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Banking Bill

This amendment relates to continuity obligations. It may help if I first provide a brief explanation of how these obligations are intended to work in relation to banking groups. Major financial firms do not tend to operate as single legal persons. Instead they are organised as groups, generally with a single, ultimate parent company and any number of subsidiaries which may be organised into distinct sub-groups. Corporate entities within these groups are connected through shareholdings, but are likely to be connected in other ways as well. Banking groups may have hundreds of group companies. Noble Lords should note that Northern Rock was an unusually simple bank in terms of corporate structure in that the holding company was the deposit-taker and the bank had very few subsidiaries. There is no general rule about how banks organise themselves, and in particular about where they locate their systems. Some banks’ systems are split between subsidiaries; others are all located in the holding company or a particular subsidiary. For example, the holding company may employ all the group’s employees or a specialist subsidiary may provide IT services to the whole group. As currently drafted, the scope of the special resolution regime is restricted to banks; that is, institutions having permission to accept deposits under the Financial Services and Markets Act 2000. Noble Lords will be aware that I have tabled amendments to extend the scope of the temporary public ownership tool to bank holding companies. But the starting point will be to take action with respect to a bank, if that is practical. Continuity obligations enhance the likelihood of this being possible. Clauses 63 to 70 provide for these continuity obligations. In particular, the clauses include powers to place general and special continuity obligations following a transfer upon group companies of the failing bank. These obligations will be restricted to ensuring that necessary services and facilities continue to be provided to the business that has been transferred. A general continuity obligation arises following a transfer automatically, by operation of law. The intention is that it would be replaced with special and specific obligations as soon as the authorities can determine the precise nature of the services or facilities required. The special obligation gives the authorities powers to create, modify or cancel contracts between a transferee and group companies. Where the transfer involves a property transfer, such that a residual bank is left behind as a distinct corporate entity, the special continuity obligation also extends to the residual bank. But the power is only exercisable in relation to the services and facilities required to operate the banking business effectively. Let me say something about how the continuity obligations might operate in practice. A transfer of banking business may need to be made on an urgent basis. In this situation, it may not be possible specifically to identify the precise nature of the services and facilities that a bank receives from group companies. Group structures tend to be highly complex, and if there are hundreds of subsidiaries, it may take time to understand the precise nature of all the intra-group arrangements. Hence, on day one a general obligation would arise requiring group companies to provide such services and facilities as are needed to operate the banking business effectively. Then, in due course, and once the nature of the required services could be properly worked out, the power to impose special obligations could be exercised. The Government consider that reasonable consideration should be paid to service providers for any service or facility that they provide to a bank. Through Clause 69, the Bill provides the Treasury with a power to provide further details in secondary legislation on how the authorities will determine this reasonable consideration. In the amendment, the noble Baroness, Lady Noakes, proposes that there should be a two-year limit on a general continuity obligation. I entirely agree with the sentiment of the amendment. The authorities shall work to ensure that a general continuity obligation is replaced with a special continuity obligation as soon as possible. It is the intention of the authorities that a continuity obligation will be in place only until it is feasible to arrange for servicing arrangements to be separated or replicated so that the group of companies and the transferee may operate on a stand-alone basis. However, I do not believe it is advantageous to set out a time constraint on the face of the Bill. In general, the Government consider that it is not desirable to set out explicit time limits on the face of the Bill, primarily for reasons concerned with flexibility, as the noble Baroness cited when discussing previous amendments. We believe that it is important to have the flexibility to respond on a case-by-case basis. As I have described it is the Government’s intention that a general continuity obligation would be replaced by a special continuity obligation as soon as is practicable. I hope the fact that the Government have set out detailed provisions on the face of the Bill for such special continuity obligations makes clear the intention to use them. I also remind the Committee that the authorities must have regard to the special resolution objectives in their actions under the special resolution regime and ensure that their actions are proportionate. Therefore I hope that the noble Baroness will feel able to withdraw her amendment.