Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023

Wednesday 19th April 2023 Grand Committee

Considered in Grand Committee

17:42

Moved by

[Baroness Penn]

That the Grand Committee do consider the Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023.

Relevant document: 35th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

Noble Lords will be aware that Silicon Valley Bank UK Limited, or SVB UK, was sold on Monday 13 March to HSBC. Customers of SVB UK are now able to access their deposits and banking services as normal. This transaction was facilitated by the Bank of England, in consultation with the Treasury, using powers granted by the Banking Act 2009. In doing so, we limited risks to our tech and life sciences sector and safeguarded some of the UK’s most promising companies, protecting customers, financial stability and the taxpayer. We were able to achieve this outcome—the best possible outcome—in short order, without any taxpayer money or government guarantees. There has been no bailout, with SVB UK instead sold to a private sector purchaser. This solution is a win for taxpayers, customers and the banking system.

SVB UK has become a subsidiary of HSBC’s ring-fenced bank. Ring-fencing requires banking groups that hold over £25 billion of retail deposits to separate their retail banking from their investment banking activities. The regime provides a four-year transition period for an entity acquired as part of a resolution process before it becomes subject to the ring-fencing requirements. As a result of this existing provision in legislation, SVB UK is not currently subject to ring-fencing requirements. However, HSBC UK, SVB UK’s parent company, remains subject to the ring-fencing regime.

To facilitate this transaction, the Economic Secretary to the Treasury laid in both Houses of Parliament on Monday 13 March a statutory instrument using the powers under the Banking Act 2009 to broaden an existing exemption in ring-fencing legislation with regard to HSBC’s purchase of SVB UK. This is the first time that the Treasury was required to use these powers since the resolution of Dunfermline Building Society in 2009. I note that the Secondary Legislation Scrutiny Committee has raised this statutory instrument as an instrument of interest in its 35th report, published on 30 March.

This exemption allows HSBC’s ring-fenced bank to provide below-market-rate intragroup funding to SVB UK. This was crucial for the success of HSBC’s takeover of SVB UK, because it ensured that HSBC was able to provide the necessary funds to its new subsidiary. HSBC has since stated publicly that it has so far provided approximately £2 billion of liquidity to SVB UK, money that it needed to continue to meet the needs of its customers. The Bank of England and the Prudential Regulation Authority fully support this modification to the ring-fencing regime as a necessary step to facilitate the sale.

In view of the urgency, and given that this statutory instrument was crucial in enabling the sale, the Treasury determined that it was necessary to lay this instrument using the “made affirmative” procedure under the powers in the Banking Act 2009. Parliament provided the Treasury with these powers for exactly these situations: recognising that exceptional circumstances can arise where the Government must take emergency action in the interests of financial stability, depositors and taxpayers.

The statutory instrument also makes a number of modifications to the Financial Services and Markets Act 2000 in relation to the rule-making powers of the Prudential Regulation Authority and the Financial Conduct Authority. Specifically, these rule-making powers are modified to ensure that the regulators can exercise them effectively, where these powers relate to the Bank of England’s transfer of SVB UK to HSBC and write-down of SVB UK’s shareholders and certain bondholders. The statutory instrument also waives the requirement for the regulators to consult on certain rule changes related to the sale.

In addition to the statutory instrument we are debating today, the Government will also lay a further statutory instrument to make further changes to the ring-fencing regime with regard to HSBC’s purchase of SVB UK. This is to permit SVB UK to remain exempt from the ring-fencing rules beyond the four-year transition period, subject to certain conditions. Unlike the legislation we are debating today, this second exemption is not required immediately and will be introduced in due course. The second exemption was also crucial to the success of the sale of SVB UK, as it ensures that it can remain a commercially viable stand-alone business as part of the HSBC Group.

A clear determination was made by the Bank of England and supported by the Government that these amendments were crucial to facilitating the purchase of SVB UK by HSBC. The UK has a world-leading tech sector with a dynamic start-up and scale-up ecosystem, and the Government are pleased that a private sector purchaser has been found. Therefore, I hope noble Lords will join me in supporting this legislation. I beg to move.

