Kaupthing Singer & Friedlander Limited (Determination of Compensation) Order 2008

That the Grand Committee do report to the House that it has considered the Kaupthing Singer & Friedlander Limited (Determination of Compensation) Order 2008. My Lords, today there are three instruments before the Committee: the draft compensation orders for Bradford & Bingley plc and the UK subsidiaries, Kaupthing Singer & Friedlander—which, with your Lordships’ agreement, I shall refer to henceforth as KSF—and Heritable, of the Icelandic banks Kaupthing and Landsbanki. In moving that the Committee consider the first of these orders, I will speak also to the second two. I turn first to the Bradford & Bingley plc Compensation Scheme Order. Having already debated the Bradford & Bingley plc transfer order on 13 November, many of the Committee will be aware of the background to the order that we are considering today. I shall briefly summarise events in the run-up to taking Bradford & Bingley into public ownership. Following the turbulence in global financial markets, Bradford & Bingley found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution. On Saturday 27 September, the Financial Services Authority determined that the firm no longer met its threshold conditions for operating as a deposit-taker under the Financial Services and Markets Act 2000 and FSA rules. Once the extent of those problems became clear, the Government had two options: risk letting the bank go under, or provide support. Letting the bank go under would have risked instability spreading, with serious consequences for the UK’s financial system and wider economy. It was because of that risk to stability, rather than the risk to shareholders, that the Government chose to save the bank. The Government, on the advice of the FSA and the Bank of England, acted immediately to maintain financial stability and protect depositors while minimising the exposure of taxpayers. Officials worked over the weekend to bring about a part-public, part-private solution that best meets those objectives. I think noble Lords will agree that it was right to explore every option to achieve that outcome. The tripartite authorities had explored a range of private sector solutions before taking action. However, it was concluded that it was not sustainable to run the bank on a stand-alone basis, either as a listed company with public support or as a publicly owned company. A subsidy on the scale required would not, in the Government’s judgment, have provided the best value for the taxpayer. A transfer order under the Banking (Special Provisions) Act 2008 therefore allowed for an immediate transfer of Bradford & Bingley into public ownership and for the onward transfer of the retail deposit business to Abbey National plc. That was crucial for maintaining financial stability and ensuring that customers retained access to their accounts. These actions taken in relation to Bradford & Bingley demonstrate that the Government stand ready to do whatever is necessary to maintain the stability of the UK’s financial system. Today’s Committee is considering only the Bradford & Bingley plc, Heritable and KSF compensation scheme orders, which I will come on to now. The draft Bradford & Bingley plc Compensation Scheme Order, which the Treasury has laid before Parliament for affirmation, is made under Section 5 of the Banking (Special Provisions) Act 2008. As noble Lords will be aware, in the event of the Act being used to transfer shares or to extinguish share options, Section 5 requires the Treasury to establish a scheme to determine the amount of any compensation payable to shareholders, or to holders of share options, within three months of the day of the transfer order. The Heritable and KSF determination of compensation orders are made under Section 7 of the Banking (Special Provisions) Act. As Noble Lords will be aware, in the event of that Act being used to transfer liabilities or rights, Section 7 requires the Treasury to make provision, by order, for determining the amount of any compensation payable by the Treasury to the authorised UK depositor concerned. That means that the three compensation orders we are considering today need parliamentary approval before the end of this year. I regret that the recent turbulence in the financial markets has prevented an earlier decision with respect to compensation in the case of Bradford & Bingley and the Icelandic banks, allowing more time for parliamentary consideration. This draft Bradford & Bingley plc Compensation Scheme Order reflects the model used in the Northern Rock plc Compensation Scheme Order in most respects, and provides for an independent valuer to assess any compensation payable to the former shareholders of Bradford & Bingley. As in the case of Northern Rock, noble Lords will recognise the need for a fair and proper way to assess the amount of compensation, if any, that should be paid in these circumstances. The Banking (Special Provisions) Act, whose provisions both Houses have debated and agreed, makes it mandatory for any compensation scheme to be based on the assumption that state support has been withdrawn and that no such support will be provided in future. Crucially, this compensation must be fair, which means that it should be based on a realistic assessment of the shares’ value without public support. It is fair and right that the Government should not be required to compensate shareholders, or others affected, to the extent that taxpayers’ support inflated the value of their shares. Taxpayers should not be expected to pay compensation for value that would not exist without their support. The mandatory assumptions in the