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Banking Bill

Some of our earlier discussions, in particular the probing by the noble Lord, Lord Higgins, on objective 5, have been helpful in illuminating the issues raised by the noble Lord, Lord Howard. Amendment 13 proposes that protection of creditors should be a separate SRR objective, while Amendment 16 states that the code should provide further information on how the interests of creditors will be taken into account when operating the SRR. Let me set out why these amendments, laudable as they are, are unnecessary. First, objective 5, already drafted into Clause 4, is important in this respect. The term in objective 5 about the need to "““avoid interfering with property rights in contravention of a Convention right””" refers to the rights of property holders who might be affected by the use of the SRR. That can include the bank or building society itself, its shareholders or creditors or other third parties. Such persons may hold property in the failing bank or building society or have a right of control over such property, or both. The inclusion of this objective acknowledges the importance of acting proportionately when exercising these powers. The primary convention right at issue is Article 1 of Protocol 1 to the convention, the right to property. Other convention rights—including Article 6, the right to fair trial—may also be relevant. Therefore, objective 5 operates to ensure that any interference with the rights of creditors must be in the public interest and proportionate. Secondly, a number of specific features of the SRR operate to protect non-depositor creditors, such as the protection that we propose for set-off and netting arrangements in the case of a partial transfer—a matter which I suspect we will, quite properly, discuss at length in Committee. I also draw noble Lords’ attention to the compensation provisions that we have provided and, in particular, to the possibility of compensation being payable to creditors under a third-party compensation order. As for partial transfers, there is the additional safeguard, reflected in Clause 60, of ensuring that no creditor remaining in the residual bank is left in a position in which they are worse off than in the event of a whole-bank insolvency. We certainly agree that the interests of creditors need to be taken into account when determining whether the SRR should be deployed and in exercising the stabilisation powers. I am therefore very comfortable with the sentiments driving the amendment proposed by the noble Lord, Lord Howard. However, we do not think that it is appropriate to provide expressly for the protection of creditors, unlike the protection of depositors, to be made a separate objective. Creditors—to a much greater extent than retail depositors—can take a number of steps to protect themselves in the event of counterparty failure, including taking security and adopting set-off or netting arrangements. Where creditors stand unsecured, they do so in the knowledge that this is the case and having secured a suitable rate of return on the terms of their liability. None of this is the case with depositors. The Government have been clear that the SRR measures are focused on protecting the depositor class both as an end in itself and because of the important role of depositor protection in maintaining financial stability and confidence in it. The authorities have therefore developed the SRR tools accordingly. A prime example is the new bank insolvency procedure tool which supports fast payout for depositors. A different regime would need to be designed if the protection of creditors, in and of themselves, was a primary objective for the exercise of the SRR powers. Protecting creditors should therefore not be a reason in itself for pursuing the SRR tools. On that basis, I do not agree that the protection of creditors should be elevated to be an objective of the SRR. Amendment 16 is intended to ensure that the code of practice includes text on how the interests of creditors will be taken into account during the exercise of the SRR tools. Again, I do not believe that the amendment is necessary for pretty much the same reasons as I have just set out—namely, that the Bill sets out how the interests of creditors are to be treated and protected. The code of practice provides further information on the interests of creditors by providing further information on objective 5 of the SRR, which concerns avoiding interference with property rights. Given that, I do not believe that there is a need for a separate section in the code on this matter, and therefore I ask the noble Lord, Lord Howard of Rising, to withdraw the amendment.