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Banking Bill

My Lords, I intend to do that. It is an important point and I will not sit down without addressing myself to it. Perhaps the noble and learned Lord will allow me to come to that point in time as it relates rather more to the other amendments and not to Amendment 54 tabled by the noble Lord, Lord Howard. All of these powers are different in their scope and purpose. As I said, there must be a compelling public interest case for these powers and the House must consider each on its merits. Therefore, the question the House faces today is whether the retrospective power in this Bill is justified in the public interest. We have had the scrutiny which the Constitution Committee suggested was necessary for these issues. In fact, the scrutiny has probably exceeded even the exceptional standards the House normally presents on issues such as this. I believe that the public interest case, with respect to Clause 75, is clear. The absence of retrospective powers could jeopardise the chances of a successful bank resolution, undermining the special resolution objectives which are at the heart of this part of the Bill, including the protection of financial stability, depositors and public funds. The Bill has been produced against a background of considerable difficulty—indeed crisis—within the financial system, with great effects on the wider economy and deleterious effects on our people. Therefore, we should recognise that we are operating within a context where quite significant action needs to be taken. If I had not anticipated this when the noble Lord, Lord Goodlad, supported by my noble and learned friend Lord Morris and the noble and learned Lord, Lord Lyell, spoke, I knew that the Constitution Committee would present its position in a critical way with a heavy onus resting on the Government to justify to the House why a retrospective power of such breadth as that which is contained within Clause 75(3) is required. The committee asked the Government to consider whether the scope of the power could be narrowed and to give examples of where the retrospective aspect of the power might be used. I will start by trying to deal with the issue of examples, but I preface my remarks by the obvious point that we are talking about events that will happen rapidly and in relation to which it is not easy for us to give clear identification of what might happen. It is no use quoting from the past. We are trying to anticipate with this legislation the kind of crisis which could occur in the future and to ensure that there are powers in place for the authorities to be able to cope. The drafting of a transfer order in a fast-burn situation with events moving rapidly may not be perfect. Errors and inaccuracies may creep in. Whether it is appropriate to correct these retrospectively will depend wholly on the facts of the case. If it were the case that the order could not be drafted and action taken rapidly, the very purpose of what the clause seeks to address, in terms of the challenges of a failing bank, could not be achieved. As I said, it is difficult for me to give instances. However, there may be cases where the parties all intended to achieve a particular effect and have proceeded on the basis of that intention, but looking at the instrument may reveal that the text itself is ambiguous or even wrong. In such cases it may be entirely appropriate to correct the drafting with retrospective effect to ensure that the parties who have signed up to the resolution are indeed in the position that they intended to be in when they gave their agreement. Alternatively, there may be provisions of the law that it would be perfectly proper and sensible to modify, but which are overlooked when the transfer takes place because of the speed at which intervention is required and because of the complexity of the field. I shall illustrate how difficult that could be with regard to the provisions that relate to the control of undertakings. There are numerous provisions regarding significant changes to the ownership of companies, including provisions that require the prior consent of the regulator to a change in ownership. A share transfer instrument or order is likely to trigger those provisions. The Government would expect to comply with them in full; that would, of course, be their intention. It is not impossible, however, that in a rapid fast-burn resolution of a bank with a novel structure or one that carries on an unusual range of activities, we might inadvertently overlook such a provision. If we did not have the retrospective power, the directors of the bank, or indeed third parties, could be faced with the prospect that action taken to effect the resolution might lead to them facing a regulatory penalty. Indeed, in some circumstances it could even result in criminal penalties. Some of these regimes could result in contracts not being enforceable or the transfer not being recognised. All this could lead to serious uncertainty about the consequences of the resolution for the parties involved. As we have debated previously, any uncertainty in entering into these developments could seriously jeopardise the prospect of the resolution being successful. I shall give the House another example. There are provisions of regulatory law that apply in different ways depending on the group structure of the regulated entity. Some regulatory law will aggregate the activities of undertakings in the same group. Were the Treasury to take a bank into temporary public ownership as things stand, the bank would find itself in the same ““group””—I use that in inverted commas—as Northern Rock, Bradford & Bingley and RBS. We may find that various provisions of regulatory law apply