Banking Bill

Public Bill Committee, 11 November 2008.

Further written evidence to be reported to the House

Roger Gale (Conservative, North Thanet)

Good morning. In accordance with the Speaker’s statement last week, I will suspend proceedings at 11 o’clock and invite those present to stand in silence for two minutes in memory of those who have given their lives for their country in two world wars and in more recent conflicts. Should any Member not wish to participate, I would be grateful if they left the room prior to the silence and returned afterwards.

Clause 30

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 128, in clause 30, page 13, line 31, after second ‘instrument’, insert ‘made under this Act’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following amendments: No. 129, in clause 30, page 13, line 33, at end insert ‘and’.

No. 130, in clause 30, page 13, line 34, leave out ‘other’.

No. 131, in clause 30, page 13, line 36, after ‘instrument,’, insert ‘or’.

No. 132, in clause 30, page 13, line 37, leave out ‘or otherwise’.

David Gauke (Conservative, South West Hertfordshire)

Welcome to the Chair, Mr. Gale. Before I commence, I once again draw the Committee’s attention to my entry in the Register of Members’ Interests.

This morning we will discuss the clauses on property transfers and partial property transfers, some of the most important and controversial elements of the Bill. The issues in clauses 42 and 43 are particularly controversial and I do not intend to get embroiled in them at this stage. None the less, we have a number of comments and questions on the matters at hand. Most of our amendments are probing and aim to flush out issues relating to the relevant clauses.

Amendments Nos. 128 to 131 are minor amendments. The intention is to seek further clarity on the clause and in particular on the definition of “property transfer instrument”. It appears that a property transfer instrument must be made under clauses 10 and 11. However, the drafting of clause 30 retains a degree of ambiguity and does not state explicitly that such an instrument must be made under clauses 10 or 11. The argument has been put to us that the wording of the clause could apply to a transfer of property not through this legislation, but through an agreement between parties. I do not think that is the intention, and I have no desire to press the amendments as long as the Minister gives us some assurance about those concerns. We shall be grateful for his response.

Ian Pearson (Labour, Dudley South)

It is a pleasure to see you in the Chair again, Mr. Gale.

The clause makes provision for property transfer instruments. The Bank of England may make such an instrument to effect a transfer of property, rights and liabilities to a private sector purchaser or a bridge bank. A property transfer instrument may do one or both of two things. First, it may provide for the property, rights or liabilities of a specified bank to be transferred. Secondly, it may make other provision in relation to a transfer.

I appreciate the probing nature of the amendments tabled by the hon. Gentleman and I hope that I can give the clarification he seeks. Amendment No. 128 proposes that for the purposes of the clause, a property transfer instrument be defined as having been “made under this Act”. I agree that would make clear the position of the instrument; however, the status of a property transfer instrument is already implicitly so defined in the Bill as a matter of logical necessity. The amendment is thus an unnecessary addition to the drafting of the clause. The powers of the Bill can, of course, be exercised only under the Bill and, therefore, they relate specifically to the special resolution regime.

The hon. Gentleman seeks to make further changes to the provisions of subsection 1(a) and (b). In general, the amendments appear to reduce the flexibility of the provision a property transfer may make.

Amendment No. 129 would make it compulsory for a property transfer instrument to transfer property, rights and liabilities, and to make other provision relating to the transfer. That reduces flexibility. In some circumstances it may be unnecessary to make provision other than for the transfer of property, rights and liabilities. I accept that such a situation may be unlikely but it seems unnecessary to restrict flexibility in this way.

Amendment No. 130 would remove the word “other” from the first line of subsection 1(b). The drafting of the clause is intended to distinguish clearly the two types of provision that a property transfer instrument may make. First, an instrument may provide for the transfer of property, rights and liabilities. Secondly, an instrument may make other forms of provision related to the transfer, as I explained earlier. The deletion of the word “other” is thus unnecessary.

Roger Gale (Conservative, North Thanet)

Order. I am sorry to interrupt the Minister. I am sure Fabian Review is somehow relevant to the Committee, but may I gently remind Members that it is not in order to read newspapers or other publications in Committee?

Ian Pearson (Labour, Dudley South)

Amendments Nos. 131 and 132 reduce flexibility. The changes remove the potential for a property transfer instrument to make provision in relation to property, rights or liabilities that have not been transferred by property transfer instrument. Such flexibility may be beneficial. I remind the Committee that for a property transfer instrument to be made, the general and specific conditions of SRR intervention must be satisfied. Only in those circumstances may the Bank of England make a property transfer instrument. The Government consider that once that test has been met, it is right that the authorities have the appropriate powers to resolve the bank. That could involve a situation where a consensual transfer can be agreed but needs to be supported by stabilisation powers—for instance, to make provision for continuity or in relation to default event provisions, as we shall discuss. Such flexibility is provided by the words that the amendment seeks to excise from the Bill. Although we accept that the situations where that may be possible are rare, as the provision would be a less invasive exercise of statutory powers we consider it appropriate to have that flexibility. I hope that I have satisfied the hon. Member for South-West Hertfordshire about our intentions regarding the clause.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for that response. On amendments Nos. 129 and 132, I accept his argument that greater flexibility may be necessary, albeit unlikely. It is helpful to the Committee that the Minister has elaborated on the rarity with which those powers are likely to be used.

I detected that the Minister did not have much objection to amendment No. 128, which inserts the words “made under this Act”, and that he may almost have felt that it would assist the drafting. However, I take the point about the provision already being implicit. Having heard the Minister, I am still not convinced that amendment No. 128 could not improve the Bill in a minor way, but I do not intend to divide the Committee on the matter. If the Government were inclined at a later stage to insert the wording for clarification for those unfortunate people who will not have read this debate, I should welcome it. I beg to ask leave to withdraw the amendment.

Clause 31

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 133, in clause 31, page 14, line 6, leave out ‘or’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following amendments:

No. 134, in clause 31, page 14, line 7, leave out ‘in any other way’ and insert ‘common law’.

No. 135, in clause 31, page 14, line 12, leave out ‘(by any name)’.

David Gauke (Conservative, South West Hertfordshire)

Clause 31 relates to the effect of a transfer, which we touched on in the debate initiated by my hon. Friend the Member for Wellingborough last week. He raised the issue of whether subsection (3) has effect notwithstanding EU provisions. I have no intention of repeating that argument, but there are one or two ambiguities in the clause; in particular, subsection (3) refers to the transfer taking effect

“despite any restriction arising...in any other way”.

It would be helpful if the Minister could explain what that means. The subsection also refers to contract or legislation, so presumably “in any other way” means a common law restriction. If it means more than that we would welcome clarification. Our intention, in particular with amendment No. 134, is to flush that out.

With amendment No. 135, we query whether “(by any name)” in subsection (4)(b) is necessary. It is a drafting point, but the expression does not seem to add a great deal to the interpretation of the subsection. Can the Minister explain otherwise? I shall raise one or two points in a stand part debate, but the purpose of the amendments is to seek clarity from the Minister as to the intention of the clause.

Peter Bone (Conservative, Wellingborough)

I speak in favour of amendment No. 134. The Government seem to have made it clear in earlier debates that one cannot use the words “in any other way” because the EU laws apply. Removing “in any other way” and inserting “common law” would mean that the Bill will do what the Government say it should do, so the amendment is most helpful for them.

The front page of the Bill states that in the view of the Chancellor of the Exchequer the provisions of the Bill

“are compatible with the Convention rights”.

However, they cannot be compatible when the purpose of the clause is to tear up normal rights because we are dealing with an exceptional circumstance. Will the Minister explain how the Chancellor came to that conclusion?

Peter Viggers (Conservative, Gosport)

I am a bit concerned about the clause so I hope that the Minister can reassure me. The drafting is slightly casual. Substituting “in any other way” in subsection (3) with “common law” would make the clause clearer. I am not sure whether the words “contract” and “legislation” would limit the words “in any other way”. The legal term for that is eiusdem generis.

The long title of a Bill limits the amount of material in the Bill; similarly, in parliamentary terms, a parliamentary question must be followed by supplementary questions that derive from the main one. The eiusdem generis rule, if strictly applied to the Bill, would mean that the words “in any other way” would be subject to the words “contract” and “legislation”. They would not give the freedom that they appear to give the Government, but could be construed within the rules of eiusdem generis, meaning that the provisions would be subject to contract legislation.

On amendment No. 135, I hope that the Minister will be able to spell out for us what he anticipates that consent “by any name” will mean. If he can explain what the other names for consent may be or why the definition of consent needs to be expanded to include “by any name” it would be reassuring. If he cannot I would find it rather more disturbing. I endorse my hon. Friend’s probing amendment.

Ian Pearson (Labour, Dudley South)

The clause makes provision in relation to the effect of a property transfer instrument. Its purpose is to ensure that a transfer of property is effective in law and takes place in spite of any restrictions that might otherwise exist, such as a requirement to secure the consent of a person who does business with a bank. The hon. Member for South-West Hertfordshire has proposed a set of amendments that would narrow the interpretation of the clause. I will seek to explain why we believe they are unnecessary and unhelpful.

Subsections (3) and (4) of the clause, which the hon. Gentleman wants to amend, are drafted in deliberately broad terms. Once the authorities have decided to intervene in the public interest to resolve a failing bank and the necessary general and specific conditions have been met, the Government consider it appropriate that a transfer should take effect despite any restriction. That is to maximise the chances of a successful resolution in so far as is feasible.

For that reason I do not consider that the changes proposed in amendments Nos. 133 and 134 would be appropriate. They would restrict the breadth of restrictions relating to contracts, legislation and common law. The changes would be likely to be a subject of interest for people seeking to pick holes in the transfers; for example, a party could argue that a restriction that was ignored did not technically relate to a contract, legislation or common law and that it would, therefore, get in the way of a successful transfer and resolution under the SRR.

Of course, notwithstanding the provisions of the clause, a transfer may not take effect in a manner that contravenes Community law—a point highlighted in the debate prompted by the amendment tabled by the hon. Member for Wellingborough. In addition the Treasury has reserve powers, which we will consider in the debate on clause 66, to ensure that international obligations that do not have effect in domestic law are nevertheless not contravened by the exercise of powers under the SRR. Subject to those constraints, the Government consider it appropriate that a transfer should take effect despite any other restriction.

The hon. Member for Wellingborough raised the issue of compatibility with the European convention on human rights. It would not be normal for Secretaries of State to give detailed justification as to why they think a complete Bill is compatible with convention rights. It is important for me to respond directly to amendment No. 135, which appears to narrow the definition of what may be deemed a requirement for consent.

Peter Bone (Conservative, Wellingborough)

I thought that the Minister was about to explain why the Government thought that the convention was not under threat from the Bill. It seems clear to me that it is, because rights under contract are being torn up. That is the whole purpose of the clause. The argument that the Minister will not tell me will not do. The Government must explain; there must be some general reason why they think that the Bill complies with the convention.

Ian Pearson (Labour, Dudley South)

Let me have another try to see if we can go further in response to the hon. Member for Wellingborough. It is normal practice that if a Bill confers powers, they must be exercised in a way that is compatible with the convention. It is clear that that can be done in a way that is compatible with convention rights, so personal property rights can be overridden if the Government’s action is proportionate and in the public interest. That is the case with the Bill, which is why the statement has been made.

Amendment No. 135 appears to narrow the definition of what may be deemed a requirement for consent. One of the principal rationales for the stabilisation tools is that it may be necessary to circumvent the usual mechanisms for transferring shares or property, if it is in the public interest. Given that it is imperative that a transfer occurs immediately and with full effect, it is right that there are no restrictions on making the transfer once the general and specific conditions have been met.

If the provisions of the clause were narrowed, private sector transferees might be deterred from acquiring a failing deposit taker’s business, as they may perceive that a significant execution risk is attached to the transfer. A transfer to a private sector purchaser is unlikely to be arranged unless commercial counterparties are certain that they will obtain complete control over the property transferred to them. I hope that clarifies the points that have been raised by hon. Members, and that the amendment can be withdrawn.

David Gauke (Conservative, South West Hertfordshire)

We have strayed on to the European convention on human rights and I will return to it in the stand part debate. On the Minister’s comments on my amendments, I am not clear about what “in any other way”, for amendment No. 134, or “by any name”, for amendment No. 135, might mean. I am not sure what those words add to the clause. I take the Minister’s point that it is important that the transferor—the private sector purchaser—is certain of complete control, but I do not see how “by any name” assists in that process. Equally, however, I do not see how the phrase does any harm, so I shall not press for a Division.

Reluctantly, I shall not press for a Division on anything else, even though I do not think that the Minister gave the Committee a full answer as to why the wording is necessary, but we are in bipartisan times. I do not know whether the Minister wants to intervene and have another crack at it.

I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

The heart of clause 31 is about providing certainty in a transfer—ensuring that it occurs and that the Government go as far as they can to provide certainty. Does the Minister acknowledge that the effect of clause 31 is deeply constrained, by necessity, for the reasons that my hon. Friend the Member for Wellingborough identified. First, European Union law overrides the provisions of subsection (3), and, secondly, convention rights and, in particular, the Human Rights Act 1998, contain provisions about respecting private property.

Does the Minister agree that challenges to the effects of the Bill, regardless of the provisions set out in clause 31, are likely to come from European law or the Human Rights Act? The provisions will not be effective in dealing with such challenges and will not provide the certainties for the transferor that the Government seek. I do not make that point in a particularly hostile or antagonistic way, and no doubt the Minister will assert that he is confident that nothing that occurs under the Bill, once enacted, will breach the Human Rights Act, but that will be for the courts to determine. I merely raise what appears to be an unavoidable situation. Clause 31 contains some holes and does not provide complete certainty of control because of the structure of our law, the Human Rights Act and European Union law.

Peter Bone (Conservative, Wellingborough)

I should like to follow up on what my hon. Friend has said. If we accept the clause, we shall be doing something that is probably unique. We will definitely be passing, in common parlance, a piece of legislation that states it will overrule EU Acts. That is clearly the Government’s intention. If the Bill’s provisions had to be implemented following a disaster, the national emergency would clearly be such that we would not care two hoots what the EU said and would carry on doing what was in the interests of the British nation. The Government are correct in that view and should be congratulated on it, but they should not be congratulated on pretending that such an emergency would not happen, because it clearly could. Members on the Conservative Benches have given the Government an opportunity to spell that out, but they have declined to do so. However one reads things, we are clearly saying that we will do what is right in the national interest to protect the financial system and we will ignore what the EU says.

Equally, the Chancellor’s statement that the Bill is compatible with the convention on human rights is clearly contrary to the facts. Those rights cannot be taken away in such a manner, for the protection of financial stability in a crisis, without affecting the individual’s human rights. I am afraid that is neither proportional, nor a proper manner, and for that reason the statement should not be on the front page of the Bill. I congratulate the Government on what they are about to do, but I am afraid that I do not congratulate them on lacking the courage to put in the Bill what they actually mean. The Government, whichever party was in power, would stick up for the rights of the nation, but it is a shame that this Government will not put that in the Bill.

Ian Pearson (Labour, Dudley South)

Clause 31 describes the effect of a transfer of a failing bank’s property rights and liabilities, and its real purpose is to ensure that the transfer of property is able to provide certainty of outcome and speed of execution, in spite of any restrictions that might otherwise exist. Despite the comments of the hon. Member for South-West Hertfordshire, I believe that the clause and the Bill as a whole help to provide certainty of outcome.

The clause makes similar provisions to those in clause 16, which provides for the effect of a share transfer instrument or order, and members of the Committee will recall that we discussed that in the light of the amendments tabled by the hon. Member for Wellingborough regarding European Community law. As I said then, we believe that the Bill is compatible with European Community law and with our responsibilities under the convention on human rights.

Roger Gale (Conservative, North Thanet)

Order. In a moment I shall suspend the Committee for two minutes. For the benefit of Members who were not present at the start, Members will be invited to rise. If any Member does not wish to participate, given that they are already in the Room, I suggest that they remain seated.

Ian Pearson (Labour, Dudley South)

Discussing the amendments to clause 31 a few moments ago, I mentioned the importance of acting in a proportionate manner and in the public interest. Article 1 of the first protocol of the European convention on human rights provides for the protection of property rights, but that protection is not absolute. Property rights may be interfered with where it is in the public interest and proportionate to the aim pursued.

Very powerful public interests are demonstrated by the satisfaction of the general and specific conditions in the SRR. In addition, the Bill makes provision for the assessment of compensation that would demonstrate that a fair balance has been struck when intervening under the SRR to protect financial stability and depositors. We believe that the actions we are taking are very much proportionate and in the public interest. We have consulted on them extensively, as the Committee is aware.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for his comments and am not surprised by what he said. Will a court ultimately determine whether the actions taken under the Bill are proportionate? I expect the Government to say that those actions will, of course, be proportionate and will need to comply with the European convention on human rights, but does the Minister recognise—I do not attack the Government on this—that there will always be a slight question, because of the nature of the European convention on human rights and the Human Rights Act 1998?

Ian Pearson (Labour, Dudley South)

I understand the point that the hon. Gentleman makes. We think that the actions that we propose are in the public interest and are needed to protect depositors, and we believe strongly that they are proportionate. It may be possible to construct a legal opinion that suggests otherwise, but that would be quite difficult, as we feel very confident of our grounds. There is widespread recognition that we need powers to deal with failing banks and building societies. That is why we are discussing the Bill and why we had to take action under the Banking (Special Provisions) Act 2008. It would be difficult to construct an argument that we are not acting in a proportionate way through the Bill. It is vital that provision be made to make it clear that a transfer takes effect notwithstanding any restrictions in contract, legislation or any other form, which is why we have phrased the clause in the way we have.

Clause 32

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 136, in clause 32, page 14, line 23, leave out ‘(including legislation of the European Union)’.

The amendment relates to subsection (1)(e), which is one of those pieces of drafting where one suspects that the draftsman and the Government have something in mind. The aim of the amendment is to find out what that is and whether it is possible for the clause to be more explicit. My amendment would remove some wording, which I am keen to replace with more specific wording, but until we know what the Government have in mind it is not possible to propose an amendment that is more specific.

The subsection refers to a property transfer instrument transferring property rights or liabilities, including rights and liabilities under an enactment

“(including legislation of the European Union)”

—the words that I seek to remove. What EU legislation do the Government have in mind? Do they have in mind passport rights under the markets in financial instruments directive or the banking co-ordination directive? The passport rights in those directives enable a branch of a European economic area institution to locate in the UK. Are those the sort of rights and liabilities that the Government envisage? If not, what do they have in mind? The amendment is intended to press the Government to elaborate on what they are seeking to address, with a view to tightening up the Bill so that we know what sort of enactment under EU legislation they mean.

Peter Bone (Conservative, Wellingborough)

I support my hon. Friend’s amendment. It is clear that the idea of the parliamentary draftsman and his interpretation of the Minister’s wish was that the provision would be governed by the sovereignty of Parliament, otherwise there was no need to put those words in. We were told earlier that the Government believe that the measure complies with EU law, so it is not necessary to say that because it is implicit. If that is the case, the additional words are not necessary and my hon. Friend’s amendment is correct.

I suspect that the draftsman included those words because he intended in the previous clause that we would override EU law. The Bill does not seem to match the Government’s intentions and my hon. Friend’s amendment is most helpful to the Government. I expect the Minister to accept it.

Ian Pearson (Labour, Dudley South)

No, I am afraid that I shall not do so. The hon. Member for South-West Hertfordshire asks a good question. If I explain the intention behind the wording, perhaps matters will become a little clearer.

