Bradford & Bingley plc

Philip Davies Excerpts

Wednesday 27th November 2013 Westminster Hall

[Philip Davies (Shipley) (Con)]

It is a pleasure to serve under your chairmanship, Mr Betts. I hope you will convey my thanks to Mr Speaker for granting this debate.

As the Member of Parliament for the Shipley constituency, which includes the towns of Bingley and Crossflatts, where Bradford & Bingley was based, I have asked for this debate on behalf of the nearly 1 million Bradford & Bingley shareholders and bondholders who still do not know how or why their company was expropriated in a way that destroyed it as an ongoing business, unlike what happened to banks such as the Royal Bank of Scotland and Halifax Bank of Scotland, which had far weaker balance sheets.

I have also called the debate on behalf of the employees of Bradford & Bingley, many of whom had worked there for many years and were also shareholders. This debate is also important for the local community in Bingley and across the Bradford district, which has lost a highly valued brand from the high street. Bradford & Bingley had been in existence since 1851.

I thank many hon. Members for their support, both those here today and the many unable to attend. I particularly thank my right hon. Friend the Member for Mid Sussex (Nicholas Soames), who has been extremely helpful and supportive. He is a champion of the many shareholders in his constituency who lost out when Bradford & Bingley was nationalised in the way it was.

On Friday 26 September 2008, in the foyer of the Oval Office of the White House, the then Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), made the decision to nationalise Bradford & Bingley during a telephone conversation with his Chancellor, the right hon. Member for Edinburgh South West (Mr Darling), who was in the UK. That decision was extremely disappointing for the shareholders, many of whom remain outraged by what they consider to be legalised theft. Indeed, it is a shame that neither right hon. Gentleman is here today to explain the part they played in the scandal.

Days after the telephone call, the Cabinet Office stated in response to a freedom of information request from a shareholder, Mr Jonathan Bloch, that it had no files whatever. David Blundell, the chairman of the Bradford & Bingley shareholder action group, whose main objective throughout has been to secure the truth on the nationalisation—he is also a director of the UK Individual Shareholders Society, a voluntary organisation whose main objective is to protect the rights of private investors—said to me at the time that he had difficulty believing that the Cabinet Office statement was true, and so it has proved.

After further freedom of information requests, the Cabinet Office finally admitted in 2011 that it did possess the relevant records, but it refused to release them on the grounds of public interest. The Cabinet Office also refused on the grounds of public interest to state whether the nationalisation decision had secured Cabinet approval. I put on the record my admiration for David Blundell’s tireless work on behalf of the Bradford & Bingley shareholder action group and his determination to get to the bottom of the events surrounding the nationalisation.

[Alec Shelbrooke (Elmet and Rothwell) (Con)]

I put on the record my thanks to my constituent, David Blundell. He is fighting for the small person who invested their life savings in those shares and is now faced with nothing because of the decisions made at national level by the then Government. They have had no answers.

[Philip Davies]

My hon. Friend is absolutely right, and I know that he has been particularly helpful to the Bradford & Bingley shareholder action group. I thank him for all the help and support he has given to the many shareholders.

Surely the public interest demands full disclosure of the facts to secure the truth. How can the refusal even to release whether the nationalisation of Bradford & Bingley was ratified by the Cabinet ever be in the public interest in a democracy? Surely voters are entitled to know, let alone shareholders, bondholders and employees.

How do we know that the Cabinet Office’s original statement was untrue? I am probably one of the few people—I am sure you are another, Mr Betts—who has read the relevant part of “Beyond the Crash” by the right hon. Member for Kirkcaldy and Cowdenbeath, in which he admitted his part in the sorry mess. The shareholders would otherwise still be in total ignorance of the nationalisation process.

[Annette Brooke (Mid Dorset and North Poole) (LD)]

I congratulate my hon. Friend on securing this debate. I have had a vast amount of correspondence from just one constituent. I concur with him that the situation is bad enough, but the lack of openness for savers and investors means that they remain frustrated. It is vital that we make the information public.

