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Banking Bill (Money)

As the hon. Member for South-West Hertfordshire (Mr. Gauke) rightly notes, these are technical issues, but in many instances they are absolutely crucial for ensuring legal certainty. It is important that the detail is got right, and that is one reason why we have had the extensive consultation that I mentioned earlier. I can certainly assure the hon. Gentleman that the banking liaison panel will monitor the legislation, and we also want to use it in the wider role that I have announced previously. If problems arise, we want to be able to take the widest possible advice about potential solutions. I shall respond briefly to some of the technical points that the hon. Gentleman raised. I am sure that the banking liaison panel will continue to look at any further technical issues that may arise, but the hon. Gentleman asked about conditions precedent. That provision is already in commercial use and could easily be substituted for a termination right. Since the Bill was introduced, the authorities have been concerned that the definitions used in it did not cover the conditions precedent device with absolute certainty. For example, a contract may provide for B to perform an obligation in favour of A, but only when one of a number of specified events has or has not occurred. Typically, those events would be similar to events that would entitle a party to terminate a contractual arrangement—such as non-performance by A of his obligations to B, or matters relating to A's creditworthiness. As a result, the Government consider it essential to leave no doubt that devices such as conditions precedent are caught by the Bill, and have introduced amendments to achieve that. Otherwise, counterparties could seek to opt out of the special resolution regime, and private sector purchasers might be reluctant to accept transfers of banking business, for fear that they would be ineffective. The hon. Gentleman asked how the conditional transfer under amendment 18 would work. Its aim is to prevent counterparties from closing out against the transferee simply as a result of the transfer, while at the same time preserving their termination rights against the residual bank. I emphasise that that does not prevent the counterparty closing out should the transferee breach the obligations that have been assumed. An unfettered right to close out against the transferee or new company carries potential risks for the resolution. The new company could immediately be required to pay crystallised liabilities, and that could create liquidity stress. Moreover, a counterparty that closed out on such a basis would have acquired a better right than it had in the first place, namely the right to close out not against a failing institution but against the more creditworthy bridge bank or private sector purchaser. That is not the same as the termination right for which the counterparty had contracted, and the Government believe that the amendment to clause 34 offers a way of overcoming that concern. Government amendments 14, 18 and 28, among others, concern default events. Amendments 14 and 28 respond to concerns raised by interested stakeholders about the drafting of clauses 22 and 38, and I shall give the House an example of how we have worked. My noble Friend the Financial Services Secretary arranged a meeting between Treasury officials, parliamentary counsel, and the City of London Law Society to resolve these problems. The amendments are the result of the concerns that have been addressed. We have always been clear that the purpose of the clauses is not to prevent termination rights from being exercised when the transferee defaults on the obligations that they assumed. If a party assumes a contract under transfer, and then breaches an obligation under that contract in a way that is unrelated to the transfer, the counterparty should be able to exercise any right to terminate the contract that may arise in consequence. Interested parties thought, for technical reasons, that the drafting did not achieve that outcome, and although we did not agree, we were happy to respond to those concerns by bringing forward amendments that are intended to dispel any doubts that might exist. That is another example of the consensual approach that we have adopted. Finally, I turn to Lords amendment 18, to which the hon. Gentleman referred. It relates to clause 34. The amendment is part of a Government package to respond to the concern that the powers relating to default events would lead to market uncertainty for financial contracts, particularly those with set-off and netting arrangements. I should make it absolutely clear that under the financial collateral arrangements directive, the Government must allow financial collateral agreements to take effect in accordance with their terms, including by respecting terms that commit the counterparty to closing out. As the hon. Gentleman is aware, we are talking about a minority of financial contracts that are not protected under the directive. I do not have the technical expertise to go into the detail of what those contracts are, but I gather that those who understand these matters know what we are talking about. The hon. Gentleman asked how widely we had consulted on some of the issues. The best response that I can give is to say that we have consulted influential legal advisers on our approach. The indication is that they will advise clients that clean legal opinions can be provided. We will publish draft orders on Royal Assent, which hopefully will be received this week, and will make the statutory instruments on commencement next week. It is right that we continue to make progress on those issues. A significant number of technical issues have been addressed in the amendments, but we will of course want to continue to keep them under review. The banking liaison panel is a useful forum that will enable us to do that. Lords amendment 7 agreed to. Lords amendments 8 to 16 agreed to.