Banking Bill

Public Bill Committee, 13 November 2008.

Clause 65

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment No. 119, in clause 65, page 32, line 10, at end insert

‘, where the Treasury is satisfied that not to do so threatens the stability of, or confidence in, the UK financial system’.

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: Amendment No. 155, in clause 65, page 32, line 15, leave out subsection (3).

Amendment No. 120, in clause 65, page 32, line 39, after ‘(8)(b),’, insert

‘in order to protect the stability of, or confidence in, the UK financial systems’.

Amendment No. 121, in clause 65, page 32, line 42, leave out from ‘days’ to ‘beginning’ in line 44.

Amendment No. 156, in clause 65, page 33, line 1, leave out paragraph (c).

Amendment No. 157, in clause 65, page 33, line 5, at end add—

‘(10) No Order under this section may amend subsections (8) or (9).’.

Clause stand part.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to serve under your chairmanship once again, Mr. Hood. Clause 65 has provoked an enormous degree of concern from outside bodies. Pretty well every outside body that has examined this Bill has objected to it. The clause enables the Treasury by order to amend the law contained in this Bill. It allows secondary legislation to amend primary legislation, which is in itself objectionable. There must be at least a presumption that a clause such as this—often described as a Henry VIII clause—should be scrutinised heavily and, ideally, removed, unless there is a very, very strong case for its retention.

Before going into the detail of clause 65 and the amendments that we have proposed to ameliorate some of the difficulties, it is worth highlighting again one of the broader problems—perhaps the most important—contained within this Bill, which is the degree of uncertainty it creates with regard to some transactions. We discussed at some length the safeguards regarding partial transfers when we debated clauses 42 and 43. As I commented on Tuesday, those safeguards are not necessarily well developed. There is a concern in capital markets that the UK could be left with a regulatory regime that will enable the authorities to interfere in transactions, leaving some creditors worse off than they would be otherwise.

It may help if I inform the Committee that since our debate on Tuesday I have had discussions with two lawyers from leading international firms, one of whom told me he was aware of a transaction that was not completed because one party was concerned that the provisions in the Bill created too much uncertainty. The other lawyer told me that she was aware of a transaction that nearly fell through for the same reason. Those cases related specifically to issues of partial transfer but with clause 65, on top of the uncertainty in the Bill as a whole regarding partial transfer, there is uncertainty surrounding the power to change the law by order without proper parliamentary scrutiny. As a practical example of the difficulties this may impose, the lawyers I spoke to have the view that they may need to qualify legal opinion to a client considering a transaction with a UK bank by referring to clause 65. Notwithstanding everything else they may have said about the legal position, there is a risk that the law could be changed very easily by an order. That further complicates the matter. For that practical reason, many outside bodies are concerned about clause 65, as well as for the constitutional reason that Parliament appears to be surrendering its ability to properly scrutinise legislation in that field. Those are strong objections, and I suspect that the Minister will not be able to persuade us that clause 65 is acceptable.

We have made various attempts to improve the Bill and to provide some comfort and certainty to those outside bodies. Amendment No. 119 relates to subsection (1), which is at the heart of the clause. It states that the Treasury has to have regard to the special resolution objectives. That test is insufficiently strong. We propose that in using the exceptional powers the Treasury should, at the very least, be satisfied that not to do so threatens the stability of, or confidence in, the UK financial systems. I dare say that the Minister will point out that the objectives of the special resolution regime touch upon that, but the Treasury merely “having regard” is not reasonable. The wording is so weak that it seems to attempt to avoid any kind of judicial review of decisions made under the clause. It needs to be toughened up, so that the Treasury is at the very least “satisfied” that there is systemic risk before using the powers. I would usually say “reasonably satisfied”, but we have debated that it is not normal to insert “reasonable” in a provision that applies to a public body. The Treasury should not be able to use the powers as a routine way of trying to improve the legislation. It is the purpose of the Committee to examine and improve the Bill, and it is not appropriate for the Government subsequently to be able to do so, by producing an unamendable order.

Amendment No. 155 relates to subsection (3)—yet another objectionable element of the Bill. As the clause stands, an order may make provision that has retrospective effect. Therefore, not only will it be possible to change the law with an order, but that law can be retrospective. I do not need to go into enormous detail to highlight the uncertainty produced by the ability to create retrospective law. Transactions that have been entered into in good faith based on the law as it stands, can be disrupted as a consequence of subsection (3).

Amendment No. 120 to subsection (9) is similar to amendment No. 119. Generally, orders under clause 65 will be made by affirmative resolution. It should, of course, be by such resolution, to the extent that it is acceptable for orders to be made in that way. The subsection allows the Treasury to make orders other than by affirmative resolution, but there is no higher test as to when those orders can be made; it is not necessary that there be a need to protect the stability of, or confidence in, the UK financial systems or that there is systemic risk. The amendment seeks to address that.

The Government also propose that they should be able to make an order in such circumstances during a parliamentary recess. The order would not need to be ratified for 28 days, not counting the period during the parliamentary recess, so it is perfectly possible that the Government could change primary legislation in August by an order that would not be ratified until the House returned in October.

Sally Keeble (Labour, Northampton North)

How does the hon. Gentleman propose that special measures should be taken? An awful lot of the problems with Northern Rock, and other problems this year, unfolded while Parliament was in recess, and we had to kick our heels because the Government did not have the powers set out in the Bill. How does he propose to deal with crises that occur during our long recess?

David Gauke (Conservative, South West Hertfordshire)

The powers do not necessarily require a crisis in order to be used. If it is a genuine crisis—in which circumstances there may, at a push, be a case for such provisions—Parliament should be recalled, and we should scrutinise the measures properly. What we cannot have is a period of several months every year when there is no parliamentary input.

Sally Keeble (Labour, Northampton North)

I agree with the hon. Gentleman about the recall, but does he propose that primary legislation should be used? As we have seen, that takes a long time.

David Gauke (Conservative, South West Hertfordshire)

I do think that primary legislation should be amended by primary legislation. I disapprove of Henry VIII clauses. We are talking about the ability to amend primary legislation by an order that may occur while Parliament is in recess, with no opportunity for Parliament to take a view at the time, and the subsequent retrospective ratification of that decision, possibly some months later. If we are talking about a genuine crisis, Parliament should be recalled. Indeed, one could argue that Parliament should be recalled much more frequently than it is. If we need to change primary legislation because we face a systemic risk, of course Parliament should be there to debate it. I am grateful to the hon. Lady for agreeing with that in her comments.

Stewart Hosie (Scottish National Party, Dundee East)

Reluctant as I am to agree with the Government on almost anything these days, there is a serious point about the legislation. The hon. Gentleman will recall that in the Northern Rock shambles, one of the difficulties that it faced was the argument that it could not achieve a weekend takeover when it was alleged that there was an early bid from Lloyds TSB. Surely the measures are meant precisely to facilitate immediate action in such circumstances, notwithstanding the difficulties of our being in recess for a prolonged period. Surely that is part of the process.

David Gauke (Conservative, South West Hertfordshire)

But the purpose of the Bill is to create the framework for the authorities to act quickly. If the primary legislation is produced properly, we should be in a position to give the authorities the flexibility to deal with crises, yet what we have here is essentially a suggestion that maybe we have not got the Bill right at all, that we might need to make changes as we go along and that every time we face a new crisis we will just make a quick change by way of an order. I fear that that suggests that the Government are not entirely confident with the legislation as it stands.

Colin Breed (Liberal Democrat, South East Cornwall)

Is it not really an admission of the potential failure of all that we have been doing here? Frankly, clause 65 would obviate almost everything else that we have been discussing for the past few weeks, because it would allow it to be changed. Unless we can tighten the clause up considerably to apply to very specific circumstances, leaving it as it is would be wholly inappropriate.

David Gauke (Conservative, South West Hertfordshire)

What is proposed is far too broad, even if we recognise that not every piece of legislation is perfect. To accept these provisions, as they currently stand, will create uncertainty. So there is a practical effect. As the hon. Gentleman says, the purpose of these Committee proceedings is to ensure that the Bill is right and not to enable legislation to be easily changed subsequently.

Mark Todd (Labour, South Derbyshire)

I have some sympathy with the hon. Gentleman’s argument, but it would be extraordinary arrogance on the part of the Government and members of the Committee if they thought that they had produced conclusive answers to a problem that had not been foreseen 12 months ago, and for which—this deserves a lot of criticism—virtually no planning had taken place. Some realism on the need for flexibility and the opportunity to think afresh would be welcome.

David Gauke (Conservative, South West Hertfordshire)

As always, the hon. Gentleman makes a thoughtful point. If there is something wrong with the primary legislation, let Parliament look at it again properly. Clause 65 essentially enables the Treasury to make orders that come into effect potentially long before Parliament has the opportunity to address them. Amendment No. 121 highlights the issue of the recess and the long period of time that may elapse between the passing of the order and an opportunity for Parliament to scrutinise it.

Let me also highlight one of the issues contained within subsection (9)(c), which amendment No. 156 seeks to delete. Even if Parliament eventually gets a chance to scrutinise this change in legislation and to debate an order that has been passed before it has had an opportunity to debate and vote on it, the lapse of such an order

“does not invalidate anything done under or in reliance on the order before the lapse and at a time when neither House has declined to approve the order”.

That seems a very curious state of affairs. Not only can the Government change primary legislation by an order, but they can change it by an order that has not been debated by the Committee. Furthermore that order can have had effect for two or three months, even though, when Parliament does have an opportunity to vote on it, it defeats it. That is an extraordinary situation to be in.

Sally Keeble (Labour, Northampton North)

The hon. Gentleman is pulling out one paragraph of a subsection when, as I understand the drafting, all the subsections apply. It is and, and, and. It is not this one, or this one or this one. To take out one paragraph and say that it is the be-all and end-all is quite wrong. It is a misunderstanding of the way that the legislation is drafted and of all the caveats that have been put in to safeguard against the misuse of order-making powers.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the hon. Lady’s comment, although I do not agree with her. On the question of safeguards, if she believes in safeguards in subsection (9), I hope that she will support amendment No. 120, which inserts a safeguard that the measures should apply only in the event of a systemic risk. Subsection (9) begins:

“But if the Treasury think it necessary”.

—which is not too great a safeguard, I would suggest—it may make an order without complying with the affirmative resolution. The order can be made, but will lapse after 28 days, ignoring recesses. Even if it does lapse, however, nothing done under it is invalidated. Furthermore, under subsection (9)(d), nothing is to prevent the making of a new order, so, conceivably, the Treasury could happily continue making orders every 28 days—it could get defeated, introduce another one and so on ad infinitum.

My point to the hon. Lady is that that is not a set of different conditions, but the order in which things will happen. First, an order will be made without affirmative resolution. Secondly, if it lapses after 28 days, it will be deemed to have been effective before lapsing. That is my objection: in that period, an order changing primary legislation, which Parliament will not have considered, will remain law. If she disagrees with that interpretation, I will happily accept a further intervention.

We have proposed a new subsection (10) stating:

“No Order under this section may amend subsections (8) or (9).”.

The amendment’s purpose is merely to highlight the fact that if clause 65 can enable the Bill to be amended, it could presumably amend the safeguard in clause 65(8), which does at least say that any amendment should be made by affirmative resolution. Presumably, however, the Government could use the affirmative resolution to scrap subsection (8), and from then on the negative resolution only would be used. That does not provide much of a safeguard.

