Banking Bill

Public Bill Committee, 6 November 2008.

Clause 5

Eric Illsley (Labour, Barnsley Central)

I remind the Committee that with this we are taking 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)

I welcome you to the Chair, Mr. Illsley, for today’s proceedings.

We had quite a full debate on this group on Tuesday afternoon and I want to reflect a little on the Minister’s response to it. Before I do so, I should like to refer to the comments that my hon. Friend the Member for Gosport made about who should pull the trigger. He made them in the context of the debate about the code and we will pick up on that in clause 7. My hon. Friend and I share the same viewpoint on this. For a variety of reasons we believe that the best body to pull the trigger is not the Financial Services Authority but the Bank of England.

My hon. Friend gave a clear elucidation of those reasons on Tuesday. If we concentrate on the efficiency of the regulatory system, there is a danger that we forget about its effectiveness. The responsibilities of the tripartite authorities are so clearly delineated in each other’s minds that sometimes there is no overlap or any form of check or scrutiny or engagement in other aspects of their arrangements. That is why giving the Bank of England the power to pull the trigger will give it a much greater role in the supervision of the banking system.

We need to get the balance right. We do not want to have two regulators, but we need to ensure that there is an effective check and there is no risk of regulatory forbearance by one regulator. My party’s policy is that the Bank of England should pull the trigger but, as the Minister knows, in the interests of passing the Bill speedily, my right hon. Friend the Member for Witney (Mr. Cameron) indicated that we would not be pursuing this matter now. We will leave this one for another time. It is very much on our agenda to look at this.

I want to go back to the Minister’s remarks on Tuesday afternoon and to focus on two points. The first is about flexibility. We appreciate the need for flexibility in the code and the way in which the powers are operated. The Minister talked about flexibility in the context of making a statement on the use of powers and my amendment on “comply or explain”. I understand the point he makes, but there is a risk attached to flexibility that we need to bear in mind. The code is being put out to consultation today and will be redrafted. If it is too vague or opaque, or the need to comply with it is too lax, it will undermine confidence in the way in which it is meant to circumscribe the exercise of powers in the Bill. I will come back to the comments made by the hon. Member for South-East Cornwall about the benefits of that circumscription.

The second point is on the threshold conditions. The Minister indicated that the FSA, in the light of the Bill, will look again at the threshold conditions to ensure that the two things dovetail. When will the FSA consult on a revision of the threshold conditions? Will there be fewer conditions? I mentioned a couple of the conditions on Tuesday. Will the adequate resources condition be the key condition in the context of the Bill, and how much guidance will the FSA give on the conditions? One concern is that too much opacity on how the conditions can be met or, indeed, breached, will undermine confidence in the use of powers in the Bill.

I should like to go back to the central purpose of having the code in the Bill and why the code is important. The Bill includes some quite invasive powers: it gives the tripartite authorities powers to interfere with the rights that creditors and investors would normally enjoy. For example, it gives the tripartite authorities the right to take control of the bank and to transfer part of its assets into a bridge bank. The code is meant to provide confidence to creditors and investors about how the powers will be exercised. Increased uncertainty about that means that there is high risk in the eyes of investors and creditors. Higher risk means an increase in the cost of capital, which will make it harder for banks to raise capital, which will have an impact on the wider economy. If the cost of capital of a bank increases, so will the cost of the loans it makes to households and families.

I believe that the Government recognise that, which is why they have accepted that it is important that the code sets out the limitations on the exercise of powers in the Bill. However, to give confidence to the sector, the code needs to be explicit about the circumstances in which, and when, the powers will be exercised. The Government must therefore produce a much more detailed code if they are to allay any fears about the use of the powers. They need to provide clear guidance to the tripartite authorities rather than produce a rewrite of the explanatory notes, and to set out, in the context of clauses 10, 11 and 12, the hierarchy of the stabilisation options, and what is the preferred option.

Not only the code but the threshold conditions need to be more specific to avoid the sense that they can be used in an arbitrary fashion. The Government will argue that they need flexibility; that an overly restrictive code will constrain the freedom of action. However, if the use of invasive powers in the Bill is perceived to be unconstrained, markets will make their own judgments on whether they should invest in British banks. If the code as redrafted does not provide significantly greater detail on how and when the powers will be used, there will be demand for the constraints to be in the Bill rather than the code.

The Government need to reflect on the tension between flexibility and reassurance. At the moment, the code errs on the side of flexibility. If that continues, the cost of capital will rise, and families will pay the price through higher interest rates. Moving forward, the Government need to think carefully about how the code should be redrafted to give confidence to banks and their investors and creditors. Certainly, conversations that I have had in the past few days with external parties suggest that the code as currently drafted does not do the job that people expected it to do.

Ian Pearson (Labour, Dudley South)

It is a pleasure to welcome you to the Chair for this sitting, Mr. Illsley. I spoke at some length on the proposed amendments to clauses 5 and 6 on Tuesday afternoon, and I do not intend to do so today.

I should like to say two things in response to the hon. Gentleman, the first of which is on his point about the FSA and the need to explain the situation. The FSA is looking at the guidance on threshold conditions, not the conditions themselves, and plans to consult on it in December. However, as I made clear earlier, I can confirm that adequate resources and management suitability are key conditions for assessment of the trigger.

There are always decisions about what to put in primary legislation and what is more naturally secondary legislation or required in codes of practice. Those decisions are fairly straightforward in many instances, but in others they are matters of judgment, with fine distinctions. We always have debates about those issues.

I welcome the hon. Gentleman’s general support for the Bill and I note his comments on the code. As he says, we are consulting on it, starting today, and also consulting on the secondary legislation. We have been working closely with the expert liaison group and others to ensure that we get the details of the secondary legislation right. I do not think that there are any differences on intention or principle other than on who exercises the trigger. There is genuine willingness on both sides of the Committee to have legislation and a code of practice that does the job that we all want it to do. With those brief comments, I hope that we can move on.

Mark Hoban (Conservative, Fareham)

I welcome the Minister’s remarks. It will be important for the Bill’s progress through the other place, where their lordships will be looking carefully at the revised code and how it interacts with the powers, to get the balance right. My main concern is that the balance between the constraints, which the code imposes on the exercise of powers, is not right. I recognise the tension between primary and secondary legislation and the code. I, and others, would be more comfortable, if the code was beefed up, but people will make their views known clearly through the consultation process. I beg to ask leave to withdraw the amendment.

Clause 7

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment No. 75, in clause 7, page 4, line 27, leave out ‘not reasonably likely’ and insert ‘highly unlikely’.

I, too, welcome you to the Chair, Mr. Illsley. The amendment is also in the name of the hon. Member for Fareham, who will no doubt want to say a few words. The clause, which covers general conditions, is another important part of the Bill. The amendment is in tune with some of the previous amendments discussed, which concern how and when the powers, and the stabilisation powers in particular, are used, and their effect on the enterprise that they are used upon. On the face of it, the amendment may seem semantic, in that we are seeking to delete the words “not reasonably likely” and replace them with “highly unlikely”. In the Bill, we are attempting to consider not just current conditions but conditions in the future when this legislation may be used in different circumstances. Hopefully, it will not be used in a general sense, but in the specific case of a particular banking operation. The amendment refers to the timing of the use of such powers, which is crucial.

Our proposed regime should be invoked only when it is clear that all other possibilities for retrieving the situation in which the bank finds itself have been properly explored. Moreover, the board and the advisers must have made every effort to prevent the failure and have been given the necessary period of time to pursue such opportunities. In fact, everything possible must have been done and must have failed before the regime can be invoked. In such a situation, it is not just “reasonably likely” but highly unlikely that they will meet those threshold conditions.

As I said earlier, such a measure is all about timing. If at all possible, we should try to maintain the integrity of the whole business. We should consider the value of that business and the opportunity for it to continue. We should not take precipitate action that would jeopardise that possibility.

Leaving action too late could jeopardise the possibilities for protecting the depositors, which is the principal thrust of the Bill. None the less, exercising those powers too early could jeopardise the interests of other stakeholders in the business, so the timing is critical. Just as we discussed the opportunity of exercising the powers in a flexible way, so, too, the authorities will want as much flexibility as possible in determining exactly when they introduce the powers.

The amendment is designed to raise the bar to protect, to a certain extent, the bank and its directors in their efforts to maintain the enterprise. We do not want action to be taken too early in the interests of depositors without necessarily taking into account the interests of other stakeholders. We are talking about pre-solvency situations. The enterprise at that stage may be solvent, but it may not reach the threshold conditions. There is a period of time in which there are opportunities to save it.

The Government should seriously consider the amendment, particularly in light of the remarks made by the hon. Member for Fareham during our debate on the last clause. The amendment will provide some measure of confidence to those who are being asked to invest substantial sums in the banks. It is likely that part of any operation to try to meet the threshold conditions will inevitably involve recapitalisation or the raising of additional capital. Going out to seek fresh capital when there is a possibility that the trigger will be pulled because it is “not reasonably likely” that the bank will meet the threshold conditions is a whole lot different from going cap in hand with a clear indication that it is highly unlikely that the trigger will be pulled. To a certain extent, it will give a view on whether a capital-raising exercise is a possibility. It may even jeopardise the capital-raising exercise, thus defeating the whole purpose of trying to maintain the entity as a whole.

Although, it may seem merely semantic to change the words, they are highly significant. If we are moving the bar, or having the bar set at such a low level as “not reasonably likely”, it will affect the efforts of any bank under threat of not being able to meet its threshold conditions to retrieve the situation. An awful lot of things may not be reasonably likely at any one stage, but that does not mean that they will not happen. Efforts can be made and negotiations can be undertaken, but once they have been completed and it becomes clear that any rescue measure seems to be beyond redemption, in that sense, it then, of course, becomes highly unlikely. At that stage, it is inevitable that the threshold conditions will not be met, and the powers can be exercised.

As I have said, we should seriously consider those points because, as we noted when we discussed the last set of amendments, confidence in the marketplace, the cost of capital and the ability to maintain a competitive operation within the general marketplace should not be jeopardised. I have referred to the measure being just for depositors and they are, of course, an important part of the legislation, but so too are other aspects of the whole banking business. That includes those who provide the capital for banks and the way in which banks generally operate in the competitive marketplace. With those factors in the mix, we should be careful before exercising the powers and we should ensure that the conditions to be pursued are set at an appropriate level. The bar should not be set too low. In addition, the authorities should not be brought in too early as that could even be to the jeopardy of depositors—although not necessarily. However, it could certainly be to the jeopardy of other stakeholders.

Mark Hoban (Conservative, Fareham)

I do not have much to add to the comments of the hon. Member for South-East Cornwall, who highlighted the challenge posed by the wording of the Bill. It certainly seems that there is a low hurdle for the FSA to jump to trigger the powers. I shall touch on the issue of time scale, which the hon. Gentleman also mentioned. An institution might have a short-term funding problem for a week, but the position might be resolved in a month. What is the time scale for the exercise of the second condition? It is not clear how much leeway the authorities would give a business in that situation. We need to probe that matter. In part, it might be dealt with in a revised code. The hon. Gentleman and I have opted to strengthen the constraints in the Bill, but that might not be the best way, so we need some clarity about when the condition applies. The Bill states:

“Condition 2 is that having regard to timing and other relevant circumstances”.

