---

Investment Bank Special Administration Regulations 2011

My Lords, I bring some comfort to the Minister, as he has already had a plethora of questions, which I know he will dutifully answer in his wind-up. I have a few questions of my own but I begin by saying that we welcome these regulations, which bring investment banks within the terms of the special administration or wind-up rules for banks contained in the Banking Act, which otherwise apply only to deposit-taking banks. As my noble friend Lord Myners reminded the House, this goes back to the Banking Act 2009 on which he led for the Government—I was pleased to give him some minimal support at the time and enjoyed that experience—but there was always going to be considerable secondary legislation attendant upon that Act. The regulations are part of that process, and we welcome them and commend them to the House, as the Minister will do in his final speech. I also want to reassure the Minister that I do not think I will go far down the line on which my noble friend Lord Myners managed to stir up the attendant House—the issue of bankers’ bonuses. There will be a time for debates on that and he will know that we are all watching the work of the independent commission on banking and awaiting its outcome. He will also know that the country expects the industry to be responsive to the obvious fact that mistakes were made and calamities visited both on this country and on the wider world economy because of the significance of the banks. In particular, he will know that their return to the bonuses concept affects our nation adversely in circumstances in which so many people are hard pressed for resources. That applies especially to the banks in which the taxpayer has a substantial stake. The Government must respond to this fundamental question: how is it that, when the rest of the country is suffering such privation, people can pay themselves such enormous sums in bonuses and do so on the basis of a taxpayer bailout? However, that is a debate for another day. As I indicated to the Minister, I shall concentrate on one or two detailed questions. I want to ask about Regulation 6(1)(b), under which there can be an application for special administration if that is deemed ““fair””. Fair by whom? Presumably, the decision is made by the Financial Services Authority or the Secretary of State, but who defines what is fair? This seems a very loose term, in what are otherwise tightly drawn regulations, so I ask the Minister to comment on that point. Secondly, an important element in reducing the vulnerability of investment banks is to require them to hold more capital and, especially, to limit their leverage. Can the Minister outline what steps are being taken to implement either of those measures? In what ways is this legislation future-proof? Which agency will be responsible once the FSA is wound up? There is an important element of client protection in these regulations, which my noble friend Lord Myners referred to. Who is actually going to ensure that there is consumer protection? Investment banks deal predominantly in wholesale markets, so it might be thought that the Bank of England was relevant. It is clear, however, that once the FSA goes we need to know who is going to take responsibility regarding consumers in both areas. One of the key problems in winding up an investment bank is that it is not easy to identify client assets. Again, my noble friend Lord Myners identified some of these issues. That was a crucial element in the collapse of Lehman Brothers. There is nothing in the regulations to facilitate the matching of assets and liabilities for the firm as a whole. What steps are the Government taking to remedy this issue? What answers are they going to give on the issue that my noble friend first identified? As my noble friend has introduced the subject of German legislation and the way in which the Germans have responded, is it not also the case that US authorities have taken important steps to facilitate netting by requiring derivative instruments to be traded with central counterparties? What is the position in Britain? We do not know what the UK Government are doing about these matters. The German and US Governments have already acted, and we need to know what our Government intend to do on these matters. A truly effective resolution regime—that is, a special administration or wind-up regime—would embody a requirement that firms develop living wills. Will the Government require investment banks to do this? Have we any proposals on that point? The legislation suggests that at this stage the Government appear to have learnt very little over the past there years. All that they are doing is putting in place the power to wind up investment banks without at the same time making the regulatory changes that would reduce the probability of failure and provide for orderly wind-up. We do not just need a mechanism; we need a process that ensures that the mechanism works speedily and fairly. I suggest to the Minister that these regulations, welcome though they are, are such a partial dimension of the total picture that the House will need reassurance on these wider matters.