Financial Services (Banking Reform) Bill

Lord Deighton Excerpts

Tuesday 8th October 2013 Lords Chamber

Moved by

[Lord Deighton]

24: Clause 4, page 17, leave out lines 20 to 44 and insert—
“(1A) The Treasury may by regulations require a ring-fenced body to make arrangements for any one or more of the following purposes—
(a) ensuring that, except in prescribed cases, the ring-fenced body cannot become liable to meet, or contribute to the meeting of, pension liabilities which arise in connection with persons’ service on or after a date specified in the regulations (“the specified date”) in any employment, other than service in an employment in respect of which the employer is a ring-fenced body;(b) ensuring that, except in prescribed cases, the default of a person other than another ring-fenced body would not result in the ring-fenced body becoming liable to meet, or contribute to the meeting of, pension liabilities arising in connection with persons’ service in any employment before the specified date;(c) to the extent that it is not possible to ensure the result mentioned in paragraph (a) or (b), minimising any potential liability falling within paragraph (a) or (b).(1B) The regulations may make provision enabling the trustees or managers of a relevant pension scheme in respect of which the employer or one of the employers is a ring-fenced body—
(a) to transfer to another relevant pension scheme part of the pension liabilities arising in connection with persons’ service before the specified date together with part of the assets of the scheme, or(b) to divide the scheme into two or more sections in relation to which prescribed conditions are met.(1C) The regulations may make provision—
(a) enabling a ring-fenced body to apply to the court in a case where the ring-fenced body has been unable to reach agreement with another person (“P”) about the making of arrangements with P on commercial terms for one or more of the purposes in subsection (1A), and(b) enabling the court on such an application to order P to enter into arrangements with the ring-fenced body for those purposes on such terms as the court considers fair and reasonable in the circumstances.(1D) The regulations must provide that any terms specified by the court by virtue of provision made under subsection (1C)—
(a) must be terms which, in the court’s opinion, represent terms on which the arrangements might be entered into if they were being entered into for commercial reasons between willing parties dealing at arm’s length, and(b) may involve the payment of any sum by instalments.(1E) The regulations may make other provision—
(a) about the making by a ring-fenced body of arrangements for one or more of the purposes in subsection (1A);(b) about any transfer or division falling within subsection (1B).”

[The Commercial Secretary to the Treasury (Lord Deighton) (Con)]

My Lords, I turn to Amendments 24 to 37. A central principle of ring-fencing is that ring-fenced banks must be independent from the rest of their groups, so that the failure of another member of the group cannot spread to—and bring down—the ring-fenced bank. Under existing pensions law, if a ring-fenced bank continues to share a pension scheme with other parts of its group then, if another group member were to fail, the entire liability for the scheme could fall on the ring-fenced bank as the “last man standing”. If this liability were sufficiently large, it could then threaten the viability of an otherwise healthy ring-fenced bank. Allowing ring-fenced banks to remain liable for a group pension scheme would thus leave open a potential avenue of contagion from the group to the ring-fenced bank.

It is for this reason that the ICB recommended that ring-fenced banks’ liabilities to group pension schemes should be removed or mitigated. Proposed new Section 142W, as currently set out, therefore gives the Treasury the power to require that ring-fenced banks make arrangements to ensure that they cannot become liable for the pension liabilities of any non-ring-fenced entity, or that they minimise such potential liabilities if they cannot entirely prevent them arising. This could involve segregating an existing pension scheme into discrete sections, or splitting it into two separate schemes. Restructuring would largely be executed through the existing means allowed for under pensions legislation.

The amendments to the powers as currently set out do not change the overarching policy objective. They simply ensure that the powers are wide enough to make sure that that objective is met in all scenarios. Under the existing drafting, the Bill allows the Treasury to make regulations requiring ring-fenced banks to make arrangements in relation to potential statutory liabilities they have to multi-employer schemes.

These amendments expand the scope of the power, allowing the Treasury to make regulations requiring that a ring-fenced bank ensure that it cannot become liable for the pension liabilities of non-ring-fenced banks, or at least minimise its potential liabilities to them, whether the liabilities are statutory—such as those which arise under the employer debt legislation—or non-statutory, such as can arise under contractual arrangements such as guarantees. The amendments also allow the Treasury to make regulations including provisions to help the banks to achieve the required separation of pension schemes, such as enabling the trustees to split the scheme or transfer assets and liabilities to a new scheme; and providing that a ring-fenced bank can make an application to the court if it is unable to reach agreement with a third party about the terms on which it should be released from a contractual arrangement or guarantee giving rise to potential pension liabilities.

In addition, the amendments enable the Treasury to make regulations requiring banks to do all they can to obtain clearance from the Pensions Regulator for any restructuring undertaken to comply with ring-fencing, to ensure that pension scheme members are adequately protected. This strengthens the existing provision in the Bill which only allows the Treasury regulations to require that a bank apply for clearance.

Finally, the amendments introduce a power, allowing the Treasury regulations to modify, exclude or apply legislation—including primary legislation—for the purposes of achieving the required separation of pension liabilities. Pension arrangements are inherently long-term in nature, and the Government must be able to respond flexibly to unforeseen developments as banks restructure their pension schemes if they are to ensure that the economic independence of ring-fenced banks is preserved. Regulations made under this power, like all regulations made under proposed new Section 142W, will be subject to the draft affirmative resolution procedure, and can be made only for the specific purposes outlined above. These amendments therefore ensure that proposed new Section 142W is effective in making the ring-fence robust.

