Financial Services Bill
The Committee consisted of the following Members:
James Rhys, Marek Kubala, Committee Clerks
† attended the Committee
Chris Leslie (Nottingham East) (Lab/Co-op): Good afternoon, Mr Gray. What a pleasure it is to be back in Committee discussing the Financial Services Bill under your firm but fair hand. Hopefully, we are now in the final straights. This is the last programmed week of debate; we have already had several occasions to debate whether more time should perhaps be given to discussing the Bill, but that issue is for another occasion.
The clause relates to mutual societies and the transfer of functions between various regulators in respect of how we regulate the financial well-being and conduct of the mutual and building society sector. It provides for several orders that are consequential to the preceding clause, 47, and the transfer of some provisions under the Financial Services and Markets Act 2000 which would not otherwise be applied or disapplied without its provisions.
The Government have published a draft mutuals order to help inform, in theory, our debate. I do not know whether members of the Committee have had a chance to read the 42 pages of technical statutory changes proposed by the draft mutuals order, but if the document is a definition of “helpful”, I am not sure what an “unhelpful” document might look like. However, I should not disparage the Minister’s efforts. It is always useful to have draft arrangements put before the Committee, but it is a matter of regret that no explanatory notes are attached to them.
Will the hon. Gentleman at least share my regret that, by the time we reach the end of such an important document, bang on page 42, we think, “Hold on a minute, hopefully some light might have been shone on some of the technical provisions in the draft mutuals order”? I did look online for such detail, but the key information was missing. I should be grateful if the hon. Gentleman said when the explanatory notes will be published; it certainly would be useful if it were in time for our discussions on Report. If not, I hope they can be made available before consideration of the Bill in the other place. I understand that the Government will publish a consultation paper “later this year” on their general policy approach and the detail of the order. That paper might relate to the state of the explanatory notes; I am not sure whether the hon. Gentleman can
Obviously, the Government are considering whether the Prudential Regulation Authority’s objective should be applied to various other functions under the mutual legislation, which is part and parcel of the consultation process. I accept that it is not easy to go back through previous legislation and disentangle the question of which of the two new regulators should have responsibility for what. However, given that we are trying to apply the concept of prudential regulation to some friendly societies Acts, credit union Acts and so forth, it would be useful if the Minister gave us a flavour of what, if anything, will be different in the PRA’s oversight of certain matters. It would also be useful if the Minister gave us a fairly straightforward and simpler explanation of whether any substantive points are buried in either the clause or the draft mutuals order.
My question—perhaps this is what I was looking for in the explanatory notes—was about the consultation on the arrangements. My understanding is that the consultation document will focus predominantly on the PRA’s objectives and how they will be applied to mutuals legislation. Why are the FCA’s objectives not included in the consultation? I might have missed something, but it would seem that the consultation question should have both in parallel.
The draft mutuals order—again, I might have missed something in reading it because there was no explanatory note—talks about the transfers to the FCA or the PRA as though the question of which regulator will step in at which moment has been left as a grey area. That approach is peppered throughout the order. It is as though, in drafting the order, the Minister has hedged his bets, making reference to both regulators just so that one or the other will capture the issues. Why are we leaving it for the regulators to carve up responsibilities between themselves in certain circumstances?
Sheila Gilmore (Edinburgh East) (Lab): Does my hon. Friend sense a potential problem here for mutuals? At the moment there is uncertainty as to what will happen in the future, at a time when we should be encouraging them to have confidence to grow.
Chris Leslie: That is absolutely right. There is a broader point, to which I will come, which will include some of those questions. One of the implicit downstream consequences of transferring some of the regulatory responsibilities for mutuals and building societies to the FCA and the PRA concerns whether we aid and enhance the ability of the mutuals sector to grow and flourish, or whether we cloud and confuse its ability to navigate through the regulatory system. Consequently, will it be materially disadvantaged in the regulatory system when compared with the plc model?
I know that some of my hon. Friends on this Committee not only represent their own political party, but are Co-operative Members of Parliament. Indeed, I am a Labour and Co-operative Member of Parliament, as are my hon. Friends the Members for Kilmarnock and Loudoun and for Islwyn. It is rarely noted that we represent two different political parties. I mention that because it is highly relevant to clause 48 and other clauses before us. It is important to take the opportunity
Given that we are talking about transferring responsibilities between regulators, which regulator will be the champion for the mutuals model? Who will actively encourage the benefits that can flow from a non-plc corporate form? Will either of the regulators have any responsibilities for such matters, or will neither?
It is a moot point under which clause in part 3 the issue arises, but this one seems as good a clause as any under which to discuss it. Ultimately, the Treasury ought actively to seek to diversify the financial sector. Therefore, by corollary, the Treasury ought to take steps to promote options for mutual enhancement of various corners of the financial services sector. However, I am sceptical about whether the Treasury is fulfilling such a function, and we should therefore ask which of the regulators might do so.
I suspect the Minister will tell us that the regulators are neutral, hands-off and not in any way concerned about the specific model in the mutual sector. That is a great pity, particularly given the disadvantages that might hit the sector. The Minister will know that there was a very long discussion about whether the mutual sector was at a regulatory disadvantage in respect of the capital instruments that might be classified as core tier 1 capital under prudential requirements regulations—the Basel III arrangements—but I understand that some progress has been made on that in the form of the EU capital requirements regulations.
Will the Minister confirm whether he believes that good progress has been made on those European arrangements? To what extent were the UK Government party to advocating the resolution of the concerns raised? We have not tabled amendments about that, because we sense that changes are in train. Many people, however, are anxious about the mutual sector being at a material disadvantage, because it does not have equity in the usual sense that plcs do, and therefore the mutual sector does not have the same constitutional set-up to enable it to prove its capital reserves and capital base.
Will the Minister explain about the draft mutuals order and the consultation? Will he clarify what the Government’s intentions are and why the FCA’s objectives are not part of that consultation process? Will he let us know what is happening about the capital instruments and, more broadly, will he say which regulator will champion such issues? Certainly, Opposition Members are interested in knowing more.
This clause is an odd place to have a general discussion about mutuals. We touched on them during the stand part debate on clause 22 in relation to proposed new
The hon. Gentleman raised the issue of the capital requirements directive IV and the availability of capital instruments for building societies. I have to say that, when we came into office, the impetus behind the mutual sector, despite the number of Opposition Members professing to support it, had rather run out of steam. As a consequence of the work that this Government have done with the Building Societies Association, CRD IV has been altered through consultation to ensure that an instrument is there, which we broadly believe is available to building societies. That is a sign of the coalition living up to its commitment to support mutuality. Proposed new section 138K is also a sign that we are living up to our commitment.
By publishing the mutuals order in January, we sought to inform Parliament and the public, as the Bill progresses through the House, that the Government will publish a consultation paper towards the end of the summer. There will be an informal consultation period to gather views from the industry and the wider public on the policy approach and the detail of the order. The consultation will include views on whether the PRA’s general objective should be applied to its functions under the mutuals legislation. We welcome informal views from members of the industry, including the BSA, in advance of this. There will be a more formal conversation once the mutuals order is published. We expect the explanatory notes to be published as part of that wider consultation.
The hon. Gentleman asked why the draft mutuals order has a PRA objective applied, and not the FCA’s. The point is that the Government are considering whether the PRA’s general objective could be applied to its functions under mutuals legislation. The draft mutuals order has been published with the PRA objective applied to help Parliament and the public’s understanding prior to the consultation in the summer. We have not applied the FCA’s objectives, partly because the FCA has a wide range of objectives and responsibilities under the mutuals legislation. Trying to apply the FCA’s objectives to its functions under mutuals legislation would potentially increase the complexity of the FCA’s decision making with regard to mutuals. Part of the problem is that the Financial Services Authority’s functions are not currently applied to its functions under the mutuals legislation, so we are taking the process a step further.
The hon. Gentleman asked what would be different about the PRA’s oversight of mutuals compared with the FSA’s. Consistent with its general approach, the PRA will take a more forward looking and judgment-led approach to regulating mutuals than has happened in the past. That reflects a general shift in approach by the PRA. Broadly, the prudential regulation of mutuals will map on to the PRA’s regulation of deposit takers or
The provisions in the Bill and the work that we are doing with mutuals more broadly are consistent with commitments in the coalition agreement. We want to see greater diversity. It is encouraging that the Co-op, for example, has preferred bidder status for the divestment of Lloyds bank branches. That will be a significant strengthening of mutuality in this country, which we should welcome.
