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

I thank noble Lords for their inputs on this subject. The noble Baroness, Lady Noakes, made the powerful point that the work of Banking Liaison Panel does not cease with the approval of these statutory instruments but is part of a continuing dialogue and role. The innovation and creativity of financial markets will almost certainly mean that we regularly have to revisit this and achieve clarity in our own minds that the existing provisions are appropriate to cope with new instruments as they emerge. The noble Baroness also raised wider issues relating to consultation. I have considerable sympathy with her comments. A good consolation process is a dialogue. It is one in which people who take the trouble to respond are entitled to a considered and reasoned response. There are perhaps some pointers here that we should bear in mind in further consultations. The submissions we receive are posted on the Treasury website, which helps enhance debate and discussion, but it is a somewhat incomplete meal because it does not explain the responses, save in statements made to this House and in the other place during the evolution of legislation and instruments. The noble Baroness raised questions also in connection with process in respect of the publication of the minutes of the Banking Liaison Panel. The Government are not opposed to their publication; indeed, we would be very happy to have them published if that was the wish of the Banking Liaison Panel. The first thing to do is to ensure that the panel is content that that is a way of working which will not inhibit it fulfilling the role that we expect from it. The forerunner, the expert liaison group, was happy with summary minutes being published; I hope that the Banking Liaison Panel may be drawn towards a similar conclusion, but we should leave it to it to establish its own views on that. I have already referred to the issue relating to formal responses to the consultation process. I have added in that respect that I can commit that the published minutes of the BLP should be accompanied by a narrative on the Government’s response to consultation responses. I hope that that will take us a further, significant step forward in achieving an open dialogue and debate. The noble Baroness made another important point about the need to ensure that the Act and these statutory instruments are consistent with promoting the UK as a good place in which to conduct the business of banking. One of the ways that we shall do that is by showing clearly the way in which we arrive at public policy decisions. The Government responded to the Merits Committee’s eighth report and its request for more information on the consultation process. Our response appeared in the Merits Committee’s 10th report and I direct noble Lords to it. I am also inclined to agree with the noble Baroness and the noble Lord, Lord Newby, about the form of words used in respect of the 21-day rule, which we should always endeavour to respect. Rather than say that we shall comply where necessary and appropriate, I would prefer to reverse that and say that we shall comply unless there are circumstances in which we judge that to be unnecessary or inappropriate. In such circumstances, we would explain why we had reached that conclusion. The noble Baroness, Lady Noakes, raised a point in respect of smaller companies. In making the order, the Government needed to strike a balance between ensuring that they can deliver vital continuity of service, about which the noble Baroness was particularly concerned when we debated the Bill, and liquidity for small businesses in the event that their bank fails and suitable protection for the more advanced risk mitigation techniques that may exist between larger firms and their banks. For this reason, the Government believe that a carve-out from the netting protection for all FSCS-eligible depositors, including small companies, is appropriate to allow the authorities effectively to provide continuity of service for those depositors. However, we are aware that certain stakeholders believe that the combination of this carve-out and the FSA’s interpretation of the relevant European rules could lead to firms requiring more regulatory capital. We are investigating this concern and are aware that there will be a meeting between the FSA and the banks on this topic soon. Irrespective of the FSA’s position, I note that how banks meet increased regulatory capital costs is a commercial decision for them. The Government will be watching developments in this area carefully. I have already indicated that the Banking Liaison Panel will review the order now that it has been made. This issue will be picked up as part of that review. The noble Baroness raised a point about foreign property and made a forecast, which we shall watch with interest. Foreign property is not carved out of the safeguard. We think that the likelihood of foreign banks withdrawing from lending to UK banks due to formulation of the safeguard is very small. We have formulated the safeguards to ensure that the UK authorities have the necessary flexibility to make partial transfers of failing banks in the interests of financial stability, reducing risk for the UK taxpayer. The Government take this position for the following reason: foreign property is not carved out of the set-off and netting safeguard. The order simply states that if property that UK authorities attempt to transfer is not transferred due to the failure of a foreign court to recognise the transfer, this failure does not constitute a breach of the order by virtue of not all the relevant property rights or liabilities being transferred. Foreign counterparties are likely to want to be transferred and ought to be able to take action before their local courts to get a transfer recognised. Counterparties could write into their contracts the need for a foreign bank to recognise a transfer under the SRR. A partial transfer under the SRR is almost certainly a reorganisation measure under the Credit Institutions Winding-Up Directive. As such, EEA states are required to recognise the transfer. The noble Baroness asked, too, about the scope of the safeguards order and whether it was wide enough for relevant financial instruments. As I indicated in my opening remarks, we are aware of concerns in this area that some stakeholders hold. It is our understanding that these concerns are primarily related to technical drafting and that there are varied legal interpretations on whether some relevant financial contracts have been excluded. I should note that in drafting we amended the order to address the core concern in relation to relevant financial instruments—the need for the order to cover loans. As I mentioned earlier, as part of the Government’s existing commitment to working in partnership with the industry, the Banking Liaison Panel will review the safeguards order. If changes to the order are desirable, the Government will make such changes before the Summer Recess; we certainly recognise the need to do that as quickly as we can, subject to doing a good piece of work, because we understand that opinions will be developed on the basis of these statutory instruments. The noble Baroness reminded us that when this Act was first discussed, many forecast that the roof would come tumbling in on our heads. A considerable degree of credit for the fact that it has not is due to this Chamber and the debates that took place over a number of days, when we progressively improved the quality of the Bill that had been presented to Parliament. A great deal of credit is also due to the expert liaison group for the work that it has done, which I am sure that the Banking Liaison Panel will continue to do in what I think we all acknowledge is an extraordinarily tricky but very important area for an important part of our financial economy. I hope that these comments go some way to assuaging noble Lords’ concerns. I reiterate that the legislation was formed in close consultation with the industry and it was necessary to make it in time for the commencement of the Act. As I have indicated, it will be subject to further review this summer in close consultation with the industry, under the auspices of the new Banking Liaison Panel. Motion agreed.