Banking Bill is a start, but still a long way from the end

The Banking Bill completed its passage through the House of Lords and was returned to the Commons on 10 February 2009. It needs to receive Royal Assent and be brought into effect no later than 20 February as the Banking (Special Provisions) Act 2008 runs out on that day. The 2008 Act was rushed through parliament last February in order to create the power to nationalise Northern Rock. Since then it has also been used to take over Bradford & Bingley.

At one level the Bill is very technical. It does, however, contain massive powers akin to expropriation in the name of financial stability. In the last 18 months both global and UK financial stability have been severely tested and the lack of robustness in the banking system has also been exposed. The balancing act in this Bill was to create sufficient powers to deal with another round of banking emergencies while not trampling over rights and liberties. Only time will tell whether the balance has been struck correctly.

The tight timetable to scrutinise the Bill, exacerbated by the timing of parliamentary recesses, meant that the House of Lords adopted the novel procedure of starting its scrutiny on an identical Banking (No 2) Bill before the Commons had given the original Bill a third reading. When the original Bill did arrive in the Lords, we allowed that Bill to catch up with the progress of the No 2 Bill and thereafter dealt only with the first Bill.

The Bill now returns to the Commons with some significant changes. Some of these were introduced by the government as a result of issues arising in the banking world since the Bill was first drafted. Others were made as a result of opposition points during debate.

One of the principal changes made by the government is the ability to use the temporary public ownership powers to take over the holding company of a failing bank, not just the bank itself. This is a very wide power and, in principle, this could allow the government to take over Tesco plc if its bank subsidiary failed. The government said that they needed this power in order to cope with complex group inter-relationships.

Another major change is a very wide power to completely re-write insolvency law for investment banks by statutory instrument. This change was introduced in the light of the practical points which arose following the collapse of Lehmann Brothers in September 2008. The ability to make such fundamental changes by statutory instrument was strongly criticised by the Lords’ Delegated Powers & Regulatory Reform Committee which recommended that, even if the Lords was convinced of the need for the power, the power itself, plus any regulations made under the power, should cease after two years and be replaced by primary legislation. The problem was that this would create more uncertainty for investment banks and those with which they do business and so the Lords accepted the government’s alternative proposal for a two year review of the secondary legislation.

In the Bill originally introduced in the Commons there was a very wide ‘Henry VIII’ power to re-write the law for the purposes of the effective use of powers in the Bill, including with retrospective effect. While the power was narrowed somewhat in the Commons, it remained very wide. The Lords’ Constitution Committee reported serious concerns about retrospection. The liveliest debates in the Lords were on this issue. In the end the government convinced the House that there was a case for the power in appropriate circumstances. But they added a rider so that the Treasury has to have regard to the fact that it is in the public interest to avoid retrospective legislation.

The original Bill contained a fairly wide power authorising the expenditure on bank rescues and similar activities, including the £37bn bank recapitalisation announced last October. In the Lords, the government considerably widened that power to allow them to spend money on supporting the economy not just financial stability. The Lords, in the one division which the government lost, voted for a clause which required the Treasury to make a three monthly report to parliament on how these wide powers are actually being used.

This Bill needs several statutory instruments, together with a code of practice, to be introduced immediately after Royal Assent. This is where some of the really technical issues are dealt with. There are advanced drafts of some of these and so the work of parliament will not cease once the Bill completes its passage.

A number of other changes were made to improve parliamentary accountability and otherwise to make the Bill work better. Even with all these changes, the Bill does not deal with many pressing issues about the financial system. These include the future shape of banking in the UK, the role and responsibilities of international financial institutions and further reform to the FSA. There are various streams of work, both at home and internationally, and so we can expect to see yet more time spent by parliament on the banking system for some time to come.