Draft Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023
(1 year, 6 months ago)
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The Economic Secretary to the Treasury (Andrew Griffith)
I beg to move,
That the Committee has considered the draft Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023.
It is a pleasure to serve under your chairmanship, Ms McVey. As hon. Members will be aware, Siliconâ Valley Bank UK Ltd—or SVB UK—was sold to HSBC on Monday 13 March. The aim of the sale was to ensure that customers of SVB UK could access their deposits and banking services as normal, limit risks to our tech and life sciences sector, and safeguard some of the UK’s most promising companies. We achieved those outcomes without any public money or Government guarantees. There was no bail-out; SVB UK was sold to a private sector purchaser. The solution was a win for taxpayers, customers and the stability of the banking system. The International Monetary Fund has said that the UK’s response to SVB UK restored market confidence and contributed to the UK’s upgraded growth forecast. It now expects the UK to avoid a recession this year.
On Monday 13 March, using powers under the Banking Act 2009, I laid in both Houses a statutory instrument to facilitate the sale of SVB UK to HSBC. That instrument, which has now been approved by both Houses, granted HSBC’s ringfenced bank an exemption so that it could provide liquidity on non-arm’s-length terms to SVB UK on an ongoing basis. That was needed to facilitate the sale of SVB UK to HSBC, because it ensured that HSBC could provide the necessary funds—over £2 billion in the days immediately afterwards—to its new subsidiary. The exemption also ensures that HSBC UK can provide liquidity to SVB UK as needed going forward.
This second statutory instrument provides an ongoing exemption from ringfencing requirements for SVB UK beyond the existing four-year transition period. That exemption is subject to conditions relating to the size of SVB UK’s core deposits and the type of business that it can undertake. The first condition is intended to ensure that SVB UK or its subsidiaries cannot hold core deposits, which are typically retail and small business deposits, above the existing threshold in the ringfencing regime, which is currently £25 billion.
The second and third conditions are intended to ensure that SVB UK or its subsidiaries will be allowed to undertake new business activities only if they are similar to those conducted by SVB UK at the time of the acquisition by HSBC. Those conditions are intended to ensure that the exemptions from the wider regime are limited to what is needed to facilitate the sale of SVB UK. Together, they minimise risks to financial stability and limit any competitive distortion.
Hon. Members will note that Sam Woods, deputy governor for prudential regulation and chief executive of the Prudential Regulation Authority, has confirmed the PRA’s support for the provisions in the draft order, in a letter that I have laid in the Library. There are copies in the Committee Room for Members. He states that the statutory instrument, with its conditions, supports
“the PRA’s primary statutory objective of safety and soundness, and limits competitive distortion.”
He also confirms that the PRA feels that it
“has a range of tools…to ensure the effective supervision of HSBC UK and SVB UK”.
In conclusion, the draft order, along with the previous exemption, is crucial to the purchase of SVB UK by HSBC. It protects taxpayers, depositors and the financial system. 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 was found. I hope that hon. Members will join me in supporting the draft order.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
It is a pleasure to serve with you in the Chair, Ms McVey. I thank the Minister and his team for briefing me ahead of today’s debate. We welcome the quick work done by the Treasury, the Bank of England and regulators to secure the HSBC rescue deal for the UK arm of Silicon Valley Bank. SVB UK serves a high concentration of life sciences and tech companies in this country, and those firms play an indispensable role in driving growth and innovation across the economy. We recognise that granting an exemption to the ringfencing regime for HSBC was necessary to guarantee the sale of SVB UK in exceptional circumstances. That is why the Labour party will support the draft order.
I just want to ask the Minister a few questions. First, has he considered whether maintaining a special exemption for HSBC in the future represents the best long-term solution? Can he assure me that he and his officials, alongside the Bank of England, have considered all the alternative options now that the collapse of SVB UK has been averted? I recognise the specific circumstances of SVB UK, but does he agree that ringfencing reforms were introduced for good reasons, to protect savers and taxpayers from a banking crisis? Can the Minister reassure me that, beyond SVB UK, his Government are committed to the integrity of the ringfencing regime, and that regulation must prioritise the safety and soundness of our banks?
Peter Grant (Glenrothes) (SNP)
The SNP will not oppose the draft order, but I would appreciate some clarification. We have to be up front that this is a controlled, measured and proportionate weakening of the consumer protection requirements that were put in place after the catastrophic financial crash 15 years ago.
In principle, we all support the position that there will be rare occasions when those consumer protection measures need to be weakened, and in some cases removed altogether for a short time in order to prevent even more serious harm that might have arisen had they been enforced. The Government’s argument is that the threatened collapse of Silicon Valley Bank UK Ltd was one such occasion. I do not think that anyone could argue with that, because we saw what happened in 2007 and 2008, when banks collapsed in a chaotic and uncontrolled way. In essence, the ringfencing requirements were introduced to try to prevent the situation arising ever again in which a bank was too big to be allowed to fail. The regime allows banks to fail in a way that causes as little damage as possible, and ideally none whatever, to the wider economy.
