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Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009

I thank the Minister for introducing the statutory instruments, which were not unexpected given the discussions that took place during the passage of the Banking Act earlier this year. We recognise that these initial statutory instruments dealing with partial transfers needed to be in place for the commencement of the Banking Act and have no problem with the fact that the Treasury has used the procedure laid out in Section 259 to lay the statutory instruments subject to later affirmative approval. While the statutory instruments were published in draft in November, we are aware that there have been debates on the substance of them right up to almost the last minute before they were laid—the Minister referred to that in part. It would have been a miracle had the Treasury’s legal team got the statutory instruments 100 per cent right first time. I shall refer to the specific points that have been made to us later on so that at least they are clearly on the record. From the perspective of the financial services industry, the use of the expert liaison group was regarded as a very constructive and good way of dealing with the detailed concerns about the secondary legislation, even though not all of those concerns have in practice been addressed. I hope that the Treasury will continue to work with the Banking Liaison Panel in a similarly constructive way to resolve any remaining issues. The work of implementing the Bill cannot be regarded as being at an end when these statutory instruments are approved. While it is clear that consultation has worked well for the industry, I should like to raise it from a different perspective: that of Parliament. The Merits of Statutory Instruments Committee of your Lordships' House raised in its eighth report the fact that the documentation for the statutory instruments includes relatively little about the consultation with stakeholders. It noted that it is seeking further information on that from the Treasury. The Minister did not refer to it in his opening remarks. Can he update the Committee on how the Government intend to respond to that request? Processes such as the expert liaison group and the Banking Liaison Panel serve a good purpose of bringing the market experts into the same room as the Treasury, the Bank of England and the Financial Services Authority, which should enhance the quality of the secondary legislation that is developed. However, at the same time, there is a danger that the process of consultation becomes virtually secret. For example, I know that the Treasury had a large number of consultation responses to the November consultation document, to which the Minister referred. Those responses are available on the Treasury website, but the Treasury has given little or no direct public response to the matters raised in them. For example, the documentation accompanying the impact assessment for the partial transfer safeguards order deals with consultation over the whole period since the first proposals were put into the public domain more than a year ago and with the changes over that period. However, that obscures the fact that there were a number of consultation responses to the very specific draft statutory instruments contained in the November proposals. There was no focus on the changes, if any, that were made following the November document. Parliament has to approve these statutory instruments, for which the affirmative procedure is mandated. Parliament may also debate instruments which are made under the negative procedure. The information that is normally available to Parliament is a consultation, the responses to it and the Government’s responses to it. But when there is an inner circle of consultees, such as the expert liaison group, considerably less information is available to Parliament, which is what the Merits Committee was reflecting in its request for further information on consultation. We discussed during the passage of the Banking Bill what degree of transparency should be attached to the processes of the Banking Liaison Panel, and the Government resisted any formal reporting requirements in respect of it such as the release of minutes. While I had some sympathy for that position at the time, when faced with statutory instruments such as those that we are considering today, the process of consultation has become almost invisible to those of us not involved in the detail. Perhaps the Minister could comment on how the processes of consultation could be made more transparent for Parliament when we consider any later instruments under the Banking Act, which I am sure will be intermediated through the Banking Liaison Panel. I also ask the Minister to set out whether and to what extent the Government intend transparency of the workings of the Banking Liaison Panel to be implemented notwithstanding the lack of a formal requirement, as set out in the Banking Act. Moving from process to the substance of the statutory instruments, I have received no specific comments on the Banking Act 2009 (Third Party Compensation Arrangements for partial Property Transfers) Regulations 2009, which the Minister referred to by their nickname of the "no creditor worse off" regulations. It is perhaps unsurprising that we received no comments on this statutory instrument, because our clear legal advice was that the "no creditor worse off" arrangements added nothing to legal certainty. They are nice to have, but not essential to the working of financial markets, so we must simply hope that if they ever have to be used—we hope they do not—the regulations are robust. However, we received briefing from the British Bankers’ Association, the London Investment Banking Association and the International Swaps and Derivatives Association on the restriction of partial property transfers safeguards order. This is what the Minister referred to in his introductory