Clearly timing is a key factor. I am not sure what “other relevant circumstances” those who drafted the Bill have in mind, but we need to understand the context in which the power would be exercised and how the regulator would define “not reasonably likely” in relation to that area.

Ian Pearson (Labour, Dudley South)

Nobody wants precipitate action taken when a bank gets into difficulties, but I also hope that nobody wants the situation to be left so that it is too late to exercise stabilisation powers in a timely manner. The question is what balance needs to be struck and what judgments need to be made in that area? I fully understand the points made by the hon. Member for South-East Cornwall; he wants to probe us on the conditions and establish whether the bar is being set at the right level. We believe it is and I shall explain why.

Sally Keeble (Labour, Northampton North)

Can my hon. Friend explain why the FSA should be the one to pull the trigger and how he wants the FSA to operate because there has been failure in the regulatory regime? I want assurances about what the exact expectations and the justifications were.

Ian Pearson (Labour, Dudley South)

I shall happily cover that point, although the hon. Member for Gosport has raised it and we have discussed it on a number of occasions, including on Second Reading and in debate on other parts of the Bill.

Let me explain why the tests we are putting in place with these two general conditions are the right ones. The purpose of the clause is to make it absolutely clear that the authorities will not—indeed, cannot—use the stabilisation powers until it is clear that a bank is failing and that voluntary or regulatory action is no longer appropriate to resolve the situation. Clause 7 has two conditions that need to be met. The first is that

“the bank is failing, or is likely to fail, to satisfy the threshold conditions”.

The second is that

“having regard to timing and other relevant circumstances it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions.”

That point of “reasonably likely” has been raised by the hon. Member for South-East Cornwall with his amendment and the word “timing” was discussed by the hon. Member for Fareham in his contribution. On timing, it is not appropriate to set in the Bill a future time limit by which the bank has to demonstrate that it is reasonably likely that it can turn the situation around. The two conditions are to ensure that the bank is put into the special resolution regime at the right time. The cumulative effect of both conditions achieves that, as they cover a decision based on, in the first instance, the current situation of the bank regarding quantitative and qualitative conditions, and a decision about whether the future turnaround of the bank is unlikely. Those decisions are designed to ensure that the SRR powers can be exercised before the banks enter insolvency. One reason for that—as we have discussed in relation to other clauses—is to preserve whatever residual value there may be in the failing bank, which is a point that the hon. Member for South-East Cornwall made strongly on Tuesday. Acting at that time increases the chance of a private sector solution or a swift resolution through a bridge bank. Given that fact, the reasonable likelihood for the second test provides the right level of assurance for stakeholders that voluntary or regulatory action will no longer work, while increasing the prospect of a successful resolution.

The use of any of the stabilisation options also includes a strong public interest test which we will debate in clause 8. As Lord Turner recently said to the Treasury Committee, things can move very quickly when a bank is in a failing situation. These are matters of judgment, but I do not think that the amendment proposed by the hon. Member for South-East Cornwall would help. We believe that the two conditions set the bar at the appropriate level.

My hon. Friend the Member for Northampton, North asked the familiar question about why the FSA should pull the trigger rather than the Bank of England. We believe that the FSA, as the regulator of firms, should be the lead authority in deciding when a bank is failing. That position was supported by respondents to the January and July consultations. Giving the trigger to another institution would be likely to lead to dual regulation of financial firms, which would be wasteful and costly. Obviously—I have made this point on a number of occasions—at such a time the tripartite authorities would be in close contact, as they are now.

If the hon. Gentleman feels that he has to press the amendment, I will encourage the Committee to oppose it. We believe that the test of reasonable likelihood—the two conditions in clause 7 and the public interest safeguards in clause 8—sets the right level, but I appreciate the probing way in which he has pursued the amendment.

Colin Breed (Liberal Democrat, South East Cornwall)

I thank the Minister for his response. During the debate on the last two or three clauses, I and the hon. Member for Fareham have pointed out some potential unintended consequences of the Bill. The principal thrust of the Bill is to protect depositors; it is obviously designed to prevent runs on individual banks, and that is absolutely right in today’s situation. In many respects, it is hard to disagree with the Minister, because if the principal thrust is to protect depositors we want as much flexibility as possible to enter into an arrangement to achieve that objective at the most appropriate time. The hon. Member for Fareham and I were saying that that has consequences regarding perhaps how capital can be raised—the cost of that capital—the wider institutional market perception of the Government’s proposals and how deposit-taking institutions undertake their business. We do not know the consequences of course; we are trying to predict them. So often in this place we rush headlong into legislation, with the right intention—to achieve a speedy response to an unfortunate event—and then we live to repent, because of consequences that we had not thought of.

I shall not press the amendment because the matter has been well highlighted and ventilated in the Committee. However, I urge the Minister and the Treasury officials to think about the consequences that may unwittingly be brought about because of the fundamental desire to protect in all possible circumstances the interests of depositors. There are other interests that sometimes need to be balanced.

It is difficult to argue against what has been said on the main thrust of the Bill. We were probing the Minister, and also pointing out that there might be unintended consequences and that those might not be in the greatest interest of the UK economy and the banking network as a whole. That is the danger. On that basis, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 86, in clause 7, page 4, line 38, leave out subsection (6).

I want to probe how the special resolution objectives that were set out in clause 4 interact with the power to pull the trigger. We will look at the interaction between the objectives and other parts of the legislation under clauses 8 and 9.

It would be helpful to think about how the sequence of events is covered. Clause 7 gives the FSA the power to pull the trigger, which will determine whether the Bank or Treasury can exercise the stabilisation powers referred to in clause 1(4).

The Bill presents that as a linear process. The first step is either that the FSA will determine that the Bank, under clause 8, may exercise the stabilisation powers to enable it to sell a bank to a private sector purchaser or transfer it to a bridge bank, or that the Treasury will put the bank in temporary public ownership. The second step, if no financial assistance is given, is that the Bank of England will decide whether it should transfer the bank to a bridge bank or a private sector owner. The FSA, having said that the trigger can be pulled, may delegate the responsibility for what powers and options are used when no financial assistance is given. If financial assistance has been given, either the Treasury can take the bank into temporary public ownership, or the Bank can use the stabilisation powers to transfer the bank to a bridge bank or a private sector provider.

However, clause 7(6) appears to suggest that the FSA will act within a different framework of objectives from the Bank and the Treasury. The objective that will drive the FSA in that context will be the need to meet conditions 1 and 2, but it also appears that it will be driven by the objectives set out in the Financial Services and Markets Act 2000. There is not a complete match between those two sets of objectives, and after the FSA has pulled the trigger the Bank of England or the Treasury might decide not to exercise the stabilisation powers because they do not believe that to do so would be appropriate in the context of the clause 4 objectives.

The FSA might pull the trigger, and the Bank and the Treasury could say, “No, we will not bother doing that because we do not think that we can achieve our objectives after you pulled the trigger.” So what happens then? That might be part of the problem about the sequence of events, but I am not sure that the process is as linear as the Bill suggests. The Minister has said that the tripartite authorities will discuss resetting all those things, but will they get to the point of saying together that they would pull the trigger and take action so that the decisions are made virtually at the same time? That way, the FSA would in effect only pull the trigger if it believed that the Bank or the Treasury would use their stabilisation powers.

It is worth pointing out that subsection (4) relates to our old friend financial assistance. Given the debate we had on Tuesday about financial assistance, it would be helpful to understand what sort of financial assistance the Government envisaged in the context of the FSA being able to pull the trigger. It would be helpful if the Minister expanded on how the FSA’s objectives under the Financial Services and Markets Act interact with the objectives under clause 4 and how the decision-making process will work in practice, as opposed to how it appears to work legally.

Ian Pearson (Labour, Dudley South)

The amendment looks at the FSA’s decision on whether the general conditions are met and proposes that that should be subject to the SRR objectives, and I would like to explain why I do not agree with that. A fundamental distinction needs to be made between whether the SRR should apply and what actions should be taken. Deciding whether the general conditions are met is an exercise in determining whether the SRR should apply, not what actions should be taken in pursuance of it.

The SRR objectives are relevant to what actions should be taken, and they stipulate them clearly, but they should not condition whether it is appropriate for the SRR to apply to a bank in the first place. The general conditions relate specifically to regulatory and voluntary action outside the SRR rather than action under it. That is important in providing confidence to stakeholders and the market that stabilisation powers cannot be exercised before other, non-SRR options are deemed not appropriate. That was the point made by the hon. Member for South-East Cornwall. It is right to consider what steps can be taken before the trigger is pulled and stabilisation options are considered.

The general conditions in clause 7 are linked to the threshold conditions set out in the Financial Services and Markets Act 2000. Therefore, in exercising such decisions, the FSA will be acting according to its objectives and principles under the Act. That is the point referred to by the hon. Member for Fareham, and it is absolutely right that that should be the case. In deciding whether the general conditions in clause 7 are met, the FSA would have regard to the rules and guidance in the threshold conditions section of the FSA handbook, which has regard to the statutory objectives set out in the FSMA.

The conditions have been designed to give the market confidence that regulatory and voluntary options have been explored before a bank is put into the SRR. Given that, to impose a different set of objectives over and above the principles and objectives that guide the FSA’s decisions under the FSMA would provide confusing and possibly conflicting guidance to the FSA in exercising its discretion. There is clearly a distinction to be made between the actions taken under the SRR and whether the SRR should apply, which will depend on the conditions being met and the FSA’s exercising its decision-making power in accordance with the rules and guidance in the threshold conditions in its handbook.

For those reasons, I hope that the hon. Member for Fareham will feel able to withdraw his amendment. He raised an interesting point about whether the FSA would pull the trigger if the Bank did not want to act. As I have explained on a number of occasions, the decision to pull the trigger is taken by the FSA, but it will be taken after close consultation with the Bank of England and the Treasury. As various consultations have made clear, it is not a linear process. Very few things in real life are; I think that Einstein said that even a straight line was not necessarily linear. Authorities would consult each other on all decisions, as is set out in the Bill. In practice, the intention would be that the decisions would all be taken and announced together.

Sally Keeble (Labour, Northampton North)

The clause goes to the heart of some of the problems that we saw in the Northern Rock debacle. My hon. Friend has described how he thinks the procedure will work in practice. How much scenario planning—war games or whatever—has there been or will there be to test how the procedures would work in practice?

Ian Pearson (Labour, Dudley South)

We can probably say that the relationship between the Bank of England, the FSA and the Treasury has been forged in battle over recent months. Extensive and close consultations have been held. I do not think that circumstances could arise in which the FSA would pull the trigger without knowing what the Bank or the Treasury was going to do. There is close co-operation, and I do not doubt that it will continue.

Sally Keeble (Labour, Northampton North)

The issue about the working of the tripartite authorities is critical, and Opposition Members and some Labour Members have been critical of it. The mechanism was supposed to resolve some of the difficulties that arose last time. Will the Minister be clearer and say exactly what steps have been taken to check or work through how the mechanisms would resolve some of the current difficulties, and how they would operate in practice?

