers and the interests of the taxpayer.

In February 2008, when it became clear that, in the light of prevailing market conditions, no institution was prepared to make an offer to take over Northern Rock that was judged adequate to protect the taxpayer, the Government took the decision to take the bank into temporary public ownership. To that end, legislation to give the Government powers to transfer the shares or property of a failing bank was brought forward in the Banking (Special Provisions) Act 2008, which received Royal Assent on 21 February of this year. The main transfer powers expire, under the terms of that Act, on 20 February 2009. That Act provided the Government with temporary powers should further action be needed while permanent legislation—this Bill—was being prepared and passed.

The prudence of that approach has been demonstrated by events concerning Bradford & Bingley plc. On Monday 29 September the Government used both the share and property transfer powers provided by the 2008 Act to bring the bank into temporary public ownership and then to transfer the deposit book to a private sector purchaser. The special resolution regime outlined in clause 1 replaces the 2008 Act with a permanent framework for the authorities to resolve a failing bank, with objectives that include protecting and enhancing financial stability and confidence in the banking system, and protecting depositors and public funds. Those objectives will be considered under clause 4. By setting out a clear and credible statutory resolution regime to address a failing bank, which removes control from the bank’s management by overriding the powers of shareholders and directors, the regime also provides a strong incentive for banks and their directors to take action to prevent their business from getting into difficulties.

Unlike the 2008 Act, the SRR has been designed as permanent legislation and therefore provides a framework with strict conditions that must be met before the powers are exercised, clear objectives that the authorities must have regard to in exercising those powers, and refined stabilisation powers that are targeted in their effect alongside new tools such as the bank insolvency procedure. Clause 1 also establishes that each of the tripartite authorities—the Bank of England, the Treasury and the Financial Services Authority—has a role in the operation of the special resolution regime. The powers and responsibilities of those bodies are extended by the Bill, in line with each institution’s current mandate and responsibilities, to enhance the UK framework for financial stability and depositor protection. The SRR also provides the authorities with a wide range of tools to meet the above objectives, by resolving a failing bank or facilitating fast payout to depositors. The establishment of the special resolution regime was widely supported by stakeholders throughout the consultation process; I am also grateful for the support from Opposition Members.

As I have said, clause 1 clearly sets out the framework for the whole package of SRR tools—we will debate the tools later—giving the authorities the full range of options for dealing with a bank that is experiencing difficulties. I appreciate that the Committee will wish to discuss many of the provisions that the clause summarises, and which I have just briefly run through. I am looking forward to debating the provisions in detail over the remaining sittings. However, I propose that detailed consideration of those provisions be reserved until we reach the corresponding clauses. I will be guided on that by you, Mr. Gale. Given that clause 1 is a broad summary clause, intended to provide users of the Bill with a clear understanding of its contents, I urge that the clause stand part of the Bill.

Roger Gale (Conservative, North Thanet)

The clause is fairly wide-ranging—as the Minister has indicated—and it is up to the Committee to decide how broad it wishes the clause stand part debate to be, bearing in mind that we need to try to avoid covering too much ground that will be touched on under other clauses. If it becomes necessary to embrace other arguments and discussions prior to further clauses being reached, I shall bear that in mind. As the issue is complex, I am acutely conscious of the need to have a fairly wide-ranging debate now. The decision is in the hands of the Committee.

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship, Mr. Gale, for this ninth sitting, which by my reckoning takes us to about halfway through the Committee’s proceedings. I am not sure that we have broken the back of it yet, but the end is in sight. I take note of your comments, Mr. Gale, about guiding our debate. I recognise the challenge in trying to restrict remarks. One could make a speech that lasted for both sittings today and well into Thursday, but it would not be in my interests or those of the Committee to go down that route—

David Gauke (Conservative, South West Hertfordshire)

Shame.

Mark Hoban (Conservative, Fareham)

—although my hon. Friend might tempt me to do so if he is not careful. I want to give a sense of where we are coming from over part 1 and to set the backdrop for our debate on it.

As the Minister said, clause 1 sets the scene for part 1. I share his recognition that one of the learning points from the crisis over the last year is the lack of a decent toolkit for dealing with the problems of a failing bank. That came out particularly clearly from the debate on the future of Northern Rock and the time it took to resolve that situation suggests that we did not have the right tools available. I suspect that if the tools that were initially developed in the Banking (Special Provisions) Act 2008 and have been fleshed out in this Bill, had been deployed in respect of Northern Rock they would have produced a different outcome. We do not know what that outcome might have been, but we have seen how Bradford & Bingley was tackled and in some respects it was not dissimilar to Northern Rock in its problems. A very different solution was found for Bradford & Bingley compared with Northern Rock.

It is in a way disappointing that the Government have not listened to the warnings that they were given prior to this crisis about the adequacy of the framework for dealing with a failing bank. At the end of one of the scenario-planning exercises that the tripartite authorities undertook and which looked at this issue in about 2005, both the Governor and the then chairman of the FSA, Sir Callum McCarthy, highlighted the need for a review of the tools that were available. They recognised that the framework that was in place was not sufficient to deal with the consequences of a failing bank.

The Bill provides a set of tools, the stabilisation options in part 1, the insolvency procedure in part 2 and the administration procedure in part 3. When considering those stabilisation options and the transfer to a private sector purchaser and to a bridge bank and temporary public ownership, we need to bear it in mind that this part of the Bill invests significant powers in the tripartite authorities. Those powers enable them to make important decisions affecting the function of the banking system and the wider financial sector, as well as affecting the outcomes for individual institutions and their creditors. The framework for the exercise of these powers is set in clauses 4 and 5, and we will talk about them in more detail later on.

Clause 4 sets out the objectives of the special resolution regime. The Committee will note from the range of amendments tabled on clause 4 that there is a question about the completeness and adequacy of the framework which we would want to probe in that debate. Clause 5 talks about the code of practice. We are grateful for the early sight of the code last Thursday, but as the Minister wrote in his covering letter, it is very much a work in progress. It makes it a little difficult in the context of the debate on clause 5 to understand just what the safeguards will be over the exercise of the power by the Bank, the FSA and the Treasury, given the amount of work that still needs to go into the code. It would be helpful for the Committee if, in his summing up of this stand part debate, the Minister would outline how he envisages the process of consultation on development of the code working, in parallel with the passage of the Bill.

For my part, I would want to see before Report in this place a more detailed code that is much closer to completion—I accept it might not be finalised—than the one that was circulated to us on Thursday, so that we can be sure that a robust framework is in place that will govern the use of these powers. I am sure that when we reach clause 5 we will have a long discussion about the nature of the code.

The concern I have—also expressed in the response to the stakeholders’ consultation—is to ensure that there is a proper framework in place so that these powers are exercised in a predictable way: that people know the circumstances in which they will be exercised. That is what we are lacking at the moment. We will try to tease out how we shall know the circumstances in which the powers will be exercised. That requires further elaboration in the code and I hope that today’s debate helps us establish more detail.

In talking through this part of the Bill, it might help the Committee if the Minister were able to use recent examples of how the powers in the special provisions Act have been used, to illustrate how they will be exercised in the framework in this Bill and to explain the points of difference between the special provisions Act and the Bill before us. The Minister referred to how Bradford & Bingley was dealt with in the context of temporary public ownership and the transfer of shares and property. We also had the situation with Heritable where the FSA determined that the threshold conditions had been breached and that led to deposits being transferred to ING Direct and the rest of Heritable being placed into administration; there was a similar pattern with Kaupthing. These are powers that we would expect to see in this Bill.

However, one element of the Icelandic banking system fell outside the powers of the special provisions Act and it would be helpful for the Committee to understand how the Bill would deal with Landsbanki’s branch in the UK. A different set of powers was used to tackle the problems faced by Landsbanki. We need to understand how the Bill would tackle a situation where a bank’s branch based in the UK faced significant financial problems. A relatively large number of banks based in the UK operate through a branch system rather than through a UK subsidiary. We will come to that in clause 2, when I will probe it in more detail. That important issue needs to be resolved.

We want to ensure there is some predictability in the way that these powers are used. That will require us to probe some of the language in later clauses. Clause 7(3), for example, says that the power can be exercised if

“it is not reasonably likely that...action will be taken...to satisfy the threshold conditions.”

That sounds a relatively low test and I think people would expect a higher test where the threshold conditions are to be invoked. We will come to that. That is why it is important in this debate on part 1 to tease out some of the language and the meaning, certainly in relation to that clause. The explanatory notes state:

“Those conditions essentially demarcate the boundary that must be crossed before the stabilisation powers...may be applied to a bank.”

That does not further our understanding of how clause 7 will work.

The issue of partial transfers is one of the most contentious in the clause, and stakeholders have expressed concern about it. Before debating the relevant clauses, we will want to see as much as we can of the draft statutory instruments that relate to partial transfers, or a clear statement from the Government of the principles that might underpin them. Part of the architecture of the reforms is that the power should be set out in primary legislation, the safeguards in the secondary legislation and further elaboration in the code of practice. We need to see that entire package before we decide whether we are content with the Bill. The Minister has expressed his willingness to make it available, for which I am grateful, but the state that the code of practice was in when it was circulated on Thursday suggests that there is still some way to go before those documents approach a reasonably final stage.

My final point is that the Bill focuses on what will happen when things go wrong. It is important to have the right set of solutions in place when that happens, but I am sure that all members of the Committee feel that prevention is better than cure. We want to ensure that the FSA, the Bank and the Treasury, in tandem with the work that we are doing here to the legislative framework, look carefully at how they will ensure that the preventive framework is in place, so that those powers will hopefully remain sitting on a shelf gathering dust after the current crisis is over, rather than being used on a regular basis.

Peter Viggers (Conservative, Gosport)

This is a crucial clause in an important Bill. We must realise that we are not going back to the year 2006. When the legislation is passed, we will not be returning to the happy, confident days before the credit crunch impacted a year or more ago. To that extent, the Minister is completely right when he says that the measures we are putting in hand are permanent and that many of the issues relate to a new permanent framework, and that is why it is so important to get it right.

When the US authorities were faced with difficulties and introduced Sarbanes-Oxley, the effect on the banking industry and the efficiency of financial markets was disastrous. The City of London will be allowed to expand to a greater extent than it might otherwise have done because the American financial markets are now rather constipated and hampered by the bureaucratic and legalistic effects of Sarbanes-Oxley and the imposition of measures that caused difficulty for their operation.

Some of the measures that we are introducing now will be permanent, but others will of course be temporary, and that imposition will need to be removed if we are to return to the days of an efficient and confident banking system. We need to distinguish carefully between the permanent measures, which we must get right, and the temporary measures needed to satisfy the present difficulties.

I have previously—I remember raising the issue with the Minster—put forward the nearest analogue to the present situation, which is the situation of Lloyd’s of London in the 1990s. I draw on my experience as a director of a bank in the secondary banking crisis of the 1970s, so I have, uniquely in the Committee, been here before. I was also one of the four members of Lloyd’s of London’s audit committee when it pushed through what was then the biggest single corporate rescue in the history of finance, so I am sure that the nearest analogue to our present situation is Lloyd’s of London. In that case, an insurance underwriter would underwrite a risk and then lay it off by reinsuring with another insurance entity. That second insurance entity would then lay off his risk. What would develop was what was known in Lloyd’s days as a spiral, which was a spiral of reinsurance so that the second, third, fourth, fifth—perhaps the 15th—insurer did not know the exact nature of the assets he was reinsuring. That is a very close parallel to the current collateralised debt obligations. Our present difficulties arose because of the creation of collateralised debt obligations in the United States initially, and the reinsurance and refinancing of the toxic assets in a spiral very similar to the Lloyd’s spiral of the 1990s.

Brooks Newmark (Conservative, Braintree)

I have to agree with everything that my hon. Friend is saying about some of the causes. Does he agree that another major cause was that many of the directors of these banks did not understand where some of the hot shots on the derivative desks were making the money? The derivatives they were trading were very complex and highly leveraged. The question here is how we legislate to ensure that directors understand where their institutions are making their money and what the risks associated with those assets are.

Peter Viggers (Conservative, Gosport)

Indeed. My hon. Friend makes a very good point. I recall being called in by the then Prime Minister Margaret Thatcher, who told the assembled junior Ministers that we would be faced with a number of complex situations. Quite often it was difficult to understand the nature of the complexity of the issues that were being put to us. I remember her saying with a very firm and direct gaze, “Never do something you do not fully understand.” That is exactly what happened in the secondary banking crisis. There were people in senior positions in banks who did not fully understand the nature of the complicated instruments that they were acquiring. They saw those very clever hot-shot people dealing in these assets. They saw that fees were involved. They saw that it was very profitable and they allowed the deals to go through.

There is an exact parallel here with Lloyd’s of London. I remember it very well. One Lloyd’s underwriter would nod through risks that he did not fully understand. In the trade he was known as the nodding donkey. Anyone wanting to offload a risk could go to him and he would agree because he was making a great deal of money out of trading in assets that he did not fully understand. There is a close parallel. I could go into considerable detail on this. It took up a great deal of my time in the 1990s, but the parallels between the Lloyd’s spiral then and the banking spiral in the last year or two is very close.

Brooks Newmark (Conservative, Braintree)

There is one other point to make. People at Lloyd’s felt that they could effectively pass the sardines continually around and that everybody would keep making money. It is analogous to what has gone on in the last 10 years and the theory that it was the end of economic history; we had ended this era of boom and bust and we could manage growth for ever. Perhaps this is the hubris that we have found—I do not mean to be too political here—with the current Government’s thinking that they could control events and control cycles. But at the end of the day it is difficult to control cycles. Therefore the Bill needs to address a little bit more how we manage our way through difficult times, particularly economic cycles. We have seen today that we have not ended the era of boom and bust.

Peter Viggers (Conservative, Gosport)

I very much respect all the points that my hon. Friend makes. He is one of the Members of Parliament who, in a previous incarnation, dealt with very large amounts of money. He understands large sums with lots of noughts on the end, which are difficult to grasp if one has not been involved in banking and international financing matters.

There are close parallels between the Lloyd’s situation of the 1990s and the banking situation that has developed in the last year or so. What lessons can we learn? I have made the points before and it is a matter of regret to me that despite the fact that I have talked to journalists from the Financial Times, made speeches on the Floor of the House and raised the issue with the Minister, the points that I am about to make have not been fully understood and comprehended.

What did Lloyd’s do? How did it face up to that very difficult situation? Faced with a spiral of risks, which were not fully understood, that had been undertaken by a range of bodies, Lloyd’s separated the toxic assets—the uncertain assets—from the viable, continuing business. That is what the banks should be attempting. They should be carrying out a much more scrupulous, careful and determined analysis of their assets and should be separating out the viable, continuing business. All the banks and building societies that we have been talking about have very sound businesses and assets. The accountants and others need to identify the parts that are definitely, provably sound and then separate them from the assets that are not definitely, provably sound. Of course, not all of those assets will be defective and useless; many will be valuable. When I talk about toxic assets or doubtful assets, I am not talking about worthless assets, but those with a value that cannot be completely proven.

Lloyd’s separated the uncertain assets and moved them into a new vehicle, which was called Equitas. If we were to follow that plan in the current banking situation, Smith bank Ltd would identify the proven valid assets, which would stay in the parent company, but all the uncertain assets would be relegated to a subsidiary—for the sake of simplicity, let us call it Smith Toxic bank Ltd. Smith bank Ltd owns Smith Toxic bank Ltd, which owns the uncertain assets. There are two key points: first, it is crucial that new money—taxpayers’ money, investors’ money and shareholders’ money subscribed by way of rights issue or preference shares—does not go into the old, mixed up Smith bank Ltd, which includes toxic assets, but into the new Smith bank Ltd, the parent company, which only has assets that are known to be sound.

One does not invest new money in a body that has assets of uncertain value, which is why I think that the Hank Paulson plan is fundamentally flawed, although I am not claiming to know more about banking than Mr. Paulson. It is flawed because it involved putting the $700 billion of new money into mixed bodies that included the toxic or uncertain value assets, rather than putting it into proven, sound top companies.

Peter Bone (Conservative, Wellingborough)

My hon. Friend is making a clear argument. The standard way that accountants would deal with the matter would be to provide fully against what we have called the doubtful, or toxic, assets. Those should have been written down and established before any investment decisions were made. Would that not have the same effect as my hon. Friend’s suggestion?

Peter Viggers (Conservative, Gosport)

I think that one needs to go further to identify and isolate the toxic assets. Drawing on the parallel of Lloyd’s of London, taking a top company and making allowances and provisions against its assets does not have the same decisive and incisive effect as separating off the assets. Identifying and isolating toxic assets is a central feature of the way ahead.

John Pugh (Liberal Democrat, Southport)

The hon. Gentleman puts forward a therapy for many banking ills. Does he consider that the procedure that he is mapping out would probably have been a better way of dealing with Northern Rock in the early days, when some of the sub-prime mortgages were held by Lehman Brothers and an agency of Northern Rock?

Peter Viggers (Conservative, Gosport)

Indeed. My point has general application. My central point is that new money should go into the purged body, so that shareholders and taxpayers know that they are investing in a sound body rather than a tainted or uncertain one.

There is some good news here. My second point is that if the tainted assets are identified and isolated—carefully identified and cross-checked against other tainted assets—it will be found that because the spiral has involved reinsurance or, in the case of CDOs in banking, reinvestment, in a ring, all the banks that undertook that insurance or investment made reservations against their investment, because they too were uncertain about the value of the asset. When all the tainted assets are pulled together and carefully cross-checked, the bank that undertook the collateralised debt obligation and then sold it on will be found to have made reservations against the CDO, as did the second, third and fourth banks and so on, perhaps in a multiple ring. There will have been a duplication of reserves in the spiral, and therefore the risk and the potential loss will not be quite as great as had been thought. That is the good news.

I urge that there be much closer analysis and breakdown of risk, that investment go into the purged top body and not into the mixed body, and that an analysis of the toxic assets be undertaken, perhaps by a different body. If Smith bank toxic assets and Jones bank toxic assets are pulled together and carefully identified, the lesson of Equitas is that there will be duplication and the risk will not be as great as originally thought. That is exactly what the sage of Omaha has discovered; his American company has invested in Equitas, demonstrating that the value of the loss was not as great as it should have been.

I have seen some references to the point that I am making. For instance, last week a former Japanese Finance Minister made an important speech, urging that there be closer analysis of the risks that banks have undertaken and more careful identification of the toxicity of the assets. I return to my central point, which is that I am not satisfied that the authorities—the Bank of England, the Treasury or the Financial Services Authority—have done enough to ensure that banks undertake as scrupulous and detailed an analysis of their prospective losses as they should.

Brooks Newmark (Conservative, Braintree)

I agree that the Paulson plan was flawed, in that it effectively asked taxpayers to stump up for all the bad assets. My hon. Friend’s solution is to try to separate off the bad assets—effectively creating a good bank and a bad bank—but he will find that many assets defined as toxic are not really. They are assets that are effectively under water compared with when particular individuals took out loans. These houses still have a value and over time these particular assets will, with inflation, rise and no longer be toxic assets.

