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Banking Bill

We have covered the general purposes clause so I shall start by addressing the questions of the noble Baroness, Lady Noakes, and by presenting the Government’s amendments. I thank her for the constructive way in which she has introduced the amendments in her name, and her indication that she intends not to press them to a vote but rather to seek a better explanation and to help shape and influence our thinking as we approach Report. I am confident that we have interests in common and that all parties are committed to seeking the best possible wording. As I have noted, Clause 48 provides a broad definition of the interests to be protected. This is intentional and ensures that the secondary legislation to be made under the power is not restricted by the technical definitions in the clause. Further detailed technical provision will be unsuitable for primary legislation. In short, this ensures that a broad range of interests can be included within the scope of the safeguard power and seeks to ensure that the safeguard power remains sufficiently adaptable to accommodate innovation in the financial markets. The Government have received a number of representations from industry bodies and practitioners in relation to the definitions used in this clause. While I emphasise that Clause 48 is an enabling power, so is not the legislation which provides the actual protection, the Government consider it appropriate to amend the definitions to eliminate any outstanding doubt about the types of interests the clause is designed to protect. In broad terms, the amendments do two things. First, they separate the definition of security interests from title-transfer arrangements. Although the economic effect of the two types of arrangements may be either the same or similar, there are significant legal distinctions between the two. For example, a title-transfer security arrangement involves the outright transfer of ownership of the property in question from one party to another. This is not normally the case with security interests, which typically involve the acquisition by a creditor of a right in property which remains owned by the debtor. As a result, the Government consider it desirable to remove the definition of title-transfer arrangements from the definition of security arrangements and to define it separately. Secondly, the Government’s amendments make clear that the power does not treat set-off and netting as synonymous concepts. Although netting arrangements sometimes use set-off, netting can also be achieved through other methodology legally distinct and separate from set-off. The Government’s intention in bringing forward Clause 48 is not to change the existing legal concepts of security interests, set-off and netting arrangements and title-transfer security arrangements. Rather, the purpose of Clause 48 is to enable protection to be provided for these interests in the context of partial transfers under the special resolution regime, while allowing scope for the enabling power to address changes to these concepts as industry usage continues to develop and innovate. Some may say we have had a bit too much innovation in banking in recent years, but the industry will continue to innovate to meet the needs of its customers and we must be careful that we do not inhibit the benefits that can arise from innovation. I believe our intention is made absolutely clear by the provision of Clause 48 which indicates that these definitions only apply for the purpose of this section. It is hoped, however, that the amendments in my name usefully clarify the intentions of the Government in view of the helpful representations that have been made by interested parties. I hope that the government amendments will be accepted. It is my understanding that opposition Amendments 81 and 95 would have a similar effect to the government amendments tabled in relation to this clause. Indeed, the noble Baroness, Lady Noakes, indicated that that was the case. These amendments would make technical changes to the definitions used in Clause 48. In particular, they relate to the definitions of ““security interests””, ““set-off””, ““netting”” and ““netting arrangements””. While the Government agree with the broad purpose of the amendments, they consider that the amendments tabled in my name offer a more appropriate solution. Noble Lords may find it useful if I explain why the government amendments differ slightly from those proposed by the noble Baroness. In broad terms, the difference is one of level of detail. I start by noting that Clause 48 does not provide the actual safeguard. It is, as I said, an enabling power, providing the Treasury with the power to make appropriate safeguarding secondary legislation. There is a risk that, in seeking greater detail in the clause and in using technical terminology, the opposition amendments may unduly narrow the scope of the enabling power. Perhaps it would help if I gave an example of this. The opposition amendments would introduce terminology relating to the law of England and Wales, and Scotland, into the definition of security interests. The Government, by contrast, think it preferable to describe security interests in the generic terms alluded to in my introductory remarks. This approach ensures that the potential scope of protection of Clause 48 can include English security interests, but also security interests granted under other legal systems. The use of domestic terminology in the amendment may imply—an unintended consequence, I am sure, but one that illustrates my wider point—an intention to exclude foreign law security interests from the security interests that may be protected under Clause 48. The noble Baroness, Lady Noakes, asked about Scottish law. There is, of course, considerable interest in this Bill in Scotland, as elsewhere in the United Kingdom. The benefit of using broad and generic terms in the clause is that that enables the broadest range of interests to be protected, including those under Scottish and, indeed, foreign law regimes. Greater precision can, if necessary, be used in the order made under the clause. We are aware of the issue with Scottish trust law and are considering it further, but we are grateful to the noble Baroness for raising it in debate. We will certainly introduce further amendments if that proves necessary to address the particular requirements of Scottish trust law. In reciprocity to the constructive way in which the noble Baroness has presented these amendments, I would be more than happy to offer a meeting between industry lawyers, including those to whom she referred, Treasury legal advisers and parliamentary counsel to discuss Clause 48, if that were considered helpful. These are highly technical provisions and I think that all noble Lords are agreed that it is important that we get them right. I hope that the noble Baroness accepts this explanation and remains of the view that she need not press Amendments 81 and 95 but can support instead the government amendments brought forward in relation to this clause. The paragraph that Amendment 85 would omit makes it clear that netting arrangements include what is known commercially as ““close-out netting””. This is an important type of netting arrangement. Following a trigger event, a party under a close-out netting arrangement is entitled to close out all outstanding contracts subject to the netting arrangement, calculate a sum—for example, related to profit or loss—in respect of each and then work out a net sum either owed or owing. One of the principal characteristics of close-out netting is that it permits netting in respect of contracts that have not fully run their course—for example, where both parties have not yet finished performing their obligations under the contract and no actual debt is owed or owing at the time of the trigger event. That is why the definition refers to theoretical debts. That form of netting is important. For example, it is used in the master agreements of the International Swaps and Derivatives Association. The omission of that definition would suggest that Clause 48 was not intended to be capable of being used to protect that form of netting. The noble Lord, Lord James, asked a series of complicated questions about a theoretical example. I am aware that what I say at the Dispatch Box can be relied on by the courts as indicating the Government's thinking. It would be unwise for me to seek to address at the Dispatch Box the technical questions that he raised. Instead I offer to address them, if I can, in writing, so that he can have the benefit of that explanation and the words that I used immediately prior to my statement to reach a conclusion on whether he wants to table his amendment again on Report. On that basis, I invite him not to move his amendment.