Ian Pearson (Labour, Dudley South)

As my hon. Friend knows, we have consulted widely on the Bill. We have talked extensively to the Bank of England and the FSA, so it is not as if there has not been an enormous amount of discussion on how the tripartite authorities will work together. There is consensus on the legislation that it is an appropriate way forward. In the evidence-taking sessions that we had at the beginning of the Committee, there was widespread acceptance, when the FSA and the Bank of England were asked questions by members of the Committee, that this was a workable and sensible way forward. We are following that in the Bill.

Mark Hoban (Conservative, Fareham)

I think that the hon. Member for Northampton, North is alluding to the lack of clarity. The Bill is actually quite straightforward in that it offers the possibility of pulling the trigger and deciding on the stabilisation options. In that respect, there is a clear legal process. However, the implementation of the measure is more sophisticated, because there will be a debate or dialogue between the tripartite authorities about the problem bank. There could be a situation in which the Bank and the Treasury decide that they cannot use the stabilisation powers because they do not think it appropriate. Their conclusions will inform a decision by the FSA to pull the trigger. Effectively, they will have a veto over the trigger, but the Bill suggests that they would not have such a veto. There is a tension between the practical ways in which the powers will be exercised and the legal form. Actually, the practical implementation gives rise to some of the uncertainty and concerns that people have about how the tripartite authorities operate, particularly in the context of a situation such as Northern Rock.

Ian Pearson (Labour, Dudley South)

I agree with the hon. Gentleman that a clear and sophisticated approach is being adopted to the legislation. Of course, the authorities will work extremely closely together on these matters. As we all appreciate, we are talking about exceptional circumstances. We have experienced such circumstances, and we have the examples of Northern Rock and Bradford & Bingley. We have learned lessons from those and the legislation that we have designed would have been appropriate in those circumstances. It will put a permanent regime in place that gives confidence to the financial markets that there is clarity in our approach. At the same time, our approach recognises that we cannot put the minutiae of future discussions between the three organisations in the Bill.

Peter Viggers (Conservative, Gosport)

The Minister is seeking to reassure us about the procedures for consultation in relation to the pulling of the trigger—I should certainly like to be reassured on that. The procedure will work only if the Bank is sufficiently tasked and staffed so that it is capable of staying close enough to the situation for the consultation to be worth while. It is no good for the FSA to have the staff or monitoring capacity if the Bank is slightly divorced because it is unable to participate through a lack of resources. Will the Minister reassure us that the Bank will be resourced sufficiently to remain close enough to the situation to be worth consulting over such matters?

Ian Pearson (Labour, Dudley South)

I agree that the Bank of England needs to be resourced to perform the tasks required of it, particularly the responsibility for financial stability under the powers given to it in the Bill. That is right and proper.

As a final word on the matter, because we are treading on the ground of a stand part debate, I want to make it clear that we are not designing a zero-failure regime. There might well be circumstances—who is to say?—in which the Bank or Treasury decide not to use a stabilisation power where the threshold conditions have been triggered. In those circumstances, the bank might go into a normal insolvency, but it might also go into the bank insolvency procedure detailed in the Bill to ensure fast payout through the Financial Services Compensation Scheme. It is not a zero-failure regime, but we believe that the lead responsibilities among the different parts of the tripartite arrangement that makes up the authorities are the right lead responsibilities. Of course they will work together closely. That is the normal and expected way of things.

Mark Hoban (Conservative, Fareham)

One suggestion made in the context of the code was the need for a decision tree to set out the various steps of the process in order to enable users to understand what happens when and in what circumstances.

Ian Pearson (Labour, Dudley South)

A non-linear decision tree?

Mark Hoban (Conservative, Fareham)

Indeed, that is part of the problem. I tabled my amendment to delete subsection (6) because I interpreted the clause to mean that the general conditions would be exercised very differently from the powers exercised by the FSA under the Financial Services and Markets Act. However, the Minister says that there is a boundary or demarcation line, and that the FSA will consider the threshold conditions in the context of the FSMA and its rulebook. That will be one part of the boundary, and then it will flip over into the powers granted by the Bill to the Bank and the Treasury.

However, that demarcation line does not actually exist. There is no clear line. It is more of an iterative process among the tripartite authorities—I do not think that one can have a circular decision tree—that will affect how the FSA exercises its powers under the FSMA and how the powers in the Bill will work. We are trying through a legal process to impose clarity where clarity does not necessarily exist, and part of the challenge is reassuring people about how the powers will be exercised when that degree of clarity is lacking.

That is part of the Government’s challenge in communicating how the Bill will work in practice. The explanatory notes do not make the process clear, so it is again up to our old friend the code to elaborate on that slightly circular process. We need to work a bit harder on explaining how the initial process will work in practice. However, I beg to ask leave to withdraw the amendment.

Clause 8

Mark Hoban (Conservative, Fareham)

I want to make a few brief remarks about clause 8 and to probe the public interest point that the Minister mentioned in our brief discussion on clause 7. The clause sets out the conditions that enable the Bank to use its share transfer or property transfer powers to transfer a bank to a bridge bank or a private sector purchaser. Condition A is that the exercise of the power is necessary having regard to

“the stability of the financial system...the maintenance of public confidence in the stability of the banking system...or the protection of depositors.”

Those three points relate back to the objectives of the special resolution regime in clause 4. I can understand why that is the case. What surprises me about those powers—given the nature of the stabilisation, the share transfer and the property transfer powers—is that they do not have regard to objective 5 in clause 4 (8), which is

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

If we are talking about the Bank exercising the stabilisation powers, then it would have to consider objective 5. Will the Minister expand a little on that?

Peter Bone (Conservative, Wellingborough)

We are now returning to an earlier argument that we had in which we said that the Government have some super-objectives, and that all the objectives listed in clause 4 do not balance each other. Now we have this clause, which states only three of the objectives rather than the five. Therefore the Government have, in effect, three super-objectives. I do not understand why the Government will not admit to that.

Mark Hoban (Conservative, Fareham)

My hon. Friend makes an important point. We debated the priority of the objectives, and we were told that there was no priority. However, we have a situation in which one of the objectives, which is relevant to the powers the Bank can exercise under clause 8, has been excluded. We must consider whether objective 5 in clause 4 has any value both in the Bill and in the context of the share and public transfer rights.

Condition B is phrased rather differently. It comes into play when the Treasury notifies the Bank that

“they have provided financial assistance in respect of a bank”.

Again, we have debated this matter. We have considered what financial assistance means and what types of financial assistance can trigger the special resolution regime. We know that the Government will come forward with secondary legislation on that. Again, we have a situation in which the objectives that condition B relates to are much more limited. Subsection (5) (a) says that

“the Treasury have recommended the Bank of England to exercise the stabilisation power on the grounds that it is necessary to protect the public interest.”

It is not clear whether that is the same public interest that is referred to in subsection (2), which is effectively in the first three options. Subsection (4), however, refers to the financial stability objective. The Treasury, through condition B, recommended that the Bank should exercise its stabilisation powers, but there is no reference to objective 5, which is about property rights. Given that those rights effectively effect a partial transfer, why is objective 5 not listed there? Concerns have been expressed about the impact of such powers on creditor rights. Therefore, it is surprising that objective 5 has not been included in clause 8.

Condition B can be satisfied only if

“the Treasury have recommended the Bank of England to exercise the stabilisation power”

and if it is the Bank’s opinion that that is the best way to proceed. Will we ever know whether the Bank has turned down the Treasury’s request? Would the Bank ever turn down the Treasury’s request or is it one of those areas where we are back to the non-linear decision tree in which there is a general discussion and all the steps are announced at the same time?

I wonder whether the Minister will take the opportunity to explain which definition of financial stability applies in the clause. We have the broad definition in the code and the one set out in the evidence given to us at the start of Committee by Nigel Jenkinson of the Bank of England and provided in evidence to the Treasury Committee. The Bank’s working definition, supplied to us in the evidence session, is narrower than the definition in the code. I raised that with the Minister on Tuesday, but the question did not get a reply. It will be helpful to understand how the tripartite authorities will reconcile the two definitions of financial stability.

Returning to this slightly non-linear process, I think that clause 8 is subordinate to clause 7, whereas the language in clause 8(6) suggests that it is in addition to it and that the two work together. The provisions in clause 8 can be exercised only if a decision under clause 7 has been reached, but the language in clause 8 does not reflect that.

Ian Pearson (Labour, Dudley South)

The authorities recognise that the stabilisation powers can alter or remove property rights and involve public authorities taking control of commercial institutions. Therefore, the special resolution regime stabilisation powers should be used only when they are justified in the public interest. To that end, in addition to the general conditions provided in clause 7, the Bill requires further specific conditions to be met before the authorities can deploy particular SRR stabilisation options, and those are set out in clause 8. The clause requires the Bank of England to be satisfied that specific conditions have been met before exercising a stabilisation power to transfer the whole or part of a failing bank to a private sector purchaser or a bridge bank. I draw the attention of the Committee to the structure of the conditions, which require that one of two specific conditions be met before the Bank can act.

Condition A ensures that, before the Bank of England can exercise the powers to transfer a bank to a private sector third party or a bridge bank, it needs to be satisfied that exercising the powers is necessary, having regard to the public interest in the stability of the financial systems of the UK, in the maintenance of public confidence in the stability of the banking systems and in the protection of depositors. Those specific conditions provide a higher test than a public interest test framed in wholly general terms. Effectively, they set out in the Bill those elements of the SRR objectives, which the hon. Member for Fareham noted we discussed under clause 4, to which the Bank of England must have regard before deploying its resolution tools. Before determining that the conditions are met, the Bank of England must consult with both the Treasury and the FSA.

Peter Bone (Conservative, Wellingborough)

Will the hon. Gentleman give way?

Ian Pearson (Labour, Dudley South)

May I reply to the points raised by the hon. Member for Fareham? I will then happily give way. The hon. Member for Fareham asked why the specific conditions cover all the SRR objectives, but ignore the SRR objective of protecting property rights. The aim of the stabilisation tools is to protect depositors and to maintain financial stability and confidence in the banking system, or to protect public funds if they have been invested in the bank before the SRR powers were exercised. The authorities must have regard to the objective of protecting property rights when exercising the tools, so it is not appropriate for it to be a public interest test that justifies using the tools.

Peter Bone (Conservative, Wellingborough)

Towards the end of his speech the Minister said, “the stability of the financial systems of the UK...and the protection of depositors.” It says in the Bill “or”. If it is “and”, all the conditions will have to be met; if it is “or”, only the protection of depositors. I wonder which it is—the collection of the three or the single one. If it is as it says in the Bill, not as the Minister said, it could be just the protection of depositors, irrespective of the other two conditions.

Ian Pearson (Labour, Dudley South)

My understanding is that it could specifically refer just to the protection of depositors. It could refer to all three of them but singly would be possible.

Condition B in clause 8 applies to the situation where the Treasury has provided financial assistance to a failing bank

“for the purpose of resolving or reducing a serious threat to the stability of the financial systems”.