Act give effect to that. However, it is important to note that this order does not impose the same assumptions on the valuer of Bradford & Bingley that were imposed on the valuer for Northern Rock. In the Northern Rock compensation scheme order, as well as assuming that state support had been withdrawn and that no such support would be provided in future, the valuer was required to assume that Northern Rock was not a going concern and that it was in administration. That difference is because the position of Bradford & Bingley was not the same as Northern Rock’s. When taken into public ownership in February 2008, Northern Rock had been in receipt of substantial institution-specific financial assistance for over five months, in the form of both loans from the Bank of England and the provision of Treasury guarantee arrangements. By contrast, no such guarantee arrangements had been provided to Bradford & Bingley, and the Bank of England had provided no loan facilities to it that were not also open to all qualifying institutions. As a result, it is right to impose no further assumptions beyond the mandatory assumptions under the Banking (Special Provisions) Act 2008. It will be for the valuer to assess the implication of those assumptions. The order sets out that the amount of any compensation payable will be determined by an independent valuer, appointed by the Treasury. We intend to advertise for expressions of interest in that position in the new year, if the House and the other place agree to this order. After a proper selection process, and after consulting the Institute of Chartered Accountants in England and Wales, the Treasury will make an appointment. We will, of course, be looking for someone independent of all interested parties and with both extensive company valuation skills and the ability to handle a range of relevant stakeholders. Once an independent valuer has been appointed, he or she will decide on the process to be followed. The valuer will then determine the value of Bradford & Bingley shares on the transfer date, on the assumption that public support was withdrawn and no further support was provided, and come to a decision on the amount of any compensation payable. Once that assessment has been made, anybody affected will be able to ask the valuer to reconsider his or her determination; a revised assessment will then be made. Anyone affected who is dissatisfied with that revised assessment will then be able to refer the matter to the Financial Services and Markets Tribunal. This order is the fairest way forward for both shareholders and the taxpayer. It is fair that the value of any compensation should be determined by an independent valuer, but only on the assumption that public support was no longer available. This order allows for that to happen in a clear way, with opportunities for the valuer’s decision to be challenged at an appropriate time. I turn to the compensation orders with respect to the UK subsidiaries Heritable and KSF of the two Icelandic banks, Landsbanki and Kaupthing. On 7 and 8 October 2008 respectively, the FSA decided that Heritable and KSF no longer met their threshold conditions and were unlikely to continue to be able to meet their obligations to depositors. Accordingly, the Chancellor announced that by orders made under the Banking (Special Provisions) Act 2008, the retail deposit business of Heritable and KSF were to be taken into public ownership. Heritable and KSF were then placed into administration and their retail deposits subsequently transferred to ING Direct. The position of Heritable and KSF differs from that of Bradford & Bingley, as the former shareholders still own the shares. The compensation to be assessed relates to the transfer of liabilities: that is, the retail deposit book and associated rights. It is therefore considered that a much simpler compensation mechanism is appropriate in such circumstances. Matching amounts of cash provided by the Treasury and the Financial Services Compensation Scheme backed the subsequent transfers of the retail deposits to ING Direct. Heritable and KSF are required to pay back the total of all costs and liabilities owed to the public sector in transferring the liabilities. The Government negotiated reductions in the amounts to be paid to ING Direct by the FSCS and the Treasury for transferring the retail deposit books. Those reductions were £1 million for Heritable and £5 million for KSF, and the Government’s claims in the administration of Heritable and KSF will be reduced accordingly. Without the provision by the Treasury and the FSCS to the purchaser of funds equal to the liabilities transferred, the deposit books would have been unsaleable and have represented negative value to any potential purchaser. Given that the transfers were made up primarily of liabilities to repay retail deposits and associated rights, that they would not have been possible without significant public support, and that Heritable and KSF have obtained the benefit of the £1 million and £5 million negotiated with ING for the deposit books through the reduction in those companies’ repayments to the Government, we consider that no compensation should be payable for the transfers. The compensation orders therefore provide in each case that the compensation payable is to be determined as nil. I hope that I have explained clearly these orders’ background and purpose. It is right that we should establish a fair way to assess the amount of any compensation payable to people who have lost their shares or had share options extinguished. The three orders we consider today set out fair compensation processes, and I commend them to the Committee.