A weakness of some of the solutions that have come up is that there is no solution to deal with the front-end crisis, which is a super-decline in asset values, almost to an extent that the values of houses are lower than any rational market would say that they are. One needs to come up with a solution that gives confidence to people who are borrowing and to the housing market, so that over time many of these so-called toxic assets effectively reflate their way out of their toxicity.

Peter Viggers (Conservative, Gosport)

Indeed. Using the word toxic is shorthand, which is why I did expand and say uncertainty, because uncertainty derives from not knowing how other people will value the assets. A book of mortgages will have a high value if people are confident in property prices but if they are not confident the value is doubtful and becomes “toxic”. We need to restore confidence. If one is drowning and wants to restore confidence, one has to get a foot on the bottom of the swimming pool. It is no use just splashing around. We have to find a firm, clear point of certainty, which in my opinion is to have assets that are certified as valid and sound. That is where new money should go, not into the mixed body.

I am grateful to the Minister for his attention. I am concerned about this point. I hope that more can be done to satisfy me that the point has been grasped and that the Government are working in this way.

Peter Bone (Conservative, Wellingborough)

I am pleased to follow my hon. Friend the Member for Gosport, who made an important case and highlighted the problems in clauses that we shall be discussing.

My hon. Friend described the problem of what we have seen in the banking sector as a spiral. The accountants’ reaction to this is that all these debts are toxic. It is an unfortunate word because it really means doubtful value of assets. They might not be toxic. What has happened is a collapse in the market for those assets. As a chartered accountant, my reaction is to ask why we do not write those things down to their lowest possible value. That is the problem. If they are written down to where they are at the moment, there is a collapse in the asset base of the individual banks, which then has to be responded to by stuffing in capital through investments in shares and preference shares, which is the way that this crisis has been handled. I am interested in the idea of moving these debts out of the banks and putting them into separate subsidiaries. That is an interesting proposal because it then produces a good bank and a bad bank but the bad bank might not actually be a bad bank. That is one solution.

Mark Todd (Labour, South Derbyshire)

If the hon. Gentleman has studied the Scandinavian banking crisis, he will know that the establishment of the bad bank there did eventually deliver a rather better outcome than had been anticipated because, as he says, they were not assets without value; they were simply assets for which it was not possible to determine an appropriate market value at that time, which had led to substantial writedowns. So there is merit in a bad bank option.

Peter Bone (Conservative, Wellingborough)

I am grateful for the hon. Gentleman’s intervention. I do think that we should be looking at that.

The other solution is to take a more realistic value of the provision made against the assets. Instead of writing them down significantly, they should be written down to a realistic value, as we heard Angela Knight argue in oral evidence. If that is done, the requirement for the capital to be injected into the bank is by no means so great.

I am also concerned that the Bill does not address the speed at which the Government have put in, or propose to put in, extraordinary amounts of money without really knowing the value of the banks. It is extraordinary that banks that could make billions year after year can overnight seem to become virtually worthless so that, without billions of pounds of investment by the Government, they would sink. We have already seen in today’s media that the proposed injection into Lloyds bank of huge amounts of preference money by the Government is now being said by Lloyds to be unnecessary because it will have repaid it all within a year. I question whether we are looking at the real problems or reacting to the crisis as we perceive it at the moment.

John Pugh (Liberal Democrat, Southport)

I do not know whether the hon. Gentleman shares my conceptual confusion. I listened carefully to what the hon. Member for Gosport said about differentiating toxic and non-toxic assets and what the hon. Member for Wellingborough said about how the toxicity of assets could change. The hon. Member for Gosport then redefined toxic and non-toxic in terms of certainty and uncertainty, but what is toxic or non-toxic then itself appears to be uncertain. I wonder whether we ought to continue to use the term “toxic”, given that it is largely a metaphor and has no real resonance in economic science.

Peter Bone (Conservative, Wellingborough)

The hon. Gentleman makes my point. The word “toxic” is trundled out in every news broadcast as though it means something, but it does not mean anything. It is the actual value of an asset that we cannot be sure of, and I think that we have got the approach wrong on that. My hon. Friend the Member for Gosport suggested a solution that really highlights the issue. The bad bank is nowhere near as bad as it looks, because those assets have been provided against time and again by different banks, so it is only really the first set of debts, where the first loans are in doubt and part of them will be valuable anyway, that needs to be provided against. I am not sure that the spiral of debt, which has led to a spiral of provision against the value, is necessarily the right way forward.

Brooks Newmark (Conservative, Braintree)

My hon. Friend has made several excellent points, and it might be instructive, not only for him, but for my hon. Friend the Member for Gosport, and perhaps even for the Minister, to have a look at a new document that has come out today from the Centre for Policy Studies called “From Boom to Bust: a plain guide to the causes and implications of the banking crisis” by Mr. Howard Flight. Reading his analysis might be a helpful guide to the Minister in coming up with some robust solutions to the current crisis.

Peter Bone (Conservative, Wellingborough)

I thank my hon. Friend for his intervention. I have not had a chance to read that document, but I am sure it would be worth reading, because Mr. Flight is a superb author.

In conclusion, I feel that we should avoid using the word “toxic” because it is misleading. We just need to look at the basics of what a company is and what its value is. The banks cannot have gone from being the soundest investment one could possibly have, making billions of pounds each year, to having such colossal writedowns overnight. That just does not make common sense.

Ian Pearson (Labour, Dudley South)

Perhaps I could begin by responding to the comments by the hon. Member for Gosport and then move on to the issues regarding Landsbanki, safeguards, the code and consultation.

I accept the broad thrust of the analysis by the hon. Member for Gosport: that the origins of the global financial crisis were in the sub-prime market in the United States and that there was insufficient understanding of the impact of collateralised debt obligations on the whole market system. I do not particularly like to use the term “toxic assets” either. However, in this case we are talking about impaired assets in some shape or form.

The hon. Member for Gosport sees close parallels with Lloyd’s. There are some parallels, but there are also different circumstances. In the case of Lloyd’s and the reinsurance market some years ago, the company got into significant difficulties but it dealt with them. Banks or building societies may get into difficulties and they will manage them themselves. They will adopt a number of strategies, whether that is writing down the assets or isolating and separating out bad and doubtful debts. I do not think that there was a systemic risk to the global financial system in the case of Lloyd’s, as there has been as a result of the problems in the sub-prime market. But that is not to say that the hon. Gentleman does not make a number of valid points about these areas.

The hon. Member for Wellingborough mentioned the accounting treatment in this area. He will be aware of changes that were announced a couple of weeks ago in how the mark-to-market rules are to be interpreted in distressed economic conditions. That has been a beneficial clarification. The Government were still right to take the action that they did on liquidity, recapitalisation and providing debt guarantees to stimulate inter-bank lending. It is important to recognise that action needed to be taken on all three fronts because of the financial situation that we found ourselves in.

Peter Viggers (Conservative, Gosport)

I would submit that the situation at Lloyd’s and the present situation are very comparable. When the Minister said that the Lloyd’s case would not have led to the collapse of the financial markets, he described Lloyd’s as a company. Lloyd’s is not a company. It is an unincorporated structure. The people backing Lloyd’s at that time were 30,000 of some of the richest people in the United Kingdom, whose names were put forward to become names at Lloyd’s. If Lloyd’s had failed it might well have led to the bankruptcy of some 30,000 leading citizens and would have had a devastating effect on the City of London and on financial markets generally. The parallel is closer than his remarks indicate.

Ian Pearson (Labour, Dudley South)

I agree of course with the hon. Gentleman’s statement about the legal status of Lloyd’s. I was trying to draw a distinction between that and the problems that banks and building societies might face in the future.

Peter Bone (Conservative, Wellingborough)

I should be grateful for the Minister’s opinion. He talks about liquidity, which obviously needed to be put into the banking system, and bank guarantees, which I also understand, but I query the third element—the capital. If one has written these doubtful assets down to a level that is far less then they are worth, one is putting in billions of extra capital that would not be necessary if one had the right valuation in the first place.

Ian Pearson (Labour, Dudley South)

The hon. Gentleman is clearly right that in distressed market conditions assets get written down. In the case of banks that would affect their tier 1 capital ratios—hence the need for recapitalisation. Obviously we have gone through completely exceptional circumstances over the last couple of months, which is why there have been substantial international discussions, and why we took the action that we did across three fronts—liquidity, recapitalisation and debt guarantees—to get the inter-bank lending market moving. It is why there has been general consensus, as a result of those international discussions, that this is the right approach, and other countries have followed our lead. However, that does not neglect the need for banks and building societies to take action to deal with their own situations. The hon. Member for Gosport is completely right: hiving down the impaired assets part of an institution to a subsidiary company can be an effective strategy, and some institutions have done that in the past 12 months.

Brooks Newmark (Conservative, Braintree)

Did the Government consider converting debts such as bondholders into equity, as a way of right-sizing the impaired capital structures of those banks? That would give the balance sheet a sensible capital structure, as opposed to simply infusing taxpayers’ money to right-size the balance sheet, which would leave impaired debt in place. I mean junior debt not senior debt—bondholders, for example. There are many bondholders in all those banks, and they could easily have been forced to convert their debt into equity.

Ian Pearson (Labour, Dudley South)

We had detailed discussions with the banks on a wide range of issues concerning their financial position. We believe that we took the right course of action, in conjunction with the banks, to help to ensure stability in the financial markets.

Mark Todd (Labour, South Derbyshire)

One of the difficulties with using the bad-bank option as a relatively rapid response to a crisis is that it requires the unpicking of the asset basis of the various businesses that have been handled differentially, because of the different approaches to writedown that banks have taken in short time frames. The Scandinavian model was facilitated by almost the entire Scandinavian banking system ending up in public sector hands, which meant that the separation of assets into a bad bank could be compelled through one coherent ownership model. That is not the case in the UK.

Ian Pearson (Labour, Dudley South)

That is a helpful clarification for the Committee, but I repeat that there is nothing to stop individual banks putting assets into subsidiaries at the moment. It is a perfectly permissible approach. We will discuss good banks, bad banks and partial transfers later, but the point emphasises the importance of the safeguard provisions. I shall speak broadly about them in a moment, and we will come back to them under clauses 42 and 43.

Mark Hoban (Conservative, Fareham)

May I take the Minister back to his comments on capitalisation and the writedown of asset values? Is it his view that the Government’s contribution to the recapitalisation of banks—either subscribed for by private shareholders or underwritten by the Government—is sufficient to cover historical writedowns only, or has some idea of future levels of writedown on both mortgage-backed securities and corporate debt been factored in?

Ian Pearson (Labour, Dudley South)

I do not want to respond directly, but I will say that the agreement that the Government have reached with the banks has been designed to ensure that the banks are able to meet their tier 1 capital ratios. The overriding objective of the Government’s actions has been to ensure confidence and stability in the banking system.

Mark Todd (Labour, South Derbyshire)

The Treasury Committee queried an aspect of this yesterday. It was made reasonably clear that the FSA and the banks had modelled requirements according to a variety of circumstances, which would have included a substantial further loss in their asset base before determining the capital injection requirement that the Government have subsequently offered.

Ian Pearson (Labour, Dudley South)

I thank my hon. Friend for that comment. I understand that the Chancellor wrote to the Chairman of the Treasury Committee providing a significant amount of detail regarding the announcements that were made in the House on 8 and 13 October and that that is publicly available.

I move on to the point about Landsbanki raised by the hon. Member for Fareham. We can deal with it in more detail in clause 2, if it is felt necessary. We believe it right to put in place arrangements to ensure that retail depositors receive their money in full and we continue to work with the Icelandic authorities to ensure fair treatment for UK depositors and creditors. There clearly is a difference, which we discussed earlier, between subsidiaries of an Icelandic bank, which are regulated by the FSA, and branches, which are regulated by the home country authority. The Bill does not in general allow the authorities to take control of branches of European economic area banks in line with our obligations under Community law. There are clear EU law obligations that we need to apply.

The Bill differs from the Banking (Special Provisions) Act 2008 specifically with regard to new tools to deal with failing banks, such as the proposals on bridge banks, and the two new insolvency procedures—the bank insolvency procedure for fast payouts to depositors and the bank administration procedure to make partial transfers effective. There are other differences with regard to preconditions, framework powers and compensation. It might be helpful if I circulated to the Committee a brief summary of the differences between the Bill and the 2008 Act. We are able in the Bill to provide a permanent framework to refine and develop the powers in the Banking (Special Provisions) Act. In some cases those powers are very broad, and there was significant stakeholder concern about their broad nature and the fact that there is not the legal certainty that hon. Members rightly want. That is why the safeguard provisions, and others that we will come on to discuss, refine the powers in the Act.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for his offer to circulate a document distinguishing what we have in the Bill and what is in the 2008 Act. Some elements of the Financial Services and Markets Act 2000 are to do with transfers of property too. As the Minister is being so helpful, would it also be possible to circulate a summary of any developments and changes regarding the Financial Services and Markets Act as well?

Ian Pearson (Labour, Dudley South)

I will certainly look to do that as speedily as possible.

Mark Hoban (Conservative, Fareham)

Before the Minister moves on, I should like to return to the comparison between the 2008 Act and the Banking Bill. Clearly the 2008 Act’s powers have been used to bring about change in a number of institutions—we have talked about Bradford & Bingley—but how would those circumstances have been handled if the wide-ranging powers in the Banking Bill had been available to the Government? Knowing that will help us to understand how the Government will apply the powers in practice in a context with which we are familiar.

Ian Pearson (Labour, Dudley South)

It may help if I clarify those points directly. A Bradford & Bingley-type resolution is possible under the Bill, because clause 2 permits the transfer of banking to temporary public ownership via a share transfer. Clause 14 permits the partial transfer of the deposit book and branches, such as in the case of Santander. A similar result is also possible using direct partial transfer by the Bank of England to Abbey or any other private purchaser, or, alternatively, via a bridge bank. The exact resolution option used would depend on a wide range of detailed factors, but the options pursued in the Bradford & Bingley case are possible under the permanent regime if a similar situation arises in the future.

Mark Hoban (Conservative, Fareham)

That is very helpful, but can the Minister go further and elaborate—not necessarily now, but perhaps when we discuss the relevant clauses—on the factors that suggest one course of action rather than another? It will help to build a sense of how the powers will be used in practice if the Minister uses the same examples later on and says, “If this happens, we will use these powers for these reasons and if something different happens, we will use a different set of powers”.

Ian Pearson (Labour, Dudley South)

I shall see what is possible. The range of tools is an important feature of the regime and how the tools are used depends on the particular circumstances faced. With Kaupthing Edge, deposits were first transferred to a company owned by the Bank of England and then to ING Direct; under the Bill the same effect can be achieved in a variety of ways, as I have outlined with regard to Bradford & Bingley. I am happy to write to the Committee setting out the general differences between the Bill and the 2008 Act. If I can, I will give examples of how the same situations are still possible.

Finally, I want to respond to the comments made by the hon. Member for Fareham about the consultation process on the code. As I outlined in my initial remarks, on Thursday we intend to publish a consultation document on the safeguards and on the draft code received by the Committee last Thursday. I want to highlight the fact that the safeguards will be put in secondary legislation, which is what stakeholders have been asking of us. That obviously ensures that there will be proper parliamentary scrutiny in future.

As I indicated, I have already shared the draft code with the expert liaison group and I will ensure its continued involvement. However, given that we are publishing the draft code only on Thursday and there needs to be a consultation period, I cannot guarantee that we can have a further draft of the code by Report, because we will not have been able to get all the consultation responses. The assurance that I can give is that the real detail of the safeguards will be in secondary legislation. That will go through the parliamentary process, which will certainly ensure a level of scrutiny. Our intention is that consultation on the code will be finished and we will have the final version before the Bill completes its parliamentary passage. If there are any concerns about it there will be an opportunity for them to be expressed at a later date.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for that clarification of the process, but two questions arise. First, will the code to be published on Thursday be significantly different from the code that members of the Committee saw last Thursday? Secondly, the Minister will be aware of the concern about the possible gap between primary legislation being passed and secondary legislation being debated. What is his view about that gap? Will secondary legislation be in place around the time of Royal Assent, or will there be a longer delay? The longer the delay, the greater the uncertainty in the market about how effective those safeguards will be.

Ian Pearson (Labour, Dudley South)

First, my understanding is that the code is not substantially different from the draft that the Committee saw last Thursday. It has been seen by the expert liaison group at first-cut level. Undoubtedly there is potential for it to be modified through the consultation process by the expert liaison group and by others who will naturally have an interest in it. I completely appreciate what the hon. Gentleman says about the gap. I would like as small a gap as possible between the legislation coming into force and the secondary legislation being improved and that is certainly what we will endeavour to achieve. The consultation document that we are issuing this Thursday provides some draft legislation showing what the secondary legislation would look like. There will be an opportunity for its external scrutiny, and I hope that it will be in good shape so that we can implement it as soon as possible after the Bill receives Royal Assent.

Clause 2

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 87, in clause 2, page 2, line 28, at end insert—

‘( ) Where a stabilisation power is exercised in respect of a bank, it does not cease to be a bank for the purposes of this Part if it later loses the permission referred to in subsection (1).’.

This is a technical amendment, which makes it clear that the provisions of part 1 continue to apply to banks in respect of which stabilisation powers have been exercised, even should such banks lose their regulatory permission to accept deposits under the Financial Services and Markets Act 2000.

An example of where that scenario could be material is as follows: as we will discuss when we come to clause 57, the expression “residual bank” is used in subsection (1) of that clause to impose continuity obligations between a residual bank and a transferee. It is highly likely that a residual bank will have been placed in the new bank administration procedure, and in such circumstances the residual bank would no longer have a valid deposit-taking permission. The amendment would prevent the argument from being made that a company without a deposit-taking permission is not a bank, and hence not a residual bank within the meaning of clause 57(1).

John Pugh (Liberal Democrat, Southport)

I should like move to a wider point. There used to be a well honoured distinction between retail banking and investment banking, but that has now completely gone in legislation. May I probe the Minister a little? Has any thought been given by the Treasury to reinstituting such a distinction in terms of which regulations may apply to which type of institution? Over time such distinctions become almost meaningless, but that is part of the problem.

Roger Gale (Conservative, North Thanet)

Order. Before we go wider, the Minister made it plain, and it is clear, that this is a technical amendment. Ordinarily, I would be relaxed about having a broader debate, but it might help the Committee if we deal with the amendment and then have a stand part debate during which hon. Members may go wider. I think that is the appropriate way to proceed.

Ian Pearson (Labour, Dudley South)

I am happy to abide by your instruction on the matter, Mr. Gale. I have explained clearly that this is a narrow technical amendment that we believe to be necessary, and I hope that the Committee will support it.

John Pugh (Liberal Democrat, Southport)

I do not need to reiterate the remarks that I made before, but there is a strong feeling that we might need different regimes for different types of bank. If there is no capacity to differentiate types of bank in legislation, it is obviously another tool that is not in the toolbox. The legislation is clearly being introduced in response to an immediate crisis, but there must be far-thinking spirits in the Treasury who are considering what they can do to give long-term stability to the banking sector as a whole.

