Northern Rock plc Transfer Order 2009

My Lords, the House is indebted to the Merits of Statutory Instruments Committee of your Lordships’ House for the sterling work that it does on the huge quantities of secondary legislation that emerge from the Government. In the case of the Northern Rock plc Transfer Order 2009, which was made by the Government on 8 December 2009, the committee reported its findings in just one week, on 15 December. It is the committee’s fourth report that provides the basis for the Motion that I have tabled. I apologise to the House in advance for the length of my remarks; the more that I looked at the order, the more I was troubled by loose ends and unanswered questions. The split of Northern Rock into a good and a bad bank has been well flagged for some time, and there is no surprise that this has been done. In broad terms, we on these Benches support the restructuring of Northern Rock in the interests, in particular, of privatising an unwelcome addition to the stock of government assets. While we were not surprised by the fact of the order, the surprise has come in the manner of the underlying transaction and the apparent determination of the Government to keep Parliament and taxpayers almost completely in the dark about it. Indeed, it is not only Parliament and taxpayers that have been sidelined by the Government’s obsessive secrecy; creditors and other interested parties in Northern Rock have been ignored as well. There are several issues that I wish to raise with the Minister about the order. I will start with the general issue of providing information to Parliament about the split of Northern Rock into a good and a bad bank. The Explanatory Memorandum to the order provides the bare minimum of information about how the order works. Paragraph 10.2 merely notes, as foreshadowed in the ministerial statement that was made on the day that the order was made, that: ""The Government intends to provide Parliament with details of the financial support provided to support the restructuring of Northern Rock in January 2010"." That begs the question of why the Government could not have provided the information to Parliament at the time when the order was made. It is clear from the sentence that I have just quoted that the Government had already agreed to provide the financial support when the order was made and must have known what that entailed. Can the Minister offer any credible reason for keeping Parliament in the dark? The Merits Committee, in its measured way, observed at paragraph 7 of its report that: ""The House may feel that it would have been better placed to consider this Order if details of the financial package had been made available at the time the Order was made"." The House has not been given any chance at all to consider this order properly. Two days ago the Treasury finally gave some information to Parliament by way of a Written Ministerial Statement some 25 days after the order came into effect. We learn that a further £3 billion of capital is being put into the good bank, now called Northern Rock plc, as well as £2.5 billion of loans into the bad bank, now called Northern Rock Asset Management plc. So behind the order is another £5.5 billion of taxpayers’ money going into the Northern Rock black hole, and it took until Monday of this week for that fact to emerge. Financial support, however, is only part of the picture. There is nothing in the document laid before Parliament that shows what the transaction actually involves. In order to get an inkling of what is involved, we have to go to the Treasury’s website where various documents may be found. There is an 81-page Northern Rock plc transfer administration agreement, together with Appendix A of 21 pages and Appendix B of 96 pages. There are also two so-called "related documents", which together amount to 380 pages. If we work through all these documents, we can finally glean from page 68 of the transfer administration agreement that the interim figures for assets and liabilities transferred from the old Northern Rock to the new one are £11.7 billion and £20.3 billion respectively. The difference between the two—some £8.6 billion—is due to be paid from the old Northern Rock to the new Northern Rock. This is the figure of £8,581 million referred to in paragraph 3. These figures may give an idea of what is in the new Northern Rock—the good bank—but they tell us absolutely nothing about what is left behind in the bad bank. This lack of information about the way in which significant assets acquired with taxpayers’ money are being scattered around is nothing short of shocking. I now move to something equally shocking concerning the Banking (Special Provisions) Act 2008. Some noble Lords will recall that that Act was rammed through Parliament at huge speed in order to nationalise Northern Rock. This order is made under Section 8 of the Act, which allows the transfers covered by the order. That is not the issue. The issue is that, by virtue of Section 13 of the Act, orders made under Section 8 are generally to be carried out by the negative procedure unless the order makes provision for determining the amount of consideration payable by a transferee—under Section 8(6). If subsection (6) were involved then the order would be subject to the affirmative procedure. The Treasury has so constructed the transfers covered by this order that they have included no provision for determining consideration and have hence squeezed the order within the negative procedure, as was pointed out by the Merits Committee. That seems to be the Treasury at its most cynical: first, to draft the affirmative requirements of the Act in an obscure way and then to maximise its use to avoid parliamentary scrutiny. Unfortunately, I was out of the country nursing a broken arm when the Banking (Special Provisions) Act was passed but I know that the opportunity for scrutiny of the Bill was restricted. I could find no trace of the Government explaining that the implications of Sections 8 and 13 combined meant that parliamentary scrutiny of subsequent transactions would be easily sidestepped. An ordinary expectation would have been that any significant transfer, such as the one covered by this order, would have involved consideration being determined and hence would have been subject to the affirmative procedure. This order says that ACo—the old Northern Rock company—is to pay the £8.6 billion I referred to earlier to BCo—the new Northern Rock company. An innocent reader of the order might conclude that that was the end of the story but that is far from the truth. The legal documents on the Treasury website, to which I have referred, show that this sum is only the preliminary estimate of the difference between the book values of the assets and liabilities being transferred. There is every intention and extensive legal provision for these preliminary figures being firmed up and changed before the final figure for the transfer is arrived at. The transfers took place under this order on 1 January 2010 but the transfer administration agreement was dated 7 December 2009. Hence the figures which netted out to £8.6 billion had to be illustrative figures, extracted from a balance sheet before that, or dreamt up by the lawyers solely for the purposes of the transfer administration agreement. The final figures will be as at 1 January 2010, presumably extracted from the audited accounts of 2009. It was fully in contemplation at the time of the order and the transfer administration agreement that adjustments to the £8.6 billion would be needed. Yet, the only reference to this is in a small-print