The clause creates great constitutional difficulties, and we in Parliament take such matters very seriously. Some in the outside world are enormously concerned about the way in which the clause injects uncertainty into the system. We already criticise the Bill for causing concerns about partial transfers. That is not a theoretical concern: already transactions are not happening as a consequence. We debated that on Tuesday, and I think that the Government recognise this issue and have made some movement on the safeguards contained in the order-making powers in clauses 42 and 43. However, we have pressed them for more movement, but we are seeing none on clause 65, which undermines the certainty that the capital markets require. Clearly, anything that we can do to try to address that has to be of benefit. It is a practical issue, and the Government do not appear to be moving. Depending on what the Minister says, we will be inclined to press some of our amendments. Unless there is movement, the uncertainty will only increase. I am afraid that clause 65 is already having a damaging impact on the competitiveness of the UK capital markets.

Colin Breed (Liberal Democrat, South East Cornwall)

I do not want to repeat what the hon. Gentleman said, but I wish to be associated entirely with his comments on the clause. He and his colleagues probably went through the same exercise as we did in attempting to make the clause acceptable by dispelling some of the obvious problems that it causes owing to lack of confidence. The amendment is similar to others that we have tabled, in the sense that we have tried to create some hurdles so as to get an idea of when those powers will be used. The amendment, as drafted, is an excellent attempt to do that, and if the hon. Gentleman presses it I will certainly support him.

As hon. Members will know, we tabled an amendment to delete the entire clause, because I find the first few words wholly unacceptable:

“The Treasury may by order amend the law”.

The Treasury might well be the fount of all knowledge and wisdom, although that has perhaps not been so clearly displayed in recent times, but frankly it is not here to amend the law—we are. I am in principle against that and so will vote against the clause en bloc if given the opportunity to do so on stand part.

I recognise that to a certain extent the clause is written in what we might call a wartime situation. These are extremely uncertain and difficult moments, and almost daily we are regaled with even more horrors of the impending doom and gloom of the next year or two. The banking industry is still in a state of flux, and I accept that we do not know that things will settle down to such an extent that those powers will not have to be used. However, the Bill and those powers are intended to be enduring, so it is intended to address not only wartime situations, but peacetime situations. In a future peacetime situation, such a provision will be wholly unacceptable and have enormous unintended consequences in the capital markets.

At the minimum, we should be looking for such provisions to endure for a limited period, and a two or three-year sunset clause would at least give us the opportunity to review how those powers have operated, and to look, hopefully in a more measured way, at the financial landscape at the time to see whether those rather draconian powers continue to be necessary. I accept that there has been a valiant attempt to establish a clearer sense of when those powers will be used, but as it stands I still find the concept of the Treasury amending the law by order unacceptable, so I will support the amendment if it is pressed and vote for the removal of the clause on stand part.

Sally Keeble (Labour, Northampton North)

I shall be brief. Aside from some of the specifics, there is an important general point to be made. As the scale and nature of the crisis has unfolded over the past year, one of the things that we have seen is how very fast-moving and innovative the industry is. The legislation attempts to give a statutory framework for dealing with the problems in an orderly way, but there might be a slight culture clash with a fast-moving and innovative industry because, despite the best will in the world, drawing up legislation is by nature a slow and cumbersome process. Unless we have such a provision to enable the Treasury to adapt to changing and perhaps unforeseen circumstances, we will be passing legislation that might be fit for purpose for the last crisis but which will not enable the Treasury to deal with the next one. Although I have many reservations about governmental order-making powers, I think that something of that kind is needed in the circumstances.

Amendment 119 would add to subsection (1) the words

“where the Treasury is satisfied that not to do so threatens the stability of, or confidence in, the UK financial system”.

However, the subsection already includes that proviso, because it refers back to the special resolution objectives set out in clause 4(4) to clause 4(8), which we have already discussed at some length, and agreed on. They cover exactly the kind of points that, I think, the hon. Member for South-West Hertfordshire intends amendment No. 119 to cover.

There is also a restriction on the powers. There are not unfettered powers for anyone in the Treasury to do whatever they feel like. There is a discussion of the general purpose of the exercise of the powers, and which powers can be used. Of course there will always be a need for close scrutiny, and perhaps a suspicion that the Government are using powers to do what they want, without having thought things through clearly in the legislation. However, the clause starts with the general objective, which is more or less what the hon. Gentleman has set out in his amendment, then it defines the powers that can be used and the general purposes. It narrows things down to provide the democratic and parliamentary scrutiny, then it narrows them down further to set out some of the process that should be used.

The issue that must, of course, be dealt with is that the industry will say, “This creates uncertainty. We need more reassurances that the powers will not be used perversely.” Governments are not supposed to do that anyway. That applies to any order-making powers, and there are legal processes for challenging perverse decisions. However, it may be helpful if my hon. Friend the Minister can further explain the thinking about the circumstances that are relevant, or the assurances that the industry might need to make it clear that the powers, which are necessary, would be used only in realistic circumstances.

As a general point, it was appalling that hon. Members were in recess and nothing could happen while economic circumstances changed, and that events that would most affect our constituents unfolded while we were not here. We could not engage in any scrutiny. Also, we knew that if anything were to be done, it would need primary legislation. We all know how cumbersome that is. I welcome the fact that the Government would have a range of powers at their disposal. We have had the chance to discuss that, and there is provision for accountability to Parliament, and for proper scrutiny. Such powers are never particularly welcome, but the hon. Gentleman’s amendments are covered, and his concerns dealt with, and what remains is for my hon. Friend to give the industry some assurances about some of the circumstances.

Ian Pearson (Labour, Dudley South)

I hope, indeed, to give assurances to the industry and to others who follow such matters closely, and to clarify the situation for hon. Members.

I want first to explain why clause 65 is needed, and then I shall discuss the amendments. Banks often comprise complex, multi-jurisdictional corporate entities. As financial markets continue to develop, the trend is set to increase. Furthermore, many of the provisions of the special resolution regime interact and sit alongside complex financial services, banking, company and insolvency law. The special resolution regime, which, I remind members of the Committee, is a new legislative device, provides the authorities with powers to act with respect to failing banks.

Those are not banks that are functioning successfully and in normal conditions. They are banks that are sufficiently failing to meet the general conditions for intervention and which it is in the public interest to resolve. It is inevitable that there will be conflicts between the public interest objectives and resolving a bank in severe financial distress. Moreover, the provisions of legislation are designed to work in relation to a normally functioning business.

In the absence of a power to amend legislation, as set out in clause 65, there is a material risk that the authorities may not be able to fully effect a transfer, which could impact on the effectiveness of the powers taken in the Bill. That could have adverse implications for financial stability or public funds, which would not be in the public interest.

The purpose of the power is to provide the Treasury with the means to modify legislation to enable the powers of the SRR to be used more effectively. That is set out in subsection (1). However, it is not a general power to amend legislation; it is targeted and limited. In particular, the power may be used only to facilitate the use of one of the stabilisation options. Therefore, the scope of the power is severely constrained to amending legislation, which affects the resolution of banks under the SRR.

In broad terms, there are two ways in which this power can be used. The first way would be for the Treasury to make a specific amendment to a piece of legislation for the purposes of making effective the resolution of a specific bank. The amendment would apply only to the specific bank. It would be localised to the particular resolution. It would not apply to any other bank, or any other banks in respect of which the powers of the special resolution regime were used.

The second way would be for the Treasury to make an amendment to legislation that applied to all resolutions or a class of resolutions carried out under the SRR. For example, the power could be used to disapply a particular provision of the Companies Acts in relation to bridge banks. That would then apply in each resolution in which the Bank of England used the bridge bank tool. It will not apply to other banks.

It is envisaged that that form of modification will be made in the light of resolution experience. For example, it might become clear that a certain provision of legislation is an impediment to resolution in general, and so it is beneficial to disapply it for all subsequent resolutions. The ability to make such amendments limits the need for resolution-specific amendments, and ensures that the tools of the special resolution regime may be future-proofed as the financial markets and banks develop over time.

Regardless of how the power is used, the modification may apply only to a bank subject to the stabilisation option. Modifications do not apply to any other bank. So, for example, the power could not be used to take action with respect to banks participating in any aspect of the recapitalisation process. As no stabilisation power has been used or is proposed to be used on those banks, clause 65 is not applicable.

There is also an appropriate level of parliamentary scrutiny of the use of the power, which is subject to the affirmative resolution procedure. However, in situations of urgency, the Treasury may make the order subject to the 28-day procedure. That is because there may be circumstances in which a transfer needs to be made at extremely short notice, and it is necessary to modify aspects of legislation to make it effective. Any prior requirement for each House to approve a draft order in such circumstances before it may come into force would cause delay, during which time the Treasury would be unable to take the necessary steps to address the failing bank. That could potentially lead to severe disruption in the financial markets, place public funds at unacceptable risk, and exacerbate financial instability.

Sally Keeble (Labour, Northampton North)

Can my hon. Friend confirm that if the power goes through the affirmative procedure, because of the way in which the days are counted and our recesses fall, it could take some months to get an order through? That would be completely counter-productive in light of the speed needed for many of these processes.

Ian Pearson (Labour, Dudley South)

My hon. Friend makes a good point. The hon. Member for South-West Hertfordshire raised it in relation to amendment No. 121. He suggested that the 28-day clock would start ticking only when Parliament returns after the recess. That is not the case. Parliament can call a debate immediately after the recess, or a decision could be taken to recall Parliament.

David Gauke (Conservative, South West Hertfordshire)

I take the point that the debate could happen straight after the recess—as the Minister said, there is a 28-day clock—but the measure ignores

“periods of dissolution, prorogation or adjournment of either House for more than 4 days”.

It would ignore the recess. The 28-day limit imposed by subsection (9) runs only when the House is sitting, does it not?

Ian Pearson (Labour, Dudley South)

That could be the case, but it is equally true that the clock does not have to start ticking then, and the debate does not have to be within 28 days. My understanding is that it is perfectly possible for Parliament to debate it immediately after a recess, and I think that that is what would happen in normal circumstances.

David Gauke (Conservative, South West Hertfordshire)

That is not what the clause says.

Ian Pearson (Labour, Dudley South)

If I may move on, hon. Members may be aware that it is not unprecedented for such powers to be taken to ensure that Bills are fully effective, especially where an entirely new regime is introduced in an area already populated by a complex and interrelated body of primary and secondary legislation and common law.

For example, the Safeguarding Vulnerable Groups Act 2006 provides the Secretary of State with a power to make further provision to give full effect to the Act. That power may be used to amend, revoke or otherwise modify enactments. Another example is section 148 of the Criminal Justice and Immigration Act 2008, which includes a power to make consequential amendments to legislation, including primary legislation, to ensure that the Act is fully effective.

I have informed the Committee of the general circumstances in which the power might be used, but it might help if I provided some specific examples. Of course, it is not possible to provide an exhaustive list, because it is not possible to foresee every circumstance surrounding the failure of any particular bank or which pieces of legislation might be relevant to the resolution. If that were possible, there would be no grounds for taking the power, as we could just put all the relevant changes into the Bill. The following examples are intended to give a flavour of how the Treasury might use the power.

Suppose the business of a failing deposit taker is transferred to a private sector purchaser. In some circumstances, it would be appropriate to modify the provisions of part 16 of the Financial Services and Markets Act 2000, which deals with the financial ombudsman scheme, to ensure that consumers could make complaints to the scheme relating to the failing bank and obtain a remedy from the private sector purchaser.

Another example is that it might be necessary to disapply section 169 of the Companies Act 2006, which provides company directors with the right to protest against their removal, with respect to a bank entering the special resolution regime. Although clause 19 provides a power to remove directors, the power under clause 65 could be used to remove a director’s right to protest against that removal.

