Banking (No. 2) Bill [HL]

That the Bill be read a second time. My Lords, while these are challenging times for financial markets and economies around the world, the Bill before the House today is a timely package of reforms to improve the UK’s system for ensuring financial stability and protecting depositors. I am very grateful for the indications of cross-party support for the Bill. Before turning to the substance—the context and content—of the Bill, it is worth saying a few words about the use of the No. 2 Bill procedure. On 26 November, my noble friend the Government Chief Whip set out to the House how we intended to proceed with the Banking Bill in the current Session, with the support and agreement of the usual channels. The No. 2 Bill before the House today is identical in every respect to the Banking Bill that is expected to arrive from the other place; the procedure allows us an additional fortnight to consider the Bill, which I am sure noble Lords will agree is entirely to the benefit of the House. As noble Lords will be aware, the key provisions of the Banking (Special Provisions) Act 2008—that is, the emergency legislation used to deal with banks such as Northern Rock and Bradford & Bingley—will expire on 20 February 2009. Therefore, it is necessary for the Banking Bill, the long-term permanent replacement for the special provisions Act, to be passed and in place in time by that deadline. To take as much time as possible to prepare and consult on this legislation in advance of its introduction into Parliament, something which the Government have been pressed to do by stakeholders on all sides of the debate, the Banking Bill has been through three formal rounds of consultation, including over the Summer Recess, to which many hundreds of detailed responses have been received. The Banking Bill was then introduced in the other place in early October, as soon as possible after the Summer Recess, and was carried over to the current Session. The Banking Bill is expected to complete its passage in the other place and be received by this House tomorrow. It is then expected that Second Reading of the Banking Bill will be taken formally as first business on Thursday. At this point the No. 2 Bill will be dropped and all further consideration in this House will be on the Bill brought from the Commons. By agreeing to this procedure, and enabling this Second Reading debate to go ahead today, noble Lords have ensured that the Bill can begin Committee stage when we return from the Christmas break. I am, as I said at the outset, very grateful to the Members opposite for their commitment to work with us to secure the passage of the Bill while enabling it to receive the fullest scrutiny possible, as is appropriate for such important legislation. I am very hopeful that we will continue to work together in this vein as it progresses through this House. I turn now to the context in which the Bill is being considered. As noble Lords will be aware, events in financial markets over the past year or so have posed significant challenges for business, authorities and economies across the world. Over the past 18 months the Government have been working, together with the Bank of England and the Financial Services Authority, to tackle these issues in the UK and at an international level. The Government have stepped in on several occasions to protect the stability of the UK’s financial system—in the case of Northern Rock and Bradford & Bingley—using powers provided by the Banking (Special Provisions) Act. But that legislation was only ever designed to be temporary. The need for proper, permanent arrangements to ensure financial stability and protection for depositors in the UK is clear. Today's Bill is a central part of the Government’s package to strengthen the UK’s framework in this area. The decisive and comprehensive action that we have taken to improve the capitalisation and liquidity of UK banks is another fundamental element of the package. The Bill is the result of an extensive process of consultation, including three consultation documents issued jointly by the tripartite authorities. We have consulted with key industry participants and experts, and of course, we have had vital input from the Treasury Select Committee. The Government have also established an expert liaison group, placed on a statutory footing by Clause 10, which will help the Government to shape secondary legislation under the Bill, in particular the crucial area of partial transfer safeguards, on which we have recently consulted. The Bill also represents the Government’s considered response to some of the key lessons learnt during this period of financial turbulence. It provides a permanent addition to the UK framework for financial stability and depositor protection. These arrangements will provide the UK authorities with a refined and proportionate set of tools to deal with difficulties in the banking sector, which can affect depositors and the wider economy. It is vital to get these proposals right to ensure that the UK’s framework is sufficiently robust to deal with future, as well as current, challenges. The Bill provides the right framework and range of powers to ensure this. The Bill includes elements designed to: first, implement a special resolution regime to enable the authorities to deal effectively with a failed bank and reduce its impact on depositors, taxpayers and the wider economy; secondly, enhance consumer confidence and strengthen consumer protection; thirdly, strengthen the authorities’ institutional arrangements, primarily through enhancing the Bank of England’s role in financial stability; and, finally, implement measures to reduce the likelihood of individual bank failure. I turn to the detail of the legislation and speak first to Parts 1 to 3. The Government are introducing a special resolution regime, or SRR. This SRR