I do not think that there is any disagreement on the need for an exemption to the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014, because that was clearly part of what was needed to prevent the bank from failing completely. I hope that the Minister will be able to persuade the Committee why that exemption needs to be made permanent, rather than applied for the usual four-year period. When the Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023 was debated on 27 March, the Minister effectively said that the exemption was necessary—I am paraphrasing his words—because HSBC needed to be allowed its new subsidiary. There was no publicly funded bail-out because HSBC had had to bail it out to the tune of over £2 billion at the time, and possibly a bit more since.
I am not clear why that exemption needs to be made permanent. Are we saying that the subsidiary, Silicon Valley Bank UK, will continue to need bail-outs beyond the four-year period? Remember that HSBC would not have bought it had it thought that it would be a permanent drain on its resources. I appreciate that there is a big difference between liquidity issues and profitability issues, but SVB UK certainly did not have profitability issues; it made quite a handsome profit in the last financial year for which it reported. At the time of the takeover, HSBC thought that it would make a gain of around £1.4 billion on the purchase. It has now scaled that back, and in the quarter 1 results published on 2 May this year it gave a value of just over $1.5 billion, as opposed to a similar number of pounds. For something that it paid £1 for, $1.5 billion is still not bad.
The Minister referred to the letter of 9 May from the chief executive officer of the Prudential Regulation Authority. He pointed to the explanatory memorandum, which makes it clear that the draft order is not intended to have any impact whatever on the PRA’s powers or how it uses them. He specifically mentioned section 55M of the Financial Services and Markets Act 2000, which, along with some of the sections around it, gives the PRA extensive powers. Will the Minister clarify just how widespread the PRA’s powers are? For example, could the PRA use its unaffected powers to reinstate some of the ringfencing requirements without recourse to Parliament? If there is to be a reimposition of the ringfence, does that need to be approved by Parliament in the same way as the exemption was?
My key question is this: is there an expectation that Silicon Valley Bank UK will have liquidity issues that need support from its parent company more than four years after the takeover? If we do not expect that, why do we need this order?
Mr Khalid Mahmood (Birmingham, Perry Barr) (Lab)
It is always a pleasure to serve under your stewardship, Ms McVey.
I agree with my hon. Friend the Member for Hampstead and Kilburn that we should not contest the order, but I want the Minister to note a couple of things. The continual failure of banks hurts growing businesses that it is important we support. Will the Minister look to strengthen the PRA to ensure that there is sufficient depth to scrutinise banks and their savings? Will he look into the idea of a national development bank to help businesses and small start-ups to succeed?
Andrew Griffith
It is always a pleasure to respond to the hon. Member for Hampstead and Kilburn. I thank her and the hon. Member for Glenrothes for their support.
I reassure both Opposition spokespeople that the exemption was a necessary move in the eyes of the Bank of England, which conducted the process to seek an alternative buyer, of which the exemption was a necessary precondition. In this case, the introduction of a long-term exemption, as opposed to the time-limited exemption of four years in the existing legislation, will ensure that the outcome that I think we all seek—the continued flow of funds on an affordable basis, particularly to small businesses and start-ups—can happen on a commercial basis. That is the reason for the long-term exemption from the ringfence.
I assure Members that the exemption is an exception, and not just to the process. The fact that we have introduced this statutory instrument, thereby giving Parliament the opportunity to scrutinise the change, demonstrates the proper nature of the exception process; this is not being done simply by the exercise of a discretion on the part of any of the participants.
I also assure Members that the intention behind the ringfencing regime—the desire to reconcile the protection of consumers and the importance of the financial stability system with the ongoing viability of a healthy financial sector—continues to this day. The objectives remain exactly the same. We have put out a call for evidence on the long-term review and will publish our response to it in due course. We are taking the appropriate amount of time and I am always happy to consult Members so that we get it right. This is not something that we seek to rush and we certainly do not seek to deregulate for deregulation’s sake. We wish to regulate the balance of harm.
It is also the case that the provisions of the original 2014 order might not always be the optimal point on the envelope. For example, we are trying to ensure the flow of funds to small and medium-sized enterprises, which is perhaps a shared objective. As we seek to move forward on ringfencing, that is not to repudiate the original intention laid down by this House but to revisit some matters, many years down the road from the 2008 banking crisis and in a different environment—for example, this sale happened very quickly—so that we can look at the most effective remedies in a situation in which things can move much quicker.
I think I have broadly addressed most questions. As the hon. Member for Glenrothes observed, the PRA’s powers are wide and are not fettered, other than in respect of the long-term continuation of this particular ringfence. A monitoring regime that many would characterise as intrusive will apply to the SVB UK subsidiary, just as it will to HSBC. We should be reassured—this is broadly what the PRA chief executive said in his letter to me that has been laid before the House—that the PRA feels it has the necessary powers.
On the slightly out-of-scope point from the hon. Member for Birmingham, Perry Barr about a national development bank—I understand that this was his opportunity to raise that important topic—we have made, as he will know, a number of interventions that support businesses at every point on the spectrum, from the good work done by the British Business Bank and its many different schemes to provide finance and liquidity, to the UK Infrastructure Bank, which has a specific remit in respect of net zero and levelling up. Rather than detain the Committee, let me say that I am always content to meet Members to explain the work we are doing and seek challenge if they would like us to look at additional work.
Question put and agreed to.