Bank Resolution (Recapitalisation) Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

Report stage
Monday 4th November 2024 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I add my support to my noble friend’s amendment.

If the power were used on a bank that had already achieved the MREL set for it, that use of the mechanism would raise questions about whether MREL and the minimum capital requirements had been set correctly—and whether there had been a regulatory failure. In either event, the Bank is conflicted, whether through the setting of MREL in its capacity as a resolution authority or through setting capital levels through its PRA arm. I am clear that the Bank should not have the power to cover up regulatory failure, which this unconstrained provision allows. There is no way for the Treasury to stop the Bank using the power other than by using the power of direction that exists but has never been used in the existence of the Bank since nationalisation. Unconstrained powers are unhealthy. That is why I support my noble friend’s amendment.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I concur with what other noble Lords have said about this amendment: that is why I have added my name. It cannot be left as a possibility for any size of bank; if it needs to apply to a larger bank, perhaps the MREL level should have been set higher. We have this rather unusual situation in the UK where we set MREL at a much lower level; it is set at about a quarter of the level of other countries. If there is a nervousness about needing to use it for a bank that is a little bit larger, perhaps some other fundamentals about where MREL is being set are wrong.

The premise of this Bill is based on it being an alternative to insolvency, where that would have been the normal end result. Maybe the compensation scheme would have had to pay out on deposit guarantees and so there is the happy thought that the money could be perhaps put to different use this way round. But the assumption should still be insolvency and we need a public interest test before we go looking at the Financial Services Compensation Scheme. It is already an extraordinary event—so how extraordinary are extraordinary events? I do not think one can layer extra extraordinariness on top of it: there has to be a line somewhere.

We do not know how many dips into the Financial Services Compensation Scheme there are going to be. In insolvency, there is one dip for the deposits that are guaranteed. It does not say that there cannot be multiple dips. There is already the notion that there is this enormous pot of money. Maybe it looks like a bank tax—and everybody hates banks and it is a pot to raid—but it is a very good way to cause more issues within the wider banking sector. Frankly, it is unfair if there are not some bounds somewhere. So I think this is the right one and, if the Minister is not going to incorporate the amendment, which I think would be a jolly good idea, we on these Benches will be supporting the noble Baroness, Lady Vere.

[Lord Eatwell (Lab)]

My Lords, my colleagues from the Financial Services Regulation Committee are rather confused on two issues; that is very unusual, but they do seem to be. First, there is the idea that somehow, if MREL were exceeded in a financial crisis, that would be a regulatory failure. The only way to prevent such a regulatory failure is to have MREL at 100%; that is to avoid the total failure of the financial system. That would be a disaster for lending in this country. At the moment, MREL is set at levels that are deemed to be a reasonable buffer under circumstances that might reasonably, even in extremis, be expected to occur. As we saw in 2008-09, even events that are deemed to be events that would occur only once in a millennium can occur several times in a week in a severe financial crisis. An MREL which can never be exceeded is 100% and if my colleagues are seeking to impose that on the British financial system, I would be very surprised.

The other point that seems to be neglected—it is why I deem this amendment to be irrelevant—is that my colleagues should recall that, in one of the letters from the Financial Secretary, he pointed out there was a cap on the amount that would be raised from the financial compensation scheme for these purposes. That cap, as I recall, was £2.5 billion. In those circumstances, £2.5 billion would never be sufficient to deal with the collapse of one of the big banks. So the cap itself defines these regulations as fitting only relatively small banks.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, I think that everything that needs to be said about these amendments has probably already been said. I have added my name where I could; one came in very late, so I could not. I congratulate the noble Baroness, Lady Noakes, on her diligence in getting the committee name in properly so that everybody knows where to go, with all these hundreds of people who are going to be reading this legislation. Nevertheless, we are an institution, as it were, so it is good to see our name there.

I also congratulate the noble Lord, Lord Vaux, on his diligence in hounding to a conclusion the final report, because it is, as he said, very important. In the meeting we had recently, those present from the Bank of England wondered why we might want this and suddenly nodded when I said, “Because otherwise Parliament may never find out what really happened”: that is what it is all about. They might think we do not want to know, many years on, if it is a long period. The sorts of people who sit on these committees do want to know, because we are the ones who have to learn and have to ask the questions, to make sure that it is not going wrong again. It is very important, and I hope the Minister will accept it. If votes are called, these Benches will be supporting the noble Lord, Lord Vaux.