Clause 32 provides that a property transfer instrument may transfer any property, rights and liabilities, and gives specific examples of the types of property that that may include. For instance, the instrument may transfer property acquired between the making of the instrument and the transfer date. It may also make provision for foreign property owned by the bank to be transferred. Having consulted those who prepared the Bill, I want to make it clear that the intention is to enable the transfer of the broadest possible range of property, rights and liabilities. As we explained elsewhere during the passage of the Bill, we have tried to future-proof it, which is a matter of course in legislation, so that we do not have to keep revising it.

The final example of what transferable property may be, as the hon. Gentleman noted, is rights and liabilities under the enactment, including legislation of the European Union. The hon. Gentleman seeks to probe us by removing that reference to Community law. I tried to think of examples in which that might be appropriate. The first example that my officials came up with was milk quotas, which would not normally apply to the banking sector, but it is an example of a property right under European law. Carbon trading permits under the EU emissions trading scheme may well be an appropriate example. We do not know what instruments may be included in the future.

Why is there a problem with including EU legislation, given the possibility that something might be applicable and could be transferred if the special resolution regime was engaged? It seems a sensible and logical thing to do. It would be rather perverse to exclude something because it originated in EU legislation.

Peter Bone (Conservative, Wellingborough)

Earlier in the debate—indeed, throughout the debate—we have heard that we do not need to put the words in the Bill because it already complies with Community law. Anything in Community law applies to the Bill, so the words are unnecessary. If we take them out, and if the Government are right, the context does not change because the European Communities Acts apply. The wording seems superfluous and we try not to include such wording in Bills. I cannot see the logic of putting it in when it already applies and we have not put those references in anywhere else.

Ian Pearson (Labour, Dudley South)

I cannot see the logic of taking the wording out. I am advised that those are not superfluous words and that they are needed to ensure that we have a broad and encompassing definition to make it very clear that any property rights and liabilities that are included in EU legislation could be transferred under the powers in clause 32, if the special resolution regime was engaged.

I want to be clear. The reference is not intended to suggest that the Government will legislate in a manner incompatible with Community law, as I explained previously. That is not possible and the Government would not seek to do it. I hope the hon. Gentleman and members of the Committee are satisfied that the provisions in the clause are appropriate, needed and sensible, and I hope the hon. Member for South-West Hertfordshire will withdraw his amendment.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the Minister’s response. As I said in my opening remarks on the amendment, my intention was to flush out exactly what the Government had in mind when they referred to EU legislation. I was not expecting milk quotas. The provision would appear, from what the Minister has said, to be largely precautionary and I have no objection to it other than that it seems vague. The Minister did not refer to passporting rights—I anticipated that they would be considered rights under an enactment, including EU legislation. I do not know whether passporting rights would fall under the provision. Although we did not receive the expected clarification, the Minister’s remarks were helpful. The wording does no particular harm, and I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

I have one question, which we could also address under clause 36 on foreign property. It concerns the rights and liabilities under the law of a country or territory outside the UK, which, according to clause 32, a property transfer instrument may transfer. There will always be foreign law issues, and there may be a clash between these provisions and foreign law. A particular issue is that under our arbitration Acts we acknowledge and respect decisions made by foreign arbitrations, but it is not entirely clear how the provisions in clauses 32 and 36 relate to those Acts.

I do not expect the Minister to respond on that point, but I mention it as something that he and his advisers might want to consider. There may be nothing to it, but it might be helpful for the Committee that I have mentioned it. It also might be helpful if the Minister, either now or under clause 36, told the Committee how the relationship between foreign law and the provisions will work, and whether there are difficulties with transferring rights and liabilities under foreign law when we are not necessarily in a position to do so.

Ian Pearson (Labour, Dudley South)

It is important that a property transfer instrument is able to transfer all of a failing bank’s property. If a crucial element of a bank’s business were left behind, that could jeopardise the effectiveness of the transfer. If a private sector purchaser believed that to be a material risk, it might not agree to take part in the transaction. With a property transfer to a bridge bank, if some property could not be transferred, that might reduce the likelihood of an ultimate sale or increase the risk to public funds. That is why the clause is particularly necessary.

The inclusion of foreign property in the scope of the clause is crucial, given the international and multi-jurisdictional nature of many of the UK's banks. At the moment, I do not have a direct answer to the arbitration point raised by the hon. Gentleman, but we can discuss it further under clause 36 and the obligations there, because we need to ensure that a transfer of foreign property is effective. Overall, the clause underpins the effectiveness of the Bill’s property transfer powers, and I urge that it stand part of the Bill.

Clause 34

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 137, in clause 34, page 15, line 20, leave out ‘despite the transfer’ and insert

‘as if the transferee is the transferor’.

The amendment addresses a drafting issue. Clause 34(1) states:

“A licence in respect of anything transferred by property transfer instrument shall continue to have effect despite the transfer.”

Concern has been raised with us that the clause, as currently drafted, appears to have the effect that the licence endures only for the benefit of the transferor, as opposed to the transferee, which I do not think is the intention. The amendment would mean that both the transferor and the transferee gain the benefit of the licence. I expect the Minister to confirm that the amendment accurately reflects the intention behind clause 34(1) and that the clause, as currently drafted, would not have that effect. Our intention in tabling the amendment is to ensure that the Minister dispels any ambiguity that might exist in the current drafting.

Ian Pearson (Labour, Dudley South)

The clause provides for a property transfer instrument to make provision in relation to licences, and the purpose is to ensure that, if any banking business transfer relies upon a licence, appropriate provision may be made to ensure that the transfer is effective. An important example is any form of IT licence granted to a deposit taker that might give it permission to use a particular type of system to operate its business. To ensure continuity of banking services, it is important that those licences are valid after a transfer.

The hon. Gentleman proposes to amend the phrasing of subsection (1). I accept that the provision set out in subsection (1) is broad, but I also point out that subsections (2), (3) and (4) provide for the power to be refined to the particular resolution. For example, if it was in the public interest to exclude a licence from the operation of the clause, the property transfer instrument could provide for that. There is also the flexibility to apportion responsibility for compliance with a licence between a transferor and a transferee. Given the scope for refinement and honing, I consider the original wording to be preferable. The amendment also overlaps with the continuity provisions, which can be made under clause 33. Therefore, I ask the hon. Gentleman to withdraw the amendment, and if it is pressed to a vote, I urge members of the Committee to reject it.

David Gauke (Conservative, South West Hertfordshire)

I am not sure that the Minister has quite got to the heart of my concern, which was not so much that subsection (1) was too broad, but that in a way it was too narrow. It seemed to suggest that the licence endured only for the benefit of the transferor, which is not the intention behind the clause, unless the Minister wishes to say otherwise. What the Minister has said makes the intention of the clause clear: the licence will apply for the transferee as well as the transferor. That provides sufficient clarification for me, so I will not press the amendment, but I am not sure that the Minister’s remarks quite got to the heart of my concern.

Ian Pearson (Labour, Dudley South)

I apologise for not covering that point. Subsection (1) states that the licence has effect with respect to the transferred property. The transferred property is transferred to the transferee. So I can confirm that it is the intention of the clause that relevant licences apply to the transferee.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that explanation. I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

My question relates to subsection (3) which states:

“Where a licence imposes rights or obligations, a property transfer instrument may apportion responsibility for exercise or compliance between transferor and transferee.”

In a scenario where the responsibilities are apportioned to the transferor and transferee and the transferor does not comply with the responsibilities under the licence—perhaps he is in breach of a systems licence—what rights does the transferee have? How is the apportionment enforced? The transferee could be dependent upon the transferor complying with a particular licence and if the transferor does not do so, the transferee appears to be in a vulnerable position. Again, this comes back to the question of certainty and ensuring that we have a system in place that is supportive of transferees to make it an attractive proposition.

There is nothing about this in the clause—it may be elsewhere—and in those circumstances it seems that apportionment may leave the transferee vulnerable. An amendment to the clause might provide the transferee with an ability to enforce the obligations contained within a licence or perhaps for it to take over those obligations subsequently. I am sure that the Minister will appreciate my concern. I do not claim that there is an easy solution, but I throw it open to the Committee and ask the Minister to explain how the Bill as currently drafted seeks to address the problem.

Ian Pearson (Labour, Dudley South)

I understand the point that the hon. Gentleman is making about subsection (3). In normal circumstances the property transfer instrument would determine the apportionment of responsibility for exercise or compliance between the transferor and the transferee and it would have been expected that both the transferor and the transferee would be content with the instrument that was being applied. The enforcement of the licence will depend on the circumstances, but the effect of the exercise of the power under the clause will be to alter the legal entitlements under the licence, whether under private or public law. I hope that provides at least some clarification for the hon. Gentleman. If there is anything more that he wishes to raise, I would be happy to consider it.

David Gauke (Conservative, South West Hertfordshire)

For clarity, is the Minister essentially saying that the property transfer instrument is the agreement that will address this point and that the transferee may well have a contractual right against the transferor to deal with this matter?

Ian Pearson (Labour, Dudley South)

Yes, indeed. That is my understanding.

Clause 35

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 138, in clause 35, page 15, line 34, at end insert ‘or’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss amendment No. 139, in clause 35, page 15, leave out lines 37 to 41.

David Gauke (Conservative, South West Hertfordshire)

The clause relates to termination rights. In particular, it contains a definition of “default event provision” and provides a list of circumstances. Amendment No. 139 would delete items (e) to (i). We are raising a query because the items provide examples of circumstances that do not appear to be termination rights or default events as such but could cover almost any obligation under a contract.

For example, item (e) reads,

“a sum becomes payable or ceases to be payable”,

and item (f) reads,

“delivery of anything becomes due or ceases to be due”.

Item (h) reads,

“any other right accrues, changes or lapses”,

and (i) reads,

“an interest is created, changes or lapses”.

Those situations are quite broad and might happen in the course of a contract without any suggestion of a default event. Will the Minister clarify why those subsections are there? Does he recognise the concern that, given the current drafting of clause 35, a default event appears to be very broadly defined, and will he explain to the Committee why that is the case?

Ian Pearson (Labour, Dudley South)

The clause sets out certain provisions relating to events of default and makes similar provisions to those in clause 21, which we debated last week. As has been noted, events of default are extremely common in contractual documentation. If the act of making a transfer or events leading up to that act triggered contractual rights for parties to terminate or modify their contractual arrangements with a failing bank, it could reduce significantly the bank’s ability to continue as a going concern. That would reduce the value of the business transferred and might even render resolution under the special resolution regime impossible. Clearly, that would have a number of significant implications for the resolution.

A transfer of property 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. Therefore, the provisions in the clause specifying that the authorities may turn off event of default clauses are extremely important for a successful transfer.

Subsection (1) defines a default event provision. The hon. Gentleman’s amendment would significantly narrow that definition. In broad terms, what he seeks to achieve is to carve out events that do not relate specifically to the right to terminate, modify or replace agreements. Although the amendment would still provide the authorities with the means to turn off any right to terminate, they would not have the power to turn off other rights that might accrue through the exercise of the property transfer power. We believe that the existence of those rights could pose significant challenges to the resolution.

For example, suppose that the counterparty could create the right for a penalty sum to be payable if the property transfer powers were exercised. That could require the authorities to pay a substantial sum if relevant property were transferred to either a bridge bank or a private sector purchaser. That would not be in the public interest, and could have the same economic and commercial effect as a right to terminate the agreement, or perhaps an even more adverse effect.

The hon. Gentleman says that the powers are very broad. They are far more refined than the powers taken in the Banking (Special Provisions) Act 2008, which includes powers for authorities to turn off any event of default of any person having a specified connection with a deposit taker, a very broad power indeed. In contrast, the provisions in clause 35 are significantly more refined. The default event provision cannot be entirely unrelated to the transfer. Instead, it must be related to

“the making of the [property transfer] instrument...anything that is to be, or that may be, done under or by virtue of the instrument, and...any action or decision taken or made under this or another enactment in so far as it resulted in, or was connected to, the making of the instrument.”

They are also designed to be adapted to particular circumstances. Therefore, where practicable, an event of default could be modified rather than entirely disapplied, as provided for in subsection (4). The very broad powers in the Banking (Special Provisions) Act 2008 have been narrowed following consultation and contained in clause 35.

I hope that I have demonstrated to the Committee that this clause is necessary and that the amendments would place an unwarranted restriction that might get in the way of a successful resolution.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for that response. In the light of his comments, I beg to ask leave to withdraw the amendment.

Peter Bone (Conservative, Wellingborough)

This clause is extremely important and the Government are right to draw it to our attention. I wonder what would happen in the case that, although the default clause could not be operational under law, nevertheless the company with the default clause went ahead. Is this similar to chapter 11 protection in the USA, where creditors cannot enforce against a company that is in chapter 11? Is it the intention that if a company is dealing with a bank which then has a transfer under these provisions, it is forced to continue with the original contract in the manner in which it was first drawn up and not allowed to stop? I assume that is what it means, but I would like the Minister to clarify that point.

Ian Pearson (Labour, Dudley South)

I am happy to provide what clarification I can. It is important to set this clause within the overall context of what we are trying to achieve, which is to deal with failing banks and to find the most appropriate remedy, whether it be transfer to a private sector purchaser, a bridge bank or taking the failing bank into temporary public ownership. This clause sets out certain provisions in relation to events of default. In the circumstances of a failed bank where we want to take action in the public interest and protect depositors, we cannot have a situation where events of default—built into contracts under normal contractual arrangements—can be engaged and in effect frustrate the action that we want to take in the public interest. Disapplying these events of default provisions, as we seek to do in this clause, is a sensible way to ensure that we can use the SRR for the purposes intended.

Peter Bone (Conservative, Wellingborough)

I understand the Minister’s argument entirely. It is right that the person who would normally enforce the default clause is not allowed to enforce the default, which may be to claim back the money. Does it go further to establish the principle that parties have to continue with the contract in the previous form, or are they allowed to stop the contract but not enforce the default clause?

Ian Pearson (Labour, Dudley South)

I understand the point the hon. Gentleman is making. The purpose is certainly to allow transfers to go ahead and there will be a right to continue the contract. He raises an important point about whether a counterparty might subsequently desire a change of contract in the future; I think that that would be part of normal commercial arrangements. The intention is to deal with situations as I have described, in which we are trying to rescue all of or parts of a failing bank. It would not be possible to transfer property effectively if events of default were being exercised on a routine basis, which is common in normal commercial contracts. That is why the termination rights clause is in the Bill and is essential if we are to have effective property transfers.

Clause 36

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 140, in clause 36, page 16, line 19, after ‘means’, insert ‘property which is’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following amendments: No. 141, in clause 36, page 16, line 20, leave out ‘property’ and insert ‘physically situated’.

No. 142, in clause 36, page 16, line 21, leave out

‘rights and liabilities under foreign law’

and insert

‘a right in action which exists only under the jurisdiction outside the UK (disregarding any arbitration provisions)’.

David Gauke (Conservative, South West Hertfordshire)

I mentioned clause 36 a moment ago in the context of foreign property, of which the clause provides a definition. Amendments Nos. 140 to 142 are probing amendments, which attempt to clarify the definition of foreign property. The provision is important in that it applies to a partial property transfer order to preserve set-off—an issue that we shall turn to shortly. Therefore, it is important to get the definition right. There is a drafting error in amendment No. 142, which the Minister may identify.

I shall give the Minister and the Committee examples of circumstances in which it is not entirely clear what is and is not foreign property. I will be hugely impressed if the Minister is able to provide an immediate answer; I fear that I am being a little unfair on him for ambushing him by providing these examples, but any guidance that he provides will be helpful. None the less, if there is uncertainty, it is helpful for the Committee to be aware of it.

We have received representations giving areas where the current definition is unclear. The examples are as follows: First, English law bearer securities held outside of the UK, for example in Euroclear, in Belgium, or in Clearstream, in Luxembourg; secondly, a New York-law-governed option over UK property, for example commodities held in a UK warehouse; thirdly, an English-law-governed right to the delivery of US securities; and finally, a German-law-governed right to the repayment of a loan denominated in sterling made by a UK bank branch.

I do not expect the Minister to provide immediate answers, but I may be doing him down. I highlight those cases to demonstrate that this is a complicated area. What is foreign property and what is UK property is not always clear, given that there are various conflicting elements, such as the choice of law, the relevant currency and the type and location of the property. There are all sorts of complicating factors. It has been put to us that clause 36 is perhaps not as clear as it might be in determining which factors are predominant.

Ian Pearson (Labour, Dudley South)

We have already considered, in clause 32, that a property transfer instrument may make provision to transfer foreign property. In domestic law, the transfer of foreign property will be recognised as effective because it is authorised by primary legislation. The only exception to this is when the transfer is contrary to European Community law, an issue that we considered in the debate on the proposed amendment to clause 32 tabled by the hon. Member for Wellingborough. The critical question is whether the transfer of foreign property will be recognised as valid under foreign law legal regimes. If foreign courts will not recognise the transfer, it might not be practically effective.

Clause 36 makes further provision to ensure that transfers of foreign property are recognised as effective when that is not the case simply by virtue of the property transfer instrument. In particular, an obligation is imposed on the transferor to take steps to ensure the effectiveness of the transfer under the foreign law legal regime. For instance, the transferor might have an obligation to ensure that property registered in the United States, or in any other country, is effectively transferred.

The hon. Member for South-West Hertfordshire raised some interesting points on whether our definition of foreign property is adequate and on what may or may not be covered. I do not have an answer for him immediately available. However, I can respond to the point he made about arbitration when we discussed clause 32. The purpose of clauses 32 and 36 is to secure the greatest possible scope for the recognition of transfers under foreign law. International commercial documentation may be subject to arbitration provisions, so the effect of the exercise of stabilisation powers will depend on the context. In certain circumstances, it might be necessary to override provisions subject to arbitration, such as an event of default that applies on the exercise of stabilisation powers. However, if a later question arose on the compliance with the agreement by the transferee, that matter would fall to be determined by arbitration in the ordinary way.

Amendments Nos. 140 to 142 seek to change the definition of foreign property. That provision has deliberately been drafted broadly so that it applies to all property where questions of recognition under foreign law legal regimes might arise, and the hon. Gentleman’s amendments are likely to narrow the scope of the definition. Again, that relates to our general point that we seek to future-proof legislation as far as possible and have broad categories, rather than specific ones for particularly narrow definitions. Were the amendments to be accepted, the provision of clause 36 could not be used for some foreign property, even if doing so would be beneficial for the resolution and in the public interest. I am sure that the hon. Gentleman would not want that to happen.

Peter Bone (Conservative, Wellingborough)

I am grateful for the Minister’s explanation. Have there been discussions with the American Government about the transfer of what would, in effect, be their assets, if an American company were involved? Has there been an agreement with the Americans that one would be allowed to register in America, despite that perhaps damaging the rights of a US-based company? Has there been intergovernmental discussion on those issues?

Ian Pearson (Labour, Dudley South)

I am not aware that the UK Government have had discussions on the Bill with foreign Governments. We have, however, consulted extensively with the banking sector. Many banks that operate in the UK are international and are governed by a variety of jurisdictions. The points that have come back to us from the consultation reflect the global nature of the banking system. In general, if a matter is wholly governed by domestic law, the transfer will be effective because it is authorised by primary legislation. Here we are talking about matters governed wholly or partly by foreign law, which will attract the additional assistance provided for in clause 36.

