Banking (No. 2) Bill [HL]

My Lords, I thank the Minister for introducing the Bill and for clearly explaining its contents. However, the highlight of the day will be the maiden speech of the noble Lord, Lord Smith of Kelvin, who is a welcome addition to the select band of chartered accountants in your Lordships' House. I am sure that his experience will contribute greatly to the quality of our scrutiny of the Bill. As the Minister explained, the Banking (Special Provisions) Act 2008, which was rushed through Parliament last February to allow the Government to nationalise Northern Rock, will expire in the middle of February. I confirm that the Official Opposition have agreed that in these difficult times it would be undesirable for the Government to be without legislative cover in case there are further crises in the banking world. Hence, we are co-operating with the Government to ensure that the Bill that will arrive from another place later this week becomes law before the 2008 Act runs out. To that end, my noble friend George Osborne has signalled that we shall not challenge the Government in the Division Lobbies of your Lordships' House on an important aspect of the Bill on which we and the Treasury Select Committee in another place disagree with them: whether the Bank of England, rather than the Financial Services Authority, should hold the power to initiate the stabilisation regime in Part 1. Our approach on co-operation during the passage of the Bill and our forbearance on the issue that I have just mentioned in no way signal that we shall not subject the Bill to our customary scrutiny. There are many issues on which we and, more importantly, the financial services industry, which will be affected by the Bill, have concerns. We shall be pressing those concerns with some vigour and, if necessary, we shall seek the opinion of the House. We recognise that the Government have made some constructive changes during the Bill’s passage in another place, notably the statutory recognition of the banking liaison panel, the modification of the Henry VIII powers in Clause 75 and on draft secondary legislation and the draft code of practice. However, we think that there is still some way for the Bill to travel. I hope that the Minister will be prepared to listen to the concerns expressed on the Bill. It might seem attractive to him to exploit the political goodwill that we bring to the Bill in allowing its speedy passage on to the statute book, but I hope that he will not be tempted to ignore reasoned and reasonable opposition. We have not taken a total vow of abstinence from dividing the House. There is one recent lesson from the United States that we should keep in mind when scrutinising the Bill. In the wake of the Enron scandal, the US passed, at great speed, the well meaning Sarbanes-Oxley legislation. It has imposed significant costs and has driven international companies away from US capital markets. I do not want us to look back on the passing of the Banking Act 2009 and find that it has become our Sarbanes-Oxley. Our financial services sector is an important part of the UK economy and London has, until very recently, been seen as the best place to do business and has attracted global capital and global players. However, London developed in part because of the weaknesses of other capital markets, and we should always remember that other financial centres would relish the opportunity that might be presented if we get the Bill wrong. If we cast our minds back to last year when the Northern Rock crisis first emerged, a number of things were not right. The tripartite arrangements were not robust, the FSA had fallen down on its prudential regulation responsibilities and the Bank of England claimed that its hands were tied in various ways. The Government have attempted to deal with some of those issues in the Bill, but there are some gaps. One area that we will examine in Committee is whether the regulatory objectives for the FSA, as set out in the Financial Services and Markets Act 2000, are well formulated. For example, there is no mention of prudential regulation. The first objective is to maintain confidence in the financial system. That was certainly not achieved in 2007, but the objective itself is flawed. It is not framed in terms of creating or maintaining a financial system in which confidence can be placed. The FSA’s job appears to require it to create confidence in the financial system whatever its quality, and that cannot be right. In 1997, the Government removed a crucial role from the Bank of England in relation to overall debt levels. It has not been restored in the Bill, and we want the Bank to have a duty to monitor debt levels and to write to the FSA if it believes they are too high. The FSA should then modify its approach to supervision and regulatory capital. Let me now turn to the detail of the Bill. We support the broad outline of the special resolution regime as set out in Parts 1, 2 and 3 although, as I have already mentioned, our preference is for the Bank of England to be in the driving seat rather than the FSA. We have other important reservations about this part. The Minister will be aware that the banking industry is at one in its concerns about the partial transfer provisions of the Bill in relation to set-off and netting arrangements, which are an integral part of the way in which financial institutions do business with each other and with other counterparties. The definitions in Clause 48 remain problematic. The safeguards set out in Clauses 47 and 48 rely on secondary legislation to produce a legally robust solution that will underpin legal certainty for set-off and netting arrangements. While this gives flexibility, it of itself creates uncertainty. While