remarks. As I said earlier, I shall set out those concerns for the record. Those who have briefed us believe that they raise significant issues. The first concern is the approach to safeguards for netting arrangements, and whether the definition of "excluded rights" in Article 1 is correct. I am told that there are two issues here. First, the definition of "financial instruments" cross-refers, in effect, to MFID, which will exclude a number of instruments and contracts that are commonly subject to netting arrangements. These include spot and forward foreign exchange contracts, physically settled commodities derivatives, and spot and forward bullion transactions as well as derivatives on newer asset classes such as longevity and mortality. Quite a number of areas appear not to be covered by the current reference. Secondly, the definition of "excluded rights" is in terms of contracts entered into otherwise than in the course of an activity that relates solely to relevant financial instruments. The fear is that many contracts will become excluded rights just because they could include non-relevant financial instruments issues. I am told that this could be a problem, even if all the transactions under a master netting agreement are protected, but used to hedge a non-protected transaction such as a loan. The Minister implied that the Treasury was aware of the technical issues; I am sure that it is fully aware. The Minister said that this would be on the first agenda of the Banking Liaison Panel, and that if any changes were necessary, they would be brought in before the Summer Recess. That is welcome up to a point, but I am also told that, as we speak, legal opinions on existing arrangement are being drawn up. If clean legal opinions cannot be given on existing arrangements, that could cause significant problems for those with material amounts of such contracts. In addition to causing specific difficulties for particular institutions, it could also put a further dent in the attractiveness of the UK and English law as the home for many of these financial instruments. I am sure that the Minister agrees that that would be undesirable given the pre-eminence of our financial services industry. The second issue raised with us concerns the inclusion of small companies, which are protected by the Financial Services Compensation Scheme. The Minister also referred to this. A consequence appears to be that the FSA is saying that it is required by the EU capital requirements directive to treat balances with these customers on a gross basis. This obviously increases the regulated capital required to be held, the cost of capital that banks incur and—other things being equal—would lead to higher costs of borrowing for the small businesses within the retail deposits carve-out. I am sure that the Minister would not regard that as desirable either, especially in today’s economic environment. The Minister will recall that we debated the problem of regulatory capital during the passage of the Bill. The November consultation document, at paragraph 2.16, said in terms that, ""the Government’s clear intention is to protect contracts relevant for regulatory capital purposes from the threat of disruption under a partial transfer"." We urged the Government to place that clear commitment on the face of the Bill, but they declined to do so. We now appear to be facing an issue where regulatory capital will indeed be affected by the threat of a partial transfer. I am told that discussions are continuing with the FSA on this point and I do not know whether the Minister can update the Committee on that, but I understand that even if the regulatory capital issue is resolved, the same issue can also affect clean legal opinions where a group of companies contains one or more small companies, which most groups do. I have a further point to put to the Minister on a more general level about future statutory instruments under the Banking Act. The Treasury was asked by the Merits Committee about the breach of the 21-day rule in relation to statutory instruments made under the 2009 Act and the Banking (Special Provisions) Act 2008. I have no problems with the responses that the Treasury gave in respect of the specifics, but when dealing with the issue of further statutory instruments made under the 2009 Act, the Treasury's memorandum submitted to the Merits Committee said at paragraph 27 that the Treasury's intention is to observe the 21 day rule, ""where this is necessary and appropriate"." That is completely the wrong approach. The Treasury should observe the 21-day rule unless it can establish that it is necessary and appropriate to ignore it. Will the Minister confirm that the Treasury will regard the 21-day rule as of the utmost importance unless it is necessary genuinely to breach it? I conclude with foreign property. The consultation responses to the November consultation have one consistent theme—that foreign property is a problem. I note that the compensation arrangements do not cover the issue of the purported transfer of foreign property which is not effective due to foreign law and the partial property safeguards order singles out ineffective foreign property transfers as not breaching the order. We discussed in Committee the broad area of who bears the risk of ineffective property transfers and I understand that the Government want to leave the risk wholly in the market. I will content myself today with one prediction, which is that foreign property will cause some real problems in respect of partial transfers whether in this country or—perhaps more likely due to regulatory action—in other countries, where the uncertainties regarding foreign property may lead to regulatory capital inefficiencies. I do not know whether those problems will in turn have an effect on our financial services market, but I hope that the Minister will confirm that the Banking Liaison Panel and indeed the Treasury will keep this firmly under review.