In America and the UK, there is some thought that some of the liberalisation that blurred distinctions between different types of bank was a mistake and part of the problem. Is the feeling in the Treasury that a bank, however it is defined, should simply have that sort of global meaning, or is there capacity to distinguish between types of bank in regulation and legislation?

Mark Hoban (Conservative, Fareham)

I do not normally get excited about the definition bit of a Bill, but I just want to push the Minster’s thinking on that point, partly to echo the comments of the hon. Member for Southport, because he highlighted an important distinction. Subsection 1 of the clause states that

“‘bank’ means a UK institution which has permission...to carry on the regulated activity of accepting deposits”.

However, some banks that do not accept deposits—investment banks, in effect—would fall outside the scope of part 1. Elsewhere in the Bill, we have already given the Government the power to provide financial assistance to what would be called, in the context of the amendment, non-banks and financial institutions that are not deposit-taking institutions. That was set out in clauses 214 and 215, which we debated last Thursday morning, so the Bill already envisages that the Treasury could bail out an investment bank, insurance company or investment manager. Investment banks make a major contribution not only to the economy, but to financial stability, so I am not clear why they are being excluded. It suggests that the entire bias of part 1 is to protect depositors, rather than looking at the broader perspective of maintaining financial stability, which is set out in the objectives under clause 4. I am a little concerned that the wholesale operations of banks will not necessarily be covered in part 1.

If one takes into account what happened with the collapse of Lehman Brothers in the US, one can certainly see that there has been a significant impact on the UK as people sought to unwind their trades, and hedge funds tried to work out their position. Hedge funds were examining whether their agreements were permitted, whether the transactions between Lehmans and its accounting partners would hold, whether client money counts, and a whole host of related issues. I would not want to say that it undermined financial stability, but it certainly slowed down the current working of the wholesale markets. I would have thought that some of the powers in part 1 might be of use if a wholesale bank were to face financial problems, and I am concerned that subsection 1 seems to exclude institutions that are commonly known as banks but that do not accept deposits from customers.

My second point is about subsection (3). I touched on it in the previous debate and the Minister flagged it up for more detailed discussion under clause 2. Subsection (3) defines a UK institution as one that

“is incorporated in, or formed under the law of any part of, the United Kingdom.”

The example that I used to probe the Minister on how far the regime goes the UK branch of the Icelandic bank Landsbanki. Interestingly, Landsbanki also had a subsidiary in the UK, which was dealt with differently from the branch. People—myself included—would say that although it was important for the Government to protect the interests of Landsbanki’s depositors in the UK, it was evident that the Government lacked the tools to look at the bank’s assets, which is why they had to use the Anti-terrorism, Crime and Security Act 2001 passed in the aftermath of 9/11.

How will the powers in the Bill affect a branch in the UK? Branches undertake significant banking activities, and the Financial Services Compensation Scheme website will list all deposit-takers that are branches of overseas banks. That will indicate how important the matter is. In a slightly different area of financial services, rules have been developed for businesses operating in the UK with headquarters overseas, to enable the branch arrangement to become more familiar. However, how Landsbanki was dealt with raises the broader question of how we manage the affairs of branches where there is financial collapse, which links to my point on investment banks. One investment bank that springs to mind—a major player in London—is a branch of its parent and is, therefore, not incorporated in the UK.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend makes an important point. In essence, the issue is that under the investment services directive, prudential regulation for passported institutions is performed by the home state regulator, not the host nation. At the moment, therefore, the FSA and the Bank of England do not have a role in regulating prudential supervision for such branches. It would be interesting to know what, if anything, is changed by the Bill.

Mark Hoban (Conservative, Fareham)

My hon. Friend makes an important point. There is a distinction between the conduct of business rules, which would cover a branch operating in the UK, and prudential supervision. We could end up with the curious situation of a financial services sector in the UK that had become so internationalised that although the FSA regulated the conduct of business, it could not say a great deal about prudential regulation because there was a series of branches. If branches are excluded from the Bill, the Government will have few tools with which to protect the UK financial system when its stability is threatened.

It is important that the Minister elaborates in his reply how the Bill affects those branches, and what other tools are available to safeguard the interests of depositors in branches. As the Landsbanki example demonstrates, there seems to be a lack of alternatives, other than the freezing order under the 2001 Act. I do not want to debate that—we did so last Monday in a Committee on Delegated Legislation—but it is a good example of the limitations of the Bill and why the Government need to make clear which tools in the Bill can and cannot be used in respect of a branch.

Ian Pearson (Labour, Dudley South)

Clause 2 sets out the definition of a bank for the purposes of the Bill. A bank is defined as a UK institution that has a regulatory permission granted by the FSA under the Financial Services and Markets Act 2000 to accept deposits. If such an institution gets into serious difficulties, the authorities will have the option of using the stabilisation powers of the special resolution regime set out in part 1 where that is justified in the public interest.

The definition of a bank does not include a building society or a credit union. They have their own particular legal characteristics and the provisions of the special resolution regime need to be modified accordingly. Clauses 71 to 75 set out how the special resolution regime is applied to building societies and clause 76 allows it to be extended to credit unions. The Treasury will also by order add to the exclusions from that definition of a bank, which may be necessary to refine further the precise scope of institutions that may be subject to the SRR and to take account of future developments.

Two key points were raised by hon. Members. First, I shall respond to the hon. Member for Southport’s point that the legislation does not differentiate types of bank. That is not true. The Bill clearly applies only to deposit-taking institutions. It does not apply to investment banks without deposit-taking permissions, which are completely different. I hope that makes the situation clearer.

John Pugh (Liberal Democrat, Southport)

I accept that and I am grateful for the clarification, but I think the Minister would accept that under subsection (1) it is a necessary condition that a bank takes deposits. A big bank may do lots of other things as well, so under the definition of a bank one might find banks that are straightforward, traditional banks such as the Co-operative Bank, and others where deposit-taking is a very small, almost incidental, aspect of their business. Their real money may be made elsewhere and they function in most respects as investment banks.

Ian Pearson (Labour, Dudley South)

I understand the point that the hon. Gentleman is making but we consulted widely on the point about investment banks, and it was clear that the Bill and the SRR could not apply to non-deposit takers. The Treasury is considering which steps to take in the case of other types of institution and we will consult more widely. There is clearly a significant issue.

Mark Hoban (Conservative, Fareham)

Can the Minister explain why it is not appropriate to apply these powers to investment banks?

Ian Pearson (Labour, Dudley South)

This is an area where we believe that further work is needed. All the consultation that has taken place to date has been on the basis of the Bill as it stands and to extend it would be a significant change. Extending the SRR to investment banks may help to protect financial stability if a failure were to occur but we believe such action would have a significant number of downsides. The risks of such an approach might include the fact that the tools might not be the most appropriate for non-deposit-taking financial institutions. The SRR, including the infrastructure, objectives, powers and some of the tools, has been designed with an emphasis on depositor protection as well as being part of financial stability. The cross-border nature of the largest and most systemically important non-deposit-taking institutions suggests that the national approach on its own might not be enough. That applies to some extent to any deposit-taking multinational but the issue is far more acute for investment banks.

Mark Hoban (Conservative, Fareham)

This almost falls into that great “Yes Minister” thing of being too difficult. We are a global financial centre and, yes, there is a range of multinational institutions based in the UK, some of which are deposit-takers, some of which are investment banks. One criticism of the previous arrangements was that there appeared to be no measures in place to deal with the collapse of Northern Rock. That had a detrimental impact on London’s relative standing among global financial centres. We are a global international centre, yet the Government have shied away from thinking through the consequences of the impact of the collapse of a multinational investment bank in the UK. The Government have missed an important opportunity to think that through and to recognise London’s pivotal role in international financial services.

Mr. Newmarkrose—

Roger Gale (Conservative, North Thanet)

Order.

Ian Pearson (Labour, Dudley South)

I give way to the hon. Member for Braintree.

Brooks Newmark (Conservative, Braintree)

I thank the Minister for giving way. My hon. Friend the Member for Fareham makes an important point. I am curious to know what representations the Minister has had from the investment banks, which are all based in the UK, and what feedback he has had about what the Government propose.

Ian Pearson (Labour, Dudley South)

There is widespread support for the measures in the Bill, particularly the definition in the clause. The Bill focuses on deposit-taking institutions. It is quite right for the Committee to point out that investment banks are in a different category. Most are not deposit-taking institutions and to that extent would not be covered by the Bill. As I have indicated there are potential downsides if we try to include investment banks in the Bill. It is an issue on which the Treasury is doing further work, together with the tripartite authorities. We want to ensure that we take all the action that is necessary to give people confidence that the overall financial system is in safe hands.

Colin Breed (Liberal Democrat, South East Cornwall)

We understand that. The aim is to protect depositors. However, there are wider issues, the widest or perhaps most appropriate of which is the fact that most of the problems for depositors have been caused not by the deposit-taking and normal banking business of those institutions, but by the very activities of aspects of the bank that are not included in these regulations. Therefore, there is a real case for considering how the regulations can be moved into the investment banking side and perhaps even for the real disaggregation of those activities so that they can be separately regulated.

Ian Pearson (Labour, Dudley South)

The hon. Gentleman makes a fair point and it is something that we will want to consider. Investment banks are represented on the liaison group. They agree that the SRR should focus on deposit-takers, but there is clearly an issue for the future, which we are considering.

The second point raised by the hon. Member for Fareham concerns our limitations with regard to branches. As I outlined in the earlier debate, we need to be clear that the SRR can apply only to UK-incorporated banks. Under European economic area law, prudential regulation of EEA branches is for the home state regulator who is responsible for taking the lead on resolving difficulties with EEA banks. The powers of the host state regulator are therefore limited. Even if we sought to take powers to apply the SRR to EEA branches, the UK authorities could act on those powers only in highly circumscribed ways. Many of the SRR powers—for example, share-transfer powers, which have been developed for use in relation to shares and securities as defined in UK law—would have to be completely redesigned to be applicable to EEA branches.

The approach that we have taken is consistent with the principles of home state regulation of EEA branches. However, the Committee should also note that the remit of the Financial Services Compensation Scheme extends to branches of banks from other EEA states, which have joined the top-up arrangements, as per the directive. Of course, the FSA works closely with other regulators within the EEA to resolve difficulties with EEA firms operating in the UK.

Our experience with the Icelandic branches has demonstrated the importance of ensuring that home state regulation is effective. We need to hold further discussions about that in international forums. A college of regulators has also been proposed, but we need to ensure that people putting money into a branch of a foreign bank feel sufficiently assured that their money is safe, and to ensure that it is made clear which authority is regulating a bank or building society when people are investing their money.

Mark Hoban (Conservative, Fareham)

The Minister has touched upon the distinction between branches regulated through home/host arrangements and UK-incorporated subsidiaries. More than anyone appreciated, the Landsbanki situation revealed the growing gap for consumers between branches and UK-incorporated businesses. Some measures in the Bill would enable a wholesale transfer, for example, of accounts from one bank to another, as happened with Bradford & Bingley. I am not clear from the Bill and from the Minister’s explanation whether that type of facility would have been available to the depositors of Landsbanki as a branch. I suspect that it would not have been, so depositors will have to understand that there are two levels of protection and that it will be much easier for them to get continuity of service and to have instant access to their money if a UK bank is in trouble, because the safeguards do not exist with foreign-owned branches. Icesave depositors could be waiting until the end of the month to get their money. How do the Government or the FSA intend to communicate the important differences between a UK-incorporated bank and a branch of a foreign bank?

Ian Pearson (Labour, Dudley South)

An important issue of investor awareness and information is being raised, which we have all suddenly become far more aware of over the past few months. It has always been the case that a person investing in the Isle of Man is investing in a separate tax jurisdiction with a separate regulatory regime. I do not think that the situation has been made as clear as possible to individual investors, whether they are investing in a branch of an Icelandic bank or in a UK subsidiary of an Icelandic bank. There needs to be greater clarification in the marketplace, which, I am sure, the Financial Services Authority, which regulates those matters, is addressing.

Peter Bone (Conservative, Wellingborough)

I am grateful to the Minister for accepting an intervention just before he finishes. From what he is saying, I understand that there will be a compulsion or a health warning on foreign subsidiaries in this country—it is a very good idea—which says, “Certain aspects of your investment are not protected by British regulations”. Is that what the Government are proposing?

Ian Pearson (Labour, Dudley South)

I certainly want to use that sort of language. Investors should be aware of the regulatory regime and the deposit protection measures that apply to any bank in which they consider putting their money. I hope we all accept that general principle. We need to ensure that there is clarity of information in the marketplace, which is perhaps not there to a sufficient extent at the moment.

Several hon. Membersrose—

Roger Gale (Conservative, North Thanet)

Order. The Minister has wound up the debate.

Clause 3

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 88, in clause 3, page 3, line 1, leave out from ‘assistance”’ to end of line 2 and insert

‘has the meaning given by section [“Financial assistance”].’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government new clause 9—“Financial assistance”.

Ian Pearson (Labour, Dudley South)

The purpose of the amendments is to provide the Government with the power to specify assistance that should or should not be included in the definition of financial assistance for the various purposes for which it is defined in the Bill, particularly as it is used in part 1. The term “financial assistance” appears throughout part 1. For example, it appears in relation to the trigger conditions for the special resolution regime and in relation to the valuation principles for the calculation of compensation.

Committee members will recall that the term also appears in part 7, as we have already discussed, to provide the necessary parliamentary authority for the Treasury to use public funds to provide financial assistance to financial institutions and

“in connection with, the provision of financial assistance to building societies.”

In all circumstances, the term includes giving guarantees, indemnities or any other kind of financial assistance, actual or contingent. The reason for moving the amendment is to recognise the fact that the Government can provide financial assistance to failing banks in a number of ways, and they may not wish some form of assistance to be treated as financial assistance for the purposes of all of the Banking Bill’s provisions.

Financial assistance is mentioned throughout this part of the Bill, but perhaps I might explain the purpose of the amendment by referring to two examples. First, in Clause 9(3), the provision of financial assistance for the purpose of resolving a threat to financial stability is defined as one of the conditions for taking a bank into temporary public sector ownership. However, it is not the Government’s intention that all forms of financial assistance to banks should mean that such a condition would be met, as that would provide a serious disincentive for banks to take advantage of other forms of financial assistance. In particular, the Government are thinking of the recent financial assistance that has been offered to the banking market as a whole, including the recapitalisation scheme and the credit guarantee scheme for banks to take up on commercial terms.

Another example can be found in clause 7, which requires the FSA to determine whether a failing bank remains in compliance with its threshold conditions. When assessing whether the threshold conditions continue to be met, it is likely that it will be appropriate for the FSA to consider the position of the firm without taking into account financial assistance provided to that firm on an exceptional basis. However, it may be appropriate for the FSA to take into account any financial assistance provided under a system-wide scheme—such as that provided under the recapitalisation scheme—when considering whether the firm still meets its threshold conditions. It is difficult to say now what forms of assistance will be excluded from the definition. To future-proof the Bill by providing for current and future schemes of financial assistance to be included or excluded as appropriate, the Government believe that it is prudent, therefore, to take a power to specify types of assistance that should and should not be counted as financial assistance. I hope that hon. Members will agree that the amendment is a sensible and prudent measure and I commend it to the Committee.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for clarifying the purpose of the amendment and new clause 9. Nevertheless, I want to question him further. I think that he was trying to draw a distinction between specific assistance to an institution and system-wide support. He cited the recapitalisation package, but that has been accepted by only a handful of banks, so the credit guarantee scheme is available only to those banks that signed up for it.

I shall broaden the matter out a little. Last week, the Bank of England published a consultation document on the types of financial assistance that it might provide to banks. On the whole, they are system-wide schemes. They include the operational facilities that it proposes using to replace the standing facilities; the statutory discount window facility that will enable banks to borrow, given security against a wide range of collateral at any time, the type of collateral reflecting the size of the drawing; and the possibility of permanent long-term repos against high-quality private sector securities. As far as I am aware, they are system-wide schemes. Do the Government believe that they would fall outside the definition of financial assistance and that they have no mind to accept new clause 9?

Ian Pearson (Labour, Dudley South)

On the recapitalisation scheme, the Government believe that assistance under it should not be of a type that would trigger certain provisions of the Bill—for instance, the provision for taking a bank into temporary public sector ownership. Nor should system-wide financial assistance, including the recapitalisation scheme, be treated as financial assistance for the purposes of the FSA’s assessment of whether the threshold conditions have been met.

The purpose of the recapitalisation scheme is to recapitalise banks and place them on a more secure financial footing. It would therefore be inappropriate if access to the scheme impacted on triggers for the use of the SRR powers. However, that does not mean that it will be excluded from the definition of financial assistance for all the purposes of the Bill. For instance, in some cases, access to the recapitalisation scheme may be relevant in determining compensation.

The special liquidity scheme has been mentioned. It does not fall within the definition of financial assistance, but it is not clear whether such system-wide assistance should be treated as financial assistance for the purposes of the trigger mechanisms in the Bill, including the determination by the FSA of whether a bank meets its threshold conditions.

Mark Hoban (Conservative, Fareham)

The Minister said that it is not at all clear whether things such as the special liquidity scheme should be treated as financial assistance. He will understand that those who are using a special liquidity scheme would like some clarity on whether it is classified as financial assistance under the Bill.

Ian Pearson (Labour, Dudley South)

Let me try to clarify the matter. The special liquidity scheme falls within the definition of financial assistance, but I said that it is not clear that such system-wide assistance should be treated as financial assistance for the purposes of the trigger mechanisms in the Bill, including the determination by the FSA of whether a bank meets its threshold conditions. We therefore need to exclude such assistance from certain provisions of the Bill. I hope that I have made matters clear.

Mark Hoban (Conservative, Fareham)

I am not entirely sure that the Minister has done so. It would be useful for the Committee to know in which sections it might be deemed to be financial assistance and in which it will not. My understanding is that the special liquidity scheme was designed to help banks through the current liquidity crisis. The Bank of England has made some proposals, but it would be helpful to know how it might develop its money market operations to improve liquidity in the market. What will be the precise interaction between those schemes and the Bill? That might well affect the extent to which banks take up the schemes. It also suggests that a bank that takes up a special liquidity scheme might find itself at risk under the Bill if the scheme is not excluded from the definition of financial assistance throughout.

Ian Pearson (Labour, Dudley South)

I hope not to create confusion on that point. I hope that I was clear in saying that the SLS does fall within the definition of financial assistance, but that its operation would clearly not be something that one would want to take account of when the FSA was determining the threshold conditions. We will need to exclude that from certain provisions of the Bill, but not all of them. It might help members of the Committee if I wrote to them to explain in more detail how we see amendment No.88 and new clause 9 operating in practice.

Mark Hoban (Conservative, Fareham)

I am grateful for the Minister’s proposal to write to us, and it would be helpful if he indicated in that letter the sections in which the SLS would and would not be treated as financial assistance.