In such situations, to protect public funds, the Bill requires the Treasury to lead in judging that a stabilisation power is necessary to protect the public interest but the Bank of England will still lead in deciding that an exercise of a stabilisation tool best protects that public interest. This arrangement ensures that both authorities exercise powers under their mandates.

The hon. Member for Fareham also asked about definitions of financial stability. One definition of financial stability relates specifically to the Bank’s exercise of its powers under the SRR. There is also a wider definition of financial stability. That explains why there are different definitions. It might be helpful if I write to the Committee and explain the difference and the reasons for it.

This is an important clause that ensures that the stabilisation tools are used only when it is necessary to protect financial stability, confidence in the banking system or depositors.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for his reply, which reinforced the intervention about the hierarchy of objectives made by my hon. Friend the Member for Wellingborough during my earlier remarks. It appears that the principal objective is the protection of depositors. Whenever we debate what the Bill seeks to achieve it appears that the interests of investors and creditors rank pretty low down the list of priorities. That is reinforced by this clause, which enables the Bank to disrupt traditional property rights because it gives the Bank the power eventually to have partial transfers. The message that comes through clearly is the relatively low priority given to the rights of creditors. That goes back to the concern people have about this Bill—that the power given by the Bill to the tripartite authorities is not well constrained when it comes to the interests of people other than depositors. The Government need to think carefully about how that protection of creditors is expressed or given—we will come on to that again in clauses 42 and 43. I do not get the impression at the moment that creditors are given a particularly high priority. That is why I would expect to see the Government take the interests of creditors more seriously. The Bank could have had regard in clause 8 to objective 5 in the same way as it has regard to the other objectives. There is a gap that the Government need to address.

Clause 9

Mark Hoban (Conservative, Fareham)

I shall not go over the ground that I covered under clause 8, but the same sorts of concerns arise. There are two examples of temporary public ownership that we can refer to. One is the way that the Government dealt with Northern Rock, which is still in temporary public ownership and will be for some time. The other is the rescue of Bradford & Bingley, which, as I understand it, involved that institution going into temporary public ownership to enable deposits to be transferred and some of its residual activities to be acquired by Abbey Santander.

What guidance does the Minister have for the Committee on how long an institution will be allowed to be in temporary public ownership? The example of Bradford & Bingley would suggest a relatively short time—it was a very temporary measure—whereas Northern Rock could be with us as the people’s bank for some time. Temporary is an elastic term, but it would be helpful to know where temporary public ownership fits in the stabilisation options hierarchy, alongside private sector purchasers and bridge banks.

Ian Pearson (Labour, Dudley South)

As we debated under the previous clause, the stabilisation powers can alter or remove property rights, and they involve public authorities taking control of commercial institutions. Therefore they should be used only when they are justified in the public interest. I wish to take issue with the hon. Gentleman. He said that we are not taking the interests of creditors sufficiently into account; clause 8 provides a higher-level test with regard to the public interest, which is why we included it.

Whereas clause 8 deals with the specific conditions for transferring a failing bank to a private sector purchaser or a bridge bank, this clause provides specific conditions that must be met before the Treasury can take a bank into temporary public ownership. Those conditions are that the exercise of the power is necessary to resolve or reduce a serious threat to the stability of the UK’s financial systems, or that it is necessary to protect the public interest where the Treasury has provided financial assistance in respect of the bank for the purpose of resolving or reducing a serious threat to the stability of the UK's financial systems.

The specific conditions in clause 9 are in addition to the general ones in clause 7, and are the same as those in the Banking (Special Provisions) Act 2008. Hon. Members will note that they therefore provide a higher test than those in clause 8. They signal that the power for the Treasury to take a bank into temporary public ownership is a last-resort SRR tool, and reflect the situations in which doing so may be the most appropriate option. Examples of those situations are: where the Treasury has provided a failing bank with a significant amount of public money to stabilise it; where wholesale and long-term restructuring is required to return the bank to the private sector; and where the bank is subject to an extremely fast-burn or complex failure such that there is insufficient time or means to effect a property or share transfer to a private sector purchaser without significant risk. The clause provides a strict test, and makes it clear that temporary public ownership is a last resort.

The hon. Gentleman asked how temporary “temporary” is. It would not be sensible to put a time limit in the Bill. The Government would not intend the option to be a long-term one, reflecting how the word is normally interpreted. We try to make it clear in clause 9 that we consider temporary public ownership only if it is appropriate. It is certainly a last-resort option. We would always want in the first instance to prevent a bank from entering the SRR. If it was necessary to do so we would look at the private sector purchase route. We would look to use the bridge bank tool. The temporary public ownership tool should be seen very much as one of last resort.

Mark Hoban (Conservative, Fareham)

I am grateful for that clarification. It is very much one of last resort, but I am not sure how clause 9 demonstrates that. It does not say that if we are unable to achieve the options set out in clause 8 we can move into temporary public ownership. Clause 12 talks about the “third stabilisation option”. I am not sure whether that means that it is the third preference, so I am not sure where this proof that it is a last resort appears in legislation.

Ian Pearson (Labour, Dudley South)

The higher tests for temporary public ownership than for a bridge bank or transfer to a private sector purchaser clearly demonstrate the Government’s intention. We believe that taking ownership of the whole of a bank must be justified only on the basis of a higher public interest test that reflects the specific reasons why such action will be taken. We think it important that this is an option to address financial stability risks, including when financial assistance has already been provided, as I have explained. It is important to have the ability to protect taxpayers’ interests by taking full control of a failing bank. I am happy to repeat that the higher test levels and the fact that the authorities would always want to look for another solution first, very much reflect the way in which we have designed the Bill overall.

Peter Bone (Conservative, Wellingborough)

I understand that the Minister is stating the Government’s position, which is that if circumstances necessitate it, partial public ownership will be the last resort. That is their intention. But it does not bind any future Government to that. The next Government may be very keen on nationalising things. That is very unlikely, but the Bill does not rank it. The Minister is stating the current Government’s position if such an event occurred.

Ian Pearson (Labour, Dudley South)

It is certainly this Government’s position. But I refer the hon. Gentleman to some of the detail of the clause. It makes it clear that a high level of test needs to be satisfied before action can be taken in this area. There would have to be a systemic threat to financial stability. There would have to be some significant Government investment in the failing bank already. A medium-sized bank that got into financial difficulty and which the Government had not supported previously could not suddenly be nationalised. That is not the Government’s intention. Clause 9, as I understand its construction, would not allow that to happen. We are trying to make the Government’s position in this area as clear as possible. That is why I have indicated very strongly that this is seen as an option of last resort which might be needed in certain circumstances.

John Pugh (Liberal Democrat, Southport)

Just to be absolutely clear, and I think I understand the logic of the position, the Minister is saying that the Government wish to keep open the possibility of temporary public ownership, even if the option of private sector purchaser and bridge bank is also open at the same time. In other words, it could be a tool of preference. That is clearly what the legislation says at the moment. Even though the preference would normally be to use it as a last resort, it would not inevitably be used as one, and it could be used in circumstances where there was still a private sector purchaser in the wings or the possibility of a bridge bank.

Ian Pearson (Labour, Dudley South)

As I was trying to explain, the higher public interest test means that it could be used only when financial assistance had been provided or there was a systemic threat. It could not just be generally used. If either of those conditions were met, it would be a matter for the Treasury, in discussions with the Bank of England, which will take the lead responsibility in exercising stabilisation tools, to come to some agreement about the best way forward. I used the term “last resort” because it announces the Government’s intention clearly, but it would not be appropriate to put that in the Bill. It could certainly be an appropriate course of action depending on the circumstances, but as I have outlined, the higher-level tests provide a significant assurance about how the power might be used in future.

Mark Hoban (Conservative, Fareham)

I am still not entirely clear that the clause includes a higher public interest test. It provides a public interest test where financial assistance has been provided, but financial assistance is also one of the precursors to condition B in clause 8. It is not clear where the crossover point is between condition B and the higher tests in clause 9. The Minister may say that the language in subsection (2) about “a serious threat” beefs up the provisions beyond clause 8. That might be his justification that the test in clause 9 is a higher test, but I am not sure that that is what he is saying. We have not heard clearly on the record what specifically about the wording of clause 9 makes it a higher test than clause 8 and a power to be used only in the last resort.

Peter Bone (Conservative, Wellingborough)

On the principle behind the clause, I understand entirely the Government’s position that Government ownership of a bank is the last resort, but that is not what the Bill says. Under the Bill, even though a private market opportunity might be available, the Government could decide that nationalisation, even temporary nationalisation, was more in the public interest.

If that is what the Government mean—if they want to leave it open for a Government to decide that nationalisation is an option although there is a market solution—that is fine. However, that is moving a long, long way from the position at the start of the crisis, when the Chancellor was almost apologetic about nationalising Northern Rock, saying that it was the last thing and that we could not find any other market solution. We may have to come back to this on Report, but I ask the Minister: what are the Government really saying? Are they saying that in all cases, they want a market solution if possible?

Mark Todd (Labour, South Derbyshire)

There is one conceivable circumstance in which pursuing an available market solution might not be regarded as appropriate or in the public interest. We have seen an illustration of that in the dilemma involved in the permissive approach to the merger of Lloyds TSB and HBOS. A judgment might be made that that was such an uncompetitive move in the marketplace that it was not in the public interest to pursue it, even though it could be conceived as a solution to that particular banking crisis. That is an illustration of why the tools might be used slightly differently.

Peter Bone (Conservative, Wellingborough)

That was the longest intervention that I have ever had to deal with—it has lasted several hours—but the hon. Member for South Derbyshire (Mr. Todd) made a good point earlier. I wrote down what he said. It is the reverse of the point that I was making, but it is none the less a point of principle.

The hon. Gentleman said that there was a market solution for HBOS and Lloyds. The competition laws were originally torn up so that there would be a market solution, but since then we have had nationalisation. That is at the heart of the issue.

The Government say that nationalisation is the last resort. However, we have seen with HBOS and Lloyds that it is not the last resort but the favoured resort. We must return to that question on Report, as the Government’s assurances and statements do not match the Bill’s provisions; nor do they match what is happening in practice.

Ian Pearson (Labour, Dudley South)

I shall make a couple of points in response to the hon. Gentleman’s concern about whether temporary public ownership is a measure of last resort. As I indicated earlier, it is not appropriate to use the term “last resort” in the Bill. However, I believe that the Bill makes it clear that temporary public ownership is a tool of last resort. I shall explain why.

The Bill achieves that purpose by ensuring a higher public interest test for temporary public ownership than for the stabilisation options of transfer to a private sector purchaser or a bridge bank. The hon. Member for Fareham will appreciate that under clause 9 a bank can be taken into temporary public ownership only if there is a serious threat to financial stability or if it is necessary to protect the public interest when financial assistance has been provided to the failing bank to reduce or resolve that threat to financial stability.

Under clause 8, however, a bridge bank or private sector purchase can be exercised if it is necessary to protect financial stability, to protect confidence in the banking systems or to protect depositors—or any combination of the three. Under clause 8, the Bank of England can exercise a private sector purchaser or bridge bank tool if it believes that it is necessary to protect the failing bank’s depositors, even if it believes that there is no risk to financial stability. That is not allowed for temporary public ownership.

