Bradford & Bingley plc Transfer of Securities and Property etc. Order 2008

My Lords, I am grateful to the noble Viscount, Lord Eccles, for initiating today’s debate—a debate which he described in his introductory comments as timely—on the Bradford & Bingley order. I am also grateful to the Merits of Statutory Instruments Committee for its important work on the instrument. The noble Viscount, Lord Eccles, brings to his observations a distinguished record of achievement in industry, investment and corporate regulation. I was also pleased that the noble Lord, Lord James, with his experience in this area, has been able to participate in the House’s discussion. Before I respond to the points raised in the debate, it may be helpful if I set out the record of how we got to this point. Following extraordinary turbulence in global financial markets, Bradford & Bingley found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution. The noble Viscount asked what we meant by ““the business plan not working””. We simply mean that the business plan which hitherto had worked was no longer working because of a serious loss of confidence in the institution on the part of those placing deposits with it. On Saturday, 27 September, the Financial Services Authority determined that Bradford & Bingley no longer met its threshold conditions for operating as a deposit taker under the Financial Services and Markets Act 2000 and the FSA’s own rules. At that point, the Government, on the advice of the FSA and the Bank of England, in accordance with established tripartite practice, acted immediately to maintain financial stability and protect depositors while minimising the exposure of taxpayers. Officials worked over that weekend to bring about a part-public, part-private solution which best met those objectives. The tripartite authorities had explored a range of private-sector solutions before taking action. I hope that the noble Viscount will realise that it is extraordinarily difficult to put into the public domain issues of high confidence in discussion with other banking institutions. Quite frankly, to have detailed with any precision those discussions, while it may have satisfied our curiosity and wish to better understand the circumstances here, would, in the judgment of the Government, have severely impeded the opportunity to have similar discussions should they be required at some further time in the future. The Government concluded that a transfer order under the Banking (Special Provisions) Act 2008 best delivered the Government’s objectives of maintaining financial stability, protecting consumers and protecting the taxpayer. This action taken in relation to Bradford & Bingley demonstrated that the Government stood by, and continue to stand by and ready, to do whatever is necessary to maintain the stability of the UK financial system, and confidence in that system. The noble Viscount quoted my right honourable friend the Chancellor of the Exchequer as setting a high test for the exercise of such orders. I assure him and other noble Lords that in our judgment the circumstances here were such that a failure to take action to protect the interests of the depositors of Bradford & Bingley and to reassure people that they could have confidence in the British banking system would have had adverse consequences had we not taken that action. The fact that there were no queues outside Bradford & Bingley does not mean that this was not a serious situation. The fact that there were no queues is largely a consequence of the decisive action taken by the tripartite authorities. That is how Bradford & Bingley got to this point. I thank the noble Viscount for his erudite summary of the finances of that institution, in particular his important observation that this organisation had, with the benefit of hindsight, become overly dependent on wholesale deposits. Since 1851, Bradford & Bingley had largely funded itself from its own retail deposits, but it changed its whole culture and business ethos as a consequence of or immediately after demutualisation. In so doing, it significantly increased its riskiness. As noble Lords are aware, the flexibility in the Banking (Special Provisions) Act allowed for an immediate transfer of Bradford & Bingley into public ownership and for the onward transfer of the retail deposit business to Abbey National. That was crucial for maintaining financial stability and ensuring that customers retained access to their accounts. The noble Viscount described that as ““draconian””. I would beg to suggest that most of Bradford & Bingley's depositors were delighted that that action was taken in order to ensure that their interests were well protected and, in so doing, others could see that the interests of depositors with British institutions would be similarly protected in similar circumstances should that be required. This is the second order under the Banking (Special Provisions) Act since it was passed by Parliament in February this year. As noble Lords will remember, the Government used an order under the Act in February to transfer Northern Rock into temporary public ownership. Unlike that order, the Bradford & Bingley transfer order which we are debating today exercises the power to make a further transfer following a transfer of a bank to the public sector. Let me summarise for noble Lords some of the key components of the transfer order. First, the order transferred Bradford & Bingley into public ownership through the transfer to HM Treasury of the company’s shares. Secondly, the order was used to transfer Bradford & Bingley’s UK and retail deposit business, its branch network and its shares in its Isle of Man subsidiary to Abbey National plc. The liabilities were backed by a contribution from the Financial Services Compensation Scheme and the Treasury. The balance of Bradford & Bingley’s business remains in public ownership. That includes its mortgage book, personal loan book and headquarters. The decision to make the second transfer of the retail deposit business was based on the need to protect depositors in the then prevailing market conditions of a wholly private sector solution. As I explained to noble Lords, the authorities explored possibilities for a private sector solution. The Government concluded that Bradford & Bingley was not sustainable to be run on a stand-alone basis in a circumstance where it had lost the confidence of depositors. Through the two transfers under this order, a stable resolution for the whole of the bank was achieved. It has been effective in enabling the Government to protect depositors and maintain financial stability. The transfer of the retail deposit business to Abbey National, a stable institution, was achieved without any disruption to customer service and maintained financial stability. The Banking (Special Provisions) Act 2008 also provides for a compensation order to be made. The Treasury will define a scheme for determining the amount of any compensation payable to the former shareholders and others who may have been affected by the transfer of shares into public ownership. To this end, the Treasury will lay a compensation order within three months of the transfer order, as defined in the Banking (Special Provisions) Act. I draw noble Lords’ attention to issues surrounding the Financial Services Compensation Scheme and the triggering of payments. Following the FSA’s determination that Bradford & Bingley was unable, or likely to be unable, to satisfy claims against it, the Financial Services Compensation Scheme was triggered. Therefore, under the transfer order, the FSCS paid out approximately £14 billion to enable retail deposits held in Bradford & Bingley and covered by the FSCS to be transferred to Abbey. The Treasury made a payment to Abbey for those retail deposit amounts not covered by the FSCS, amounting to approximately £4 billion. That was the top-up over and above the maximum amount guaranteed by the FSCS. These amounts should be repaid by Bradford & Bingley from the realisation of the assets of the remaining business. The company will pay down its liabilities to FSCS and HMT as it is wound down over time; that is to say, as assets are sold and mortgages are repaid by Bradford & Bingley’s customers. I draw noble Lords’ attention to the new Banking Bill and how it will affect similar situations, should they ever arise in the future.