Chris Leslie: I am grateful to the Minister for outlining that. I am not quite clear that I have got my head around the difference between the consultation on the PRA’s and the FCA’s objectives. There is a broader discussion to be had. We will shortly be touching on some of it when we debate clauses 50 to 53 in respect of the Government’s wider strategy on mutuality and building societies. I am not convinced that there is sufficient rigour or seriousness within the legislation or the regulators when it comes to matters affecting mutuals or building societies. However, I understand the Minister’s points on clause 48 and on the capital requirements directive, so I do not feel the need to contest this clause.
and whether that is to be defined as conclusive evidence of the transfer. It would be helpful if the Minister could explain why on earth this clause is necessary. I hate to say it, but the explanatory notes are entirely unhelpful in shedding any light on this circumstance. Will he explain what certificate the Treasury would issue to a mutual on property vested in a person immediately before a transfer order?
We discussed the draft mutuals order in our debate on clause 48, which relates to the transfer of functions to mutual societies. The draft order mentions certificates only once. Under the amendment to section 90(8) of the Friendly Societies Act 1992, it states that the FCA
There is no mention of a certificate issued by the Treasury. Will the Minister explain why the draft mutuals order does not discuss the Treasury certification process? Will he clarify the circumstances in which those certificates would be issued?
Mr Hoban: The clause arises from clause 47, which we discussed last Thursday, and clause 48, which we just ordered to stand part of the Bill. The hon. Gentleman should look at clause 48(2), which discusses the powers for the Treasury to make a transfer order. One power, under subsection (2)(b), is for the
Chris Leslie: It is rather strange that the Treasury is involved. Would it not normally fall to one of the regulators to issue a certificate? Why is it specifically the Treasury maintaining this particular function and not another appropriate body? That is what I wanted clarification on from the Minister. It is difficult to gauge it from the Bill and it is certainly difficult to gauge what on earth its point is from the explanatory notes. There have been a number of occasions where the wording of the clause is simply cut and pasted from the Bill into the explanatory notes. I do not quite see why the Treasury is retaining this function. Will he as the Minister sign certificates relating to property transfers? That is presumably the consequence of the clause. What capability does the Treasury retain to properly test and fulfil those obligations under that particular certification process? He will get my point. I do not understand why the Treasury is involved and I would be grateful if he explained that.
Mr Hoban: The Treasury issues the certificates because it is given the power to do so under clause 48. I find it rather odd that we are back on this point, having just had a stand-part debate on that clause, which did not seem to cover its contents. The Treasury is given powers under this clause to issue orders because there may be reasons why we have to amend the legislation relating to mutual societies. That is part of the architecture of the provision that is carried forward from FSMA 2000.
Chris Leslie: I accept that this is not a question and answer session, but a stand part debate. However, when I see the Minister holding aloft a copy of the Bill and flicking through it, I sense that he might be busking a little in relation to why the provision has appeared in the Bill. It may have come as a consequence of FSMA, but why?
I thought the point of the architecture of the new regulators set up by the Minister was that they would be arm’s length bodies that would take on much of the detailed and, presumably, operational activity. I thought that he was telling the Committee that Her Majesty’s Treasury would be strategic and policy-focused, yet under the measure, it seems that he will get out his quill pen and sign a bunch of certificates. Perhaps in a dusty
I am surprised that little light has been shed on the provision, and the lack of answers and elaboration leaves me in a dilemma. Do we go along with the measure, accept the Minister’s assurance and nod it through? Do we say, “It’s only another clause—let’s just let the thing roll,” or do we hope that inspiration will strike him at any moment and an answer will be forthcoming? I hope the latter. If that inspiration is of a strong calibre, he might want to intervene, but if he is not inspired, perhaps because the inspiration prompts more questions than it answers, he might not wish to do so. I should love to give him another opportunity if he can explain why the Treasury is retaining the function. I am grateful that he wants to intervene.
When such important rights are transferred, it is entirely appropriate that the Treasury be engaged to certify them. The function goes way beyond a regulator’s usual powers. I am sorry that I am waving about a copy of the Bill, but I thought it would be helpful for the Minister to be familiar with it—I had assumed that the same went for the hon. Gentleman. The provision is all as stated in the Bill. There are more pressing and interesting matters to move on to.
Chris Leslie: That intervention was useful, because it clarified that the Minister’s justification for the provision is: “It is self-evident.” Opposition Members want clarity on the legislation, but his answer is, “There it is in the Bill. This is an important function, which the Treasury must fulfil.” I counsel him to ask questions about the provision, because the spotlight has not been shone sufficiently on to particular corners of mutuality and building society legislation. The Treasury will retain functions that might be transferable. I am not saying that that is wrong, but it is a symptom of insufficient attention being given to that sector of the financial services industry.
Mark Durkan (Foyle) (SDLP): The Minister said that clause 49 ensures that the Treasury will clarify exactly what is transfer, but the clause heading is “Evidence.” The certificate can be issued at any time; it does not necessarily have to be issued at the time of the transfer order. Is it designed to deal with any issue of contention, with any controversy that may arise or with any legal dispute, by stating that the Treasury will answer any dispute simply by issuing a certificate?
Chris Leslie: Yes. Again, it looks as if the Treasury will fulfil almost a quasi-judicial function. I can envisage a circumstance where the Minister, standing bewigged in the court of property rights and opinions, has to arbitrate between various property transfers. That would be a bizarre state of affairs for the Treasury. The provision
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): I have been listening carefully, and it strikes me that once again we are talking about problems that arise from the cut-and-paste nature of various parts of the Bill. Surely it would have been better to have looked at some of the proposals in more detail, and I hope that the Minister might still commit to doing so.
Chris Leslie: Indeed, and that is the theme I am warming to in this part of the Bill in respect of mutuals and building societies. Not enough rigour or attention has been paid to the sector, despite the protestations of the coalition agreement. The Government appear to be in cut-and-paste mode; there are no explanatory notes here, and there is no strong explanation about residual powers for the Treasury there. That is my general concern.
Mark Durkan: In that vein, do we not return to the serious discrepancy in the Bill, namely that the FCA and the PRA will both deal with mutuals on different matters, but the PRA will not be able to issue guidance? It will have no statutory basis for guidance, but the FCA will. Will that not leave the mutual sector in a state of confusion, if it will be able to rely on advice or guidance from the FCA but will have no basis of guidance from the PRA?
Chris Leslie: Yes. That is another concern, which did not occur to me as much as it did to my hon. Friend. It is a downstream consequence of the structural changes that are being made. I do not wish to go over the ground I have covered, and I think I have made my point. I will not oppose clause 49 stand part because there probably is a justification for the provision continuing, although the Minister has not been very articulate in explaining what it is. Perhaps we will look at the matter another time, in another place.
Chris Leslie: Clause 50 repeals several sections in part 21 of the Financial Services and Markets Act 2000, for example subsections (1) and (2) of section 334, which relate to the Friendly Societies Commission. It is important to have a smooth transition process from individual organisations—such as the Registry of Friendly Societies or the Building Societies Commission—to the FSA, and beyond to other regulators. Many of the powers that are being transferred are already largely redundant because of changes made by previous clauses.
Will the Minister clarify why the Government are repealing subsections (1) and (2) of section 334, regarding the Friendly Societies Commission, but not subsections (3)
and other provisions in section 334 relating to the Friendly Societies Commission. If the Friendly Societies Commission is defunct and has gone or is going— I think it has gone—why are we retaining subsections (3) and (4)?
Mr Hoban: Clause 50 addresses functions that were transferred to the FSA when FSMA was enacted in 2000. Clearly, given that those functions are now with the FSA, part 21 is no longer required. The listed bodies, such as the Registry of Friendly Societies, the Building Societies Commission and the Building Societies Investor Protection Board, are now defunct, so there is no point in retaining those sections.
As the hon. Gentleman touched on, section 334 (3) and (4) of the 2000 Act addresses amendments to legislation. Those subsections, therefore, need to stay in force. If we repeal subsections (3) and (4), the amendments that they permit would also have to be repealed, which we do not want. If we want to retain those amendments, subsections (3) and (4) must remain. The drafting has been carefully designed to ensure that what needs to remain in force remains in force.
Chris Leslie: I am grateful to the Minister for that explanation, or I think I am. I read the clause slightly differently, as if some of the Friendly Societies Commission provisions will continue for an organisation that is no longer extant. I take the Minister’s assurance on that.
Chris Leslie: Clause 51 looks technical and detailed, although it is short and sweet. Government Members welcome the clause’s updating of the Building Societies Act 1986. My hon. Friends will recall that that particular Conservative Administration introduced legislation that liberalised the rules on building societies. The 1986 Act, of course, allowed widespread demutualisation of the building society sector. My hon. Friends will know the saga that occurred thereafter.
