Banking (Special Provisions) Bill 2007

[Samuel Gallagher]

Banking (Special Provisions) Bill 2007

Mr Speaker,
 
I beg leave to introduce the Banking (Special Provisions) Bill 2007. This legislation will provide the government with the necessary powers to take Northern Rock into temporary public ownership. This is not legislation that the government brings forward lightly or without due consideration, both of which I will touch upon in my introductory remarks.
 
The necessity of this legislation, Mr Speaker, can be traced back to 1998, when the previous government and the previous Chancellor, the Rt Hon Member for Kirkcaldy and Cowdenbeath, removed financial services supervision from the Bank of England and established the Tripartite System. In doing so, the ability of the Bank to act in the event of a threat to the financial system in a timely fashion was weakened. The division of authority prevented effective communication between institutions. It was, at the time, a flawed system. It was confirmed as a flawed system in the past months.
 
And then, of course, there was the negligence. The Tripartite Authorities conducted numerous exercises to plan for contingencies. In 2004, they ran an exercise involving a bank coming under immense stress because of difficulties with its mortgage book. In 2005, they ran an exercise involving a bank stressed because of a liquidity crisis. The result of these exercises was a realisation that the relevant authorities and planning for responding to such contingencies were not in place. Despite these findings, the previous government did not create the required authorities. Times were good, Mr Speaker, and ministers wanted to focus on increasing spending, not increasing preparedness.
 
We now see the costs of the inaction laid bare. It is the responsibility of this Conservative government to rapidly address the negligence of a previous Labour government.
 
Then there is the question of the necessity of this legislation. And it is necessary, Mr Speaker. Though some in the opposition cheer for the failure of banks, that is an irresponsible position. The reality is that the financial system is critical to Britain’s families and communities. The stability of the financial system is critical to Britain’s families and communities.
 
The options before us were limited and poor. The administration of Northern Rock would have been catastrophic: for communities, for families, for the financial system, and for the taxpayer. The private sector solutions available to us represented poor value for money. They would have required long-term taxpayer subsidy. Even then, our models showed that the cost to the taxpayer would be noticeably greater than that of temporary public ownership. Finally, there was temporary public ownership: the option we sought to pursue.
 
Temporary public ownership, for all its flaws, is the best option for our communities and families that rely on Northern Rock. It is the best option for the stability of our financial system. And it is the best option in terms of protecting the taxpayer. Therefore, it is the option that is the most rational to pursue.
 
Mr Speaker, the tenants of this legislation are straightforward. It gives the Treasury the authority to transfer securities and property from certain deposit taking financial institutions into public ownership. It establishes the conditions under which such action is justified: namely in the case of risks to the macroeconomy or financial stability. It creates a compensation scheme, as is required under human rights legislation. It establishes a mechanism for transferring a deposit taking institution out of public ownership. These are the key technical tenants of this bill.
 
I should like, however, to focus on the safeguards that the government is placing into this process. First, Mr Speaker, we want to ensure accountability when this action is taken. While we recognise that a decision of the magnitude envisioned in this bill must be taken by an accountable minister, the advice given should be a matter of public record. Therefore, we are requiring that the Tripartite Authorities make public their agreement or disagreement with an order issued under this bill.
 
Additionally, the government is committed to competition in the banking sector. For that reason, we are ensuring that the Office of Fair Trading can review decisions made under this bill and business plans put forward by institutions taken in public ownership. A bank taken into public ownership – a bank that has failed – should not benefit from public ownership to the detriment of peer institutions that did not fail. That is critical to maintaining a competitive financial sector. More importantly, that is vital to ensuring that consumers have options and are protected. We will ensure that competition and consumer protection remain central to our regulatory apparatus – even for institutions brought into temporary public ownership.
 
Finally, Mr Speaker, there is the matter of severance packages for executives from these institutions. We are providing legal footing for the government to deny executives and board members from firms subject to action under this legislation from being the beneficiaries of generous severance packages. They can receive the compassionate package that a normal person would be entitle to.
 