Peter Bone (Conservative, Wellingborough)

That is an extraordinary change in the law that is not mentioned anywhere in the Bill. If that is the Government’s intention, why on earth is it not in the Bill?

Ian Pearson (Labour, Dudley South)

The power to remove directors is certainly in the Bill. In such extreme circumstances, we believe that that is absolutely right and appropriate, and we have debated it.

Mark Hoban (Conservative, Fareham)

The Minister said in his remarks that the Government were looking for the power to remove directors’ right to protest their removal. If he believes that it is important for the Government to deny directors that right, why is it not in clause 19? When we debated the removal of directors under clause 19 in the context of renegotiating their remuneration, he made it clear that directors would retain their normal legal rights in those circumstances.

Ian Pearson (Labour, Dudley South)

I remember talking about directors maintaining their legal rights, and I will undertake to discuss with officials whether that should be put in legislation.

A further example relates to shadow directorship. It may be necessary in certain circumstances for the Bank of England or the Treasury to give directions to the board to ensure that the public interest objectives of the resolution are met. That applies in particular to the initial stages of the resolution, when stabilising banking business is paramount and public funds might be at greatest risk. In some circumstances, therefore, it might be appropriate to disapply various provisions of the Companies Acts in relation to the authorities’ conduct during the resolution, such as shadow directorship.

Mark Hoban (Conservative, Fareham)

Will the Minister give way?

Ian Pearson (Labour, Dudley South)

I want to make a little progress. I shall give some real-life examples of shadow directorships.

Mark Hoban (Conservative, Fareham)

Will the Minister give way on that point?

Ian Pearsonindicated assent.

Mark Hoban (Conservative, Fareham)

My recollection is that provisions are in place already, in the Banking (Special Provisions) Act 2008, to ensure that the Treasury and the Bank of England do not act as shadow directors. If the Minister’s concern is genuine, why not replicate that Act’s provisions in the Bill?

Ian Pearson (Labour, Dudley South)

That is probably why I should not have given way—I was going to explain some of that. Hon. Members might be interested to hear that powers to modify legislation were used in many of the recent resolutions under powers provided by the Banking (Special Provisions) Act. For the transfers of Northern Rock and Bradford & Bingley to the Treasury, the shadow directorship provisions of the Companies Acts were disapplied. For the Bradford & Bingley onward transfer, merger law was disapplied, and for the transfer of the Kaupthing accounts, the powers were used to modify insolvency law to create a simplified version of the bank administration procedure.

Stakeholders have made representations arguing that the power undermines the safeguards that we are putting in place for partial transfers.

Mark Todd (Labour, South Derbyshire)

Will my hon. Friend give way?

Ian Pearson (Labour, Dudley South)

Let me make this crucial point first.

The power will not be used by the Treasury or others to modify provisions or safeguards in the Bill. That would not be appropriate, and the Government have no intention of using the power in that way.

Mark Todd (Labour, South Derbyshire)

I can see why my hon. Friend hesitated to give way. He makes a persuasive case for the principle of providing for substantial flexibility in the Bill in order to respond to unforeseen events. However, he was not so persuasive on the wording of the clause. Although I shall vote for the clause, if necessary, because I agree with it in principle, we have an opportunity, based on the important qualifications he made in his speech, to sharpen the wording to reassure those concerned about parliamentary accountability and those in the industry about the security of some of the decisions that they might make.

Ian Pearson (Labour, Dudley South)

As always, my hon. Friend makes a very helpful contribution.

On the point about the position of directors, Members will be aware that clause 19 provides powers to vary service contracts or to remove directors. Clause 65 enables consequential changes to be made to facilitate the resolution. I hope that makes the matter clear but, as I have said, I shall talk further with officials about that matter.

On the point about 28 sitting days, nothing prevents Parliament from holding a debate on an affirmative resolution earlier in the 28-day period following a recess. Legally, and if desired, there could be a period of up to 28 days, but I cannot believe that business managers, if something was controversial, would not want to—[Laughter.]

Jimmy Hood (Labour, Lanark and Hamilton East)

Order.

Ian Pearson (Labour, Dudley South)

I shall now address the amendments, on which I hope that I can reassure the Committee. The issues raised have been dealt with appropriately already in the Bill, but I want to make clear why I do not believe that we should amend the provisions in the manner proposed.

The hon. Member for South-West Hertfordshire proposes, through amendments Nos. 119 and 120, that an additional test be required before the power may be exercised—that there must be a threat to the

“stability of, or confidence in, the UK financial system”.

I remind the Committee that the initial transfer will have met the general and specific conditions for action as provided by clauses 7, 8 and 9. Those are high hurdles. As my hon. Friend the Member for Northampton, North pointed out they have to be within the terms of the objectives in clause 4. The fact that the conditions are met for the initial intervention gives the authorities warrant to take the necessary steps to resolve the bank. Given those points, I believe the amendments are unnecessary and, indeed, otiose, as the matter is already covered as part of the Bill.

Amendments Nos. 121, 156 and 157 relate to the procedural provisions of the clause. Amendment No. 157 proposes that the powers provided by the clause may not be used to amend the procedure for making an order under the clause. As I have already said, it is not the Government’s intention to amend the provisions of the Banking Bill using that power. It would not be appropriate, nor would the power be construed to have that effect. In particular, secondary legislation cannot be exercised to expand the scope of its enabling powers, and so lift itself up by its bootstraps. I hope I have provided reassurance to Members that this amendment is unnecessary too, as the power cannot be used in the manner about which they are concerned.

Amendment No. 156 suggests that if an order should lapse, the provisions of the order should be invalidated. The amendment removes a standard provision that provides that things done under orders not later affirmed by parliamentary resolution remain valid. The amendment would introduce a high element of risk to using the power. That particularly applies if an order was made under the clause in relation to a transfer of property or securities to a private sector purchaser. In such a situation, a potential acquirer would in all likelihood not be willing to take part in the transaction, given the risk that provisions of the order—which could, for example, grant them certain protections—might not stand. Therefore, I cannot accept the amendment. The hon. Member for South-West Hertfordshire has been stressing the importance of legal certainty but the amendment would introduce a lot of uncertainty in the process, so I hope he will consider withdrawing it.

Amendment No. 121 makes a technical change to the nature of the 28-day procedure. We have already discussed that and I do not consider it appropriate. Parliament must be given adequate opportunity to approve the resolution.

Amendment No. 155 proposes that the order made under clause 65 may not take retrospective effect. Although the Government recognise that this is a broad power, we consider it an important part of the clause. Retrospective provision may be required in circumstances where a transfer has occurred with particular swiftness, which, as recent events have shown, is perfectly possible. Given the incredibly complex affairs of banks, it may not be possible to identify each and every precise statutory barrier in any given circumstance before making a transfer. For example, if it were necessary to amend a statutory provision that threatened to impede a property transfer, an unacceptable level of legal uncertainty would be likely to arise if the change did not have effect simultaneously with the property transfer. In a fast-burn situation, the due diligence to identify the impediment may not be completed until after the transfer has taken place. For those reasons, it is considered necessary to make retrospective provision from the date of the transfer. I hope my explanations have provided Members with sufficient assurances as to why clause 65 is necessary and should not be amended in the ways they propose.

There are two other points I should like to make. The first is to stress that the Treasury can only amend the law through a statutory instrument that can be struck down by Parliament. Therefore, it is only with Parliament’s agreement that we can exercise this power. The Treasury may only amend the law in circumstances when the special resolution regime powers need to be used more effectively—to stress again the limited nature of the use of the power.

Having reflected on the debate, I want there to be certainty, and for banks to obtain unqualified legal opinions from advisers on their legal rights under contracts across the piece, as the British Bankers Association said in its submission. We are consulting on the partial transfer safeguards, and I hope that my explanations today on the limited nature of clause 65 will be helpful in making clear to the Committee how the clause might be applied. I will, however, ask the expert liaison group whether any changes could be made to this needed clause, to strengthen legal certainty, and if judged necessary I will bring forward amendments on Report.

David Gauke (Conservative, South West Hertfordshire)

First, I address the comments made by the hon. Member for Northampton, North on the test in subsection (1). The Minister also touched on the matter. Both he and the hon. Lady referred to clause 4—the special resolution objectives. My concern has not been assuaged; the current wording does not address it and therefore my amendment is not otiose. The test for a change to the law is merely that there is regard to the special resolution objectives. I accept that the various tests in clause 4 and elsewhere need to apply to the use of the stabilisation powers, but those tests are not the same as that which applies to whether there is a change in the law under clause 65. The test there is much weaker:

“having regard to the special resolution objectives”.

I accept that narrows the scope of the test if it has to apply to the use of stabilisation powers, and that the safeguard is also in subsection (2). The Minister elaborated on that, and I accept that it is somewhat helpful. However, it is nothing like as strong a test as that which we propose in amendment No. 119, or for that matter amendment No. 120. That test is specifically to focus on systemic risk, which is the most important objective. The change in the law has to meet that test. I am therefore not persuaded by the Government’s arguments.

The hon. Member for Northampton, North pointed out that primary legislation is cumbersome. It is, up to a point, but let us not forget that we put the Banking (Special Provisions) Act through both Houses in two days. Primary legislation can move more rapidly when it needs to.

I now turn to the Minister’s comments. His examples were not persuasive for two reasons. First, as my hon. Friend the Member for Fareham pointed out, if the Minister has specific examples in mind, why are they not in the Bill? The Minister may say that they are not exhaustive, but even if they are not, and even if the Minister is convinced that clause 65 has to remain in the Bill—although we are not persuaded that it should—if there are areas where the Government think they will need flexibility, let us debate them now, and make provision in the Bill. The Minister’s examples were not particularly helpful to his case.

The second reason why the Minister’s examples were not helpful is that they highlighted the significant matters that we could be talking about. If we are talking about the withdrawal of the usual protections available to directors’ employment rights, that matter, or at least the framework for it, is sufficiently serious to be dealt with in primary legislation. I do not think that I was present for the Committee’s debate on directors’ employment, but if the Minister was arguing that those protections will still exist—the point alluded to by my hon. Friend the Member for Fareham—yet at a subsequent stage of proceedings he was arguing that the Government are retaining the flexibility to remove those protections by order, it seems quite a serious point.

Peter Bone (Conservative, Wellingborough)

My recollection was that the Minister also argued that if we did not do that, the European convention on human rights and the rights of the directors under contract law would be infringed. I agreed with the Minister then and did not press the point, but the Government now appear to have a hidden agenda.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to my hon. Friend for making that point. Are we to end up with a situation where the only protection available for directors is the ECHR or will there be a place for Parliament to debate those matters too?

Mark Todd (Labour, South Derbyshire)

I must admit that I did not interpret the Minister’s remarks as meaning that contract law would be set aside by the executive action of the Bank. I, too, would be alarmed if it was suggested that the normal protections offered by a contract should be dispensed with at the fiat of government. I particularly welcomed the Minister’s suggestion that the clause required further scrutiny by those who wished to provide greater certainty in the matter. I am not persuaded by the hon. Gentleman’s argument that we should dispense with the clause and its principles in its entirety. The Minister made a persuasive case that there were areas of doubt and uncertainty to which we might need to respond, and that it would be more efficient to do so in that way. However, I take the hon. Gentleman’s point on the narrow issue.

David Gauke (Conservative, South West Hertfordshire)

On the narrow issue, perhaps we will all need to reread precisely what the Minister said.

Mark Todd (Labour, South Derbyshire)

I hope not.