I shall give an example of problems that might arise if amendments Nos. 140 to 142 were accepted. The amended definition of foreign property would not extend to liabilities under foreign law, yet liabilities might form a key part of a contractual relationship critical to the operation of the banking business—for example, the obligation to pay for services provided under an IT contract. Clauses such as clause 36 have been used in other contexts, for example in paragraph 11 of schedule 21 to the Energy Act 2004, which makes provision for energy transfer schemes where energy companies enter special administration, and in the Banking (Special Provisions) Act 2008 itself.

Although the provision in the clause cannot guarantee foreign law recognition in all circumstances, it gives the authorities the greatest scope possible under domestic law to secure such recognition, and could prove to be an essential component of a successful resolution. I therefore invite the hon. Member for South-West Hertfordshire to withdraw his amendment, because it would unnecessarily and unhelpfully get in the way of a potentially successful resolution under the SRR.

David Gauke (Conservative, South West Hertfordshire)

We are in danger of falling into the traditional roles of a Government Minister seeking greater flexibility and an Opposition spokesman seeking greater clarity. It is probably right that we perform those roles.

I am grateful for the Minister’s comments on the arbitration provisions. As I mentioned, I did not expect him to be able to respond to the examples that I gave of ambiguity in the definition of foreign property. It may be helpful to the Committee and for the general interpretation of the clause if he could provide a written response.

I will not press the amendments. I have made my point, which is that there is a lack of clarity. I understand why the Government want flexibility in the circumstances, but outside bodies have suggested that it is not clear how the provision will work. It would be helpful for all concerned if the Minister would address that in due course. I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 143, in clause 36, page 16, line 32, leave out subsection (6).

Subsection (6) states:

“An obligation imposed by this section is enforceable as if created by contract between the transferor and transferee.”

It is not entirely clear why the deemed contractual provisions should displace a person’s right under breach of statutory duty. I should be grateful if the Minister could explain why the subsection is included here. I have not noticed whether it is included elsewhere.

Ian Pearson (Labour, Dudley South)

As I made clear, clause 32 is about property transfer instruments involving transfer of foreign property. As we said earlier, clause 36 provides a mechanism to require a transferor to take steps to ensure that the transfer is effective. Such provisions were used in the resolution of Bradford & Bingley. The transfer order provided that Bradford & Bingley should take appropriate steps to make the transfer of foreign property to Abbey Santander successful.

The mechanism for ensuring that a transferor takes appropriate action is that an obligation may be placed on him. The hon. Member for South-West Hertfordshire proposes that the obligations should not be enforceable as if created by a contract. The Government consider that this would reduce the likely effectiveness of a transfer of foreign property. If an obligation were not enforceable as a contract, it would be more difficult to compel the transferor to take steps to ensure that a transfer was successful.

For example, because the obligation is enforceable as a contract, any person who is unwilling to comply with it must consider whether the authorities would be able to bring a claim for substantial damages, should non-compliance prejudice the resolution and give rise to economic loss. Other contractual remedies would also potentially be available to compel compliance with the obligation, such as an interim injunction and an order for specific performance. The absence of such incentives to comply would reduce the likelihood of a successful resolution, particularly if a piece of foreign property was essential to the operation of the bank. Further, it could put off a potential private sector purchaser. In short, the Government do not believe it would be in the public interest to admit this provision, and it is for those reasons that we think that Amendment No. 143 would be damaging and unhelpful.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that explanation. I beg to ask leave to withdraw the amendment.

Peter Bone (Conservative, Wellingborough)

When I dealt with the United States when I was in business, our contracts always included a clause stating that they would be interpreted by the law of a particular jurisdiction. Sometimes it would be UK law and sometimes it would be US law. What happens here? If the clause states that it will be interpreted in relation to UK law, all the damages and all the threats in this very sensible clause would apply. However, if it is interpreted under the laws of the USA, none of that would apply. How do the Government intend to get around that problem unless there is some sort of mutual discussion with other states, particularly a major trading partner like the US?

Peter Viggers (Conservative, Gosport)

I do not wish to oppose the clause. In noting its importance, I assume that the word “property” in the present context means anything capable of being owned. I assume that it is a broad definition and not restricted to real property. I assume that the word “foreign” means anything that is not susceptible to UK law. I can see that the Government are trying to make the proposals as comprehensive as possible. They need to be sweeping proposals because the subject with which we are dealing is extremely complicated.

My hon. Friend the Member for Wellingborough referred to American law but I think I am correct in saying it is not American law that would govern such a contract but the law of Delaware or California or Rhode Island. That, too, is a complication.

Some of the instruments that can be brought forward can be extremely opaque. I remember that the most opaque instrument I was capable of creating when I operated many years ago was a Liechtenstein Anstalt, which is an unincorporated body in Liechtenstein, controlled by Virgin Island bearer shares, which is almost impossible to work through. It is a very opaque suitcase. So we are dealing with complicated fields which can require very sweeping provisions.

Subsection (6) says that

“an obligation imposed by this section is enforceable as if created by contract between the transferor and the transferee.”

That is a sweeping provision indeed. Similarly, subsection (7)(b) says that

“obligations imposed by direction are enforceable as if created by contract between the transferor and the Bank of England.”

It is important that we keep a sense of proportion in having these sweeping provisions. If one goes too far with them it may well be resented by foreign legal bodies and diminish foreign law recognition. I would be reassured if the Minister could tell me that this point has been considered, that we have gone as far as we need to go and no further, that careful consideration has been given to foreign law recognition and that he is confident that, insofar as it is possible to ensure the certainty that he desires, this will indeed be the result.

Ian Pearson (Labour, Dudley South)

Let me try to answer some of the direct questions that have been asked. The hon. Member for Gosport asked about the definition of foreign. I refer him to subsection (8), which makes it clear that this is a jurisdiction other than the UK. I am happy to confirm that property has a wider definition and is not confined to real estate.

This is an important clause. Subsection (3) states that

“the transferor and the transferee must take any necessary steps to ensure that the transfer is effective as a matter of foreign law.”

It is not the case, as the hon. Member for Wellingborough suggests, that we have to have extensive dialogue with other jurisdictions. We are trying to ensure that the transferor and the transferee fulfil obligations that we are imposing to take the necessary steps to help bring about a successful resolution.

Subsection (4) makes provision for the period before a transfer may be fully effective as a matter of foreign law. For this period the transferor must act on behalf of the transferee by holding any property or right for its benefit and discharging any liability on its behalf. Subsection (5) makes it clear that expenses incurred by the transferor in relation to these acts must be met by the transferee.

The hon. Member for Gosport raised some issues about what he regarded as the sweeping powers and obligations under subsections (6) and (7). As I sought to make clear in a previous debate on an amendment, we believe that it is important that there is enforceability as a contract in the unlikely instance where someone might be unwilling to comply. As I explained, in those circumstances there will be potential remedies that the authorities could bring, such as a claim for substantial damages. Other contractual remedies could potentially be available to encourage compliance with the obligation, and I mentioned an interim injunction or an order for specific performance. We think that it is right that those enforcement powers are contained in those subsections. As a general matter of course, however, we would expect to reach agreement with both the transferor and the transferee about the circumstances that will pertain with regard to foreign property. As is always the case when framing legislation, it is of course appropriate to consider every eventuality, and that is what we are seeking to do with some of the wording in the clause’s subsections.

Clause 38

David Gauke (Conservative, South West Hertfordshire)

I will raise two brief points on clause 38, which relates to the procedure followed after a property transfer is made. The Bank of England is required to send a copy to the relevant bank, the Treasury, the Financial Services Authority and any other person specified in the code of practice. I want to raise the issue of the role of Parliament. I am not suggesting that Parliament can or should be included within that list, but I assume that the Treasury would make available a property transfer instrument to Parliament, or would that not be possible because it contained information of a sensitive commercial nature?

My second point confirms that that would not be confidential because a copy of the instrument will be placed on the Bank’s website and in two newspapers. I would be grateful if the Minister could provide some guidance on that. Clearly, putting something on the website is cheap, but placing a copy of it in two newspapers might be expensive. Is that what the Government normally do, and what newspapers do they have in mind? From my memory of legal practice I know that notices used to be published in the London Gazzette, but I do not know whether that is what the Government have in mind. Perhaps the Minister could elaborate on which newspapers the Government intend to publish a copy of the instrument in.

Ian Pearson (Labour, Dudley South)

The clause sets out various procedural provisions in relation to property transfer instruments and is analogous to clause 23, which makes similar provisions for share transfer instruments. Naturally, the making of a property transfer instrument will follow a period of intensive consultation between the authorities, and that is required by the provisions of clauses 7, 8 and 9, which we have already considered. The Clause adds to that process by providing for a formal requirement for the Bank of England to send a copy of the instrument to the FSA and the Treasury.

As the hon. Member for South-West Hertfordshire suggests, the clause also provides that the Bank of England should publish a copy of the instrument on its website and in two newspapers. We think that that is a reasonable requirement, designed to ensure that an instrument producing legal effects is adequately publicised and that all appropriate parties are fully aware of the transfer. In practice, given the ubiquitous nature of modern media, it is difficult to imagine a transfer being carried out under the radar, but I confirm that it is not our intention to do so. That is why we make it explicitly clear in clause 38(2), which overall is a relatively uncontentious clause.

Peter Bone (Conservative, Wellingborough)

Other than not knowing which two newspapers, the contents of the clause are not contentious. That sort of detail has not been published on the current nationalisation of the three banks, although some draft memorandums of share transfers have been placed in the Library. Will the Government publish in that way the details of the current situation, even before the Bill goes through the House?

Ian Pearson (Labour, Dudley South)

I shall confine my comments to the Bill. I stress again that we believe that it is right that the instrument is adequately publicised, because it alters legal rights. Publication in newspapers, in addition to on the Bank’s website, seems the most appropriate option. How much detail will be in the instrument will depend on the individual case. We have an appropriate procedure in the clause for the making of the property transfer instrument, and I urge that the clause stand part of the Bill.

Clause 39

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 96, in clause 39, page 17, line 39, leave out subsection (5).

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following: Government amendment No. 97.

Government new clause 12—Reverse property transfer—

Government new clause 13—Temporary public ownership: reverse property transfer.

Ian Pearson (Labour, Dudley South)

The measures in this group are analogous to those that we debated under clause 25 on the share transfer powers.

I have already referred to the general context in which transfers may take place. The general principle is that due to the swiftness with which the authorities may have to act, and the complex nature of the businesses that they are acting on, it is sensible to provide for considerable flexibility. These measures provide further flexibility for supplemental and reverse property transfers.

Supplemental and reverse property transfers provide particularly valuable flexibility for property transfers. Not only do the powers provide the Bank of England with the means to ensure that an initial property transfer is effective, but they may also produce a better outcome for the resolution. For example, a further transfer of property to a bridge bank may increase the value of the bridge bank, in turn increasing the amount that a private sector purchaser is prepared to pay for the business. That will be treated as proceeds of resolution under a bank resolution fund, the net proceeds being available for the failing bank.

The Bill already provides flexibility to the Bank of England to make supplemental transfers in relation to the bridge bank stabilisation option. The Government consider it desirable to extend that power. Amendment No. 96 provides the Bank of England with the flexibility to effect a supplemental property transfer to a private sector purchaser. As I made clear in the debate last week on the analogous Government amendment for supplemental share transfers, the measure would be used where a transfer to a private sector purchaser had occurred at speed and before all due diligence could be completed. In that situation, a supplemental transfer of property could be made to ensure that the purchaser had all the relevant things for carrying on the banking business effectively.

The existence of the power should increase the likelihood of an immediate private sector solution being successful, as commercial purchasers are assured that the authorities have the means to ensure that the transfer is fully effective. However, I should emphasise that a supplemental transfer would never be made simply because a private sector purchaser had requested it. The action would have to meet the resolution objectives, and the authorities would have to consider it necessary and proportionate.

New clauses 12 and 13 introduce powers to make reverse property transfers. Those powers are available in three situations. The first is when the Bank of England has made an initial transfer to a bridge bank and wishes to transfer some of the property back to the failing bank. The second is when the Treasury has taken a bank into temporary public ownership, transfers property to a publicly owned onward transferee and subsequently wishes to transfer some property back to the bank in temporary public ownership. The third is when the Bank of England has a bridge bank, transfers some of its property to a publicly owned onward transferee and subsequently wishes to transfer some property back to the bridge bank.

In summary, the Government amendments provide the flexibility to make reverse property transfers subject to one constraint—that property may not be transferred back from the private sector purchaser.

It may help the Committee if I provide some examples of how the power may be used. If the Bank of England had transferred the majority of a failing bank’s business to a bridge bank but it became clear in due course that some small aspect of its balance sheet was not attractive to a private sector purchaser, that item could be transferred back to the failing bank, allowing the bridge bank to be sold. Another example would be using the power to transfer back if a particular class of asset suddenly deteriorated in quality. In summary, the powers may be used to optimise the balance sheet of the bridge bank.

The partial transfer safeguards apply to supplemental and reverse property transfers. They offer three protections. First, the authorities will need to provide the same degree of protection to set-off and netting arrangements when effecting supplemental and reverse property transfers. Secondly, security interests will need to be protected. Thirdly, supplemental and reverse property transfers will need to be taken into account when determining the compensation amount for creditors left in the residual bank. I look forward to debating those safeguards in detail when we come to clauses 42, 43 and 55.

In addition, the Government consider it appropriate to introduce another safeguard to run alongside the flexibility provided by the amendments. It is proposed that secondary legislation should set out a list of property rights and liabilities that may not be transferred back. For example, if a creditor in a bridge bank thought that the bridge bank would be transferred back to the failing bank, the creditor may not have sufficient confidence to continue doing business with the bridge bank. In broad terms, the Government therefore propose to protect liability holders from being transferred back. That, of course, includes depositors. I emphasise that in no circumstances would protected depositors be transferred back. The consultation document on safeguards, published last Thursday, provides further detail on this point; the document also consults on what types of asset and liability should be protected.

To conclude, the Government consider this group of amendments and new clause to be a worthwhile addition to the Bill. I remind the Committee that when using the powers provided by the amendments, the authorities must have regard to the special resolution objectives. They will guide any decision to make a supplemental or reverse property transfer. I hope that the Committee will accept the amendments and new clauses.

David Gauke (Conservative, South West Hertfordshire)

The Minister was right to mention safeguards in this context. I hope that we will turn to them shortly, although I note that according to the discussion paper that the Government produced last week, they are at an earlier stage of development than others, and draft secondary legislation has not yet been prepared. We are therefore unable to debate the detail of reverse and supplemental transfers today. We will return to that subject later.

The Minister gave hypothetical examples of how the provisions in the Government amendments and new clauses would be of assistance. That was a great help. However, as the Treasury’s consultation paper makes clear, the amendments are driven by

“the light of recent experience”.

We may talk about hypothetical examples, but partial property transfers have already happened. We have seen it with Bradford & Bingley and with Kaupthing and Heritable. The Government are therefore able to benefit from the experience of those processes to find weaknesses within the system and seek to improve it.

It seems that the amendments, which have come relatively late in the process, derive from the experience of Bradford & Bingley and the Icelandic banks. The Minister will correct me if I am wrong, but that is the impression given by the Treasury document, which on two occasions says that in the light of recent experience, the Government consider it appropriate to increase flexibility.

We are not against flexibility in these circumstances. We have some sympathy with what the Government are seeking to do and the Minister made a reasonable case for the provisions. However, they seem to be a consequence of something happening in the Bradford & Bingley and Icelandic bank cases, so it might help the Committee if the Minister could explain the particular problems that arose in those cases and why the clauses would be helpful. He gave examples which sounded hypothetical, but are they in fact rooted in the experience of the past few weeks?

Ian Pearson (Labour, Dudley South)

I fear that I shall have to disappoint the hon. Gentleman. I do not want to get drawn into a detailed discussion of Bradford & Bingley or Kaupthing Singer & Friedlander and Edge as these are obviously very recent events. In response to those circumstances and to the thinking that that has engendered within the authorities, we believe that the flexibilities in the amendments and new clauses could be beneficial in situations that might occur. We believe that the additional flexibility could enable successful resolutions and, as I indicated in my initial remarks, potentially optimise the balance sheet of a bridge bank and make the transfer to a private sector purchaser more likely.

David Gauke (Conservative, South West Hertfordshire)

I am not sure that it is entirely appropriate to decline to discuss a matter because it arises from recent events. The Committee is capable of discussing recent events. I stress that twice in three paragraphs the Treasury document makes it clear that amendments were introduced in the light of recent experience. It would be helpful to the Committee to know what that recent experience is.

Ian Pearson (Labour, Dudley South)

As I explained, recent experience is obviously framed by specific situations in which the Government and the authorities have taken action, but it has also produced a great deal of thinking within the authorities about what powers are needed. It has given us the opportunity to look at hypothetical circumstances as well as real situations when framing the legislation. As a result of those broad deliberations, we believed that it was appropriate to provide additional flexibilities for the future. I do not want to be drawn on the detail, not because I am not happy to defend the actions that we have taken—far from it—but there is still the possibility of future litigation, so it is probably best that the detail of these matters is not directly discussed.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister. May I put it another way? I take the point that events may inspire deeper thinking, new circumstances may emerge and hypothetical circumstances may be considered, but would he say that the inability to carry out supplemental and reverse transfers in the Bradford & Bingley and Icelandic cases has proven to be disadvantageous to the Government in trying to address those matters?

Ian Pearson (Labour, Dudley South)

I do not want to get drawn on to that ground. We should bear in mind that we often deal with situations in which action needs to be taken very swiftly indeed, with only limited time for detailed analysis. As I explained earlier, in some cases due diligence will not have been possible. In those circumstances, having the flexibility needed to take rapid action can help to maintain the value of a failing bank. I think the hon. Gentleman broadly accepts what we are trying to do with the powers and he is trying to press us on the detail. I have explained to him why some of that is difficult, but the powers are, in our view, worth while and needed.

Peter Bone (Conservative, Wellingborough)

I quite understand the Minister not wanting to be drawn on the specifics of the Bradford & Bingley situation but, in general terms and without being specific, would the Bradford & Bingley transfers have been easier if these tools had been in place?

Ian Pearson (Labour, Dudley South)

The actions that the Government have taken with regard to Bradford & Bingley are entirely right, and those who look at these matters from outside welcomed them. It is not helpful to try to retrofit the experience of Bradford & Bingley into the Bill’s deliberations, although I am being invited to do so. The key learning points have been that the speed of events and the uncertainty that often arises require the flexibility to take action and the ability to transfer back, with safeguards in place, so that if a deal is done with a private sector purchaser, we will not go back on it. Being absolutely decisive and certain in that is helpful. The measure is designed to allow successful resolutions in the future, and I hope the amendment is agreed to.

David Gauke (Conservative, South West Hertfordshire)

I have a brief question about drafting, which applies elsewhere. Subsection (6) states that:

“Before making a supplemental property transfer instrument the Bank of England must consult...the FSA, and...the Treasury.”

As far as I can see, there is no real guidance about what is supposed to flow from that. I query whether the wording should be “notify” rather than “consult”, because it is not clear what the FSA and the Treasury are being asked, and how the Bank of England should react to any responses received from them. Can the Minister outline how he sees that aspect working and why “consult” rather than “notify” is used?

Ian Pearson (Labour, Dudley South)

We have discussed similar subsections in other parts of the Bill and at all stages I have been at pains to point out that the authorities work extremely closely together in these situations and on the exercise of the special resolution regime. When we are talking about supplemental property transfer instruments, it is important that we continue the dialogue among the Bank of England, the FSA and the Treasury. The word “consult” is right rather than “notify” when we expect discussions to take place. In the normal way in which these events are handled, we would expect a close consultation not just on transfer instruments, but far more broadly.