[Baroness Noakes (Con)]

My Lords, I declare my interest as a shareholder in UK banks which are subject to the ring-fencing regime. My husband and I hold shares in HSBC, which will benefit from this order, and in both NatWest and Lloyds, which are subject to the ring-fencing rules but do not derive a benefit from this order. I think my registered interests in this case probably cancel each other out.

I should say that I have never been a big fan of ring-fencing. The triple whammy of an electrified ring-fence, elaborate resolution planning and higher capital and liquidity requirements have imposed a very high set of costs on UK banks which can in the long run result only in disbenefits for UK bank customers —that is, all of us. I do, however, believe passionately in fair competition and level playing fields, and my concern about this order—and, more so, the one that we are promised that will come later—is that it distorts competition and creates an unlevel playing field by creating unfair advantage for one particular bank in relation to the ring-fencing rules.

I completely understand that the Bank of England had to operate under pressure to achieve a sale of Silicon Valley Bank over a weekend and that avoided having to place it into an insolvency procedure, and we owe the Bank a debt of gratitude for what it achieved over that weekend. But there are some aspects of the transaction—and therefore this order—which I find mysterious. I am also, as I said, concerned that HSBC has obtained an unfair competitive advantage compared with other UK banks, so I have some questions to put to my noble friend.

First, SVB UK is not a ring-fenced bank under UK legislation and it remains outside that legislation. Why did the Bank not agree to sell the bank to HSBC itself rather than to HSBC’s UK ring-fenced subsidiary? Had it done that, I do not believe that any special legislation would have been necessary. HSBC operates a narrow definition of ring-fencing—unlike other UK ring-fenced banks—such that the majority of its commercial customers are serviced within the non-ring-fenced part of HSBC. Why was it decided to place Silicon Valley Bank UK into the ownership of the ring-fenced bank? Would it not have been more appropriate to have put it somewhere else within the HSBC Group along with other commercial customers?

Secondly, what activities of Silicon Valley Bank UK would disqualify it from being housed within a ring-fenced bank? Commercial banking business can be satisfactorily included within a ring-fenced bank provided that the business within the ring-fenced bank is in effect plain vanilla business—that is, conventional lending and very simple derivatives, which are allowed. What does Silicon Valley Bank UK do which would disqualify it from being placed properly within the UK ring-fence of HSBC, and what policy grounds make it necessary to allow the ring-fenced bank to own this kind of business when it cannot carry out that business itself?

Thirdly, the Minister has said that the order was necessary to allow HSBC’s ring-fenced bank to provide funding out of the ring-fence at preferential rates to Silicon Valley Bank UK. Why was this funding not provided out of HSBC’s other, non-ring-fenced resources? Of course, I can see the attraction to HSBC of using the cheap funds that it has from its ring-fenced depositors, but the ring-fence regime was set up precisely to stop such funds leaching out of the ring-fence. Related to that, is there any limit on the amount of funding that HSBC UK can provide from within the ring-fence to Silicon Valley Bank in breach of the ring-fencing philosophy, and if there is not a limit, why not? Are there any limits to the generosity with which the ring-fenced bank can provide the funds, since it is going to be providing at rates below market rates? Will there be any limit to that degree of discount that it will allow, and again, if not, why not?

Fourthly, can the Minister confirm that Silicon Valley Bank UK will not be allowed to form part of HSBC UK’s Bank Domestic Liquidity Sub-group, or DoLSub, and that liquidity will be monitored separately for the ring-fenced and non-ring-fenced parts of HSBC UK? If that is not the case, can the Minister explain the position on how liquidity is to be managed and monitored within the ring-fenced bank and its new subsidiary?

Lastly, it is clear that the intention is to provide some long-term exemptions from the ring-fencing regime, and the Minister referred to this. I appreciate that the precise details may not yet be finalised, but will the Minister set out what exemptions are likely to involve? I believe that the Minister said that this would be in a separate statutory instrument and therefore Parliament would be able to look at that, but it would be good if she could confirm that. My main concern when we come to the second order is whether it will be fair and reasonable for ring-fencing exemptions to be provided on a long-term basis, which disadvantages other UK banks which have to operate completely within the ring-fence rules. Put another way, when considering the case for HSBC to be allowed special treatment, will the Government ensure that they consider the case for equivalent relaxations to be more generally available? I look forward to my noble friend the Minister’s response.