Ian Pearson (Labour, Dudley South)

I will of course try to bring as much clarity as I can in that area, and I accept the point that some people will need to understand exactly how the regime will work.

Clause 4

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 77, in clause 4, page 3, line 19, at end insert

‘; and for the avoidance of doubt, this includes ensuring—

(i) continuity of service; and

(ii) unrestricted access to deposits.’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following: Amendment No. 74, in clause 4, page 3, line 19, at end insert—

‘(6A) Objective 3A is to protect and safeguard the value of the enterprise.’.

Amendment No. 78, in clause 4, page 3, line 20, at end insert

‘and to ensure that the expenditure of any public or private funds is done in an economically efficient manner.’.

Amendment No. 76, in clause 4, page 3, line 22, at end insert—

‘(8A) Objective 6 is to protect the interest of creditors.

(8B) Objective 7 is to avoid distorting competition amongst banks.’.

Amendment No. 79, in clause 4, page 3, line 24, at end add—

‘(10) In respect of Objective 7, competition law shall apply to a bank, whether it is wholly or partly owned or controlled by the Government, including a bank to which sections 9 and 12 apply.

(11) Where a bank is wholly or partly owned or controlled by the Government and where section 214 applies, the bank is prohibited from using its favourable position or Government support to its commercial advantage and thereby to prevent, restrict or distort competition in the market for financial services as a whole, or on a product by product basis.

(12) For the purposes of subsection (10) competition law includes the provisions of the Competition Act 1998 and the Enterprise Act 2002, and European Community law competition provisions.

(13) For the purposes of subsections (10) and (11) ownership or control shall be determined by reference to sections 26 and 29 of the Enterprise Act 2002 and by reference, where Community law applies, to the Council Regulation 130/2004 (the European Merger Regulations).’.

Clause stand part.

Mark Hoban (Conservative, Fareham)

The clause is an important element of the Bill because it sets out the objectives that will determine how the various stabilisation powers will be exercised. I thought that I would perhaps start with the clause stand part section of the debate and then move on to the various amendments, because that is probably the most helpful way of putting the amendments in context.

The clause lists the five objectives to be met through the special resolution regime. Subsection (9) makes it clear that those are set out in no particular order, but I think that since our debate about the types of institution to be covered by part 1, we have all had a feeling that one of the main thrusts is the protection of depositors, and in a moment I will deal with how I see that playing out. I will just comment on the objectives.

We considered the first objective, financial stability, at some length last Thursday, so I do not want to run through that debate again, and I suspect that you would not allow me to do so, Mr. Gale. I was taken by the definition given in the draft code of practice, because it gives an indication of the direction in which the Government are travelling. It is rather a pity that the Committee was not able to see the code of practice before our debate on Thursday, because I thought that one point in the definition went rather wider than that given by the Governor of the Bank of England and by Nigel Jenkinson, the executive director of financial stability at the Bank, in oral evidence.

In the code of practice, it is suggested that financial stability includes

“the efficient operation of financial services and markets for...capital-raising, risk transfer, and the facilitation of domestic and international commerce”.

That is quite a broad and helpful definition and I think that it is actually broader than the definition that was given when we discussed it last Thursday. However, I am not clear—this is one of the recurrent themes that has emerged throughout the debate about the objectives—what weight will be given to the individual objectives when looking at the operation of the special resolution regime.

One of the consequences of the way in which the Government used powers to freeze Landsbanki’s assets was that it affected the efficient operation of wholesale markets. It created uncertainty about how transactions would be closed out, and the Government responded to that uncertainty through their use of clarifications to licences under a separate clarificatory document. But the action created uncertainty in the market, prevented the efficient operation of the wholesale market, and acted as a barrier to international commerce. In seeking to protect depositors and, potentially, safeguard taxpayers’ interests, the Government undermined the efficient working of capital markets. Therefore, it would appear that in the context of the Government’s approach to Landsbanki—given the Minister’s remarks on clause 2, I appreciate that branches are excluded from the powers in this Bill; I am just using this as an example—objective 3, “to protect depositors”, and objective 4, “to protect public funds”, had higher priority than financial stability, or certainly that bit of the financial stability objective that relates to the efficient functioning of capital markets.

Although the clause states in subsection (9) that there is no priority, it would be helpful if the Minister could give us some feeling of the kind of circumstances that might arise and how the objectives fit into them. We do not know that at the moment.

The clause states that objective 2 is

“to protect and enhance public confidence in the stability of the banking systems of the United Kingdom.”

Public confidence has several dimensions, according to the code. It refers to the expectation that deposits will be repaid in accordance with the terms, that normal banking services will be continuously available, that perceived problems in one bank or building society will not extend to other banks, and that systems exist to protect the interests of depositors if a bank does suddenly fail.

The intention of the objective is to drive us towards the view that authorities will have regard for the need to act in a way that enhances rather than detracts from people’s confidence in the banking system, but I wonder to what extent the objective will be looked at in the context of the crisis. We have had a sustained period of financial instability, and there is a perceived systemic risk to the banking system. As a consequence, to use the Minister’s phrase in giving evidence to the Committee a fortnight ago, the Government will do what it takes to fix it. Clearly, what it takes in the context of a systemic crisis may well be very different from what it takes to fix the problems of a single bank that faces problems in isolation from the others.

For example, in the context of this crisis, we have a de facto 100 per cent. guarantee for retail deposits, as evidenced initially in respect of Northern Rock but now in connection with deposits with Icelandic banks that have not been transferred to ING Direct, but we know from our debate on the Financial Services Compensation Scheme and the amendments to the FSA’s rules that the deposit limit is £50,000.

My understanding is that if we were to look at the various powers that are available to the Government, in normal circumstances, less weight may be given to objective 2 than in the current circumstances, and in normal circumstances we would go back to a £50,000 limit rather than a 100 per cent. limit. It would be helpful if the Minister could explain how objective 2 would work in periods of financial instability such as we have now, and how important it would be if we were in more stable times.

Objective 3, which is intended to protect depositors, was largely covered in our debate on the Financial Services Compensation Scheme at the start of Committee about what role the FSCS can play in ensuring that there is a speedy pay-out to depositors. If consumers can access their funds quickly and speedily, that will give them confidence in the strength of the banking system.

Another way of protecting depositors is to transfer accounts to another bank. That could take place under the stabilisation options as part of the powers that are available. That is what happened with Bradford & Bingley. Over the weekend, the accounts were transferred from Bradford & Bingley to Abbey Santander and, as a consequence, the depositors at Bradford & Bingley had access to their money from Monday morning. They would not have noticed a difference in the system, because it was a seamless transfer, their accounts were not frozen and there were no problems about paying their bills, whereas those accounts that were not covered by that type of process—those of Kaupthing Singer & Friedlander that were not part of the Edge brand—are being guaranteed by the Government and will be subject to a pay-out through the Financial Services Compensation Scheme. People with such accounts will not have that same easy access to their money. From the debate last week about Landsbanki, we have seen that people with deposits in Icesave will not get access to their money probably until the end of this month. There is an issue about ensuring that the tools that we have facilitate easy access to depositors’ accounts. That is an important objective.

The Minister may want to correct this impression if he thinks it is erroneous, but it is clear from the debate so far that, if we were to consider ordering the objectives, objective 3, on the protection of depositors, would top the list. I would be interested to find out whether the Minister disagrees with that interpretation and under which circumstances it would not be the most important objective.

Ian Pearson (Labour, Dudley South)

The hon. Gentleman clearly understands the clause, including subsection (9), which states:

“The order in which the objectives are listed in this section is not significant; they are to be balanced as appropriate in each case.”

Yet he is trying to get the Government to indicate that certain areas are priorities; they are all priorities for us. We will want to make decisions depending on the circumstances of particular cases. We believe that we are discussing the right sorts of areas. I resist his view that one objective is more important than another; they need to be balanced.

Mark Hoban (Conservative, Fareham)

I accept that up to a point. However, this part of the Bill is limited to institutions that accept deposits, as we established clearly when we discussed clause 2. I have to say that the Bill points in a particular direction.

The Government’s priorities in dealing with the current financial crisis and with where particular institutions have been under threat have pushed towards objective 3 taking the lead in respect of how the crisis is to be resolved. Perhaps that is a presentational issue and if that is so I would accept that. However, there is a tension between the objectives and we need to understand how that tension would work out in practice. If the objectives rank equally, it would be helpful to understand where the trade-offs between them are, because at the moment I am not clear that there is necessarily a trade-off between objective 3 and the other objectives.

Peter Bone (Conservative, Wellingborough)

My hon. Friend is making an important point. Clearly, some of the objectives cannot be met at the same time. Is not the reality of the matter that when panic set in at No. 11 Downing street, when the crisis was in full flow, the Government’s objective was presentation? Whatever made the Government look best was the objective. That is not really the basis for good government. We need to know the different weighting of the objectives.

Mark Hoban (Conservative, Fareham)

My hon. Friend takes an uncharacteristically uncharitable view of the Government’s objectives on the matter. However, he makes a point. The thrust of the debate has been protecting depositors, and there are going to be tensions between the objectives. Notwithstanding subsection (9), I tempt the Minister to outline a scenario in which objective 3 would be subordinated to another objective, and to say where the trade-off is between it and other objectives. There could be a trade-off between objectives 3 and 4, because the Government could issue a 100 per cent. guarantee of deposits. That would protect depositors, but at a cost to the taxpayer. As we discussed in earlier debates, the taxpayer is likely to pick up the cost of guarantees on amounts of more than £50,000 in connection with some of the Icelandic banks. There is a tension between protecting taxpayers’ interests and protecting depositors. I am not being critical of the Government, but in those sorts of cases objective 3 comes before objective 4, not only in the sequence in the Bill but in producing an outcome.

It might be that that trade-off is not quite as clear in more stable times. The Government may decide that there is not a systemic risk to the financial system and therefore, for example, that they can give a lower priority to the protection of depositors through the Financial Services Compensation Scheme than they give at the moment. However, given the debate on this clause, a degree of transparency regarding the importance of the various objectives and how they will work in practice needs to emerge. This is one of the key clauses in the Bill, and such transparency will help people to understand how the special resolution regime will work in practice.

While we are on objective 3, I should like to speak to amendment No. 77, which would add, at the end of line 19, the words

“and for the avoidance of doubt, this includes ensuring...continuity of service; and...unrestricted access to deposits”.

As my remarks have indicated, depositors’ preference would be the ability to be transferred seamlessly from bank A to bank B when there is a financial crisis, rather than having to make a claim through the FSCS. The amendment would emphasise that that is the best way to achieve the right outcome for depositors. It is not the only way, because we have the FSCS, but for the protection of depositors, it is important to be clear about our expectations when the tripartite authorities look at the various instruments to be exercised.

The great example of when such an approach worked was Bradford & Bingley. The approach was facilitated in a way that kept the payment system open so that people could process their transactions, ordinarily. There is a concern about the way in which one of the Icelandic banks was dealt with. The payment system in respect of that bank and its customers was frozen, thereby preventing people from making payments from their accounts. For a number of reasons, that is not a good position to be in—neither for the customers nor the bank. If customers cannot make a mortgage payment to a lender because their account is frozen, they will be in arrears. That is not good for the customer and creates a problem for them with their bank. If a bank suffering from that payment freeze is a mortgage bank, it will not be able to receive payments from its borrowers, which will create uncertainty about the value of the book of business. If there is a problem with consumers, the transfer and the way in which they access their bank accounts, the best thing to do is to ensure that there is a transfer from one bank to another, rather than face the consequences of their account being frozen and then be locked out of that account until the FSCS has managed to work its way through. That is why, through amendment No.77, we are trying to be more precise about what we would like to see: an optimal solution for how to protect depositors.

In the context of objective 4, which is “to protect public funds”, there is little explanation in either the code or the explanatory notes of how that objective will work in practice and in conjunction with the other objectives. We know, for example, that taxpayer funds are at risk at Northern Rock, but they are also potentially at risk at Bradford & Bingley. In addition, there is exposure on Landsbanki and the non-edge accounts of Kaupthing, where there is a taxpayer guarantee. We know that taxpayer funds have been used as part of a recapitalisation package for the banking sector, and last Thursday, in the context of clauses 214 and 215, we discussed how we can broaden the categories of the financial institutions that could receive financial support through the consolidated loans fund. Today, we have talked about broadening the definition of financial assistance.

In the context of objective 4, we need to understand from the Minister what value is attached to the use of taxpayers’ funds, and whether the Government will instinctively back a solution that has more limited recourse to public funds than one that would require greater recourse to public funds. Are there options under the various tools available under part 4 that require a small amount of the taxpayers’ fund to work, and which would therefore be the Government’s preference, even if they might compromise the stability of the financial system’s objective in objective 1? Again, we want to be able to understand the interplay between the two.

We will come back to objective 5 when we talk about later clauses. One of the key words in the code that we ought to dwell on for a moment is “proportionately”. The code says that

“the bank or building society itself, its shareholders or creditors or other third parties...have a right of control over”

their property.

One of the Bill’s features is that in certain circumstances, it gives the tripartite authorities the right to interfere with control over that property. The argument in the code is that

“The inclusion of this objective acknowledges the importance of acting proportionately in exercising these powers.”

I am not clear from the code what “proportionately” means and under what circumstances the Government think it appropriate to break those rights of control. The partial transfer mechanism does break that right of control, and some safeguards will be put in place over the exercise of that right. It would be helpful if the Minister threw some light on paragraph 13 of the code. As drafted, it does not go far enough in setting out the way in which this objective could be satisfied.

I want to move to amendments Nos. 74, 76 and 78. We now have an opportunity to discuss whether the list of objectives in clause 4 is complete and whether there are other objectives that we should bear in mind when exercising these powers where there are the stabilisation tools, and what sort of framework should be used to govern the choice of tools by the tripartite authorities. I do not want to steal the thunder of the hon. Member for South-East Cornwall by picking up on amendment No. 74, but, as he said from a sedentary position, it complements amendment No. 76, which inserts a new objective 6 to protect the interests of creditors.

This brings a different dimension to the debate about the objectives. We talked about them in the context of protecting depositors and the taxpayer. We touched a little on the context of objective 5, but other people have an interest in how the stabilisation tools are going to be used. There are creditors who will have an interest, not just trade creditors, but non-retail depositors. These are people who have money on deposit with a particular bank who are not covered by the FSCS and whose accounts will not be transferred across automatically in the way that we had envisaged in the context of objective 3.

It is worth just mentioning that objective 3 just talks about depositors. It is no more specific than that. It does not say retail. The Minister might argue that objective 3 covers wholesale as well as retail depositors. This is where some tension arises in the clause. One can envisage a situation where it is possible to achieve objectives 3 and 4 in the context of a particular crisis by transferring depositors across to a third party and then setting off a mortgage book to a separate third party through a fire sale. That fire sale may raise enough to cover the taxpayers’ exposure, and obviously the transfer deposits would meet the interests of the depositors, but would it be sufficient to cover the interests of other creditors? There is insufficient recognition in the clause of the interests of other creditors. Inserting objective 6 or objective 3A into the Bill would provide a dimension that is currently lacking.

The objective of the hon. Member for South-East Cornwall goes rather wider than mine in terms of the enterprise value. It will take into account the interests of shareholders. One of the things that we recognised in the debate is that shareholders should bear some of the costs of the failure of an institution. The question is whether having the more precise definition that we should aim to protect the interests of the creditors is a good way to ensure that the range of creditors in the institutions are protected.

One area that we need to think about is bondholders. There is some concern that when we look at the people who provide capital, we often do so in the context of shareholders and the equity element of the capital in a business. Clearly, many institutions do raise money through bond issues. That is where part of the concern comes regarding the adequacy of the safeguards under the Bill as to whether bondholders’ interests are adequately protected. Explicit reference through either proposed objective 3(a) or objective 6 would help ensure there is some recognition of the role that bondholders play in financing businesses and that their interests are not being disregarded in the pursuit of any of the other objectives.

Amendment No. 78 will, at the end of line 20, insert the words:

“and to ensure that the expenditure of any public or private funds is done in an economically efficient manner.”

That is to make sure that we look very carefully at the way taxpayers’ funds are being used to resolve financial problems at a particular institution. In examining the various tools that the Government are looking at, are we making sure that the best way to get value for our money is considered? If they are looking at financial support, perhaps through a guarantee of deposits, is that the most effective way of meeting the objectives of the Bill? Are there better, more effective ways they could achieve that?

Amendment No. 76 has two more objects. It protects the interests of creditors and inserts a new objective 7, which is to avoid distorting competition among banks. Amendment No. 79 amplifies the meaning of objective 7.

Peter Bone (Conservative, Wellingborough)

This is a very important issue. When the Government first suggested that Lloyds and HBOS could join together and tear up competition law, it was because no public money would be involved—it was going to be a private sector settlement. We have subsequently seen huge amounts of public money being put into this mega-bank. If the proposed objective—a very important one—were included, it would not allow that sort of thing to happen. It seems a very important addition to the objectives.

Mark Hoban (Conservative, Fareham)

Competition is important. It has cropped up twice in the current financial crisis, initially in the context of Northern Rock and also in the context of the merger of Lloyds and HBOS. Banks and building societies expressed concern at the time of the acquisition into public ownership of Northern Rock—which now feels more like nationalisation—that Northern Rock would be able to use its position of effectively having a sovereign guarantee, by virtue of being owned by the Government, to operate in a way which would undermine the competitive position of other institutions. Having the guarantee, it could market itself as being as safe as houses—perhaps not the best analogy, given the state of the house market. It was seen as a safe bet because the Government were standing behind it. Arrangements were put in place to ensure that Northern Rock did not exploit its competitive position vis-à -vis other lenders.

Colin Breed (Liberal Democrat, South East Cornwall)

Obviously, that is exactly what happened. At some stage Northern Rock had to cease taking certain moneys and products and also had to ensure it was complying with state aid rules which could be invoked. So, it is a real situation, which could easily arise again. It is almost axiomatic that an institution is placed at a competitive advantage if the Government become involves in that institution and stand behind it.

Mark Hoban (Conservative, Fareham)

Indeed. My recollection is that the start of the Northern Rock debate was about yield and return, rather than stability. When we had the second wave of financial instability in the aftermath of Lehmans and people were moving their deposits around, Northern Rock became particularly attractive, as did certain Irish banks because the Irish Government gave a 100 per cent. guarantee. There was a flight to safety rather than to yield—a change in approach. My hon. Friend the Member for Wellingborough was about to intervene—perhaps that covered his point. As I said, we will come on to HBOS in a second.

Peter Bone (Conservative, Wellingborough)

That was the gist of the argument that the hon. Member for South-East Cornwall made. If we have a series of objectives that have to be balanced in making a decision, is it not important that this objective is one of them? At the moment it would be excluded from consideration.

Mark Hoban (Conservative, Fareham)

That is why we were trying to tease out from the Minister why the Government have not included the objective of competition and distorting competition between banks. My hon. Friend raised the issue of Lloyds TSB and HBOS. When the deal was announced—prior to the Government’s recapitalisation package—both Houses agreed that the competition rules should be waived to facilitate the merger. Referral of the bid would have slowed the process, added to the uncertainty in the financial markets and created more instability.