Clause 41

Clause 42

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 144, in clause 42, page 19, line 26, after ‘include’, insert ‘any’.

This is a minor drafting amendment seeking greater clarity. I do not want to stray into the wider issues on clause 42, which are substantial. The amendment speaks for itself but I do not consider it vital. If the Minister has anything exciting to say about it, I am sure the Committee will be pleased to hear it, but I am happy to proceed to the stand part debate.

Roger Gale (Conservative, North Thanet)

Do I take it that the amendment is not moved?

David Gauke (Conservative, South West Hertfordshire)

Yes.

David Gauke (Conservative, South West Hertfordshire)

We finally reach clause 42, which is at the heart of many concerns about the Bill. To some extent the clause needs to be looked at together with clause 43. For these purposes, I shall make one or two introductory remarks. We recognise the advantages—

Roger Gale (Conservative, North Thanet)

Order. Given that the amendment has been withdrawn and there is no amendment tabled for clause 43, I am content to take stand part debates for both clauses together, if that helps.

David Gauke (Conservative, South West Hertfordshire)

I am happy with that.

Roger Gale (Conservative, North Thanet)

Minister?

Ian Pearson (Labour, Dudley South)

So am I.

Roger Gale (Conservative, North Thanet)

Fine. Let us do that.

David Gauke (Conservative, South West Hertfordshire)

I am grateful. My introductory remarks consequently apply to both clauses. Partial transfers are important to the manner in which the Bill is designed to work. They enable a bank to be split, with some assets and liabilities in one entity and the remainder in another. Essentially, we are left with what could be described as a good bank and a bad bank.

My hon. Friend the Member for Wellingborough eloquently set out his objections to the term “toxic assets” and the Minister tended to agree. None the less, there is one bank that is much more commercially attractive and therefore more likely to be acquired by a private sector purchaser, leaving another entity that will contain assets which, to put it kindly, will carry a degree of uncertainty. At a practical level, we have already seen the use of partial transfers in the case of Bradford & Bingley, Heritable and Kaupthing. We will return to those cases, although I know the Minister is keen not to be drawn too much on the subject.

Although the provisions relating to partial transfers are helpful in trying to address some of the difficulties with a failing bank, they are also the area that has caused most concern. Those of us in the Committee who heard evidence from the British Bankers Association and the London Investment Banking Association at the beginning of the process will be well aware of concerns that without sufficient safeguards, partial transfer provisions may have serious implications for the competitiveness of London banks.

I know that the Government recognise some of those concerns. Indeed, the consultation paper published last week highlighted a number of matters raised by stakeholders, including increased cost of capital for UK banks, higher regulatory capital requirements, potential evasion by counterparties, the likelihood that UK banks will seek to restructure their arrangements to ensure that partial transfers cannot easily be applied to business, and the ultimate possibility that all those factors might have adverse effects on UK financial effectiveness.

Peter Viggers (Conservative, Gosport)

In supporting the thrust of my hon. Friend’s arguments, I remind him that the BBA said in a statement that its strong preference was for the special resolution regime element of the legislation, or at least the part dealing with partial transfers, to be deferred pending a much more detailed analysis of the cost and risk factors arising. In evidence before the Treasury Committee in July this year, the Governor of the Bank of England emphasised that it was far more important to get the SRR legislation right than to rush it according to a fixed timetable. I support the points that my hon. Friend is making.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to my hon. Friend, who anticipates my comments and raises an important point. If there is one part of the Bill and the surrounding legislative framework that we need to get right, it is the safeguards provided here. My argument today will stress that, highlight the concerns and examine how the Government seek to reassure. I do not deny that the Government are aware of the issue and are seeking to address it. The Committee needs to examine in some detail whether they have succeeded.

The question is whether the Committee is in a position to make that assessment, because work is still very much in progress. The various methods by which the Government seek to address the issue—the safeguards in secondary legislation, and the code of practice—are at various stages of development and are not necessarily complete.

Peter Bone (Conservative, Wellingborough)

My hon. Friend is introducing the amendment with his usual clarity, but one thing troubling me about the debate is the fact that in many cases, we are dealing with matters of which we have no knowledge. The situation is uncertain. We are in uncharted waters. However, in respect of partial transfers, we are not, because we have seen the examples of Bradford & Bingley and the Icelandic banks. Does my hon. Friend think that the Government are being fair in not being prepared to discuss those partial transfers in detail so that we have practical evidence of what happened?

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend makes a valuable point. We have such experience. The Government have experience of how partial transfer works, and that is clearly guiding them, whether with concrete examples of problems that have arisen in the course of those transactions or through something less direct that has none the less been provoked and inspired by them. It is probably helpful to the Government, in assessing whether they are getting legislation right, to have gone through the experience of Bradford & Bingley, Kaupthing and Heritable, but it would be useful if the Committee could benefit from that experience as well. I encourage the Minister to be as open as possible with the Committee about the issues that have arisen from those cases.

I return to the concerns raised by outside bodies, particularly the BBA and LIBA. Essentially the concern relates to the cherry-picking of assets and liabilities so that the good bank gets what is commercially the best for it, leaving the bad bank with the more difficult assets and liabilities. The creditor is therefore left with a divide between the various assets and liabilities, which makes netting and set-off very difficult. It cannot be sure whether it can net or set off its assets, liabilities and contractual positions, which creates a great deal of uncertainty and increases its credit risk and its insolvency risk for counterparties dealing with British banks.

That will ultimately increase the cost of capital for British banks and reduce liquidity. That could have a long-term impact on the UK banking sector. The Treasury consultation document refers to the fact that the UK has a competitive advantage in this area. English law is attractive to creditors in such circumstances and that competitive advantage could be lost. That is perhaps a relatively cheery way of putting it. The fact is that we could be left with a competitive disadvantage if we get this wrong. The safeguards that we are debating in the context of clauses 42 and 43 are, therefore, very important.

I should like to raise one point about the architecture of these clauses. Clause 43 appears to a large extent to be a subset of clause 42. Both clauses refer to the fact that the Treasury may, by order, restrict the making of partial property transfers. It is clear what the different areas covered are. Clause 43 relates specifically to issues of netting and set-off, security interests, structured finance and so on. This is not a major point, but would it be possible to deal with all this under one clause? What is served by the separation of the clauses?

Clause 42 gives the Government power to make regulations limiting the scope of a partial transfer. Last week when I intervened on the Minister to ask whether the safeguards relating to partial transfer would be retained in the code of practice or the secondary legislation, he said:

“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.”——[Official Report, Banking Public Bill Committee, 6 November 2008; c. 366.]

We will come on to the safeguards relating to netting and set-off, which the Government propose to address in secondary legislation. With regard to partial transfers however, they say in the consultation paper that although they have the power to make regulations limiting their scope, they do not intend to so in secondary legislation. They intend to do so within the code of practice. I should be grateful if the Minister could confirm that that is the case and explain why the Government do not intend to make regulations limiting the scope of partial transfers.

Within the consultation process three scenarios were set out as the possible scope of a partial transfer. The first was a transfer of the deposit book only, to ensure protection and continuity of service for depositors. The second was a transfer to facilitate a pre-agreed private sector purchaser resolution, and the third was a transfer to sanitise the balance sheet of a failing bank by separating good and bad assets. The Government have said that in the light of recent transfers—we come back to the point about Bradford & Bingley, Heritable and Kaupthing—there needs to be flexibility. They argue that the three scenarios set out a while ago do not provide sufficient flexibility, and highlight how Bradford & Bingley required the transfer of related assets such as branches and systems. I understand that, but it seems that it would be perfectly possible, in the light of the recent experiences, to look again at the issue of scope and to amend definitions, so that when we refer to the deposit book we also include related branches and systems. We can return to the scenarios with a view to redrafting them to incorporate those things, and also perhaps to making them more flexible. Nevertheless, that could be done in secondary legislation. I do not see why the recent cases suggest that that cannot be done, and I would be grateful if the Minister would discuss that.

It would also help if the Minister could give us his assessment of how the Banking (Special Provisions) Act 2008 applies. I know that he will write to the Committee comparing the provisions in the 2008 Act with those in the Bill, and that will help. Will he outline how, with the benefit of hindsight, he sees that the 2008 Act provisions are flawed or inadequate, or fail to address the circumstances that may arise? We have some experience of that—as my hon. Friend the Member for Wellingborough made clear—and it would help the Committee to know what the role of the existing provisions is, and why the provisions in the Bill will be of benefit.

I now turn to Bradford & Bingley. I know that the Minister is not particularly keen to address this matter, but, having experienced the splitting-up of that bank, what is his assessment of the cost of transferring the deposit book to Abbey Santander? What is his assessment of the value of the residual bank, which is essentially the mortgage book still held by Bradford & Bingley? I and my right hon. Friend the Leader of the Opposition visited the offices of Bradford & Bingley last month, and discussed the events involving the bank with staff and management. I would be grateful if the Minister could say where we are with Bradford & Bingley, and whether the Government have made any assessment—this comes back to a point made by my hon. Friend the Member for Wellingborough a week or so ago—of the value of the residual bank. Although we talk about a good bank and a bad bank, the bad bank tends to have assets that are uncertain. Where does the Minister see the taxpayer with regard to the part of Bradford & Bingley that has been taken into public ownership? It still has a substantial mortgage book; as mortgage holders come off their deals, they may be unable to find an alternative deal in the current circumstances and so go on to a standard variable rate. In those circumstances, Bradford & Bingley may prove profitable. I raise the question because it will give us a better understanding of how splitting good and bad banks may work, as a bad bank can do rather well—a point made by the hon. Member for South Derbyshire.

May I raise a question about subsection (3), which seems strange? I do not know what it is meant to do, and it would help if the Minister were able to provide some guidance. It states:

“Provision under subsection (2)”—

orders that the Treasury may make—

“may, in particular, refer to particular classes of deposit.”

One senses that the draftsman has something in mind, but it is not clear to the Committee what it is. It would be helpful to know.

I have already mentioned netting and set-off. Again, I refer the Committee to the evidence received from BBA and LIBA. In essence, they were concerned about the possibility of partial transfer—that a bank or a counterparty would be unable to get a clean, unqualified legal opinion that it could net-off for proper risk purposes. It would therefore have to account on a gross basis for the capital against credit risk. As I said, the Government recognise that concern, and I have cited paragraph 2.4 of the consultation paper.

Clause 43 provides for orders to be created to provide protection. I understand that the secondary legislation structure has evolved in recent months and days. Originally, there would have been a safeguard to ensure that netting assessments could occur for qualifying financial contracts. That proposal was contained in the special resolution regime consultation, but it did not get a particularly favourable response from the industry.

The next proposal was put to the expert liaison group, which met on 31 October. It was that the safeguards would be based on industry master netting agreements. The difficulty with that, identified by the expert liaison group, was distinguishing between an amended industry standard and a bespoke agreement, as a result of which there would be a degree of uncertainty and a potential for evasion.

As the Government propose again to use secondary legislation, all contracts that contain any kind of netting provision will benefit from protection, subject to specific carve-outs. The carve-outs are crucial. The level of protection will depend upon them. Broadly, they will consist of the following. First, it deals with contracts governed by foreign law. I can tell the Minister that paragraph 2.11 of the consultation paper contains an erroneous “not” in the first line—either that or I misunderstand it. It covers contracts governed by foreign laws, which is why clause 36 is significant. We request clarification on contracts governed by foreign law, and what foreign property means.

The second carve-out is debt securities issued by the failed bank. The third is claims that are crucial to the preservation of banking security. It is clear from the draft order that it would include retail deposits, mortgages and other loans, and liabilities other than financial securities in the ordinary course of business.

The final carve-out deals with liabilities that constitute some or all of the counterparty’s claims against the bank, which seems reasonably uncontentious, given that it would favour the counterparty. However, paragraph 2.15 states:

“The Government will also consider adding other carve-outs that may be necessary to ensure sufficient flexibility, while still delivering sufficient certainty to the market. Consultation responses on this point are being sought.”

Hon. Members have noted that great uncertainty remains about how that will work. The structure for providing protection depends on what the carve-outs are, and if they are too broad, or if we do not know what they will be, it will be very difficult for us to assess whether the level of protection provided is sufficient. That remains a concern.

In paragraph 2.16, the Government state that their

“clear intention is to protect contracts relevant for regulatory capital purposes from the threat of disruption under a partial transfer. Therefore this consideration will outweigh any of the carve-outs listed above.”

Clearly, that is designed to provide some comfort and help to the banking industry, which is to be welcomed, but we have two concerns. First, that wording is not contained in the secondary legislation, as far as I can see. Although it is helpful to see it in the consultation paper, it is not replicated in the draft order. Will the Minister explain why?

Secondly—this point has been raised by the BBA—there is a risk of circularity. Under certain circumstances, it is a precondition for netting arrangements to be recognised in the regulatory capital calculations. That would be legally enforceable. If legal enforceability depends on whether an arrangement is recognised for capital purposes, we find ourselves in a circular position. That is not say that the thinking behind paragraph 2.16 is not welcome, but given the circumstances it might raise, we should not be too complacent in making arguments about the carve-outs and saying, “It doesn’t really matter, because as long as we have paragraph 2.16 it is fine.” There might be an issue of circularity.

To be fair, this point is in the consultation paper, but I would be grateful if the Minister could clarify that it is not the Government’s intention that only contracts for regulatory capital protection purposes will be protected. We should pursue providing protection to all contracts containing netting provisions without a carve-out. That might provide the greatest certainty. That is discussed in paragraph 2.25, which says:

“the Government believes that such an approach...would be too restrictive”,

and essentially would mean that a

“partial transfer could only be executed solely on the basis of transferring property ‘counterparty by counterparty’.”

It would help the Committee if the Minister could explain how the issue of netting and set-offs was addressed with regards to Bradford & Bingley, Kaupthing and Heritable. Was it done on a “counterparty by counterparty” basis? What does the Banking (Special Provisions) Act 2008 allow for?

Peter Bone (Conservative, Wellingborough)

It would be most helpful if the Minister could talk simply about the issues that arose in relation to the Bradford & Bingley partial transfer, so that we have an idea of exactly what the problems and issues were. We have a practical example. We should know the details.

Jimmy Hood (Labour, Lanark and Hamilton East)

I remind the Committee that with this we are taking clause 43 stand part.

David Gauke (Conservative, South West Hertfordshire)

I welcome you back, Mr. Hood. It is a pleasure to serve under your chairmanship. Before we adjourned earlier today, my hon. Friend the Member for Wellingborough raised an issue that I endorse. He said that it would be helpful, when discussing the issue of partial transfers, if the Government would give the Committee the benefit of their experience of the partial transfers that have already occurred under the existing regime of the Banking (Special Provisions) Act 2008—that is, in respect of Bradford & Bingley, Kaupthing and Heritable.

Another issue addressed in the Treasury consultation paper on safeguards for partial property transfers published last week relates to security interests, which are the interests the lender has in the property collateral of the party to whom they have lent on a secured basis. This has been an area of concern, in that the provisions could result in disruption and make it difficult for the security holder to enforce security, which would set London banks at a competitive disadvantage.

The special resolution regime consultation proposed the transfer of all liabilities to the new company with the related collateral or not at all. Concerns have been raised that the proposal may limit flexibility from the Government’s perspective because of floating charges. The Government have clearly considered how floating charges should be addressed and, as I understand the position, they have decided not to go for maximum flexibility but to provide some certainty and security. We welcome that, but I should be grateful if the Minister could confirm the approach set out in the consultation paper and elaborate for the Committee’s better understanding the Government’s thinking in that area.

I understand that the safeguard will restate the legal requirement to respect the integrity of security interests covered by the financial collateral directive. Will the Minister give the Committee some guidance as to whether it should be the financial collateral directive or the regulations made under it for the purposes of UK law—the Financial Collateral Arrangements (No. 2) Regulations 2003? I believe that they are wider than the directive. It would be helpful to know whether any consideration was given to using the regulations rather than the directive as the basis for these provisions. Were any considerations given to the use of secondary legislation referring to regulations rather than the directive? The draft statutory instrument refers to the directive rather than the regulations.

Another issue has come up with regard to structured finance. Again, the Government are keen to ensure that there is no disruption to structured finance arrangements and we welcome that. There is nothing on that point in the draft order, which seems to be at an early stage, so it is difficult for the Committee to discuss the provisions at great length or in detail, although we welcome the principles guiding the Government’s action.

As I stated this morning, it is vital that the safeguards in place as a consequence of clauses 42 and 43 are effective, to protect the competitive position of London banks. However, I should like to highlight one area where we are not in a position to assess the status of the proposed legislation and proposed secondary legislation—enforcement. What happens if things go wrong? If a transfer falls within a class prohibited by the order—currently the draft restriction of partial transfers order—what will happen? We have to look at regulation 6(5) of the draft order, which at the moment merely states in square brackets:

“The steps are to remedy the breach identified in the notice.”

Perhaps the Minister can provide some clarification about exactly what steps will be taken to remedy any breach, because that is important and it is necessary to ensure that partial transfer takes effect to produce a result that is not incompatible with the relevant safe harbours, which we spent some time discussing this morning. If something is in a safe harbour, it is important that it is properly protected and that the harbour is safe.

That is another example of our being somewhat short of details. The document published last Thursday is helpful; there is some indication of movement in the right direction in the view of industry bodies that have been concerned about the proposals, particularly the idea of moving away—in the context of netting the set off—from master netting agreements to incorporate bespoke agreements, which seems to have a lot to be said for it. However, there are still a large number of areas where the drafting is at an early stage or non-existent, which makes it difficult for the Committee to debate the provisions as effectively as we should do.

The matter is at the heart of the concerns raised by outside bodies about the competitiveness of the UK banks, yet we are having to consider it without knowing where we shall end up, because the key parts are not clauses 42 and 43—no amendments of any substance have been tabled or proposed for those clauses—but relate to secondary legislation that is at draft stage. Although things have moved considerably since the first meeting of the expert liaison group on 31 October, the document, from which I have quoted at some length today, was published only last Thursday so industry groups may not have had an opportunity to digest all its finer detail and to convey their thoughts to Committee members.

I return to a point made by my hon. Friend the Member for Gosport at the beginning of the stand part debate: whether the Government should consider the proposal made by the London Investment Banking Association, among others, that the provisions relating to partial transfers be implemented at a later date to ensure that we get them right and that we do not fall into some of the difficulties that the Government themselves recognise. I raise the matter not in an attempt to push the Government into a corner—far from it—but to urge the Minister at least not to rule out that possibility, because although we are debating something important today, it is not clear what we shall end up with.

I do not want overly to anticipate our debate on clause 65. However, outside bodies are looking for assurances about greater certainty in this area, and clause 65, which enables the Government to change the statute by statutory instrument, undermines that certainty. That has to be taken into account when we consider the package as a whole.

The Government are moving in the right direction, although concerns remain about the provisions we have, and even greater concerns about those we do not have. I therefore urge the Minister to do all that he can to address them, or at least to be prepared to take this aspect of the Bill in a steadier way, without jeopardising the implementation of the Bill as a whole, so that we get this area of legislation right.

Peter Bone (Conservative, Wellingborough)

We have reached what is perhaps the most controversial part of the Bill. Against the backdrop of the current economic crisis, we may have a tendency to rush through the clauses on partial transfer. We are moving against all the rules of the market; the essence of the Bill is not to let the rules of the market apply but to intervene to stabilise the financial situation.

