Investment Bank Special Administration Regulations 2011

Lord Sentamu Excerpts

Thursday 3rd February 2011 Lords Chamber

[Lord Myners]

I had almost concluded my speech but the noble Baroness’s intervention has provided me with an opportunity to carry on and say more. There are very talented people working in UK banking and some of them are among the world’s very best. They earn their remuneration. Sir Philip Hampton, the chairman of Royal Bank of Scotland, referred to a gangmaster culture in some of the banks. I put down a Question for the Minister on this subject, to which he gave his standard Answer on bank bonuses which I can now recite. Regardless of the Question I ask, I get the same Answer. Perhaps it will change at some point, but I am beginning to lose any great hope that the Minister will seek to answer the Questions that I ask him on these subjects.

[The Archbishop of York]

The noble Lord, Lord Myners, normally speaks with great sense and clarity on matters of money, but the question is not that banking is not an honourable profession. People who work in the banks are people of good will and good respect, and they do a very good job. The first question is about bonuses. People in this country find the bonus culture indefensible. The second question is about the gambling casinos around banking. Will they get rid of those gambling casinos? Many people say they do not like them. The question that the noble Lord asked the Minister about Lehman Brothers and deposit accounts in Germany illustrated the point. Some people say that that is not the honourable business of banking. Anybody who is having a go at banking is saying not that banking is not an honourable profession or that bankers are not very able people doing a good job but that these bonuses and the gambling casinos taint the entire profession of banking.

[Lord Myners]

I can only say that there are failures of agency functions here. The shareholders are not holding the boards to account, and the boards are not asking the right questions or building depth of talent. It may be that the Minister, with his great experience in this area, can share with us his thoughts about why banking has this problem of high bonuses. My father was a fisherman, and there was not a big bonus culture in fishing. There is no bonus culture in making ball bearings, in engineering or in the hospitality industry. I think the answer possibly lies with the work that the Independent Commission on Banking is doing. The Minister always treats anything I say positively with considerable scepticism and caution, but I repeat my strong endorsement of the creation of the Independent Commission on Banking. It may well raise some interesting perspectives on the points that have been made. I close by simply saying that I fully support the administrative orders being tabled today.

--- Later in debate ---

[Lord Sassoon]

My Lords, when we have a Project Merlin outcome to announce, the noble Lord will no doubt have every opportunity to cross-question me on these matters. I also note, just in case noble Lords missed it, that the noble Lord committed himself to that being his final intervention. He is certainly well below his batting average for interventions in my closing remarks but we will see whether he holds to it. I shall try not to provoke him. The only further thing that I wanted to say in response to the noble Lord was that, despite what I just said about banking and unfinished business on bonuses, I very much echo what he said about the importance of the City. Extraordinarily skilled work is done by many experts across the financial and business services in the City, and the City adds great value to the UK economy; we should not forget that.

I will respond to a couple of the points raised by my noble friend Lady Maddock. The supplier proposal adapts existing provisions in insolvency law, specifically within the Insolvency Act 1986. We are trying to ensure that, in the case of investment banks, those critical suppliers without whom the resolution of the investment bank cannot take place—the positions cannot be closed out—continue to supply. When we talk about 28 days, it is important that the supply is paid for but it is a question of whether it is paid for within the 28 days. The supplier can stop supplying if any charges in respect of the supply remain unpaid for more than 28 days, if the administrator consents to the termination, or if the supplier has the permission of the court. In that context, the definition of hardship will be left to the judgment of the court.

As regards the bar date, the critical protection is that sufficient time has to be allowed for publicity to be given to the fact that the investment bank has gone into special administration. There has to be sufficient time for affected clients to calculate and submit their claims and for practical difficulties in establishing claims to be sorted out. Therefore, I believe that there are sufficient protections in the regime.

The noble Lord, Lord Davies of Oldham, asked me a number of questions. I hope that I have dealt with the future-proofing and questions around the Financial Services Authority. Consumer protection will be fully taken into account in the architecture that we will propose to replace the Financial Services Authority. Central counterparties and the regulation of over-the-counter derivatives is an area which falls within the general heading that I addressed: namely, that we must work to achieve international and global solutions. I see some nodding and shaking of the head from the Benches opposite. That indicates that these things are not easy. We need to have a regime in place that is safe and appropriate for the markets in the UK, but equally we need to ensure that we have something consistent within the EU and the G20 framework as mechanisms which could provide safe solutions that might work against free investment flows. We have to ensure that this is not one of those issues where protectionism comes to the fore under the cloak of providing safe solutions. I absolutely take the point that the settlement of transactions is ongoing business in which the Government take an active part.

As regards how living wills fit with this new regime, recovery and resolution plans are again a core part of both our and the G20 authorities’ response to the “too big to fail” problem and will be required of all systemically important financial institutions. That is the critical definition in that context. It is not a question of an arbitrary definition that splits investment banks from other banks in the way that the noble Lord suggested might be the case.

On the protection of client assets, it is worth remembering that the FSA has set up a new client asset unit, which is a centre of excellence and expertise within the FSA, in further recognition of the important issues raised by the lessons learnt from Lehman. That further stresses the fact that although these instruments being put in place today are critical, they are in many respects only a part of a wider construct.

The first point that the noble Lord raised, but the last one which I should address, concerns the definition of fairness. The relevant provision is based on existing provisions in the Insolvency Act 1986 and the Financial Services and Markets Act 2000. “Fair” is the modern term for the previously used “just and equitable”. While I do not profess to be an expert on these matters, I am assured that the term “fair”—its use is based on a lot of case law defining “just and equitable”—is well defined under court rulings and will be well understood by those administering the special administration regime.

That has been a long response to a short but important debate.

[The Archbishop of York]

I did not clearly hear the noble Lord’s answer to the question of the noble Baroness, Lady Maddock, about the bar. Who will determine what sufficient time is? How would I know that as a client? Who will determine that it is sufficient?

[Lord Sassoon]

I thank the most reverend Primate for pressing me on that. The critical thing, as I said before, is not that some arbitrary time is laid down, because that will relate to the complexity of the individual administration case. The objective has to be for the administrator to fulfil his objectives. The principal objective that we are looking for is the return of the money as quickly as possible. That will be the objective that the administrator will be looking to fulfil, subject to these safeguards that I have tried to explain to make sure that absolutely everything is being done so that those with money at risk are informed and have time to calculate their claims. A date cannot be fixed in a way that applies to all circumstances, because, if so, there would be a backstop date that might disadvantage people in a simple administration.

Motion agreed.