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Banking Bill

We move to rather more complicated territory. Amendment 78 adds two new subsections to Clause 47. This is in the difficult area of partial transfers, which is potentially one of the most significant areas of the Bill for the banking community. For today’s Committee, these are probing amendments, but the Minister should be in no doubt that the issues underlying them are of huge significance to the banking community. I know that the Government have been working constructively with the banking industry for some time, but there is unfinished business in this area and I hope that the Minister will at least give an update on the Government’s position following the completion of the consultation on the November White Paper on partial transfers. Indeed, I hope that he will be able to return to this issue generally on Report with a finally agreed solution. If the Government are unable or unwilling to do so, I shall feel obliged to return with an amendment at that stage. My amendment seeks to ensure that the Treasury will not allow partial transfers to alter the effect of arrangements for regulatory capital purposes. The Government made this commitment in paragraph 2.16 of the November consultation paper on the special resolution regime. Industry players have been dismayed that, despite the unequivocal terms of paragraph 2.16, the Government have subsequently made it plain, both in Committee in another place and in the expert liaison group, that they have no intention of enshrining that commitment in primary legislation. My amendment seeks to do two things. First, the first proposed new subsection would require the Treasury to ensure that partial transfers have no effect on contracts that are relevant for regulatory capital purposes. Secondly, the second proposed new subsection tries to ensure that any secondary legislation made under either Clause 47 or Clause 48 would alter contracts that are relevant for regulatory capital purposes. I do not pretend that the wording of the proposed new subsections is perfect, and I have already indicated that I shall not divide the Committee on them today, but I hope that the Minister will look to their underlying purpose and respond in that light. Before getting to the meat of the amendment, I understand that the draft secondary legislation, which is being consulted on, will be made under Clause 48. There is a more general power in Clause 47, but I could find no reference to the purpose to which the Government intend to put it. I have drafted my amendment to cover both Clauses 47 and 48 on a belt-and-braces basis, but it would be helpful if the Minister set out the Government’s intentions behind Clause 47. At the heart of the issues with which the amendment seeks to deal is the Government’s basic approach to partial transfers. The Government wish to include as much as possible in secondary legislation and place as little as possible in the Bill. That, of course, is the customary government position in the name of flexibility. As I understand it, the banking community was initially prepared to go along with the Government’s view on the basis that secondary legislation would cover its concerns, but I now detect a real concern about the likely content of the statutory instrument that is leading to a revived desire to see further changes to the Bill. My amendment seeks to deal with one important aspect, but while regulatory capital is an important issue, the concerns run wider. If there is any uncertainty about how the secondary legislation will affect contracts, it is that it will affect the overall attractiveness of London as a financial centre. It is likely that it would increase the cost of capital for UK banks, which will do nothing for their international competitiveness, and it will drive business out of London markets in favour of other jurisdictions where there is greater certainty. If there is any uncertainty about the legal position, it will be impossible to get clean legal opinions on contracts of set-off and similar contracts. That will certainly mean that they will not be effective for regulatory capital purposes both in the UK and in other countries. As I said, it will also make London an extremely unattractive place in which to do financial business, because, if the counterparties cannot get legal certainty, transactions simply will not happen. The lack of watertight set-off and netting arrangements also affects the non-bank counterparties and could disrupt conventional Treasury cash management techniques. It could also have an impact on what goes into the annual accounts not only of banks but of ordinary commercial businesses. My amendment today is based on regulatory capital on the basis that, if we can solve the issues for regulatory capital, the other problems will also be avoided. However, they may not be. Amendment 80, which is in the name of the noble Lord, Lord Eatwell, and is in this group of amendments, seeks to tackle the problem from a different direction, and I look forward to him speaking to it. There is a very real problem which will emerge as soon as the Bill receives Royal Assent. I understand that some banks are already involved in contingency plans in case the final version of the Bill leaves any doubts about the effectiveness of instruments for regulatory capital purposes. That contingency planning involves massive rewriting of contracts, and possibly things being taken out of the London market. What has concerned the industry is the draft statutory instrument, with its very wide carve-outs. It is difficult for the Committee to debate that draft statutory instrument, because it is not before us, but it underlies the concerns about the use to which Clauses 47 and 48 will be put. That is why I think it necessary to raise those issues. As the Minister will be aware, the industry wants to see set-off, netting and similar transactions left alone by partial transfers and completely unaffected by them. The industry is worried by the prospect of the carve-outs being made by the orders under Clauses 47 and 48. For example, the draft statutory instrument provides that foreign property is not to have protected rights. The BBA believes that the only viable way forward may be to exclude foreign property entirely from partial transfers. There are similar concerns about the carve-outs, such as in respect of deposits, and the issue of securities. All in all, the concerns which have been fed to us about the carve-outs, plus the uncertainty of not seeing the final version of the statutory instrument, have tilted the balance of opinion against carve-outs. People are certainly worried by the prospect of it being left to secondary legislation. The Government have said that some issues might be dealt with in the code of practice, but that would not be regarded as helpful. If such issues went to the heart of legal certainty, the code of practice would have absolutely no impact. We debated that in the context of Amendment 20, moved by the noble Lord, Lord Eatwell, on our first Committee day. A code of practice is not enforceable by anyone and can contribute nothing to legal opinions. Similarly, the no-credit or worse-off regulations to be issued in Clause 60 will not improve the ability to issue clean legal opinions because they fall far short of a government indemnity. These are very difficult issues. I hope the Minister will be able to lay out the Government’s current position. I do not expect this to be resolved today. The consultation has, as I said, passed, so I hope that he can give at least a preliminary response on that basis. The industry remains extremely concerned about the way in which the Government are approaching partial transfers and the impact it will have on financial instruments and the financial services industry in the UK. I beg to move.