---

Banking Bill

Before turning to the amendments, I will take a moment to summarise the purpose of Clause 225 and explain the amendments that have already been made to the original clause in another place. The purpose of Clause 225 is to put the use of public money in the proposed bank resolution or insolvency arrangements, or in the more general provision of financial assistance to banks and their customers, on to a proper footing. The Treasury and other government departments have powers derived from statute or common law to do various things including, for example, to provide guarantees or indemnities, or to make loans. They have only the ability to spend money to make good on these commitments if Parliament provides the money. This is usually done through estimates approved in the annual appropriation Acts. As a matter of law, the annual appropriation Acts can give full statutory cover for expenditure in estimates, but it is a long-established convention that there should always be specific enabling legislation to enable the finance for a new service to be provided from public funds. Clause 225 would provide that statutory cover. However, the original clause only provided for financial assistance to be given to UK authorised institutions, which have permission to accept deposits; in other words, UK deposit takers. It was realised, particularly in the light of the events last year surrounding Icelandic banks, that such a limitation could make it more difficult to protect the interests of UK consumers or safeguard the interests of UK taxpayers when an overseas institution fails. It was also realised that the original clause would not provide cover for assistance to be given to financial institutions, which were not themselves deposit takers—for example, bank holding companies that were not themselves authorised persons. Amendments made in the other place dealt with these issues, and the government amendments I have tabled will address two further issues that have arisen more recently. Amendments 173A and 173E will provide statutory cover for expenditure incurred in connection with schemes run by government departments other than the Treasury. The amendments will provide statutory cover for schemes where the financial assistance being provided will facilitate the activities of the bank or financial institution and provide a benefit to a third party—such as customers of banks or other financial institutions—or to the wider economy. This will provide statutory cover for any expenditure incurred in connection with schemes such as the Homeowners Mortgage Support Scheme, which was announced by the Prime Minister on 3 December, and the Working Capital Scheme announced by my noble friend Lord Mandelson on 14 January. Before turning to Amendment 174, let me say that I appreciate the concern that the scope of the powers to grant financial assistance could be too broad. Moreover, I can see why the noble Baroness, Lady Noakes, thinks there should be an explicit link to objectives such as financial stability or market confidence. However, let me assure your Lordships that the powers to provide financial assistance—though they look broad on the face of the Bill—will always be subject to rigorous tests and safeguards. Any Government would want to subject the giving of financial assistance to the most careful scrutiny for value for money and affordability and it will always be necessary to comply with obligations in Community law, which restrict the giving of state aid. I turn now to the additional safeguards proposed in the noble Baroness’s amendments. I am concerned that Amendment 174, which seeks to link the provision of financial assistance for purposes not connected with the special resolution regime to objectives similar to those of that regime, could prove unduly restrictive in a way that she might not have intended. The amendment would seem to rule out precisely the kind of scheme the Government’s amendments I have just mentioned would allow. For example, we could not operate the Homeowners Mortgage Support Scheme. This scheme will encourage lenders to enable ordinary hard-working households that experience a redundancy or significant loss of income to reduce their monthly payments to a more manageable level, by deferring a proportion of the interest payments on their mortgage for up to two years. I hope the noble Baroness would agree that it is desirable, but I am not sure we could argue that the scheme passed any of the three tests put forward in her amendment. For one thing, homeowners are not, in that capacity, depositors. Equally, we could not run the Working Capital Scheme announced by my noble friend Lord Mandelson. This scheme would tackle the current constraints on bank credit available for lending to ordinary-risk businesses with a turnover of up to £500 million per annum. The noble Baroness’s friends in this House welcomed the scheme. I am also not sure that we could say that the scheme was necessary by reference to the stability of financial systems, the maintenance of public confidence in the stability of banking systems or for the protection of depositors. I am sure that we could develop other examples, but the real point is that it may be difficult to justify an individual scheme against the criteria proposed