Building Societies (Insolvency and Special Administration) Order 2009

My Lords, I thank the Minister for introducing these statutory instruments, and I apologise in advance for my intervention being somewhat longer than the Minister’s introduction. When I looked at these instruments in detail in preparation for the debate, I realised that they raised rather a lot of issues. I shall be dealing with issues of both process and substance. I shall start with a point that is common to both the order and the regulations. They have been laid under Section 259(4) of the Banking Act 2009, which as the Minister has explained, allows the first orders to be made as made affirmatives if the Treasury is satisfied that it is necessary to make the order without laying a draft for approval. It is the Treasury’s use of this procedure that I wish to explore. We fully understood that when the 2000 Act was considered, some orders would need to be made very quickly after Royal Assent, so that there was a complete body of law available for use and to ensure that there was no uncertainty, which could have been damaging to the market. When the first orders were debated on 16 March we accepted that the made affirmative procedure was necessary. I was never clear on why the Treasury was allowed to keep the made affirmative procedure open once the urgency of the initial orders had passed. Both statutory instruments that we are debating cover generic issues that the Treasury should have got on with as soon as the Act was passed. I can see that the Treasury needed to customise the special resolution regime for the Dunfermline Building Society to deal with the issues that arose, and that if it wanted the Financial Services Compensation Scheme to absorb some of the costs, it needed to amend the FSCS. But I do not see why we should let the Treasury sit on its hands, wait for an emergency to come along and then use the made affirmative procedure as if that were the most natural thing in the world. Alternatively, if the Treasury wants to use the made affirmative procedure after the first opportunities have passed, the orders should be restricted to the Dunfermline Building Society or sunsetted. It would have been perfectly obvious that both these instruments would be needed even if they were not necessary literally on day one, as some of the others were. The right course would have been for the Treasury to have issued draft orders and consulted on them with a view to bringing them before Parliament in the customary way. The Treasury has had since Royal Assent in early February to work on this. It had at least seven weeks before the end of March in which at least some consultation could have taken place if it had been bothered. I do not believe that Parliament gave the Treasury the power in Section 259 to use the made affirmative procedure as an optional alternative to using the proper processes of consultation and laying in draft. The Treasury has merely said in its documentation that it is "necessary" for it to have acted in that way, but it was necessary only because it had not commenced the normal course for making orders under the Act. It is particularly telling that paragraph 3.6 of the Explanatory Memorandum to the insolvency and special administration order notes that the order includes more than is necessary to deal with the Dunfermline Building Society solely to use the draft affirmative procedure because a later order would not be able to take advantage of that power. The Minister repeated that a few moments ago. The Treasury intends to milk the Section 259 power for all it is worth, regardless of necessity. I do not believe that Parliament intended to give the Treasury that kind of power. Will the Minister now say how many more opportunities the Treasury will have to play fast and loose with the normal parliamentary procedure for statutory instruments? Taking the orders that we debated in March and the statutory instruments that are now before us, how many further first-use opportunities will the Treasury have left? Does it intend to use the made affirmative procedure for those orders or will it allow the normal processes to go forward? With these orders and regulations, the Treasury has invented a new approach to consultation, namely consultation in arrear, coupled with a vague promise to amend the orders at a later stage if it considers it necessary. In the case of the FSCS order, the Explanatory Notes say that a permanent replacement for the order will be consulted upon before the Summer Recess. In each case, of course, the Treasury will hold the whip hand: it has got its orders through by these made affirmatives, and will change them only if it suits, whatever emerges from consultation. When we consider the first batch of orders under the Banking Act 2009, there had been consultation on earlier drafts, which does not apply here. Despite considerable work within the expert liaison group, there remained a number of issues outstanding. Will the Minister update the House on the resolution to those matters we discussed in March? The Minister told us that they would be considered by the Banking Liaison Panel, and that the Government stood ready to alter the orders if necessary. Has there been a resolution to the issues that I raised in relation to the partial property transfer safeguards order? Those concerned the definition of excluded rights, and also transactions with small companies. I am looking here for evidence that the Treasury is prepared to amend these made affirmatives, because there are many who suspect that they will just ignore problems that are raised. Will the Minister also say what will happen in terms of consultation on both these instruments? How will it be conducted and how long will the consultation last? I am sure that the Banking Liaison Panel will be used, but will the consultation go any wider than that? Importantly, will Parliament be informed about the consultation and its outcome? When we debated the Banking Act 2009 orders in March, I raised this with the Minister and he undertook to look again at how consultation would be shared with Parliament. This may in turn depend on the transparency of the Banking Liaison Panel’s proceedings, which I raised in March and also during the passage of the 2009 Act. I asked the Minister to update the House on that. He will recall that it was not even clear in March whether the minutes of the Banking Liaison Panel would be released. Given that building societies generally are a relatively small part of the totality of the issues addressed by the Banking Act, is the Banking Liaison Panel the appropriate forum for dealing with the relevant technicalities so far as they