I should like to conclude my discussion with the plan for Northern Rock going forward. It our intention – a goal agreed to by the Tripartite Authorities and the incoming Northern Rock leadership team – to pursue to remutualisation of Northern Rock. This will be the first act in a growing focus on strengthening the mutual and cooperative sector in the United Kingdom.
 
This decision, Mr Speaker, is a sensible one. Northern Rock, prior to 1998, thrived as a building society that provided financial solutions to the families and communities in the North East of England. After restructuring and moves to bring it back into profitability, we have confidence that Northern Rock can be returned to the community as a building society. This will involve reform: reform of its structure, reform of its lending practices. However, once completed, Northern Rock’s customers will have the opportunity to become the owners of a remutualised, reinvigorated Northern Rock.
 
The incoming leadership of Northern Rock is in agreement on this vision and will see it carried out.
 
This remutualisation, Mr Speaker, is a path that makes sense. Community lending and banking need not be about profit at all costs. Profit at all costs was the mantra of the previous government. So long as the banks were generating tax revenue, ministers were uninterested in how they were doing it. That is a terrible mantra. Community lending and banking should be at the cornerstone of building a big society, one in which we strive for greater inclusion and opportunity within the financial sector. They should be a cornerstone on which strong families are built: families that are secure in their financial future. That is the vision we put forward today.
 
This is a significant bill, Mr Speaker. This is a significant action. But it is necessary. I am committed to ensuring macroeconomic stability and the stability of our financial sector. This legislation gives us the tools to achieve that. And, Mr Speaker, we will use these tools cautiously. We will seek to refine them in the future, to create a better regulatory regime. And as we act, we will use these tools to ensure that our financial sector grows stronger and healthier as result.
 
I commend this bill to the House.

[Macmillan]

ORDER! Second Reading!

[Ruth Murphy]

Mr. Speaker, 

I thank the Chancellor for her comprehensive statement to the House. 

Northern Rock’s failure has left so many families and businesses across Britain unsure for their economic futures. As the Chancellor herself acknowledged, turbulence in the financial sector has affected growth in the United Kingdom. I, like many Britons, fear that further developments may have devastating impacts on jobs, wages and public services. 

To that end, the response from the Labour Party has, as I know it has for many Britons, left a sour taste in my mouth Mr. Speaker. This is a time where we need careful scrutiny and, in the national interest, need to make clear we will act and collaborate in the national interest. That the Labour Party have now resorted to convoluted “gotcha” questions and misguided populism has been disheartening. 

I do not think the Chancellor has shown herself at her most dignified in response. A significant portion of the British public will be watching the Chancellor’s statement today desperate for answers and solutions. That nearly half of her speech was set to prepare a political attack on the Labour Party is undignified and tone deaf. 

In times like these, we need less politics and more maturity. 

Fortunately, to that end, I want to make the Liberal Democrats’ intentions clear Mr. Speaker: we support the bill. The Chancellor was not left with desirable choices, Mr. Speaker, but it is my conviction that on balance she made the correct choice. Temporary public ownership is the least costly option, is the option that best promotes security for Northern Rocks’ customers and, as the government have signalled, will ensure good behaviour and a viable future can be secured for Northern Rock.

I also think so far the Chancellor has executed that choice in a way which is measured, proportionate and responsible. The safeguards the Chancellor has implemented in this legislation seem imminently sensible.

And the decision to relaunch Northern Rock as a building society is one the Liberal Democrats don’t only support but are enthused by. While the current leadership within Northern Rock is committed to the Chancellor’s aims to remutualise Northern Rock, I would appreciate if the Chancellor could outline how she would ensure that process was maintained when the time came to return Northern Rock to the private sector. 

I also think the Chancellor would do well if she could inform the House the broad terms in which she feels Northern Rock could once again be returned to the private sector.

Further, could the Chancellor outline to the House what she believes would constitute more effective banking regulation to replace the current framework we now know to be ineffective?