[Philip Davies]

I am grateful for the hon. Lady’s support. I am sure her constituent, who is a shareholder who lost everything, is also grateful for her support. Her point on the lack of transparency is absolutely right.

The full picture of how the banking crisis developed probably goes back to 2003-04, when there were small changes in accounting standards, but the main catalyst was the introduction of the international financial reporting standards, including international accounting standard 39, by the then Government in 2005. IAS 39 proved to be a catastrophically defective standard that may even contravene UK law.

The Local Authority Pension Fund Forum, the universities superannuation scheme, Threadneedle Asset Management and other investor groups sought the opinion of leading counsel George Bompas QC. His opinion suggests that company directors must override the international reporting standards to comply with company law and may need to ignore the advice obtained by the Financial Reporting Council. The opinion also states that the defective financial outcomes of the standards, which are still in place, should be overridden by invoking the true and fair view requirement of the law. Those problems remain, as highlighted by the failure of the Co-operative bank and Britannia building society, both of which were audited by KPMG.

The concerns on accounting standards are widely held. In November 2012, the then Governor of the Bank of England, Sir Mervyn King—now Lord King—argued for a £35 billion capital raising by British banks. He is on record as saying:

“Bank accounts are dishonest because Britain’s accounting rules are faulty. Reckless lending, inflated profits, irresponsible bonuses have all been possible, not just because of greedy bankers, but because of the rules themselves—and a failure of regulators and politicians to recognise the problems.”

The banks used IFRS and IAS 39 from 2005 onwards, and it appears that the then Government were content to receive corporation tax from the inflated profits rather than exercise a duty of care towards savers and investors. People have blamed the lack of regulation for the excesses of the banks, which led to their demise. That is too simplistic. It was not the lack of regulation—banks had mountains of regulations to meet—but the lack of regulation on important things that was the problem.

I will now address the sequence of events prior to the nationalisation. The Bradford & Bingley 2007 accounts were published in April 2008. The auditors passed Bradford & Bingley as a going concern and a dividend was paid. In August 2008, a rights issue was completed at a price of 55p less than eight weeks before the nationalisation. The auditors KPMG completed extensive audit work on the rights issue, and the interim results announced on 29 August 2008 supported a solvent, well capitalised bank. With net assets of £1 a share and a tier 1 capital ratio of 9.1%, shareholders were entitled to believe that Bradford & Bingley was a going concern when the reality was that it was “going, going, gone” just one month later.

Within days of the nationalisation, the Government provided more than £60 billion of support to the two Scottish banks. Bradford & Bingley had a far stronger balance sheet than those banks, as shown in the banking crisis post mortem published by the Local Authority Pension Fund Forum. Furthermore, the public statements of the board emphasised the balance sheet strength of Bradford & Bingley on 29 August and 25 September 2008, a day before the nationalisation decision. That strength was again confirmed by Messrs Kent and Pym, the chairman and chief executive respectively, at a Treasury Committee hearing on 18 November 2008. Their statements conflict directly with the justification of the nationalisation decision by both the Government and the tripartite regulatory authorities. So who was telling the truth?

In the week after the nationalisation, the savings book and retail branch network were sold—arguably at a fire-sale price—destroying the company as an ongoing business. What shareholders, bondholders, employees and my local community want to know is why Bradford & Bingley was singled out in that way, in stark contrast to the treatment of other banks.

Every other bank bailed out at the time is still a going concern—even Northern Rock. Shareholders in some of the bigger banks at the time, such as HBOS, still have shares that have value. Why was Bradford & Bingley, uniquely, closed down, especially given that its financial situation was certainly no worse—indeed, all the evidence suggests it was better—than that of the others? Does the Minister not believe that people are entitled to know the answer to that simple question?

Whereas other banks were considered too big to fail, was Bradford & Bingley seen as too small to save? With constant speculation in the media at the time, was it felt that, if Bradford & Bingley was taken out, the speculation about the health of the banking sector would subside? Whatever the reason, and however little we like it, I hope the Minister agrees that we are entitled to know it.

