Bank Resolution (Recapitalisation) Bill [HL]

Debate between Lord Livermore and Baroness Bowles of Berkhamsted

Committee stage
Tuesday 10th September 2024 Grand Committee

[Lord Livermore (Lab)]

As the noble Baroness said, we touched on this briefly in the first day of Committee. If it is okay with her, I will write to set out the precise way in which the mechanism would work in that instance.

[Baroness Bowles of Berkhamsted (LD)]

I thank the noble Lord for his reply, which was broadly as I expected. We can draw from it that, in a situation in which the scheme will be used for recapitalisation, it will not set any precedents, because we do not know how much money will be in the pot if there have been other events. It will be considered case by case.

On the one hand, that has to be so, otherwise you might fall into the sort of trap perceived by the noble Baroness, Lady Noakes: that it is a perpetual pot, which the banks will have to fill, no matter what. That is not satisfactory but, at the same time, it is nice to have as much clarity as possible about the expected outcomes. We come back to the same point about what goes into the code of practice or other versions of it, whatever they may be.

My final point—I do not need to labour points that we have been around before—is that, in his answer about eligible depositors, the Minister said that this is enshrined in PRA rules. I just wish that it was enshrined in primary legislation, as it used to be. I had not absorbed how that was in the rules and was therefore changeable by the PRA. I thought that it would be fixed in primary legislation, but that is something else to think about. With those comments, I beg leave to withdraw my amendment.

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[Lord Livermore (Lab)]

Yes, absolutely; I will very happily meet. I will write a letter setting this out in greater detail, provide the worked examples, and then perhaps we can meet on that basis.

[Baroness Bowles of Berkhamsted (LD)]

I thank the Minister for his replies but I am still not satisfied, in part because of what is in the Explanatory Notes. They should be amended because they cannot stand alongside everything else that is said. I know that they have no legislative power but if we are looking for ways to interpret, they are there. The problem comes from, as I said, “shortfall”, which is defined in a way that has ambiguities. I know full well that “shortfall” was an unusual word; it did not need to be in the BRRD and was put in by the counsel—I think I know who did so because I was told to guard it with my life—for various operations that may still be needed. Now is the time to make it clear. The linkage back to it is not good.

Alongside worked examples, it would probably be quite useful to have a list of the instruments that we think are covered and those that are outside. MREL, which is loss absorption amount plus recapitalisation amount, covers common equity tier 1, other equity instruments, subordinated senior non-preferred instruments and ordinary unsecured senior instruments. It does not include repayable deposits and non-returnable deposits.

How have we ended up talking about bailing in unsecured depositors when we are talking about MREL, because they should not be there in the first place, as far as I understood things? If we cannot understand that, that is not right to put before the public. Can we have a list of the instruments that we think can be bailed in, where they are bailed in, and then the point at which in that stack the FSCS compensation can come in? Once we have worked out where that is and can see it clearly, I should be much better pleased if we could define that ab initio in the Bill rather than reference back to language that is flawed and risks either leading us up the garden path or not being able to understand it, even though I declare that I have confidence that the Bank of England will probably get it right.

It is splitting hairs, but I cannot make that wording work; I am sorry. Therefore, in hoping that I will get some more explanations, for the present, I shall withdraw the amendment, but it may well be that either this or my Amendment 22 in some form might need to reappear on Report. I beg leave to withdraw the amendment.

Bank Resolution (Recapitalisation) Bill [HL]

Debate between Lord Livermore and Baroness Bowles of Berkhamsted

Committee stage
Thursday 5th September 2024 Grand Committee

[Lord Livermore (Lab)]

I am told that the answer to that is no.

[Baroness Bowles of Berkhamsted (LD)]

I know that the notes have no effect, but those regarding Clause 4(3) say that it

“amends section 12AA … to allow the Bank to take into account the funds provided by the FSCS when they are calculating the contribution of shareholders and creditors required when exercising the bail-in write-down tool”.

That says that you will be able, and consider it positive, to adjust the contribution of shareholders. That is because you are using incoming capital. I think that the shareholders and bail-inable creditors should be written down as they are supposed to be, then, when you still do not have enough money for capitalisation, there is the money from the Financial Services Compensation Scheme. I understood that and have no problem with it, apart from the size issues. Saying no to the question just put by the noble Lord, Lord Vaux, contradicts what is written in paragraph 26 of the Explanatory Notes.

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[Lord Livermore (Lab)]

On the noble Baroness’s first point, we are committed to updating the code of conduct, to doing so swiftly and to consulting with industry thoroughly on it. I cannot give her a timescale today. On the commitment to write letters, of course I will make sure those letters are copied to all noble Lords.