relate to building societies? I now turn to some substantive issues in relation to these instruments, starting with the building societies insolvency order. The Merits Committee of your Lordships’ House queried with the Treasury the amendments made by paragraphs (9) to (11) of Part 2 of Schedule 1 to the order. These deal with who may make an insolvency order under Section 95 of the 2009 Act. For banks, the Government may make an order, but this is disapplied for building societies. The Treasury explained this in terms of the FSA being the registrar instead of the Government, which applies for companies, but that seems to me a difference without a distinction. Can the Minister explain why, given the evident fact that the Treasury was in the driving seat over the Dunfermline Building Society, the powers to initiate the insolvency process within the special resolution regime is restricted to the FSA or the bank? It seems to me no more than a convenient fiction, possibly to make it clear that no blame can be laid at the Treasury’s door. My second point in relation to the building societies order relates to the status of building society members, where they may receive a distribution but are not able to vote. This is explained in the Treasury’s response to the Merits Committee in rather obscure terms. It is acknowledged that shareholding members have an interest that is equivalent to debt, but the difficulties of working out how they should vote seems to be the justification for their disfranchisement. I put it to the Minister that this is not a sound approach to making law. Can he say how many and what value is attributed to any Dunfermline members remaining after the partial property transfer? Or to put it another way, who, precisely, has been disfranchised by this order? Turning to the FSCS order, the Minister has promised consultation before the Summer Recess. This indicates that the Government are not overconfident that they have got it right. I would like the Minister to say a little about how he expects this to proceed, and whether there has been any consultation thus far on the detail with, in particular, the banking industry. The Minister will, of course, be aware that the policy did not receive the support of the banking community when it was introduced in the 2009 Act and, therefore, some significant issues may well need to be discussed. I have three areas on which to question the Minister. The first concerns the definitions set out in Regulation 2. In many cases, they refer to documents issued by the FSA, such as the COMP source book. These definitions are qualified by the phrase, ""as amended from time to time"." That is basically okay, provided it is clear what document is referenced at any point in time. There is no other reference that I could see to ensure that, if a source book or other document is changed, the version that is relevant is the one that was applicable at the time the relevant event occurred. We clearly do not want the FSA’s rule book to be capable of being applied retrospectively—at least, I hope we can agree on that. I hope that the Minister will explain how these references are supposed to be applied. Secondly, I spent a long time trying to work out the difference between Amount A and Amount B, the scheme’s liability and the amount of the recovery, all of which terms are used in the regulations. In another place, the Minister said that Amount A was about £1.6 billion, which was the amount provided to Nationwide as part of the deal. I am not sure that that is correct; it seems to ignore any other costs which will accrue to the Treasury, which, in this instance, appear to include interest costs. Will the Minister say precisely what amount the Treasury has specified provisionally as Amount A under Regulation 4? This is what the Treasury is required to do, and I assume that it has done it. The Minister in another place said that the FSCS has not yet informed the Treasury of Amount B. I am puzzled by that. Can the Minister explain why that has not happened? Does the FSCS not have the relevant information and, if not, why not? What is the problem? Under paragraph (5) of Regulation 6, the scheme’s liability is to be "further reduced" by, inter alia, the amount of the recovery set out in the independent valuer’s determination under Regulation 8. The amount is reduced to Amount B, if that is less than Amount A. Why is this described as a further reduction? If there has not been a reduction from Amount B to Amount A, can anything else be described as a "further reduction"? I did not understand how these calculations were expected to fit together. Clearly, the independent valuer’s opinion of the amount of recovery will depend on whether the valuer calculates the amount of recovery under Regulation 8 in a way which reflects the deal the Treasury actually made to transfer the protected deposits and anything else. If the valuer considers that the Treasury should have got a higher amount for good will or the branch network or whatever when transferring the deposits, that will reduce what it can get back. My honourable friend Mr Mark Hoban asked the Minister in another place how much Nationwide paid for the ability to acquire the Dunfermline business, but I could not find an answer from the Minister yesterday. Will the Minister give that information today? Obviously, much more rests on the credibility of the independent valuer, who must reach an independent view of value and not merely endorse the Treasury’s weekend deal-making skills. All eyes will be on him. Can the Minister say any more about the independent valuer? When will one be appointed; what skills sets will be required; and what appointment process will be followed? My third question on the FSCS order relates to the independent verification process set out in paragraph (7) of Regulation 5. In Regulation 8 there is a reference to an independent valuer—that is, the qualities of the valuer are crucial. However, when we get to verification, the Treasury can appoint any person, whether or not he is independent. The process of verification is described as independent but not the person. That would leave open the possibility of using an insider on the pretext that he would carry out an independent process. The FSA used exactly that fiction for the only published report to date on its conduct in relation to Northern Rock, where its internal auditor was used for a so-called independent review. We do not think that that amounts to sufficient independence for the verification process. Will the Minister explain further? As I said at the outset, I apologise for the length of my intervention but I felt that these issues needed to be covered fully.