Sally Keeble (Labour, Northampton North)

Does the hon. Gentleman accept that funds flowing to a certain organisation or people behaving in a certain way do not mean that the bank or institution concerned is taking advantage of its position? The Governor of the Bank of England made that point yesterday in the Treasury Committee. It is about public perception. The hon. Gentleman would have to frame an objective that dealt with the intent of the organisation in trying to exploit its position.

Mark Hoban (Conservative, Fareham)

The hon. Lady makes a good point, which goes back to the example of Northern Rock. Potential depositors saw Northern Rock as a safe place to put their money because it was under public control, not because of any deliberate action on behalf of its management. That is why proposed new subsection (11) in amendment No. 79 says that a

“bank is prohibited from using its favourable position or Government support to its commercial advantage and thereby to prevent, restrict or distort competition in the market for financial services as a whole, or on a product by product basis”.

That tries to limit the opportunities for a bank to use the fact that it is backed by the Government to engage in distorting competition. That issue was dealt with in Northern Rock by saying that there was a limit to how many of its products would appear in a best-buy table. In that respect, Northern Rock’s management were exploiting the bank’s position by using the Government guarantee. A more organic process would have been for consumers to decide that they wanted their money to go to a lower risk destination despite the yield offered.

Colin Breed (Liberal Democrat, South East Cornwall)

That just exposes yet another tension between the objectives, because if the bank could use its position in that way it might well minimise the impact on the taxpayer at a future stage, and significantly enhance the depositors’ situation. If we want to promote those objectives, the use of the bank’s position—the Government standing behind them—could be extremely advantageous in promoting other objectives.

Roger Gale (Conservative, North Thanet)

I remind the Committee that with this we are discussing the following: Amendment No. 74, in clause 4, page 3, line 19, at end insert—

‘(6A) Objective 3A is to protect and safeguard the value of the enterprise.’.

Amendment No. 78, in clause 4, page 3, line 20, at end insert—

‘and to ensure that the expenditure of any public or private funds is done in an economically efficient manner.’.

Amendment No. 76, in clause 4, page 3, line 22, at end insert—

‘(8A) Objective 6 is to protect the interest of creditors.

(8B) Objective 7 is to avoid distorting competition amongst banks.’.

Amendment No. 79, in clause 4, page 3, line 24, at end add—

‘(10) In respect of Objective 7, competition law shall apply to a bank, whether it is wholly or partly owned or controlled by the Government, including a bank to which sections 9 and 12 apply.

(11) Where a bank is wholly or partly owned or controlled by the Government and where section 214 applies, the bank is prohibited from using its favourable position or Government support to its commercial advantage and thereby to prevent, restrict or distort competition in the market for financial services as a whole, or on a product by product basis.

(12) For the purposes of subsection (10) competition law includes the provisions of the Competition Act 1998 and the Enterprise Act 2002, and European Community law competition provisions.

(13) For the purposes of subsections (10) and (11) ownership or control shall be determined by reference to sections 26 and 29 of the Enterprise Act 2002 and by reference, where Community law applies, to the Council Regulation 130/2004 (the European Merger Regulations).’.

Clause stand part.

Mark Hoban (Conservative, Fareham)

Welcome to the 10th sitting, Mr. Gale. I had just taken an intervention from the hon. Member for South-East Cornwall before we adjourned; we were discussing my proposal to include a competition objective in the Bill, so that the issue is recognised and used when determining how the tools—the stabilisation powers, the bank insolvency procedure and the bank administration procedure—are used. We must think about the powers, not only in the context of the five objectives, but also the potential further objective of avoiding the competitive impact that a bank subject to those powers could have.

The hon. Member for South-East Cornwall alluded to the possible tension between a competition objective and a bank’s ability to repay taxpayers’ funds quickly. We talked about that in the context of Northern Rock earlier. Restricting the ability of a bank that is subject to one of the powers to compete could delay the repayment of any financial assistance that that bank had received from the taxpayer, because it would not be in a position to attract new funds from retail depositors, for example. Conversely, if the restriction was on offering mortgages and lending, that might hasten its ability to repay taxpayers’ money, depending on the dynamic and the particular competitive effect that we want to deal with. As we discussed before lunch, there are tensions within the objectives in the Bill and within some of the proposed objectives, but it is important to understand the role that the objectives will have and how they will shape decisions that the tripartite authorities will make about the stabilisation powers.

Two points emerge from the code in relation to the objectives. Paragraph 17 of the draft code states:

“Following actions taken under the SRR, the Authorities must make public statements explaining (a) how they have acted with regard to the SRR objectives; and (b) how they have balanced the objectives against each other”—

which refers to the tension that we have been debating.

“The form such an explanation will take will depend on the circumstances.”

Can the Minister say how long we shall have to wait for such a statement after the powers have been used? Will it accompany the exercise of the powers or will it appear a couple of months later, after the powers have been exercised? Obviously there is an issue about timing and the nature of the information that can be disclosed by such an explanation. Paragraph 18 of the code points that out:

“It should be noted that it will not be possible to divulge certain information, for example information the release of which would threaten financial stability or the confidence of the banking system.”

Clearly the longer that is left, the more information could be received, but it will also mean that market participants will be in the dark about why the authorities have taken the steps that they have. The sooner the information is released the more difficult it is to give a full explanation. Does the Minister see that tension being resolved?

Does the Minister feel that the Treasury statements released in the aftermath of the FSA’s triggering the threshold conditions for Kaupthing and Heritable constitute a template for what we should expect under clause 17? I hope that the answer is no, because the statements did not clearly explain why the Government were taking those actions. I shall return to that point in a little more detail on clause 7, which deals with the threshold conditions.

Secondly, I want to understand the interaction between the objectives of the FSA under clause 4 and the Financial Services and Markets Act 2000. The subject is raised in the code. Paragraph 16 states:

“The sole exception to this rule relates to a decision taken by the FSA, under section 7 of the [Act] that the general conditions for use of the SRR have been met. This decision will be taken in the context of FSA’s objectives under the Financial Services and Markets Act 2000”.

I appreciate that we could cover the subject in more detail when debating clause 7, but there seems to be a carve-out later in the Bill saying that the objectives in clause 4 will not be applied to the exercise of the powers under clause 7. It would be helpful if the Minister were to elaborate on the interaction between the objectives of clause 4 and the 2000 Act, and specifically why they are carved out in clause 7.

One of the challenges in trying to understand the objectives and their application is the lack of transparency in the Bill, the explanatory notes and the code on how they will interact, and on how they will return the powers that could be used under parts 1, 2 and 3 of the code. The code is meant to be a safeguard on the exercise of power. I would have expected it to say rather more about the interaction of objectives.

The amendments are probing; we seek to understand the scope of the objectives, how they work together and how they relate to other aspects of the Bill, including references to the protection of creditors and compensation that are not reflected in clause 4. I want to know how those objectives will work, why they are limited to five and why they do not include competition and the protection of creditors and shareholders. We would be comfortable if the Minister were to give a fairly full explanation on those points. We look forward to his doing so.

Colin Breed (Liberal Democrat, South East Cornwall)

I wish to speak to amendment No. 74, which is in my name and that of my hon. Friend the Member for Southport. As I said this morning, it is complementary to the other amendments to this important clause. However, it is particular in adding to the third objective, that of protecting depositors. As the hon. Member for Fareham said, it should cover depositors in the widest sense; I assume that it means retail depositors, but it may include others.

The amendment would add the words

“to protect and safeguard the value of the enterprise.”

That is important when we come to the use of the special resolution and the stabilisation powers, which are set out in clause 4(2)(a) rather than in banking insolvency or administration procedures. At that stage, the bank may well be trading—indeed, it is likely to be trading—and will not necessarily be a failed bank. It might become a failed bank, but at that moment it will not be failed in the legal sense. Paragraph 9 of the draft code of practice reads:

“The term ‘protection of depositors’ refers specifically to the objective of protecting depositors from the effects of the failure of an institution”.

The actual moment of failure is an important aspect. When a bank has failed—perhaps gone into insolvency or administration—that is one thing, but before that, it is considered whether the bank is going to be a failure. Paragraph 9, about which I have some other comments to make, mentions

“the effects of the failure of an institution, as an end in itself”.

What concerns me is that it is likely, as we found out in Treasury Committee meetings on Northern Rock, that the FSA was aware of some of the problems with Northern Rock some months before it failed. Although the bank was considered in many respects to be an outlier in how it secured wholesale funds and so on, it was given time to try to put it right. The fact that it did not do so, or that the FSA did not insist that it do so, is another matter, but during that period the bank was not failed. It was trading, receiving deposits and entering into mortgage arrangements, and although it was perhaps on the list for close attention, at that moment in time it had not failed.

Mark Todd (Labour, South Derbyshire)

I think that the evidence of the internal audit was that it was not on any list for close attention. That was one of the major problems with Northern Rock: it was attended to all too little.

Colin Breed (Liberal Democrat, South East Cornwall)

It may have been attended to all too little, but the FSA had it on close watch from January. The report says quite clearly that it had been brought to the attention of the directors. It had been perceived as an outlier in terms of its chart and what it had done, and it was working with the FSA. Nevertheless, it does not matter whether it happened in January or in March. It was quite some time before the events of August, when it actually failed. Northern Rock was in intensive care, which may be the sort of situation in which we find ourselves if the special resolution regime is imposed in future. Banking organisations might begin to display all the potential signals that they are heading towards the rocks, but at that moment, they might not be.

It should be necessary to ensure that the overall value of the entity, which is often in large part goodwill rather than just tangible assets, is maximised for everyone during that period. Of course, once it goes into administration or insolvency, there are clear rules about how the administrator may act, but until that happens and while it is still under the stabilisation powers, it is important that consideration be given to maximising the value of the bank in its fullness. That is consistent with directors’ duties to promote the success of a company under section 172 of the Companies Act 2006. During the period of intensive care that may precede the failure of the bank, it is important that that principle is maintained. That is the purpose of the amendment.

I readily accept that this is a subjective judgment on timing, and timing is all important in such matters. While things can go on for quite a few weeks, matters often come to a head quickly and something happens. We may therefore go from an attempted stabilisation to a wholesale failure. It is important, however, that when we think about protecting the depositors, which I know is the main thrust of the legislation, we do not lose sight of other aspects of the bank. We know, for instance, that large pension funds are normally significant investors in banks.

Peter Bone (Conservative, Wellingborough)

The hon. Gentleman is making a good point. I wonder whether he has a view on the following. I understand from these objectives that the Government are not talking about the normal business relationship and the normal duty of directors to look after the whole of the company, but are saying that they will look after a specific group of creditors, that is, the depositors. Does the hon. Gentleman agree that that looks as though the Government are sinking?

Colin Breed (Liberal Democrat, South East Cornwall)

That certainly may be the impression. As I said, the main thrust of the legislation is to protect depositors. We should not lose sight of the fact that prior to actual failure—when there are clear rules for the way in which administrators may undertake their duties, and the relative classes of shareholders, creditors and so on are more easily established—if one still has a going concern, although it may be limping along, it is important to recognise that directors have other duties. There may well be an opportunity to rescue the situation before it goes into failure, and to have regard for maximisation. Once intervention happens, share prices can disappear and the value of the entity can evaporate overnight. It is important that we do not lose sight of the objective that while there is still a going concern, the creditors and shareholders should have at least some say in what is going on.

It would be helpful if the Minister gave us some basic assurances that in the period when stabilisation powers are being introduced and we do not have an actual failure, the Government have a view as to how that is to be handled. At the end of the day, it must be normally in everybody’s interest to try to save the institution and ensure in one way or another that it continues. To have a further contraction, through a merger or a takeover, is not likely to be in the interests of competition. To have a failing bank is not likely to be in the public interest or the economic interest; it is not likely to be in too many people’s interest. It is therefore important that in that period these powers are used, as much to try to ensure the continuation or the maximisation of the value of the whole, as to try to get to a situation where the company is split up, sent off, recast and such, and we have shareholders taking a real bath, creditors losing out, and everything else.

I would be grateful to the Minister if he addressed that period when a company is not insolvent, but is in intensive care, when the directors are doing all sorts of things to try to maintain their business, and if he said something about how these powers will be used in those circumstances.

Peter Viggers (Conservative, Gosport)

Mr. Gale, rising gives me the opportunity to apologise to you and to the Committee for my mobile phone going off. I thought that I understood the technology; I clearly do not.

My first point is not the most serious one I have ever made in Committee. Under clause 1(5), each of three bodies has a role in the operation of the special resolution regime, and they are listed as the Bank of England, the Treasury and the Financial Services Authority, whereas when we reach clause 4(3), the same three bodies are listed in a different order: the Treasury, the FSA and the Bank of England. The parliamentary draftsman never does anything for no purpose, and I would be curious to know the purpose of that particular difference in listing. The listing accepted in the rest of the Bill is the same as that in clause 4(3), so it must be clause 1(5) that is out of order. That is not my biggest point.

The more important points are that the Bill is predicated on supporting depositors, as the hon. Gentleman has just mentioned. Clause 2(1) talks about accepting deposits. Accepting deposits and the protection of depositors seem to be a prime purpose of the Bill, but there are other bodies and other ways that banking institutions can interface with public confidence.

Increasing confidence is not just a matter of protecting depositors. There have been some quite serious mismatches, which have caused the public and our constituents real concern. For instance, there was a mismatch between the treatment of individual depositors in the Icelandic associate banks in the Isle of Man, such as Kaupthing Singer & Friedlander, where individual depositors are not protected. Similarly there is a mismatch between the individuals who invested money by way of deposits through Icelandic banks and the institutions that invested money through Icelandic banks, such as councils and, as I mentioned earlier, a children’s hospice in my constituency.

There are other ways that banks can interface. If we wish to protect confidence, it is not just a matter of ensuring that deposits are fair. For instance, if a bank were involved in, for example, bills of lading, and the bills of lading failed, that would cause a loss of confidence. It would not just be a matter of losing deposits. A breakdown in money transmission would have a significant impact on confidence. A fault in the custodian system, whereby pension funds are held by banks, would cause a problem. If a bank failed in its capacity as either a trustee or a factor of money, that would cause a problem.

We have already noticed that investment banks are not covered by the rules on the protection of depositors. What would happen to investors in banks where there is no deposit because the interest is payable under sharia law and is a shared venture? What is the rule there? My questions come down to this. Which depositors are protected? Is it UK individuals only or is it every UK institution, as there has been a mismatch so far? Secondly, depositors in what? Is it just depositors in UK banks or depositors in UK institutions as well, or depositors in overseas institutions, including banks?

My question can be summed up as follows: if the object of the exercise is to protect confidence by ensuring that depositors are protected, then a more careful definition of exactly what institutions will carry this cover is needed. What institutions have the reputation that if a deposit through them is lost, the UK Government will stand behind them through the special scheme?

There is insufficient clarity here. Lawyers acting for banks and other financial institutions will be all over this Bill when it is an Act. They will look for the interstices in it and clever ways of getting protection, which we perhaps have not anticipated. I would be a little happier—we may come to this when we consider the draft code of practice—if the law had been cast in more general terms and enabled the Bank of England to do such things as may be necessary to protect deposit and other customers of banks. But that is perhaps for a later discussion.

Ian Pearson (Labour, Dudley South)

Lawyers have already been over the Bill. They continue to go over it in substantial detail. The amendments seek to add to the objectives for the special resolution regime set out in clause 4. Before dealing with them in turn, I should like to set out the thinking behind the objectives we have put forward in the Bill and explain why I think they are the right ones.

The clause sets out the special resolution objectives, which are intended to present in primary legislation the broad purpose of the measures we have put in place and the aims that the authorities must have regard to when exercising their powers under parts 1, 2 and 3. I hope that the hon. Member for Gosport welcomes the fact that we are doing this at a broad level.

We have consulted widely on these objectives and they have received strong support. While the objectives are not defined in the Bill, the code of practice, which the hon. Member for Fareham referred to and which was sent to members of the Committee on Thursday, provides further information on their meaning and effect.

I will help the Committee by summarising what the draft code says as to the meaning of these objectives, as this touches on some of the points that hon. Members have already made in the debate; they are also covered in the amendments. Members will, I hope, forgive me if much of the following quotes extensively from the code, but it is important that these definitions are made clear before the Committee today, in order to inform debate.

The term

“stability of the financial systems of the United Kingdom”,

used in objective 1, refers to the stable functioning of the systems and institutions—including payment and settlement infrastructure—supporting the efficient operation of financial services and markets for purposes including capital raising, risk transfer and the facilitation of domestic and international commerce. As the Committee discussed last Thursday, there are a number of possible definitions of what stability does, or could, mean in different contexts; this definition provides a clear explanation in terms of the stability of the UK financial systems.

The intention of this initial objective is first, to recognise the wider systemic risks posed by the potential, or actual, failure of any institution or group of institutions. Secondly, it requires the authorities to have regard to the likely systemic impacts of their actions, or non-actions, when implementing an SRR tool.

Mark Hoban (Conservative, Fareham)

The Minister referred, as I did, to last Thursday’s debate about financial stability. Does he not agree with me that the definition set out on financial stability in the code is likely to be the one by which people will judge the achievement of the effectiveness of clause 216? Will this in effect become the definition of financial stability? Should that not be recognised in clause 216, as well as in the code?

Ian Pearson (Labour, Dudley South)

For the reasons that I outlined last Thursday, it is right that we do not put a detailed definition of financial stability in the Bill. We believe that the right place to do that is in the code, which is why we provided that clarification in terms of our understanding of objective 1.

Objective 2, and the term

“public confidence in the stability of the banking systems”,

refers to the crucial role that public confidence has in maintaining the stable and efficient operation of financial services and markets. The confidence of the general public is of particular significance in maintaining stability in a banking system whereby it is important that banks’ deposit liabilities exceed the liquid assets that they hold at any one time.

Public confidence has a number of dimensions. For example, it refers to the expectation that deposits will be repaid on demand; normal banking services will be continuously available; problems—or perceived problems— in one bank or building society will not extend to other banks; and if a bank or building society does fail, systems exist to protect the interests of depositors.

The intention of the second objective is to ensure that the authorities have regard to the need to act so that a failing bank or building society will be resolved in a manner that enhances public confidence in the banking system as a whole.

The term “protect depositors” in objective 3 refers specifically to the objective of protecting depositors from the effects of the failure of an institution, as an end in itself. That objective goes beyond the need to ensure public confidence in the banking system, and recognises the important public policy objective of ensuring that depositors in a failed institution are adequately protected.

Under the Bill, such protection can be delivered in different ways, such as by facilitating fast payout, or account transfer, under the Financial Services Compensation Scheme to eligible depositors through the bank insolvency procedure, or facilitating continuity of banking services through the stabilisation options in the SRR.