[Lord Eatwell (Lab)]

My Lords, I am grateful to the noble Lord for introducing this set of amendments about pension schemes. The argument for the amendments raises two significant questions. We are talking here about transitional arrangements: about moving from a group pension scheme to what might in future be deemed to be necessarily separate schemes for the ring-fenced and non-ring-fenced components of a group. There must therefore be other transitional arrangements as well—for example, property leases which are relevant to a group. Are they, too, to be separated and decomposed? What are we going to do about all those group liabilities similar to pension liabilities during the period between the implementation of legislation for ring-fencing and the conclusion when ring-fencing has been in place for some time? Over that period, there have to be transitional arrangements. Clearly, pensions are a very special case because the people will presumably stay where they are, but there must be other elements of liabilities which are also rather difficult to untangle. My first question is therefore: what is the Government’s thinking about such transitional problems?

The second question, which is much more specific to pensions and immediately arises, is whether the separation will be to the detriment of members of the pension scheme. This is precisely an area in which scale can become enormously important in a pension scheme, especially with respect to diversifying risk. The sheer scale of a pension scheme can be a component of the commercial success of that scheme. If the scheme is to be broken up, will it be to the significant detriment of the pensioners? There must surely be some consideration of whether it is to be their detriment and, if so, of what measures are to be taken to remove that detriment.

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[Lord Deighton]

On the noble Lord’s question about transitional arrangements, the structure with respect to group liabilities will generally be to ensure that liabilities that are particularly relevant to the newly structured organisations that fall out of the ring-fencing arrangements are consistent with the businesses that they are in, so that an operating unit is created which has liabilities which match the business that it is running. If there was a lease at the group level and the ring-fenced bank was the organisation leasing the building, you would expect there to be an inter-company arrangement which would pass the cost down to that level. That is the principle and I think that most banks operate on that basis anyway because one is trying to put the costs and revenues where the business is. There is a provision under Part 7 of FiSMA which allows for transfer of business schemes if one is moving other businesses, but that is a separate point.

On the question of banks and trustees, it is for the banks to work out the practicalities. The legislation defines the objectives to make sure that the ring-fenced bank is protected and that the trustees and pension arrangements are protected in each case, which is why the provisions here ensure that the regulator is contacted in each case. Essentially, the cost of making this work, so that the pensioners are, at a minimum, indifferent to the outcome, will sit with the bank. That is the principle behind this. There may be some costs involved for the banks to leave the pensioners no worse than indifferent, and those costs are an intrinsic part of this separation and the advantages that it brings us.

[Lord Higgins]

Will my noble friend perhaps consider between now and Report whether there is not a strong case for the two schemes to be quite separate? There may well be a conflict of interest between the pensioners of one part of the bank and those of the other part; for example, on whether it should be a final salary scheme or a defined contribution scheme and so on. Will he consider whether one should not leave it to the banks but determine that they shall be separate pension schemes?

[Lord Deighton]

We will certainly review the question in that light. The principle behind this is that they would be separate pension schemes. They may be very similar schemes which are separated, but the notion here is that the ring-fenced bank would have one scheme and the rest of the group would be under different arrangements, the key objective being that the ring-fenced bank would not have an exposure to the pension liabilities that arise elsewhere in the group. That is the key principle here.

Amendment 24 agreed.

Moved by

[Lord Deighton]

25: Clause 4, page 18, line 11, leave out “a ring-fenced body from making” and insert “the making of”

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Moved by

[Lord Deighton]

39: Clause 5, page 21, line 36, leave out “In”

[Lord Deighton]

Amendments 39 to 41 bring Clause 5 into line with the new senior managers regime recommended by the PCBS. The intention behind Clause 5 is to make sure that directors of ring-fenced banks always have regulatory approval to perform their functions. The clause was introduced before the PCBS made its recommendations about the new senior managers regime. It required directors of ring-fenced banks to be approved persons when they carried out designated significant influence functions, in the terminology of the old regime. The Bill now introduces the senior managers regime, in which the concept of a significant influence function has been replaced. A technical amendment to the clause is therefore necessary to require that the regulator, which can be the PRA or the FCA, always has to designate directors of ring-fenced banks as senior managers, which removes the references to the old terminology.

Amendment 39 agreed.

Moved by

[Lord Deighton]

40: Clause 5, page 21, line 36, leave out “after” and insert “is amended as follows”

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Moved by

[Lord Deighton]

42: Clause 6, page 22, line 13, after “provisions,” insert—
“( ) the extent to which ring-fenced bodies are carrying on the regulated activity of dealing in investments as principal (whether in the United Kingdom or elsewhere) in circumstances where as a result of an order under section 142D(2) that activity is not an excluded activity,( ) the extent to which ring-fenced bodies are carrying on activities that would be excluded activities by virtue of an order under section 142D(4) but for an exemption or exclusion made by such an order,( ) the extent to which ring-fenced bodies are doing things that they would be prohibited from doing by an order under section 142E but for an exemption made by such an order,”