[Baroness Kramer (LD)]

My Lords, first, let me say that obviously we will support this order—although I cannot see any way in which one could not. In retrospect, it confirms the regulatory adjustments that were necessary or enabled the efficient rescue of Silicon Valley Bank UK and the transfer of ownership to HSBC, effectively protecting customers from the implications of the collapse of the US parent. We need to congratulate the Government, or the Treasury, the Bank of England and indeed the industry—Coadec, Tech London Advocates and BVCA—for acting together, co-operating and moving swiftly to make sure that a problem did not turn into a crisis or catastrophe.

That said, I have a whole series of questions. I am incredibly grateful to the noble Baroness, Lady Noakes, who in far more detail and far more effectively than me raised the relevant questions on ring-fencing. Where she and I slightly disagree is on her request that, if there is going to be a long-term exemption that gives a competitive advantage to HSBC, let us let everybody have it, whereas I am concerned about the undermining of ring-fencing in a fundamental way. I can understand that sometimes one has to act to undermine ring-fencing on a short-term basis, but this has pinned into it that second exemption, which effectively makes this a life-long exemption.

I will not repeat the points that the noble Baroness made. I have a lot of them down on the piece of paper in front of me, but she made those points so well that I think the Minister needs only to hear them once—they were so detailed and rightly crafted. We have to understand whether to some extent the Government are pre-running the changes that they anticipate making under the Edinburgh proposals. We saw that with previous financial services Bills, when powers were given to the regulator ahead of the consultation processes that would all be relevant to it, so the consultation process then led to a phase 2 or part 2 Bill that came in later. I am very anxious to understand whether this is reflective of the Government’s approach to ring-fencing from now on—in other words, that they no longer intend to separate retail banking from investment banking.

I recommend to everybody the work that we did in the Parliamentary Commission on Banking Standards, in taking evidence for more than two years. The reasons for ring-fencing retail banking from investment banking were multiple and complex, and certainly included culture. Retail banking is essentially a utility and investment banking is very different in its risk profile. There is no question but that some of the misbehaviour that we saw in retail banks, PPI being just one of many examples, was inspired by that cross-cultural flow between the investment bank and the retail bank.

It was also true that many risks that we saw banks take, which were entirely inappropriate and not well understood and which led to a crash, for which we all continue to suffer, were inspired by access to what was seen as very cheap and easy money—money sitting in retail deposits, checking accounts and saving accounts, and not protected to a certain degree by insurance, which took away any sense of responsibility to customers. Banks took on risks that they would not have been able to take on had they been financing themselves wholly in the financial markets, because the markets would have recognised those risks and demanded far higher returns if they were going to finance such activities. So that access to a pool of cheap money was absolutely critical to the structures that led to the financial crash of 2007-08. I am really concerned that we have changes here that foreshadow a much more extensive undermining of ring-fencing, and I hope that the Minister will respond to those broader issues, as well as to the detail that the noble Baroness, Lady Noakes, asked for.

18:00

There is a substantial set of issues, and this might be the Minister’s opportunity to provide a fuller response than she was able to do at the time of the Statement. I have never understood why SVB UK was not ring-fenced in any way from its US parent when it was playing such a critical role in the financing of the tech sector. Will the Government look at that issue, in particular cross-border ownership and potential cross-contamination as a consequence?

The Minister suggested that that was an issue for the Bank of England to deal with through stress tests, but it strikes me that it is a lot more than that. In the failures of not just Silicon Valley Bank but the two other banks that became troubled in the United States, we have really seen that systemic risk is extremely complex, crosses national boundaries and can be triggered by seemingly small events. I would like to hear whether the Minister anticipates an investigation of what happened on both sides of the Atlantic and a lessons-learned follow-up to all that. In this case, we saw such a rapid collapse. In the modern digital age, the collapse of banking institutions happens at a pace that we have never seen before, and I would love to know whether that is leading the Government to have a rethink.