Public policy concerns around effective depositor protection are particularly relevant in the case of retail depositors protected by the Financial Services Compensation Scheme. Protection of retail depositors is also likely to be conducive to realisation of a number of other objectives, such as protecting and enhancing public confidence in the banking system. However, the use of the SRR may also offer protection to other types of depositor, particularly where the SRR tool chosen may provide continuity of service to both retail and non-retail customers of a failing institution.

Mark Hoban (Conservative, Fareham)

May I pick up the comment made by my hon. Friend the Member for Gosport? I want to check that the Minister is right—or that what I take from what he says is right—that depositors as a term expands beyond retail depositors, to cover all depositors. Clearly, if the decision were taken to put a bank into administration, retail depositors would be covered by the FSCS but non-retail depositors would rank alongside other creditors in terms of distribution. They might argue that the choice of mechanism made by the authorities did not protect them while it did protect retail depositors. I wonder whether the use of the word depositor is not too widely drawn.

Ian Pearson (Labour, Dudley South)

The objective to protect depositors covers all depositors, retail and wholesale, but I would point out that the focus of the SRR will often be primarily on retail depositors eligible for compensation from the FSCS, as demonstrated by the bank insolvency procedure which is designed to speed up payout to this class of creditors. It is right that the objective covers both retail and wholesale depositors.

The term “protection of public funds” in objective 4 refers primarily to the protection of taxpayers’ interests in the effect of expenditure of public money. The intention of this fourth objective is to recognise the strong fiduciary duty of the authorities, in particular the Treasury, in taking decisions with implications for public funds.

The term in objective 5,

“to avoid interfering with property rights in contravention of a Convention right”

refers to the rights of property holders who might be affected by the use of the SRR. This can include the bank or building society itself, the shareholders, creditors or other third parties. Such persons may hold property in the failing bank or building society or have a right of control over such property, or both. The inclusion of this objective acknowledges the importance of acting proportionately in exercising these powers.

The hon. Member for Fareham asked in the early part of his contribution about the definition of proportionality in the code. This is an issue that has been considered repeatedly both in domestic and international case law. In broad terms, it means that property rights should be interfered with to the minimum extent necessary to achieve the public interest aims, albeit those aims may provide very powerful justifications for intervention.

This clause also notes that the objectives are to be balanced as appropriate in each case. Again, the hon. Member for Fareham invited me to speculate whether particular areas have priority. I want to make it clear that we need to look at these on a case-by-case basis. We have always been clear that our primary objectives are to protect depositors and financial stability, and stakeholders have supported these purposes. We have included other rights, such as protecting property rights, in acknowledgment of the potentially invasive nature of some of these tools. It is right that we judge our action on a case-by-case basis.

Peter Bone (Conservative, Wellingborough)

The Minister has been most helpful but is it not unfortunate that the Bill does not say that the primary purpose is those two objectives? The Minister has said it but the Bill does not say it.

Ian Pearson (Labour, Dudley South)

We have been clear that depositor protection and public confidence in the banking system are essential. When deciding to take action, it is right that the special resolution objectives should be as we have set out in clause 4. I refer hon. Members again to subsection (9), which says that

“they are to be balanced as appropriate in each case.”

Peter Bone (Conservative, Wellingborough)

Will the Minister give way?

Ian Pearson (Labour, Dudley South)

Prolonging the discussion will not particularly help in this case.

Peter Bone (Conservative, Wellingborough)

It would help me.

Ian Pearson (Labour, Dudley South)

We think that these are the right objectives. What is important is that we have the flexibility to look at the appropriate balance of such objectives on a case-by-case basis.

Peter Bone (Conservative, Wellingborough)

Will the Minister give way?

Ian Pearson (Labour, Dudley South)

Oh, go on then.

Peter Bone (Conservative, Wellingborough)

I am grateful for the gracious way in which the Minister gave way. Will he go away and think about the matter? Clearly, he is correct in what he says. However, that is not what the clause says. We cannot have all the objectives jumbled together; we have to have some primary ones. The Minister is right to say that the two primary objectives are financial stability and depositor protection, and that is all that needs to be said in the clause. I know that the wording will not be changed now, but perhaps the Government can go away and reflect on it.

Ian Pearson (Labour, Dudley South)

I do not want to go away and reflect on it, actually, because we considered the measure at some length before coming to the conclusion that these are the right objectives. Together the objectives capture the public interest that should be pursued in operating the special resolution regime, and are the most important factors to which the authorities should have regard when taking action under the SRR. That is why we believe that including the objectives in the Bill provides guidance to market participants and other stakeholders as to how the SRR powers will be used.

We believe that it is impossible to define the objectives exhaustively. The concepts at issue are too complex to be reduced to hard-edged statutory definitions. The applications of the objectives may well change over time. That is why we have the code of practice, to elaborate in more detail how the objectives are to be interpreted and applied. That was the point that I made to the hon. Member for Fareham earlier.

Let me now turn to the amendments that have been proposed on the objectives. I hope to reassure the Committee that the issues that have been raised are already appropriately dealt with in the Bill as it stands. I want to make it clear why I do not believe that we should amend clause 4 in the manner that has been proposed.

In discussion of the detailed definition of the SRR objectives as set out in the code of practice, let me explain why I believe that both the second and third objectives, as set out in the Bill, implicitly include the concepts of access to deposits and ensuring continuity of banking services. If there is any doubt regarding that, the code of practice, to which the authorities must also have regard, makes it explicitly clear. I do not believe that amendment No. 77 is necessary.

Amendment No. 74, tabled by the hon. Members for South-East Cornwall and for Southport, calls for a requirement

“to protect and safeguard the value of the enterprise”.

I presume that means the enterprise value of the failing bank. The enterprise value of a company is usually made up of a number of elements, including the market capitalisation of the bank. That is the market value of all its shares in issue in addition to the value of its debt financing and other liabilities. I do not believe that a core objective of the SRR should be to protect this measure of the value of a firm. When a failing bank enters the SRR, the stabilisation options in the Bill are deployed because the authorities believe that they are necessary in the public interest. At this point, it is the Government’s view that the wider public interests of financial stability, depositors’ interests and protection of public funds may well outweigh the commercial interests of the bank.

I want to reassure the hon. Member for South-East Cornwall that a number of specific features of the SRR will operate to safeguard and protect the value of the failing bank. The Bill is designed so that the stabilisation options of a transfer to a private sector purchaser, such as a transfer to a bridge bank or taking the bank into temporary public ownership, can be applied before the insolvency threshold has been reached. In turn, that helps to protect against the destruction of any residual value that the failing bank has upon entering insolvency. I think that that addresses the hon. Gentleman’s point.

I should also like to draw the attention of the hon. Member for South-East Cornwall to clause 53, which introduces the bank resolution fund. The fund, which is compulsory for a bridge bank but optional when taking a bank into temporary public ownership, is designed to ensure that the proceeds of any resolution, minus deductions necessary adequately to safeguard public funds, must flow back to the failing bank. If the Bank of England or the Treasury put in place a bank resolution fund, the resolution fund order may place a duty on the authorities to maximise the proceeds available for distribution, subject to meeting the special resolution and bridge bank governance objectives. I believe that that mechanism should also help to achieve the result that the hon. Gentleman is looking for. I therefore hope that he does not press the amendment to a Division.

Amendment No. 78, tabled by the hon. Member for Fareham, proposes that we state that the expenditure of public and private funds is done in an economically efficient manner. Of course I agree with the intention of the amendment, but again, I am not convinced of the argument to make it an objective of the special resolution regime. First, there are adequate general mechanisms to monitor and provide oversight of the use of public and private funds by the Government and other public bodies. In addition to the value-for-money and propriety analysis that the Government will undertake before providing financial assistance, there are external mechanisms to ensure that assistance is provided in an appropriate manner, for example through the work of the National Audit Office.

If the hon. Gentleman is referring to funds of the FSCS when he mentions private funds, I should say that we have put in place a number of provisions to ensure that they are used in an appropriate manner, when called on to fund the SRR, as in clause 157. I refer him in particular to the requirement that any resolution costs that the FSCS must contribute should be independently verified, and the core principle that the FSCS cannot contribute more than it would have had to pay out to insure the depositors had the bank entered insolvency.

I also do not agree that the objectives that the hon. Gentleman proposes in amendment No. 76 should be included in the Bill. The amendment proposes that the protection of creditors should be a separate SRR objective. Let me set out why I do not believe that that part of the amendment is necessary. First, as I have said, objective 5 operates to ensure that any interference with the rights of creditors must be in the public interest and proportionate. Secondly, there are in addition a number of specific features of the SRR that operate to protect non-depositor creditors, such as the protection of set-off and netting arrangements in the case of a partial transfer, which we will discuss in due course when we come to clause 43. Furthermore, I draw hon. Members’ attention to the compensation provisions that we have provided, particularly the possibility of compensation being payable to creditors under a third party compensation order. In relation to partial transfers, there is the additional safeguard, reflected in clause 55, of ensuring that no creditor would be worse off than in a whole-bank insolvency.

We can certainly agree that the interests of creditors need to be taken into account when determining whether the SRR should be deployed and that their interests need to be respected, but we do not think that it is appropriate to provide expressly for the protection of creditors as a separate objective from the protection of depositors. Creditors, to a much greater extent than retail depositors, can take a number of steps to protect themselves in the event of counterparty failure, including taking security and adopting set-off and netting arrangements. When creditors stand unsecured, they do so in the knowledge that that is the case, and having secured a suitable rate of return on the terms of their liability with the bank. None of that is the case with depositors. The Government have made it clear that the class of creditor that the measures focus on protecting is the depositor class, both as an end in itself, and because of the important role of depositor protection in financial stability.

Finally, I should like to turn to the important topic of competition law. I believe that the intention behind amendments Nos. 76 and 79, tabled by the hon. Member for Fareham, is to ensure that a bridge bank or a bank in temporary public ownership does not take commercial advantage of its favourable position in terms of Government support in a manner that distorts the market for financial services as a whole. He made that point clearly in his contribution.

Again, I reassure the hon. Gentleman that we have put measures in place to meet that intention. The first is the code of practice, the draft of which includes measures regarding the running of a bridge bank or a bank in temporary public ownership and guidance on running the bank on a conservative basis. Furthermore, both bridge banks and banks in temporary public ownership will continue to be regulated by the FSA in the same manner as other financial services providers. The Office of Fair Trading will continue to keep the relevant markets under review in order to protect the interests of UK consumers and the British economy. As the amendment addresses the running of bridge banks and banks in temporary public ownership rather than the general operation of the special resolution regime, I argue that the measures that I have set out meet his aim more appropriately.

The hon. Gentleman also probed the extent to which banks in receipt of financial assistance will be permitted to take advantage of that assistance in an anti-competitive manner. That is an important point. It is crucial that banks cannot use the receipt of financial assistance to obtain an inappropriate competitive advantage. I reassure him that firms in receipt of financial assistance will still be subject to the provisions of competition law and that the competition authorities will continue to have the powers to investigate any breaches. As I have said, the Office of Fair Trading will continue to keep the relevant markets under review in order to protect the interests of UK consumers and the British economy. Additional restrictions may also be imposed on those in receipt of financial assistance in order to comply with the rules on the provision of state aid.

Returning to the point about priorities, the hon. Member for Fareham made the Government’s argument for us when he pointed out that the weighting of the different objectives outlined in clause 4 may change in different times and contexts. He is absolutely right. It illustrates why we should not attempt to rank objectives in the Bill, despite the injunctions of some Opposition Members. To give one example, in cases where significant public financial assistance had been committed before the special resolution regime, objective 4 on the protection of public funds would be likely to increase in importance, but it is not possible or desirable to put into the Bill the sorts of trade-off that the hon. Member for Fareham discussed or to stipulate in advance what they might be.

The hon. Member for South-East Cornwall sought assurance that the aim is to preserve a viable entity. I confirm that that is exactly the case. Before the SRR operates, the objectives of the bank’s management and the FSA as its regulator will clearly be to run it as a going concern. Once the bank is in the SRR, subject to the objectives that we are debating, the authorities’ aim will be to preserve the business or part of it as a viable business entity. All along, pre-SRR, we want businesses to continue as going concerns. Once a business is in the SRR, the first point is to preserve all or some of its parts as viable business entities.

I hope that I have demonstrated that the SRR objectives in the Bill strike the right balance between being clear about our primary aims and the purpose of the SRR measures and protecting other important rights and interests. I also hope that my explanation of other measures in the Bill and the code of practice address the concerns raised in the amendments. I hope that that provides adequate reassurance that we have taken those important matters seriously, that hon. Members, who I think tabled the amendments in a probing spirit, will not press them and that we can agree that clause 4 should stand part of the Bill.

Mark Hoban (Conservative, Fareham)

I thank the Minister for his full reply to our debate on clause 4. Given his remarks, I want to reflect on a few points. We had an exchange during his speech about what was meant by “depositor”. I am still concerned that the Bill deals with depositors in a rather broad way. The explanatory notes do not clarify the position, so we are reliant on a non-binding code of practice for a clearer definition.

I do not want a local authority or charity depositor to look at the objectives and say that the Government had not protected them because they had been ranked alongside the window cleaner and the person who provides the stationery when it comes to the payout on administration for insolvency. I believe that we need greater clarity about the different levels of protection given to the different types of depositors in the various sectors. A retail depositor has a very different set of protections from a non-retail depositor. That does not come across, either in the Bill or in the explanatory notes, and it is not as clear as it could be in the code of practice. It is important to make it absolutely clear to depositors what protection they are likely to receive under the scheme.

There is a gap that the Government need to consider on the question of financial stability. The working definition used in the evidence session at the start of the process by the Bank’s executive director for financial stability, Nigel Jenkinson, was narrower than the definition in the code of practice. We could end up with the Bank believing that it was accountable for one thing in the context of how it operates, with the code of practice expressing financial stability in a wider fashion. The two should be more closely aligned, so that all the tripartite authorities know exactly what is meant by financial stability.

It was conceded on Thursday that this business should be covered by the Bill, but the Bank and the Treasury should be singing from the same hymn sheet. I am not sure that they are. That will add to the confusion over the respective roles of the Bank and other tripartite authorities and how financial stability is to be addressed under the Bill, particularly under part 1. More work needs to be done on that aspect.

The balance of objectives is dealt with in subsection (9); my hon. Friend the Member for Wellingborough debated it with the Minister, and I touched upon it in my remarks. One part of the challenge is that people will need to know how the objectives work together in different circumstances. One objective of the code—we will talk about it in our debates on clause 5—is to give some clarity and predictability. Clause 5(2)(a) is about how to achieve the special resolution objectives. We need a window in the code on how they interact at different times. I agree that they may vary; indeed, the code reflects on the fact that they may vary, depending on the time.

I drafted amendment No. 77 before I saw the draft code. Paragraph 10 of the code makes much clearer how depositors might be protected. Amendments Nos. 74 and 76 are on the value of the enterprise and the interests of the creditors respectively. I am not sure whether the safeguards identified by the Minister are sufficient to reassure creditors. The safeguards come across almost as a second-order priority, because they are to be dealt with in secondary legislation or in a different clause. The fact that they are not in clause 4 indicates that creditors’ rights are not as important, and the Government’s thinking on ensuring that value is left in the business for creditors does not seem as important as some of the other objectives in clause 4. I am not sure whether the Minister has addressed that point fully, and we might want to return to it later.

The Minister teased apart the issue of whether we are dealing with public or private money. I want to touch on the efficient use of private money, which we will probably deal with in more detail under clause 157 about the funding of the regime. There is a provision in the Bill to verify how the money is spent—like an audit. From my accountancy training, I know that an audit does not necessarily show that money has been spent well or efficiently.

Mr. Boneindicated assent.

Mark Hoban (Conservative, Fareham)

I expect my hon. Friend was both a client and an auditor at different stages of his career before he came to the House. An audit does not provide exactly the reassurance I seek in amendment No. 78. I accept the point about public money—that the NAO is there to provide an external check, and that before spending taxpayers’ money the Treasury will go through its own processes to determine whether that is the best way to resolve the crisis; however, the provision for independent verification of the use of the funds that the banking sector will provide to the FSCS, to meet some of the costs of resolution, does not necessarily go far enough.

On competition, I think that the Minister set out to reassure us that there are sufficient checks on an institution that has been subject to one of the stabilisation tools, to ensure that it does not act anti-competitively. During the debate on the code, I might touch on the meaning of “conservative” in the section dealing with temporary public ownership. The Minister has acknowledged the importance of ensuring that the right arrangements are in place so that banks in receipt of public financial assistance are not unfairly advantaged. It would be wrong to advantage banks that are seen to have failed, to the detriment of those that seem to manage their businesses successfully without recourse to public funds. On that basis, and with the reservation about creditors, I beg to ask leave to withdraw the amendment. I will not seek permission later to press any of the other amendments in the group to a vote.

Clause 5

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 81, in clause 5, page 3, line 35, at end insert—

‘(ca) how to determine whether the threshold conditions under section 41(1) of the Financial Services and Markets Act 2000 will be breached,’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following: Government amendment No. 89.

Amendment No. 80, in clause 5, page 4, line 3, leave out ‘have regard to the code’ and insert

‘comply with the code or publish an explanation of why they were unable to comply with the code in good time after their actions,’.

Clause 5 stand part.

Amendment No. 82, in clause 6, page 4, line 11, leave out ‘and’.

Amendment No. 83, in clause 6, page 4, line 14, at end insert ‘, and

(d) those persons whom it considers to have relevant knowledge of those matters.’.

Amendment No. 85, in clause 6, page 4, line 17, at end insert

‘only after complying with the requirements set out in subsection (1).’.

Amendment No. 84, in clause 6, page 4, line 18, at end add—

‘(5) The code shall not come into force unless it has been approved by a resolution of each House of Parliament.’.

Clause 6 stand part.

Mark Hoban (Conservative, Fareham)

The code of practice in clause 5, which we have already referred to quite a bit today, is seen by third parties as an important part of the legislation, because it is one of the tools that would give the market comfort regarding how the powers in parts 1, 2 and 3 will be exercised. It is therefore important that the code gets it right and that there is sufficient guidance in it to enable people to predict reasonably well when and how the powers will be used. Subsection (2) of clause 5 sets out some of the guidance that will be included in the code. I will start by talking about my amendments, and then speak more generally about clauses 5 and 6 stand part.

My amendments aim to highlight some of the potential deficiencies in the code as currently drafted. Amendment No. 81 inserts some additional guidance on the context. It reads,

“how to determine whether the threshold conditions under section 41(1) of the Financial Services and Markets Act 2000 will be breached”.

The code, to be fair, refers to that. Paragraph 28 states:

“The FSA’s Handbook contains rules and guidance relevant to an authorised firm. In particular, within the FSA Handbook, the ‘COND’ Threshold Conditions contains rules and guidance on the threshold conditions. There are a range of conditions, including: legal status and location of offices; the adequacy of the firm’s resources (financial and non financial) in relation to the regulated activities which the firm carries on; and suitability issues (e.g. competent and prudent management, conducting business with integrity and in compliance with proper standards). These are set out in more detail in the FSA Handbook.”

