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Banking Bill

This group of amendments relates to clauses which enable safeguards to be put in place in respect of partial transfers. It may aid the debate if I first provide a general introduction to what the Government are seeking to achieve in respect of this issue. I welcome the constructive introduction given by the noble Baroness to these amendments and I share her concern that it is important to get this right. I am sure that the representations that the Government have received from the banking industry and others have also been made to Members of the Committee. We are making good progress and I hope to be able to report on that later when setting out a route to reaching a satisfactory end position. I turn first to the issue of consultation, and I shall bring noble Lords up to date on the position. The consultation closed on 9 January. We received only 15 replies, but those in the stakeholder communities most interested in the matter have broadly welcomed the approach to the safeguards that we are establishing. Interest remains around the protection of set-off and netting, in particular the proposed carve-out from the safeguards. However, the Government are listening to concerns and a meeting is to be held with the expert liaison group this week to discuss the consultation responses. I would be happy to come back to noble Lords following that meeting, when we reconsider the Bill on Report. As noble Lords are aware, the Government recognise that partial transfers may be potentially invasive, and they have been working extremely hard to ensure that appropriate safeguards are in place. Responding to interested parties’ concerns, the Government are putting legislative safeguards in place to protect bank creditors and counterparties in a partial transfer. As my noble friend Lord Eatwell said, there are two noble purposes here: to promote the opportunity for partial transfer and to protect the concepts and efficacy of offset and netting arrangements. It is a delicate balance to ensure that the language of the Bill can respect both those objectives. We certainly recognise the importance that market participants attach to 19 Jan 2009 : Column 1451 set-off and netting arrangements, and to security interests. For example, legal certainty about a netting agreement is vital for risk management. Therefore, in responding to stakeholders’ concerns, the Government are consulting on the details of three safeguards. First, Clause 48 provides a safeguard to protect set-off and netting arrangements, on which so many bank counterparties rely. Secondly, to protect security interests, Clause 48 also provides a safeguard so that secured creditors retain recourse to their collateral. Thirdly, Clause 60, to which we will come in due course, provides a safeguard that we will provide compensation for creditors left in the residual bank—and I hope this addresses the point made by the noble Viscount, Lord Eccles—to ensure that they are made no worse off than if the whole bank had entered into insolvency procedure; that is, as if the authorities had not intervened. In addition, the code of practice will set out the types of circumstance in which the authorities would wish to consider a partial transfer. Building on the work done so far, the Government will continue to work with interested parties to develop these safeguards, as well as the other secondary legislation. To this end, the expert liaison group has been established to prepare the secondary legislation for the special resolution regime. The group has already met on various occasions and provided valuable advice on the detailed nature of the safeguards. Last November, having first sought the group’s advice, the Government published draft statutory instruments for key safeguards. The consultation period for that document recently closed, as I have said, and we will be scrutinising those responses and finalising the secondary legislation. The amendments in this group relate to Clause 47, so I shall describe its provisions next. It enables restrictions to be placed on the making of partial transfers through the property transfer powers. The range of ways in which the Treasury may restrict partial transfers is deliberately broad. In addition to setting out restrictions, the power provides for secondary legislation to permit conditions to be imposed before a partial transfer can be undertaken, and it can require partial transfers to include particular provisions. Amendment 78 seeks to require the Treasury to make regulations under Clause 47 to protect contracts and arrangements that are relevant for the purposes of a firm’s regulatory capital. Put simply, the calculation of how much regulatory capital a bank needs to hold is likely to be based, in part, upon the netting and set-off arrangements that it has in place. It is therefore important that those arrangements are protected, as was noted in the November consultation document. As I have already said, the Government are proceeding to scrutinise responses to the safeguards consultation and finalising the relevant secondary legislation. While it is important not to prejudge that exercise, I can say now that the secondary legislation to be made under Clause 48 will provide for substantial protection for set-off and netting arrangements. Such protection will cover the vast majority of contracts and arrangements relevant to regulatory capital purposes, which is important in order to address market concerns. However, the issue of regulatory capital is extremely complex. The Government’s position is that rather than offer a general protection for regulatory capital, the secondary legislation should protect the types of contract that are important for regulatory capital. This approach provides greater certainty to counterparties about what is and is not covered. The Government consider that explicitly stating what kinds of contracts are protected is a more appropriate solution. As I have noted previously, it is also the Government’s view that such provision is best suited to secondary legislation. With these reassurances, I hope that the noble Baroness will feel free to withdraw her amendment. The amendment tabled by my noble friend Lord Eatwell provides that a partial transfer may not undermine any pre-existing and close-out arrangements. Although I hope I have already made this clear, I should reiterate the Government’s position that protecting netting arrangements is extremely important. The noble Baroness, Lady Noakes, is right to emphasise that getting this right is critical to London and the UK remaining an important banking centre. I fully agree with the underlying purpose of my noble friend’s amendment. However, the Government consider that there are significant benefits in partial transfers. These have been demonstrated by a number of recent resolutions, particularly in relation to Bradford & Bingley plc. This is why the Government have proposed a strong set of protections for set-off and netting, but subject to limited tailored exceptions which will ensure that partial transfers can still take place in appropriate cases. The amendment, which provides that all netting and close-out arrangements must be protected without exception, would potentially prevent any partial transfers. But, as I have said, the Government agree with the general principles expressed by my noble friend that protecting set-off and netting arrangements is extremely important and we are putting in place detailed secondary legislation under Clause 48 to do just that. Draft orders have been published for consultation and the Government are currently scrutinising responses. I hope that this will reassure noble Lords. The noble Baroness, Lady Noakes, asked what safeguards the Government will introduce under Clause 47. She is right that the main safeguards will be made under the power in Clause 48. In Clause 47, the Government intend to use the power to provide a clear protection for counterparties which have been transferred to a bridge bank or private sector purchaser so that they have certainty that they will not be transferred back to the residual company. Details of this were provided in the consultation documents at paragraph 5.19 onwards. I hope that my noble friend also will not press his amendment.