The whole Silicon Valley experience, combined with that of Credit Suisse, which happened at virtually the same time, means that we have to look at and think again about resolution regimes as a mechanism for dealing with failing banks. I fully accept that Silicon Valley Bank in the US did not have an adequate resolution plan, largely thanks to a watering down of banking regulations in the US. Interestingly, a leading figure in lobbying to achieve that was Greg Becker—SVB’s CEO. Those same dulcet tones have been very active at lobbying here in the UK for the watering down of banking regulation, and I wonder whether the Minister can tell us whether there is now a little more cynicism in the Treasury as it listens to those sweet notes.

It is also important that in the United States, Silicon Valley Bank did not have an adequate resolution plan and the Orderly Liquidation Authority in the US could have imposed a resolution but decided not to because it felt that that would be harmful to the broader interests of the financial sector and business in the United States. Resolution was deemed the wrong answer to manage a bank failure in that case. It is troubling that in the UK, we rely so heavily on resolution as the best—indeed, almost the only—answer for dealing with bank failures.

I referred to Credit Suisse—obviously a collapse—where a resolution plan was in place but the regulator, FINMA, chose not to impose it. Marlene Amstad, president of FINMA, declared that resolution of Credit Suisse would have triggered a widespread financial crisis. Sometimes I hear regulators in the UK brush that aside and say, “We understand how to do resolution in the UK”, but Marlene Amstad is a senior, highly respected regulator and I am concerned that neither the Government nor the regulators here have taken her views seriously. They are the views, from the coalface, of someone who had to deal with a crisis in a real-life timeframe.

I raise the issue again, because, in presenting their Edinburgh reforms, the Government seem to regard resolution as so powerful and inviolable that it justifies removing other key protections, the most notable of which is the ring-fencing of retail banking from investment banking. I am concerned to hear from the Government something that indicates to me that they are not being naive, that they understand that resolution is not a universal answer to bank failures and that it may be a mechanism that can be applied only in fairly narrow circumstances. From what we have seen in the last month, one might begin to think that using resolution is really only possible both when the failing bank is insignificant in the role it plays and in the context of very stable, broader financial markets.

Finally, ahead of the return of the Financial Services and Markets Bill, I ask whether this whole experience is leading the Government to look again at the international competitiveness clauses. When I speak with bankers, there is a general acceptance that these clauses would have put the UK regulators under great pressure and, in essence, into a position where they would have felt unable to resist the demands of the industry to match the relaxation of rules enjoyed by Silicon Valley Bank in the USA. That would have been the case even when regarding the competitiveness objective as a secondary objective. Had we not had the experience of seeing what happened with Silicon Valley Bank, we would have found ourselves in precisely the same position, with key regulations stripped away. It really is only by luck and chance that we have not had the equivalent of Silicon Valley Bank here; if the timing had been different, we might well had faced that.

I hope that the Minister can give me some of those reassurances. However, if all she does is answer the detailed questions of the noble Baroness, Lady Noakes, she will help me very considerably.

[Lord Tunnicliffe (Lab)]

My Lords, I am grateful to the Minister for introducing this order. I begin by reiterating the Labour Party’s thanks to the officials at the Treasury, the Bank of England and the regulators to secure a rescue deal for the UK arm of Silicon Valley Bank. While there will be important lessons to learn from SVB’s collapse, it was vital that swift action was taken to preserve financing for the life sciences and tech companies that will play such an important role in our future economic growth.

I also thank the noble Baronesses, Lady Kramer and Lady Noakes, for bringing out areas of concern, which I certainly have not seen raised in the same sharp relief. I hope that the Minister will be able to give us some feel as to the extent to which this reach of the ring-fence will be of significance or not, and, if it is significant, why it is intended to be made perpetual by a subsequent order. Equally, when we are discussing lessons learned, the noble Baroness, Lady Kramer, shone a light on the issue of the speed of collapse. The physical queues outside Northern Rock created time; today, very little time need be created between an area of significant concern turning into total collapse. I hope that the regulators, when doing a proper lessons-learned exercise on this will ponder on that point, to see what, if anything, we need to do to be better able to manage the rate of collapse that is potentially available.