Clause 51 makes further changes to the 1986 Act—the previous Administration made a number of changes—that will hopefully go some way towards strengthening the defences of the mutual sector. The Minister, like my hon. Friends, has said elsewhere on a number of occasions that the actions of demutualised ex-building societies played a part in the growth of sub-prime lending in this
Specifically on clause 51, the previous Government gave the Treasury secondary legislative powers to allow building societies to create what are known as floating charges where such a move might be necessary for stability. As far as I understand it—as a layman in such issues—a floating charge is a form of security interest giving preferential rights over a fund of changing assets that floats, or hovers, until its conversion or crystallisation into a fixed charge. A body of case law and common law governs many such floating charge arrangements. In literature on these matters, there is a lot of discussion about the ambiguity of some of that common law and whether, over the past 100 years or so, there has been sufficient definition about how the courts define floating charge arrangements. They have often been cited as legal devices created by lawyers, without necessarily requiring any statutory or legislative support.
Floating charges give a certain degree of latitude to transfer circumstances, where building societies might, for various reasons, need to be subsumed or merged with other entities. Will the Minister explain why the clause goes further at this time than in the past? The only safeguard I can see built into the provisions is a reliance on European definitions of “participants” in debt payment systems. Does the Minister feel that that offers adequate protection to building societies?
The clause amends the Building Societies Act 1986 to legalise the application of floating charges. Apparently, there is an existing prohibition against floating charges, which inhibits the building societies sector’s ability to access private sector funding. An exemption to the 1986 general prohibition against floating charges was made by the previous Government, to enable assistance to distressed building societies to be made. In 2010, my noble Friend Lord Myners proposed changes to a series of arrangements for building societies, and an order was made. Although there was a consultation on the floating charge arrangements, he did not in the end decide to proceed with the particular floating charge provisions before the Committee today.
At the time, he said that in light of further consideration on the floating charge proposition, he had decided to make a more limited order that would enable building societies to do certain things, but would not allow the floating charge arrangement to be implemented. He felt that a wider order might result in floating charge arrangements being made in a way that would not necessarily relate to financial assistance. He said that it
“would have given a general and indefinite permission to building societies to grant floating charges so that they could access settlement and payment and settlement systems directly. To do
The orders at that time only enacted a couple of provisions, and not the one in the clause. The crux of the issue is why the Government feel now—but not then—the need to implement the provision, and why those risks have apparently disappeared in the intervening period.
Mr Hoban: This is not quite what the hon. Gentleman thinks it is. We still maintain the general prohibition on floating charges. It is clear, however, that if a building society wishes to participate in the sort of payment and settlement systems that banks take part in, it needs to be able to give a floating charge to enable such participation. The fact that building societies cannot participate in the settlement and payment systems means that they cannot really compete on a level playing field with banks, and do not offer as good a deal to their customers as a consequence. It is a very limited amendment to section 9B of the 1986 Act and the prohibition on floating charges. It also happens to have been requested by the Building Societies Association. I hope that with those reassurances, the hon. Gentleman will allow the clause to stand part of the Bill.
Chris Leslie: I do not understand what is achieved. Can the Minister set out the purpose of the change in layman’s terms? The clause is probably perfectly rational, but if he explained that, it would help to give the Committee a better grasp of why it is necessary.
Mr Hoban: I think that I have explained: it is to permit participation in settlement systems. It is done at the request of the BSA. That is the reference in subsection (3) to subsection (4). It explains why we need to introduce the change. I am not sure that I see the controversy about something that is in the interests of building societies and their customers.
Chris Leslie: I am not entirely satisfied with that answer. I do not think that it is adequate simply to regurgitate the words in the Bill—or in the rather unhelpful, in this case, and useless explanatory notes—and say what the effect of the floating charge arrangement is. It would be nice to have a sense of why the circumstances now require the change. What is the practical application? What building societies are we talking about? Does the Minister have particular company circumstances in mind to which this might apply? He has his head down and wants to plough on, so I will not stand in his way, but I am not very happy with his explanation of why the changes are necessary.
Chris Leslie: Clause 52 is probably the clause that relates most closely to the issues of the existence and continuance of the building society and mutuals sector. The series of changes to the Building Societies Act 1986 hopefully helped to stem the tide of demutualisation that afflicted the building society sector when some decided to move to a plc model, and we know what happened then. In fact, we are close to the 25th anniversary of the 1986 Act, which allowed all that to take place. None of the 10 then building societies that demutualised exist independently now, whether that is Abbey, the Halifax or others. Bradford & Bingley building society—based in Shipley, the constituency that I used to represent—was a fine mutual institution that demutualised, and we know the saga that came from that.
Fabian Hamilton (Leeds North East) (Lab): My hon. Friend mentioned Bradford & Bingley building society, but the largest building society at the time was the Halifax, which swallowed the famous Leeds Permanent building society, and we all know what happened to the Halifax.
Chris Leslie: Absolutely. That is why, when we are talking about transferring building society businesses from a mutual to perhaps another form of mutual or, in this case, company, we have a duty to learn the lessons of what went wrong in the 1986 Act and to ask whether we are doing the right thing to protect a model that is already under some stress.
I am pleased to say that the building societies that weathered the storm have been doing a lot better recently, and more power to them. They are important players in diversifying the sector, but I worry whether enough is being done proactively to support the sector, never mind to create a level playing field.
Chris Evans (Islwyn) (Lab/Co-op): To underline what my hon. Friend is saying, is he aware that Moody’s has upgraded six building societies’ stand-alone ratings? That is a good comparison with what he has said about those that are no longer in existence following demutualisation or their being swallowed up by larger entities.
Chris Leslie: There is logic in the way that the building societies market has developed subsequent to that consolidation process. However, that also comes with its own advantages and disadvantages. We have discussed such matters previously, and, when we were discussing the sector’s diversity, my hon. Friend the Member for Foyle mentioned that credit unions, which are a different form of mutual, have taken up much of the space in terms of the small-scale, micro-finance participants. I worry, however, that there is gap in the provision of financial services in that mid-scale non-plc structure, which may not be there for much longer, and we need to be mindful of that.
I do not want to detain the Committee for too long, but clause 52 seeks to update the Mutual Societies (Transfers) Order 2009, which was taken through in another place before the last general election. Just so
There may be some sound reasons for that, and I would like the Minister to say what particular companies or subsidiaries of building societies he has in mind with that change. I know that it is unlikely that the Minister will be tempted to name the names of existing mutuals that may have subsidiary company structures beneath them, but a change obviously took place when the Britannia building society merged with the Co-op. That move was facilitated by the changes made by the previous Administration and would have been prevented by the rigidities within the old building society legislation. We need to take steps to allow flexibility to such building societies. In many ways, the change is probably useful, but I have several questions for the Minister.
Cathy Jamieson: Does my hon. Friend agree that many people actively choose to use building societies because of their structures, because of the membership model, and because of the opportunity for them to participate in, or at least have an influence on, decision making? They would want reassurance that, whatever the Minister intends to do here, the ability of those organisations’ members to have a say will not be undermined in any way.
Chris Leslie: That is true, and we want to ensure that the added value that comes from being a member, rather than purely being a customer, is protected and supported, which is why I was trying to get a sense from the Minister of what specific cases he has in mind. Would particular building society arrangements be applicable under clause 52?
However, we must be careful with the business of membership. My hon. Friend will be familiar with the concept of carpetbaggers, which was the phrase used at the time, meaning people who would open an account with a building society with a view to obtaining shares in the windfall that would flow from demutualisation. My hon. Friend the Member for Leeds North East mentioned such building societies as Leeds Permanent, Halifax, Abbey, and Bradford & Bingley. In the rush to demutualisation, the floodgate was opened for some of those by the 1986 Act.
Sheila Gilmore: I may be wrong and perhaps my hon. Friend will correct me, but I do not recall that the 1986 arrangements were necessarily specifically intended to encourage demutualisation. In effect, a loophole was found that allowed people to start that process. A lot of people were perhaps tempted, without understanding the full implications, to go with something that offered some quick gains. Is there anything in the clause that could open up those loopholes, in particular subsection (2)(b)?
Chris Leslie: I do not know. To be fair to the Minister, the clause is probably proposing a useful small change in respect of transfers between mutuals and other mutuals, although some of their structures will have plc or limited company forms beneath them. My question is whether
The building societies eventually got wise to the carpet-bagging technique and devised what is known as the “poison pill” strategy to counteract the thirst of the carpetbaggers to get those windfall gains. They required in their constitutions that any windfalls from those shares should be given to charities; essentially they could not be pocketed by the customer. That sutured the problem to a degree. However, I am not yet convinced that we have properly solved that particular problem. It has not arisen much subsequently but it is a saga relevant to clause 52.
Chris Evans: I remember that time. Many building societies were under hard pressure to demutualise, not through the Government—accepted—but the media. Many of the carpetbaggers referred to by my hon. Friend had well funded media and advertising campaigns. They specifically targeted members of the building society to vote for demutualisation. How does my hon. Friend envisage overcoming that if the situation arises again?