The Treasury appointed Peter Clokey of PricewaterhouseCoopers as independent valuer for the purposes established under the Bradford & Bingley plc Compensation Scheme Order 2008. His nil valuation was published in July 2010, two months after the general election. Like the shareholder action group, I believe that his terms of reference were far too narrow and that the Labour Government concealed the fact that the bank had received funding support before the nationalisation, pretending for many months that the valuation would be fair and independent, when they knew it would not be, because the in-administration approach of the order ensured a nil valuation and prejudiced legal claims and submissions to the independent valuer and the upper tribunal review body.

Many shareholders—the former owners of the company —believe the valuation exercise was a cynical attempt to dampen media, press and public interest, thus kicking the matter into the long grass. I know that David Blundell has a high regard for Peter Clokey and his colleague James Worsnip. He respects their integrity and appreciates the assistance they provided, within the limits of their remit. In his view, their behaviour may be compared favourably with that of certain Ministers, the Treasury, the Financial Conduct Authority and the Cabinet Office. I met Peter Clokey at the time, and I felt he was sympathetic to the plight of shareholders, but the terms of reference the Labour Government gave him left him no alternative but to give a nil valuation.

The Government’s position on the valuation was that Bank of England support through the special liquidity scheme was not ordinary market assistance, despite more than 30 banks having, and some continuing to have, the use of that facility. That interpretation was a key factor in the nil valuation. However, the European Commissioner’s statement giving clearance to state aid following a request from the UK Government in the early part of the financial crisis in banking markets included the following:

“The UK authorities accept that the recapitalisation scheme and guarantee scheme contain State aid elements. In their view the extension of the SLS”—

the special liquidity scheme—

“is part of the essential role of the Bank of England and therefore not a state aid. In the event that the Commission concludes that the Liquidity Measures do contain aid elements, the UK Government submits that they form part of a wider package to remedy a serious disturbance in the economy of the United Kingdom which is compatible with the common market.”

Therefore, the UK Government argued to the EU that the special liquidity scheme was part of the normal workings of the Bank of England, but they specified the exact opposite in respect of the Bradford & Bingley valuation. Is that a further example of the double standards that have applied in this nationalisation process?

Since the 2008 nationalisation, there have been hundreds of freedom of information requests to Ministers, the Cabinet Office, the Treasury, the FCA, the Department for Business, Innovation and Skills and the Bank of England, but the shareholders still do not know how and why their company was expropriated. The treatment to which they have been subjected has been at best incompetent and at worst mendacious.

Leaving aside the Cabinet Office’s original untrue statement, the shareholders have been subjected to refusals on the grounds of cost and public interest, which, combined with further untrue statements and failures to reply to requests, have made a mockery of the Freedom of Information Act. The action group has made requests to the Cabinet Office and the Treasury for internal reviews in respect of their failure to provide the information requested, and it has appealed to the Information Commissioner’s Office in respect of the FCA’s failure to provide the records we all know it had.

The latter point is of particular interest, as David Blundell has a DVD recording of a telephone conversation in which a Financial Services Authority officer reassures a shareholder of the company’s financial strength just six days before the nationalisation. To date, the FCA has denied knowledge of any such records, which is rather incredible, as the DVD was sent to the shareholder by the FCA.

There is also strong evidence of a substantial level of communication between John Kingman at the Treasury and Robert Peston of the BBC, whose coverage of Bradford & Bingley caused a run on the shares and deposits. The Treasury stated it did not have such information and that Mr Kingman’s records had been cleared. In the interests of balance, I should make it clear that Mr Kingman denies being responsible for leaking any information to Robert Peston, although, as Mandy Rice-Davies said, “He would, wouldn’t he?”

Mr Kingman believes that the sole reason for the allegation is that he worked with Robert Peston at the Financial Times in the 1990s. An FOI request to the BBC was refused on the grounds that Mr Peston’s records were for journalistic purposes. The fact of the matter remains that someone at the Treasury leaked the situation to Robert Peston and to the Telegraph, precipitating a run on the bank from which it did not recover. The suspicion is that that was done deliberately to clear Bradford & Bingley from the decks so that the Treasury could focus on saving the bigger banks.

