Bank Resolution (Recapitalisation) Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

2nd reading
Tuesday 30th July 2024 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I welcome the Bill, as I do the recognition that resolution, rather than insolvency, can be a better public interest solution for smaller banks, or at least for some smaller banks. Smaller and specialist banks are providing banking services, in particular to growth companies and start-ups, which cannot easily get banked with big banks. Likewise, I continue to hope that we will have community banks. I believe that the resolution process, should it come to that, looks a more supportive outcome all round.

As Silicon Valley Bank showed, businesses have a harder time protecting their deposits when there is a need to have sizeable sums available for running the business, including paying salaries, and that resolution reaches a fairer solution for businesses and their employees. It is a pity that it is always a megabank that has to come to the rescue, but it has ever been so, and of course again they get more competitive. We had concerns at the time, which the Minister has already covered to some extent, that maybe the HSBC ring-fence was got around; my noble friend Lady Kramer may mention that as well.

Overall, though, I have no concerns about the principle and content of the Bill, but there are a few related points that I would like to raise. The cost-benefit analysis shows that resolution can be less expensive—in effect, just using funds that would have been paid out to insured depositors. I would say that even if it were a bit more costly, it has a public interest benefit.

I also wonder whether there can be double or hybrid dipping into the FSCS; for example, if the resolution included a haircut on deposits, bringing deposits under the £85,000 level and triggering individual payments so that there could be both recapitalisation and individual compensation drawn from the FSCS. These might seem strange proposals, but I saw some very strange proposals during the financial crisis in the EU. Double dipping for recapitalisation, or subsequent rounds of recapitalisation, is envisaged in Clause 2—or is it the case that loss of deposits will be done only as part of insolvency? Is there a bar to mixing the two?

One of the guiding principles is to stay within the overall levy affordability criteria for industry. Does this inevitably mean that timing plays a part? If there is more than one rescue in a short time, will depositors end up somehow getting a worse deal by going through the bankruptcy and insolvency route rather than the resolution route, or will there be a look at the sort of smoothing over time of the burden to the banking and finance sector?

The move in the Bill may also be a psychological one, as it cuts down the demarcation between those banks that have to hold MREL and will be resolved, and those that do not hold MREL and are expected to be allowed to fail. I do not want a consequence further down the track to be a call for small banks to hold MREL. MREL was intended for large banks posing systemic risk and engaging in riskier capital market operations, but it has already crept downwards to mid-sized banks, which do not have capital market operations and for which MREL is unduly expensive. MREL also makes the depositor the enemy, as the highest liability a bank can have is its depositors. This shows in the low rates of interest of those banks with lots of other types of business and in the flight of depositors to smaller banks seeking reasonable rates. MREL in itself is a driver as to where you put your deposits, because otherwise you will not get a decent return, but at the same time, by doing that you are perhaps going somewhere less safe.

Finally, as it must, the Bill amends Section 213 of FSMA 2000 in respect of the FSCS. I take this opportunity to voice again my dissatisfaction with how that scheme works on the FCA side, where the £85,000 guaranteed sum is not actually guaranteed because it suffers deductions to cover administration expenses, as has just been announced in the case of WealthTek, where there is a charge of some £23,000 deducted from the £85,000 guarantee. Once again, the FCA dallied for a year after a whistleblower contacted it about the culprit, John Dance, during which time the situation for investors declined substantially.

It is additionally galling for investors to find the FCA taking the costs of the administration out of what they thought was a guaranteed amount. It is quite easy not to know that this happens. I have asked a lot of the people I work with in the financial sector about whether they know it is not £85,000 on the FCA side, and that you might lose a big chunk of it to the administration. Even many people operating in fund management did not know this themselves. That is probably because it is such a big strapline, but it does not say: “Wahey—you might have expenses taken away from this”. Now, this does not happen on the banking side—at least not yet. I believe this is due to the provisions of the EU deposit guarantee scheme, which I may have had a hand in.

First, can the Minister assure me that, alongside the modifications for use of the Financial Services Compensation Scheme in small bank resolution, and in any domestication yet to come of the retained EU law deposit guarantee scheme, there will not start to be cost deductions from the £85,000 on the PRA side of things? Secondly, on the FCA side of things, I think that that guarantee should be a guarantee, and if costs have to be recouped, then it should be through another route. In the WealthTek case, it said that only 4% of investors fell into the trap of the unexpected deductions. The fact that that is thought to be a small number of investors is all the more reason not to have that trap and discriminate against a small number of investors. Is this something that the Government will look at? Overall, I am not happy that the FCA is in charge of the rules of the scheme that allow it to force the cost of its own dalliance on to the investor guarantee.