footnote in the Explanatory Memorandum, which is at pains to say that such adjustments, which could be considerable, are not "consideration", and the order does not say how the adjustments are to be determined. This is all convenient for avoiding the affirmative procedure. Can the Minister say how the adjustments will be effected? The order is clear as to the payment of £8.6 billion but unclear as to any adjustments. Can the Minister say whether the Treasury intends to use the power of modification in paragraph 22 of the order to achieve the final effect, as foreshadowed by the transfer administration agreement? That brings me to the modification power in paragraph 22 of the order. This was also covered by the Merits Committee in its fourth report. Paragraph 22 allows the two Northern Rock companies to make a modification instrument. This is subject to Treasury consent. The Merits Committee said in paragraph 5 of its report that, ""as both companies are wholly owned by the Treasury, the House may have a view on how much of a safeguard this would provide"." I suggest that the House should have a very dim view of the safeguard involved. Furthermore, the Treasury’s relentless desire to marginalise Parliament is also evidenced in paragraph 22. This provides for publication of the modification instrument in newspapers and online, but there is no mention of laying it before Parliament or any other mechanism for ensuring that Parliament is kept up to date. I turn now to the impact of the transfer order on certain creditors of Northern Rock. I want to explore with the Minister whether the Government have behaved properly in relation to all those who were creditors of Northern Rock before the transfer order came into effect. The Merits Committee, in paragraph 6 of its report, drew the attention of the House to the lack of consultation on the order. Consultation was undertaken only with Northern Rock, the Financial Services Authority and the Bank of England, which is, I submit, so inward as to amount to no genuine attempt to carry out consultation at all. The Explanatory Memorandum notes merely: ""It was not considered appropriate"," to consult beyond that, but no reasons were given. I hope that the Minister will be more forthcoming this evening in the light of the comments that I am about to make. The Merits Committee said in paragraph 6 of its report that, ""the House may wish to satisfy itself that the restructuring is in the public interest"." It pointed out that some former Northern Rock shareholders are unhappy that they have received no compensation for their shares. I do not wish to revisit the issue of compensation to shareholders, but I will concentrate on creditors, who have to be paid before there could be any question of return to shareholders. The Explanatory Memorandum to the order in paragraph 3.4(i) says that because of the way that the transfers were made, ""ACo will be no worse off than it is currently"." That is an arguable statement but, more importantly, it does not address the question of the creditors of ACo and whether they are worse off. Some creditors of Northern Rock did not benefit from government guarantees given to Northern Rock when it ran into difficulty. Broadly, the Government guaranteed the retail depositors of Northern Rock, but not all of its wholesale liabilities. These guarantees have been rolled over into the two new companies by guarantees issued at the same time as the transfer order. Before the transfers, the creditors were creditors of the old Northern Rock company, which was a mixture of good and bad assets. After the transfers, some creditors will be creditors only of the company now known as Northern Rock Asset Management—that is, the bad bank. I wish to raise with the Minister whether the Government have disadvantaged those creditors by isolating them in a vehicle which has only undesirable assets. How can it be reasonable to isolate the creditors in this way, especially as they have not been consulted? Can the Minister explain how the Government see the end game of the bad bank? What is the prognosis for the creditors of the bad bank? Do the Government believe that the creditors of the bad bank will have any losses to bear at the end of the day? In the light of that, can the Minister explain why the transfer order makes no provision for any good-will value to be attributed to the value of the business which is transferred to the new Northern Rock company by this order? I assume that the ongoing business which was owned by the old Northern Rock company has a value. If it had no value, there would have been no reason for the Northern Rock name to be kept in the new Northern Rock company. If the business had no value, it would have been wholly improper for the directors of the Northern Rock company to have agreed to pay £10 million to its local, but not particularly successful, football team in order to promote the Northern Rock name. As neither the transfer order nor the transfer administration agreement deals with a value or good will, the old Northern Rock company has, in effect, given the Northern Rock business to the new Northern Rock company for nothing. Will the Minister say whether it is fair to the creditors left behind in the bad bank? I cannot see that it is. Will the Minister explain why this transaction, effected by the transfer order, does not amount to a preference either for the creditors transferred to the new Northern Rock company, which will include the Government, or to the shareholders of Northern Rock, who are also the Government? The Minister will be aware of the duties which apply to directors of insolvent companies. Can he say how it is that the transfers avoid the dangers of undue preference, which would almost certainly have arisen had we been dealing with transactions which arise in the private sector? My last area of concern also relates to a creditor, although a rather different one, from the bondholders and similar, which might have been prejudiced by the transfer order. This concerns the pension scheme. I understand and look to the Minister to confirm that Northern Rock’s pension scheme has been left in the bad bank. The pension scheme has a significant defined benefit section, which now appears to have been stranded in a company which may not pay all its creditors. I understand that there is a deficit in the scheme on an actuarial basis of some £60 billion. My source for this figure is the Minister’s honourable friend Mr Frank Field who knows a thing or two about pensions. Mr Field has raised questions of whether this transfer to the good bank should have recognised the liability being left in the bad bank. He has concerns that the Government plan to dump any residual liability in the bad bank into the Pension Protection Fund, which is funded by employers generally and not the Government. Hence, there is a real issue of public policy at stake. I hope that the Minister can explain the position. I have taken a long time to explain my concerns with this order. I have big concerns about the way in which the Treasury has treated Parliament, so that we are unable to scrutinise what is an important transaction properly. I have substantive concerns about whether the Government and Northern Rock have treated creditors fairly in the process. We should seek to welcome the fact that the Government are trying to maximise the value of Northern Rock, so that some or even all the taxpayers’ money can be recouped in due course. I hope that the Minister will agree that the principle of taxpayer value should not be used to ride roughshod over the interests of other parties. I beg to move.