I am not sure whether the code really provides the guidance that people need to determine whether the threshold conditions will be breached, or which threshold conditions in particular the Government are interested in. For example, one of the threshold conditions not referred to in paragraph 28 is the appointment of a claims representative. I do not know whether the breach of the appointment of a claims representative will trigger the special resolution regime. I hope it does not, but part of the problem is that we are left none the wiser in the code as to whether that is the case.

On the matter of the location of offices, I printed off the relevant section of the conditions handbook to see whether it might provide me with some more detail. It states that

“if the person concerned is a body corporate constituted under the law of any part of the United Kingdom...its head office, and...if it has a registered office, that office, must be in the United Kingdom.”

Would the fact that a FSA-regulated firm decides to change its head office and move out of the UK be sufficient to trigger the special resolution regime? It may be sufficient to remove its authorisation, but do we really want to go down the route of triggering the special resolution regime if a firm happens to change its head office?

The explanatory notes to condition 2.2 talk about how a firm’s head office might be defined. It is not defined in the Act apparently, nor in the post-BCCI directive, nor in the insurance mediation directive. The FSA handbook states:

“This is not necessarily the firm’s place of incorporation or the place where its business is wholly or mainly carried on. Although the FSA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control, that is, the location of: the directors and other senior management, who make decisions relating to the firm’s central direction, and the material management decisions of the firm on a day-to-day basis”.

I am not clear whether a breach of that threshold condition is sufficiently important for the stabilisation powers to be used. If it is important we need some guidance in the code to say why. Where the Government are coming from in the threshold conditions is not really about the location of the head office or the appointment of a claims representative—it is about the adequacy of resources. That, to my mind, is the sense of where the Government got to on Kaupthing and Heritable, but all that we know in the context of those two institutions is that the FSA judged that the threshold conditions had not been met. I do not know why the FSA made that judgment and the reason was not apparent from the Treasury’s press release on the topic.

If we are talking about adequate resources we should say so in the Bill and the code. We should give people some guidance in the code as to what it means if adequate resources rules have not been met because I think they are subjective terms. I shall give an example from the FSA’s online handbook:

“FSA will interpret the term adequate as meaning sufficient in terms of quantity, quality and availability, and resources as including all financial resources, non-financial resources and means of managing its resources; for example, capital, provisions against liabilities, holdings of or access to cash and other liquid assets, human resources and effective means by which to manage risks.”

That is a very subjective definition of the meaning of adequate resources. We do not necessarily want the FSA to be tied to a quantitative definition but we require some guidance in the code as to what the FSA would deem inadequate resources, to give a flavour of the sort of areas we are looking at. The code is currently deficient in not providing that detailed guidance, which is why I propose amendment No. 81.

On amendment No. 80, the current situation under subsection (4) is that the authorities must have regard to the code. I think the term “have regard to” is too weak. The authorities might read it, not be very interested, throw it away and not be bound by it, but it is a key part of the structure of this series of reforms and the code is seen by the outside world as an integral part of the package. Simply to “have regard to” the code is not strong enough to give the right degree of emphasis when bearing in mind the powers set out in part 1. That is why I have suggested in my amendment that the requirement should be on the tripartite authorities to comply with the code or publish an explanation of why they were unable to do so,

“in good time after their actions”.

Comply or explain is a term that is used quite often by businesses in their accounts. If something does not comply with the code, they explain why. I am suggesting that the same principle should be used in the provisions.

Some other omissions might be dealt with on a stand part basis. Paragraphs 2 to 13 of the code, which set out how the objectives in clause 4 are to be defined, do not go far enough in detail, although we have dealt with that point in the previous debate. Paragraph 29, on page 7 of the code, uses curious language that leads me to think—although I do not think this is the right interpretation—that the default tool for the Bank to exercise is the bank insolvency procedure. Paragraph 29 says:

“Under section 8 of the Act, the Bank may only exercise a resolution tool other than the bank insolvency procedure if satisfied that the exercise of the power is necessary”.

It is almost as if the Bank of England will start on the basis that it will exercise the bank insolvency procedure unless it thinks the powers in paragraph 8 that enable it to have a private sector purchaser or bridge bank are better. I assume that the default is private sector purchase, that the bridge bank is the second preferred option, and that temporary public ownership or the bank insolvency procedure rank further down the list of priorities.

Mark Todd (Labour, South Derbyshire)

The hon. Gentleman highlights a concern that I share. The code is silent on whether the institutions involved should just stand aside and let the bank collapse, on the basis that its collapse poses no systemic risk to financial stability in the UK. That implication is not set out in the code; in fact, the default position is that the authorities will take some action, almost no matter which financial institution is involved, on whatever scale and however isolated the impact might be. I would welcome the greater clarity in the simple position: “This is a matter for the market to resolve. We shouldn’t be involved at all.”

Mark Hoban (Conservative, Fareham)

I think I understand where the hon. Gentleman is coming from—it relates to the clarity of the code and what the code says the default options should be. As I understand his view, it is that the instinctive reaction is that action should be taken, rather than that the market should run its course and the bank should end up in administration or insolvency. The drafting of paragraph 29 certainly suggests that the expectation is that default will end up in administration or insolvency, rather than that all the stabilisation powers should be used first. Perhaps the language needs to be clarified further to get it right so that we can understand the sequencing or the priorities.

Mark Todd (Labour, South Derbyshire)

Will the Committee permit me to clarify a little further? It is important to emphasise the moral hazard position, which is that the public sector should not be expected to step in whenever an institution appears to be threatened. The last few months have almost given the impression that whatever institution is threatened and whichever group of savers might find their savings in jeopardy, the public purse will step in to resolve the matter. The code is an opportunity to make it absolutely clear that that is not the case. There are circumstances in which an institution may be permitted to collapse because it does not pose a systemic risk to the financial stability of the UK, but the last few months have allowed us to drift away from that debate.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman makes an important point. I am not entirely clear in my mind whether that issue has been properly addressed throughout the crisis. The hon. Gentleman makes the point that before the crisis started, the assumption would be that the market would work its way through some of these issues, that the deposit protection scheme and the Financial Services Compensation Scheme were there to protect consumers and that if a bank collapsed, that would be the route. That goes back to the moral hazard point of view—the warning to investors, creditors and depositors: “Don’t expect to be bailed out. You need to think about your own position.”

During this crisis, we have moved to a situation where it is expected that our Government and Government generally—the crisis affects countries outside the UK as well—will leap to the rescue; and to use the Minister’s phrase from the evidence session, that we will do whatever it takes to solve the problem. One of the Treasury’s challenges in writing the code is to write it in a way that covers both our present situation and what happens when financial stability returns. That goes back to the comment made during the last debate about the context in which such decisions are made. In a time of financial instability, a different set of decisions might be made from those that would be made in a period of financial stability, when moral hazard may well come back to the fore. However, it is important for the code to distinguish clearly between the two situations, and what the impact will be. It is difficult to draft the bit about what the impact would be, because that itself could lead to a degree of uncertainty, but it would be helpful to be able to tease apart the two different contexts.

Colin Breed (Liberal Democrat, South East Cornwall)

I entirely agree with the hon. Member for South Derbyshire. We have, to an extent, drifted away from what was the norm only a few months ago. Of course, there is no obligation on the Government to use the powers; they may not consider the time appropriate to use them. The powers are very clearly designed to protect depositors—there is no qualification to that. They may be depositors of very significant funds—well in excess of the compensation scheme limits—and if there was a qualification, standing back and letting the bank go might be perfectly acceptable. Some of the objectives have made that position more difficult, which is a slippery slope that I suspect may make Governments wish to return to something more akin to the norm with moral hazard; otherwise, they will be inveigled into trying to come in under special resolutions to protect almost any situation, because of the extent of the deposits.

Mark Hoban (Conservative, Fareham)

This is a difficult area to get right and I am pleased that I am in the position of having to criticise the code rather than having to draft it. It is a much easier position to be in. The interchange of thoughts about what sort of messages the code sends out is important, because when drafting the code one needs to be very careful about the impression that is created in the minds of depositors, as I alluded to earlier in response to the hon. Member for South Derbyshire before I took the intervention from the hon. Member for South-East Cornwall. For example, if there is a very clear restatement in the code that the limit for deposit protection is £50,000 and that will apply in the future, we may see the shuffling of money around banks, post offices and so on, which may trigger a fresh wave of uncertainty.

We need to get the balance right. It is important, in general, that we try where possible to give as much detail about the context as we can, and to give a degree of predictability even though it may cause some people concern. The more predictability there is in the code, the greater the market’s confidence that the code is right and the greater the likelihood that it will know how the powers will be used. That is what the code is about—how the powers will be used and how market participants can be confident that the powers will not be used will-nilly, at the drop of a hat. We are talking about the controls and the checks on the exercise of the powers, which is why the code needs to be detailed at the front end to give people a greater sense of how the powers will be put into practice.

I am not a great believer in long documents and I always think that it is better to have a shorter ones, but when I opened the file containing the code of practice, I was surprised at how short it was given the complexity of the issues. While this is an early draft, and I suspect that later drafts may elaborate on some of these issues, this area needs elaboration. How should people expect the powers to work in—to use a different analogy—wartime and peacetime?

I have some more specific comments. Paragraphs 32 and 33 of the code deal with clause 8 of the Bill:

“The test of ‘necessity’ is a high one. In determining whether the exercise of the power is necessary, the Bank must have regard to whether other approaches would resolve the situation.”

Again, I am not sure whether there is enough information in the code to determine when the bank will find it necessary to exercise such powers. The code is a bit light on timings of when things may happen, so we need a bit more specificity in that regard. I draw the Committee’s attention to paragraph 20, which says that there will be a

“revised Memorandum of Understanding between the Authorities”

which

“will set out how the Authorities will communicate with each other before and during the resolution of an institution”.

It is not clear when that memorandum will be produced, and it would be helpful to know. When the Treasury Committee debated the matter, it was suggested that we would see the MOU long after the passing of the Bill. To help us understand how the authorities will interact with one another in the context of the Bill, it would be helpful to have sight of that element of the revised MOU before the Bill completes its passage through both Houses.

In paragraph 33, there is a trade-off. It says:

“The assessment must balance the short- and long-term effects on financial stability, public confidence and depositor protection of different resolution options.”

That is absolutely right; I could not disagree with that statement, but what does it really mean? What are the short and long-term effects? The paragraph refers to the need “to protect depositors” but it does not expand to cover the short and long-term effects on financial stability or public confidence.

Paragraph 36 of the code refers to

“the operational risks of managing a bridge bank and the amount of public funding that may be required to keep it operational.”

There is no sense of where the economic decision comes into play. We talked about the protection of taxpayer interests in the previous clause. The code says that

“the Bank will need to take into account in determining the feasibility of different tools”

factors such as the operational risks of managing a bridge bank and the amount of public funding that may be required to keep it operational. I do not get a sense of where the balance of judgment is between this and temporary public ownership.

Paragraph 40 of the code does not say much apart from paraphrasing conditions A and B. I think that more work needs to be done on that area if we are to understand how the Bank, or the tripartite authorities, will act in the public interest and how they will apply the conditions. I would have expected more clarity in that area.

Paragraphs 44, 45 and 46 are important and relate to the announcement of the tools and to accountability. I referred to that matter earlier today in the context of amendment No. 80, in which I call on the relevant authorities to comply or explain. Paragraph 46 relates to something that I mentioned in a previous debate. The Minister responded by saying how transparent the Treasury would be over the exercise of such powers. I asked him whether the announcement made by the Treasury in respect of Kaupthing and Heritable was a model or a template for what we would see under paragraphs 44, 45 and 46 or whether we would see a fuller explanation. The Minister did not come back to me on that point, and I was too slow to pick him up on it, but I will give him a second chance in this debate to explain—if he has not thrown away the notes that his officials prepared. That is important, because it helps to build up an understanding of how the Government will react in the minds of participants. When people are assessing how the powers will be used, they will look not only at the code, but at how the measures are applied subsequently, to see where the gap is between the application and the code. Therefore, we need to ensure that a decent level of information is available to help participants to understand the range of powers. Also, of course, that is an important part of holding the tripartite authorities to account on how the powers will be used.

I am not a member of the Treasury Committee and I was not able to listen to yesterday’s sitting because I was engaged on the Report stage of the Dormant Bank and Building Society Accounts Bill, but I suspect that the Committee would like to debate again Icelandic banks, for example, in the event of the exercise of the stabilisation powers. The more transparency about how the powers will be used and the more announcements that are made about them, the easier it will be for Parliament to hold the authorities to account, which is particularly important when taxpayers’ money is involved.

Paragraph 52 begins with the words: “In exceptional circumstances”. What are exceptional circumstances? Are they so exceptional that the Government do not expect the measure to be used? It is important to clarify the definition of exceptional circumstances.

To go back to time periods, paragraph 60 of the draft code states:

“However, in situations where there is expected to be a lengthy period of time prior to a sale, the Bank shall put in place an appropriate governance structure”.

How long is “lengthy”, and when does one decide when something has gone from being short to “lengthy”? If the powers had been available and the Bank had owned the shares in Northern Rock, it might have thought that it could flog it within a couple of months. However, I suspect that the gap between the Northern Rock rescue in September and its nationalisation in February would be deemed “a lengthy period” if the powers had been available at the time, and it may have been necessary to put in place appropriate governance arrangements. What is “lengthy”? How long is a reasonable period before steps to put in an “appropriate governance structure” need to be taken?

In his remarks on a previous clause, the Minister referred to the safeguarding in the code of practice of operating strategies. Paragraph 68 states that that

“is likely to involve the bridge bank operating on a conservative basis, to protect the franchise value of the business”.

I am not sure what “conservative” means. Does it mean prudence in the management of liabilities or when dealing with repossessions? Is it “conservative” in that the bridge bank does not take any risks and operates at the less competitive edge of the threshold? Doing so could impede the achievement of its objectives. Knowing the meaning of “conservative” in this context would be helpful to the banking system.

I appreciate that no one expects a bridge bank to exist for too long a period—that is not necessarily its purpose—because there could be other ways in such a period to resolve the situation. Paragraph 72, on the bridge bank report, states:

“The Bank must report to the Chancellor about the activities of a bridge bank if a bridge bank exists for a year. The first report must be made as soon as is reasonably practicable after the end of one year beginning with the date of the first transfer to the bridge bank. A similar report must also be made as soon as is reasonably practicable after the end of each subsequent year”.

My understanding is that Northern Rock reports quarterly to the Treasury, and I am not sure why the reporting requirements for the bridge bank are less onerous. I thought that they would be broadly comparable.

Paragraph 80, which is on disposal and onward transfer, states:

“Following this process, the Bank shall complete the transaction. This may be achieved through a standard commercial agreement...or by exercising the onward transfer powers provided in the Banking Bill.”

I do not know whether there is a practical difference between the two options. Will they be used in different circumstances, or are they interchangeable? It is not clear why that might be the case.

Paragraph 93, on page 16, is also ambiguous as to time:

“If a bank is likely to remain in public ownership for longer than a short period”.

It is sometimes difficult to determine what a short period is. There is no guidance, and the context is the objectives that the Treasury will set for the board of directors. In the case of Northern Rock, even though we are in a period of temporary public ownership, that period has been deemed sufficiently long for the Government to set objectives. The Government could have argued in February that they expected to make a quick sale and therefore would not set objectives. That is a purely hypothetical argument rather than a realistic one, but the presumption should be that objectives will be set for a bank in temporary public ownership.

Having read through the code, I have just picked out some areas where further work needs to be done. I make those points not to sound pedantic or picky but to say that we need to be much clearer about how the code will operate in practice if it is to be the reassurance that the financial services sector is looking for as to how the powers will be exercised.

To touch on amendments Nos. 82 to 85 to clause 6, which I tabled, I wanted to focus on the consultation process surrounding the code. Since I tabled the amendments, the Minister has tabled a new clause that addresses amendment No. 83, which would insert after subsection (1)(c) a new line (d):

“‘those persons whom it considers to have relevant knowledge of those matters.’.”

The new clause, which is not scheduled for debate today, deals with amendment No. 83, because it sets out clearly who should be consulted. In terms of the broader consultation on revisions to the code, the Government might wish to go wider than that. I have also proposed that the code should undergo some form of scrutiny. I would not normally advocate parliamentary scrutiny of a code, but given the importance invested in this one, Parliament should have the opportunity to consider it. It forms an important part of the framework of the Bill.

In conclusion, the code as we saw it on Thursday, which is largely as it will be when it is made available for public consultation later this week, requires a lot more work. One or two people to whom I have spoken who have seen the code share my view that there should be much more detail about how it will work in practice, and others do not yet see it as the safeguard that they anticipated. I hope that the Minister will see my comments as constructive rather than critical for the sake of being critical. We want to be constructive about how we engage on the code, but there is a lot more work to be done.

Colin Breed (Liberal Democrat, South East Cornwall)

The proposal relates to an amendment that we tabled to clause 7. Under clause 5(2)(d) the code will provide guidance on

“how to determine whether Condition 2 in section 7 is met”.

While I recognise that we are talking about a draft code of practice, what we have so far does not really explain precisely how it will be determined that condition 2 in section 7 is met. It merely repeats some of the wording from the Bill itself.

A fundamental aspect of both the amendments to clause 4 and what is happening in clauses 5, 6 and 7 is how the external investors may view bank shares or banks in the future. Their investment, which can be considerable, may be far less certain than they had originally expected. The determination of whether condition 2 in section 7 is met is fundamental. We need a clear indication of that in the code because that sort of clarity, along with the other aspects of amendments that are yet to come, and one that has already been withdrawn, is fundamental to the way in which the SRR will work.

Timing is obviously of the essence. I accept that and it is recognised in the guidance. But we need to be much more precise about how that condition is exercised. Upon that will depend so much of the perception of whether a bank can raise more capital, whether it has enough investors to begin with and even future capital-raising exercises if necessary. Unless investors are confident that the plug will not be pulled from a bank in which they are going to invest and that the conditions will be clearly met and will not be very subjective in their interpretation, they will be reluctant to invest in such businesses.

Peter Bone (Conservative, Wellingborough)

I am trying to follow the hon. Gentleman’s argument. Is he making the case that where a bank is in some sort of trouble, but has not reached this stage, investors who might invest in order to save it will stand back if they do not know the precise terms of when the special regime will come in?

Colin Breed (Liberal Democrat, South East Cornwall)

That is exactly right. As the Minister said, the objective is to try to maintain these entities as going concerns. In general terms that will probably require some sort of recapitalisation and additional investment. The conditions under which an entity may ultimately come under some sort of regime may determine whether that capital-raising exercise is successful. We have to make it much clearer that it is not too subjective and that clear conditions have to be met, so that people understand what will happen. As I said, I can see in the drafts no clear explanation of how it will be determined whether condition 2 in section 7 is met.

Mark Todd (Labour, South Derbyshire)

I want to amplify briefly the point that I made in my intervention on the hon. Member for Fareham. We are contributing to the process of producing in the code not a specific disaster plan, but a document that is effectively enshrined in law. As it is referred to in the Bill, it will be a permanent feature of the regulation of banking in this country, and will be used as a reference document of some considerable substance.