Chris Leslie: As I said, I get a sense that a lot of building societies have taken matters into their own hands and changed their constitutions. A lot of those roads have been closed off. It is important to note that, under the current legislation, the scope for mutual societies to transfer their business is quite limited. That usually means they are permitted to transfer their business only to another mutual of the same category, for example, from a building society to a building society. Otherwise they may transfer to a company and become demutualised, leading to the loss of mutual status and membership.
The previous Government took steps to increase the options available to building societies, allowing them to transfer to a subsidiary of another mutual society under a simplified procedure. I mentioned before that of Britannia to the Co-operative Group in 2009. That was made possible to retain the business within a mutual ethos as well as provide for members of the transferring mutual to have rights in that holding mutual. Therefore, that 2009 transfer order has stood the test of time. I am presuming that these proposed changes are consequential to that.
Why does not clause 52 properly pick up the promise that the Minister made in the coalition agreement, when talking about fostering the diversity of the financial services sector and promoting mutual? We have nothing in the Bill other than this small cluster of clauses to go on when it comes to those arrangements. Do not just take my word for it, Mr Gray. The hon. Member for Cardiff North (Jonathan Evans) chairs the all-party parliamentary group on building societies and financial mutuals, which published a report on this issue in July. The Minister appeared to give evidence at its hearings, as did the current chief executive of the PRA. Having heard the evidence, that group came to some very important and quite startling conclusions. Its first conclusion was that
Fabian Hamilton: Does my hon. Friend agree that while the clause goes some way towards supporting and strengthening mutuals, it does not go far enough? Moreover in hindsight, had some of those former mutuals not demutualised, the financial crisis we faced in 2008 might not have been as extreme.
Chris Leslie: This is one of those lessons that has to be learnt. A stronger mutual sector during the financial crisis would not have been disadvantageous; it would have been a protection. It would have ensured that those key decision makers had different motivations and so might not have taken as many risks. The key point I was coming to was the all-party parliamentary group’s specific recommendations:
That latter recommendation was resisted by the PRA during the hearings by the all-party group but it is perfectly reasonable. One of the other interesting adjuncts is that the group also recommended that some sort of diversity index be created as a proxy for testing whether the level of diversity in the financial services sector is improving or worsening. That is a useful idea.
Teresa Pearce (Erith and Thamesmead) (Lab): I have listened with interest to what my hon. Friend has said. I agree that the price of demutualisation is a bitter pill that taxpayers have had to swallow. I am also interested that 65% of complaints received by the banking ombudsman are about banks and only 2% are about building societies. That demonstrates the good model of consumer service that we are looking to achieve with the Bill. Does he agree that we need not just to protect building societies but to help them to flourish so that we have that diversity in the high street?
Chris Leslie: Indeed, it is important that we have more challenge to the plc model. It does matter. Corporate structure feeds through into the attitudes of those companies towards their customers and their members. If an organisation is owned by its customers it stands to reason that it will treat them with more respect and more courtesy than if they did not have those additional rights over it. That is something we should advocate.
Why has the Minister not taken up some of the recommendations in the all-party parliamentary group’s July report? He has had ample time to reflect on some of those and move forward with them. Given the inclusion of this promise in the coalition agreement I was under the impression that that some pressure would have come to bear from Liberal Democrat Members on Conservative Members about strengthening the building society and mutual model. It appears not to be the case. We do not see these provisions in the clause or the other suite of clauses in part 3 of the Bill. That is a great shame.
The Building Societies Association and others have made their own representations to Ministers about the need for improving the regulatory frameworks so that they support and work with the grain of the mutual sector far more successfully. It would be important if the Minister could deal with those particular points.
I have asked specific questions about some of the provisions under the clause, especially whether the hon. Gentleman had cases in mind for the changes that regulators will transfer. The explanatory notes refer to the Financial Services Authority having the residual powers under the clause, but they do not set out whether the PRA or the FCA will take them on from the FSA. It is always slightly worrying when I see references in the explanatory notes to the FSA continuing to have certain responsibilities, but it is the broader matters of defending and supporting mutuality, learning the lessons from the demutualisation saga and taking the opportunity to improve the Bill that I particularly wanted to press.
Fabian Hamilto n: It is a pleasure to see you in the Chair this afternoon, Mr Gray. I want to continue one of the themes that my hon. Friend has discussed, and to pose one or two more questions to the Minister. The Secretary of State for Business, Innovation and Skills, a senior member of the Liberal Democrat party, on 23 February 2010 just before the general election said:
“While the Liberal Democrats have no fundamental ideological opposition to selling the taxpayer stakes in the nationalised and semi-nationalised banks—indeed we support re-privatisation—there is no hurry and every reason to show patience. UKFI now believes that it will be a state shareholder for at least five years. Experience in Korea, Sweden, Israel and in the US would lead us to believe that the optimal time frame for disposal of nationalised or semi-nationalised assets is probably close to 10 years. That is the time needed to sort out and restructure banks, manage bad assets and restore normal, safe lending…Sweden still owns almost 20% of a bank that it bailed out in the early 1990s (Nordea). We should not rule out the taxpayer taking interests in Northern Rock, Lloyds and RBS for similarly long periods.”
Why have the coalition Government sold off Northern Rock in such a rush, and at such a huge loss to the taxpayer? Will the Bill, in fact, help prevent such a fire sale? Surely it would have been better to have waited for the economy to recover before selling off the assets at rock bottom prices. Does the Minister believe that the clause and part 3 of the Bill, in general, would have prevented a rushed sale like that from taking place, and perhaps will prevent one in future? Does he agree that what has happened represents poor value for taxpayers? Will the clause ensure that proper consideration is given to the need for greater diversity and competition in the banking sector in future?
My hon. Friend the Member for Nottingham East referred to several issues in relation to the principles of mutuality and the problems that have existed about demutualisation. Those of us with a strong commitment to the mutual sector want to hear not only about protections for existing mutuals, but how, proactively, the Minister proposes to ensure that, as is stated in the coalition agreement, financial services will
In his remarks, will the Minister tell us a bit more about what he proposes to do and about how his performance in promoting mutuals will be measured? We need to know how the Government will promote mutuals, and what staging posts will be used to measure success and to ensure that the right approach is taken and—importantly—that there is continued consultation. I hope to hear more from the Minister, who I am sure can respond to those points and to the ones raised earlier.
Mr Hoban: Before I turn to the clause, I am happy to respond to the comments made in the debate, which has gone wider than what, as I shall explain, is a narrow power. The coalition agreement commits us to the promotion of mutuality, and mutuals have an important role to play in financial services. I point out that some mutuals suffered financial distress during the financial crisis—I think that the first use of the Banking Act 2009 powers was for the Dunfermline building society—so the question has to be seen in proportion. The mutual sector also has issues that need to be resolved, and that is one reason why we have driven forward the debate on CRD IV, which is a good example of how we are promoting the mutual sector.
On Northern Rock, the hon. Member for Leeds North East quoted at length the remarks of the Secretary of State for Business, Innovation and Skills. The deal that the previous Government agreed with the European Commission for rescuing Northern Rock required it to be sold within two years. That is not a matter for this Government; it is yet another legacy of the Labour Government that we have had to deal with. We encouraged mutuals to come forward with bids for Northern Rock, which was well documented in one of our recent publications.
Mr Hoban: I was just saying that we had sought bids from mutuals, as indicated by the document on the sale of Northern Rock published earlier this month. No mutual made it through to the final round, but we are
Chris Leslie: I know that the Minister wants to move on, but on Northern Rock, surely he approached the Competition Commissioner in the European Commission for an extension, beyond the end of 2013, of the state aid arrangements in respect of the sale of Northern Rock. I would have expected the Treasury to seek that.
Mr Hoban: The previous Government signed up to the commitment for disposal, which was the right thing to do. The sale was in the interests of the Northern Rock business and, as demonstrated by the Deutsche Bank financial analysis that is documented in the report we published, in the interests of taxpayers. To have kept Northern Rock in public hands for longer would have led to the destruction of value. I counsel the hon. Member for Nottingham East, who takes a keen interest in the matter, to look at the report, which sets out the issues clearly.
I do not want to repeat my earlier point about the provision in clause 22, which ensures that the FCA and the PRA produce a report looking at the impact of regulation on the mutuals sector; that would be repetitious. However, that commitment is there.
Karen Bradley (Staffordshire Moorlands) (Con): My hon. Friend will be aware that my constituency has a great history of mutuality and co-operatives, with both Leek United and one of the main centres of the Co-operative—the old Britannia base—being located there. Will the Minister reassure the members of those mutuals and my constituents who are employed in them that nothing in the Bill will make their lives more difficult or threaten the mutuals’ status?