Mark Hoban (Conservative, Fareham)

In effect, clause 9 covers a much narrower set of circumstances, with stricter tests. Clause 8 deals with a much wider range of conditions that could be used to justify bridge bank or private sector solutions, whereas clause 9 deals with a narrow and serious threat to financial stability, or financial assistance, and it is that which could trigger temporary public ownership.

Ian Pearson (Labour, Dudley South)

Bingo! That is exactly the position I was trying to explain. Clause 8 would allow the regime to be exercised on the grounds of needing to protect depositors. We cannot do that under clause 9. We believe that the narrowing demonstrates that temporary public ownership is a last resort. It is clearly not appropriate to put it in the Bill, but that is certainly what is intended.

Clause 10

Peter Viggers (Conservative, Gosport)

I am not sure whether there is a mistake in the clause, but I should like clarification. The heading of the clause is “Private Sector Purchaser”, yet subsection (1) refers to “a commercial purchaser”. I would like to know the difference. A private sector purchaser is clearly one who is not in the public sector. That is the only definition. The word “commercial” must refer to a body involved in commerce, which could include a state. State enterprises could thus be involved if there was a commercial solution and that, of course, would include sovereign funds. Is there meant to be a distinction between private sector and commercial? My understanding of law is that the text in a Bill takes precedence over the clause heading, so are we talking about a commercial solution that could involve sovereign funds and enterprises owned by other states?

Ian Pearson (Labour, Dudley South)

Clause 10 establishes that where the general special resolution regime conditions—as set out in clause 7—and the specific conditions for the private sector purchaser stabilisation option of clause 8 are met, the Bank of England may effect a sale of all or part of the business of a bank to a commercial purchaser. The Bank is already responsible for important aspects of financial stability and the Bill provides for the responsibilities to be formalised, including through the addition of a statutory financial stability objective, as previously discussed in our debate on clause 216.

Given those responsibilities, the Bank should have the tools available to resolve a bank in the interests of financial stability, so the Government are making the Bank of England the UK’s lead resolution authority, conferring on it powers to effect the key stabilisation options—the private purchaser tool we are talking about and the bridge bank tool. Stakeholders and the Treasury Committee have supported the proposal.

The means to transfer the ownership and business of deposit takers already exists but commercial transfer mechanisms are not appropriate for dealing with failing banks. They are often too slow and do not provide sufficient certainty for parties involved in the transaction. The same is true of the part 7 procedure in the Financial Services and Markets Act 2000. The private sector purchaser tool in the clause provides for swift and certain transfer of some or all of the banking business from a failing bank to a private sector purchaser. The resolution of a failing bank by way of a transfer to a private sector purchaser is a highly desirable outcome and would generally be the Government’s favoured option, as I hope I have made clear.

A private sector solution is likely in many circumstances to be the resolution option that best meets the special resolution objectives. The transfer may be effected either through the transfer of a bank’s shares or other securities, or its property, rights and liabilities. Having both options provides enhanced flexibility. Property transfer powers also enable the Bank of England to choose which parts of a failing bank’s business to transfer. The facility for partial property transfers provides further flexibility to the Bank of England, increasing the chance of a private sector sale—an important point.

The hon. Member for Gosport is correct to note that the clause text has primacy. The heading is intended to give an indication of the intention. The phrasing in the clause is drawn widely to ensure that a range of transfers is possible, subject to meeting the public interest.

Clause 11

Mark Hoban (Conservative, Fareham)

The clause deals with the bridge bank option, which is the least familiar to the Committee. We all know what temporary public ownership is, and we all know about the private sector. I want to speak about some of the tensions that there might be in running a bridge bank. We touched on them briefly when dealing with the code. The arrangements generated a reasonable amount of comment during the consultation process, but there is concern about how a bridge bank might operate in practice.

In response to the July consultation, the British Bankers Association said:

“Under the bridge bank model the Bank of England would play a key role in setting strategic objectives and overseeing the management. Inevitably having the central bank involved in matters of commercial positioning, possibly with the bank also receiving public financial support, could raise competition policy issues.”

The code suggests that the Bank would be run on a conservative basis.

The City of London Law Society, in its response, said:

“We would...welcome further clarification regarding what a bridge bank would be able to do in terms of banking functions. Is it envisaged that it will be able to accept new deposits or to accept new business? There is a real risk that allowing it to carry out traditional banking activities could distort the inter-bank market.”

Not LIBOR in that context, but competition between banks. The society noted that it could be argued—as we did earlier this year in the context of Northern Rock—that

because of the bridge bank’s healthy and attractive balance sheet and because it is in effect supported by the Authorities, there is the chance that it will have a competitive edge over other banks.”

In terms of running a bank on a conservative basis—I use the language of the code—to what extent will a bridge bank be able to carry out the normal activities of a bank? Will it be open to accepting new business? Will it be open to innovative competition with other banks?

One objective of the bridge bank is to try to facilitate a private sector purchase. It would clearly need to maintain the franchise value of the failing bank. Would that be maintained if the bank is run in a conservative fashion, or would it always be at the bottom end of the market? If so, that position could stifle it over time and limit its ability to grow. In the long term, it could reduce its franchise value, although that depends on how long it remains as a bridge bank. These issues would not necessarily be relevant if it was a bridge bank for only a month, but the rules for the reports that the bank would need to make allow for the possibility of the bridge bank lasting for more than a year. I would like a better understanding of the constraints under which a bridge bank would function.

Another aspect is who would run the bridge bank. The Bank of England is in charge of appointing a new board of directors, subject to the approval of the Financial Services Authority. The City of London Law Society said in its representation:

“The directors may be selected by the Bank of England from amongst the existing directors of the failing bank... but there is clearly a question as to whether such directors would be willing to take on the corporate governance of the bridge bank...to whom would they owe their duty of care—the Authorities or the failing bank’s creditors?”

The code says that the bridge bank’s board may or may not include employees of the bank, and that it will be decided case by case. However, according to the July consultation on the special resolution regime, the Bank of England is expected to weed out from the board of the failing bank the directors who contributed to its downfall. The example of Northern Rock may be instructive. The chief executive and the chairman resigned fairly quickly and new senior directors were appointed, but not all the executive members of the board of Northern Rock were replaced.

The third element to pick up on is how the bridge bank will be run at arm’s length from the Bank of England. Arm’s length is defined by the code as

“leaving day to day management of the bridge bank to its board of directors and keeping shareholder involvement at a strategic level.”

It later states that

“the Bank shall work with the board of directors to decide upon how the bridge bank should be operated... where appropriate the board shall produce a business plan setting out how the directors intend to operate the bridge bank in a manner pursuant to meeting the objectives.”

If the primary objective is to sell the bank on, how will that be reconciled with the challenge of the competitive issues? The arm’s length relationship the bank will have with the directors as the sole shareholder is the right place to start, but there is also the potential move towards deciding how the bridge bank should be operated and where the division is to be drawn between the arm’s length relationship and the operational decisions. The Minister will not be immune to some of his colleagues’ comments about the actions that Northern Rock should be taking in the context of repossessions. When the Government take a controlling stake in RBS and a large minority stake in Lloyds HBOS, pressure will be placed on them as a significant shareholder to become involved in the day-to-day operations of the bank. How will the arrangements for bridge banks work to prevent that day-to-day interference?

John Pugh (Liberal Democrat, Southport)

I have a different set of concerns. The clause starts:

“The second stabilisation option is to transfer all or part of the business of the bank to a company”.

I want to talk briefly about partial transfers. In our evidence sessions concerns were expressed about that remedy. Angela Knight was particularly vocal. Responding to a question from the hon. Member for Gosport, she said that

“we would like to see an entire bank move... Partial transfers come rather a long way down the list. Our preference would be not to have a partial transfer unless there has been a default. If it is the decision of Parliament that a partial transfer must remain as part of the SRR tools before a default is triggered, it is absolutely essential that the creditor’s rights are not reordered, that the netting is properly taken care of and that the decisions taken at the time cannot be retrospectively changed by clause 65.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 48, Q136.]

She was a particularly eloquent witness. She gave some reasons for her stance and her distaste for a partial transfer earlier in the proceedings in answer to a question from the hon. Member for Fareham. [Interruption.] I am sorry. My phone is ringing. It is not a call from the British Banking Association, although one would have been helpful.

Angela Knight told the Committee that

“other people’s intervention regimes do not interfere with creditors’ rights, and netting agreements are preserved so that there is not the problem of not being able to net off your capital. Certainly, we have been told by a number of our members that if they could not net off, they would no longer be able to do that business here in the UK, so we would see a commensurate loss of a significant amount of business out of London.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 38, Q109.]

The allegation is that there is a possibility on the horizon that fewer people will engage in banking activities in the City of London or in the UK.

I reiterate those concerns because they were legitimately brought up by the British Banking Association in a particularly eloquent and telling way. It may be that the concerns the association is voicing are well addressed by subsection 3, which provides for a code of practice that may allay the association’s concerns about what might be regarded as an unfair or improper partial transfer. We can return to the debate about toxic and non-toxic assets and how we treat them differently, but the Minister has heard the concerns of the BBA. Has he had time to consider and respond to them? The concern is primarily about the first sentence of the clause; the association has a distaste for partial transfers because it thinks that as long as they are in the toolkit there will be detriment to City business, so I would like the Minister to respond to that concern.

Ian Pearson (Labour, Dudley South)

I understand the concerns of the British Bankers Association on that matter, and my officials have had extensive discussions with its representatives. It is represented on the expert liaison group, whose views we have been listening to intently. It is fair to say that partial transfers are the most contentious part of the special resolution regime. We are keen to ensure that creditors are no worse off in the case of partial transfers, which is one of the reasons why we inserted clauses in the Bill that will enable us, through secondary legislation, to provide strong safeguards.

As I have explained, we are consulting on both the code and some of the legislation on safeguards for partial property transfers. If I may engage in a little publicity, the document “Special resolution regime: safeguards for partial property transfers” is available today at the very reasonable price of £14.35, but it is free to members of the Committee, who I am sure would like to take one from the brown box in the Committee Room. The document answers several of the points that the hon. Member for Southport raised because it specifically covers set off and netting arrangements, security interests, structured finance and third-party compensation. It includes consultation on the code, which the hon. Member for Fareham also talked about on several occasions. We are keen to see comments on the code from outside.

David Gauke (Conservative, South West Hertfordshire)

We will have a greater opportunity to debate those matters when we get to clause 43 and, to some extent, clause 42. Is the Minister saying that the safeguards will be included in the secondary legislation or in the code of practice? Presumably there will be a combination of the two, but can he give us some guidelines on what the balance will be?

Ian Pearson (Labour, Dudley South)

The stakeholders we consulted this year have been very much of the view that they want the safeguards in secondary legislation, rather than in the code. We have taken that to heart, which is why we have produced the consultation document. It is right that those safeguards are enshrined in secondary legislation. When the hon. Member for Fareham has had an opportunity to look at what we are proposing, he might start to take a different view of the code than that expressed in his previous comments. Rather than putting the safeguards in the code, it is right that they should be enshrined in secondary legislation and that Parliament should have an opportunity to debate them. We have tried, as far as possible, to reflect the views of stakeholders in the secondary legislation.