Many people can understand taking a whole bank and nationalising it. They can understand a whole bank being part of a fire sale to the private sector. We have seen that happen in the past and we understand the implications. A fire sale would mean that the shareholders would lose a lot of money, but the creditors would still be ranking in the business. Nationalisation would result in a huge loss to the shareholders but the liabilities would go across with the bank. Creditors who are not depositors will lose out significantly with partial transfer.

I am still struggling to understand how the Bradford & Bingley situation was managed. It would help if we had—even if only for my benefit—an idiot’s guide to the process that the Government went through. They did it in exceptional circumstances and seem to have pulled off something that is generally welcomed, but I am not sure what the outcome will be. In effect, we have two banks: the good bank and the bad bank. The good bank went off to Abbey Santander and the bad bank is left, but I do not know what it is worth.

Under the clauses that we have already debated the Government are allowed to send bad bits back to the rump bank. I do not know whether it is intended that in most cases the rump bank or the bad bank will then go into administration. I am not clear about whether the money from a partial sale to the private sector goes to the original shareholders or whether it is used to pay off creditors in a ranking order. I am not sure about any of these things. Because the detail is left to regulations, we are struggling.

This is probably the most important part of the whole Bill. We could proceed with the Bill and leave these clauses until a later stage when we have much more detail. The Conservatives want to get the Bill right. It is a measure that we hope no one ever has to use. We are dealing with concepts that are so strange and unusual that more time on these provisions would be most useful. We have already had to deal with default clauses, yet all the things that would normally happen under them are not in the Bill. It would help if the Minister could tell the Committee where we are with the only concrete partial sale that has occurred—albeit some time ago, in relative terms—Bradford & Bingley.

I am not arguing for the commercial details but for the general principles—the way in which the sale happened, how it occurred, who will get what from where and the likely outcome. A concrete example for dealing with partial sales would help the Committee enormously. I take the point made by my hon. Friend the Member for South-West Hertfordshire: it would be hugely damaging if we got things wrong and there was a feeling in the global marketplace that it was best not to do business in Britain because if something went wrong the business would lose much more than if it were based elsewhere. We hope that the provisions are never enforced—of course, if we have a new Government they never will be enforced because everything will be milk and honey from then on—but I accept that we must look seriously at the possibility of that happening somewhere down the line, in 20 or 30 years. We do not want to lose 20 or 30 years of business because we got one part of the Bill wrong.

Peter Viggers (Conservative, Gosport)

I recognise the need for the Bank and other bodies working with the Treasury to have exceptional powers to deal with exceptional difficulties. We have a set of circumstances that require the Government to take unusual measures, but it worries me that the rules that we are considering will wipe out all the rules of private enterprise and virtually give the Government an opportunity to start with a clean white sheet of paper on which to write their own plot. Which of the provisions do the Government intend to be temporary and which permanent? Perhaps the Minister will find that question difficult, because he will know, as I do, that the world we go back to in 2012 or 2015, when the current difficulties are over, will not be the world of 2004 and 2006. We will not immediately go back to freedom of credit. If the Minister could essay an answer, I should be grateful for his comments.

Ian Pearson (Labour, Dudley South)

We intend the Bill to put in place a permanent special resolution regime. We have been clear that there are things that are right and appropriate to put into primary legislation and that other matters rightly should be the province of secondary legislation, which is still permanent but where there is greater ability to make changes urgently. Other things are in the code and will be reviewed from time to time. The debate throughout the Committee stage has been about what is most appropriately put in which box—primary legislation, secondary legislation or a code. I hope that helps the hon. Gentleman.

Peter Viggers (Conservative, Gosport)

I am grateful to the Minister. We have had an exchange a bit like this before, when—perhaps as a tribute to my incredibly advanced years—I was harking back to the days when the Bank of England was able to carry out its negotiations and discussions behind closed doors. The Minister pointed out that we have to move on, that we have to recognise that we are in the 21st century and that such outdated practices are no longer possible. I regret that the old idea of the Bank working quietly and privately is no longer possible, because the proposed structure is undoubtedly mechanistic and gives the Government powers that they have never had before.

I express caution on behalf of the banking profession—including the British Bankers Association and others—which is concerned that we should not put permanent legislation in place until a great deal of thought has been given to the overall structure. We are where we are, and we have some way to go yet in the Bill, but I put these comments down as a marker to Government and support my hon. Friend the Member for South-West Hertfordshire in expressing concern about the comprehensive nature of the powers that can be given to Government.

Ian Pearson (Labour, Dudley South)

I fully appreciate stakeholders’ concerns about the Bill’s partial transfer provisions. We have talked to stakeholders about them on many occasions and, as the Committee will be aware, we have held three rounds of formal public consultation, an extensive series of stakeholder workshops and meetings between February and September 2008, and have published draft clauses from the most complex part of the Bill—the special resolution regime. The most recent round of consultation was about the safeguards on partial property transfers. The hon. Member for South-West Hertfordshire raised many issues that appear in the consultation document. Those who take an interest in our proceedings will have noted what he said, and we will consider fully all the representations that he has made as we seek to refine the special resolution regime safeguards.

The Committee will be aware by now that clauses 42, 43 and 55 and the secondary legislation contain a number of legislative safeguards to protect bank creditors and counterparties in a partial transfer. The Government recognise particularly the importance that market participants attach to netting arrangements and security interests. For example, legal certainty with respect to a netting agreement is vital for risk management. Therefore, in responding to stakeholder concerns, we are consulting on the details of three key safeguards.

First, clause 43 contains a safeguard to protect the set-off and netting arrangements on which so many bank counterparties rely. Secondly, it provides for a safeguard to protect security interests so that creditors with a fixed or floating charge retain recourse to their collateral. Thirdly, clause 55 contains a safeguard that will provide compensation for creditors left in the residual bank, to ensure that they are made no worse off than if the whole bank had been wound up: in other words, had the authorities not intervened.

The safeguards are important and should give market reassurance so that the potential problems alluded to by the hon. Member for South-West Hertfordshire and others will not arise in practice. In addition, the code of practice will set out the types of circumstance in which the authorities would wish to consider a partial transfer. Building on the work done so far, the Government will continue to work with stakeholders to develop the safeguards and the other secondary legislation.

I welcome the comments made by the hon. Member for South-West Hertfordshire recognising that the Government have been listening and continue to engage in dialogue. As he is aware, we have established a new expert liaison group, which will help prepare the secondary legislation on the special resolution regime. On other occasions, I have referred to the process as one of co-production. We want to get it right. The expert liaison group has already provided valuable input on the detailed nature of the safeguards, and the consultation document reflects some of its initial views, but there are a lot more opportunities for the expert liaison group and stakeholders more widely to contribute.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister. It is encouraging that there are a lot more opportunities for the expert liaison group to make contributions. His comments have highlighted the fact that we are at quite an early stage of the process of developing the various safeguards. I know that he said that the Treasury will hear the representations made during the debate, but these proceedings should not be just part of a consultation process. We are the law-makers, yet it seems to me that the law is being made after Parliament has had the opportunity to scrutinise and debate these matters. The consultation seems to be lagging behind Parliament, because we should now be debating something pretty near its final form.

Ian Pearson (Labour, Dudley South)

I shall say more on the timing in a few moments. However, it is not necessarily abnormal for the Government to seek to pass primary legislation and then to implement secondary legislation later. We are going through the normal procedures of both Houses. On Second Reading, several Opposition Members expressed concern about the time it had taken the legislation to reach that stage. We have very good co-operation with stakeholders, and we want to continue to work with them to ensure that we get the legislation right.

Clause 42 provides the Treasury with a power to place restrictions on partial transfers. Although the Government are not proposing to place broad legislative restrictions on partial transfers, it is still beneficial to include the clause, as I shall explain. The clause provides the authorities with the means to place restrictions on the nature of the partial transfers that they may effect through use of the property transfer powers provided by this part of the Bill. The making of restrictions has the potential to provide bank stakeholders with greater certainty about how the property transfer powers will be used to effect partial transfers. That could be through a particular strict condition, or through a more general restriction on when and how partial transfers would be executed. Given the nature of the powers, stakeholder interest and the technical complexity of the issue, the Government consider it appropriate to take a power in the Bill to provide for restrictions to be made as the authorities deem appropriate. For example, if further consultation with stakeholders reveals a particular facet of partial transfers that the authorities may wish to restrict in order to provide greater certainty to the market, the clause provides the mechanism through which that can be achieved.

As I have already noted, the range of ways in which the authorities may restrict partial transfers is purposely broad. The flexibility reflects the complex range of issues likely to be generated in different bank resolutions. The Government consider it appropriate and desirable for safeguards of this nature to be provided in secondary legislation, rather than in the Bill. Any order made under such a power would need to make provision at a level of detail inappropriate to primary legislation. That reflects the complexity of bank resolutions and of the property, rights and liabilities of banks. It will be important to retain flexibility, including the flexibility to amend or add to the nature of the restrictions placed on partial transfers.

I remind the Committee that the SRR is a new legislative regime. Experience may show that partial transfers should be more or less restricted than initially thought, to respond to continuing market reaction to the powers, or to the authorities developing practical expertise in resolving banks in difficulty. At the very least, the nature of the restrictions will need to be updated in line with innovation in the financial markets. However, in view of the significance of the issues addressed by the power, and in view of the standing nature of the provision to be made, the power is subject to the draft affirmative procedure. In addition, the Government are committed to consulting fully on the key elements of the secondary legislation for the safeguard.

To that end, the Government are consulting on what secondary legislation should be made under clause 42. At this stage, we propose that the power should be used to place restrictions on reverse property transfers. The restrictions are designed to provide certainty to creditors transferred to a bridge bank that they will not be moved back to the residual bank. However, this is not a closed book. Further consultation with stakeholders may determine that further restrictions are appropriate. What is important, however, is that the authorities have the means to put the restrictions in place in an appropriate way, preserving market confidence in the use of the property transfer powers. The clause provides those means.

Clause 43 provides a key partial transfer safeguard. It provides the Treasury with the power to protect security interests and set-off and netting arrangements. The purpose is to provide protection for private law interests. Secondary legislation made under this power will describe in detail the nature of the interests to be protected and the way in which they are to be protected. The recently published consultation document provides detail on the Government’s proposals.

It may help if I describe the nature of the interests that the safeguard is designed to protect. In broad terms, a security interest is a specific protection, taken by obtaining a property interest in the debtor’s property, against which recourse can be had in defined circumstances—for example, in cases of non-payment. At its most basic, netting is the process whereby multiple contracts are set off against one another. However, netting also involves more complicated arrangements, utilising the basic concept of set-off to manage transactional risk.

For example, close-out netting may allow all the contractual obligations of a party to be terminated on a trigger event and reduced to a single sum, either owed or owing to the counterparty in question. Such cover is often provided under industry standard master agreements, prepared by bodies such as the International Swaps and Derivatives Association. However, counterparties also use a range of bespoke arrangements. Those arrangements are crucial to the functioning of the financial markets, and are an integral part of the way in which counterparties do business with banks. It is therefore important that we get the safeguards right, and that we strike the right balance between the protection that the market needs and the flexibility that it is desirable to retain in order to effect appropriate partial transfers.

The power in clause 43 provides a broad definition of the interests to be protected, which reflects the extremely broad range of interests that exist in that field. The interests that the power needs to address include, for example, security interests granted under foreign legal systems and complicated types of set-off and netting arrangements used in particular types of specialist markets. Protection may be given to such interests in the ways set out in subsections (2) and (3). Again, flexibility is needed to reflect the complexity of the underlying arrangements, and the ways in which protection might be provided. The draft order proposed to be made under the clause is, as I have indicated, the subject of consultation.

The protection to be afforded will, in broad terms, ensure that the integrity of the interest is respected, to the extent provided for in the order. For example, when a series of contracts are subject to a netting arrangement protected by the order, the requirement could be to transfer all such contracts or to leave all such contracts behind, as to transfer some but not all would interfere with the operation of the netting arrangement.

In line with clause 42, the Government propose that the detail of the safeguard should be set out in secondary legislation. That is for two main reasons. First, implementation of the policy will require detailed consideration of complex and varied interests in a variety of market contexts, the detail of which is appropriately addressed in secondary legislation.

Secondly, it is desirable to retain flexibility in order to adjust and refine the safeguard in the light of experience. That is particularly important in this context, because security interests and set-off and netting arrangements have proved to be highly innovative. The latter, in particular, have developed and evolved significantly over a comparatively short period of time. Changes to the safeguard may be necessary to ensure that it continues to protect what it is intended to protect, but also to ensure that innovations do not undermine the policy aims that the special resolution regime is intended to serve.

Draft orders were published in the 6 November consultation document, following discussions with the expert liaison group. The precise nature of the safeguards is subject to consultation. However, at this stage the Government propose a set of broad protections. The Government propose to protect all contracts covered under set-off or netting agreements from potential disruption caused by a partial transfer—apart from a set of clearly defined exceptions. The protection extends to bespoke agreements, in addition to those made under industry-recognised master netting agreements. The Government consider that the safeguard provides the market with a strong and clearly defined protection, while leaving the authorities with sufficient flexibility to carry out appropriate partial transfers.

Mark Todd (Labour, South Derbyshire)

The balance between the discretion required to exercise the power and the certainty required by someone trading with a bank when trying to reach a long-term commitment is a delicate one.

I have been slightly puzzled by the application in this legislation of the word “may” to the protections to which the Minister has referred. It implies a discretion that allows the Government not to exercise the powers granted to it to protect the various interests to which he refers. Will he clarify the use of that term, because it puzzles me that there does not seem to be an obligation involved to protect the interests he has stated?

Ian Pearson (Labour, Dudley South)

I am not sure to which “may” my hon. Friend is referring. The policy intention is to provide a strong safeguard that provides protection to bespoke agreements, to agreements made under industry-recognised master netting agreements and to provide, as part of that context, clearly defined protection. This is something that the industry has welcomed and has been asking questions about and we will be responding to the consultation exercise.

Mark Todd (Labour, South Derbyshire)

May I give examples of the use of “may”? Clause 43(3) says,

“an order may apply to arrangements generally or only to arrangements...of a specified kind, or...made or applying in specified circumstances.”

That is rather general, on the lines that those are our broad intents but we can do it another way. The difficulty with uncertainties may be dealt with by clearer guidance which is being discussed now. My concern is that what is on the statute book enshrines a degree of discretion that those lending to a bank or seeking to construct an instrument with a bank might have some anxiety over.

Ian Pearson (Labour, Dudley South)

I understand the point that my hon. Friend is making. I want to be clear that we are intending to make progress and issue secondary legislation to provide the safeguards that are reflected in clauses 42, 43 and 55, as I have already outlined to the Committee. We think that with regard to partial transfer powers we should outline the principles in the code. My hon. Friend will see the draft legislation that is in the “Special resolution regime: safeguards for partial property transfers” consultation document. I confirm the Government’s intention, following consultation, to proceed with it.

Peter Bone (Conservative, Wellingborough)

Following what the hon. Member for South Derbyshire has said, it is rather important to give certainty in this area as it is the most controversial. The Minister has assured us that it shall happen but I am afraid the Bill says that it may happen. Would it not be worth thinking about whether those “mays” should be turned into definites?

Ian Pearson (Labour, Dudley South)

I will certainly think about it and talk to officials about the different “mays” and “shalls”. We may consider that changes need to be made to the Bill but, on the other hand, we may not; we may think that our original thinking was correct in this matter.

To conclude on security interests, the Government are proposing that all forms of security arrangement where a creditor takes an interest in the property of the debtor should be protected, including both fixed and floating charges, which was a point raised by the hon. Member for South-West Hertfordshire.

A number of hon. Members requested further information on lessons learned from Bradford & Bingley, as an example of a partial transfer. As I said before we adjourned for lunch, it is inappropriate to discuss the details of current resolutions, not least because of litigation issues. However, in order to help the Committee, let me provide some general reflections on this case and how recent resolutions have informed our thinking on partial transfers.

Using the powers in the Banking (Special Provisions) Act 2008, put in place in February, Bradford & Bingley plc was taken into temporary public ownership by way of a transfer of its securities. Then, as part of the same order, its deposit business and its branches were transferred by way of a property transfer to Abbey Santander, backed by a contribution from the Financial Services Compensation Scheme and the Treasury. The parts of the bank that were not transferred to Abbey—in broad terms, mortgages and other assets—remain in public ownership. That was a relatively simple example of a partial transfer. Under the transfer order, the FSCS paid out approximately £14 billion to enable retail deposits held in Bradford & Bingley and covered by the FSCS to be transferred to Abbey, with the Treasury making a payment to Abbey for retail deposit amounts not covered by the FSCS, amounting to approximately £4 billion.

It may also help the hon. Member for Wellingborough to set out how a partial transfer might work, but I want to stress that this is just one example. The Bank of England could use the bridge bank stabilisation options to transfer a deposit book of a failing bank to a bridge bank. The residual company—that is the banking business not transferred—would enter the bank administration procedure, as provided for by part 3. The residual company would be wound up by a bank administrator, while providing necessary services to the bridge bank. The Bank of England would work to stabilise the bridge bank and sell on to a private sector purchaser as quickly as possible. That is an example of one way that the powers could be exercised in the future.

The hon. Member for South-West Hertfordshire also asked a number of questions about clause 42(3) and our treatment of it in the consultation document on partial transfer safeguards. First, to answer his question on the why subsection (3) refers to classes of deposits: the provision gives an example of the class of property to which restrictions could relate. Subsection (3) does not state that restrictions must necessarily relate to deposits. It is designed to give a flavour of the type of provision the underlying secondary legislation could make.

The hon. Gentleman also asked why the Government are consulting on making provisions for general restrictions in the code of practice rather than in legislation. As he noted, the Government agree that key safeguards to partial transfers should be put in secondary legislation. That is why we are consulting on putting in secondary legislation the safeguards to protect set-off and netting, to protect security interests and to aim to ensure that no creditor be worse off through a partial transfer. Feedback from stakeholders, as the hon. Gentleman noted earlier, is that those three safeguards, and in particular the protection of set-off and netting, are the most important, and we intend them to be covered through secondary legislation. However, as he is aware, we are consulting on providing additional guidance in the code of practice on what property, rights and liabilities could be transferred in a partial transfer and in what circumstances such partial transfers would occur.

As I have said, recent events in the financial markets have clearly demonstrated that preserving the flexibility of the authorities is crucial. Therefore, we do not believe that at this stage there should be, in addition to the safeguards that I have just mentioned, a general legislative restriction on the scope of partial transfers. However, the guidelines in the code of practice will give the market more clarity about the nature of the partial transfers that the authorities may effect. However, we are consulting on it and I look forward to receiving stakeholder views on it.

Another issue raised by the hon. Member for South-West Hertfordshire was about paragraph 2.16 of the consultation document. Paragraph 2.16 sets out the Government’s broad policy intention towards set-off and netting arrangements, which is to protect contracts relevant for regulatory capital purposes from the threat of disruption. However, it would not be appropriate for the draft order to adopt a specific definition to that effect, in part due to the circularity point raised by the hon. Gentleman. Instead, the draft order specifies that set-off and netting arrangements will be protected subject to delineated exceptions, which is important so that counterparties can attain the necessary legal certainty. The Government will be working with stakeholders, including through the expert liaison group, to ascertain whether the provisions of the draft order address the policy objective of protective set-off and netting arrangements with rate contracts that are relevant for regulatory capital calculations.