Returning to clause 52, the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 allowed Britannia and the Co-operative to come together, because the Act enabled mutuals of two different types to merge without members—in this case Britannia—losing the benefits of mutuality. That was an important piece of legislation, steered through this House by a former colleague, Sir John Butterfill. It was occasionally known as the Butterfill Bill in tribute to his work.
Clause 52 seeks to build on the 2007 Act. It will extend the regulators’ existing power under section 42B of the Building Societies Act 1986, enabling them to direct the transfer of a building society to a subsidiary of a mutual. It will ensure that section 42B will be updated to take into account provisions of the 2007 Act. It will enable the smoother transfer of building societies into subsidiaries of mutuals. I remind Opposition Members that the clause strengthens mutuality, because it could be used in situations in which a building society is in financial distress. To ensure that it remains viable
The clause is not about carpetbagging or demutualisation, but about finding another tool to strengthen the mutuals sector. It is a further example of the work that we have done in pursuit of the coalition Government’s agreement.
Cathy Jamieson: I hear what the Minister says about protecting and strengthening, but a point was raised about the promotion of mutuality. How do the Government intend to do that and by what standards will that be measured? How will this particular clause help? Will the Minister explain what the Government intend to do?
Mr Hoban: I started my remarks, both after and before the Division, by referring to this matter. I mentioned some of the things that we are doing—such as CRD IV —at the beginning of our proceedings this afternoon. We have had previous debates—on clause 22, for example—along similar lines, so I do not want to trespass on the Committee’s patience. As I said, the measure is an example of what we are doing to promote mutuality: it would ensure that regulators have a full suite of powers to enable them to intervene when a building society is under pressure or when we want to see ownership transferred to another mutual. That will help to protect and strengthen the sector.
Chris Leslie: I am grateful to the Minister for his patience. Will he specifically address the provisions that could have been in clause 52, as recommended by the all-party group on building societies and financial mutuals? It said that it wanted a specific regulator to have a duty to promote mutuals and foster diversity, and it recommended that the PRA should have a
Mr Hoban: Again, that would be micro-management. It is not for me or the House to decide upon the organogram of the PRA. The PRA will decide what is appropriate. Clause 22 and new section 138K impose a specific duty on the PRA and the FCA that gets the regulator to think very carefully about the impact of its rules on mutuals, which is an important step.
In a previous sitting, we debated the context of social investments. Customers of all financial institutions expect a level playing field and the same protection, whoever they deal with. They expect an institution to remain sound and solid. They do not expect special favours, which would perhaps reduce the protection available to them and give them a worse deal. We need to see consistency, and that is why it is appropriate that we do not favour one sector over another. Opposition Members would be concerned if we had a special pro-listed company objective. We do not. It is right that we have a level playing field across the sector, and that is underpinned by new section 138K.
Sheila Gilmore: I understand the position that the Minister outlines about a level playing field, but is there not a problem? Sometimes a level playing field can conceal problems and differences. For the social enterprise sector, and indeed for the mutual sector, the form of regulation that might be appropriate for other financial organisations may be inappropriate, which might result in there not being a level playing field. Such organisations could be disadvantaged by inappropriate regulation.
“The regulator must prepare a statement setting out…its opinion whether or not the impact of the rule is significantly different from the impact of the proposed rule on…the persons within subsection (3)(a)(i), and…those persons as compared with persons within subsection (3)(a)(ii)”.
That provision takes up the point about distinction—that regulation might have different impacts on mutuals compared with organisations in the non-mutual sector. It underpins not only the concept of a level playing field, but the understanding of the differential impact of regulation on different types of entity. The right provisions are in place, and clause 52 helps the mutuals sector. We should make progress.
Chris Leslie: I am disappointed by the Minister’s response. Of course, it is important to focus on the questions in clause 52 that relate to transferring business in a mutual to another mutual arrangement, but other protections are missing that might have been included. I was not the only one to entreat that the clause take a more proactive and positive stance on the mutual model; in his own commitment in the coalition agreement, the Minister said that he would promote mutuals.
The fig leaf that the Minister keeps citing is new section 138K in clause 22, which provides for rules and guidance for the regulators. However, the provision ensures only that a statement will be written about what happens to the mutual sector—it does nothing to promote it. He might think that that fulfils the coalition agreement, but I am convinced that many people will think it does not. Why does clause 52 not include provisions that address not only the concerns of the all-party group, but the promises made in the coalition agreement? He has not dealt with those matters satisfactorily.
The clause relates to transfers of mutual business. The Northern Rock deal must stand as one of the worst as far as the taxpayer is concerned. I wish the new venture well and hope it succeeds, but it virtually gives away the asset from the taxpayer. With £250 million stripped from Northern Rock’s assets to fund the purchase—[ Interruption. ]
The Chair: Order. I am sorry to interrupt the hon. Gentleman. I have been fairly generous so far in allowing a Second Reading-type debate, but we ought to return to the specific question of whether the clause should stand part of the Bill. We should not be discussing the sale of Northern Rock. The specific question is that the clause stand part of the Bill.
In the case of the Northern Rock transfer to a private company, not to another mutual, the Minister says, “Well, the advice from Deutsche Bank and others is in the public domain.” I am not sure that that is so. I think that there was a cursory summary document about the transfer. If there are to be further business transfers with other consultants being brought in to advise on them, as in the case of Northern Rock, we must have more transparency in public information. I got the impression that the Minister was saying that that Deutsche Bank advice would be published. If that is so, we would welcome that.
The hon. Member for Staffordshire Moorlands, whose contribution I welcome, mentioned the Co-operative and the Leek United building society in her constituency. Nothing in the clause may threaten the building society model, but there is certainly nothing substantive to promote the mutual sector. We are voicing those concerns today.
Praying in aid new section 138K in clause 22 does not address the problem, but it would be invidious to oppose this minor, specific improvement in the clause. My hon. Friends and I are concerned about the elements that are conspicuous by their absence. I do not want to oppose the clause, but I regret that the Minister has missed the opportunity to fulfil his commitment to the coalition agreement.
Chris Leslie: Normally we would not discuss such a small clause, which relates to the interpretation of part 3, but I have a quiz question—a little bit of light relief—for the Minister. Will he explain in layman’s terms what is meant by subsection (2):
Mr Hoban: The subsection clarifies that references to a person’s functions under an enactment include references to the same person’s functions under any other enactment, as applied by the first enactment. That provision is needed because some legislation listed in clause 47(2) applies to functions in other legislation. The subsection ensures that changes to other mutuals legislation that we made under a mutuals transfer order would take place upon enactment.
Chris Leslie: The hon. Member for West Suffolk understood that—it was clear to him—but I am afraid that I am a simpler fellow and do not quite understand that sentence structure. The Minister seemed simply to read subsection (2), although perhaps he paused and put a little bit of emphasis on particular words, but I still do not understand why the explanatory note did not state more clearly what this provision was for.
‘(3) The first case requires the Bank of England, FPC, FCA or PRA to provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given, and full information about the circumstances.’.
Chris Leslie: Part 4 deals with the collaboration between the Treasury, the Bank of England, the Financial Conduct Authority and the Prudential Regulation Authority and was featured in significant detail on Second Reading. I have significant worries, all the way to clause 63, about both the drafting and content of this procedure. The context is that, by creating an additional organisational change, the Minister has framed the Bill in such a way as to cloud and obfuscate lines of accountability and decision making within the arrangements. Memorandums of understanding are needed, as are other duties, to co-ordinate the various bodies and organisations, and that necessitates changes to the clauses in part 4, some of which have changed since the original draft of the Bill last summer, in response to a number of concerns and worries voiced by both the pre-legislative scrutiny Committee and the Treasury Committee. Amendment 173 has been grouped with amendments 176 to 178. Broadly speaking, they relate to the notification of a material risk to public funds that the Bank of England is obliged to give the Treasury, and the need, in our view, for changes to ensure clarity about who will receive what warning and the downstream consequences of that.
We believe it would be preferable for an early warning system of that formal notification of risk to be instituted in the Bill. It would serve a number of purposes. First, it is necessary for the Bank, FPC, FCA and PRA to have a more proactive stance when scanning the horizon for potential future risks, and not simply wait until financial assistance is expected and required. It would be better to have incentives and structures within the system to allow that informality, that early warning process, to come into place. We are not the only ones to have thought about that; other organisations have also done so.
David Rutley (Macclesfield) (Con): Will the hon. Gentleman give the Committee further detail of what the early warning system would look like? I understand the point he is making but, presumably, like most financial services organisations, the Bank would have risk logs and other related materials that it uses on an ongoing basis, and is probably in dialogue with the Treasury anyway.
