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Banking Bill

We now turn to the second debate on investment banks. This concerns three new government clauses which provide for the specifics of the enabling power of the Government to make regulations to change the insolvency regime for investment banks. This power would only be exercised if the Treasury review concludes that a new procedure is needed. The first amendment in this debate introduces the second of four new clauses that will make up the enabling power. This new clause sets out the broad principles that would shape such a modified regime. The Government would be able to modify existing insolvency law in its application to investment banks or establish a new procedure for insolvent investment banks. In line with existing insolvency law, this new regime would apply when an investment bank is either unable or likely to be unable to pay its debts or where its winding-up would be fair. When drafting regulations to change the insolvency regime for investment banks the Treasury must have regard to balancing the following needs and issues: first, identifying, protecting and facilitating the return of client assets; secondly, protecting the rights of creditors; thirdly, ensuring certainty for investment banks, creditors, clients, liquidators and administrators; fourthly, minimising the disruption of business and markets; and, finally, maximising the efficiency and effectiveness of the financial services industry in the UK. Noble Lords will appreciate that this list further confirms that the Government are contemplating regulations that could fundamentally affect the priority of claims in an administration. As a result, any order to bring in regulations that modify the insolvency regime for investment banks will be subject to parliamentary scrutiny. I will come back to that point in a moment. The third new clause provides the detail about what the regulations must provide for and how they will work. It includes provision—if it is decided to establish a new procedure—for the regulations to set up those persons who can initiate the special procedure or who can make an application to the court for the procedure to be initiated by court order. Under current legislation there are different ways for a company to enter liquidation or administration, and this provision ensures that, should it be decided to create a standalone procedure, we can select the most appropriate way for the new procedure. Under the new clause, the regulations may also include provision for new objectives for a new procedure and functions for an insolvency office holder. This would allow, for example, the new regime to give priority to the return of client moneys, if the review so recommended. The regulations may also include provision regarding the conditions that would need to be fulfilled before an investment bank could be put into the new regime or have any special provisions applied. Furthermore, if a new standalone regime is introduced, the regulations may provide for how this new regime would sit with existing insolvency and administration regimes, including bank insolvency and bank administration, in which the investment bank in question also runs a deposit-taking business. Additionally, the regulations may include provision for temporary or permanent moratoriums to be imposed at the onset of the new regime and provision to amend existing enactments for the purposes of the new regime. In addition, the regulations may make specific provision to deal with a number of specific issues, as provided for in subsection (6) of the new clause. The regulations may also confer functions on certain bodies—for example, the court, the Financial Services Authority or the Financial Services Compensation Scheme. Noble Lords will note the wide sweep of this enabling power. I repeat that the Government will know what changes to investment bank insolvency are appropriate only once the review has been completed. Let me further remind noble Lords that Parliament will have the opportunity to scrutinise any new regulations that are made under this power and that any regulations made must have regard to both the protection of client assets and the protection of other creditors’ rights. The fourth and final new clause sets out the detail by which any regulations may be made. The clause will provide that the regulations should be made by statutory instrument and be subject to the affirmative procedure. The Treasury must consult before making any such regulations. On this point, I would remind the House that an expert sub-group of the expert liaison group will also be consulted and will provide guidance to the Government throughout this process. Finally, to provide comfort and certainty to the financial markets, the regulation-making power is subject to a sunset clause so that it lapses after two years, after which time it will have become clear whether it is necessary to proceed with any legislative changes envisaged. I believe that these new clauses are necessary for the Government to provide certainty to the market that they intend to deal with the problems raised by the administration of Lehman Brothers International (Europe).