David Gauke (Conservative, South West Hertfordshire)

Indeed. Let us put it this way: there is no reason, as far as I can see, why clause 65 could not be used to dispense with those contractual rights. The Minister’s remarks merely highlight why we are concerned about the clause. The hon. Member for South Derbyshire is clearly uncomfortable with the way in which the clause could be used. We will read Hansard to see whether the Minister said that it is one possibility that the Government are already considering.

Sally Keeble (Labour, Northampton North)

The hon. Gentleman talked about clause 4. Could he comment on the substantial protections provided under clauses 7, 8 and 9 in terms of the exercise of powers? There are the objectives, the exercise of powers and the further assurances that my hon. Friend the Minister gave about going back and looking at some important qualifications. That would seem to provide the assurances that are needed. He also said that he will come back with amendments at a later stage, which would seem to deal with the one area of doubt that was left.

David Gauke (Conservative, South West Hertfordshire)

I take the hon. Lady’s point about clauses 7, 8 and 9, but this is overall a Bill that retains a reasonable degree of flexibility for the Government. My point is that regardless of clauses 7, 8 or 9, the test as to whether the law can be changed is still a very weak one. That is the objection to subsection (1).

I welcome the Minister’s statement that the clause will not be used to amend the Bill and so I certainly will not press for a Division on amendment No. 157 because it does not go nearly far enough. Given that statement, however, why cannot we see that carve-out in the Bill? I hope that the Minister will consider tabling an amendment to that effect. If he does not, I suspect that we might, because it is an important point.

With regard to amendment No. 121 and the ticking clock, I am touched by the Minister’s faith in business managers’ ability to ensure that controversial matters are debated and voted on as promptly and prominently as possible. I take his point that such debate need not always happen at the end of the 28 days, but the fact is that that is what the legislation says. It could happen so it is a weak argument to say, “Well, maybe it won’t.” It does not say it must happen 28 days after the order has been made; it says up to 28 days. For those reasons, I am inclined to press amendment No. 121 to a vote.

I welcome the remarks, to which the hon. Member for South Derbyshire alluded, about the fact that the expert liaison group will be consulted and so on, but overall I did not feel that much comfort was provided to outside bodies or that the issue of uncertainty was addressed. It remains a concern. If one speaks to any lawyer or outside body in the field, they are worried about the breadth of the provisions. That is why we have attempted to amend the clause to narrow it down. Even those who, like the hon. Member for South Derbyshire, are persuaded that clause 65 is necessary might agree that we can at least try to restrict it to provide a little more comfort.

For those reasons, I intend to press amendments Nos. 119, 155, 120 and 121 to a Division. Members on the Conservative Benches remain deeply concerned about clause 65, and we will be voting against it at stand part.

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 12, in clause 65, page 32, line 22, leave out subsection (5).

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: Government amendments Nos. 13 to 16.

Government new clause 5—“Enactment”.

Ian Pearson (Labour, Dudley South)

This is a technical amendment. The group comprises one new clause and several consequential amendments to clauses 65, 109, 122, 143 and 154. The technical amendments extend the meaning of “enactment”, where referred to in the Bill, to include Acts of the Scottish Parliament and instruments made under them, Northern Ireland legislation and subordinate legislation. Without express provision for the inclusion of Acts of the Scottish Parliament or instruments made under those Acts, any reference to an enactment in the Bill would not include them, which would restrict the effect of the legislative provisions of the Bill in Scotland and could limit the authorities’ ability to deal with Scottish banks.

Clauses 65, 109, 122, 143 and 154, as drafted, contain wording to extend the meaning of “enactment” for those specific clauses. However, new clause 5 will apply to the entire Bill, so the various subsections defining a reference to an enactment will be redundant. Therefore, amendments Nos. 12 to 16 make consequential amendments to remove those references. The amendments are straightforwardly technical and I commend them to the Committee.

Stewart Hosie (Scottish National Party, Dundee East)

I have a quick question for the Minister. Obviously, in general terms, it is unsatisfactory for the UK Government to be able, almost by fiat, to overturn or change the decisions taken in another legislature. However, in the emergency situations of a failing bank and for the delivery of the special regime for a failing bank, particularly in a short period, it is probably important. I am conscious, having taken advice, that there is no particular opposition in principle, so long as the Minister can confirm that any primary or secondary legislation in Scotland that would be changed would be solely for the purposes of, or in consequence of, the Bill and in the delivery of the special regime for a failed bank. If I can have that guarantee, I would have no difficulties at all with the new clause and the amendments.

Ian Pearson (Labour, Dudley South)

I can certainly give the hon. Gentleman the assurance that he seeks. That is exactly the intention.

Clause 66

David Gauke (Conservative, South West Hertfordshire)

I have a quick question about clause 66(1), which states:

“The Bank of England may not exercise a stabilisation power in respect of a bank if the Treasury notify the Bank that the exercise would be likely to contravene an international obligation of the United Kingdom.”

I would be grateful if the Minister explained the purpose of the subsection. What interests me is that it is perfectly possible that the Bank of England and the Treasury will have conflicting views about international obligations. Indeed, there may be evidence to suggest that such a tension existed over actions taken with regard to Northern Rock last year. I put this question to the Bank of England at an earlier stage of proceedings in Committee—does the Treasury anticipate that it will make decisions about international obligations? Will it be possible for the Bank of England to take a view not to exercise a stabilisation power because it believes that to do so would contravene an international obligation, even though the Treasury does not hold that view? In other words, will the test of international obligations be assessed by the Treasury alone, and if the Treasury is satisfied, the Bank may exercise its stabilisation powers? Or will both the Bank and the Treasury take a view, and if either institution is of the view that international obligations will preclude the use of stabilisation powers, will those powers not be used?

Ian Pearson (Labour, Dudley South)

On a number of occasions, we have discussed the right balance of responsibilities between the authorities: the Bank of England, the Treasury and the Financial Services Authority. That division of responsibilities has been supported by stakeholders. The authorities have worked and will continue to work closely together in all those circumstances. We believe that Her Majesty’s Treasury should have the leading role when it comes to international obligations. The role of each authority in the SRR is clear: the FSA will assess whether a firm should enter the SRR, the Bank of England will operate the SRR and the Treasury will deal with public finances and the overall public interest and exercise the stabilisation option to take a bank into temporary public ownership, taking into account international obligations. One would expect Government to do that. That is not to say that we will not have close dialogue with the Bank of England on matters that relate to areas in which it has an interest, but it is right and proper that the Treasury takes the lead in those circumstances.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Minister for those comments. I do not disagree with him on whether the Treasury should take a leading role. The question is whether it takes the sole role. I should like to press him on this matter. Is the origin of the clause a degree of tension that exists as a consequence of the Northern Rock issue and the view that the Bank of England took on the restrictions that applied to any covert action that it could take? There is a feeling that it took a more prescriptive view than was generally deemed necessary.

Ian Pearson (Labour, Dudley South)

The origin of the clause lies in the consultation and the fact that we think it a necessary part of the Bill. Of course, the Treasury will talk to the Bank of England, and they will work together on all these matters. It is entirely right and proper that someone should lead and take final decisions. When it comes to international obligations, that has to be the Treasury.

David Gauke (Conservative, South West Hertfordshire)

If the Bank of England took a different view and said that international obligations prevented it from doing something and the Treasury said that they did not, would the Treasury view prevail?

Ian Pearson (Labour, Dudley South)

I do not want to get into hypothetical circumstances, but let me make it clear that the Treasury has the lead responsibility in this regard. It will be the Treasury’s views that count when considering what our international obligations are and how they should be interpreted.

Clause 76

Mark Hoban (Conservative, Fareham)

I have a quick question for the Minister. In what circumstances does he envisage introducing orders to apply the SRR to credit unions?

Ian Pearson (Labour, Dudley South)

The clause creates a power to extend the SRR to credit unions. We will keep the position under review, but we have no immediate plans to extend stabilisation powers such as bridge bank, temporary public ownership and private sector purchasing powers to credit unions at this time. Credit unions have a relatively small number of depositors, and their failure does not pose the same threat to financial stability that the failure of banks and building societies might. Moreover, credit unions are dealt with effectively under existing insolvency procedures. However, it is important to keep the matter under review. We have talked about future-proofing legislation, and that is what this provision does.

Clause 157

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 177, in clause 157, page 81, line 42, after ‘bank’ insert

‘, building society or credit union’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to take Government amendments Nos. 178 and 17.

Ian Pearson (Labour, Dudley South)

It is a pleasure to serve under your chairmanship, Mr. Gale. Without wishing to intrude into what would normally be the province of a clause stand part debate, I shall first say something about clause 157. I emphasise that the clause allows the Treasury to require the Financial Services Compensation Scheme to contribute to the costs of the special resolution regime. As we have discussed before, the Government believe, as a point of principle, that the financial services sector, through the FSCS, should contribute to the costs of the SRR.

The amendments are all technical. Government amendments Nos. 177 and 178 amend the clause to allow the FSCS to contribute to the costs of the resolution of building societies and, if the stabilisation powers were extended to credit unions, credit unions as well. That ensures that our approach to the FSCS contributing to the costs of resolving banks can be extended to building societies and, if needed, credit unions. We discussed that earlier today.

Government amendment No. 17 ensures that the FSCS contribution to the SRR will not be classified as FSCS management expenses. That brings the treatment of the FSCS funding of the SRR in line with the treatment of the FSCS funding of compensation payments to claimants under the scheme. I commend these sensible technical amendments to the Committee.

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship, Mr. Gale. I point out, for the benefit of Government members of the Committee, that it is only as a consequence of the presence of Opposition members in Committee this afternoon that the Committee can continue, as I think that the Government Benches are not quorate. I am sure the usual channels are cognisant of our good will in ensuring that the Bill proceeds.

Bob Blizzard (Labour, Waveney)

By maintaining their places, Opposition members enable Government members to be carrying out other duties in the corridor. Those members will return to Committee in due course.

Mark Hoban (Conservative, Fareham)

It is always better for armies to be visible than invisible, according to my friends with military experience.

I want to ask the Minister about Government amendment No. 17. I had intended to raise this point in a clause stand part debate. In the context of the rescue of Bradford & Bingley, my understanding is that the interest that is being charged on the £14 billion that the FSCS has borrowed is classified as management expenses and therefore will be borne not by the depositing sector within the FSCS, but by all participants in it—independent financial advisers, investment managers, insurers and so on. I listened to the Minister’s explanation of Government amendment No. 17. Will that have retrospective effect or will IFAs and others have to bear that cost, as it is currently classified as part of the management expenses?

Ian Pearson (Labour, Dudley South)

My understanding is that the FSCS was used to fund the deposit book transfer of deposits to Abbey Santander, and this is similar to the provisions in the banking insolvency procedure in the Bill for a deposit transfer, which the Bill provides for the FSCS to fund through clause 110(1)(b). Provision by the Treasury under clause 110 for the FSCS to fund the use of a stabilisation tool would technically occur before the onset of insolvency, and therefore before the FSA can currently activate the FSCS. However, that does not mean that the firm in difficulties might be resolved at lower cost to FSCS levy payers.

As I explained when dealing with amendment No. 17, our intention is to bring the treatment of FSCS funding of the SRR into line with that for its funding of compensation payments to claimants under the scheme. We believe that we have achieved that.

The hon. Gentleman asked about interest. Yes, interest is regarded as a management expense. However, it is a specific expense that is borne only by deposit takers, so individual financial advisers do not pay. I hope I have clarified the point.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for that clarification. Having had conversations with IFAs, I know that the position that he has outlined will be welcome to them, as there was ambiguity about the provisions for the FSCS and others. IFAs will be grateful to the Minister for clarifying the matter.