Chris Leslie: That is what we are trying to tease out from the Minister. There are a number of reports that might be useful. The PRA will have a document called the proactive intervention framework—the PIF—which it has already said it will rely on. There is concern that some of those secondary and subsidiary activities might not manifest themselves to the Treasury, because they will all be guarded and cloistered within the Bank of England. Specifically, there is a bigger debate in another clause about the extent to which this clause invests powers in the Bank of England generically or in the individual person of the Governor of the Bank of England. That is why we need something more than a simple notification when on the brink of a potential crisis. We need a series of early warning potentials that can be exercised.
Lorely Burt (Solihull) (LD): I have a concern, which may or may not be appropriate, and I am interested in the hon. Gentleman’s view. If there is a formal requirement for notification, will the markets have any knowledge of that? If these warnings are going to and fro all the time, would that not have an unsettling effect on the markets?
Chris Leslie: The Bill anticipates that. The hon. Lady makes an important point, because such warnings or discussions could spook people and the markets. There are occasions when the Treasury and the Bank of England can decide not to publicise those warning processes and that notification arrangement precisely for the reasons she gives. The Bill already deals with some of those circumstances quite adequately, so there is no particular disagreement between us and the Minister on that point.
However, the Treasury needs to be given a heads-up on the potential risk to public funds, rather than such circumstances suddenly emerging in a formal way. I accept that it is difficult to draft and frame legislation to capture that concept, but ensuring that we have that system in place in a way that specifically empowers all
Chris Leslie: As the Minister knows, this issue has come up during our debates, but it is not clear in the legislation whether the deputy governor, a chief executive of the PRA or other officials at the Bank can make that notification. [ Interruption. ] The Minister scoffs, but I had presumed that we should read subsection (1) to mean that the Governor will decide when the Bank makes a notification. Am I wrong? I will give way to the Minister if I am and if it is not the responsibility of the Governor alone to make that notification.
Mr Hoban: The responsibility rests with the Bank of England—it is clear and in the Bill. The Bank of England has the responsibility to make the notification. If we had meant the Governor, we would have said “the Governor”. If it was meant to be a Doorkeeper, it would have said “a Doorkeeper”. If it was meant to be a Clerk, it would have said “a Clerk”. It is the Bank of England.
Chris Leslie: The Minister does not understand my point, which is that if, for argument’s sake, a responsibility fell on the Treasury to notify the Bank of England, one would naturally assume that the legislation would be interpreted to mean that the Chancellor of the Exchequer—otherwise known in the legislation, I think, as the Secretary of State—has that responsibility and therefore would be able to decide when a notification was given. The Minister may feel this to be a small point, but it came up significantly on Second Reading. As I read the clause, it would not be possible for the deputy governor or the head of one of the other regulators to make a notification should the Governor disagree with it. In this legislation, the “Bank of England” is taken to mean matters which the Governor sanctions. The Minister can stand up and say that the legislation is clear and it says “the Bank”, but he must accept that there is an important point here. We are creating new regulatory structures and setting up this architecture with all these other regulatory responsibilities, but we are then at risk of gagging them, preventing their voicing concerns about policy matters that may have a downstream consequence on the taxpayer, unless they get the agreement of the Governor of the Bank of England when making a particular notification. That is our key point.
We are going slightly wider than the amendment that we are discussing, Mr Gray, but we will come to those points in future amendments. With amendment 173, I want to establish the principle that the early warning of a material risk to public funds ought to be made in a strong way. I am delighted to see three members of the Treasury Committee here, and I am simply taking a leaf from that Committee’s 21st report, in which the hon. Members for Hereford and South Herefordshire and for Wyre Forest considered the circumstance and made their recommendations. In some respects, the amendment is a bit of plagiarism on my part; I merely copied some of their suggestions and tabled an amendment that would, hopefully, facilitate their view on the issue.
Chris Leslie: Paragraph 166 of the Treasury Committee’s 21st report says that the Committee is concerned about material risks becoming apparent too late to the Treasury. The Committee recommended that the Bill
“require the Bank to give the Chancellor an early warning of the possibility that a notification of a material risk to public funds may need to be given, and full information about the circumstances.”
I share the concerns of the hon. Members for Wyre Forest and for Hereford and South Herefordshire, and of my hon. Friend the Member for Erith and Thamesmead, who served on the Committee when the report was published. That is why I tabled my amendments in that vein. I hope the Government will agree to their provisions.
The issue has been of concern to others as well. The British Bankers Association stated on page 3 of its briefing on the crisis management aspects of the Bill that it is concerned that the notification process as framed might have perverse consequences:
“Given that the MOU stipulates that the Bank should notify the Treasury of a material risk to public funds and specifically that ‘if in doubt’ it should ‘tend towards notification’ it is possible that one outcome of the MOU as currently drafted would be to bring forward the point at which the PRA (as the new authority responsible for triggering the SRR), under the Bank’s governance structure, would determine that a firm has met the conditions for resolution. Since recovery is invariably a better option than resolution, it would be an unfortunate consequence of the duty to notify if it resulted in the PRA having less tolerance in its judgment concerning whether the threshold criteria were irrevocably breached. At the very least, this introduces a further area of uncertainty to an already subjective test which remains the subject of considerable nervousness in the market.”
Chris Leslie: No. My interpretation of the BBA’s concern is that some degree of earlier warning arrangement would help to ensure that a series of flags, traffic lights, or whatever the Minister wishes to characterise a warning process as, might gently begin to raise concerns or awareness of a situation developing within the Treasury. Rather than that information being hoarded within the Bank of England, it would be far better to have some process of dialogue. That is why it is important that the amendment be made, in order to put an early warning in the pipeline. That is the purpose of amendment 173.
Sheila Gilmore: Is the concern that if the procedure involves only formal notification, either it would be made too soon, which could cause actions to be taken or concerns to be promulgated needlessly within the financial system, or it would held back too late? Would not an earlier step give a gradation in that process?
It is good that clause 54 requires that notification, and there are a number of circumstances when it would be expected to be used. However, it is important to have a preliminary step—the early warning arrangement—so that we can learn the lessons from the Treasury Committee’s careful and thoughtful scrutiny of the Bill, and particularly of the point about notification. It was in the hope that we could facilitate the Minister’s acceptance of the Treasury Committee’s recommendations that we tabled the amendment.
Mr Hoban: What we have sought to do through these crisis management arrangements is to create some clarity, whereas under the previous regime there was confusion as to who is responsible in these circumstances. In fact, the hon. Gentleman’s amendment would re-create that confusion where the Bill tries to create clarity.
Let me explain why the hon. Gentleman’s amendment is unnecessary. First, as we have made clear in our response to the Treasury Committee, the duty on the Bank to notify the Treasury of a risk to public funds already achieves the amendment’s aim. The notification process is designed to be triggered early enough that an additional early warning system is not necessary. If we are not careful, there could be an early warning of an early warning of the early warning; however, we have designed this notification process to ensure that an additional layer of complexity is not required.
We are talking about a relatively early stage of the process. The provision is designed so that the Bank cannot wait until the need to use public funds actually materialises. As clause 54(1) makes clear, the Bank must make a notification as soon as it believes
in the future in which public funds might need to be used. So it is not the quantum of public funds that matters; it is the risk of that need arising. Therefore, in the scenario the hon. Gentleman describes—where the Bank is aware that at some future point a risk to public funds could arise—the Bank should be making a notification under the existing duty, and not requiring some sort of early warning mechanism.
In addition, to underscore this process the draft memorandum of understanding makes it clear that there must be no surprises for either institution. It also spells out that, where the Treasury independently identifies
As I have said, the hon. Gentleman’s amendment would create confusion by adding additional regulatory bodies to clause 54. The clause is based on the premise that the Bank and the Bank alone is responsible for notifying the Chancellor of risks to public funds. If, therefore, the Bank fails for some reason to notify the Chancellor in time, it is absolutely clear and transparent where accountability for that failure would lie.
There was some discussion about whether it would be better to have earlier or later notification, and whether earlier or later notification would increase or decrease the risk of intervention. Let me be clear to hon. Members about this. The Bank of England’s duty to notify the Treasury of a risk to the public funds is entirely separate from the Prudential Regulation Authority’s decision about whether a firm should be put into the special resolution regime.
Where a firm is in difficulties and one or more of the potential options to resolve the firm—if it fails—would involve the use of public funds, the Bank should notify the Treasury. In most circumstances, that will be well in advance of any decision to trigger putting the firm into the special resolution regime. A notification of risk to public funds does not mean that the firm will definitely fail, or that public funds will definitely be used in the case of failure. Therefore, a notification of a risk to public funds would have no impact on the PRA’s assessment of a firm’s ability to meet its threshold conditions.
