Banking Act 2009 (Restriction of Partial Property Transfers) (Amendment) Order 2009

The Government have therefore proposed that the BLP should continue to work on this matter over the next year, with the aim of treating small companies that are part of large groups in the safeguards order in a manner that will address industry concerns while ensuring that the authorities can resolve a failing bank or building society effectively. The Government will continue to discuss with the panel how we can progress this issue. I turn to the substantive provisions of the order. The amendments ensure that, in establishing which transactions fall under the protection of the safeguards order, the order covers to the full the range of transaction types that can be or are typically included in set-off or netting arrangements. This was a concern following the laying of the safeguards order, and I told the House on 16 March that the BLP would be looking at the definition of relevant financial instruments in the order. This amendment is the result of that consultation. As we are all aware, this is a complex and evolving field. We are confident, though, that the definition of "relevant financial instrument" proposed in these amendments is comprehensive and future-proofed as far as possible. Our feedback from industry is that it is content with the new drafting. The amendments also clarify the legal intention that the inclusion of any excluded right or liability under a set-off and netting arrangement does not exclude the entire arrangement from protection under the safeguards order. This is the so-called "bad apple" problem arising from the presence of the word "solely" in the original order. Ministers have given assurances that the term "relates solely to" is intended to prevent market participants wrapping up service contracts with financial contracts, thereby gaining the protection of the order for their service contracts. However, there is a difference in legal interpretation over the effect of this drafting, and some industry participants took quite a different view of the effect: that the inclusion of any excluded right or liability under a set-off and netting arrangement excludes the entire arrangement from the order’s protection. It was never the Government’s policy intention that the presence of excluded rights or liabilities under a wider set-off and netting arrangement should render that entire arrangement unprotected by the order. I make it clear that, in the Government’s view, the drafting of the safeguards order did not have this legal effect. However, as there are differing legal views on this, the Government have responded to the concerns and removed "solely". Our feedback from industry is that it is happy with the result. There is also an amendment in respect of Section 34(7) of the Banking Act 2009, which deals with trusts. That section provides that where a property transfer instrument makes provision about property held on trust, it may also make provision about the terms on which the property is to be held and how any powers, provisions or liabilities are to be exercised after the transfer. The purpose of the section is to ensure that a transfer of property is able to provide certainty of outcome and speed of execution in relation to property held on trust by or for a banking institution, in spite of any restrictions that might otherwise exist. The panel was concerned that trust arrangements for any bond held by a failing bank or building society could, on the face of the legislation, be modified or terminated irrespective of the consequences for the transaction, bond holders or any other interested parties. The amendment makes clear that a partial property transfer can remove or alter the terms of a trust only to the extent necessary or expedient to transfer the legal or beneficial interest or any powers, rights or obligations of the banking institution in the trust property to the transferee. It cannot remove or alter the terms of the trust for any other purpose. The authorities can, of course, make different provision for different cases and circumstances. The new drafting does not prevent the authorities making different provision for different trusts. However, the authorities cannot remove or alter the terms of a trust to cherry-pick parts of the banking institution’s legal or beneficial interest or powers, rights or obligations, and the new drafting does not give rise to doubt about this point. Finally, the order excludes from set-off and netting protection all publicly tradable securities that are not referred to or described in a netting or set-off arrangement, while retaining the protection for securities that parties expressly rely on for netting purposes or are referred to or described in such an arrangement. This benefits all parties involved in a partial transfer. The authorities will be able to transfer the securities all parties believe should be transferred without the risk of inadvertently breaching the safeguards in so doing. These amendments meet the vast majority of the market’s concerns, and demonstrate that the Government are committed to working with the industry to ensure that the regime is as effective as possible. I would like to put on record the Government’s thanks to the Banking Liaison Panel, and in particular the panel’s subgroup on safeguards, for their very hard work and thorough advice. I hope that noble Lords will agree with this order, and I beg to move.