The hon. Member for Fareham rightly said that it is easy to recognise what temporary public ownership or a private sector purchase are, but that a bridge bank is slightly different and might appear strange to people from outside looking at our deliberations, so I shall explain in a little more detail what the bridge bank option will do. In essence, the bridge bank option will give the Bank of England the opportunity to stabilise a bank, preserve franchise value and ensure that consumers have continued access to banking services. It will provide the Bank with time to pursue a private sector solution where that could not otherwise have been arranged immediately by allowing, for example, potential acquirers the necessary time to carry out essential due diligence on the business.

The bridge bank option is important, as it enhances the possibility that the authorities can facilitate the onward sale of the bank to a private sector purchaser, which, as I have said, is the Government’s favoured option for bank resolution. I understand the views that Angela Knight from the British Bankers Association has expressed. In response to the hon. Member for Southport, the BBA and the Building Societies Association recognise the potential utility of the bridge bank as a tool, but they have concerns about the safeguard provisions and the situation of creditors, which we are trying to address.

Of course, it is important that bridge banks be managed in the right way. The hon. Member for Fareham raised issues about what we mean by management on a conservative basis. It is appropriate to set out how that will work in practice in greater detail and, to that end, the code of practice, which the Committee considered on clause 5 and which is available for consultation, makes illustrative provision.

It may be helpful to put on record the fact that the Bank of England will not profit from operating a bridge bank. The compensation provisions, which will be discussed in detail in due course, provide that a bank resolution fund must be established when a bridge bank is created. The fund provides the failing bank with a contingent economic interest in the resolution. The bank resolution fund is a scheme under which the failing bank becomes entitled to the proceeds from the sale of some or all of a bridge bank’s business, less any deductions necessary to reflect the use of public funds in the resolution, including the placing of public funds at contingent risk, or any other costs of the resolution. On the winding-up of the failing bank, the net proceeds of the resolution will flow to the creditors and, should creditor claims be satisfied in full, the shareholders of the failing bank.

Peter Viggers (Conservative, Gosport)

I am listening carefully to the Minister. He said that the entitlement would be minus any amount reflecting the net cost. Is he referring to the Treasury and Bank of England costs of administering the bank? There must be management and administrative costs involved. I imagine that most costs would be ring-fenced within the bank, but there must be costs of administering the entity at the centre. How will the costing be done and how will the Government, through their various manifestations, charge for management?

Ian Pearson (Labour, Dudley South)

My understanding of the legislation is that the Bank of England, which will be pursuing the stabilisation option, can retrieve its costs from the bridge bank. I am not aware that there are likely to be substantial Treasury costs involved, but if I have information about that, I will get back to the hon. Gentleman.

Let me take up the other points raised in the debate about the bridge bank being managed on a conservative basis. The bridge bank will carry out the banking business transferred to it, which is likely to be predominantly deposit taking. It could take on new business, but it is not at all intended that it compete aggressively in the marketplace. Our intention is to return a bridge bank to the private sector swiftly, if that is consistent with the special resolution objective and meanwhile operate the bridge bank conservatively.

I do not believe that the bridge bank would have an unfair advantage over private sector banks or that it would distort competition. It would be inappropriate for a bridge bank to compete unfairly on the back of public sector support and we do not intend that to happen. EU state aid rules and other relevant competition rules would prohibit it in any case.

In conclusion, I believe that having the provisions as a tool will be an important part of what we need to put in place for the future. It would not be sufficient to have only the ability to take a bank into temporary public ownership or to transfer it to a private sector purchaser. This is an essential tool but, as with all these tools, we hope it will not have to be used. Given the circumstances in respect of bridge banks and the issue of partial transfers, it is right that we consult widely with the industry about the potential ramifications and that we take due consideration of the views expressed to us in response, which the hon. Members for Southport and for Fareham have already mentioned. I am confident that as a result of that consultation we can produce secondary legislation that will give safeguards on partial property transfers. Our early discussions with the industry have been positive.

Clause 12

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 90, in clause 12, page 7, leave out line 4.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss Government amendment No. 91.

Ian Pearson (Labour, Dudley South)

These minor amendments are technical clarifications to the code of practice provisions in relation to banks and temporary public ownership. Amendment No. 90 removes the requirement for the code of practice to make provision about the content of share transfer orders. Every share transfer order will be different, as determined by the particular bank in question. As such, it is not appropriate for the code of practice to attempt to describe in detail the content of such orders.

Amendment No. 91 clarifies the code of practice provisions in relation to banks in temporary public ownership. As currently drafted, the code would have to make provision about the management of transferees. However, the code should not provide guidance on the management of the owner of the bank in temporary public ownership, that is the company fully owned by the Treasury or a nominee of the Treasury. Rather the code needs to make provision about the management of the bank itself.

Clause 16

Peter Bone (Conservative, Wellingborough)

I beg to move amendment No. 113, in clause 16, page 8, line 10, at end insert—

‘(3A) Subsection (3) has effect notwithstanding any provision in European Union law.’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss amendment No. 114, in clause 31, page 14, line 7, at end insert—

‘(3A) Subsection (3) has effect notwithstanding any provision in European Union law.’.

Peter Bone (Conservative, Wellingborough)

I tabled these two amendments to help the Government. I hope that when I have explained them they will be accepted, or at least the Government will think about them and come back on Report.

We are talking about a Bill and provisions that we hope never to see in force. If we had been talking five years ago about banks collapsing and the need to make provisions for them, people would have laughed—it just does not happen. It happened a hundred years ago. So, it may be that all our deliberations are for nothing. The Act may never come into force. The Minister has said on many occasions that it will only be called on in exceptional circumstances. I agree with that, but he has also gone on to say on a number of occasions that we want clarity and speed. If there is a failing financial system, speed is needed to deal with the outcome. The Bill seeks to ensure that the effect of transferring shares—or of transferring property, which my other amendment refers to—can happen straight away, without interference. It is clear that that is the intention of clauses 16 and 31. The transfers will have effect whatever any legislation says, so any contract law or other legislation will be ripped up to allow for these special, unusual provisions—temporary ownership of a bank, for example.

The problem is that the Single European Act overrides, or at least the Government believe that it overrides, existing UK legislation. We could find ourselves in the kind of situation that I think has already come about in the current financial debacle, in relation to Northern Rock. The Northern Rock provisions were delayed because the Government had to get clearance from the EU that there was not a problem with state aid. That clearance was negotiated and achieved, but it took time. If the special provisions in the Bill ever needed to be used, speed would be required. The whole Bill is designed for speed. There can be partial ownership, a sale to a private sector purchaser or nationalisation. What we cannot have is the European Union saying, “Hang on a minute; you can’t do that. You are in breach of EU law.” Worse still would be the EU not making that decision and not saying anything, leaving us in limbo. It would say, “You might be in breach of EU law, so you can’t do it,” and meanwhile the whole of our financial system would collapse. That cannot be allowed. The Government will possibly put two fingers up to the EU and do it anyway, but we do not want to be in that situation. The Government have made it clear that their intention, despite what the EU says, is that this will happen. That is what I assume; if the Minister says that that is not the case, we have a serious problem.

The Minister might be minded to say to me, “You can’t do this. You can’t add that amendment because it is not legal.” I am afraid that I am not a lawyer, and I apologise for any mistakes that I might make in the pronunciation of some of the cases that I will mention. The Minister might refer to the Factortame case, which relates to the Merchant Shipping Act 1988. The European Court of Justice—the Luxembourg-based judges who extend our law, almost behind our backs—ruled that that Act was illegal. The matter went to the House of Lords, where it was decided that the European Union Act is incorporated into British parliamentary law. That makes it difficult for us to overcome the problem that I have been talking about. We cannot be sure that the transfers of property or shares could occur without EU approval, and in the turmoil we might not get that approval, or it might be delayed. If that was the case, there would be no point in making the proposal. However, no one Parliament can bind a following Parliament. It does not have the power to do that, even if it wanted to, despite what some Ministers think. We are a sovereign nation. It will be helpful to the Committee to know that that is not my personal opinion, and that it is therefore not necessarily correct.

The Thoburn v. Sunderland city council case was on this very matter. With your permission, Mr. Illsley, I shall read a short paragraph from the conclusion. Lord Justice Laws stated:

“Whatever may be the position elsewhere, the law of England disallows any such assumption. Parliament cannot bind its successors by stipulating against repeal, wholly or partly, of the 1972 Act. It cannot stipulate as to the manner and form of any subsequent legislation. It cannot stipulate against implied repeal any more than it can stipulate against express repeal. Thus there is nothing in the 1972 Act which allows the Court of Justice, or any other institutions of the EU, to touch or qualify the conditions of Parliament’s legislative supremacy in the United Kingdom. Not because the legislature chose not to allow it; because by our law it could not allow it. That being so, the legislative and judicial institutions of the EU cannot intrude upon those conditions.”

It is quite clear from that judgment that any Government could put a little line in, as my amendment does, to take the EU law out of a specific Act. That can be implied or real. In here it will be real because we are saying it. Is it the Government’s view that the Bill as it stands would allow all these special provisions to occur without any regard to EU law? If that is the case, I will be content, but I still think it would be useful to have my amendment. If it adds nothing, it does not damage the Bill. However, it may help to clarify the position so that the law is as I think the Government want it to be. Therefore in this extreme emergency, which we hope will never occur, there will be clarity that what the British Government and this Parliament decide is the law and cannot be overturned by a small group of judges in Luxembourg who say, “By the way, you cannot have temporary ownership of the bank. You cannot sell it on privately despite the fact that you have torn up all your own laws of contract or your competition laws.”

I do not want the Minister to tell us that we are the heart of Europe and that that will never occur. We are talking about extreme circumstances. I need to know, before deciding whether to press the amendment to a vote, whether the Government intend our law to be supreme or whether they accept that the EU will look at our decisions and then decide whether we can proceed. If that happens there will be delay and there would not be clarity. I am grateful to the Committee for listening to that point and I shall be interested to hear what the Minister has to say in response.

Ian Pearson (Labour, Dudley South)

Clauses 16 and 31 set out the effect of a transfer of the securities or the property, rights and liabilities of a failing bank by an instrument or order made under this part of the Bill. In particular, the clauses specify that a transfer may take effect in law by virtue of the instrument or order. Subsection (3) of each clause specifies that a transfer is to take effect despite any restriction arising by virtue of contract or legislation or in any other way. The purpose of these provisions is to ensure that a transfer of securities is effective in law and takes place in spite of any restrictions that might otherwise exist.

Amendments Nos. 113 and 114 insert a new subsection (3A) into clauses 16 and 31. They specify that a transfer may take effect despite any restriction arising by way of a provision in European Union law. As honourable Members will be aware, Member States must not legislate in a manner contrary to Community law. We do not believe that we are legislating in such a manner with the production of the Banking Bill.