It is important to separate the two processes. We are trying, via the clause and the MOUs, to ensure that any risk that public funds might be used is brought to the Treasury’s attention as soon as possible. It is unnecessary to add an early warning system to that which is already in place. That would not be appropriate, given that we are talking about the use to which public money will be put under the PRA, the Financial Policy Committee and the Financial Conduct Authority.
Chris Leslie: I am grateful to the Minister for his response. I understand to a degree why he does not want to introduce a caveat into the provision, but I still believe that the notification procedure’s current design will result in a series of risks. Indeed, the Treasury Committee has been particularly keen to highlight that.
These provisions could lead to situations in which there is no adequate dialogue between the Bank and the Treasury. The Treasury is the steward of public funds, and if taxpayers’ funds are likely to be affected the clause would be triggered, but that could lead to indirect circumstances that may hit the public purse. That is what we want to capture in the amendment.
I accept that it is difficult to address this issue in the Bill, which is why we drafted amendment 173 as we did. An early warning and a notification of material risk would add some broader, contextual information to help the arrangements. This is an important issue, particularly given that the Treasury Committee suggested that the Bill address it, so I will not withdraw the amendment. I want to test the Committee’s will, especially given the presence of some members of the Treasury Committee.
Chris Leslie: Amendment 179 relates to how best we define material risk, and to cases where the notification of material risk needs to be presented. Amendment 180 relates to clause 61 and the memorandum of understanding in circumstances of crisis management. It states that the memorandum needs to make provision for what the Treasury and the Bank regard as material risk. I know that you are following the Bill closely, Mr Gray, and that you will recognise the two phrases in the amendments, which relate to the responsibility of the Prudential Regulation Authority and the strategic objective of the Financial Conduct Authority. Amendment 179 also refers to the strategic objective of the FCA. It goes a little further toward the strategic objective that we had hoped would be in the Bill, but for the Minister’s resistance to the amendment that we tabled at the time. We wanted to ensure that such situations encapsulated risks relating to relevant markets functioning well, fairly, efficiently and transparently.
The Bill and the draft form of the memorandum of understanding are too vague about the role of the FCA and the PRA in circumstances of material risk to public funds. Therefore, the amendments seek to ensure that the definitions also encompass these FCA and PRA matters, and, implicitly, we hope that they will be involved by the Governor in assessing whether a material risk exists. We had a prelude a moment ago to the debate we are likely to have on amendments relating to clause 58(1) and the duty that falls on the Bank of England, in generic terms, to make this notification of material risk. My concern is that that is not precise enough. It will probably be taken that the Governor will have the power to make the recommendation. It would be preferable for the FCA and PRA, as newly formed, free-standing—or supposedly free-standing—regulators to also be able to
Surely, if there is a material risk because markets are functioning badly, inefficiently or in a non-transparent way, the Chancellor should be notified and therefore made aware of whether action needs to be taken. Poorly functioning markets can have a significant impact on monetary policy and on public funds. For example, there are a number of circumstances where policy measures have needed to be taken because of deteriorations in market activity. We have not just dreamt this up. The pre-legislative scrutiny Committee, in its report on the Bill in paragraph 140, said:
Will the MOU be revised from time to time? Could that be done in a way that redefines material risk, without necessarily going through any parliamentary scrutiny process? In other words, could this MOU arrangement be amended to include prudential regulatory concerns or conduct concerns? Would the Minister expect that?
We would not expect necessarily a formulaic definition but it would be helpful if the Minister can explain why he thinks the term has not been fully fleshed out in the Bill. We suggest that it needs to include some of those conduct and prudential concerns as there are worries that the Bill is not explicit enough on that definition. There are also concerns that without a clear view as to what a material risk might entail, the Bank might not consider a material risk to be relevant or there might be circumstances where a material risk has arisen but the Treasury is not notified. We are just trying to table amendments to ensure that we capture as many circumstances of material risk to public funds, both direct and indirect, as possible. I hope the amendment is helpful, and I should be grateful if the Minister gave a sense of what he regards as being within that definition.
Mr Hoban: I made clear in the debate on the previous group of amendments that material risk refers to the likelihood of the use of public funds. It is an early warning system. That is clear. The MOU will be able to be revised. It is not a document that is set in stone. That could include changes to what is meant by material risk. Let us be very clear about what we are trying to achieve here through this MOU. It is not an all-purpose MOU. It is designed to deal with the issue of the use of public funds in a crisis. The purpose of the process set out here is to ensure that the Treasury is aware of and can take action to mitigate the risks to public funds.
Decisions to use public funds to resolve a financial crisis are for the Government to take, usually the Chancellor personally. The use of taxpayer money is rightly reserved to the Government. The clause ensures that the Treasury
The same does not apply to the objectives of the PRA and the FCA. Ensuring that the relevant markets function well is the FCA’s responsibility; the safety and soundness of PRA-regulated firms is the PRA’s responsibility. The Treasury is ultimately and solely responsible for the use of public funds. It is not ultimately or solely responsible for ensuring that markets function well or for promoting the safety and soundness of firms. The rationale for creating a formal notification process does not apply in the same way to well-functioning markets and the safety and soundness of funds in the same way as it does to the protection of public funds.
These issues move into the area of the Treasury’s direct responsibility if they have the potential to put public funds at risk. That is where the existing duty on the Bank will kick in. The additions proposed by the hon. Gentleman are both unnecessary and potentially confusing. We recognise that the FCA and the PRA will inform the Treasury when they are managing significant issues that are of wider public interest but do not impact upon public funds. The FCA and the PRA will keep the Treasury informed of these matters, not least because it is Treasury Ministers who will need to explain these issues to Parliament where necessary.
This type of communication already goes on routinely between the Treasury and the FCA. The hon. Gentleman suggests that the chief executive of the FCA or the chief executive of the PRA would be in some way scared of coming to Ministers to talk about these issues. I can assure him from the conversations that I have with Martin Wheatley, who is running the conduct business unit in the FCA, that he has no problems at all about coming to see me to talk about issues. In the same way, I have regular meetings with the chief executive of the FSA and the deputy governor for financial stability. They are all at liberty to come to talk to us about these issues, so there is that dialogue, but that does not relate to the memorandum of understanding and the duty of the Bank to notify the Treasury about the possible need for public funds. The amendments are not necessary, because they would again create confusion about what the duty is meant to achieve. We now have clarity, where we had confusion under the old regime.
Chris Leslie: I think that I understand the Minister’s logic in that he does not want to open the floodgates in the definition of material risk now; he wants to keep it relatively prosaic in so far as it is set out in the MOU. I asked about the MOU and the extent to which it will be subject to parliamentary scrutiny because those are big questions.
Ultimately, we have to step back and recognise that our constituents have grave concerns about why so much taxpayer’s money was put on the line by circumstances that were not properly captured ahead of the crisis. We cannot expect the regulators at that time to have known in hindsight about needing to capture such a set of issues, but in designing a new set of arrangements, we should ensure that material risks encapsulate the set of questions for which the two new regulators will properly have responsibility.
I am sure that it is true that the current chief executives of the FCA and PRA are very good at being vocal, meeting Ministers and communicating such questions. We read that we are losing the chief executive of the PRA, and a new deputy governor of the Bank of England is due to be appointed by the Governor of the Bank.
Chris Leslie: That is quite interesting. Will the Minister confirm that the Governor will not finally sign off the appointment, and that the deputy governor will be appointed by the Crown on the advice of Ministers?
Chris Leslie: On the advice of Ministers—it is sometimes difficult to get a simple answer from the Minister. I do not think that the Crown makes decisions without the advice of Ministers. If it is a ministerial appointment, that is important because it might imply that, to a degree, there are lines of accountability back to Ministers, which would not be the case if the Governor made that appointment directly.
I do not know whether, under any statute, the deputy governor is necessarily—I may be wrong—always the chief executive of the PRA. Might it not be possible for the chief executive of the PRA to be different from the deputy governor for prudential regulation? I do not think that the two are inextricably linked, although we have assumed that the two will always be one and the same. I do not think that that is specified in statute, but I may be wrong.
Chris Leslie: It was silly of me to have such a memory lapse about something very important. With such clarity about the issues, I concede that it is important to recognise that there may be scope for prudential regulation concerns to come to the attention of Her Majesty’s Treasury that go beyond what is contained in clause 54 on the notification of material risk. I was trying to establish that point, and the Minister has been exceptionally helpful in clarifying it. I do not want to labour the matter, so I will heed the Minister’s comments. I do not think that he has sufficiently set out his definition, but I hope that when we discuss the MOU we can consider that again.
The Chair: Order. Before we recommence, the usual channels have told me that it would be convenient if the Committee suspended for dinner at 7.15 pm for 45 minutes. I understand that there may be Divisions in the Chamber at 8 pm, so the Committee will recommence at the conclusion of one or more votes. If agreeable, we will continue our deliberations until about 7.15 pm and then suspend the Committee for 45 minutes for supper.