[Baroness Bowles of Berkhamsted (LD)]

I thank everybody who has spoken in this debate. Not surprisingly, we have had quite a lot of good points. I am still not reassured that the Bill’s scope is right. I understand entirely wanting to give the Bank of England flexibility. Ultimately, it is in the best place to judge what is the best thing to do, taking into account public interest, not setting off a systemic failure and all those kinds of things. At the same time, I have this instinctive dislike of something that enables the Bank to do something that I think it definitely should not be allowed to do, which I have said is in paragraph 26 of the Explanatory Notes. I will not repeat it.

I noticed, as the Minister spoke, that he very carefully said “primarily small banks” the whole time. There is this issue of “primarily” and where it stops. There could be other ways to include up to medium-sized banks. The code of practice could be one way of doing it, or a strategy, as the noble Lord, Lord Vaux, had as part of one of his amendments. I do not think it can be passed in this case which, as was said by the noble Lord, Lord Eatwell, could start a whole systemic issue. It is really built for the idiosyncratic case, or maybe for a couple of small banks, but that is it. It is basically about saving the uninsured depositors and people like that, in the public interest, rather than, as unfortunately it says, saving the shareholders and creditors. We have to look carefully at which creditors and at the definitions. I would like to see that laid out, because my reading is that, when we looked at the sections I quoted that date back to the BRRD, we looked at the bail-in things that happen in big banks, not at the other liabilities generally held by small banks. I might have got that wrong, but I would really like to see this properly laid out.

So I still have some issues. There needs to be something in the Bill that takes account of the concerns raised, however that is done. I can be flexible about it, but I think that my Amendment 23, when we get to it, would be one way to do it.

I am afraid that I will withdraw my amendment at this stage, but I expect to return afresh on Report. We have all been hampered by the fact that this has been a first-up Bill after vacations—and this will happen again on Report, when we will have been back for only one week. That makes it very difficult to have communications and meetings with the Minister.

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[Lord Livermore (Lab)]

My Lords, I note that a number of other amendments have touched on the topic of Treasury consent before the Bank of England exercises its powers. I hope to fully address the Government’s position on that matter now.

I start by addressing the amendment laid by the noble Baroness, Lady Noakes; I will touch briefly on some points that I have made previously. The Government believe that the existing division of responsibility between the relevant authorities in resolution works well. It is important to maintain the position that the Bank of England can take decisions on the appropriate resolution action independently, guided by the objectives given to it by Parliament under the Banking Act and in line with relevant international standards.

There would be two key risks if that system were to change. First, it would confuse the lines of accountability for resolution decision-making, in effect making the Treasury the de facto resolution authority in the case of certain banks that may be subject to the new mechanism. This would undermine the Bank’s role as the resolution authority and may be seen as out of step with the intent of the relevant international standards. Secondly, a resolution is more likely to succeed when it is conducted by a single decision-maker backed by the right resources and expertise. The Bank of England is ultimately best placed to make those judgments and, therefore, to ensure that there is market confidence in resolution action.

However, there are safeguards to ensure that the Treasury can engage with the Bank of England’s decision over resolution matters, including any use of the new mechanism. As I have noted before, the Bank of England must consult the Treasury during any resolution action as part of its assessment of the resolution conditions, which are required by statute. This is an important legal requirement and ensures that the Treasury is meaningfully engaged in the Bank of England’s decision-making process. The Treasury and the Bank also maintain a productive ongoing dialogue.

Finally, the Treasury retains absolute approval in any resolution with implications for public funds, ensuring that the interests of taxpayers are appropriately reflected in resolution decisions and the Chancellor’s ultimate accountability for public funds to Parliament. The Government view this as an appropriate and proportionate framework in the context of the new mechanism.

The noble Baroness, Lady Noakes, asked about the Bank’s accountability to Parliament. I note that the Bank must inform the Treasury and share copies of legal instruments when taking resolution action. The Treasury must lay those in Parliament. The Bank must also report to the Treasury on the use of those powers; in some cases, the report must also be laid in Parliament.

I turn to the amendment in the name of the noble Baroness, Lady Vere—I note what we might describe as a slight change of heart from her position in government over the past 14 years. Her amendment would require the Financial Services Compensation Scheme to seek the approval of the Treasury in circumstances where it has to levy in subsequent financial years after the mechanism under the Bill has been used. I should clarify that, in principle, the mechanism provided by the Bill could be used to manage multiple firm failures at once; of course, the Bank of England would carefully consider the implications of doing this when assessing the resolution conditions, having regard to the special resolution objectives.