[Baroness Vere of Norbiton (Con)]

I am enormously grateful to all noble Lords who have spoken today. I too add my thanks to the noble Lord, Lord Vaux, for tabling his amendment. This group epitomises what is so good about your Lordships’ House: a lot of movement has happened to date on these issues from the Minister, and we are grateful for his engagement and for the fact that we have been able to get a little further down the road. However, like terriers with very sharp teeth, noble Lords are not quite willing to let it go just yet, and I too support the amendments in the name of the noble Lord, Lord Vaux, and of course those of my noble friend Lady Noakes, who has also done a fantastic job in ensuring that the issues she raised, and which most noble Lords agreed with in Committee, come to the fore. Helpfully, the noble Lord, Lord Vaux, has tabled Amendment 9, which plugs a big gap, and I hope the Minister will accept that and the amendments in the name of my noble friend Lady Noakes.

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Moved by

[Baroness Bowles of Berkhamsted]

6: Clause 1, page 2, line 3, at end insert—
“(6) When discharging its functions in respect of the exercise of recapitalisation payments under this section, the Bank of England must observe the competitiveness and growth objective.(7) The competitiveness and growth objective is facilitating, subject to aligning with relevant international standards—(a) the international competitiveness of the economy of the United Kingdom (including in particular the financial services sector), and(b) its growth in the medium to long term.”

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will speak principally to Amendment 7 in this group, which has also been signed by the noble Baronesses, Lady Vere and Lady Noakes. Amendment 6 was my first attempt, when I was worried that defined first and secondary objectives were not already specified in connection with resolution. In fact, there are a whole load of objectives that have to be balanced in Section 4 of the Banking Act 2009. However, I then hit upon the formulation of claim 7, to make it agree with how it had been rendered in FiSMA 2000. I am suggesting that this is a secondary objective to all the existing ones, and the formulation is the one with which we are already familiar.

We on these Benches are not always certain of the merits of the competitiveness and growth objective, which is what I am inserting into the Bill here, in respect of the resolution authority. Our concern is that in other places, it might return to too much of the animal spirit that led to the financial crisis, but here, it has a different and particular role. The Bank has to balance all the Section 4 objectives to get the best results, and, in its resolution capacity, it is not really in a situation to be prey to animal spirits.

When it comes to the Financial Services Compensation Scheme as a source of funds, as we have already said, there are no bounds, or at least no written ones. How many dips into it can be made if the first one is not enough? How big can those dips be, compared to what might have been needed to compensate depositors if the Bank had gone bust instead? What happens if there are multiple resolution events in a narrow period of time? For how many years can the extra levy be put on to the banking sector in order to pay back the scheme? As the noble Baroness, Lady Noakes, has said before, how can we be certain that, years later, it is not called upon again in connection with some kind of legal action?

All these things are left open for the Bank of England resolution authority to decide and to do its best on. It will, of course, receive advice from the PRA, which has to consider what is an affordable levy for the industry, but it is receiving advice from a body which has in one sense just failed, and to which it is always close. It is advice that it does not actually have to take, either.

The only lever—other than the one suggested in the amendment of the noble Baroness, Lady Noakes, a requirement to minimise cost—is to impose the objective of competitiveness, which in this instance means affordability, and for that to be imposed on the resolution authority itself. It is secondary to everything else, so it cannot kick the other objectives into touch in any way; it is just making sure that there is a small reality check about what this does to other banks, especially in the circumstance that this is not the only bank or that this is not the only dip into the fund.

So, this is an instance where the secondary competitiveness and growth objective is relevant, and I hope the Minister can see his way to accepting it. If not, I shall probably seek to test the opinion of the House. I beg to move.

[Baroness Noakes (Con)]

My Lords, I have Amendment 16 in this group and added my name to Amendment 7, to which the noble Baroness, Lady Bowles of Berkhamsted, just spoke. As she indicated, the two amendments are related in that the imposition of unnecessary costs, which is the target of my Amendment 16, will do nothing to help the financial sector grow, be competitive or, indeed, support the real economy.