Chris Leslie: In many ways, the amendments go to the heart of the Second Reading debate on 6 February between the shadow Chancellor, my right hon. Friend the Member for Morley and Outwood (Ed Balls), and the Chancellor. Despite the Chancellor’s protestations at my right hon. Friend’s concerns about certain voices being excluded from the new regulatory structures, I am pleased that the Government have tabled amendments to the Bill following those exchanges. We wanted to effect a particular change to the Bill, and the Government have—at last—conceded something and recognised the need to ensure that some of the gaping holes are plugged in clause 54 by improved references to the communication of warnings about material risk to public funds.
We welcome the Government’s amendments; they are an improvement to the current Bill. It is right for the Financial Conduct Authority to be included in the list of bodies affected if a notification were triggered, or if the Treasury
Amendments 174 and 175 are similar in tone to the Government amendments, but we have added the Financial Policy Committee. It would seem strange for the new body that is tasked with responsibility for macro-prudential and broad financial stability not to be able to pull that trigger and notify the Treasury of a change. The Minister will say, of course, that the Bill does not exclude the potential of the Financial Policy Committee to act in such a way, but it does not explicitly allow it. Because of the overly-ambiguous drafting of clause 54(1), simply allowing the Bank of England to act does not give the FPC that responsibility. We have therefore tabled the amendment in the hope of clarifying whether the FPC would formally be able to have that level of dialogue with Her Majesty’s Treasury in such circumstances.
We have given the new Financial Policy Committee significant powers, but clause 54 seems to place a lot of the power to trigger an early warning notification about a risk to public funds in the hands of the Governor of the Bank of England. It is entirely possible to envisage circumstances in which the Governor takes issue with the FCA, the PRA, deputy governors or even the majority
We are trying to help the Government put some sense into the convoluted structure they have constructed by allowing the various channels to be tasked with the responsibility of safeguarding the system and, by extension, protecting the taxpayer. Under the Bill, there is a risk that the Governor might judge not to inform the Chancellor that perhaps the deputy governor believes there to be a material threat to stability. If the Governor makes a personal judgment, and for whatever reason dismisses the views of others, there could be a danger that important voices would not be heard by the Chancellor.
There are strong differences in judgment within the Bank of England about appropriate safeguards against moral hazard, for example, so we want to broaden lines of communication in relation to warnings of material risks to public funds. Although we welcome the Government’s amendments, the Minister should explain why the FPC is not included in the list.
Mr Hoban: The hon. Gentleman should have thought about to which part of the clause our amendments were tabled before he repeated them and inserted the words “and the FPC”. The second case sets out the position whereby people are exercising their respective powers under parts 1 to 3 of the Banking Act 2009. The FPC does not have responsibilities when it comes to the exercise of powers under parts 1 to 3 of that Act. That is the special resolution regime.
If the FPC were to revisit the regulatory perimeter, it might decide that the FCA should exercise some micro-prudential responsibilities in relation to deposit takers. If the FCA does exercise a micro-prudential responsibility in respect of small deposit takers, it would need to have powers under parts 1 to 3 of the Banking Act 2009, which is why we chose to insert the reference to the FCA into lines 7, 13 and 14 of the clause and why we did not choose to insert a reference to the FPC. It is not about duty to notify the mature risk per se, but the exercise of powers under the Banking Act, and those powers do not extend to the FPC.
Chris Leslie: The Minister is envisaging a hypothetical situation when the regulatory perimeter is extended for micro-prudential responsibilities to the FCA, but he does not envisage that there will ever be circumstances in which that might also apply to the Financial Policy Committee. That is a rather strange approach. There could indeed be circumstances in which some of those references relate specifically to the provisions of the Banking Act 2009 or other special resolution regimes, and I can understand the justification in drafting terms for not including the FPC in one reference or elsewhere. However, the hon. Gentleman did not deal with my core point, which was why not allow the FPC to make those representations directly to the Treasury. It would be helpful and clear if, for the avoidance of doubt, it was possible for the FPC to make such representations.
Chris Leslie: I am making the case again in respect of amendments 174 and 175. It is an important point that needs to be made. I do not know what the Minister’s intervention was intended to achieve, but we shall want to return to such matters at a later date. It is important for the FPC to be given a voice to ensure that if it has collective concerns, even if they clash with the views of the Governor, it is allowed to have a dialogue directly with the Chancellor. It is a system of early warnings and notifications of risk. What would be the reason for deliberately preventing that voice from being heard? For the avoidance of doubt, it would be better to allow for that possibility. It is therefore important to test the Committee’s view on that point. I will not press both amendments 174 and 175, but I will test the Committee’s views on amendment 174.
The Chair: Order. I am not all that inclined to allow a stand part debate on clause 54, given that we have had a fairly extensive debate on it already. I suspect it might be better to put the Question.
Chris Leslie: On a point of order, Mr Gray. I accept that we have discussed a number of amendments to clause 54, but they were in only three groups, which is a relatively modest number in amendment terms.
The provisions of clause 54 extend beyond those that we have sought to and relate to, for example, the public funds test and the role of the European Commission in the deposit guarantee scheme. Given that we have not touched on them in the amendments, not to mention discussed the concerns that the Treasury Committee has raised, it would be helpful if we had an opportunity to test the Minister on a couple of questions.
The Chair: I understand the point of order. It is matter for my discretion as the Chair, none the less, because of the breadth of the clause in question, I am prepared to allow a brief stand part debate on clause 54.
Chris Leslie: You are generous, Mr Gray, and I am grateful for your flexibility and wisdom in showing such judgment in the Chair. May I say again what a pleasure it is to serve under your chairmanship?
The concerns that the Treasury Committee voiced about clause 54 are important, because it stated that “material risk” was not adequately defined. I can tell by the facial nuances of the hon. Member for Wyre Forest, and to a lesser extent those of the hon. Member for Hereford and South Herefordshire, that they know what I am talking about in terms of the 21st report of the Treasury Committee.
The Minister, articulate as he always is on such points, has not shed sufficient light on what he regards material risk to be, and it is important that he take the opportunity to set out what he thinks it will be. Is the definition simply that in the memorandum of understanding, namely, that it is broadly those questions in the proactive intervention framework in the PRA’s report or is it broader than that? Given that it is not in the Bill, will he at least commit to finding an opportunity for parliamentary scrutiny of the MOU? As I understand it, there is no affirmative resolution procedure for that important and crucial document. My hon. Friends will be aware of the importance attached to those questions, given that they clearly relate to crisis scenarios for which we need to ensure clarity, that lessons are learned, that we have clear definitions and that we are prepared for the next situation, if and when it occurs, without fumbling around for definitions. That is the purpose of the arrangements.
In my point of order, I mentioned the public funds test. The arrangements to finance the resolution of failed institutions are evolving because of a series of legislative initiatives. In particular, the European Commission has announced its intention to develop a regime under which member states should ensure that they have arrangements in place, such as a ex ante financial resolution fund, to
The existing tri-partite arrangement has joined the banking industry in supporting the principles that banks not taxpayers must pay for failures. In agreeing that the depositor guarantee scheme can be used to contribute to resolution costs and be leveraged to meet the requirements for a national resolution fund required by the forthcoming EU directive, the British Bankers Association has observed:
“The European Commission appears to be open to the notion that DGS could be used to meet resolution costs, particularly as the European Directive on Deposit Guarantee Schemes is likely
The BBA has been quite exercised about that question, and it makes a reasonable point. It suggests that the proposed public funds test might be too restrictive to ensure that the Chancellor is engaged at an appropriate point when conditions are deteriorating rapidly. It believes it would be advisable to align the MOU and the Bill with the provisions in the Banking Act 2009 by requiring the Bank to notify the Treasury whenever there is an actual or likely need to invoke the special resolution regime.
Can the Minister offer reassurances that he is mindful of the EU directives on deposit guarantee schemes? Were they taken into account in the drafting of the Bill? Does he anticipate that it might be necessary to change legislation further at a later date, in the event that the directive on deposit guarantee schemes is used to meet resolution costs? That is a specific query about the Bill.
If a person notifies the Treasury of a material risk to public funds through a telephone call or a face-to-face meeting, would there perhaps be an e-mail, or a hard copy follow-up? Will more robust procedures be set out in the Bill? Sometimes circumstances will be fast-moving, and I worry—
The Chair: Order. Before he continues, I warned the hon. Gentleman that I would interrupt him at 7.15 pm, even if he were on his feet at the time. It is the magic hour, and I suspend the Committee until 8 o’clock, or as soon thereafter as the Divisions in the main Chamber have been completed.