in the amendment. However, the scheme may be highly desirable when seen against the background of other schemes or initiatives. The whole can be greater than the sum of its parts. Amendment 174 would diminish the flexibility available in devising and implementing schemes. It could constrain our ability to deal with future crises—including crises where the three objectives set out in the amendment were at issue. Amendments 173F and 174AA would introduce a sunset provision into the financial assistance clause. We can debate the merits of sunset provisions in general when we discuss Amendment 208 tabled by the noble Lords, Lord Newby and Lord Oakeshott, so I shall confine my remarks to the implications of these amendments. They would mean that the extended definition of financial assistance, introduced by government Amendment 173E, would last for only two years after Royal Assent. As I have just explained, government Amendments 173A to 173E will put the provision of financial assistance by government departments to bank customers rather than to banks themselves on a proper footing. The effect of the amendments would therefore be that expenditure under schemes covered by the extended definition of financial assistance could not be incurred after two years after Royal Assent. If the schemes are guarantee schemes—and both the Homeowners Mortgage Support Scheme and the Working Capital Schemes are—they might never really get off the ground. Expenditure is not incurred when a guarantee is given but when it is called, so the guarantees on the scheme could only be given for defaults in the two-year period that occurred before February 2011. It would not be long before giving such guarantees would be almost pointless. More generally, I am, of course, delighted that the noble Baroness, Lady Noakes, has such confidence in the Government’s plans for tackling the current crisis that she thinks it will be over in less than two years. We certainly expect our measures to bear some fruit in that time, but it would be wrong to assume that all these measures could be discontinued in a fixed, short period such as two years. As I said, some measures may necessarily require expenditure after two years even if they are closed to new entrants in that time. Others may need to run for longer periods in any case. So fixing a time limit now would simply be an unnecessary hostage to fortune. Government Amendments 174A and 174B address a different issue regarding the provision of financial assistance. As your Lordships will know, the Treasury has arranged to support the UK banking sector. These arrangements include the Credit Guarantee Scheme for new interbank lending introduced in October 2008, and the Asset Protection Scheme and the guarantee scheme for asset-based securities, announced on Monday 19 January. These schemes involve the provision of guarantees or similar financial commitments by the Treasury. Of course we hope that there will be no need to make payments in respect of any of these commitments, but clearly the Treasury must be in a position to settle promptly any liabilities that arise under the schemes. Normally, this would be effected by securing parliamentary approval for an estimate. However, the expenditure might be needed at any time, including during a recess when estimates could not be obtained. Also, it would be very damaging for confidence—and lead to all sorts of unhelpful speculation—if the Treasury were to seek an estimate including estimated amounts of money to cover the expenditure just in case any liabilities arose under these schemes. Amendments 174A and 174B address this issue by proving for direct access to the consolidated fund, without an estimate in cases where the funds are required urgently, and providing for parliamentary reporting with suitable safeguards for commercial confidentiality and for maintaining market confidence. Amendment 174C would have the effect of making adjustments to the definition of ““a financial institution”” subject to the draft affirmative rather than to the negative procedure. I recognise the point that there ought to be parliamentary scrutiny of important changes to the scope of a scheme to provide financial assistance, but I am not convinced that the affirmative procedure would be necessary or appropriate in this case. The power in Clause 227 is to provide clarity and certainty in the difficult cases that may arise at the margins of the definition of ““a financial institution””. It is not intended to be—and indeed could not be—used to make something that was not properly a financial institution into a financial institution for the purposes of Clauses 225 or 226. The power is therefore likely to be needed in cases where genuine doubt has arisen about the status of a particular institution. We may have to move quickly in those cases to dispel that uncertainty. We could not be confident of doing that with the affirmative procedure where debates in Parliament would be required. Of course, Parliament would still be able to call a debate on any order made under this clause to hold the Treasury to account on any change to the definition of ““a financial institution”” that it makes. I hope that the noble Baroness, Lady Noakes, will agree not to move her amendments and I beg to move my amendment.