Colin Breed (Liberal Democrat, South East Cornwall)

I accept the amendments. However, I am sure the Minister is aware that there is much disquiet among building societies about their contributions to the fund in the current circumstances. The formula is based upon their retail deposits, which in the past was not a bad measure. The more deposits they have, the more they should contribute to the fund. In today’s circumstances, we are bailing out people with relatively little in retail deposits. Much of the problem is caused by the fact that the building societies have relied on the wholesale market. It seems a tad unfair that those that have been operating with significant retail deposits and lending a proportion of that money, which is much more prudent in today’s circumstances, are now being required to pay a larger ratio into the FSCS fund.

I put that down as a marker because I believe the Minister ought to consider the formula for contributions before Report.

Ian Pearson (Labour, Dudley South)

I understand the point raised by the hon. Gentleman, which was discussed briefly in earlier debates. I know that some building societies feel strongly about the matter, and I understand that they have been making representations to the Financial Services Authority, among others. I have no doubt that those representations will continue. The Government will continue to follow the situation closely.

Mark Hoban (Conservative, Fareham)

I have some questions about the operation of the clause. I take the Minister back to his brief opening remarks on the last group of amendments. Let us look at the matter in a different way. Traditionally, when there is an administration or insolvency—a process to sort out the problems of a failing company, be it a bank or otherwise—the cost of the process is borne by the company itself, not by its peers. Why should sound and stable banks pay the costs of a bridge bank, temporary public ownership or the transfer to a private sector purchaser? Surely the investors in the company, principally the shareholders, should pay either through a lower distribution on wind-up or through lower proceeds on sale. Why is it appropriate for banks that have not failed to pay the costs of a bank that has? I distinguish between the FSCS in its normal activities and some of the costs incurred in the process under discussion.

I shall move on to more detailed questions about the individual parts of proposed new section 214B. Proposed new subsection (1)(b) states that the section applies where

“the Treasury think that the bank was, or but for the exercise of the stabilisation power would have become, unable to satisfy claims against it.”

To what extent would the bank have to be unable to satisfy those claims for the Treasury to exercise that power? We have just debated amendment No. 17 about the treatment of expenses, which relates to proposed new subsection (2). The assumption in proposed new subsection (3) appears to be that the costs will be borne by the banks—the Minister provided clarification on amendment No. 17 on that basis—but the new subsection does not make it clear that that cost will always be borne by deposit takers. Is the expectation that other members of the FSCS could bear those costs or would those costs, in the first instance, always rest with the deposit-taking sector?

On proposed new subsection (3)(a), how will the Treasury determine the costs that will borne by the scheme? What principles will it use to determine which costs will be borne by the scheme and which will be borne elsewhere? We spoke about Bradford & Bingley on the previous group of amendments. The FSCS has taken out a loan of £14 billion to fund the transfer of balances. Scheme members will bear the interest on that, which is about £900 million per year, and they could, potentially, also bear any defaults on the Bradford & Bingley mortgage book. One assumes that if a similar partial transfer had to be used in the future, the FSCS would bear the same type of costs.

I am not sure how much wider the definition of costs could go. Will the scheme cover the operational costs of a bridge bank, or will the bridge bank be expected to pay for those? If an indemnity on the value of the mortgage book is given to a purchaser, will the Government expect the scheme to bear those costs? Are there other operational costs that the Government expect the scheme to bear? What are the parameters of the costs that the scheme could bear? It would be helpful to provide some predictability.

Proposed new subsection (3)(b) states that the Treasury shall make regulations

“providing for independent verification of the nature and amount of expenses incurred”.

It also refers to the potential appointment of an auditor. I alluded to that is an earlier debate on the objectives, when I raised the issue of money being used in an efficient and economical way. Who will control and monitor the amount that is being spent? It is all very well auditing something, but that is a retrospective check. Will there be a prospective check? If the FSCS and its members are to bear the costs, is there a role for them, alongside the tripartite authorities, in agreeing the types of cost that could be incurred? Potentially, they will be writing a blank cheque to the tripartite authorities and they would like a level of control over the types of cost that they will be expected to pick up. The proposed new subsection is not clear on whether that control would be in place.

I had some difficulty understanding proposed new subsection (4), maybe because I am not a lawyer. Perhaps the drafting is clearer to those better versed in the law than I. I think it is trying to set a cap on the amount the scheme would pay, so that it would not exceed the amount payable if the stabilisation power had not been exercised. I assume that means that, rather than a failing bank’s being dealt with through one of the stabilisation options in part 1, it would become insolvent and be dealt with through administration or insolvency or the bespoke tools that we are going to deal with in part 2 and part 3. That is the comparison that will be made.

The Minister will recognise the complex and subjective nature of the judgment that the valuer would need to reach. The outcome of those judgments would have a significant impact on the cost incurred by the scheme member. Will the Treasury consult with scheme members before issuing regulations to ensure that there is some consensus on the rules that will guide the independent valuer? I am not saying that that will determine the outcome but clearly there would be an opportunity to reduce the conflict between scheme members and the tripartite authorities—perhaps avoiding the need to appeal to a court or tribunal—if there were some consensus about the process that a valuer would use in approaching a valuation.

Again in proposed new subsection (4), I think the expense is limited to the amount the scheme would have paid out. Is this calculated on a gross basis, that is, does it not take into account the recoveries from the bank or the amounts actually paid out? If the amount that would have been paid out was £10 million but for the stabilisation options, but only £5 million had to be paid and, of that, a bank had assets that would cover £3 million of costs, it would end up with the FSCS bearing a cost of only £2 million—that is, the amount paid, net of recoveries. What is the limit that the scheme will pay? Is it the £10 million; is it £8 million, as the explanatory note suggests; or is it the level of recoveries of £3 million? I am not sure how, in proposed new subsection (4), paragraphs (a) and (b) interact with each other to determine the amount the scheme will have to bear. I would be grateful for clarification.

Regarding proposed new subsection (7), my understanding based on the explanatory notes is that these expenses could be funded from a pre-funded Financial Services Compensation Scheme. Will the Minister confirm that that is the intention of proposed new subsection (7)?

Ian Pearson (Labour, Dudley South)

Let me begin by restating why the Government believe, as a point of principle, that the financial services sector, through the FSCS, should contribute to the costs of the SRR. I will then address a number of points raised by the hon. Gentleman.

There are two strong arguments why the financial services sector should be contributing to the costs of the SRR through the FSCS. First, where intervention is necessary to prevent costs to the wider economy of the failure of a bank, we believe there is a compelling argument for banks to contribute to that cost because banks—and the financial services sector more widely—benefit directly from the achievement of the SRR objectives, particularly the objective of enhanced financial stability and confidence in the banking system. It is therefore entirely appropriate that the sector should contribute to measures that achieve these objectives. Secondly, but for the use of a resolution tool, the financial services sector would have to fund through the services of the FSCS the cost of compensation to depositors arising from the failure of a deposit taker. Therefore it is also entirely appropriate that the Treasury may provide that the banks contribute to the costs arising from the exercise of the special resolution regime tools that are designed to address a failing bank.

In response to consultations on the provision, the banking industry has consistently opposed our plans. In its view, the costs of resolution should be met by an acquiring company or the insolvent bank’s estate. However, industry should be called upon before taxpayers contribute to any shortfall.

Mark Hoban (Conservative, Fareham)

Is it the Minister’s view, therefore, that the acquirer or the estate of the failed bank should bear the costs initially, and that anything in excess of that should be borne by the wider financial services sector?

Ian Pearson (Labour, Dudley South)

That probably depends on the circumstances and the particular transaction. I have tried to outline the general principles that underpin clause 157. The clause notes that the FSCS will be called upon to contribute to the resolution costs when a stabilisation power under part 1 of the Bill has been used, and when the Treasury considers that, but for the exercise of that power, the FSCS would have normally been triggered to pay out to depositors under the provisions of the Financial Services and Markets Act 2000.

I shall draw the Committee’s attention to a number of safeguards that the Bill puts in place around that power. First, as set out in subsection (4)—which the hon. Gentleman spent some time discussing—the Treasury will only contribute up to the hypothetical cost of depositor compensation payments. Secondly, as also set out in that subsection, if the FSCS pays out to depositors it should not be called upon to contribute to the costs of any other resolution tools for the same bank. Finally, as set out in subsection (3), there will be independent verification of the nature and amount of the expenses incurred.

The hon. Gentleman queried the meaning of “unable to satisfy claims against it”. I am advised that that is a standard term that refers to when the FSCS will be triggered. It is in part 5, chapter 15 of FSMA. The subsections regarding the resolution received many probing questions from the hon. Gentleman. I have already drawn particular attention to subsection (4), which outlines some of the requirements of the regulations, and subsection (3) sets out that the Treasury can make regulations to specify the expenses that the FSCS should contribute to. It is important to recognise that the regulations will be fully consulted on. To return to the hon. Gentleman’s example, we do not think that the operational costs of the bridge bank would be included.

While we will consult on the regulations, it might help to briefly indicate some examples of what resolution costs could include. We have in mind the market value of any guarantees provided by the authorities to the bank, financial assistance provided to support a resolution, the administrative costs of the SRR—for example, the cost of an advisory service procured by the authorities to effect a resolution—and certain compensation costs.

The hon. Gentleman also asked whether the acquirer pays the resolution costs. Yes, the acquirer will bear those costs. For example, under the bank resolution fund the proceeds of any resolution will flow back to compensation costs.

The hon. Gentleman also raised the issue of consultation. He asked whether the Treasury will consult with scheme members on the rules that will guide the independent valuer, and I want to be clear that the answer is definitely yes. We can consult on any principles, but we must recognise that valuation involves complex calculation of a hypothetical insolvency, so it might not be appropriate to involve FSCS members in all of the independent valuer’s procedures and calculations. I hope he appreciates that throughout the Bill we have always wanted to commit to working with the industry in a consensual, open and transparent manner, and that applies to the extent that it is possible to do so in this case, just as it has with other aspects of the Bill that we have discussed.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for those answers but am concerned about who will bear the costs initially. He indicated that the acquirer would bear some of the costs through the bank resolution fund, but I am still not clear that the creditors and shareholders would bear some of that cost as well. I am with the Government on ensuring that the taxpayer does not bear the cost, but there is a residual concern that in trying to do so we give the impression that the first port of call is the FSCS, rather than the acquirer or creditors. I might return to that point on Report to get a little more detail clarifying the ordering.

From the Minister’s comments about the limit on how much could be paid, I think we may take it that if the hypothetical cost was £10 million and the FSCS only paid out net £5 million, the contribution that members would make could still be a further £5 million; so the way in which that works is now clearer in my mind.

Clause 77

Mark Hoban (Conservative, Fareham)

This point might seem rather trivial to the Minister, but I would like to know why in subsection (1) the procedure is described as insolvency. The normal procedure is either liquidation or administration, so insolvency seems to be a new term invented for the purposes of the Bill to describe the process. Indeed, it becomes clear in subsection (2)(b) that the order appoints a “bank liquidator,” and that term is used thereafter fairly regularly. Indeed, clauses 86 to 89 deal with the process of bank liquidation.

I am not sure why the Government have chosen to introduce the word “insolvency.” Someone rather crudely suggested that, given that these things are normally matters for the Department for Business, Enterprise and Regulatory Reform, the Treasury was a little more lax in its language, but knowing the Minister’s dual role, I am sure that he would not have allowed that to happen. It would be helpful to know why “insolvency” was used in this case rather than the more traditional liquidation.