to it in a different way. We are aware of those issues and aim to comply with them in full or, where appropriate, to seek a waiver from the regulator. However, it is possible that a particular bank might raise different issues that had never been dealt with before and we might miss something. Again, there is a risk of regulatory penalty and unenforceable contracts. Contracts entered into by the bank after temporary public ownership could potentially be laid open to challenge as a result of the breach that had occurred. There is a risk that that could threaten the resolution, and the Treasury’s judgment, based on ongoing contingency planning, is that that risk is a serious one. I appreciate that retrospective provision was not used in the resolution of Northern Rock, Bradford & Bingley or the Icelandic banks, but experience shows that there is a clear public interest in being able to respond swiftly to fast-moving events to achieve the special resolution objectives, including protecting depositors and maintaining financial stability, two of the significant objectives of the Bill that establish the context in which these powers are being sought. Indeed, the authorities need to intervene at even shorter notice than in previous resolutions. The difficulties relating to Northern Rock were very well known but a bank failure can occur out of the blue—for example, where an unforeseeable event destabilises the bank. That might occur where trading losses have been concealed by deception and we would not have the warning—limited though it was—that the bank was in trouble in the way that we had with regard to Northern Rock. Of course the Government do not take that power lightly but the public interest argument for effective resolution of banks is compelling. That would be jeopardised without the retrospective power. I hope that the examples clarify for the House how retrospection might work in practice and that I shed some light on some of the possible consequences if the authorities did not have recourse to that power. The noble Lord, Lord Howard—I am all too conscious of the fact that he has the last word on the amendment—might point out that the examples I provided relate to the needs of the authorities to return to issues that they have not been able to resolve successfully at the first attempt. That may be so, but I would point out that the affairs of a large modern bank can be extraordinarily complex. We have to accept that there is a real chance that the authorities may not be able to resolve the problems immediately and perfectly at the first time of asking. If that means only up to the possibility of making a mistake, the Government are obliged to do so, but I believe that it is better to do that now and prepare for the possibility in the legislation than to proceed on the assumption that the Government on every occasion will get it right first time. I hope therefore that the noble Lord will accept that the Government are prepared to own up to the possibility of fallibility, particularly when dealing at short notice with the affairs of multimillion-pound large and complex financial institutions. I hope that he will also accept that the prudent course of action is to make provision that will enable the Government to confront that reality and to act to resolve it if it proved in exceptional cases to be necessary. If the noble Lord can accept the case that I have put in the face of his spirited articulation of the principles of parliamentary scrutiny to which he has subjected the clause, I hope that he can withdraw his amendments and give us the basis for further discussions between us before Third Reading on outstanding points of detail. I turn to Amendment No. 55, which is in the name of the noble Lord, Lord Goodlad, and which has attracted the support of the other distinguished members of the Committee: the noble and learned Lord, Lord Lyell, and my noble and learned friend Lord Morris. We have considered this proposal to remove the power to make retrospective provision if it is desirable; allowing only that the provision may be made if necessary, which is the burden of the noble Lord’s case. I remind the House that anything done under this power will be in pursuit of the special resolution objectives. In this sense, any use of the power will always be necessary: after all, we are dealing with a crisis situation and crisis provisions operating in a short space of time represented by the special resolution procedure, which is the whole substance of that part of the Bill. However, if the power were limited to what is necessary, it would suggest that a retrospective provision could be made only where it would be impossible to effect a resolution otherwise than by making retrospective changes. The examples I have given of when the retrospective power might be used illustrate why the need to change the law, including retrospectively, may involve the evaluation of competing public interests. Such an evaluation may show that the case for retrospective provision is justified in the public interest. If such provision could be made only where necessary, that would prevent the better outcome for the public interest being pursued, yet that should be the guiding principle of a Government in action in this context. It would also give litigants seeking to undermine the resolution a basis to make points on whether something was necessary as opposed to desirable. Parliament is the principal forum for debating the appropriateness of retrospective provision, not the courts in legal action brought by those who have self interest, not the public interest, as their motivation. I hope that the explanation of the wording satisfies the noble Lord, Lord Goodlad, sufficiently for him not to move his amendment.