Banking (No. 2) Bill [HL]

My Lords, I thank the Minister for his careful presentation of the Bill. Like the noble Baroness, I look forward to the maiden speech of the noble Lord, Lord Smith of Kelvin. This is an important Bill, the principles of which we support. Despite its general title, it deals with only a small proportion of the big issues currently facing the banking sector. It is worth recalling that when we passed the Banking (Special Provisions) Act in February, there was a general view that the travails which had overwhelmed Northern Rock were largely due to particularly reckless lending policies by that institution, and that the bank’s demise did not foreshadow the near-collapse of the entire banking sector. However, that is what we have seen in recent months. Nobody, in February, foresaw a situation in which the Government would not only have to take over another failing bank, Bradford & Bingley, but would be forced to part-nationalise half the entire banking sector. Nor did we foresee that the Government would also, in effect, have to guarantee all interbank lending to stop the whole system simply seizing up, far less that such a dramatic commitment of government funds would, at best, be partially successful. The Bill, in some senses at least, seems to have been overtaken by events. Given the nationalisations and part-nationalisations, and the consolidation in the bank and building society sector over recent months, the likelihood of the measures of the Bill being brought into action—for the foreseeable future, at least—looks small. Most of the immediate issues facing the banking sector are not covered in the Bill. I will mention only four. First, how are we to get the banks lending again on terms which are not prohibitive to business? The Government are committed to putting the Banking Code, which covers these and other matters relating to the banking sector, on a statutory basis, but not in this Bill. Indeed, I understand that the code will be introduced via FSA powers, and will not be subject to parliamentary scrutiny at all, which is a great pity. Secondly, the Bill does not deal with the role of government direction to the banks in which the Government have recently taken a shareholding, which, in our view, is extremely important in terms of the way that the banks are managed. My colleague, my noble friend Lord Smith of Clifton, talked during the debate on the Queen’s Speech about the appointment of directors to such banks. The Bill is silent on that. Thirdly, the Bill does not deal with how to ensure that the banking market operates in a competitive manner, given that the size of the merged Lloyds TSB/HBOS and the disappearance of many independent banks and many former building societies means that we have a much more concentrated banking sector than any noble Lord would have thought possible a year ago. Fourthly, the Bill does not deal with the need for countercyclical management of the capital adequacy rules. That is not surprising, perhaps, given the international nature of the issue, but it is a question for the whole banking system. Arguably, any one of those measures is more pressing than those in the Bill, given the nature and extent of the Government’s current commitments to support the banking system. We will be looking for opportunities to ensure that these issues are properly debated in the months to come. We will have the pleasure of spending most of January debating the Bill in some detail. Our approach will largely mirror that set out by the noble Baroness. Given that in another place consideration of the previous Bill was at best cursory in Committee, with most amendments not even being taken, your Lordships’ House has been given an additional responsibility to test as far as we can all the issues with which we have some difficulty. That is what we will do over the next month. Depositor protection is at the Bill’s heart. Its options regarding failing banks are designed to ensure that depositors are adequately protected, and, if a bank fails altogether, that depositors quickly receive the cash due to them under the depositor protection scheme. We agree with the BBA that continuity of service should be a priority, not least because even the best run protection scheme will take time and cost to put into place and will cause all kinds of disruption to the way in which affected depositors manage their day-to-day financial affairs. In the worst cases, the Financial Services Compensation Scheme will have to come into operation. Here we share some of the concerns expressed about the details of how the scheme would operate in practice—for example, how to offer adequate and fair support for those with temporary large balances, the question of whether the guarantee would apply to gross or net exposure, and whether the scheme would apply to each brand or each banking licence. We are also looking for government action at EEA level to provide that all banks operating in this country should sign up to the host state compensation scheme. This provision, if it had been in place earlier in the year, would have significantly reduced the difficulty faced by UK depositors and the UK authorities in dealing with the Icelandic banks. We also have questions about the pre-funding provisions. We agree with the principle that the financial sector, rather than the general taxpayer, should be responsible for funding any payouts under the Bill. However, we agree with the Government that it would be counterproductive to introduce a pre-funding scheme at present. In our