Peter Viggers (Conservative, Gosport)

I should like to probe the thinking behind the clause. My understanding is that in some jurisdictions a failed bank is subject to the general corporate insolvency laws, as is the case in this country. I understand that there are special regimes in other countries, including Italy, Norway, Canada and the United States. The Government’s principal reason for bringing in a special regime, as stated in the explanatory notes, is that depositors who are eligible claimants under the terms of the FSCS are paid out promptly when a bank fails. As I understand it, the Government intend that to be the main thrust of the proposed new insolvency regime. Then there are some other objectives which were listed in the Government’s consultative document earlier this year. The first is that depositors might be deprived of access to their accounts at very short notice if there is no special regime. The second is that no objectives exist around the fast pay-off of depositors. The third is the likely destruction of any residual franchise value. The fourth is the risk of contagion to other banks.

I can see why the Government gave consideration to the creation of a special regime. However, I draw to the Minister’s attention the fact that the majority of correspondents to the January 2008 consultation felt that wholesale changes to current insolvency provisions were not required to ensure rapid payments to eligible FSCS claimants. Several parties suggested that any new procedure should be closer to liquidation than the creation of a new regime. But the Government have proceeded to create this new regime.

To what extent has the Minister consulted with other international bodies responsible for bank supervision in order to try to ensure that the globalisation of banks is reflected by a similarity of treatment? To what extent has he had discussions with the responsible bodies in our European colleague countries, with responsible bodies in the United States and in other countries that are becoming increasingly important in a globalised market? While these provisions for a new regime in the United Kingdom are before us, I should like to know a bit about the Government’s thinking in arriving at this conclusion and putting these proposals before us. In particular, can the Minister tell us about any discussions he has had to try to ensure that our regime does not stand alone, but is carefully co-ordinated and preferably made similar to those of other countries?

Ian Pearson (Labour, Dudley South)

The clause introduces part 2, which sets out a new insolvency procedure for banks, based on existing liquidation provisions. I should like to respond directly to the question posed by the hon. Member for Fareham about the use of the term “insolvency” here. We use it because the draftsman thought that it would be a more natural, modern term in this context than liquidation.

Mark Hoban (Conservative, Fareham)

Why, then, is the draftsman inconsistent later in this part of the Bill? Clauses 86 to 92 are headed “Process of bank liquidation”, which seems a very archaic use of words.

Ian Pearson (Labour, Dudley South)

I suspect that the answer is that insolvency can involve liquidation and administration too. We would need to refer to existing law. In due course the draftsman may put words into my mouth so that I can respond further.

I want to respond the point made by the hon. Member for Gosport about the importance of the existing insolvency law. There has been extensive consultation between the Government and insolvency practitioners in this area. We believe that we have the right sort of balance in terms of ensuring a fast payout procedure, while having a system of law with which insolvency practitioners are already familiar. The fact that there has not been a flood of suggested amendments to the clauses from those outside who follow these matters shows that there is strong consensus in this area.

The Government’s objective is to ensure effective protection for depositors and to minimise the impact of a bank failure, while also providing for the orderly winding up of the affairs of a failed bank in the interests of its creditors generally. I shall set out the thinking behind the clause. In doing so, I hope to provide an overview for future debates on the bank insolvency procedure, which is established in part 2 of the Bill. The procedure will enable prompt FSCS payments to be made to eligible depositors or their accounts to be transferred to another institution. It will also provide for the winding up of the affairs of a failed bank in the interests of creditors as a whole.

The point about allowing depositors fast access to their funds in the event of a bank failure is an important one. As my hon. Friends on the Treasury Committee noted, it is not just the level of FSCS compensation payout that is important—the speed of payout is also vital. The Chairman of the Committee, referring to moves to raise the compensation limit to £50,000, stated:

“It is far more important that banks be able to identify who their insured depositors are, and that the FSCS be able to process compensation claims quickly.”

Making fast payout to depositors is indeed crucial. For depositors of UK banks to have confidence in the system, they need to be sure that the payment will be made quickly, and that they will be able to access their deposits quickly. Measures to enable depositors to access their funds quickly are important for their own sake, but also to build confidence in the banking system as a whole, and for the maintenance of financial stability.

In response to comments by the hon. Member for Gosport, I shall talk briefly about how the new bank insolvency procedure has been developed. An established feature of the UK insolvency system is the existence of special insolvency regimes for industries where failure poses unique challenges—for example, water, energy and rail. Those special regimes are based on provisions of the Insolvency Act 1986. Like those special insolvency regimes, the bank insolvency procedure is a unique process. However, it is based largely on existing provisions in UK insolvency law and practice, particularly relating to the compulsory liquidation of companies. It is worth emphasising the point that, during our consultation process, stakeholders constantly referred to the strength of the existing insolvency regime in the UK, noting its advantages over other insolvency regimes internationally.

The Financial Markets Law Committee put it very well in its response to the April consultation paper:

“The existing corporate insolvency laws in England and Wales...provide for one of the most versatile and effective insolvency regimes in the world. They are often used as a model for jurisdictions improving or developing their laws.”

That is a fairly comprehensive endorsement; other stakeholders made similar points about the insolvency provisions. They were anxious, therefore, that the Government should not make substantial changes. Bearing that in mind, we are confident that our approach is the right one.

The bank insolvency procedure builds on the strength and effectiveness of the UK’s existing insolvency regime, closely following existing insolvency law and practice. It will be familiar to companies and their professional advisers. We have not changed the statutory priority order of creditors. Consistent with existing special insolvency regimes, it is a court-based procedure, which means that it can be commenced only by a court order, and the whole process will be subject to the overall supervision of the court. That will ensure transparency, legitimacy and compliance with the Human Rights Act and provide a forum for dispute resolution. Many other provisions remain substantially the same as existing insolvency law, as we shall note when we come to the relevant clauses.

As with the existing special insolvency regimes, the bank insolvency procedure has some specific features to reflect the unique challenges of winding up a bank, and the Government’s specific objectives of protecting depositors and maintaining financial stability. As I have mentioned, the key difference from normal insolvency is that as well as providing for the winding up of a bank’s affairs, the process will enable prompt FSCS payments to eligible depositors, or else allow for a bulk transfer of their accounts to another institution. To that end, the liquidator of the bank will have specific statutory objectives: to work with the FSCS to enable prompt payouts to eligible depositors or to facilitate the bulk transfer of accounts to another institution; and to wind up the affairs of the failed bank in the interests of creditors as a whole. The authorities and the FSCS will have a key role in the early stages of the proceedings to oversee and work with the bank liquidator to ensure that those objectives can be met.

I have used the word “liquidator”. Let me explain. The word “liquidation” has to be used later in the Bill, because it is the technical, legal term. In the overview clause, we can be looser, more familiar and clearer with the readers, but we have to be precise when it comes to the details of the Bill.

Clause 77 outlines the bank insolvency procedure in broad terms. A bank enters the process by court order, appointing a bank liquidator. The bank liquidator aims to arrange for the bank’s eligible depositors to have their accounts transferred or to receive compensation from the FSCS. To achieve that, the bank liquidator will work with the initial liquidation committee, made up of the authorities and the FSCS. When that is done, the bank liquidator winds up the bank. To carry out those functions, the bank liquidator has the powers and duties of a liquidator in normal insolvency as applied and modified by clauses that we shall discuss subsequently.

I hope that by giving a lengthy introduction to clause 77, I have set out clearly the Government’s thinking and the principles that were applied in framing the subsequent clauses. They have been consulted on to a very large extent and have the broad support of insolvency practitioners.

Peter Viggers (Conservative, Gosport)

While listening to the Minister’s careful explanation of the clause, I wondered whether liquidation insolvency is a one-way street. If a liquidator were to be appointed and found that he was in a position to manage the bank out of its current difficulties, would he have the powers to do so? Would he have the powers of a manager as well as of a liquidator?

Ian Pearson (Labour, Dudley South)

My understanding is that we are talking about a bank insolvency procedure in relation to which decisions have already been taken that the bank has failed to all intents and purposes and is not viable as a business. It is in those circumstances that a court order is made and liquidators are appointed. It has gone past the stage when there is any realistic prospect of life in the body, as I understand it, so the role of the liquidator is to—

Stewart Hosie (Scottish National Party, Dundee East)

In that case, why do we have clause 101, which refers to a liquidator who thinks that administration would achieve a better result? That provision exists in the Bill. The Minister’s answer was clear, but I wonder how it applies to clause 101, which allows administration as a legitimate objective, not just liquidation.

Ian Pearson (Labour, Dudley South)

I am about to stand corrected. My understanding was obviously far from perfect, because I am advised that bank liquidation can end in a number of ways. I suspect that the way I was describing is the most likely, but if rescue is possible, it is certainly possible to convert to administration to assist a rescue. I hope that answers the questions asked by the hon. Member for Gosport.

I hope that by giving a broad introduction to clause 77 and the bank insolvency procedure, I have clearly set out our thinking. I stress that the area has been widely consulted on and there is broad support from the insolvency profession for what we are doing.

Clause 80

Mark Hoban (Conservative, Fareham)

I draw the Minister’s attention to clause 80(4)(a). As I understand it, no de minimis limit applies, so if a bank was unable to pay a sum that was due—say, £10—the insolvency procedure could be triggered, but how does that interact with the threshold conditions? We have established that the stabilisation powers will be operated only if the FSA believes that the threshold conditions have been breached. Presumably, there would have to be a material breach of the threshold condition about adequate resources to trigger some of the Bill’s processes. Is there a gap between that approach to triggering the procedures and the approach in subsection (4)(a), which I suspect is fairly standard, but which suggests that an inability to pay a trivial amount could trigger them?

Ian Pearson (Labour, Dudley South)

I admit that I do not have an answer to that question now. In general, the clause simply sets out the meanings of terms used throughout part 2. I need to seek clarification on the exact interrelationship that the hon. Gentleman is talking about, so if the hon. Gentleman agrees, I shall write to him.

Clause 86

Mark Hoban (Conservative, Fareham)

The clause is important because it sets the two objectives for the liquidator. The first is about the depositors and ensuring that the liquidator works with the FSCS to ensue that

“as soon as is practicable each eligible depositor...has the relevant account transferred to another financial institution, or...receives payment from (or on behalf of) the FSCS.”

The second objective is

“to wind up the affairs of the bank so as to achieve the best result for the bank’s creditors as a whole.”

and subsection (4) makes it crystal clear that

“Objective 1 takes precedence over Objective 2”.

That creates a situation in which the interests of one group of creditors take precedence over the interests of other groups. A depositor preference is being built into this regime. We might find that the liquidator, to fulfil objective 1, incurs additional costs to the detriment of achieving objective 2. That particularly applies to the administration procedure in part 3, but it also applies here. For example, the liquidator might need to keep the branch network open for two or three weeks to enable payments to be made to depositors. Running a branch network is an expensive business—rent has to be paid, staff have to be employed, there are computer costs and so on. Those costs will be not be borne by the depositor group, but by the creditors, who will find that their dividend or distribution on liquidation is lower as a consequence. Will the Minister comment on that?

This is a move away from the traditional way that administration and liquidation work. The creditors would normally rank pari passu, but here there is one subset of creditors—the depositors—who are given preferential treatment over the others, to the detriment of other creditors.

Linked to that is a point that has been raised with me by some lawyers. The Minister was right in his remarks on the previous clause. There has not been a flurry of commentary on part 2 or part 3 of the Bill, but that does not mean that there is total satisfaction. There is great dissatisfaction with it. The credit institutions reorganisation and winding-up directive 2001—I am sure that we are all intimately familiar with it—enables the same legal process and procedures for winding up a credit institution to apply in all the then EU states, but now European economic area states.