The collapse of SVB was the catalyst for several other major events in the global financial system, including the very serious difficulties faced by Credit Suisse. In many senses, the UK regulatory system has functioned as hoped, which we welcome. It certainly makes the many hours spent on previous legislation worthwhile. Financial institutions and regulators in other countries have taken their own steps in recent weeks to deal with issues with entities in their own jurisdictions. The collective action seems to have calmed the markets, which is important for us all. However, I hope that the Minister can assure us that the Treasury, the Bank and the regulators continue to monitor the situation very closely, and that they stand ready to act, should that be required. With inflation still in double digits, and with the implications that is likely to have on interest rates in the short to medium term, will the Treasury finally commission a review of the risks that this could present to the financial system?

On SVB itself, the Government have thus far been unable to provide a proper justification for exempting the bank from ring-fencing requirements, which makes the four-year transition period turning into a perpetual one all the more puzzling. In another place, the Minister sought to reassure colleagues that they need not worry about the potential implications of this exception, as the number of SVB UK customers is low, particularly as a percentage of HSBC’s total client base. Is that really the most that the Treasury can say, or does the Minister have more to offer, given that this debate comes three and a half weeks after the Commons one?

Another question in that debate was on potential reform to ring-fencing requirements in this country. Andrew Griffith promised that

“there will not be any tinkering, but there might … be appropriate reforms”.—[Official Report, Commons, First Delegated Legislation Committee, 27/3/23; col. 7.]

I am not sure that those words are particularly reassuring. We expect news on those reforms in advance of the Autumn Statement, but can the Minister be a little more specific about dates and processes? How swiftly would any reforms be implemented once announced, for example? Will changes require primary legislation? If so, could this come in the Financial Services and Markets Bill, or would the Government bring forward a further Bill?

The action taken to protect SVB UK worked because it provided certainty. Customers of that bank knew within days that they would be able to continue their relationship with it, because of the acquisition by HSBC. However, in other areas, certainty is in short supply. The Prime Minister says he has a plan to halve inflation and bring interest rates down, but inflation remains in double digits and the Monetary Policy Committee is expected to announce a 12th consecutive rate hike. Under this Government, our economy is weaker, prices are out of control and never have people paid so much to get so little in return.

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their detailed questions on this statutory instrument. While everyone agreed that we reached a good resolution in this instance, it is absolutely right that we look at how it was delivered in detail and how we should reflect from this instance on the resolution regime in our wider regime. The noble Baroness, Lady Kramer, asked explicitly—but I think all noble Lords wanted to know—what the Government will do to ensure that we can learn lessons from the events around SVB UK. The Treasury and the Bank of England are working together to ensure that we properly reflect on these events and will consider how best to draw on the lessons learned and share them as needed in future.

The noble Lord, Lord Tunnicliffe, remarked on wider financial stability events, including Credit Suisse. I reassure him that the UK financial sector is fundamentally strong. The resolution of SVB UK on 13 March highlights how the resolution regime can be effectively used to protect UK financial stability. However, we continue to monitor the situation closely and remain in close contact with the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and relevant foreign and international authorities. We are absolutely committed to protecting the stability of the UK banking sector, which is key for supporting economic growth and for the UK’s world-leading financial sector.

The noble Lord, Lord Tunnicliffe, also asked whether we would commission a review of the risks that higher interest rates pose to the financial system. I reassure noble Lords that the Bank of England already has in place processes to monitor and assess risks to our financial sector and banking system. In particular, each year, the Bank of England carries out a stress test of the major UK banks, which incorporates a severe but plausible adverse economic scenario. The 2022 stress test scenario includes a rapid rise in interest rates, with the UK bank rate assumed to rise to 6% in early 2023, as well as higher global interest rates.