will replace the temporary powers taken in the Banking (Special Provisions) Act passed earlier this year. In most situations in which a bank gets into difficulties, these can be resolved through normal regulatory interventions or voluntary action. However, as we have seen recently, bank failures will sometimes occur and they can damage confidence, disrupt financial markets, harm depositors and generate significant costs to businesses and the economy as a whole. The objectives of the SRR include protecting and enhancing financial stability and confidence in the banking system, protecting depositors and protecting public funds. The SRR provides the authorities with a wide range of tools to meet these objectives. These include the transfer of a bank or its business to a private sector purchaser, the transfer of the bank’s business to a bridge bank or, as a last resort, taking a bank into temporary public ownership. Further, a new bank administration procedure is put in place to support partial transfers of a bank’s business. The Bill also creates a new insolvency process for banks, the bank insolvency procedure, that can be used, where appropriate, to enable prompt financial services compensation system payments to eligible depositors and also provide for the winding up of a bank’s affairs. We have set out clear roles for each institution in the SRR, appropriate to their expertise and responsibilities. The FSA will place a firm into the SRR when it considers that the bank is failing or will fail threshold conditions, which relate, among other things, to capital and liquidity requirements. The FSA will also have responsibility for continuing to supervise firms and for implementing any necessary regulatory actions. The Bank of England will be the lead authority in the SRR and responsible for administering the regime. This complements and builds on its existing role with regard to financial stability. The role of the Treasury will centre on the protection of public finances and overall public interest, as well as ensuring compliance with international obligations. The Treasury will also be responsible for the temporary public ownership tool. I understand that this division of responsibilities has been supported by stakeholders. The Bill will also establish compensation mechanisms to provide for the assessment of any compensation to be paid to those whose property rights have been removed or interfered with. If noble Lords will allow me, I should mention, at this point, the two additions to the Bill that my right honourable friend the Chancellor of the Exchequer signalled in his recent Pre-Budget Report. These additions will increase the legislation’s effectiveness in allowing the authorities to deal with risks to financial stability and to safeguard London’s competitiveness as a global financial centre. They will extend the Treasury’s powers under the special resolution regime to allow it to take bank holding companies into temporary public ownership in cases where the resolution of only the deposit taker within a banking group would not by itself be sufficient to prevent a serious risk to financial stability, public funds, or both. The second addition is in response to the experience of the administration of the failed US investment bank, Lehman Brothers’ UK subsidiary, Lehman Brothers International. The Government propose to take a power in the Banking Bill to introduce, by secondary legislation, and after a formal review, a new special insolvency procedure for investment firms that hold client assets or client money. The Expert Liaison Group, established by my honourable friend the Economic Secretary to the Treasury, will help the Government in this area. I intend to lay these amendments for discussion in Committee and look forward to debating them in far greater detail with noble Lords at that time. I turn to Parts 4 and 6. The Bill also contains measures to help to restore consumer confidence and strengthen consumer protection. It will ensure that, in the case of a bank failure where eligible depositors need to be compensated or their accounts need to be transferred, the Financial Services Compensation Scheme can always have access to sufficient liquidity to make timely payments by enabling the National Loans Fund to make loans to the scheme. The Bill allows for the introduction of pre-funding. I reiterate, as both my right honourable friend the Chancellor and my honourable friend the Economic Secretary made clear in the other place, that the Government recognise that this is not the right time to introduce pre-funding. However, we believe that it is important to take a power to provide the option of introducing pre-funding in the future if the circumstances make it appropriate to so do. Of course, there would be full consultation before the regulations were laid and they would be subject to full debate under the affirmative procedure. Complementing these measures, as part of the new bank insolvency procedure, there will be a statutory objective for a bank liquidator to work with the FSCS to ensure a fast payout to eligible depositors or to arrange the transfer of their accounts to another institution. Part 4 also includes the power to require the scheme, and therefore its levy-payers in the financial services industry, to contribute to the costs of a special resolution regime. This contribution will be capped at the amount the scheme would otherwise have had to pay in compensation to depositors if the bank had been wound up. There are also some small improvements to the legal framework for the scheme in the Financial Services and Markets Act 2000. As noble Lords will be aware, these improvements to the funding base and legal framework of the Financial Services Compensation Scheme are complemented by the changes that the FSA has already made, in line with its existing statutory authority under the