The process is a formality. That directive is predicated on treating creditors collectively and applying the same treatment. The Minister referred to the special insolvency regimes for railways, water and electricity. Yes, there are special cases to ensure that there is a transfer of functions, but in those situations all creditors are treated equally, whereas in this situation one group of creditors will have preference.

Concern has been expressed that the action taken by our good friend Iceland was not deemed to be consistent with the directive because it was seen to be of a regulatory nature. The concern expressed to me is that objective 1 could suggest—and there is a stronger argument for this in part 3—that the procedure is not necessarily about insolvency, but is principally a regulatory issue. I would be grateful for the Minister’s confirmation that he believes that the bank insolvency process is entirely consistent with the directive. I hope he can satisfy the Committee on that point.

Ian Pearson (Labour, Dudley South)

The clause gives the bank liquidator specific objectives and he or she will be expected to start working towards the achievement of both objectives as soon as the proceedings commence.

I will briefly explain the background. A bank liquidator’s first objective as specified in the clause is to work with the FSCS in the initial stages of the proceedings. The liquidator has two options: to ensure that the accounts of eligible depositors are transferred to another financial institution, thereby providing those depositors with continuity in banking services, or to work with the FSCS to ensure that those depositors receive prompt compensation payments to enable them to rearrange their financial affairs and meet day-to-day living expenses.

The authorities remain committed to a target of seven days, providing the depositors of a failed bank with at least a proportion of their deposits and the balance within the following few days, though we recognise that this is a challenging target. A bank liquidator’s second objective is to wind up a failed bank through realising its assets and distributing the proceeds to the bank’s creditors.

Although the legislation provides for objective 1 to take precedence over objective 2, as the hon. Member for Fareham suggests, it is very clear from subsection (4) that a bank liquidator is obliged by the clause to start working towards achieving both objectives as soon as he or she takes office.

In our view, only an insolvency practitioner who has sufficient resources available to make sure that both objectives can be successfully achieved would be appointed as a bank liquidator. So, while some staff are working towards achieving objective 1, others will be carrying out functions as they would in a normal liquidation, for example gathering information from directors, identifying and protecting the assets of a failed bank for the benefit of all its creditors, dealing with enquiries from creditors and so on.

Given the size and complexity of UK banks, it is likely that more than one insolvency practitioner, perhaps from different firms where necessary, will be appointed as bank liquidators. That is called a joint appointment and is provided for by the application of section 231 of the Insolvency Act 1986 in clause 90 of the Bill. This is common practice in complex or high profile insolvencies and will ensure that sufficient resources are available to protect depositors, while conducting the proceedings in the best interests of the failed bank’s creditors as a whole.

I appreciate the points raised by the hon. Gentleman. There has been some concern from stakeholders that, because the bank liquidator’s primary objective is to work with the FSCS, this may lead to depositor preference, with other creditors losing out. I will respond to those concerns directly and put it on the record that the bank insolvency procedure does not introduce depositor preference.

The statutory order of priority of creditors remains unchanged. Payment to depositors will be made by the FSCS, not from the assets of the failed bank. The FSCS will continue to rank as an unsecured creditor alongside the claims of other ordinary creditors. It is also important to note that under clause 110, any compensation payments to eligible depositors will be made by the FSCS.

Mark Hoban (Conservative, Fareham)

The Minister has clarified that, but in the context of clause 86(2)(a), as depositors are flipped over into another institution, they will be replaced as creditors by the FSCS.

Ian Pearson (Labour, Dudley South)

Yes, that is my understanding. We are not introducing depositor preference. The difference is that we want to pay out fast to depositors. That is the purpose of the measure, and what the Treasury Committee wanted us to do.

As I have described, the bank liquidator is also obliged to wind up the affairs of the company from day one in the best interests of creditors as a whole. As we can discuss, if necessary, in relation to clause 87, in a normal winding-up, a liquidation committee would not even be formed until a month or two into the proceedings. Given that we are aiming for eligible depositors to be paid within seven days, and that the liquidator will be working on both objectives at once, realistically, in comparison with a normal insolvency, there will be no delay in the start of winding-up in the interests of all creditors.

These objectives and the other provisions in part 2 mean that when a bank fails, the interests of both eligible depositors and other creditors will be protected. The key purpose is to ensure fast pay-out, without disadvantaging other creditors, and certainly without introducing depositor preference. I am happy to clarify that.

Clause 87

Mark Hoban (Conservative, Fareham)

The Minister alluded to the liquidation committee, and it is interesting that in the first instance it will consist of three individuals, one each nominated by the Bank of England, the FSA and the FSCS. Given that from the outset, the liquidator is supposed to work towards achieving both objectives 1 and 2, why are creditors not represented on the committee at that stage, and why is it that only when a full payment resolution has been made, creditors may be represented on the committee?

If the liquidator is working towards both goals, surely a representative of the creditors should be on the committee to represent their interests. The Minister said in response to clause 86 that the FSCS would not stand in the stead of depositors when their money has been paid out. That reinforces the point that the creditors rank second to, and not alongside, other depositors.

Ian Pearson (Labour, Dudley South)

No, they do not. Creditors are excluded only from the initial liquidation committee, because of the need for quick action to ensure that depositors receive their compensation or have their accounts transferred as quickly as possible. The initial liquidation committee will be formed by the Bank of England, the FSA and the FSCS, who will work with the bank’s liquidator to ensure that appropriate arrangements are in place for a transfer of accounts, or to ensure that eligible depositors are paid quickly.

It is right that the FSCS should be part of that initial liquidation committee, because it will be a large creditor. However, when a bulk transfer of accounts has taken place, or payments have been made to eligible depositors—we want that to happen within seven days for at least a proportion of their funds, with the balance following in the subsequent few days—the liquidation will then proceed in much the same way as normal, and creditors will be able to form a liquidation committee if they wish.

In a normal insolvency, a meeting of creditors may decide on formal liquidation, but it would be a month or two before any meeting of creditors is held, so the timing in the Bill should not delay things. We are saying only that creditors other than the FSCS would be excluded from the initial liquidation committee. However, very quickly, once a bulk transfer and the arrangements that I have outlined are made, we would move towards a normal liquidation situation. In those circumstances, creditors would be expected to be part of the liquidation committee.

Peter Bone (Conservative, Wellingborough)

It is very unusual to have a liquidation committee with no creditor representation. I can understand that the Minister does not want that representation initially, but he cannot argue that it is a matter of speed. If there was a formal committee with the Bank of England, the FSA and the FSCS, it could certainly include a creditor. I would have thought that general creditors would be happier to have some representation right at the beginning. I cannot see a problem with that, unless the Government have a principled objection.

Ian Pearson (Labour, Dudley South)

Let us compare this to the process for a normal liquidation. We are talking about an initial fast front-end process and a committee consisting of the FSCS, the Bank of England and the FSA, working with the liquidator to ensure—probably in most circumstances—a quick bulk transfer of accounts or fast payout. After that, the rump of the liquidation would go through the normal process, with creditors involved on the liquidation committee. That is how I envisage the process operating.

Mark Hoban (Conservative, Fareham)

If it is a fast front-end process, does the Minister envisage the initial liquidation committee lasting for only one or two weeks, rather than for several months? After all, we have talked about payments made within seven days and we saw the transfer of deposits from Bradford & Bingley to Abbey Santander literally overnight. Subsection (6)(d) suggests that the FSCS may resign from the liquidation committee. Presumably, if it was still a creditor of a bank and did not choose to resign, it would remain part of the liquidation committee and other creditors could join.

Ian Pearson (Labour, Dudley South)

As I have been trying to explain, we are talking about a two-stage process. I likened it to an initial fast front-end process. Normally, a month or two into the winding-up proceedings, a liquidation committee would be formed at the request of creditors following a meeting of those creditors. The arrangements we are discussing are not the normal way of doing things; we have proposed them to try to speed up the process. That is the purpose of subsections (1) and (2), which provide that following the making of a bank insolvency order, a liquidation committee must be formed made up of representatives from the Bank, the FSA and the FSCS. Those are the appropriate bodies to be included in the initial liquidation proceedings.

Peter Bone (Conservative, Wellingborough)

In a normal situation, the Minister would be correct, but the situation is abnormal. Huge assets are being removed from the enterprise, which desperately affects the remaining creditors. Unless he has a particular objection, I cannot see why there cannot be provision for a creditor to be on that committee, just to represent the interests of all the other creditors. I do not see what harm there is. It can only be of benefit, can it not?

Ian Pearson (Labour, Dudley South)

A key point in response to the hon. Gentleman is that the assets are not being removed from the liquidation. The FSCS pays out when it comes to depositors and will become an ordinary, unsecured creditor as part of the liquidation. Once we have moved from stage one of the process, we move to stage two. Once eligible depositors have been paid by the FSCS, or their accounts have been transferred, the liquidation committee will pass a full payment resolution. Following that, if the creditors elect to continue with a liquidation committee they will take the place of the authorities on that committee, so we move into a normal liquidation phase. Many of the formalities concerning membership and the role of an ordinary liquidation committee are set out in secondary legislation and subsection (7) preserves that position for the bank insolvency procedure.

The clause is important. It provides the authorities with a key role in the early stages of the proceedings. It enables the FSCS to make a fast payout and then to stand in the shoes of depositors by being an ordinary unsecured creditor. Then we move to the second stage of the liquidation, where the creditors would take the place of the authorities on the liquidation committee and events would proceed as with the normal liquidation process with which people are familiar. In our view, that is a sensible measure, which combines procedures that will be familiar to companies and their professional advisers with the short, first phase that we believe is important if we are to achieve the objectives of the bank insolvency procedure—to ensure a fast payout through the FSCS.

Clause 88

Peter Viggers (Conservative, Gosport)

It is quite unusual to read that a meeting is quorate

“only if all the members are present”,

as specified by subsection (2). I realise that under subsection (6) it is possible for the nominating body under clause 87(2) to replace its nominee at any time, but it could be quite inconvenient to call three people together under the same roof at short notice. The point would be completely resolved if being present was interpreted as being present in person or by telephone, which may be the interpretation the law would put on the clause. It is a tiny point, but I should be reassured if the Minister could look into it.

Ian Pearson (Labour, Dudley South)

I confirm that the liquidation we are talking about in this subsection is stage one of the liquidation process, so it is just the liquidation committee: the Bank, the FSA and the FSCS. It is right that all three should be present. I am sure that the Bill has not been written in a way that is completely inflexible. There would be representatives from those organisations, but all three should be present and involved in the decisions that are being taken at the initial stage.

Clause 89

Mark Hoban (Conservative, Fareham)

My assumption regarding the action that the administrator should take in implementing objective 1—prompt payout to customers—is that the order of preference for that action is not as set out in the Bill:

“Objective 1(a)...Objective 1(b)...Objective 1(a) for one specified class of case and Objective 1(b) for another.

It would actually be objective 1(a), then the hybrid of 1(a) and 1(b) and, perhaps as a last resort, objective 1(b), given that 1(a) provides fast payout for all depositors, the second option provides fast payout for some and the third is the default. I assume that is how the liquidation committee would judge the various options.

Peter Viggers (Conservative, Gosport)

Similarly, may I assume that if circumstances were to change quickly and dramatically—as they can in a fast-moving situation—it would be possible for the liquidation committee to change its options and indicate that to the bank liquidator?

Ian Pearson (Labour, Dudley South)

In direct response to the question put by the hon. Member for Fareham, it would probably be wrong to speculate on the detail of future cases. The authorities would want to make a decision based on the available information. They would be working behind the scenes to figure out whether a bulk transfer of accounts was possible in respect of subsection (1)(c). If not, they would obviously resort to objective 1(b). In the clause, we give the authorities all the options, but we have to be clear that bulk transfer of accounts would be the preferred option if someone were willing to take the accounts, and if the expenses of the bank liquidator cost the FSCS less than paying out compensation. However, we need to operate case by case. It would be up to the authorities to make the best decision, based on the information available at the time.

