Public Authorities (Fraud, Error and Recovery) Bill

Debate between Baroness Kramer and Lord Vaux of Harrowden

Wednesday 4th June 2025 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, I will very quickly make a couple of comments on Amendments 9 and 10. First, on Amendment 9, I have an amendment later in Committee that inserts a reasonableness point in a similar way, so I support this. However, I wonder whether this amendment is actually in the wrong place; I suggest that it ought to be in the initial line—“the Minister should reasonably consider”—as opposed to “reasonably proportionate”, but that is a small issue. I support the concept of Amendment 9.

Amendment 10 is quite important. This issue has been raised by the banking industry, and there is a very real concern that the receipt of a notice might provide reasonable grounds for the financial services firm to know or suspect that the customer has defrauded the public sector. In that situation, the failure to take action, for example to close or restrict the account, might conflict with wider anti-money laundering obligations and, possibly—I am not sure this is right—the corporate criminal offence of failure to prevent fraud. That might include having to exit customer relationships and so on.

So there is a very real concern from the financial services industry here. I am sure that that is not the intention of the Government in this situation but it is something that we need to think about, as the receipt of a notice cannot be seen as reasonable grounds to suspect fraud, because that would set all sorts of hares running against people who might be entirely innocent.

[Baroness Kramer (LD)]

My Lords, I will just pick up the issue that has been raised by the noble Lord, Lord Vaux. We are dealing tomorrow with a statutory instrument that attempts to provide safeguards against banks and other organisations deciding to close people’s bank accounts or to deprive them of other financial services. It is often the people who are under the most financial pressure who find it difficult to get banked in the first place. They can get a basic bank account if they are lucky, but to get a bank account with any of the features that make financial life reasonable is exceedingly difficult. I therefore share the noble Lord’s concern that we do not start a hare running.

Banks are eager to offload people who do not have a lot of exciting and interesting activity. If this notice gives them an excuse to do that, I can see that an awful lot of banks will seize that opportunity, so I raise this as an issue to be wary of. In fact, we have an SI going in the opposite direction tomorrow, so this is really for the Government to make sure that one hand knows what the other hand is doing.

Bank Resolution (Recapitalisation) Bill [HL]

Debate between Baroness Kramer and Lord Vaux of Harrowden

Consideration of Commons amendments and / or reasons
Monday 12th May 2025 Lords Chamber

[Lord Vaux of Harrowden (CB)]

My Lords, I want to ask the Minister a question that arises from this change. First, though, it is over six months since we debated these amendments. That does seem like an awfully long time for the Bill to disappear into limbo and come back, particularly when other Bills are being rushed through this House.

I wanted to ask the Minister to explain more about whether the resolution process could be used for larger banks, but I think he has actually answered that question. I am not sure his answer gives me an awful lot more confidence or comfort, but I am not going to oppose the Commons amendments. However, in the last six months, various comments have come from the PRA or the Bank of England about the fact that this Act, as it will be, may allow them to take some banks out of the MREL process. I wondered if the Minister might wish to comment on that and whether there are any consequences the other way round.

[Baroness Kramer (LD)]

My Lords, I have to say that I appreciate the explanation that we have just had from the Minister, but I and others remain disturbed by the Government’s decision not to accept the amendment, which was not just rational but well crafted, introduced by your Lordships in this House. The underlying Bill was initially presented to the House as providing a mechanism to save significant small banks from failing by recapitalising them from the Financial Services Compensation Scheme, rather than having to turn to the taxpayer. Regulated banks, as this House will know, are then required to replenish the FSCS when it is depleted for any reason, but, because the thrust of the language was around small banks—that was the intent, and that was the discussion that is in all the notes—this House very much agreed to it, with just a few probing points engaged with.

Thank goodness that we have a lot of very good brains in this House. The combination of my noble friends Lady Bowles and Lord Fox and the noble Baronesses, Lady Noakes and Lady Vere, realised that there was a significant loophole in the language. We did not realise in the beginning that any of this could be applied to the larger banks; that became clear only as those pursuing the legislation became more aware of the implications of its content. Now we have a Bill that permits the regulator to use the FSCS as its mechanism to rescue large banks. Let us be frank: it completely changes the whole profile of both risks and consequences. The amendment would have effectively closed that loophole.