I fully supported the growth and competitiveness objectives introduced for the PRA and the FCA in the Financial Services and Markets Act 2023, and I am very glad that the Chancellor of the Exchequer has given her support to those. But I hope that the Government will want to go further and make all regulators, and indeed all other public sector bodies, pay attention to growth and competitiveness. Extending this to other organisations is important, particularly in the financial services universe, as they were not included within the competitiveness and growth objective in the 2023 Act.

One of those omitted at that time—perhaps we should have spotted it during the passage of the Financial Services and Markets Act—was the Bank of England in its capacity as a resolution authority. The noble Baroness, Lady Bowles, has had to confine her amendment to the use of the bank recapitalisation power because of the Long Title of the Bill. But the competitiveness and growth objective ought to apply to the Bank as the resolution authority in toto, not simply when it exercises the new bank recapitalisation power but also when, for example, it is setting MREL levels.

My Amendment 16 adds a special resolution objective to the seven already listed in Section 4 of the Banking Act 2009, and it requires the Bank to consider the minimisation of costs borne by the financial sector when the recapitalisation power is used. It is not an absolute requirement, as it would be just one of eight objectives, and it is for the Bank to determine, under the 2009 Act, how to balance those various objectives.

When it is using the power, the Bank is playing with other people’s money. Ultimately, it is the money of those of us who are customers of the banks, because at the end of the day the money that flows through the banks will end up being borne by customers, and it is only right that the Bank should have regard to the minimisation of costs that are ultimately borne by the banks’ customers.

In Committee I tabled an amendment that focused on the costs being borne through the FSCS not exceeding the counterfactual of the bank insolvency procedure to which the Bank should be paying regard in any event. My amendment today is a less complex test and is simply designed to act as a reminder to the Bank that it should treat other people’s money as carefully as it treats its own. If it does that, it should also help to keep the sector competitive and to help it grow. I hope that the Minister will agree that this amendment is right in principle and that it responds to a number of concerns expressed by several respondents during the consultation on the power over the last year or so.

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I hope I have provided some explanation to the noble Baroness of the Government’s position on this matter, and I respectfully ask that she not press her amendment.

[Baroness Bowles of Berkhamsted (LD)]

I thank the Minister for his explanation. I have some sympathy for the position in which he finds himself, which is the usual one with the Bank of England: you cannot touch it or interfere with it, and it is infallible. You cannot occupy its mind with even a tiny other thought, as it might distract it from the resolution that it has in mind. I find that quite concerning.

Yes, we have the code of conduct and other things that are not in the Bill, but we are dealing with something a little different here. It is ruled by a public interest test, but what about the private interest test? You are using private funds to replace public funds, so there is a big difference. Some little corner of the mind of the Bank of England’s resolution authority has to register that point: private funds are replacing public funds—a special tax on the banking sector to help keep its competitors going.

Imagine you started doing this with grocery stores; what would they think about it? It is quite remarkable. It is not using private funds, by agreement, for a deposit guarantee in the public interest—that would be a specific amount that has previously been agreed—it is stretching the piece of elastic when you do not know how long it is and you are not prepared to have another little test. I find that unacceptable. Something is needed there.

I intend to press my Amendment 7 to a vote and to beg leave to withdraw Amendment 6. If the Minister can find a better way of doing that—this is a private interest test to go alongside the public interest test—he might come up with a better amendment, but this was the best that I could find for now, just to put something in the Bill that shows that we acknowledge what we are doing. This is a momentous precedent, and to say that we cannot have something in the Bill that acknowledges that is a very bad state of affairs. Where will it take us next? I beg leave to withdraw Amendment 6.

Amendment 6 withdrawn.

Moved by

[Baroness Bowles of Berkhamsted]

7: Clause 1, page 2, line 3, at end insert—
“(6) As a secondary objective to the special resolution objectives in section 4 of the Banking Act 2009, when discharging its functions in respect of the exercise of recapitalisation payments under this section, the Bank of England must observe the competitiveness and growth objective.(7) The competitiveness and growth objective is facilitating, subject to aligning with relevant international standards—(a) the international competitiveness of the economy of the United Kingdom, and(b) its growth in the medium to long term.”

[Baroness Bowles of Berkhamsted (LD)]

I wish to test the opinion of the House.