view, any funding scheme raises a number of issues which have not yet been satisfactorily resolved—for example, about the relative amounts of funding which will be required from different sectors of the financial services sector as a whole, so that contributions could be broadly related to the risk associated with each type of product provided. Rather than seek to resolve these issues now, given that pre-funding is not on the table in the foreseeable future, it would seem sensible to return to them once the current crisis has passed. For this and for other reasons, we will also argue that the Bill should have a sunset clause attached to it, so that Parliament can reassess it as a whole when we return to more normal banking conditions. I was mildly encouraged by what the Minister in the other place, Ian Pearson, said on Report in respect of sunset clauses—that there were contexts in which he would not reject the concept. I hope the Minister will endorse this approach. If depositor protection is the single main focus of the Bill, it has become clear that great care needs to be taken to ensure that the rights of other creditors are safeguarded to the maximum extent, not least to meet the other objectives of the Bill. As both the Minister and the noble Baroness have spelt out, the banking industry is extremely concerned about the detailed rules which will apply in cases of a partial transfer of assets and the potential, if these rules are not right, that they could lead to major disruption of the marketplace. These are issues being considered by the expert liaison group and I hope that when we come to Committee these concerns will have been effectively addressed by the Government via that mechanism. Given that the differences which remain in this area appear to have little to do with issues of principle between the Government and the banks and everything to do with the detailed drafting of the legislation, I hope it will be possible to deal with them via that expert liaison group. The Treasury approach to this Bill, which has involved consultation and efforts to take the banking sector along with it, appears to be pretty good. The very fact of having the expert liaison group and the intention that it should aim to iron out remaining differences before the Bill is passed is a welcome advance on the traditional Treasury approach. Despite the phenomenal grasp of the technical details possessed by both the noble Baroness, Lady Noakes, and the Minister, it seems to make much more sense for this kind of detailed technical issue to be dealt with outside the Chamber rather than within it. One issue which runs like a leitmotiv through the Bill is the relationship between the Bank of England, the FSA and the Treasury. While I fully accept that each of the three bodies will have an important role to play if the Bill is invoked, it does nothing to reassure me that some of the apparent muddle which characterised the early stages of the Northern Rock saga will be avoided in future. The key question is: who pulls the trigger to institute the special resolution procedure and when? I am concerned and puzzled about the role of the proposed Financial Stability Committee, a sub-committee of the Court of Directors of the Bank of England that consists of bank executives and non-executives to advise on protecting and enhancing the stability of the financial system. It is also expected, however, in the words of the Minister in another place, to advise executives on, "““crucial decisions regarding banks and the operation of the special resolution regime””," often in ““fast-moving situations””.—[Official Report, Commons, 31/10/08; col. 245.] Responsibility for triggering the special resolution regime rests with the FSA, not the Bank. I can just about see a logical separation between the roles of the Bank and the FSA, with the Bank responsible for the overall stability of the financial system and the FSA worrying about the financial state of individual banks and other financial institutions. If one of the key roles of the Financial Stability Committee, however, is to enable people who are close to the financial markets to influence decisions about how to deal with unfolding problems of individual banks, would it not be more appropriate if this advice were given direct to the FSA, which pulls the trigger? This should particularly be the case during rapidly moving events, which are typical when we move towards this kind of special resolution regime. With regard to when the trigger can be pulled, we share a widespread concern that the present provision in the Bill—namely, that it is not reasonably likely that the Bank can continue without the regime—is too permissive. Another area of concern which has been widely expressed relates to the near blanket order-making powers under Clause 75. In Parliament we often worry about Henry VIII powers with regard to the parliamentary system and the role of the Executive, but in this case there is real concern in the banking industry that the provisions, particularly in retrospection, could have a damaging effect upon the operation of the banking system. I hope this can be dealt with in an acceptable manner via the expert liaison group. We will, however, also want to see what the Delegated Powers Committee says when it reports later this week. We support the aims of the Bill and many of the detailed provisions that it contains. However, there are areas where further amendment is needed, and we look forward to ensuring that that occurs before the Bill leaves your Lordships’ House.