As Members will know, we always declare at the start of our Bills that they comply with the Human Rights Act 1998 and that they are compatible with convention rights. We do not say that they are compatible with EU law because we would not produce a Bill if it were not compatible with EU law. I am happy to inform the hon. Member for Wellingborough that there is nothing in this legislation that is incompatible with Community law. Indeed, the Government strongly support the general principles of the EU state aid framework and we work closely with the European Commission and Parliament on state aid related matters.

What the hon. Gentleman seeks to do through these amendments, however, is in our view clearly illegal. The provisions of the amendments would place the UK in breach of our obligations under the EC treaty, would damage our reputation in the EU and, if not corrected, would lead to legal proceedings against the UK. We cannot accept what are in effect law-breaking amendments. Nothing proposed in this legislation should give the hon. Gentleman any concern that there would be unnecessary delay in exercising the powers of the special resolution regime.

David Gauke (Conservative, South West Hertfordshire)

Where clause 16 refers to a transfer taking effect

“despite any restriction arising by virtue of...legislation”,

is the Minister saying that that is arising as a consequence of any UK legislation and that that carve-out does not apply to EU legislation?

Ian Pearson (Labour, Dudley South)

In essence, that is what I am saying. We operate within a framework of Community law. It is not appropriate to go into the detail. I appreciate that the hon. Gentleman does not want anything to get in the way of speedy resolution when the situation of a failing bank arises. The Bill as it stands will allow speedy resolution to take place and clauses 16 and 31 are appropriate as they stand.

Peter Bone (Conservative, Wellingborough)

I am partially reassured by what the Minister has said. I am pleased that the Government are not bringing forward a Bill that goes against EU law but, of course, the Government never think they are bringing forward a Bill against EU law until the justices in Luxembourg decide that they have.

My problem is that the envisaged situation will be a national emergency. It will be a crisis of enormous significance, such as we saw recently when the Government did act before getting approval from the EU and the EU had to catch up afterwards. In reality, the Government ignored the EU and persuaded it afterwards of the need to approve. I see no harm in inserting my words because they do not change the matter. If the Minister is right and the Bill complies with EU law there is no problem.

I have one question that I am not sure about. The Minister says that this legislation will not cause delays but we have seen a delay with the share placements and the preference share subscription documents relating to the £42 billion of investment by the Government into private banks. The delay has come about because in those documents, which I have read in detail, the preference share investments cannot be repaid for a minimum of five years and no dividends can be paid. Those sections of the agreements are very strange and do not make any commercial sense. They were inserted because of European Union law. Those investments have been delayed and have not taken place, despite the Government saying that they have, because commercially banks need to pay dividends to make them a marketable security. There are renegotiations at the moment, which are being widely reported in the Financial Times. Whichever way we look at it, there is clearly a delay. The situation is not of the scale that we might envisage in which the whole of the financial system was collapsing.

I am reassured by the Minister in one respect and concerned in another, but I think that I have made a mistake. I have looked at the drafting again—it is not well drafted—and it misses out the important factor that the judges must interpret it in such a way, which I should have said. I do not think that it would be right for me to press an amendment that is incorrectly drafted. The principle is still of great importance and I would like to come back to it at a later stage. I beg to ask leave to withdraw the amendment.

Eric Illsley (Labour, Barnsley Central)

For the benefit of the Committee, the Clerk and I are of the opinion that it is perfectly well drafted, which is why it was accepted for debate.

Clause 17

Mark Hoban (Conservative, Fareham)

I want to check with the Minister what the clause means, as it is not entirely clear from the explanatory notes where we are heading with it. I think that the objective is to ensure continuity of service, so that if the failing bank has a range of contracts with IT suppliers and the other bodies that a bank needs to function, those contracts will transfer to the bridge bank or to the new private sector provider. I want to ensure that that is the case.

Where does the provision sit with the fairly standard contract provision that allows a supplier or provider to withdraw from an agreement if there is a change of control? There clearly will be a change of control if a bank is moved from one set of shareholders to, say, a new private sector purchaser or to the Bank of England through a bridge bank. Ordinarily, the supplier would be able to withdraw from the contract if it was unhappy with the new owner. It is unlikely that a supplier would be unhappy with the Bank of England, but it may be unhappy, due to its history, with a new private sector owner. I want to know whether clause 17 overrides change of control provisions.

Heritable Bank, which is in administration, is unable to collect the direct debits used to meet mortgage payments because its agent has yet to reach a satisfactory agreement with the administrator. That arrangement falls outside the scope of the Bill, but what arrangements are there to ensure that the right legal steps will be in place in a future failed bank situation so that there is continuity of service? I think that we all agree that it is better to have continuity of service in, for example, the way that people operate their bank accounts, than to have to use the Financial Services Compensation Scheme. Is the clause about ensuring continuity of service? How will change of control provisions be dealt with, and what powers are available to ensure that third parties provide continuity of service when they do not want to or find some challenge in doing so?

Ian Pearson (Labour, Dudley South)

The clause sets out that a share transfer instrument or order may provide for a transferee to be treated as the same person as the transferor. In the context of a shared transfer, that means that either a private sector purchaser or the Treasury may be treated as a shareholder of the failing bank. That is necessary to preserve the continuity of a failing bank’s arrangements at change of control and is essential to ensure that the bank can continue to operate after the transfer.

In particular, the clause provides that agreements entered into by a failing bank may be treated as made by, or done in relation to, the transferee. It also provides that an instrument or order may specify that anything that relates to anything transferred and is in the process of being done by the failing bank before the transfer date can be continued by or in relation to the transferee.

As the hon. Member for Fareham suggests, that is all about ensuring continuity in a transfer situation. For example, such a continuity provision removes the requirement that on or before the transfer the failing bank’s name be substituted in commercial documentation by that of the transferee. Provision may also be made in a transfer instrument or order to require or permit a transferor or transferee to provide each other with information and assistance. The transferee may require information about the IT services used by the transferor in order to maintain continuity of banking services to depositors.

The clause therefore makes some essential provisions to ensure that the failing bank can continue to operate following the transfer. The provision is necessary to ensure that the transfer of securities is fully effective. A transferor may hold information that is important for the conduct of the resolution, so in some situations it is appropriate that the authorities should be able to require the transferor to supply that information. It is not a one-way requirement. The clause also provides that a shared transfer instrument or order may provide for a transferee to supply the transferor with information and assistance that might be necessary.

The provisions would not be used to arrange for new agreements, such as for services and facilities to be provided to a transferee. The continuity obligation powers in clauses 57 to 60 provide the powers in that regard, and we will obviously discuss them in due course. I hope that brief explanation provides the hon. Member for Fareham with some assurance.

Clause 19

Mark Hoban (Conservative, Fareham)

I want to understand what clause 19 allows the Bank to do, because it sounds interesting. A share transfer instrument may enable the Bank and a share transfer order may enable the Treasury

“to remove a director of a specified bank”,

which presumably means to sack him, and

“to vary the service contract of a director of a specified bank”,

which I assume means to pay him less and remove his entitlement to bonuses—a topic that has had a little airing over the last few months.

The instrument may also enable the Bank or Treasury

“to terminate the service contract of a director of a specified bank”

and

“appoint a director of a specified bank.”

The clause gives the Bank and the Treasury significant powers to vary the board of directors and would enable them to remove the lump sum failure bonus that directors sometimes receive when their contract is terminated. There has been much criticism of that sort of practice. Does the clause enable the Treasury to stop such big pay-offs?

Mark Todd (Labour, South Derbyshire)

I was drawn by the particularly sweeping nature of the clause, but I then assumed that it is governed by normal contract law in other senses. It must therefore be part of both a negotiation with the individual involved and also subject to the normal commitment to honour a contract that has been entered into freely between two parties.

Mark Hoban (Conservative, Fareham)

I would guess so, too, but we are in uncharted waters with the Bill. All sorts of new powers have accrued to the Treasury and the Bank to enable them to vary other types of contractual arrangements, which makes me wonder just how far they will go.

David Gauke (Conservative, South West Hertfordshire)

A few moments ago we were debating clause 16. Admittedly it relates to effecting the transfer, but it states that it takes effect

“despite any restriction...by virtue of contract”.

I do not think that will extend to the provisions in this clause, but there is provision in the Bill for normal contract law not to apply in some circumstances. The Minister might be able to tell us whether it could apply to the clause.

Mark Hoban (Conservative, Fareham)

Indeed. My hon. Friend demonstrates the value of having a legal background. My purpose is to probe the extent to which these powers can be exercised. Those who are ardent critics of the bonus culture in the banking system and who would not want to see directors being given lump sums to be paid off—I have heard such expressions of concern from the Back Benches in various debates over the last month—would fall upon the clause with great glee assuming it has achieved some of their goals. I fear that the Minister might disappoint them.

Mark Todd (Labour, South Derbyshire)

It does not permit capital punishment of directors.

Mark Hoban (Conservative, Fareham)

Indeed it does not, but there is still Report.

Will the Minister clarify the scope of the clause? To what extent does it enable the Bank or the Treasury to override some of the contractual terms that a number of people find so objectionable?

Peter Viggers (Conservative, Gosport)

As my hon. Friend has pointed out, subsection (1) gives four powers to the Bank of England and subsection (2) gives four similar powers to the Treasury. Subsection (3) states:

“Appointments under subsection (1)(d) are to be on terms and conditions agreed with the Bank of England.”

Subsection (4) states:

“Appointments under subsection (2)(d) are to be on terms and conditions agreed with the Treasury.”

That leads to some rather strange drafting:

“A share transfer instrument may enable the Bank of England... to appoint a director... on terms and conditions agreed with the Bank of England.”

Either the clause is superfluous, because one would assume that an appointment is to be made on terms that are agreed with the Bank of England and it should thus be struck out, or it is necessary to state that the appointments are to be

“on terms and conditions agreed with the Bank of England.”

As that applies only to paragraph (d), it follows, as night follows day, that it does not apply to paragraphs (a), (b) and (c). Which is it?

It is a most peculiar piece of drafting, because as the hon. Member for South Derbyshire pointed out, it seems to follow that the normal rules of contract would apply. If appointments are to be made by the Bank of England or the Treasury, they will make them on terms that they agree with the relevant parties. I would like to know whether subsections (3) and (4) are superfluous and why they do not apply to paragraphs (a), (b) and (c).

Peter Bone (Conservative, Wellingborough)

I direct the Committee’s attention to subsections (1)(b) and (2)(b),

“to vary the service contract of a director of a specified bank”.

If that is, as my hon. Friend the Member for Fareham suggests, the ability to chop people’s bonuses or ensure that they do not get huge redundancy payments, it will be welcomed by the general public. Do the Government not have a problem with that, however, in that it would immediately offend European law? The front page of the Bill states that the Bill complies with the Human Rights Act, but those provisions would not comply with the human rights of the person who was having their salary chopped and their terms and conditions messed about with. The Minister said earlier that everything in the Bill complies with European Union law, so perhaps my hon. Friend’s interpretation is not what the Government intend.

Ian Pearson (Labour, Dudley South)

The clause provides that a share transfer instrument or order may enable the Bank of England or the Treasury to appoint or remove directors. It also provides that the instrument or order may confer on the Bank or the Treasury the powers to vary or terminate the service contracts of directors. It is absolutely right that it should do so. People would not expect the Government to do anything less with regard to a failing bank. The powers are wide-ranging, and it is right that they are in the Bill.