Financial Services and Markets Act 2000, to increase the maximum level of protection offered by the compensation scheme to £50,000. In addition to improvements to general protection arrangements, we will also ensure that holders of Scottish and Northern Ireland notes are afforded a similar level of protection to that enjoyed by holders of Bank of England notes. We have worked closely with issuing banks and other stakeholders in Scotland and Northern Ireland to ensure that these provisions are fully supported, and I am pleased to say that they are. We are taking action to strengthen the authorities’ institutional arrangements, primarily through enhancing the Bank of England’s role in financial stability. The Bank will have a new statutory objective for financial stability and the range of tools available to it in its pursuit of that objective will be extended and enhanced. It will take a leading role in the execution and implementation of the special resolution regime and in the oversight of the inter-bank payment system. The Bill also provides for improved governance arrangements to support the Bank in the execution of its role. Finally, turning to Part 7, it is fundamental that we take action to reduce the likelihood of individual bank failure. The FSA already has extensive supervisory and regulatory powers under the Financial Services and Markets Act, and is taking forward a comprehensive supervisory enhancement programme. But there are further steps that we can take: we are legislating to make changes to allow the authorities to take action more effectively to prevent banks getting into difficulty. These measures include new information-gathering powers for the FSA and improvements to the flow of information between the tripartite authorities. The Bill also allows for short-term non-disclosure of emergency lending by central banks, which will help to ensure that such support can help the bank pull itself out of trouble without compromising confidence. Before the House is a comprehensive and serious piece of legislation; it is a key element in the Government’s enhancements to the UK framework for financial stability and depositor protection. But the Bill is only part of the story, and it may be useful to spell out other actions which the Government, the Bank of England and the FSA have taken or are taking to complement its provisions. As noble Lords will be aware, the Government have taken decisive action to recapitalise and strengthen the UK’s banking sector and provide support to institutions facing difficulties. The Bank of England has taken action to improve the liquidity position of the banking sector through its special liquidity scheme. The credit guarantee scheme was launched on 13 October as part of a comprehensive package of measures to address the extreme stress in financial markets and to prevent the collapse of the banking sector. The Government expect that by the end of 2008 approximately £100 billion of guarantees will have been made to participating institutions. The Government have conducted a review of how these arrangements have worked in practice. The outcome, as announced yesterday, is a set of proposals to change how the fee for use of the scheme is calculated, the length of the scheme and the currencies in which guaranteed debt may be issued. The overall effect of these changes will be to enhance the effectiveness of the scheme in supporting stability in the financial sector and maximise its impact on wider economic stability through supporting lending to the economy. In addition, the FSA is taking further action to promote financial stability and protect depositors under the powers granted to it by the Financial Services and Markets Act. The chairman of the FSA, the noble Lord, Lord Turner, is conducting a comprehensive review of the UK’s system of regulation, and the FSA is now implementing a supervisory enhancement programme to improve the supervision of regulated firms. The Government are also working with banks to ensure that households and businesses have access to the financial services and advice they need. Indeed, as announced in the Pre-Budget Report, we are bringing together a new lending panel of trade bodies, regulators, industry and consumer groups to monitor lending both to businesses and households. As I have already mentioned, there has been a significant improvement to depositor protection, with the FSA’s increase to £50,000 of FSCS protection to depositors. The problems affecting financial markets in the UK at the moment are common to markets around the world. These measures, and the provisions of the Bill, should be considered in the context of the steps which the UK is also taking in conjunction with our international partners to secure a constructive global response to current global challenges. The UK, as the next president of the G20, is working actively to pursue the steps agreed at the recent Washington summit, including work around transparency, capital requirements and other issues. We also continue to work with our European partners to ensure that appropriate steps are taken across the European Union and the European Economic Area to strengthen financial stability. The Banking Bill provides a set of measures to enhance the UK’s framework for financial stability now and for the long-term. The Bill presents a comprehensive and proportionate legislative response to recent events which will stand the test of time. It is important to get this legislation right. I look forward to our deliberations over the coming weeks. I am determined that this House is able effectively to scrutinise and debate the Bill’s provisions while we work to gain Royal Assent in a timely manner. This is an important piece of legislation that will enhance the ability of the authorities to secure the financial stability of the UK both now and in the future. I commend it to the House.