I want to make it clear at this stage that the safeguard is likely to cover many more set-off and netting arrangements than simply those that relate to contracts relevant for regulatory capital. The broad safeguard proposed would cover most set-off and netting arrangements, subject to some exceptions, and that approach has been welcomed already.

The hon. Gentleman asked what protection is provided for security. I can confirm that the Government are consulting on the position that the security interest safeguard should be comprehensive and include all floating charges. He also asked why we should refer to the financial collateral directive, rather than to regulations, which are wider. It is correct that the draft order only refers to protecting interests under the financial collateral directive, rather than regulations, but we are specifically consulting on that point. I refer the hon. Gentleman to question 10 on page 18 of the consultation document. We are open to representations on that point.

I want to return to the question of whether we are rushing this too much. I of course agree that partial transfers are critical and that it is therefore essential to get them right. That is why we have published the consultation document and why we have set up the expert liaison group to consider the safeguards. The consultation document, as I have made clear, included draft orders on the safeguards that stakeholders have informed us are the most important. Annex A of the consultation document provides draft secondary legislation for the set-off and netting arrangements and security interest safeguards in addition to draft regulations for the “No Creditor Worse Off” safeguard. I would also like to point out that the adopted approach for the netting and safeguards follows a direct recommendation from the expert liaison group.

We are making good progress on the detail of those important safeguards, and we want to get them right. We currently believe that, with the good co-operation we have had so far with stakeholders, we will be able to get them right in a timely manner so that we can pass the secondary legislation at a similar time to the passing of the primary legislation we are discussion today.

Clause 44

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 98, in clause 44, page 21, line 6, leave out ‘establishing a scheme for’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss Government amendments Nos. 99 to 101 and 112.

Ian Pearson (Labour, Dudley South)

Amendments Nos. 98 to 101 make several modifications to provision for compensation scheme orders under subsection (2). The purpose of the amendments is to enable the Treasury, where appropriate, to make provision in a compensation scheme order for a sum of compensation to be paid, rather than to make provision for establishing a scheme for determining whether transferors should be paid compensation.

I will explain why I think that that modification is essential. As I have already stated in debates on earlier clauses, in most circumstances the preferable stabilisation option for the authorities will be to effect a sale to a private sector purchaser. In such circumstances, a price will be agreed between the purchaser and the Bank of England. That price may have been determined in one of a number of ways, including an auction process.

In such circumstances, the price agreed reflects a market rate, and the Government therefore believe that there is no need to appoint an independent valuer to determine the compensation due to the transferors as the basic principle under article 1, protocol 1 of the European convention on human rights is that compensation must normally bear a reasonable relation to the property expropriated. In such circumstances, the Government believe that the process of selling the institution would have determined the fair market value, and that there is therefore no need to appoint an independent valuer. The compensation scheme order should simply state the level of compensation—the price agreed—rather than providing for a mechanism to determine the compensation payable.

Let me also be clear that there is still a means for transferors and other interested parties to appeal against the provision for compensation made in the order. That would be by way of the appeals process set out in the order, or by way of judicial review. I would also like to point out that compensation scheme orders are subject to the draft affirmative procedure. Therefore, Parliament can scrutinise the order and assess whether the provision for compensation is appropriate.

The Government are committed to ensuring that the fair value of compensation is paid to parties who have suffered a compensatable interference in their property rights as a result of an exercise of the stabilisation powers. While in many cases that will be done through an appointment of an independent valuer, in some circumstances the appropriate level of compensation can be determined through the process of resolution itself, and it is in those circumstances that I believe the Treasury should be able to specify the sum of compensation due in the compensation order. Amendments Nos. 98 to 101 make incidental appropriate technical provision that allows that. Finally, amendment No. 112 makes it clear that a compensation order is a statutory instrument.

I hope that hon. Members will agree to the amendments to clauses 44 and 56.

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 145, in clause 44, page 21, line 10, leave out ‘things transferred’ and insert

‘the bridge bank or bank in public ownership, or any property or rights of the bridge bank or bank in public ownership’.

The amendment refers to the wording in subsection (3) about a resolution fund order. As the Minister has set out, there are essentially two stages in a typical transaction—if there is such a thing in these circumstances. The first stage is the transfer of the assets into a bridge bank or temporary public ownership, and the second stage is the transfer of the assets out to a private sector purchaser. It is not clear whether the resolution fund order applies to just the first stage, just the second stage or both. The purpose of the amendment is to probe what the Government seek to achieve.

The subsection states that a resolution fund order is

“an order establishing a scheme under which transferors become entitled to the proceeds of the disposal of things transferred”.

I seek clarity as to what “disposal of things transferred” means. The amendment breaks that down into the two stages, which would provide greater clarity if the Government’s intention was to cover both stages. If the Government’s interpretation of “disposal of things transferred” is broad, the amendment incorporates that; if it is narrow then it does not. I should be grateful for the Minister’s reply.

Ian Pearson (Labour, Dudley South)

Clause 44, which the hon. Gentleman seeks to amend, sets out three types of compensation provision that can be made to compensatable persons. The first provision is the “compensation scheme order”, which requires a scheme, involving the appointment of an independent valuer to assess compensation due, to be put in place for the purposes of compensating a bank or its shareholders. Members will recall that a similar compensation order was put in place in respect of powers under the 2008 Act to bring Northern Rock into temporary public ownership. The Government amendments to clause 44 also need to be borne in mind.

Clause 44 also provides for a “resolution fund order”, which creates a scheme whereby transferors—the bank or its shareholders, depending on whether property or share transfer powers have been used—become entitled to the net proceeds of the resolution, subject to the deduction of the costs of the resolution. The scheme will include the method of calculation and distribution. Finally, the clause includes a “third party compensation order”, which provides for compensation to be provided to persons other than the transferors who have their termination rights interfered with by a partial transfer.

The Bill requires all compensation orders to be subject to the affirmative procedure, as set out under clause 56, which is in line with the recommendations of the Delegated Powers and Regulatory Reform Committee in respect of the 2008 Act. The compensation provisions in the Bill will provide suitable mechanisms for determining compensation. I hope that that background explanation was helpful.

I appreciate that the amendment tabled by the hon. Member for South-West Hertfordshire is a probing one. The clause does not refer specifically to the disposal of a whole bank in public ownership, but to the proceeds of disposal of things transferred, so a broad definition is provided for. The clause encompasses the meaning that he desires, as it does not refer to any particular method of disposal. His amendment, therefore, is not necessary. With that clarification, I hope that he will seek leave to withdraw it.

David Gauke (Conservative, South West Hertfordshire)

The purpose of my amendment was to seek clarification, and I am grateful to the Minister for providing it. I beg to ask leave to withdraw the amendment.

Clause 48

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 102, in clause 48, page 22, line 13, at end insert—

‘(aa) the Treasury makes a reverse share transfer order under section [Reverse share transfer],’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss Government amendments Nos. 103 to 105.

Ian Pearson (Labour, Dudley South)

These are technical amendments to ensure that compensation provisions are in place for the new transfer powers that we have taken under Government amendments Nos. 92 to 97 and new clauses 10 to 13. The amendments ensure that compensation orders and third party compensation orders can be made for supplemental and reverse share and property transfers—which I spoke about last Thursday and earlier today—as is the case where onward transfer powers are exercised. The amendments are necessary to ensure that consistent compensation provisions are in place throughout the Bill. I request, therefore, that hon. Members support the amendments, which I stress are technical and for consistency purposes.

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 146, in clause 48, page 22, line 21, at end insert

‘(which may, in particular, make provision in respect of specified classes of creditor, for rights in addition to any they may have by virtue of any resolution order).’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss amendment No. 147, in clause 52, page 24, line 40, at end insert ‘or to third parties.’.

David Gauke (Conservative, South West Hertfordshire)

The amendments are largely a drafting matter. There is no a particular dispute about the policy element. Amendment No. 146 relates to clause 48 and attempts to elaborate further what should be contained within a third-party compensation order. It aims to be helpful and provide some clarity to the existing wording. Amendment No. 147 is a rather short amendment to clause 52(5), which reads:

“There is nothing to prevent the application of the valuation principles in an order from resulting in no compensation being payable to a transferor.”

Presumably the same point applies to third parties, which is why the amendment would add the phrase “or to third parties”. Both amendments add something to the Bill, particularly amendment No. 147, which provides helpful clarification.

Ian Pearson (Labour, Dudley South)

I believe that the purpose of amendment No. 146 is to ensure that rights arising from provision made for compensation by way of a third-party compensation order are in addition to those rights conferred on a third party under a bank resolution scheme order. The amendment is inappropriate as the Treasury does not have the power to make provision for bank resolution funds for onward transfers.

In addition, in relation to any rights arising by way of a bank resolution fund that has been put in place in respect of the initial transfer of property to the bridge bank or bank in temporary public ownership, any provision for compensation for interferences in third-party rights arising under an onward transfer compensation scheme order will relate to separate and unrelated interferences in property rights.

Amendment No. 147 proposes that clause 52(5) should also make reference to third parties. However, as subsection (5) is applied to third parties by clause 54(3), the courts would construe that clause to refer to third parties. The amendment is simply not needed, so I ask the hon. Gentleman to consider withdrawing it.

David Gauke (Conservative, South West Hertfordshire)

I will take the Minister at his word on amendment No. 146 but I am not sure that I quite understand his argument on amendment No. 147. If he is saying that the courts will interpret subsection (5) as applying to third parties, notwithstanding the fact that the clause specifically mentions the transferor but does not say “or to third parties”, the amendment seems helpful. I do not see why he does not accept it. It seems that subsection (5) will apply to third parties, and if it does I see no reason why it should not say so, given that it specifies transferors.

I am loth to divide the Committee on this point, because it does not seem to be anything other than a technical one, and I am surprised that the Minister has not accepted it. However, I am in a generous mood. Perhaps I will allow him to ponder whether he might reconsider later and accept my amendment.

Ian Pearson (Labour, Dudley South)

I am happy to ponder, and I appreciate the hon. Gentleman’s generosity. It is our view at the moment that the amendment is otiose—

Mark Todd (Labour, South Derbyshire)

A splendid word.

Ian Pearson (Labour, Dudley South)

—and superfluous, but we will reflect on it.

David Gauke (Conservative, South West Hertfordshire)

I beg to ask leave to withdraw the amendment.

Clause 49

Ian Pearson (Labour, Dudley South)

I beg to move Government amendment No. 106, in clause 49, page 22, line 23, leave out ‘must’ and insert ‘may’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss Government amendment No. 107.

Ian Pearson (Labour, Dudley South)

As the Committee will be aware, the determination of compensation under a compensation scheme order or a third party compensation scheme order will constitute a determination of a civil right for the purposes of the European convention on human rights, and the requirements of article 6 of the convention will therefore apply. In particular, the compensation must be assessed by an independent and impartial person.

Accordingly, clause 49 provides for the amount of any compensation to be determined by an independent valuer. We touched on that point in a previous debate. The clause also sets out the process for appointing and removing the independent valuer. The Bill ensures that the valuer will be seen to be independent and impartial, as required by article 6 of the ECHR.

The clause sets out an appointments process whereby an order must require an independent valuer to be appointed by a person who is, and is seen to be, fully independent, as stated in subsection (2). The independent appointing person may appoint an independent valuer either from a list of suitable candidates supplied by the Treasury or by way of an appointment made with regard to criteria specified in the order. The clause specifies a number of other safeguards on the independent valuer’s security of tenure. For example, the independent valuer may be removed from office only on grounds of incapacity or serious misconduct, and only by an independent person.

The purpose of Government amendment No. 106 is the same as that of the Government amendments to clause 44: to remove the requirement that a compensation scheme order must always make provision for the assessment of compensation by an independent valuer. To summarise the arguments briefly, in some situations—for example, a sale through auction to a private sector purchaser—the rate agreed would reflect a market rate. In those circumstances, as I outlined about half an hour ago, the Government believe that there is no need to appoint an independent valuer to determine the compensation due. The compensation scheme order should simply state the level of compensation—that is, the price agreed—rather than providing for a mechanism to determine the compensation payable.

Government amendment No. 107 makes technical changes to clause 49 so that where an independent valuer is to determine compensation under a compensation scheme order, the provisions in clause 49 regarding his appointment, resignation and dismissal, and the appointment of any replacement independent valuer also apply. Again, I remind hon. Members that there is still a means for transferors and other parties to appeal against the compensation amount decided in accordance with the order.

I hope with that explanation and the read-across to the previous debate—

John Pugh (Liberal Democrat, Southport)

I am not sure that the Minister referred to Government amendment No. 106; I only heard him refer to Government amendment No. 107. However, to return to the point made by the hon. Member for South Derbyshire about the use of the word “may”, if “must” is substituted, as the Government wish to do, within the terms of the legislation a compensation scheme could presumably provide, in theory, for the amount of any compensation payable to be determined by somebody other than the independent valuer, or in some other way than by a method of independent valuation. Is that a correct reading of Government amendment No. 106? There is a significant change of gear from “must” to “may”.

Ian Pearson (Labour, Dudley South)

As I was trying to explain, the purpose of the amendment is to reflect the circumstances if there was a sale through an auction process, because a market rate would have been determined. Once a price has been established, it seems a highly artificial exercise to have to go through the process of appointing someone. It seems odd, after the price has been decided, that an independent valuer should come to a different judgment about the price and determine the compensation due to transfers as part of the process of selling the institution.

The hon. Gentleman is encouraging me to think about whether “may” might be used in other cases that have no auction process and where there is no clearly identified price.

John Pugh (Liberal Democrat, Southport)

Absolutely.

Ian Pearson (Labour, Dudley South)

In response, the only indication why we would not want to go down the independent valuer route at the heart of the clause would be if an auction process or a similar mechanism had clearly and demonstrably provided an agreed market rate. However, there are safeguards. If people felt that there were particular problems with the route that we had adopted, they would obviously have legal remedies and a right of appeal against the compensation order.

John Pugh (Liberal Democrat, Southport)

I accept some of the Minister’s remarks. I know what he intends. However, the legislation as framed could permit other activities than the benign acceptance of the consequences of an auction. Assurances given under the clause or elsewhere in the Bill would probably not be sufficient to eradicate that possibility. It may be a slim possibility, but it still exists in legislation.

Ian Pearson (Labour, Dudley South)

To conclude, I hope that I have given assurances about the Government’s intentions on how the clause, if amended, would be used. However, I shall reflect on the matter and if more needs to be done to clarify things I shall endeavour to come back at a later stage.

David Gauke (Conservative, South West Hertfordshire)

I want to speak about the independent valuer. My comments may be more appropriate to clause stand part, but if I raise the issue now we may not need a clause stand part debate.

The role of the independent valuer will be important. On occasion, it is possible that some political pressure may put on the valuer. I can imagine circumstances in which our constituents wrote to us to raise concerns about the valuer, so independence is clearly important, as is the perception of independence.

The Government have given some indication of how independence is to be maintained, based on the limited grounds on which an independent valuer can operate. Will the Minister give us a little guidance on the type and status of the person the Government will be looking for to fill that position? Will he give us more information about the role of the appointing person? Subsection (3)(a) refers to the Treasury making arrangements

“to identify a number of possible independent valuers, one of whom is to be selected by the appointing person”.

Will the Minister give us a little more detail about the “appointing person”?

Ian Pearson (Labour, Dudley South)

I do not think it possible at this stage to debate a job description for the independent valuer. Suffice it to say that they will be people with sufficient experience to make the judgments required of them in the circumstances. As for the appointment of an independent “appointing person”, I shall check with officials but I would be surprised if it was made under anything other than the normal public appointments process, following the normal rules that the Government apply in those circumstances. Should the position be different, I will revert to the Committee.

Clause 50

John Pugh (Liberal Democrat, Southport)

On the face of it, the clause seems innocuous. It simply says, “supplemental”. However, when I studied it I had some concerns, which I need the Minister to clear up before I can be completely happy with the clause. Although the clause is supplementary, it is wide-ranging. I draw attention to the fact that the independent valuer can publish and disclose information—which we would expect—but can also withhold information. Yet, subsection (8) states:

“Records of an independent valuer are public records for the purpose of the Public Records Act 1958.”

I am not sufficiently learned in the law to know whether that makes an exemption from a freedom of information request. I could imagine that if in certain circumstances a valuer was deemed to withhold crucial and important information, more than one interested party would wish to get hold of that information. They might have a right to do so, particularly if the information concerned the disbursement of an ailing bank and resources being allocated in one direction or another. The clause appears to create that sort of exemption and make it immune from any legal challenge, so that if people want information that an independent valuer has, primary legislation says that he has the right to withhold it. That exemption seems to be created. It may not, as a result of being created, be challengeable in law, but it may not be consistent with the principles of natural justice.

My other concern is more a matter of amplification. Subsection (3) states that jurisdiction may be conferred on a court or tribunal, and subsection (6)(b) states that there can be an appeal to a court. A number of courts are referred to, and I would simply like to know which courts we are thinking of—courts that exist and can be identified, or courts to be created for the specific purpose.

I have a similar question on subsection (3)(d), which states that at some future date a criminal offence might be created by a statutory instrument. That is not a most desirable way to create a criminal offence. I imagine that the offence would be along the lines of withholding information from an independent valuer. I wish that the Minister could give us an inkling as to what types of offences the Treasury has in mind.

Dotted through the clause are areas where clarification is required. Let me rehearse them again. First, will the clause create an exemption to freedom of information requests for information from independent valuers? Secondly, where courts or tribunals are referred to, precisely which are they? Are the appeal court and the court upon which jurisdiction is conferred one and the same? Thirdly, are we creating a new kind of misdemeanour, or the possibility of one, and if so what will it look like?

That is a complex and detailed set of questions. If the Minister wants to reply in writing, that is great by me, but if he can give amplification straight away, that will be equally acceptable.

Peter Bone (Conservative, Wellingborough)

Briefly, clause 50(2)(b) will allow the Treasury to instruct an independent valuer to withhold information. The independent valuer is there to arrive at a compensation figure. I cannot imagine any legitimate grounds on which the Treasury should instruct an independent valuer not to publish information used in obtaining compensation levels for a third party. Does the Minister have any examples of where that would apply? If not, I am not sure why it is in the Bill.

Ian Pearson (Labour, Dudley South)

I can respond to some of hon. Members’ points, but I might have to respond in writing to give further detail. The hon. Member for Southport asked why the independent valuer will be able to withhold information. The reason is the normal reason for which an independent valuer might wish to do so: the information is subject to commercial sensitivities. In that respect, article 6 of the European convention on human rights requires only the reasons for a valuation decision to be made public, not every single piece of information.

We certainly recognise that there will be a degree of interest in the independent valuer’s determination, but it is the Government’s assessment that it would be inappropriate to designate the independent valuer a public body for the purposes of the Freedom of Information Act. In particular, the independent valuer does not meet both the conditions for section 4 of that Act to apply, as he or she will be an independent person with the sole function of assessing compensation in accordance with the order and any contractual arrangements and is likely to seek commercial return for the work.

Because of the unique nature of the valuer’s function and status—they will discharge a quasi-judicial function—the Government do not consider it appropriate to designate the valuer a public body. Furthermore, the application of the Freedom of Information Act may inhibit the valuer’s ability to obtain full information from other institutions and individuals on their relations with the failed bank. That is why we do not think it appropriate for the independent valuer to be subject to the Freedom of Information Act.

On criminal offences, I am advised that the issue must relate to the provision made under subsection (2): in other words, it must involve a refusal to disclose information. I hope that is helpful to the hon. Member for Southport.