Clause 90

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 158, in clause 90, page 45, line 44, at end insert—

‘Section 135

Provisional appointment

(a) Treat the reference to the presentation of a winding-up petition as a reference to the making of an application for a bank insolvency order.

(b) Subsection (2) applies in relation to England and Wales and Scotland (and subsection (3) does not apply).

(c) Ignore the reference to the official receiver.

(d) Only a person who is qualified to act as an insolvency practitioner and who consents to act may be appointed.

(e) A provisional bank liquidator may not pay dividends to creditors.

(f) The appointment of a provisional bank liquidator lapses on the appointment of a bank liquidator.’.

The amendment provides for the appointment by a court of a provisional bank liquidator, following an application for a bank insolvency order. Clause 82(3) specifies that a bank must be given notice of an application for such an order. That is important, because to ensure compatibility with human rights legislation, it is necessary for the directors of the bank or other parties to put their case to the court against the making of the order. That is a standard approach in insolvency proceedings.

There will thus be a gap between making the application for an insolvency order, and the court hearing that considers whether it should be made. It is crucial to avoid the possibility of a run on the bank or any other scramble for assets during that period. In an ordinary compulsory liquidation, if it is considered that assets may be at risk in the period between the filing of an insolvency application and the making of a winding-up order, the court may appoint a provisional liquidator, without notice if necessary, to protect the interests of creditors. The amendment applies that provision to the bank insolvency procedure.

Being able to appoint a provisional bank liquidator will protect the interests of all creditors. For example, such a liquidator should be able to take steps to shut down operations, preventing any scramble for assets. In practice, the period between the application for a bank insolvency order and the court hearing is likely to be hours only, but the court’s facility to appoint a provisional bank liquidator will be a useful provision if the court needs to adjourn a hearing.

The possibility of appointing a provisional liquidator is consistent with ordinary compulsory liquidation, in which a provisional liquidator can be appointed under section 135 of the Insolvency Act 1986, after a winding-up petition is filed and before the hearing for the making of the winding-up order. Such an appointment is generally sought only when it is more or less certain that the court will make a winding-up order. A provisional liquidator has powers specified by the court, generally to protect or preserve a company’s assets pending the appointment of a liquidator and the making of the winding-up order. Provisional liquidators are common in high-profile and/or complex cases where assets are perceived to be at risk following an application for winding up, such as in situations where it is thought that the directors might attempt to dispose of assets prior to the making of a winding-up order.

Provisional liquidation, therefore, exists to protect the interests of creditors. The Committee should note that the provisional bank liquidator’s powers are limited. For example, modification (e) means that a provisional bank liquidator may not pay dividends to creditors. Neither would the provisional bank liquidator be able to facilitate the payout to depositors under objective 1, as they would have to wait for a recommendation from the liquidation committee on what option under objective 1 to pursue. Any ambiguities about the powers of the provisional liquidation would be clarified by the court when the appointment was made. We believe that the amendment is necessary and will help to ensure that we can continue to protect creditors.

Clause 101

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 159, in clause 101, page 54, line 3, after ‘payments’ insert ‘or have their accounts transferred’.

Under objective 1 of the bank insolvency procedure, which is set out in clause 86(2), the bank liquidator must either work with the FSCS for rapid payout to eligible depositors through the scheme or transfer their accounts to another institution. The amendment is a tidying-up provision reflecting those two strands of objective 1. Under clause 101(5), the bank liquidator can put the bank into normal administration only if appropriate arrangements are in place to deal with depositors still eligible for compensation. The amendment allows those appropriate arrangements for either the payment of eligible depositors or the transfer of their account. It is a simple tidying-up provision.

Clause 107

Mark Hoban (Conservative, Fareham)

I think I understand what subsection (9) is intended to do. It is intended to create a condition whereby the notice can prevent wrongful trading from taking place, but I do not think that it has the most elegant phrasing for that intention and I wonder whether the Minister might revisit that language to make it clearer.

Ian Pearson (Labour, Dudley South)

I will undertake to investigate whether subsection (9) does what it is intended to do and does so in an elegant way. If it can be improved, I will undertake to do so.

Clause 109

Clause 110

Mark Hoban (Conservative, Fareham)

I would like to confirm the purpose of subsection (2)(a), which says that

“money may be raised through the imposition of a levy under Part 15 of the Financial Services and Markets Act in respect of expenditure or possible expenditure under this section”.

Does “expenditure” cover only the funds that have been transferred or other costs that might be incurred as well?

Ian Pearson (Labour, Dudley South)

The clause sets out the role and functions of the FSCS in relation to a bank insolvency. It provides that the FSCS can impose a levy, under its powers in part 15 of FSMA, in order to be able to meet the expenditure under part 2 of the Bill. The word “expenditure” in subsection (2) covers both the areas that the hon. Gentleman asked about. I hope that that clarification is helpful to the Committee.

Clause 111

Mark Hoban (Conservative, Fareham)

This is a slightly odd question, but does the acquirer have to make a payment to recognise the economic value of the accounts being transferred from the failed bank to a new institution? Of course, in accounting terms they would be transferred at their book value, but the acquiring institution will gain economic value from them, because it has picked up a new raft of current or depositor accounts and some may be profitable, even in these straitened times.

Ian Pearson (Labour, Dudley South)

My understanding is that that might be the case but it would be the subject of negotiation and agreement. That has already occurred in previous instances and it is likely to occur again, but it will be dependent upon circumstances.

Mark Hoban (Conservative, Fareham)

Presumably, the profit made from the difference between the book value and the economic value will be used to offset the costs incurred by the FSCS.

Ian Pearson (Labour, Dudley South)

That is my understanding of the situation.

Clause 112

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 160, in clause 112, page 59, line 1, leave out subsection (2) and insert—

‘(2) After subsection (1) insert—

“(1A) Rules may also be made for the purpose of giving effect to Part 2 of the Banking Act 2008 (bank insolvency orders); and rules for that purpose shall be made—

(a) in relation to England and Wales, by the Lord Chancellor with the concurrence of—

(i) the Treasury, and

(ii) in the case of rules that affect court procedure, the Lord Chief Justice, or

(b) in relation to Scotland, by the Treasury.”’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government amendments Nos. 161, 162, 175 and 176.

Ian Pearson (Labour, Dudley South)

The amendments concern the secondary legislation that will set out rules for the bank insolvency procedure, the BIP, and the bank administration procedure, the BAP. Government amendments Nos. 160 to 162 mean that the general BIP rules for England and Wales—those that do not affect court procedure—will be made with the concurrence of the Treasury, rather then the Secretary of State for Business, Enterprise and Regulatory Reform. Rules that affect court procedure will be drawn up with the concurrence of the Lord Chief Justice, as usual. The Treasury, rather than the Secretary of State, will make the rules for Scotland. Government amendments Nos. 175 and 176 make the same provision for the BAP.

We have done this because the Treasury rather than the Secretary of State for BERR takes policy responsibility for banks. The BIP and BAP have been designed with specific objectives, which have been set out by the Treasury. It is right that the Treasury should take responsibility for agreeing the rules to make the procedures function in pursuit of those objectives. It is likely that the rules for the BIP and BAP will draw on existing insolvency rules. Throughout, the Government’s approach has been to ensure that we follow existing insolvency provisions as closely as possible, as I have previously outlined to the hon. Member for Gosport. In considering the rules for the BIP or BAP, the Treasury will draw on the expertise of BERR, the Insolvency Service and others in the practitioner community.

Peter Viggers (Conservative, Gosport)

It is recognised that it will be necessary to have insolvency rules to supplement and change the Insolvency Rules 1986, which themselves are a gloss on the Insolvency Act 1986. This is obviously important. Will the Minister tell us when we can see these new insolvency rules, because a firm and early timetable would be reassuring for practitioners?

Ian Pearson (Labour, Dudley South)

I do not have a specific time scale in mind. My understanding is that we have done a lot of work on these rules and they are almost ready. That should give the hon. Gentleman some reassurance.

Peter Viggers (Conservative, Gosport)

I am much obliged.

Clause 115

Roger Gale (Conservative, North Thanet)

With this it will be convenient to consider Government new clause 19—Evidence.

Ian Pearson (Labour, Dudley South)

New clause 19 is a straightforward amendment to correct an omission in the original drafting. Clause 115 deals with the use in evidence of statements made in the course of insolvency proceedings. It simply extends existing provisions of the Insolvency Act 1986 to the bank insolvency procedure. New clause 19 is a technical Government amendment that simply replicates the provisions of clause 115 for the bank administration procedure.

Clause 117

Peter Viggers (Conservative, Gosport)

The clause gives the Treasury the power to apply the bank insolvency procedure to building societies, with any necessary modifications. This will be achieved by secondary legislation using the affirmative procedure. Clause 118 that follows relates to credit unions. I hesitate to risk your wrath, Mr. Gale, but could the Minister respond in terms of credit unions as well as building societies? What is the Government’s intention with regard to bringing forward secondary legislation by way of affirmative procedure? Do the Government intend a short time frame or does this provision give the Government power to introduce the secondary legislation in due course?

Roger Gale (Conservative, North Thanet)

I think my wrath might be risked on that. Would the Minister like to respond to both?

Ian Pearson (Labour, Dudley South)

Yes, Mr. Gale. In line with our objectives of protecting all depositors and maintaining financial stability, clause 117 gives the Treasury a power to extend the provisions of the BIP to building societies and clause 118 gives it the power, if necessary, to extend it further to credit unions. We consulted widely on this issue and extending the special resolution regime to building societies and credit unions is strongly supported by stakeholders, including the Building Societies Association. The reason why detailed provision for applying the BIP to building societies has not been put on the face of the Bill is that insolvency legislation is complex and building society and credit unions have their own legal features, which differ greatly from those of banks.

We believe that time needs to be taken to ensure that procedures are brought forward that work for building societies and are fit for purpose. The Government will consult on the necessary regulations, which will be laid before the House in due course. The hon. Member for Gosport presses me on when that is likely to be. The best answer I can give is “soon”. That is not a definite response, but we do not intend to delay this matter. We want to continue to ensure protection for depositors, whether they are in banks, building societies or credit unions. The new insolvency procedures for building societies and credit unions will be very similar to the provisions in the BIP. That has been welcomed by stakeholders.

Clause 120

Stewart Hosie (Scottish National Party, Dundee East)

Obviously the clause will give the Secretary of State powers to include Scottish partnerships as institutions that might fail and therefore be required to be covered by the special regime and so on. However, I am sure that he knows, because I am sure that the Accountant in Bankruptcy has already advised the Government, that if a partnership fails it is dealt with by sequestration rather than liquidation. That does not appear to be anywhere in the Bill. Notwithstanding the table of modifications or comments on other pieces of legislation, which was in a previous clause, the clause does not appear to take cognisance of the sequestration rules and law that apply in Scotland in relation to partnerships. So can I have confirmation that that will be changed, or can the Minister simply confirm that this new insolvency procedure will apply with the necessary modifications as per the previous table which describes the bits of legislation and how they will now be interpreted?

Ian Pearson (Labour, Dudley South)

Following a helpful brief conversation that I had with the hon. Gentleman earlier, I have done a limited amount of checking. We are aware of the points that he makes. It is our intention that regulations made under clause 120 will reflect the legal terms and practices that are used in Scotland. We are aware of the situation and will endeavour to ensure that the legislation is fit for purpose.

Clause 122