Recent letters to the then Chancellor, the then Prime Minister and the current Prime Minister have asked whether the decision to nationalise was correct and consistent with the treatment of other financial institutions at the time. The right hon. Member for Edinburgh South West suggested writing to a local MP—a particularly inadequate reply, as he was party to the nationalisation decision. The current Prime Minister passed the request to the Treasury, which responded with the usual stale excuses, similar to those of the past five years. The previous Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath, has not replied at all. It would appear that the spirit of Sir Humphrey is alive and well in Whitehall and Westminster.

Three key questions remain unanswered. First, what was the exact reason for the expropriation of the company? Secondly, should the rights issue have been permitted to proceed, and were shareholders wrongly induced to subscribe to it? Indeed, many employees paid their hard-earned money into the rights issue to prop up their company. Many of them lost not only their jobs, but their savings. The Government of the time were encouraging other financial institutions to support the rights issue, only to ensure that they then lost everything as a result of the way the banks were nationalised and a nil valuation was guaranteed. No wonder people do not like dealing with Governments. Thirdly, were the comments from the directors, the investor relations department and the FSA concerning the strength of the company only days before nationalisation true?

The shareholders of Bradford & Bingley believe the nationalisation of their company was a flawed decision made in haste and inconsistent with the treatment of other banks. When the Government confiscate the property of their citizens without reason, explanation or compensation, particularly when they may be seen as at fault in their duty of care to savers and investors for not adequately regulating the companies involved in the banking crisis, all concepts of democracy and equity are laid aside. I submit that that has damaged the Government’s reputation.

I would like the Minister to tell us what the future holds for UK Asset Resolution and the staff at the headquarters in Crossflatts, in my constituency. The mortgage book is being gradually wound down, but what happens then? Many people still rely on UKAR for their jobs, and there is vast experience and expertise there that should not be lost to the banking sector. The Government state they wish to see more competition among the banks, so will the Minister commit to look at whether a new bank—a modern-day Bradford & Bingley—could be born from UKAR and be seen on high streets, bringing much-needed competition to the banking sector and protecting the remaining jobs in my constituency?

In conclusion, an independent inquiry into the nationalisation of Bradford & Bingley is long overdue. The Bradford & Bingley shareholders, bondholders and employees, and the local community, are entitled to know the truth. The Prime Minister has claimed, many times, that he is committed to open and transparent government, and he has opened an inquiry into the Co-op bank failure. I believe it is not too late for the Government to do the same—open an independent inquiry—with respect to the Bradford & Bingley nationalisation. That was, arguably, the best example of what went wrong in the banking crisis, particularly in relation to the flawed accounting standards that are still in place. Justice and the British sense of fair play demand such action, and I hope that the Minister, who is a good man, will do the right thing and agree to it.

The Government rightly claim to be on the side of hard-working people. Hard-working people were the shareholders, bondholders and employees of Bradford & Bingley who all lost out. By agreeing to an independent inquiry and making all the relevant Government papers available to it, the Government can show that they will, indeed, stand up for hard-working people.

--- Later in debate ---

[Cathy Jamieson]

I have not, to date, spoken directly to the previous Prime Minister or the former Chancellor on this particular issue. I was interested to hear what the debate would be about today, and I look forward to what the Minister has to say about any action that the current Government will take. If there is something useful to be gained from my discussing the matter with the previous Prime Minister and the former Chancellor, I would be more than willing to do so, but I do not know whether that would produce the result that the hon. Gentleman seeks.

[Philip Davies]

I am grateful to the hon. Lady for what she says, and I hope that she will pursue the previous Prime Minister and the former Chancellor. In the unlikely and catastrophic event that there is a Labour Government after the next election, the one thing that the hon. Lady could do is to promise that a Labour Government would actually release all the relevant papers and hold an inquiry. She might not be able to say anything about what happened back then, but she can certainly say what she would do if she had the chance. Will she commit to that?