The provision gives the authorities the necessary powers to put appropriate management in place, once control of the failing bank has been transferred. It is critical that the deposit taker has a board of directors with the appropriate expertise to manage the business. However, members of the board may have resigned immediately before the transfer, or the board may not have the necessary expertise or may no longer be appropriate to manage the bank. It is, therefore, vital, in the interests of the resolution, that the authorities can remove and appoint directors.

We consider it appropriate for the authorities to be enabled to make specific provision in an instrument or order in respect of the directors of the board, because the procedures for the appointment and removal of a director set out in the bank’s articles of association and in company law may be time-consuming. Further, it is likely that the right of appointment or removal of a director may be conferred only on members of the company, which would mean that the Bank of England would be unable to make an appointment in the case of a transfer to a private sector purchaser. Therefore, provision is made to ensure that appropriate directors can be put in place expediently, in all circumstances where the authorities consider that necessary.

On Second Reading, the hon. Member for Dundee, East asked the Government to consider whether it was appropriate for the Treasury—as well as the Bank of England—to have those powers. I want to respond to him now, although he is not in the room. I believe that it is appropriate, because the Treasury may take a bank into temporary public ownership as a last resort. If that occurs, it is right that the Treasury should have the power to put in place the appropriate management.

I will try to be more specific on restricting payments. My hon. Friend the Member for South Derbyshire raised this point. The terms under which former directors were employed are a matter for the previous board, and would be governed under normal contract law. The Bill provides that the authorities may make provision in a share transfer instrument or order to remove and appoint directors and to alter or terminate the service contracts of directors, but normal contract law would still apply. The authorities would want to put in place appropriate remuneration arrangements for new directors. All such management decisions would be made case by case, but it is likely that some of the existing directors have already resigned, or it might be felt that they should be required to do so.

It is also likely that some existing members of management will still be required, especially those with a high level of operational expertise for the purposes of business and managerial continuity. In those circumstances it is right that service contract variations should be in place that could include variation of salary terms, bonus payments, tenure and other matters. That might involve a period of negotiation and would again be governed by employment and contract law. Again I want to make it clear that the provisions we are debating are restricted to the specific bank that is in the SRR. These are not general powers. I hope that with those clarifications we can agree on clause 19.

Clause 21

Mark Hoban (Conservative, Fareham)

I am sure the Minister has copious notes to explain the meaning of this clause. Having read the clause and the explanatory notes, I am none the wiser as to what it means. I would be grateful if the Minister explained it to the Committee.

Ian Pearson (Labour, Dudley South)

I must apologise to the hon. Member for Gosport for not replying to the points he made about subsections (3) and (4) in clause 19 when he suggested that they were superfluous. With your indulgence, Mr. Illsley, I would like briefly to explain that they make it clear that the Bank or the Treasury can specify the terms and conditions of appointments. Otherwise this provision would be left to the board of directors to determine. We do not need to make the same provisions for paragraphs (a) to (c), which is why the clause is drafted as it is. I apologise for not replying to the hon. Gentleman in the right place.

In answer to the question by the hon. Member for Fareham about clause 21, I am more than happy to explain. The clause sets out certain provisions in relation to events of default. An event of default clause in a contract gives a specified right to a counterparty if a specified event occurs. For example, a contract could stipulate that a counterparty should have the right to terminate the contract if the bank’s credit rating changes or if there is a change of control of the bank. This clause is important since most modern contracts make heavy use of these provisions.

The transfer of securities is likely to be characterised as an event of default which would give counterparties the right to terminate or modify contractual arrangements in the event that the authorities exercise the transfer powers. Clearly, any termination of key contracts would significantly reduce the likelihood of the deposit taker being able to continue as a going concern. It could necessitate having to renegotiate contracts, potentially with new counterparties, with no guarantee that similar terms could be arranged. In extreme circumstances, for example, if the majority of the bank’s counterparties sought to rely on termination rights, the bank would be unable to continue its operations. In addition, the act of counterparties terminating their contractual arrangements with the deposit taker is likely to send a strong signal to the market that other counterparties should not do business with the bank. Thus, a number of counterparties closing out contracts could lead to a wider counterparty flight from the deposit taker, which would have severe consequences for the success of the resolution. Therefore, this clause allows the authorities to make provision for a shared transfer instrument or order to be disregarded in determining whether a default event provision applies; in other words, that such default event rights may be disapplied in relation to a transfer of control by way of a shared transfer order or instrument.

The powers are designed to be tailored to particular circumstances and thus, where practicable, an event of default might be modified rather than entirely disapplied. The provisions, however, could not be used to override financial collateral agreements, which are protected by the financial collateral arrangements directive and which in broad terms must be allowed to take effect in accordance with their terms.

This is an area where, in the light of further analysis and consultation, the Government have adopted a more restricted form of the powers than those taken in the Banking (Special Provisions) Act 2008, which, for example, apply to any person having a specified connection with a deposit taker or any of its group undertakings. That is an essential and proportionate provision for ensuring that a deposit taker can continue to operate, notwithstanding any change of control as a result of the powers under this part of the Bill.

Clause 25

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 92, in clause 25, page 11, line 23, at end insert ‘—

(a) provides for the transfer of securities which were issued by the bank before the original instrument and have not been transferred by the original instrument or another supplemental share transfer instrument;

(b) ’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenient to discuss the following: Government amendments Nos. 93 to 95.

Government new clause 10—Reverse share transfer.

Government new clause 11—Bridge bank: reverse share transfer.

Ian Pearson (Labour, Dudley South)

The group of amendments and new clauses provides for additional flexibility to be introduced to the share transfer powers relating to supplemental transfers, which are already provided for in the Bill, and also reverses transfers, which are the subject of the new clauses in the group. A similar group of amendments have been tabled in relation to the property transfer powers. Those will be debated when we reach clause 39.

While it is envisaged that the vast majority of any supplemental and reverse transfers will be made in relation to property, the amendments replicate those provisions for the share transfer powers. However, they are not, of course, being introduced simply for the purpose of consistency; there may be circumstances in which that added flexibility is needed. It may help the Committee if I provide a brief introduction to the concept of supplemental share and reverse share transfers.

Recent events have clearly demonstrated that resolution interventions may need to occur with extremely short notice. In such situations, the due diligence undertaken may only be preliminary. Further work may reveal additional details about the nature of securities or, indeed, the business that has been transferred. Supplemental transfers provide for further transfers of securities from the holders of securities to the relevant transferee. Reverse transfers provide for securities to be moved back from a transferee to the original holders of the securities. To take control of the bank, securities that confer control rights will need to be transferred. Such securities may not be limited simply to ordinary voting shares, but may include securities such as preference shares and hybrid equity-debt securities, which may confer control rights in certain contingencies. In circumstances where an extremely swift transfer of ownership of a bank is required to protect financial stability, it might not be possible to have an exhaustive list of all the securities of the bank at the time of transfer. Moreover, in general it is difficult to foresee exact circumstances that may come to pass, so there is a need for flexibility. That particularly applies given the complexity of institutions to which the powers are intended to apply.

Many banks have extremely complex capital structures, involving a broad range of different classes of security, including forms of security bespoke to the bank in question. It is worth noting that the powers may not necessarily always be used to effect an actual transfer of securities. Instead, they may be used to make provision in connection with a transfer that has already been made. For example, a supplemental order may provide simply for the conversion of securities, as permitted by clause 18, or make incidental and consequential provision, as permitted by clause 22. I accept that it would be desirable for such supplemental and reverse transfers not to be required. However, for the reasons that I have given, it is prudent to include the provision to ensure that the stabilisation powers are suitable for dealing with the broadest range of circumstances.

I shall now turn to the specific provisions of the amendments. Amendment No. 92 permits supplemental share transfer instruments to effect a further transfer of securities to a commercial purchaser. An example of the circumstances in which that may be necessary is where further due diligence reveals that a person has a class of security other than ordinary shares which nevertheless confers on that person some form of right actually or contingently to control the failing bank. Therefore it may be necessary to transfer that class of security in order for the Bank of England to secure the full control of the deposit taker for a commercial purchaser.

New clause 10 provides that the Treasury may make reverse share transfer orders. A reverse share transfer order may be made in two circumstances: first, following the transfer of a failing bank to temporary public ownership in accordance with clause 12; and secondly, following an onward share transfer to a publicly-owned transferee—a company wholly owned by the Bank of England—the Treasury or a nominee of the Treasury. As with all other forms of transfer, the Treasury must consult with the Bank of England and the FSA before making the order.

New clause 11 makes similar provision in relation to the Bank of England and bridge banks. The clause provides that the Bank of England may make bridge bank reverse share transfer instruments. Such instruments may be made following the transfer of a bridge bank’s securities to a publicly owned transferee.

Amendments Nos. 93, 94 and 95 make technical clarifications. Amendments Nos. 93 and 94 make it clear that a supplemental share transfer instrument may transfer any securities of a failing bank that have not previously been transferred from their original holders. Amendment No. 95 makes it clear that an onward share transfer from temporary public ownership may transfer all the securities of the bank that have been transferred by share transfer orders or issued after the original transfer. This provides the Treasury with the flexibility to change the bank’s capital structure before it is sold, for example, by simplifying the nature of its securities.

Finally, I would like to make two general points about the provisions of the supplemental and reverse transfer clauses. First, members of the Committee will note that the general and specific conditions of SRR intervention do not apply to supplemental and reverse transfer instruments and orders. It would not be appropriate for further transfers to be subject to these conditions, as the initial transfer may have stabilised the bank such that it no longer is, for example, failing to meet its threshold conditions. Instead, these powers are needed to give full and proper effect to a resolution where these conditions have already been satisfied at the stage of the first transfer. Of course, where these further transfers interfere with property rights, the authority concerned must still be satisfied that the action is proportionate to the public interest aim pursued.

Secondly, a general restriction has been placed on the powers to make reverse transfers of securities. That is that such transfers should not be possible following a transfer of securities to a private sector purchaser. That restriction is achieved through exclusion—that is to say, no provision has been made that would confer a power to effect such a transfer.

The Government do not consider it appropriate for the authorities to have this flexibility. The securities will have been acquired by the private sector purchaser as part of a commercial deal. The existence of statutory powers to reverse the transfer which formed part of that deal, without reference to the private sector purchaser, is likely to introduce an element of risk which a purchaser may not be content to take. That could reduce the likelihood of agreeing the transaction. Therefore, in the interests of enhancing the chances of a private sector solution, the Government are not including that power in the provisions.

Recent experience of resolving failing banks has clearly demonstrated the need for flexibility. It has also shown that transfers may occur extremely swiftly, with only limited time available for detailed analysis of the banking business being transferred. For these reasons the Government consider it necessary to amend the provisions of the Bill. Of course, I accept that it would have been desirable to include these provisions initially; but that was not possible. It would have been wrong to rush through these changes before introduction of the Bill without a full analysis. Such an analysis has now been undertaken, and we have concluded that these powers are necessary.

Clause 26

Clause 27