Finally, while there may have been failures here at home there are concerns that the implications are very much global in scope. Has the Chancellor spoken to any other Ministers of Finance and is it possible a global response or global regulatory framework could be negotiated?

[Matty Bradford]

Mr. Speaker --

I thank the Chancellor for her statement and her wonderful ability to hide the truth of what this bill will do.

This bill is, quite simply, a power grab. This Tripartite Authorities provides a check and a balance over our nation's financial system. This bill gives the head head of the Treasury - the Chancellor - unlimited power to snap her fingers and tell a bank, "I want that." The Chancellor is of course somehow limited to times of a crisis... but what does that mean? Does it mean in a case like Northern Rock? Or could it also mean when the economy is rocky and polls are looking bad so it's time to pull a financial William Croft and take unnecessary, drastic actions for the purpose of getting favourable press? Under the terms of this language, this is absolutely the case.

Of course, this bill does leave it possible for the Bank of England and the FSA to be able to make public comment condemning the action -- giving them the same exact rights to do so as literally every single person in the world. And the same with the Office of Fair Trading -- they're allowed to comment, and to advise, but that is it.

While I would hope their expertise would be listened to... I am thinking it is going to be highly likely that their advice will fall on deaf ears to this Chancellor.

Also what's important is what's not in this bill. There's nothing in this language about ensuring bank liquidity. There's nothing in this bill that does anything but give the Chancellor unlimited power to do what she wants, when she wants. 

[Samuel Gallagher]

Mr Speaker,

I thank the Hon Member for Kingston and Surbiton for her remarks and shall endeavour to answer her questions.

Regarding the future of Northern Rock, the onward transfer of the assets of the institution out of temporary public ownership requires the approval of the Treasury. Therefore, while the Treasury will not run the day-to-day operations and strategic direction of Northern Rock, the return of Northern Rock to the private sector is dependent on achieving an outcome that, in the view of the Treasury, best protects the interests of taxpayers writ large and Northern Rock's customers. We view remutualisation of Northern Rock as the outcome that achieves those ends. The position of the Treasury is to use the authorities conveyed in this Act to achieve that outcome.

Of course, we acknowledge that this will take time to achieve. Further structural reforms will be necessary at Northern Rock. The government is currently investigating, alongside the the incoming leadership team, the need to divide the assets of Northern Rock and establish a system for eventually reuniting said assets. In the long-term, we would like to see Northern Rock return to profitability and demonstrate progress in repaying the Bank of England loan extended to it before remutualisation is achieved. However, we are open to the advice of financial advisors on this term. Additionally, it is our goal to remutualise Northern Rock as a free-standing institution. However, if our aims of protecting the interests of taxpayers and Northern Rock's existing customers can be achieved via a merger with an existing building society, such an option will be explored.

Remutualisation will not be an easy task, Mr Speaker - the Treasury intends to see it through nonetheless.

In regards to banking regulation, Mr Speaker, I believe that there are number of areas in which we need improvement. However, the area that the government has the greatest control over is the structure of regulation itself. It is increasingly clear that the Tripartite System is flawed. Likewise, the lack of a resolution regime for major banks - the exact issue that necessitated this legislation - poses a significant regulatory issue. My priority as I begin consultations on reforming financial regulation shall focus on strengthening the role of the Bank of England in both macro- and microprudential regulation and establishing clear procedures for the Bank, or Treasury if necessary, to act in response to the failure of a major bank, as we saw with Northern Rock.

There are additional regulatory elements, such as those covered under the Basel II agreement, that are best negotiated at a global scale - or certainly within the confines of the European Union. I have begun discussions with colleagues on these matters and will update the House as those discussions conclude. Needless to say, with the current writedowns being witnessed across the world, we view ensuring the stability of the global financial system as one requiring a global response.