On the publication of information, the independent valuer will be able to select documents suitable for permanent preservation as a matter of public record. Selection takes place in two stages: when records are passed out of active use and later when they are subject to review. At that later stage, the independent valuer may select records worthy of permanent preservation in the National Archives; it is for the valuer to select which.

The clause provides for the Treasury to make provision in an audit for the remuneration and allowances of independent valuers, the staff of independent valuers and appointing persons. As hon. Members will be aware, there are a number of detailed provisions in the clause. I think that most of them are uncontroversial, although there is naturally Committee interest in the public disclosure matters to which I have referred.

Clause 51

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 108, in clause 51, page 23, line 38, leave out ‘and’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss Government amendments Nos. 109 and 111.

Ian Pearson (Labour, Dudley South)

This clause provides for the Treasury to make provision in an order for the remuneration and allowances of independent valuers, the staff of independent valuers and appointing persons.

While the Treasury will pay the remuneration and expenses of the independent valuer, the Treasury must put in place a monitor to oversee the remuneration and any allowances for the independent valuer, including pension arrangements. As part of his or her role, the monitor may be required to approve certain actions including the appointment of staff. The Government amendments to this clause are intended to ensure that the Treasury can remunerate and reimburse the expenses of the monitor for the functions that he or she is undertaking, which I am sure the Committee will agree is a sensible provision.

Returning to the provisions of the clause, it also provides that independent valuers and their staff should not be liable for damages for actions taken in good faith. The exemption is, however, limited so the exemption will not apply if the act or omission is ultra vires, or in bad faith, or would prevent an award of damages under section 6(1) of the Human Rights Act 1998 in respect of acts or omissions that are unlawful. This is a relatively common provision.

Finally, I wish the Committee to note that the provisions to put in place and provide the independent valuers with powers and remuneration are to be made by an order subject to the negative resolution procedure. Of course, the compensation orders themselves, which will set out such matters as valuation principles, will be subject to the draft affirmative procedure.

I hope that hon. Members will agree with this Government amendment to ensure that the monitor can be remunerated. I have provided the Committee with an explanation of the purpose and effect.

David Gauke (Conservative, South West Hertfordshire)

We certainly will not be opposing this amendment but I would be grateful if the Minister clarified the role of the monitor. Will the monitor have the right of veto over specified actions? Perhaps the Minister can elaborate on what those actions will be.

Peter Bone (Conservative, Wellingborough)

I was not following the Minister’s statement as intently as I should have done. I thought he said “negative” resolution for one of the provisions. As far as I am aware, all the statutory instruments related to this Bill so far have been affirmative. This, of course, means that Members have the chance to debate them in one and half hours but they are not amendable. A negative one—unless it is prayed against—will just go through. I missed which one they were trying to sneak through without any proper scrutiny.

Ian Pearson (Labour, Dudley South)

We are not trying to sneak anything through. As I explained to the Committee, the compensation orders will be subject to the draft affirmative procedure. It is the compensation orders that are likely to attract the most interest. The provisions to put in place and provide the independent valuer with powers and remuneration will be subject to the negative resolution procedure. That is the right balance to adopt.

We have not made express provision as to who the monitor would be but it is our intention that he or she should be an independent person with relevant experience. They could be a civil servant; they could come from the Audit Commission; they could be undertaking the task on a commercial basis. We would want to look at who was most appropriate depending on the circumstances. To clarify, the monitor cannot veto action but can and will be expected to provide an independent audit and report to the Treasury on expenses. I hope that the Government amendments will be supported.

Clause 52

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 115, in clause 52, page 24, line 26, at end insert—

‘(e) to act fairly’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following amendments: No. 116, in clause 53, page 25, line 31, at end insert—

‘(7) A resolution fund order and any action taken as a consequence of subsection (3) must be consistent with fairness.’.

No. 118, in clause 55, page 26, line 35, at end insert—

‘(d) to be determined fairly.’.

David Gauke (Conservative, South West Hertfordshire)

Indeed it is convenient to consider these three amendments together. They all stem from representations that we have received from the BBA, which can be simply described as representing the desire for a fairness test in the provisions relating to valuation. Amendment No. 115 is to clause 52, relating to valuation principles. Subsection (2) states the valuation principles that will apply and that the independent valuer must take into account. The principle suggested by the amendment is that the independent valuer acts fairly. Clause 53 relates to the resolution fund. The proposal in that regard is that a resolution fund order and any action taken as a consequence of a resolution fund order or a discretionary power conferred by such an order must also be consistent with fairness. Amendment No. 118 relates to the making of regulations that provide for compensation to be paid. Again, in the list of various factors to be determined, the compensation levels should be determined fairly.

The intention behind the amendments is to elicit some comments from the Minister about fairness. He may well say that the amendments are not necessary and are otiose—that is a splendid word and I congratulate him on being the first member of the Committee, as far as I know, to use it in these proceedings. None the less, concerns have been raised by outside bodies, including the BBA, about the valuation principles and the way in which compensation will be paid. There is a question of fairness. One difficulty that I can acknowledge is that what is fair to one person is not necessarily fair to another. It does not provide a great deal of certainty. None the less, it is an important principle and I would be grateful for the Minister’s comments on whether he would be willing to incorporate a fairness test in some of the provisions.

Ian Pearson (Labour, Dudley South)

I regard fairness as extremely important. In fact, it runs through the Labour Government’s policy. I am a little surprised that the outside bodies that have been advising the hon. Gentleman think it necessary to probe in this area and seemingly doubt both the Government’s good intentions and the fact that the European convention on human rights will apply to the circumstances that we are discussing.

Clause 52 sets out the valuation principles that may be required to be specified in any compensation scheme order. In summary, the clause allows the Government to include in a compensation scheme order a number of valuation principles. Those may cover a range of issues, including the method of valuation, whether certain matters should or should not be taken into account by the valuer and whether the valuer may make particular assumptions in carrying out his functions, such as the assumption that the bank is unable to continue as a going concern. The aim of the provisions is to allow the Government to set out the principles that they believe should be adhered to in assessing any compensation. Parliament can of course debate those, as the draft affirmative resolution procedure applies to compensation scheme orders, as I previously outlined.

One specific valuation principle that is required to be taken into account by the clause is that in determining an amount of compensation an independent valuer must disregard actual or potential financial assistance provided by the Bank of England or the Treasury. That is to ensure that taxpayer support does not artificially inflate the value of the failing bank. I know that the hon. Members for Southport and for South-East Cornwall have put forward an amendment on that principle, which we will debate in a few moments.

The purpose of the first amendment from the hon. Member for South-West Hertfordshire is to allow the Treasury in the compensation order explicitly to require the independent valuer to act fairly. I would like to reassure the hon. Gentleman that the independent valuer is already required to act in just such a manner. The independent valuer will be making an assessment of compensation, which will involve the determination of a civil right. As a result, the independent valuer will have to act fairly, in accordance with article 6 of the human rights convention, which requires a standard to be put in place to ensure a fair process for making the determination of compensation. I should also note that the valuer will also be performing a public function and will have to act fairly in accordance with the principles of public law.

The hon. Gentleman’s second amendment is intended to require the resolution fund to be consistent with the principle of fairness. Again, standards of fairness as defined under human rights law will need to be met in any event, in the making of resolution fund orders by the Treasury and the taking of action under such orders by any of the public persons specified in clause 53(3). A resolution fund order is intended to provide compensation to the transferor for the expropriation of property and that compensation must be at least sufficient to meet the requirements of article 1 of the first protocol of the European convention on human rights on the protection of property rights. Fairness is an important principle in ensuring that interferences with property rights are compatible with article 1. As I have explained, the assessment of compensation is also a civil right for the purposes of article 6.

The hon. Gentleman’s final amendment is to clause 55, which provides for the “No Creditor Worse Off” safeguard on which the Government are consulting, as I have mentioned. My understanding is that the purpose of the amendment is to require the determination of third party compensation to be made in a fair manner. Public law will still require the determinations to be made in a way that takes account of all relevant factors and is not considered irrational or arbitrary. Therefore, again, the concept of fairness is implicit in the Bill and in the orders that may be made under powers conferred by the provisions of the Bill. Therefore, in each of these clauses there is already a strong requirement for fairness, in both the outcome of the compensation determinations and in the procedure that must be put in place to determine any outcome, by way of the European Court of Human Rights requirements or through public law requirements, or both. I hope that the explanations have reassured the hon. Gentleman and those who follow these matters that the clauses already deliver the intention of his amendments.

It is, I suppose, possible to argue that the concept of fairness should be explicit rather than implicit, but I do not agree with that. The hon. Gentleman’s amendments, which introduce a requirement for fair treatment, suggest that a different standard of fairness than is usually regarded under the convention rights or public law should apply. I do not believe that that should be suggested. Parliament and the courts have already determined the appropriate standard of fairness, which these clauses comply with, so it would be unhelpful to suggest that the provisions of the Bill should seek to meet a different standard. I hope that I have demonstrated why the amendments are unnecessary and that the hon. Gentleman will withdraw them.

David Gauke (Conservative, South West Hertfordshire)

I shall resist the temptation to query the Minister’s statement that fairness runs through the heart of the Labour Government; we will leave that for another day. To address his comments, there appears to be a slight tension or inconsistency in his explanation. He argues on the one hand that the provisions are unnecessary because fairness will be part of the process, and on the other that the provisions would confuse matters by applying a fairness test different from that which exists elsewhere in the legislation. It is difficult to argue both. None the less, I am grateful for his comments that fairness is there implicitly, if not explicitly. I can see difficulties with including an explicit fairness test in the legislation, so I beg to ask leave to withdraw the amendment.

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment No. 72, in clause 52, page 24, line 28, leave out from ‘must’ to end of line 31 and insert

‘take into account such financial assistance provided by the Bank of England or the Treasury as would have been likely to have been provided to the bank if the SRR powers had not been invoked.’.

This is the third of a suite of amendments highlighting the vulnerability of the legislation in dealing with banks and financial institutions before their insolvency. We have considered the matter in debate on amendments concerning the objectives and the exercise of powers; the valuation principles are the third area.

The amendment, which stands in my name and that of my hon. Friend the Member for Southport, is in effect a direct negative of the clause’s current wording. I suppose that, to a certain extent, the issue goes back to the fairness that we just discussed. It is interesting to ask to whom we are being fair. One hopes for fairness across the board, but the thrust of the legislation is to protect depositors, which implies that the fairness, if there is any, is more fair to depositors than to others. If that is the case, in order to protect the interests and property rights of shareholders, creditors and others, and to ensure that they are not prejudiced or treated unfairly by the clause, we need to protect the residual value of the business and the entity.

The amendment is particularly relevant to the extent that the Bill retains the prospect of banks entering into the SRR regime before they have reached a state of insolvency as it is generally understood in law. It is that period that we have highlighted on several occasions. Once someone has gone into insolvency, there are clear rules about how things will happen, but in the period before that, a number of subjective judgments must be made about timing, objectives, principles and so on, all of which can be incompatible with each other to a certain extent.

However, we believe that the aim should be to make those valuation judgments consistent with an orderly run-off or wind-down of the business. Sometimes it is right for the authorities to support and create that rather than the “crash bang wallop” approach of going straight into insolvency. If that is the case, when valuation principles and compensation are being considered, it is right at least to consider what might be available from the Treasury and the Bank of England.

However, the clause currently excludes all that. I can understand why the Government would want to exclude it, but I am not certain that that sits easily with the objective of treating everyone fairly. Bearing in mind that the process could immediately precede an ultimate insolvency, it is rather contradictory to what would normally happen in the event of a full-scale insolvency. This is a probing amendment. It is for the Minister to explain and justify the clause to which we have tabled the amendment.

David Gauke (Conservative, South West Hertfordshire)

I note that the hon. Gentleman described this as a probing amendment. We would not be inclined to support it; it is right that financial assistance should be disregarded by the independent valuer; otherwise, a public subsidy will essentially end up in the hands of shareholders and creditors. We believe that that would be wrong. However, there are two points in subsection (3) where greater clarification would be helpful.

The first is the fact that the independent valuer has to disregard potential financial assistance. I am not sure what potential financial assistance is, and how the independent valuer is supposed to disregard it given that it will not have happened. Secondly, the carve-out disregards ordinary market assistance offered by the Bank of England on its usual terms. It would help if the Minister were to elaborate a little on what ordinary market assistance is, so that we are clear as to what is ordinary and what financial support should be disregarded.

Ian Pearson (Labour, Dudley South)

The amendment seeks to remove the principle that the independent valuer must disregard any financial assistance provided to the failing bank by the Bank of England and the Treasury. Although I appreciate the probing way in which the amendment was moved, it would have fundamental consequences. We cannot agree to it, as it would remove a core principle of the compensation provisions, which is that compensation should not be paid for the value of a bank as artificially inflated with the investment of public funds. If public funds have been invested, it is right that they should be discounted in subsequent evaluations. If taxpayers’ money has been invested in a bank in order to support it, the failing bank or its shareholders should not benefit through the compensation. To allow that to happen would be against the Treasury’s duty—and, indeed, the SRR objective of protecting public funds, as outlined in clause 4.

The hon. Member for South-West Hertfordshire asked about potential financial assistance. Financial assistance provided on an ongoing or continuing basis would be potential financial assistance. That probably clarifies the hon. Gentleman’s query.

On the broader point, however, there is a matter of principle. I cannot agree with an amendment that suggests, when it comes to subsequent evaluation, that we should disregard any amount of money that the Government or the Bank of England have put into a bank that subsequently gets into difficulties. That would be wrong, and it would not be accepted by the wide generality of taxpayers. I hope that the hon. Gentleman will withdraw the amendment.

Colin Breed (Liberal Democrat, South East Cornwall)

As I said, it was a probing amendment. We moved it because we needed clarity. To an extent, the matter of compensation is already a problem in certain circumstances—for instance, in respect of Northern Rock. Having put that on the record, I beg to ask leave to withdraw the amendment.

Clause 53

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 110, in clause 53, page 25, line 8, at end insert—

‘(2A) A resolution fund order may include provision for—

(a) an independent valuer to make a determination under the order (in which case sections 49(2) to (5), 50 and 51 shall apply);

(b) valuation principles to be applied in making a determination (in which case section 52(2) shall apply).’.

Clause 53 makes provision in respect of bank resolution fund orders. A bank resolution fund is mandatory following a transfer of a failing bank’s property to a bridge bank and optional when a bank is taken into temporary public ownership. Such a compensation procedure ensures that the failing bank or, in the case of temporary public ownership, its shareholders have a contingent economic interest in the proceeds of the resolution.

The bank resolution fund demonstrates that the Government do not have an economic interest in the bridge bank and that they do not intend to profit from any uplift in value arising from the stabilisation. Rather the authorities’ only aim in acting is to meet the SRR objectives. As I indicated, I do not believe it necessary to have a bank resolution fund following a transfer to a private sector purchaser, because in such circumstances the proceeds of resolution flow directly back to the failing bank or its shareholders. The Treasury should have the discretion not to put in place a bank resolution fund when a bank is taken into temporary public ownership, because in some circumstances—for example, if a significant amount of public funds has been invested—it is appropriate for the public to benefit from the upside of any resolution.

On reflection, even though the bank resolution fund method does not require the undertaking of a valuation exercise to assess the compensation due, the Government recognise that in certain circumstances the appointment of an independent valuer will be appropriate. For example, it might be appropriate to appoint an independent valuer to consider whether the actual sale price provided a reasonable relation to the market value. The amendment thus allows the Treasury to appoint an independent valuer and to put in place, alongside that, certain valuation principles to be used in conjunction with the bank resolution fund.

Peter Bone (Conservative, Wellingborough)

As the day has drawn on, I have been pondering that point in relation to earlier clauses, when the Minister referred to an auction, rather than a sale, to establish the market value and therefore to make an independent valuer unnecessary. However, I am not sure that the sale price will always be the market value, because of the way in which the deal is done. I hope that the Minister is saying that in those cases we would have an independent valuer.

Ian Pearson (Labour, Dudley South)

I understand the hon. Gentleman’s point, but it seems a little theoretical. If a clear market price is set following an auction process that results in the disposal of part of a failing bank, I cannot see why that price should not be accepted and transacted. Government amendment No. 110 deals with a different case. If passed, it would allow the Treasury to appoint an independent valuer. By allowing us to do that, if we felt it necessary, we would increase the transparency of the calculations within a bank resolution fund and help to ensure the adequacy of the fund for human rights convention purposes. On balance, the amendment should be added to the Bill, so I invite hon. Members to support it.

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 148, in clause 53, page 25, line 11, at end insert ‘or’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss amendment No. 149, in clause 53, page 25, line 12, leave out from ‘England’ to end of line 13.

David Gauke (Conservative, South West Hertfordshire)

Clause 53(3) states:

“A resolution fund order may confer a discretionary function on...a Minister of the Crown...the Treasury...the Bank of England, or...any other specified person.”

Why should we permit a discretionary function to be conferred on any other specified person? What does that provision have in mind? Should not only a Minister of the Crown, or the Treasury or the Bank of England have such a function under a resolution fund order? Amendments Nos. 148 and 149 would remove the reference to “any other specified person”. I should be grateful for the Minister’s explanation why it is necessary to be able to confer discretionary functions on somebody when—from the point of view of the Committee—it is not clear who that person would be, even though he or she would be in a relatively significant position.

Ian Pearson (Labour, Dudley South)

I provided an explanation of the purposes and reasoning behind clause 53 when we were discussing Government amendment No. 110. The hon. Gentleman’s amendments seek to remove the power under the clause for the Treasury to confer a discretionary function on “any other specified person”. I do not think that is appropriate. The bank resolution fund order may include a role for a number of persons. For example, as the hon. Gentleman indicated, the Bank of England, as set out in subsection (3)(c), will have a management duty placed upon it. The Treasury, under subsection (3)(b), could be required to pay additional compensation if there were a successful challenge that the bank resolution fund had not met ECHR requirements for adequate compensation.

In addition, other persons such as an independent valuer, an independent auditor of resolution costs or a monitor of fees can also play a role in a bank resolution fund, so instead of listing all the persons who may have a discretionary function conferred upon them, subsection (3)(d) of clause 53 allows the Treasury to confer a discretionary function on “any other specified person”. It is an important part of making the clause effective, and I hope the hon. Gentleman will seek leave to withdraw his amendment.

I shall provide a little more detail. Specific functions are conferred on appropriate persons under compensation orders and third party compensation orders. For example, the independent valuer must conduct a valuation exercise to determine what, if any, compensation is payable. An appointing person must appoint an independent valuer and the monitoring person must monitor the remuneration and other arrangements of the independent valuer. The compensation scheme order may also confer functions on appellate bodies to hear an appeal as regards any determination of the independent valuer. As such, it is not necessary to confer any other function on any other specified person. However, in the case of bank resolution funds it is impossible to specify precisely the functions a specified person may have to undertake under the bank resolution fund. A detailed provision in the Bill would be inappropriate. We therefore considered it prudent to take the power to enable the Treasury to confer a function on “any other specified person”. I hope that is helpful in explaining the intention behind the provision.

David Gauke (Conservative, South West Hertfordshire)

I will be helpful to the Minister. I beg to ask leave to withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 150, in clause 53, page 25, line 20, leave out ‘subserviate it to’ and insert

‘subordinate the requirement to the’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss amendment No. 151, in clause 53, page 25, line 22, leave out ‘its extent’ and insert

‘the extent of the requirement’.