18:15

The results of the test are expected to be published in summer 2023 and, based on the results of the stress test, the PRA will set firm, specific requirements for UK banks to cover unexpected losses arising from various risks, including the interest rate risk. I have also mentioned previously that, this year, the Bank will for the first time run an exploratory scenario exercise focused on non-bank financial institution risks to inform understanding of these risks and future policy approaches.

It is also worth noting that, while the Bank of England’s Monetary and Financial Policy Committees are separate, they have regard to each other’s actions to enhance co-ordination between monetary and macroprudential policy. The Chancellor, in his latest letter to the FPC setting out its remit and recommendations, highlighted the need for close co-ordination of macroprudential and monetary policy.

Moving from the bigger picture to the matter at hand, several noble Lords asked what the justification was for exempting SVB UK from ring-fencing requirements, not just for the four-year transition period but in perpetuity. That is a matter that will come before us in the SI to follow later this year. The exemption that we are debating today relates to the provision of preferential intragroup lending from HSBC to its new subsidiary. My noble friend Lady Noakes also asked about that. In relation to the intragroup lending provisions, it was crucial to the success of the sale of SVB to HSBC UK, as it has enabled it to provide around £2 billion of liquidity following the transaction.

[Baroness Kramer (LD)]

I do not want to pre-empt the noble Baroness, Lady Noakes, in trying to press her question, but it seemed to me that she was asking why was the ring-fenced part of the bank used to make this purchase? HSBC presumably had a very wide range of options of pieces of corporate structure that it could have used. There may be a very good answer to that, such as “This was the only one we could do over a weekend”, or something. However, the Minister also said that it was explicit in the agreement that the extended exemption would be a part of the package. That has not yet gone through a parliamentary process, and it will, but it is clear that the Government have taken a position that they will support that extended exemption. There is stuff going on here that we are trying to unpick, and I just wonder whether the Minister can help us to do that.

[Baroness Penn (Con)]

I was only at the beginning of my attempt to answer my noble friend Lady Noakes’s questions. I think that I will cover a fair amount of ground in dealing with them, but I am also very happy to follow up in writing.

I moved between the permanent exemption and the intrabank lending, so I will deal with the intrabank lending question first, then I will move on to the matter of a subsequent SI. As I say, the provisions in today’s SI were essential for the sale and allowed for the provision of around £2 billion of liquidity. My noble friend asked whether this exemption was permanent and whether there was any limit to the funding that HSBC could provide through this route. This exemption is permanent to ensure that HSBC can continue to provide liquidity support, should that be needed at any point in the future. There is no limit to the amount of funding that can be provided through this route. The PRA has stated that it has the tools to effectively supervise HSBC, even with this exemption in place.

[Baroness Noakes (Con)]

Before my noble friend leaves this point, I do not think she has addressed the question of why the ring-fence resources had to be used to do this. HSBC is very large and has very large UK operations that are not within the ring-fence, so I have been probing—and I know that the noble Baroness, Lady Kramer, is also interested in this—why the ring-fence has to be used. Why did the ring-fence exemption have to be used, because it is clearly not necessary in any absolute sense for HSBC to provide liquidity support to Silicon Valley Bank out of the ring-fence?

[Lord Tunnicliffe (Lab)]

In bringing this back to us, as the Minister will have to do for the second SI, and responding to these questions, can we have some analysis of the competitive advantage that HSBC will get out of this transaction?

[Baroness Penn (Con)]

That point was also raised by my noble friend, and I was hoping to come to it. Whether my answers mean that we will not have a further discussion on it either on the Bill or when the future SI comes forward remains to be seen. I shall try to address some of the points around the ring-fenced bank, the need to go down that route and whether SVB UK needed to be purchased by HSBC’s ring-fenced bank. That was a commercial decision made by HSBC, and it would not be appropriate for me to comment further on it.

[Baroness Kramer (LD)]

I am sorry to interrupt, but the only rationale I can think of is that from a ring-fenced bank you have that very cheap source of funding known as bank checking accounts and savings accounts. That precisely gives the commercial advantage to HSBC that the noble Baroness, Lady Noakes, is describing. Is that the only basis on which the Government were able to negotiate the deal: to make sure that the ownership of Silicon Valley Bank and the business it would pursue in future would be advantaged compared to similar activities by its rival banks? Is that what we are talking about here?

