Draft Bank Recovery and Resolution Order 2016
Draft Bank of England Act 1998 (Macro-Prudential Measures) Order 2016
(Limited Text - Ministerial Extracts only)
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The Economic Secretary to the Treasury (Simon Kirby)
I beg to move,
That the Committee has considered the draft Bank Recovery and Resolution Order 2016.
The Chair
With this it will be convenient to consider the draft Bank of England Act 1998 (Macro-prudential Measures) Order 2016.
Simon Kirby
It is a pleasure to serve under your chairmanship this afternoon, Mr Pritchard.
Since the financial crisis, the Government have implemented significant reforms to address the problems of the past and make the financial sector safer and more stable. In addition, these reforms have ensured that a bank failure can be managed in a way that protects the wider economy and financial sector without relying on taxpayer bail-outs. I will speak to both orders, which concern two key planks of these reforms: macro-prudential regulation and resolution.
I will begin with the Bank of England Act 1998 (Macro-prudential Measures) Order 2016. The Government have reformed our financial regulation so that risks to the whole system are identified and addressed. The Financial Policy Committee addresses macro-prudential risks through its powers to issue recommendations and, importantly, directions.
Mortgages are the single largest asset class held by UK banks, which makes them sensitive to the performance of the housing market and exposes them to direct risks when borrowers struggle to pay back their loans. Work done by the Bank of England suggests that buy-to-let mortgage lending can amplify the housing cycle. As house prices go up, buy-to-let investors are incentivised to enter the market and accrue capital gains, which pushes prices up for all homebuyers. As prices fall, buy-to-let investors are incentivised to sell their properties, which can drive prices down further.
The lessons of the recent financial crisis are still fresh in our memory, and we all know that the costs of financial instability are huge. That is why, in his Mansion House speech on 12 June 2014, the then Chancellor committed to ensuring that the FPC has
“all the weapons it needs to guard against risks in the housing market.”
In 2014, the FPC recommended that its powers of direction be expanded so that it could effectively tackle the systemic risks in the UK housing market. The Government agree with those recommendations and have, indeed, already legislated to grant the requested powers regarding owner-occupied mortgages. Today’s order will provide similar powers over buy-to-let mortgages. It will allow the FPC to direct the financial regulators—the Prudential Regulation Authority and the Financial Conduct Authority—to require regulated lenders to place limits on buy-to-let mortgage lending in relation to loan-to-value ratio and interest coverage ratio. This instrument is another step taken by this Government to ensure that our financial system is resilient and supports the wider economy.
I will now turn to the Bank Recovery and Resolution Order 2016. The UK’s special resolution regime provides the authorities with the tools to manage the failure of financial sector firms without relying on taxpayer bail-outs. The EU bank recovery and resolution directive established a common approach across the EU to the recovery and resolution of banks and drew on key aspects of the UK’s existing resolution regime. Since the transposition of the BRRD in January 2015, industry and the regulators have had time to digest the new rules, and they have uncovered a small number of areas where the UK’s special resolution regime could be improved. This order therefore makes changes to strengthen the UK’s special resolution regime so it works more smoothly and effectively. The Government have consulted extensively on the draft legislation through both public consultation and close engagement with the banking liaison panel. The changes have the support of industry.
The Bank Recovery and Resolution Order 2016 makes changes in three key areas. First, it makes amendments to allow the Bank of England or the Treasury to activate contractual default event provisions where they would assist a resolution. That will support the Bank of England’s efforts to resolve a failing firm and maintain financial stability.
Secondly, the order introduces new stand-alone early intervention powers for the PRA and the FCA, which could be used when an institution’s position is deteriorating to try to prevent it from failing or requiring resolution. The stand-alone powers, which include the power to require the removal of senior management, clarify the scope of the existing powers.
Thirdly, the order provides new backstop powers for the Bank of England to resolve branches of third-country institutions operating in the UK, independently of the third-country resolution authority. The circumstances in which those independent powers would be used are exceptional. The preference of UK authorities is for co-operation between authorities.
The order also addresses a couple of other issues. First, it introduces powers to enable the bridge bank tool to be applied through a share-transfer scheme for building societies. Secondly, it introduces powers for the Treasury and the Bank of England to recover bail-in expenses. As I said earlier, the changes will strengthen the UK’s resolution regime. I hope hon. Members will support both orders.
Simon Kirby
I thank right hon. and hon. Members for their contributions. These are important instruments and it is right that they are debated properly and that questions about them are answered properly.
The Government continue to learn the lessons of the financial crisis and take action to strengthen financial stability. The instruments will enable the authorities to take action to address and mitigate systemic risks in the UK’s housing market and to improve the functioning of its resolution regime. These powers are another important step in making the UK’s financial system resilient so that it works for everyone.
The Opposition spokesperson, the hon. Member for Stalybridge and Hyde, mentioned that oversight of the new directors could create problems. In answer, I can say that anyone chosen to act as a director in place of an existing board will have to satisfy the same standards and be approved by the regulations.
The hon. Gentleman said that the amendments were not clear and were hard to understand. The Government acknowledge the technical nature of the changes; HM Treasury’s special code of practice and the Bank of England’s guidance document should be helpful in increasing understanding, but these are technical measures and we have done our very best. He also mentioned that the requirements were unclear. The Bank of England Act requires the FPC to act proportionately, to publish guidance on how it will use the powers and to publish an explanation, including a cost-benefit analysis, when using those powers.
My right hon. Friend the Member for West Dorset asked about the difference between proposed new sections 71B and 71H and about the concept of reasonableness. The regulators will exercise their powers under section 71B reasonably, and they can be challenged if they act unreasonably. I hope that that is very clear.
The hon. Member for Kirkcaldy and Cowdenbeath mentioned risk assessment. The FPC has published two financial stability reports since the referendum, which make interesting reading.
I hope that right hon. and hon. Members on the Committee will support both measures.
Question put and agreed to.
DRAFT BANK OF ENGLAND ACT 1998 (MACRO-PRUDENTIAL MEASURES) ORDER 2016
Resolved,
That the Committee has considered the draft Bank of England Act 1998 (Macro-prudential Measures) Order 2016.—(Simon Kirby.)