David Gauke (Conservative, South West Hertfordshire)

Although I am sure the Committee is united in its belief that otiose is a splendid word, subserviate is not. At least, that is the view on this side of the Committee. I certainly could not find it in the dictionary. My amendment identifies only one use of it but it creeps in not only in subsection (5) but also in subsection (6). If the Minister is inclined to accept amendment No. 150 and change the wording from “subserviate” to “subordinate” the requirement and so on, we will call it a score draw. He can have one amendment and I can have the other. If he is not inclined to do so, I do not know whether I am inclined to press for a Division, but we shall hear what he has to say.

Amendment No. 151 is just a drafting issue—an attempt to tidy up subsection (5)(b). Again, I would be grateful for the Minister’s comments, if he has an argument against it, but I am not inclined to divide the Committee.

Ian Pearson (Labour, Dudley South)

I am advised by those who draft the clauses that the hon. Gentleman’s amendments seek to make “stylistic changes”.

Colin Breed (Liberal Democrat, South East Cornwall)

It is called English. [Laughter.]

Ian Pearson (Labour, Dudley South)

I do not think that there is disagreement in principle between myself and the hon. Member for South-West Hertfordshire. I admit that I am not familiar with the fine distinction between “subserviate” and “subordinate”. I urge the hon. Gentleman not to press his amendments, but I will certainly take away the question of whether “subordinate” is a clearer use of the English language and should appear in the Bill, or whether we need “subserviate” or something else that is plainer English. I will talk to officials and, if necessary, come back on Report with amendments.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister; that was as good a response as I could have hoped for. We are united in this; he is absolutely right that the amendments are stylistic—there is nothing necessarily wrong with that. I beg to ask leave to withdraw the amendment.

Clause 54

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 117, in clause 54, page 25, line 35, leave out

‘persons other than a transferor’

and insert

‘pre-transfer creditors and shareholders’.

Subsection (1) of the clause refers to persons “other than a transferor”. My understanding—the Minister may correct me—is that such persons will be pre-transfer creditors and shareholders. I tabled the amendment partly as an attempt to seek clarification as to whether that is correct, or whether there is another form of third party that might be paid compensation. If my understanding is correct, it raises the question of whether we should be slightly more specific in the legislation, and I should therefore be grateful for the Minister’s views.

Ian Pearson (Labour, Dudley South)

The clause allows the Treasury to make third party compensation orders for all transfers under the SRR powers. Third parties can be creditors or other contractors with the bank. The third party compensation order can either be part of a compensation scheme order or bank resolution fund, or be a separate order. The order may also include provision for an independent valuer and valuation principles, as discussed under the other compensation clauses.

The aim of the clause is to ensure that all relevant third parties in both initial and onwards transfers can be compensated for compensatable interferences in their property rights, arising from an exercise of the stabilisation power. The hon. Gentleman has proposed a probing amendment to specify that third party compensation orders should apply only to pre-transfer shareholders and creditors.

The amendment is not appropriate, as its effect would be to make the clause too restrictive on the question of who should be counted as a third party for the purposes of compensation. In particular, it would exclude third parties that have contracted with a bank once it is a bridge bank or in temporary public ownership, and have their rights disrupted as part of an onward transfer. To comply with the ECHR provisions, compensation provisions need to be made for all persons who suffer a compensatory interference in their property rights arising from the transfer. I have explained the background to the clause and its purpose, and I think I have answered the hon. Gentleman’s question about its scope and the need not to exclude third parties that have contracted with a bank once it is a bridge bank or in temporary public ownership, so I hope he will withdraw the amendment.

David Gauke (Conservative, South West Hertfordshire)

That was a helpful explanation. I am grateful for that clarification. I beg to ask leave to withdraw the amendment.

Clause 55

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 152, in clause 55, page 26, line 4, leave out from ‘shall’ to ‘that’ in line 5 and insert ‘ensure’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss amendment No. 153, in clause 55, page 26, line 7, leave out ‘it’ and insert ‘the residual bank’.

David Gauke (Conservative, South West Hertfordshire)

I have some general comments to make about the clause, so I shall be as quick as possible on the amendments, which relate to subsection (2). Amendment No. 152 attempts to tighten up the wording. Currently the clause refers to the Treasury having regard

“to the desirability of ensuring that if a residual bank is wound up after transfer, pre-transfer creditors do not receive less favourable treatment than they would have received”.

I suggest that the Treasury shall ensure that happens. Amendment No. 153 simply clarifies that the reference to “it” in the last line of the subsection is the residual bank that has been wound up. I think it is a stylistic point, unless I have misunderstood the clause.

Ian Pearson (Labour, Dudley South)

The clause provides a safeguard to give creditors a degree of certainty about how they will be treated should they be left in the residual of a failing bank following the exercise of the property transfer powers to transfer some of the failing bank’s property, rights and liabilities. We have already discussed how that is an important safeguard. In effect, the clause provides that the creditors remaining in the residual bank will receive on the winding up of the residual bank, at a minimum, what they would have received had the whole of the bank gone into insolvency. Of course, through the mechanism of the bank resolution fund creditors may receive more than they would have otherwise received, but the clause provides that they shall receive no less.

A second purpose of the safeguard is to ensure that a partial property transfer does not create de facto depositor preference in insolvency. The Government remain committed to the existing insolvency priority rankings and do not propose to introduce a regime of depositor preference. The clause ensures that a partial transfer of depositors from a failing bank will not have the effect of preferring those creditors transferred out.

To provide context to the amendments proposed by the hon. Member for South-West Hertfordshire I shall briefly set out how the safeguard will work, while pointing out that we are currently consulting on the draft regulations and that matters may change as a result of the consultation. Following a partial transfer, creditors remaining in the residual bank will have a claim on the assets that have not been transferred. Realisations from those assets will be distributed by the bank administrator to the creditors in line with the standard insolvency priority order. In certain circumstances the payment received by those creditors may be less than they would have received if the bank had gone into an insolvency procedure. In such situations, the clause will provide a mechanism whereby affected creditors may receive compensation for the amount by which they have been made worse off as a result of the exercise of the stabilisation tools. That amount will be calculated by an independent valuer and will involve an estimation of what realisations would have been made had the whole bank been wound up.

I believe that the purpose of the hon. Gentleman’s first amendment is to require the Treasury to ensure that pre-transfer creditors do not receive less favourable treatment than they would have received had the bank been wound up immediately before transfer. The clause as drafted requires the Treasury to

“have regard to the desirability of ensuring”

that that is the case. It has been drafted that way on purpose. The regulations made under the clause will put in place a procedure to ensure that no creditor will be worse off. That procedure will include calculating hypothetical insolvency of the failing bank. Given the necessarily counterfactual nature of the calculation, it would not be appropriate for the Government to commit in statute to ensuring that creditors are no worse off under that procedure than if the bank had been wound up, because it is not possible to know definitively what that would mean. Therefore, the language—appropriately, I believe—has been drafted in less concrete terms.

Having said that, I assure the hon. Gentleman that the Government are committed to providing adequate compensation to creditors to ensure that the safeguard is effective and provides confidence to creditors who invest in banks. I believe that the Government’s provision under the clause and the draft regulations, on which we are consulting, provides that confidence.

Sally Keeble (Labour, Northampton North)

On a point of order, Mr. Hood. It is quite hard to hear with the music going on. I do not want to be a complete misery, but it is a bit inappropriate if we are to listen to what the Minister is saying.

Jimmy Hood (Labour, Lanark and Hamilton East)

The hon. Lady is not being a complete misery. Indeed, the Chairman has already been a killjoy and has asked for the music to be turned down.

Ian Pearson (Labour, Dudley South)

Turning to amendment No. 153, the hon. Member for South-West Hertfordshire seeks to replace the term “it” with a reference to “the residual bank”. However, I do not believe that is correct. Replacing “it” with “the residual bank” would not refer to the correct counterfactual. As I have stated, the correct counterfactual is the winding up of the whole bank, not the residual bank, following a transfer. Having provided some background but without—I hope—treading on the ground of a stand part debate, I invite the hon. Member for South-West Hertfordshire to withdraw his amendment.

David Gauke (Conservative, South West Hertfordshire)

I am happy to take up the Minister’s invitation. I beg to ask leave to withdraw the amendment.

Jimmy Hood (Labour, Lanark and Hamilton East)

The jazz club’s annual reception is providing the background to the Committee.

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 154, in clause 55, page 26, leave out line 41.

Clause 55(6) states:

“Regulations may make provision about payment including, in particular, provision for payments...on account subject to terms and conditions...by instalment...by the Treasury...by the Financial Services Compensation Scheme.”

Earlier in the Committee’s deliberations, there was a lengthy debate about the Financial Services Compensation Scheme, which I have no desire to reopen. However, I ask the Minister whether regulations under the clause would amend or supplement provisions relating to the Financial Services Compensation Scheme elsewhere in the Bill. There is a question about the interaction between the third party compensation regime and the Financial Services Compensation Scheme. I am probing whether it is appropriate that regulations affecting the Financial Services Compensation Scheme should be made in clause 55, or whether that fits slightly oddly in the circumstances.

Ian Pearson (Labour, Dudley South)

Clause 55(6)(c) and (d) provide that the payment of compensation to creditors is to be made by either the Treasury or the Financial Services Compensation Scheme. The hon. Gentleman has suggested that the FSCS should not be required to contribute to the cost of providing that safeguard. Let me explain why I do not agree with him.

The Government believe as a point of principle that the financial services sector, through the FSCS, should contribute to the costs of the SRR for two main reasons. First, where intervention is necessary to prevent the cost to the wider economy of a failure of a bank, there is a strong argument for banks to contribute to that cost. Banks in the financial services sector more widely benefit directly from the achievements of the SRR objectives, particularly the objective of enhanced financial stability and confidence in the banking system. It is entirely appropriate, therefore, that the sector should contribute to measures that achieve those objectives.

Secondly, but for the use of a resolution tool, the financial services sector would have to fund the cost of compensation to depositors arising as a result of the failure of a deposit taker through the FSCS. Therefore, it is also entirely appropriate that the Treasury may provide that the banks should contribute to the cost of compensating third parties arising from an exercise of SRR tools designed to address a failing bank. As we will discuss when we reach clause 157, safeguards have been put in place to ensure that the FSCS can contribute to the SRR only up to the amount that it would have had to pay out to depositors had the bank entered insolvency.

The hon. Gentleman’s point about regulations on FSCS funding being made at this point in the Bill rather than later is a technical one, but I will certainly consider it. On a broader point, the Government have responded to strong stakeholder pressure from the banking industry and others for safeguards to be provided for partial transfers and for them to include compensation to creditors made worse off following a partial transfer. That compensation is a legitimate resolution cost because it is a necessary cost arising from the exercise of a resolution tool.

I know that in responding to consultations on that provision the banking industry has consistently opposed our plans. It argues that the cost of the resolution should be met by an acquiring company or the insolvent bank’s estate, but we strongly believe that the industry, before taxpayers, should be called upon first to contribute to any shortfall. There is a fundamental issue of principle in that regard. I appreciate the probing nature of the hon. Gentleman’s amendments, but it will be up to him to decide the official view of the Opposition in the matter.

David Gauke (Conservative, South West Hertfordshire)

I will not press the amendment. The Minister provided some clarification of the purpose of including the provision in the clause, and I am grateful to him for looking at the order in which those things are dealt with. I beg to ask leave to withdraw the amendment.

Clause 56

Clause 57

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 122, in clause 57, page 27, line 27, leave out subsection (4) and insert—

‘(4) The duty to provide services and facilities in pursuance of the continuity obligation is subject to a right to receive reasonable consideration.’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: Government amendments Nos. 123 to 127

Government new clause 17—Continuity obligations: consideration and terms—

Government new clause 18—Continuity obligations: termination.

Ian Pearson (Labour, Dudley South)

As I am sure the Committee is aware, major financial firms do not tend to operate as single legal persons. Instead, they are organised as groups, generally with a single ultimate parent company and any number of subsidiaries, which may be organised into distinct sub-groups. Corporate entities within those groups are connected through shareholdings but are likely to be connected in other ways as well. Bank holding companies may have hundreds of subsidiaries. Members of the Committee should note that Northern Rock was an unusually simple bank in terms of corporate structure, in that the holding company was the deposit taker and the bank had very few subsidiaries. There is no “general rule” about how banks organise themselves or, in particular, where they locate their systems. Some banks’ systems are split between subsidiaries; others are all located in the holding company or a particular subsidiary. For example, the holding company may employ all the group’s employees or a specialist subsidiary may provide IT services to the whole group.

As we have discussed before, the scope of the special resolution regime is restricted to deposit takers and does not include other financial institutions such as investment banks. I have said that the Government are considering what powers are needed in relation to other firms, but they do not generally consider it appropriate to extend the scope of the resolution regime beyond the deposit-taking class and that includes other non-deposit-taking firms in the financial group in which the deposit taker sits. However, we recognise that there are arguments for extending the scope that need to be considered in due course.

It is possible that the deposit taker may not be operational on a stand-alone basis. It may require the provision of essential services from other companies within the group, such as IT systems. If that is the case, removing it from the group will not lead to an effective resolution, as the deposit taker will no longer be able to function without the provision of those intragroup services. The aim of the pre-insolvency tools is to preserve continuity of banking services. That aim cannot be met without a functioning bank. Therefore, specific provisions are needed to deal with such a situation. The Government consider that the most appropriate solution for successfully resolving deposit takers that form part of a group of companies is to take powers to place general and special continuity obligations upon group companies of the failing bank. Those obligations will be restricted to ensuring that services and facilities continue to be provided to businesses transferred.

This group of amendments comprises a collection of generally technical amendments to the continuity obligations. In broad terms, the amendments do two things. First, they provide the authorities with the flexibility to remove a general continuity obligation that has arisen—in some circumstances it may be appropriate for that to occur. The provisions of the special continuity clauses already provide for the termination of the special continuity obligation, therefore new clause 18 brings the positions of the two types of obligation in line with each other. Secondly, they make changes to the consideration that must be paid to service providers. If a former group company provides a service, for example IT support, to a deposit taker, an appropriate amount should be paid for it. There is a difficulty, however, in characterising an appropriate amount in terms of a market rate.

In normal circumstances, the forces of supply and demand would work to determine the market rate and it is likely that in normal circumstances such a rate would be an appropriate amount to pay. For example, the deposit taker could solicit bids, through a tender process, for the provision of a particular service, and following an open competition, could select the service provider that offered the best combination of product and price. Such a process is clearly not suited to the circumstances surrounding the resolution of a failing bank; we have already discussed the fact that action needs to be taken urgently. Once the business is transferred, it is essential that services continue to be provided to ensure that the deposit taker remains operational from day one. That is necessary to ensure that depositors retain access to their accounts, for example. There is likely to be insufficient time for a transferee to arrange for new servicing arrangements. There will be one choice: to continue with the same services as pre-transfer.

In addition, bank systems are often highly bespoke to the particular business that they support, so it is highly unlikely that a deposit taker would be able to find and organise an alternative supplier for essential services at short notice. Given that the deposit taker would not be able to take advantage of substitute service providers, a former group company that supplies services is likely to be in a position of relative power. That position could be used to charge a ransom rate, because the deposit taker would have no choice but to accept that rate, given the lack of alternatives.

For that reason, the Government have tabled amendments to remove references to “market rate” and “market terms”. We propose instead that service providers should be paid a “reasonable consideration”. Government amendments Nos. 122 to 127 provide for that. In addition, new clause 17 provides that the Treasury may, by order, specify matters that are to be or are not to be considered in determining what amounts to reasonable consideration.

I take the opportunity to advise the Committee that the Government will table further technical amendments to clauses 57 to 60 on Report. Those will amend the provisions to ensure that they work in situations in which different parts of a bank’s business are transferred to different transferees, and in which some or all of a bank is transferred to an onward transferee. It is crucial that we get the detail right and that continuity obligations can work in the widest range of potential resolution scenarios. We tried to prepare the amendments in time for the Committee’s scrutiny, but that has not been possible. I apologise to the Committee for that, but I wanted to draw hon. Members’ attention to those additional technical amendments so that they do not come as a surprise. I should also inform hon. Members at this stage that the Government are considering whether further reserve powers are needed to deal with banking groups where the holding company is not an authorised deposit taker.

The continuity obligations that I have just described provide measures to allow the authorities to deal effectively with circumstances in which transferring the deposit taker out of a group may not allow for an effective resolution of the deposit taker. There may also be situations in which transferring just the deposit taker in a financial group, while successfully resolving that firm, could create a further threat to financial stability. Such circumstances may arise if there are other parts of the group in financial difficulty whose failure would pose a risk to financial stability. They could also arise if the transfer of the deposit taker led to the failure of the group within which it sits, which is most likely if the bank provides essential services to other parts of the group. That could create a separate risk to financial stability, particularly where the other group companies are financial firms.

In such circumstances, the most appropriate solution may be for the authorities to seek to resolve the group as a whole, rather than focusing on the deposit taker alone. The Government have been considering whether such a power is necessary and have come to recognise that it may well be. We will continue to keep that under review in the immediate short term and will introduce further amendments if necessary. As I have said in a number of contexts—for example, when we discussed investment banks last week and in the debate on foreign branches—the Government continue to keep under review options for action in respect of financial institutions other than deposit takers. The work on group holding companies is part of that process. Returning to the amendments at hand, I hope that they will be incorporated into clause 57 and other areas of the Bill as appropriate.

David Gauke (Conservative, South West Hertfordshire)

We appreciate some of the difficulties with the Bill’s original wording. Indeed, the London Investment Banking Association highlighted in its written evidence on the Bill some of the difficulties with regard to clause 57(4) and (6) working together. I can see that, to some extent, the Government are seeking to address that concern. I also note that this is work in progress, in that further technical amendments are to follow.

However, I have an instinctive suspicion of the term “reasonable consideration”. I can see the difficulties created by the use of “market rate”, but with regard to reasonable consideration, the consideration tends to be what two parties reach agreement on. The idea that a third party can determine what is reasonable in an abstract way could cause difficulty in a range of contexts. Will the Minister elaborate on how “reasonable consideration” will be reached? I have a slight concern about the amendments, but we do not intend to oppose them, and subject perhaps to that further clarification, I raise no particular objections.

Ian Pearson (Labour, Dudley South)

The authorities will work with the service provider to calculate the appropriate consideration to be paid. New clause 17 provides that the

“Treasury may by order specify matters which are to be or not to be considered in determining...what amounts to reasonable consideration”.

As a starting point, it is envisaged that authorities will examine how much the deposit taker was paying for the service before the transfer. That should be a good proxy for the subsequent discussions.

David Gauke (Conservative, South West Hertfordshire)

What is clause 57(3) intended to achieve? It states:

“The duty under...the ‘continuity obligation’...may be enforced as if created by contract between the residual bank or group company and the transferee.”

If there is a deemed contract, will it be possible for the courts to imply terms or to apply the doctrines of frustration, or fundamental breach or set-off to that contract? If the subsection is merely a mechanism for determining the quantum of damages due between the parties for breach of obligation, should it not say so? That deemed contract approach can be found in a number of places in the Bill, but it is not entirely obvious—certainly we have received representations on this—why a deemed contract is required, given that a remedy would exist in any event in the tort of breach of statutory duty. I made a similar point earlier, but will the Minister provide clarification?

Ian Pearson (Labour, Dudley South)

My understanding is similar to that which I expressed earlier. Subsection (3) provides for the obligation to be enforced as a contract; normal contractual considerations would therefore apply. I hope that that provides the hon. Gentleman with his clarification.

Clause 58

Clause 59

Clause 60