[Baroness Penn (Con)]

I am afraid I have to disappoint noble Lords and say that I have no further comment to make on the decision to purchase it by the ring-fenced bank. It was a commercial decision for HSBC.

My noble friend had some other questions on the use of the ring-fenced bank. She asked what activities SVB UK undertakes that are not allowed under the ring-fence regime. SVB UK provides lending to certain types of financial institutions, such as venture capital funds, which is not allowed under the ring-fencing regime. It also provides certain equity-related products in relation to its lending, which is also not allowed under the ring-fence regime. She also asked whether I could confirm that SVB UK will not be added to HSBC’s domestic liquidity subgroup. That is a matter for the regulator to decide.

All three noble Lords asked about the implications for competition and whether this move has given a competitive advantage to HSBC. The exemption is limited to the acquisition of SVB UK by HSBC, and was necessary to facilitate this acquisition—something I think all noble Lords welcomed. As Sam Woods explained at the TSC recently, a necessary condition of HSBC moving forward was that it could keep the entirety of SVB UK as one business. The value was in the integrated nature of the business, and HSBC could make that work only if it had it as a subsidiary of HSBC UK, the ring-fenced bank.

It is also worth reiterating that SVB UK remains very small compared to HSBC. Its assets amount to around £9 billion compared to HSBC’s $3 trillion group balance sheet.

To come on to the second statutory instrument and the permanent exemption from ring-fencing for SVB UK, the second exemption was also crucial, as it ensures that SVB UK can remain a commercially viable stand-alone business, as part of HSBC UK. It will be subject to conditions, which are intended to ensure that the exemption is limited to what was needed to facilitate the sale of SVB UK. We will set out details of those conditions alongside the second statutory instrument, which noble Lords will have the opportunity to debate. Alongside that, as I said earlier, the PRA outlined in its response to the Treasury Select Committee that it has a range of tools that it can and will draw on to ensure the effective supervision of HSBC and the protection of retail deposits.

[Baroness Noakes (Con)]

Can I just clarify something with my noble friend? I can just about understand why, for the transaction to happen over the weekend, HSBC was allowed to bully the other participants into breaking the ring-fence rules to allow it to be set up. However, allowing a permanent change means that the ring-fenced bank will be allowed to provide liquidity, and presumably capital as well, on advantageous terms to a bank which can be used as a growth vehicle within HSBC, thereby increasing the risk to ring-fenced funds. I understand why you might have to do that initially, to get the deal through, but I do not understand whether there are any limits at all on what can happen after the acquisition has happened. These permissions have been set up in a way, and are likely to continue in a way, that will allow Silicon Valley Bank to continue to operate in a way that is completely antithetical to the ring-fenced banking regime. As I have said, I am not a fan of it, but I have a strong objection to one bank being allowed to operate in a distinctly different way from other banks.

[Baroness Kramer (LD)]

I shall just add something, so that the Minister does not have to repeat herself constantly. The Minister was very clear that the flow of funds out of the ring-fenced HSBC would go into the hands of a body that will then use it to fund venture capitalists. That is not normally permitted under the ring-fence because it is a very high-risk speculative activity. The whole purpose of ring-fencing is to split activity like that away from the utility role of retail banks. Since there is, apparently, no constraint on the amount of money that can be moved, it has just opened up a massive chasm in the separation, and a massive advantage for one particular high street bank versus the others. I think that the Minister said that the amount of money that could be moved was limitless —so it is really a big issue.

[Baroness Penn (Con)]

In relation to the provision in this statutory instrument, my understanding is that the exemption to this aspect of the ring-fencing regime is on a permanent basis. The subsequent SI that we will debate will have conditions applied to it, and we will set out those conditions at the time.

I refer my noble friend and the noble Baroness to the comments from the regulators when they were asked about this issue. The PRA was confident that it

“has a range of tools that it can and will draw on to ensure the effective supervision of HSBC and protection of retail deposits”.