I felt when I read the code that it was written, perfectly understandably, in the crisis-room mentality of dealing with the circumstances that we face and how we are using powers now—the hon. Member for Fareham, very fairly, said that it is easier to criticise and a lot harder to write. It was not written in normal circumstances, in which we could perhaps respond with a wider range of policy options than we have been using until now. That is my first, guiding principle.

Additionally, to use a sort of Rumsfeld term, this is an opportunity for us to express certainty about uncertainty, particularly about risk and the principles of risk. One of my anxieties about the way in which the code is written and, of course, to some extent about the necessary actions that we have taken recently, is that they entrench in our citizens, and to some extent our institutions, an assumption that the state will intervene and provide, almost regardless of what circumstances we face. That is, baldly, an unhealthy position.

The document is an opportunity—I should say straight away that this needs to be carefully expressed—to restate some principles of moral hazard that the state’s action should in normal circumstances reinforce, although I recognise that these are not normal circumstances. Those principles, broadly, are that if a person runs or invests in a business, they must expect to take risks and, in some circumstances, may find failure and, in ultimate circumstances, utter failure and complete loss of their investment and employment. That is a part of a mixed economy. We should not try to suggest that if a person is in a deposit-taking institution, for example, such failure might not happen because the state can always intervene and resolve some of their problems. That is the first moral message that needs to be reinforced. There are circumstances in which a business might collapse. One can imagine circumstances in which that might be allowed to happen, for example, in the case of a small business or one that operates in such a niche function within the marketplace that its departure might not necessarily cause either a loss of confidence or an impact on financial stability. I think that we have recognised that the US, in the Lehman Brothers example, probably made the wrong judgment about when to reinforce moral hazard and that the consequent effect on confidence and stability was so profound that it should have accepted a greater responsibility to intervene.

Mark Hoban (Conservative, Fareham)

That is a very good example of when predictability in the market would help. Actually, the expectation of investors, based on actions that the Federal Reserve took on Bear Stearns, was that it would bail out Lehman Brothers. The fact that it did not, and allowed moral hazard to take its course, became an even greater shock, and triggered a further wave of problems.

Mark Todd (Labour, South Derbyshire)

That indicates some of the risks in an inconsistency of approach. The world is inconsistent, but the difficulty is that the jeopardy in that case was rather profound. It was probably the wrong decision. I can see why it was made, but I think it was an error. None the less, there might well be circumstances in which some other institution, not quite like Lehman Brothers, could be allowed to fail; and we should allow it to happen.

Peter Bone (Conservative, Wellingborough)

I entirely agree with the case that the hon. Gentleman is making, but I have not been able in my own mind to come up with a situation in which any Government, whatever their political colour, would allow a financial institution to go under. Does the hon. Gentleman believe, in reality, that that would happen?

Mark Todd (Labour, South Derbyshire)

In reality, the answer is yes. It could happen, and we should reinforce the message that in some circumstances it would. If we do not give that impression in a document of this kind, we risk giving the impression that, in some way, it is a charmed circle activity in which there is some form of intervention—but not, of course, one that necessarily protects shareholders’ rights; that jeopardy is pretty explicit in the choice of objectives that have been set. However, some other stakeholders certainly have protections in place that provide for the state to be the fall-back position.

The second moral hazard is that depositors should take some responsibility for their decisions when choosing where their deposits should be placed. For perfectly understandable reasons—I do not criticise the Government; I can see where they are and how they got there—we have given the broad impression that whatever has been done by UK licensed deposit-taking bodies, people will be okay to whatever investment limit they have chosen. The difficulty is that if one allows that message to be given out repeatedly, people will chase the best rates without any thought. That, of course, will incentivise market behaviour, which chases exactly those depositors.

It is important, in a document of this kind, to reinforce those principles. It does not need to be done at length, but I would prefer a firm emphasis on ensuring that when the state acts it should, in normal circumstances, seek to reinforce those moral goods in the market place rather than protecting the participants to the point where they lose the inclination for any kind of risk awareness. As the Sage of Twickenham remarked in a debate in which I was able to participate, if we protect everyone from foolish behaviour, we will have a nation of fools. That is a pretty sensible picture of the ultimate outcome of ignoring the moral hazard argument.

I encourage the Government to think further on the approach that they are taking in the code. Much work remains to be done. It has one rather embarrassing typo, which I am sure will be picked up, but there is more work of substance to be done on the document, and I am sure that we can all participate in it.

Peter Viggers (Conservative, Gosport)

The hon. Member for South Derbyshire made a thoughtful, well-informed and well-judged speech. The lesson of politics is that the battle is not so important; it is the war that matters. I do not necessarily expect the Minister to say that he accepts everything said by the hon. Gentleman and that he will order an immediate redraft, but the points that he made may at some point be taken into account. I completely share his view.

I want to address my remarks to clause 5(2)(d), which is on the crucial issue of the trigger for a special regime. We have to go back to 1997 and the creation of the tripartite arrangements between the Treasury, the Financial Services Authority and the Bank of England. The Bank, to great acclaim, was given the responsibility for setting interest rates, and to effect that the Monetary Policy Committee was created. Rather less noticed was the taking away from the Bank of its responsibility for banking supervision. The FSA was given the duty to control and monitor individual banks, while the Bank of England was given a more general power to control financial stability. The FSA fulfilled its duty, but there is little point in glossing over the facts: there were failures, and they happened on the watch of the FSA, which failed to perceive the systemic risks within some banks. We must learn from our lessons. There is no point in being too polite; we must say that there was a failure there.

The Government propose laying further specific duties on the FSA. Paragraph 26 of the draft code of conduct of the special resolution regime clearly states:

“The decision whether the bank or building society fails or is likely to fail to meet the threshold conditions is a regulatory matter for the FSA.”

That concerns me, because I have felt for some time that there should be a division of responsibility in the future, based on our learning from our mistakes in the past. The FSA should be given what I regard as the box-ticking, the responsibility for regulation, for ensuring that individual institutions meet certain criteria. The Bank of England, however, should be given responsibility for what I call banking supervision.

I distinguish between banking regulation and banking supervision. It should be possible for not only the FSA but the Bank of England to pull the trigger, because since the FSA is responsible for the routine financial regulation of banks it will naturally be reluctant to come forward and say that normal regulation has failed. It will instinctively—naturally—not wish to say that the regulation for which it is responsible has not been successful. There should therefore be a separate mechanism giving the Bank of England the power to supervise, and that power of supervision must provide it with enough personnel and abilities for it to be close enough to the management of banks to know when special action is required. Clause 8(1) states:

“The Bank of England may exercise a stabilisation power in respect of a bank in accordance with section 10(2) or 11(2) only if satisfied that Condition A is met.”

Clause 8(2) then states:

“Condition A is that the exercise of the power is necessary, having regard to the public interest in—

(a) the stability of the financial systems of the United Kingdom,

(b) the maintenance of public confidence in the stability of the banking systems of the United Kingdom, or

(c) the protection of depositors.”

In other words, the Government have put in the Bill the same kind of responsibilities for the Bank as it already has under current legislation. The responsibility for individual bank supervision is to remain with the FSA, whereas the general responsibility for financial stability, under clause 8, will be that of the Bank. That is not good enough.

The draft code of practice envisages, in paragraph 31, that the

“three public interest conditions may overlap (to a greater or lesser degree) depending upon the particular circumstances of the bank or building society and the wider circumstances of the financial system as a whole.”

So the legislation and the draft regulations envisage that there could be some overlap in the responsibilities and powers of the Treasury, the FSA and the Bank. Good, roll it on. Some level of duplication is necessary. It is not good enough to restrict the regulation and the power to pull the trigger to the FSA; the power to pull the trigger must also be available to the Bank of England, because only the Bank of England has long-term experience of bank control, the levers to affect financial stability and the traditions and ability to discern systemic risk, which the FSA, based on its record, has failed significantly to do.

As happens in the United States, I would give slightly different responsibilities to the FSA and the Bank of England, but I think that it is important that the Bank of England should not be restricted to the exercise of general powers and the stabilisation power referred to in clause 8. It should also have the ability to pull the trigger and implement the provisions to introduce the special regimes.

Ian Pearson (Labour, Dudley South)

As is evident, clause 5 provides for the Treasury to make a code of practice on the use of the stabilisation powers, the bank insolvency procedure and the bank administration procedure. The authorities—that is, the FSA, the Bank of England and the Treasury—must have regard to the code. The clause also provides a non-exhaustive list of the areas on which the code may provide guidance. As hon. Members are aware, a copy of the code was circulated to the Committee last Thursday and, as I said earlier, a consultation document on safeguards, including the code, will be issued on Thursday.

At present, the code covers further explanation of the SRR objectives, how they should be balanced, what regard the authorities should have to the code, further explanation of the roles of the authorities in the SRR, further explanation of how the authorities will judge that the general and specific conditions are met, factors to be considered when choosing the SRR tools, procedure for the announcement of the SRR tools and the Government’s arrangements for bridge banks and banks in temporary public ownership. That is not a comprehensive list, and it will undoubtedly be expanded and clarified as a result of the consultation exercise.

We have already had significant debate about the further explanation of the SRR objectives and how they should be balanced, but the hon. Member for Fareham, in a sort of online stream of consciousness, went through the code in fine detail. I will respond to some of his questions. He asked again whether the Kaupthing Edge announcement was a template. Not necessarily; we will consider such matters on a case-by-case basis.

A related question was how long to wait for a statement. We wish to make a statement as soon as is reasonably practicable, but as the hon. Gentleman said, the type of information given may depend, rightly, on the circumstances. For instance, if there is still a risk of loss of confidence in the banking system, that might affect the timing of an announcement as well as what can be disclosed in it. There are tensions between full and immediate disclosure and effective action. I think that he understands that. It explains why, although we want to publish information as quickly as is reasonably practicable, other considerations must be borne in mind.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for that explanation—he picked up that I understand the subtleties—but the announcement about Kaupthing erred on the scanty side in terms of information. For example, it did not say what trigger conditions Kaupthing had breached to lead to the FSA’s withdrawal of permission. That is the level of detail that we want. We do not need to know down to the nearest 5p why there was an issue, but there was nothing to indicate why it had lost that permission. It was missing information that could have been given in any context. Maybe they had lost their claims representative. I do not know.

Ian Pearson (Labour, Dudley South)

I note the hon. Gentleman’s comments and will take them into account as part of our consultation on the code. Regarding the point he makes about the claims inspector, the FSA handbook does refer to all the threshold conditions. The FSA will update its handbook in the light of the Bill and will address such points. On the specific example of the appointment of a claims representative, I can confirm that this condition applies only to regulated activity when it comes to carrying out insurance business.

The hon. Gentleman also referred to paragraph 29 of the code and implied that the bank insolvency procedure is the default option. That is not the intention of this part of the code. This paragraph highlights the need that a strong public interest test, as outlined in clause 8, be met before the Bank of England exercises stabilisation powers which, as hon. Members have noted, are invasive. That is why we always need to think carefully before exercising these powers.

I want to respond directly to comments raised by my hon. Friend the Member for South Derbyshire. I can confirm that it is the Government’s intention not to create a zero-failure regime. Indeed, the bank insolvency procedure has been created expressly so that there is a credible failure option. It is possible that the authorities could decide in the event of a bank or building society failure that there is not a systemic risk, that the requirement for action under the special resolution regime is not necessary. I would, however, point out that if a significant number of retail depositors were affected we might still want to use the bank insolvency procedure to ensure effective, fast payout under objective 3, or because perhaps public funds had already been committed previously to the institution which relates to objective 4.

I also want to respond to the point my hon. Friend made that the code was written in times of crisis and that it should it reflect the actions in periods of financial stability as well as instability. The point I made that there is a credible failure option in terms of the bank insolvency procedure is an important one. I would want to reflect on my hon. Friend’s point while at the same time wanting to be clear that the code is specifically about the actions within the special resolution regime, that is actions that are being taken not under normal conditions but when a bank is failing. Even then, other tests have to be satisfied. In terms of when the code is written, I think it right that we should respond to circumstances as we see them at the moment, but the Bill allows us to revise the code so it can be updated in calmer times as well as in times of financial instability.

Mark Todd (Labour, South Derbyshire)

My hon. Friend will be aware that revising a code to transfer risk back to the public and to commercial organisations will be a lot harder than setting out some of those risks at the start of the process, albeit shrouded carefully in this document.

Ian Pearson (Labour, Dudley South)

I certainly take the points made by my hon. Friend and, as I have said, we will want to reflect on them. I did want to put back to him the point that the code is deliberately designed to refer to times that are not normal because it relates to the operation of the special resolution regime.

Peter Bone (Conservative, Wellingborough)

What happens if the independent Bank of England and the FSA think that the failure of an organisation is a one-off—not systematic—but the Treasury and the Government take a wholly different view?

Ian Pearson (Labour, Dudley South)

I do not think that it is particularly useful to engage in speculation, but, from my experience and from hearing about recent discussions, there are extensive talks between the three organisations that make up the tripartite authorities in which different options and courses of action are debated. It is not possible to set out general principles in this area. We have to look at how things operate on a case-by-case basis.

The hon. Member for Fareham also asked why a bridge bank should report every year when Northern Rock reports quarterly. He may be misunderstanding what we are trying to achieve through paragraph 72 of the code, which is intended to refer to a report on why the bridge bank exists for more then a year, rather than financial reporting arrangements. We would certainly expect the Bank of England to put in place appropriate arrangements for a bridge bank’s management to report to the Bank in its role as a shareholder.

The hon. Gentleman also asked what “conservative management” is, and I am very tempted to tell him. We are trying to get the point across that we want to take action that will preserve the franchise value of the banking business transferred to the bridge bank, but we do not anticipate the bridge bank competing aggressively for new business, which was one of the concerns that he tabled an amendment on. The code will be subject to public consultation, and I think that all the points raised by Committee members will be taken into account as part of that process.

Amendment No. 81 is designed to ensure that the code includes provisions on determining whether the threshold conditions, set out in the Financial Services and Markets Act 2000, are met. I do not agree with the intention behind the amendment. The threshold conditions are regulatory conditions under the 2000 Act, and therefore provisions about determining whether they are met are included in the FSA handbook, so it is unnecessary to include in the code any provision on that determination. However, as hon. Members will see, the draft code that has been circulated refers to the FSA handbook, so stakeholders can easily find this detail should they wish. The people involved in these areas are well aware of the situation. I therefore believe that amendment No. 81 is unnecessary.

Amendment No. 80 comments on the manner in which the authorities should treat the code of practice. Clause 5(4) requires the authorities to have regard to the code. The hon. Member for Fareham’s amendment however, seeks to require authorities to comply or to explain publicly why they did not comply with the code as soon as possible after any action. I shall set out why I do not agree with that approach.

The provisions of the code are intended to provide guidance. For example, the code may set out provisions that should be taken into account or may provide for the approach that the authorities should normally seek to adopt. The expectation is that the authorities should follow the code, and that if they do not, a public explanation would normally be needed. However, a hard-edged statutory requirement to comply with the code would be inappropriate to its function and would unduly restrict the flexibility of the authorities. There may be a number of reasons why a public explanation is not appropriate; for example, if explaining an action that did not comply exactly with the code meant divulging information that itself would put at risk the SRR objectives of confidence in the banking system or financial stability. I consider that to be the appropriate status for the code, in that it will provide a significant amount of detail about how the authorities will implement the SRR and it can be updated to reflect experience gained from operating the SRR without imposing hard-edged duties or requirements on the authorities. I therefore invite hon. Members not to support the amendment if it is pressed.

Before turning to the next set of amendments, which refer to clause 6 rather than clause 5, I shall speak briefly to Government amendment No. 89, whose purpose is to remove duplication under the Bill, by removing subsection (2)(f). Clause 11(3)(c) already requires the information provided for in that subsection to be included in the code of practice, so it is superfluous to make reference to it. The amendment is simply a technical correction and I commend it to the Committee.

The next set of amendments refers to clause 6, which sets out the procedure for developing and updating the code of practice. It requires the Treasury to consult the FSA, the Bank of England and the FSCS before issuing the code. Further, it requires the Treasury to lay a copy of the code before Parliament as soon as is reasonably practicable after issuing the code. As the code is required to be a flexible document that can respond to the authorities’ experience in operating the SRR and general market conditions, the Treasury can revise and reissue the code.

Amendments Nos. 82 to 85 would introduce extra procedural requirements before the Treasury could agree and issue the code. First, amendments Nos. 82, 83, and 85 would require the Treasury, in addition to consulting the Bank, the FSA and the FSCS, to consult other interested stakeholders. Secondly, amendment No. 84 would require that the code be approved through a resolution by both Houses of Parliament before coming into force. I do not believe that those additions to the procedure are necessary, and I shall explain why.

A number of parts of the Bill, including the powers and areas that affect stakeholders the most, have been and will be subject to full consultation—indeed, that is something that stakeholders have welcomed—yet none of that is set out in the Bill and nor should it be, as it is already covered by the relevant Cabinet Office and better regulation guidelines on the development of secondary legislation. I recognise that there is, of course, substantial interest in the code. That is why, as I explained earlier, I sent a draft to the new banking expert liaison group last week for discussion at its meeting on Friday, as well as providing a draft to the Committee. As I said, the code will be extensively consulted on when the consultation document is issued on Thursday. Throughout the process of producing the Bill and its supporting documents, we have had full engagement with stakeholders, and we fully intend to continue to follow Cabinet Office guidelines in producing, and consulting on, new secondary legislation and other documentation supporting the SRR. That, I can assure the Committee, will also be the case with the code of practice. The amendments are therefore unnecessary.

Amendment No. 84 would ensure that Parliament formally approves the code of practice by resolution. Again, I do not believe that such an amendment is necessary. Under the Bill, the Treasury has a duty to lay the code before Parliament and of course Parliament is at liberty to ask questions or call for debate on the content of the code. However, the code, just like the FSA handbook, is not a statutory instrument, so I see no reason to require it to be formally approved by Parliament, just as the FSA handbook is not formally approved by Parliament. Again, I hope that our actions in producing a draft code of practice for the Committee to consider as part of the debate shows our willingness to involve Parliament and stakeholders in the creation of the document. I hope that the amendment will be withdrawn.

I conclude on the general issue of the accountability of the authorities to Parliament. The Committee will be aware that the Treasury Committee—some of whose distinguished members serve on this Committee—has been active and scrupulous in holding the authorities to account in their exercise of powers under the Banking (Special Provisions) Act 2008, and also their actions to deal with the wider financial crisis. That is exactly how it should be. The Government expect the Select Committee and Parliament to continue exercising that important responsibility.

I believe that our approach, with full consultation on the secondary legislation and the code, and with the secondary legislation coming to Parliament in the normal way, provides sufficient safeguards. I am sure that the Treasury Committee will continue to hold all the authorities to account.

If hon. Members wish to press the amendments to a vote, I suggest that, with the exception of Government amendment No. 89, they should be opposed.

Debate adjourned.—[Mr. Blizzard.]