The larger banks, as the Minister has said, already have their own dedicated process to recapitalise in case of failure, a process that was introduced after the 2008 crisis. The Bank of England requires each large bank to hold a tranche of MREL—in plain English, bail-in bonds—which can be converted to capital by the regulator in case of failure, with the consequence that the bank is thereby rescued. We need to understand why that is not considered by the Government to be an adequate system. The Minister has just said—if I understood him—that the regulators will always require that bail-in bonds are used first, and the FSCS is a resource of last resort. But that is not in the legislation. The legislation allows the regulator to turn first to the FSCS and ignore bail-in altogether. He will be very conscious that the Swiss regulator, with the failure of Credit Suisse, completely ignored the bail-in capability and chose other routes to manage the rescue of Credit Suisse.

Those who hold bail-in bonds—the investors who buy them—are extremely well remunerated for carrying the risk associated with a bail-in bond. I am trying to work out why they can now look at this legislation and begin to assume that they will have the benefits of receiving a risk premium for holding those bonds but never actually find that those bonds are forced into use in case of a failure. How can we rely on just a code to continue to determine that bail-in will be the first resort and not a later resort or no resort at all? Are the Government basically saying that there are now many circumstances they have identified in which bail-in is neither usable nor adequate? I refer to the Swiss example. What are the consequences for financial sustainability if we are saying that bail-in is a slightly busted system? Have there been blandishments from the various investors who have purchased bail-in bonds, trying to pressure the Government into creating an alternate route? What are the consequences for our small- and medium-sized banks if the FSCS is depleted by big bank failure?

The Minister says that the regulators will not ask for an unaffordable contribution from the various banks to replenish the FSCS, but it is our mechanism that ensures small depositors’ accounts. Who is going to do the replenishment if the number is too great to ask the banks to commit to it? I am quite troubled by this change in responsibility for where risk lies that is embedded in the Bill. If the Minister is so sure that the items in the code should be giving us reassurance, why have they not been introduced in this Bill as part of the legislation?

Bank Resolution (Recapitalisation) Bill [HL]

Debate between Baroness Kramer and Lord Vaux of Harrowden

Report stage
Monday 4th November 2024 Lords Chamber

[Lord Vaux of Harrowden (CB)]

My Lords, I support both the amendments in the names of the two noble Baronesses who have just spoken. I probably have a slight preference for Amendment 16 on the expenses—it is more direct—but we need something in the Bill that reminds the Bank of England that it is spending other people’s money, and that it needs to do that carefully and with care. These amendments are aimed primarily at that end, so I support them both.

[Baroness Kramer (LD)]

My Lords, I will speak briefly in support of Amendment 7 in the names of the noble Baronesses, Lady Bowles, Lady Noakes and Lady Vere, but I am not as minded to support Amendment 16 for the following reasons. Some in this House will know that I dislike intensely the competitiveness and growth objective that has been attached to the PRA and the FCA. If you were going to set out a pattern to repeat the crash of 2007-08, those two objectives would be essential paving stones on that route, so I do not look to attach that particular amendment to the Bank of England in its overall resolution role in, for example, setting MREL. It should be setting MREL to reduce risk, not to follow the lowest common denominator in the international banking arena.

Ironically, if you take the growth and competitiveness secondary objective and just apply it to recapitalisation, it turns on its head and becomes a risk-reduction tool, because it basically limits the ability of the collapse of one bank to then infect all the other banks within the system. That seems to me to be a risk-reduction strategy, so I am very much in favour of the way in which it has been crafted under Amendment 7. I say that to reassure others in this House who may be afraid that playing fast and loose with the competitiveness and growth agenda is always a risk-increasing agenda rather than a risk-reduction agenda. In this narrow role, it works in the opposite direction.