As the noble Baroness mentioned, that is one of the aims of the ring-fencing regime.

18:30

Perhaps it would be helpful if I come on to the wider implications for the ring-fencing regime, which were at the forefront of the remarks from the noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe. The changes that we have made in relation to the sale of SVB UK are not a forerunner for further changes that the Government plan to make to the ring- fencing regime. The Government announced and undertook an independent review of ring-fencing, led by Sir Keith Skeoch, and we have set out our response to that review. That response remains the approach that we will take, but it would be helpful to set out some more detail.

Last December, we announced that we intended to broadly take forward the recommendations from Sir Keith Skeoch’s review, first by publishing a call for evidence, on 2 March, to review the alignment between the ring-fencing and the resolution regime for banks. As noble Lords would expect with a call for evidence, the Government are not indicating any preferred way forward at this stage. We remain open-minded, and that call for evidence will help to inform next steps. The call for evidence closes on 7 May and then we will work closely with the Bank and the PRA, through the ring-fencing task force, to analyse received responses and respond in due course. There are no plans to amend the Financial Services and Markets Bill in relation to ring-fencing, and any fundamental change to the provision of the ring-fencing regime would require changes to primary legislation.

Secondly, in addition to that, the Government have announced their intention to consult in the middle of this year on a series of near-term reforms to the ring-fencing regime to implement the Skeoch review’s near-term recommendations. They aim to make the regime more flexible and proportionate while addressing some of its unintended consequences. For example, we intend to take banks that do not conduct major investment banking activity out of the regime completely, to relook at the activities that ring-fenced banks are prohibited from undertaking and to give them the flexibility to set up subsidiaries outside the EEA—a restriction that is a relic of our EU membership. Those near-term reforms would require secondary legislation, I believe under the Financial Services and Markets Bill once it has been passed and enacted. Our aim is to introduce that secondary legislation by the end of this year.

I reiterate that the changes made in response to dealing with SVB UK were specific to the conditions needed to allow that sale to go ahead and are not an indicator of the Government’s wider policy approach here. We do have a wider policy approach, but that pathway has been set out clearly and is the response to both the independent review and further consultation or, in the case of more fundamental reforms, a call for evidence even before any consultation. We will work with the regulators to understand the response to those calls for evidence and then look at the appropriate way forward.

[Lord Tunnicliffe (Lab)]

Can the Minister confirm whether I have understood this correctly? My understanding was that we are assured that any impact on the ring-fence regime will be brought about through primary legislation.

[Baroness Penn (Con)]

It is important to distinguish between the near-term reforms that the Skeoch review recommended—I listed some examples of what can be taken forward through secondary legislation—and any more fundamental changes, which are the subject of the questions in the call for evidence, which would need primary legislation to be amended to take forward. So it is possible to make alterations to the ring-fence regime through secondary legislation; in fact, the Government have been quite clear about their intention to do so. We will consult on that before we do so, and we will set it out then. However, the call for evidence sets out more fundamental options, and that would require primary legislation. So there is a mix, but anything such as abolishing the ring-fencing regime, or other more fundamental changes, will be set out in primary legislation. I hope that provides sufficient clarity on that point.

The noble Baroness, Lady Kramer, asked about the interaction between SVB UK and its parent in the US. I will write to her on that subject. It was a UK subsidiary, was subject to UK regulation, and had its own requirements under that regulation. However, to provide absolute clarity on that point, I will write to her. I will also look back on this debate because it has been detailed and technical—as well as very important—and will endeavour, where I can, to improve on my answers to noble Lords in writing. However, there may be areas where there is nothing further to add, even if that is not to the satisfaction of noble Lords.

It is worth concluding on the more positive note that most noble Lords started with: that the outcome of the Government’s action, together with the Bank of England, to facilitate the sale of SVB UK protected its customers and UK taxpayers. It was a good result in that respect, but the Government will continue to monitor the financial system and consider ongoing events. The final note of reassurance I offer is that the Bank of England has confirmed that the UK banking system remains safe, sound and well capitalised. I beg to move.

Motion agreed.

Committee adjourned at 6.36 pm.