[Steffan Lewis]

Mr Speaker,

The Opposition welcomes this measure from the Government. We are happy to see that the party which spent the last ten years, while in opposition, decrying any Labour Government attempt to intervene in economic affairs has decided to change its way of thinking. Members of this Chamber cannot forget that a radical, bold programme predicated on public ownership and industrial investment transformed and modernized Britain after the war, bringing many out of poverty and empowering ordinary people. Working people in communities across Britain certainly haven't.

With growing instability in our financial sector and obscenely wealthy fat-cat speculators playing with investment assets like they are toys, it is crucial that the Government be able to swiftly take action to ensure stability and security for working people. Labour wishes that the conditions necessary to take a financial institution into public ownership were less stringent - it is necessary that the Government be able to act swiftly to ensure stability and protect working people and the middle class from the recklessness of the few.

To that end we hope that both of the a. "maintaining the stability of the UK financial system" and b. "protecting the public interest" clauses in this legislation are interpreted broadly to enable public ownership of financial institutions to facilitate a high-wage, good-benefit labour market. Doing so would protect the public interest and stability of the UK financial system by strengthening the financial position of working people and ensuring that consumers can support small businesses on our high streets, creating a positive cycle of investment and growth. 

Thus, I end my remarks by asking the Government how they would interpret those clauses, urging them to do so broadly. 

[Samuel Gallagher]

Mr Speaker,

I am unclear as to how to respond to the dribble coming out of the mouth of the Member of the City of Durham. Perhaps I'm uncertain as to whether or not she's joking in her statements in this House and in the press. Perhaps I'm praying that she is. Of course, one could speculate that a former banker, in opposing this legislation, might trying to protect one's friends. One wouldn't want to name names or assign motives though.

However, I shall try to respond to her critiques as if they are serious.

Mr Speaker, the United Kingdom has no banking resolution regime. Despite reports from exercises conducted in 2004 and 2005 under the previous government identifying the clear need for a resolution regime, one was not put into place. While the government is consulting with the Bank of England and others on the structure of a resolution regime, it is not something that can be comprehensively developed and introduced overnight. Unfortunately, Mr Speaker, Northern Rock requires an immediate solution. That is what we are providing with this legislation.

Moreover, despite the Member for the City of Durham's statements on the Tripartite, it is resolutely clear that the regulators failed. The system that she has deluded herself into thinking is wonderful failed. That failure is why this legislation is necessary.

As to the Leader of the Opposition's comments. This bill is intended to be time limited and, as a result, will not be interpreted broadly. It is the position of this government that, where possible private sector solutions are infinitely preferable to temporary state ownership. Moreover, Mr Speaker, it is the position of the government that temporary state ownership is exactly that: temporary. Long-term state ownership of financial institutions will not be enabled by this legislation.

As for the rhetoric by the Leader of the Opposition: his party had no problem when the so-called "fat cat" speculators were fueling the tax revenues that his party needed to pay for public services. He voted for every piece of legislation that enabled their actions in the past ten years. Every Finance Act. Every banking regulation bill. If he wants to look for responsibility for this crisis he should take a look at his party and his record. Because, Mr Speaker, let the record show that every questionable business practice that Northern Rock engaged in: it did so while the Leader of the Opposition sat on the government benches.

Mr Speaker, as I conclude my remarks, I must be clear: the era of state ownership referred to by the Leader of the Opposition was a dismal time in British economic history. It was a time of productivity losses, of soaring inflation, and capital flight. While we are not afraid to act in an emergency, we are working to enable a regime that will remove the Treasury, to the greatest extent possible, from needing to take these decisions. These are to be isolated cases, extreme in their impact on the economy. While he may hope for a new era of state ownership, I must be clear: I have no intention of bringing such an era about. We will build a stronger British economy based on capitalism, enterprise, and a soundly regulated free market - something sorely lacking as a result of the actions of the last government.

That is the mission I accepted as Chancellor. That is the mission I will see through.

[Macmillan]

DIVISION! CLEAR THE LOBBIES

[Macmillan]

Passes by Voice Vote