there is a general view that the code of practice is helpful in giving an understanding of how the SRR regime will work in practice, it adds absolutely nothing to the area that requires legal certainty, because it would not help the giving of legal opinions on instruments. If the Government insist on secondary rather than primary legislation to achieve the safeguards, that will create an uncertainty because there will inevitably be a gap between Royal Assent and the coming into effect of related secondary legislation. That could be damaging to financial markets. In Committee, we will want to discuss with the Minister whether that uncertainty can be mitigated. While I am on the subject of secondary legislation, I remind the Minister that the House awaits the imminent publication of the report of the Delegated Powers Committee on the Bill. When the Banking (Special Provisions) Act was passed earlier this year, the Government, unusually, chose to ignore the very clear recommendations of that committee in relation to the affirmative procedure. I hope that the Government will commit to accepting the recommendations of the committee, whatever they are in this instance. We start from the very firm position that the committee’s recommendations should rarely, if ever, be ignored. There are other concerns about Part 1. I have already mentioned the ghost of Henry VIII in Clause 75, and my noble friend Lord Howard will pick that up further when he winds for these Benches. The banking industry believes that Clause 4 omits an important objective for the customers of banks, in that they need to be assured of continuity of service. Customers do not simply need their money back; they need to be able to pay their bills and receive their income, much of which now proceeds on an automated basis. The Government rightly protected this when they dealt with Bradford & Bingley, but they seem to have forgotten its importance in this Bill. There are also concerns about the test for the SRR in Clause 7 and on the provisions in Clauses 63 to 67 about providing services and facilities after a partial transfer. These will be fruitful areas for our discussions in Committee, as will the need for post-legislative scrutiny, to which my noble friend Lord Howard will speak later. We also have a concern that Part 1 applies to UK incorporated banks and does not apply to branches. We have seen the problems that UK branches of foreign banks can cause, and we are surprised that the Bill makes no attempt to deal with those issues. We will pursue this further in Committee. We have welcomed the increase in compensation limits in the Financial Services Compensation Scheme to £50,000, but we have been clear in our opposition to pre-funding, which is provided for in Part 4. Just because there is an element of pre-funding in the United States should not drive policy in this country. No reasonable amount of pre-funding will ever cope with the aftermath of the failure of a major bank, and the lack of pre-funding in the existing scheme has not been an impediment to date. We do not believe that the existence of an order-making power is appropriate; it would be appropriate for primary legislation if and when the case were ever made for pre-funding. In addition, there are concerns, particularly among those outside the banking community, about how the costs of the compensation scheme are to be borne. We will need to return to that in Committee. As well as the cost of the Financial Services Compensation Scheme, the banking industry has considerable concern about the cost more generally of this Bill. The impact assessment’s estimate of costs of between £2 million and £4 million is regarded as bordering on the absurd. I understand that further data will be available soon; we will certainly need to revisit that issue in Committee. Part 7 contains changes in respect of the Bank of England, some of which are probably of more interest to such old court hands as the Minister and me. The financial stability objective for the Bank is specified for the first time. I do not believe that, in practice, the lack of a statutory objective has had any impact on the Bank’s action—or lack of it—in the recent past, but it is no bad thing to set it out in law. If we are going to do so, we should also make sure that it is properly defined, which this Bill makes no attempt to do. We shall also be examining the role of the new financial stability committee within the Bank, and its relationship to the Court of the Bank of England. We shall be proposing changes to the tenure provisions set out in this Bill, to avoid unseemly speculation over the reappointment of the Governor of the Bank of England. We believe in transparency but are far from convinced that the requirements of Section 6 of the Bank Charter Act 1844 should be swept away in their entirety. I am aware that the Bank of England would like it removed, but we need to reflect on what has been put in its place, which, as far as I can see, is absolutely nothing. This Bill has a very broad Long Title in making ““provision about banking””. That will leave much leeway for the House to put forward other suggestions for improvements in the banking sphere. We certainly have some in mind in the light of current difficulties with bank lending, and there will be others. We shall, as usual, work diligently with the aim of improving this legislation. We have committed to ensuring that the Bill becomes law by the time that the Banking (Special Provisions) Act ceases to have effect, but that does not mean that we are a pushover on this Bill. There are plenty of days on which we could sit between now and 20 February, and we are prepared to use as many of them as it takes to complete our normal processes of scrutiny.