[Cathy Jamieson]

I am sure that the hon. Gentleman will be aware of the conventions relating to previous Governments. I am pretty sure that I will not be in a position, even in the likely event that there is a Labour Government the next time around, to discuss releasing papers from a previous Government. I understand that that is the convention irrespective of political parties. It will be interesting to hear what the Minister has to say about the action that the current Government can take.

At the time of Bradford & Bingley’s problems, the Government of the day wanted not only to try to preserve the country’s financial stability but to ensure that ordinary savers were protected. My understanding is that they did that in good faith and believed it to be the correct thing to do. I am sure that it was not an easy decision, but following the Financial Services Authority declaring default on the bank’s borrowings, the Government took decisive action. It is also worth noting that it was not only the previous Government who thought that that was the correct decision. People who were in opposition then and who are now part of the coalition also believed that it was right. The right hon. Member for Twickenham (Vince Cable), who was then the Liberal Democrat Treasury spokesman, said that if there was no private sector rescuer for Bradford & Bingley, which of course there was not, the Government were right to step in. He said at the time:

“In these circumstances, nationalisation is the least worst option. The UK Government is getting these assets for free, so it could turn out to be quite a good deal.”

--- Later in debate ---

[Philip Davies]

There is a big difference between stepping in to help and obliterating a high street bank. Northern Rock is still out there. People can still visit a Northern Rock branch. That is not the issue, however. The issue is that Bradford & Bingley was treated completely differently from every other organisation. It is not about stepping in to help; it is about how that supposed help was given.

[Cathy Jamieson]

I appreciate the hon. Gentleman’s comments. He has been a powerful advocate on behalf of his constituents, and I am sure that he will have other questions, but it is important to understand the context. The then Treasury director general wrote in the March 2012 “Review of HM Treasury’s management response to the financial crisis”:

“The Treasury drew on the experience of nationalising Northern Rock to resolve subsequent failing financial institutions, such as Bradford & Bingley, more quickly and decisively.”

That suggests that people thought not only that it was the right decision, but that action had to be taken quickly to avoid further damage to savers and the wider economy.

--- Later in debate ---

[Sajid Javid]

My hon. Friend makes a good point that has been brought up by many hon. Members. With the reforms we have implemented, and some that we are still in the process of implementing, the Government have created a stronger, more rigorous system, with regulators with a lot more teeth and a greater degree of independence.

The Government have also set up the Independent Commission on Banking, or ICB, to recommend further reforms to enhance financial stability. The Government accepted the recommendations of the ICB and are putting them into law this year through the Financial Services (Banking Reform) Bill. The Government also supported Parliament in setting up the Parliamentary Commission on Banking Standards and have accepted that commission’s main recommendations.

I turn now specifically to Bradford & Bingley. Following the difficulties Bradford & Bingley experienced in 2008, the previous Government transferred its retail deposit taking business and branch network to Abbey National after a competitive process; its mortgage business was brought into public ownership. At the time of the nationalisation of Bradford & Bingley, the UK was in the grip of a rapidly evolving crisis, as we have heard today. I cannot speak for the actions that the previous Government took to deal with the crisis, as I was not privy to the relevant discussions; nor, rightly, have I seen the papers that relate to the previous Administration, although I understand that the Treasury is handling all freedom of information requests in the proper manner.

Extensive information is already in the public domain: events leading up to the nationalisation have been looked at by both the National Audit Office and the Treasury Committee. But on the matter of information, I have to agree with the comments made by my hon. Friend the Member for Shipley, and, in particular, with the request made by my hon. Friend the Member for Chippenham (Duncan Hames), who asked the shadow Minister to use her good offices to speak to the former Prime Minister, the former Chancellor and others who were Ministers under the previous Government and closely involved in events at that time. That is a reasonable request; I hope she will act on it and get back to my hon. Friend about it. It could lead to further information that many stakeholders would find useful.

