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Banking Bill (Money)

I am grateful to the Minister for the time that he has taken to set out the amendments in this group. He was right to highlight their importance and the way in which they have emerged. One point that was raised in Committee was the narrow focus of clause 2, which defined a bank as a deposit taker for the purposes of the Bill. That meant that it covered banks such as Barclays and RBS but not Lehman Brothers, which did not take deposits. That exchange in Committee took place just before information emerged from the administration of Lehman Brothers International (Europe) in the UK. That was a complex matter which gave rise to a number of practical and legal issues around areas such as netting off transactions and expenses and separating transactions to Lehman's accounts and those of its clients. It is worth quoting briefly an article that appeared last November about the perception of one group of Lehman's clients of the problems that they encountered with its insolvency. It appeared in the Evening Standard and was based on a letter that the Investment Management Association wrote to the Financial Services Authority. It included comments such as:"““The core problem was that when Lehman folded, institutions that had placed buy and sell orders for cash equities through the firm had no idea where they stood—whether the trades had gone through or not. Institutions needed to know because if they had been trying to buy and the deal had not been completed they would want to put that trade with another broker. Likewise, if they had been trying to sell. But what happened was that all the institutions' Lehman-related equity transaction held within at the Euroclear Crest settlement system were frozen. The system was locked up. They did not know where they were, whether they were in or out of the market—and this at a time of huge volatility. And it went on for nine weeks.””" Interestingly, the letter went on to talk about the lack of a proper contractual framework for some of the transactions, something that was highlighted once the implementation of the markets in financial instruments directive had taken place. Clearly, therefore, various issues emerged from the administration process for Lehman Brothers in the UK with which we need deal. That is why, when the Government announced in the pre-Budget report that the Bill would be amended to introduce new rules to deal with the administration of investment banks, they received support from Conservative Members. However, there was also a recognition that the framing of the rules was not straightforward and, in his remarks, the Minister made very clear the complexity of the issues involved. I want to touch on two issues. The first has to do with the principles underpinning the regulations, and the second with the parliamentary process. One of the challenges arising out of these matters is definitional, especially as the term ““investment banking”” is not found in the Financial Services and Markets Act 2000. So Lords amendment 84 lists the sort of activities that such a business might undertake and uses that as the basis of the new clause. Is the Minister happy that the definition is broad enough as it stands to capture investment banks that are incorporated in the UK? Does he envisage any further changes? The Bill limits the powers to UK-incorporated institutions, and Lehman Brothers International (Europe) was obviously a UK-incorporated business, but there are branches of European economic area banks that operate in the UK and undertake investment banking activity that would fall outside the Bill's terms. Has the Minister had discussions with his EU counterparts on this matter? If the law in Germany or France on the administration of investment banks was not especially satisfactory or clear, the collapse of a German or French investment bank would have an impact on London's international activities. Clearly, some learning from the experiences of Lehman's clients has gone on. Subsection (3) of the new clause that is amendment 85 sets out the ““have regard to”” factors. It is important to set out the framework in which the regulations will be put together, to ensure that they work in the interests of the UK financial services sector, and to make sure that there is certainty for banks, for creditors and clients, and for liquidators and administrators. The issues that the Government will have to tackle when they draw the regulations together will in a way mirror some of the matters that have been debated in the context of set-off and netting. Those matters have been discussed throughout the Bill's passage, and it is worth reiterating the importance of achieving a proper resolution of the issues to do with set-off and netting. In my conversations with regulators and practitioners, it has been made clear that getting this wrong would mean that transactions would be accounted for on a gross rather than a net basis. That would flow into capital requirements and make London less attractive for international businesses, but Lords amendment 86 illustrates some of the challenges that the Government will face. It also makes it clear why there needs to be some proper parliamentary scrutiny of the secondary legislation. For example, subsection (6)(b) of the new clause makes provision for determining which"““assets are to be…treated as client assets””." The use of the phrase ““are to be treated”” as client assets is key, as that is very different from saying that the assets ““are”” client assets. The process will be that someone will have to assume that the assets are client assets, but they may belong to somebody else. A difficult process of identification will be involved. Subsection (6)(f) of the new clause says that the regulations may provide"““for the creation or enforcement of rights…in respect of client assets””." We are talking about the creation of new rights in respect of those assets, and potentially re-writing contracts, so the provisions in the regulations are significant. It will be difficult to introduce them in secondary legislation. That brings me on to my second point, which is about how the regulations are made and reviewed. Significant concern was expressed in the other place about the fact that the powers are to be introduced through secondary, rather than primary, legislation. The bank insolvency procedure and bank administration procedure arrangements in parts 2 and 3 of the Bill are being put in place through primary legislation, and the Insolvency Act 1986 was clearly primary legislation, so there was concern about the extent of the regulations that will have to be made through the regulation-making powers in the Bill. Obviously, we welcome the fact that the regulations will be scrutinised under the affirmative procedure, and the fact that there will be statutory consultation before they are laid before Parliament. It is important that the consultation works and is thorough, because as every Member in the House is aware, there is no power to amend individual items in regulations, under either the affirmative or the negative procedure. The Minister talked about the review that will take place two years after regulations are made. Perhaps my memory is faulty, but I am not sure whether he touched on the sunset clause in subsection (4), which is inserted by Lords amendment 87. The subsection says:"““If the power to make investment bank insolvency regulations has not been exercised””" within two years of Royal Assent, the powers lapse. That gives rise to the question: is it the Government's intention to make regulations under those powers? The Minister indicated that work looking into the matter was under way, but is it the Government's intention at the moment to bring forward powers under that process, or can we assume that the powers will lapse after two years? Furthermore, as the Minister said, a review clause was inserted into Lords amendment 88, which requires a review of the regulations to be completed within two years of the regulations coming into force. There is a double lock there: if the regulation powers are not used, the power to make them lapses, and if the powers are used, there is a review after two years. There was a debate in the other place about whether a sunset clause should apply to the regulations, so that they, too, lapse after two years. There would then be consistency between the two sets of sunset clauses. I understand that it was argued in the Lords that it would be better for primary legislation to be made, and for the normal processes to be used to replace the secondary legislation. I had some sympathy with the view that there should be proper parliamentary process, particularly given that the powers in the regulations are so extensive and can impact on contractual rights. There is a strong argument for enhanced parliamentary scrutiny, and perhaps for applying a sunset clause to any regulations made, as well as to the power to make them. However, on the other hand, there was a strong argument about the need for certainty. One of the themes that has characterised the Opposition's contributions to the Bill, both here and in the other place, is the idea that there should be certainty for industry. The London Investment Banking Association has expressed the concern that if a sunset clause applied to the secondary legislation, it would create uncertainty. However, it supports the sunset clause that applies if no powers are made. Clearly, its position is quite subtle and nuanced. The association's concern is that if the regulations were subject to a sunset clause, there would be a perception that our insolvency procedures were in a period of flux. When people pledged or committed assets, they would not know whether there might be a change to the rules the next day if the rules had expired. I accept the position that we have reached, whereby if the regulation-making powers are not used, they will lapse. If they are used, there will be a review after two years. In reaching that conclusion, I suspect that the Government have erred in favour of certainty rather than parliamentary scrutiny. The test that they will face in introducing secondary legislation is to ensure that there is proper consultation with interested parties. Secondary legislation needs to be robust and command broad support. Inadequate consultation and a failure to listen will lead to poor secondary legislation, which will act as a disincentive to investment banks being based in the UK.