Following the transfer of Bradford & Bingley into public ownership, the previous Government made the Bradford & Bingley plc Compensation Scheme Order 2008, which was debated and approved by each House. The order provided for a mechanism through which compensation for former shareholders would be assessed by an independent valuer. As we have heard, after conducting a robust and rigorous process the independent valuer determined that no compensation was payable.

My hon. Friend the Member for Shipley asked whether it was right that the valuer should have been asked to work on the basis that there was no Government support. I believe that it cannot be right, or in the best interests of the taxpayer, that the valuer should have been asked to compensate for value that existed only by virtue of support that taxpayers themselves were providing.

Following the determination, all affected parties had the opportunity to submit requests for the valuer to reconsider his decision. The valuer considered all requests before concluding that no compensation was payable. That decision was further upheld in the upper tribunal review.

I believe that due process has been followed at every stage. Transparent and independent arrangements for compensation have been put in place and there has been a proper process in the courts. As I mentioned, there have also been investigations by the NAO and the Treasury Committee. I have to say to my hon. Friend that I have looked at the matter closely using the limited information available to me, and from what I have seen I am not persuaded that there is a case for a further investigation or inquiry.

Before I conclude, I want to respond specifically to a number of my hon. Friend’s questions. He talked about the rights issue that took place just before nationalisation. From the information I have seen, I can tell him that the Treasury had no involvement in that rights issue at all; as we have heard, the rights issue was conducted in the summer of 2008, prior to nationalisation, and was a matter solely for Bradford & Bingley’s board and senior management. Like many banks and building societies at that time or thereabouts, Bradford & Bingley was required to meet FSA regulatory capital requirements in order to continue with those regulated activities.

My hon. Friend also raised the issue of accounting standards, and in particular IAS 39, which he said was problematic and could perhaps take some blame for the financial crisis. He is right to raise accounting standards and the contribution they could have made to the crisis. The issue has been looked at extensively by authorities around the world, including the International Accounting Standards Board. The board has proposed a series of changes to IAS 39 and other, similar accounting practices. Those changes essentially mean that, in future, banks will have to hold more capital or take losses earlier on problematic loans.

My hon. Friend also rightly expressed his concerns about the future of a number of his constituents who were transferred to UKAR during nationalisation and are currently UKAR employees. He was absolutely right to say that those people have considerable expertise and experience in an important sector. My understanding is that currently over 2,000 staff are still employed in managing the closed mortgage books of both Bradford & Bingley and Northern Rock, and are doing an excellent job.

My hon. Friend may take some comfort from knowing that those people’s skills are such that it seems they will face growing demand for them: the Council of Mortgage Lenders recently said that mortgage lending in the third quarter of this year was at its highest level since 2007 and is growing strongly thanks to the Government’s policies and the economic growth we are experiencing. I am sure that the value of the skills they hold will give some comfort to the constituents he mentioned.

[Philip Davies]

I am grateful to my hon. Friend for his comments, although clearly I am disappointed that he does not believe that there is a need for an inquiry: we are still no further forward when it comes to knowing why Bradford & Bingley was treated so differently from other banks and building societies.

In the light of the comments my hon. Friend has just made about the future of Bradford & Bingley, will he go away and think about whether a new Bradford & Bingley could be born out of what is there at the moment to be a new challenger to the banking sector on the high street and to introduce the competition that we all want?

[Sajid Javid]

I will give a commitment to my hon. Friend that I will think about that further. In fact, I will do more: he will know that UKAR is part of United Kingdom Financial Investments Ltd, the agency that acts as the Government’s shareholder in the former assets of Bradford & Bingley, and of the Royal Bank of Scotland, Lloyds and others. I will write to the head of UKFI and to the head of UKAR to ask them to consider the case that my hon. Friend has made today.

I congratulate my hon. Friend once more on securing this debate. This is an issue that he, rightly, feels very strongly about. I assure him that we are taking what we believe are the right steps to ensure the future stability of our banking system.