Moreover, any levies would be subject to the affordability cap set by the Prudential Regulation Authority, based on how much the sector can be safely levied in a given year; currently, that is £1.5 billion. In the event that multiple failures resulted in a recapitalisation requirement under that cap, the expectation is for the Financial Services Compensation Scheme to be able to levy safely for the funds within 12 months. It would not do that only if the Prudential Regulation Authority considered that it would carry issues of affordability, in which case the levies could be spread over a longer timeframe. In the event that the amount exceeded the £1.5 billion cap, the Government would expect the Financial Services Compensation Scheme to levy over multiple years, ensuring that it remains affordable for the sector.

It is important also to note that, in these circumstances, the Financial Services Compensation Scheme would be able to turn to the Treasury and request a loan under the National Loans Fund. The levies charged over multiple years would then be used to repay such a loan. Of course, borrowing from the National Loans Fund remains at the sole discretion of the Treasury.

I hope that I have been able to provide noble Lords with some reassurance on these points, and that the noble Baroness is able to withdraw her amendment as a result.

[Baroness Bowles of Berkhamsted (LD)]

I did not speak earlier because all the points I wanted to make were picked up, but there are two things on which I wish to comment. We have a change now in that, before, the Treasury would be more involved when the matter involved use of public funds; now, that has been transferred to the industry, so the Treasury is less involved and perhaps less concerned. Yet the Treasury remains the only possible constraint around and is far from perfect.

For the PRA and the FCA, there are plenty of powers to instigate reviews by government. The big mistake, apart from us not having proper oversight of regulators in general—there are various mistakes—is that those reviews have not been used a lot more often. They should be done almost on a rolling regular basis, not just when there has been a big disaster.

The other thing we have done differently is that we have made the central bank the resolution authority. Therefore, you cannot hold the central bank to account, because of its independence, in the same way that you could if you had constructed an independent resolution authority. That is, as you might suppose, the subject of a big debate that went on in Europe when I was ECON chair. There is an independent resolution authority there; it is not the central bank. That was one of the big considerations, because you cannot really hold a central bank to account. Ultimately, the sort of change that is envisaged in this Bill may move us further towards considering whether we need to do that.

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[Lord Livermore (Lab)]

My Lords, before I turn to the specific amendment from the noble Baroness, Lady Bowles, I note that the Government fully recognise the importance of market competitiveness and the critical role played by small and growing banks in serving customers across the UK.

On the specifics of this amendment, I note that, before undertaking resolution, including when using the new mechanism, the Bank must be satisfied that the resolution conditions in the Banking Act have been met. The third resolution condition is that resolution is necessary having regard to the public interest in the advancement of one or more of the special resolution objectives. Those objectives are set out in detail in the Banking Act and are intended to reflect the key objectives of the resolution regime across all in-scope firms. For instance, this includes maintaining financial stability, protecting public funds and enhancing confidence in the stability of the financial system.

The objectives do not explicitly reference market competitiveness or supporting small banks. This reflects how, in undertaking resolution, the Bank of England should be appropriately focused on managing the significant risks to financial stability that can arise in a highly unpredictable scenario. As set out in their consultation response, this has informed why the Government believe that the broader resolution framework works well, including the existing balance of special resolution regime objectives, and why we have not proposed to change them.

I note, however, that the Government actively considered both the role of small banks and market competitiveness when developing the policy approach for this Bill. In particular, market competitiveness is a key reason the Government chose to pursue a solution whereby banks must contribute to the costs of recapitalisation only after a failure has occurred. Crucially, this means that the new mechanism does not create any upfront costs for the banking sector.

As noted at Second Reading, the Government have also committed to updating the code of practice to ensure there is a clear process by which the Bank of England calculates the costs that could arise for industry if the new mechanism is used. In addition, the Government believe that the new mechanism supports the UK’s small banks. It ensures that there is a robust system in place for resolving them and maintaining continuity, when that is judged to be in the public interest. This should help support wider confidence in the regulation of the sector.

The mechanism in the Bill is also designed to be proportionate. This is why any levies associated with recapitalisation will be spread across the entire banking sector, ensuring that it is affordable for small banks. Overall, the Government believe this strikes the right balance in that these wider policy issues have influenced the design of the Bill, but that in using the mechanism the Bank of England is ultimately guided by the existing special resolution objectives. I therefore respectfully ask the noble Baroness to withdraw her amendment.

[Baroness Bowles of Berkhamsted (LD)]

I thank the Minister for that response. Again, I make the point that, through the Bill, we are changing from an inherent public interest in public money into using private money to do the rescue. I am not sure that the Banking Act was drafted with that in mind and I doubt that we could amend relevant sections through the Bill. It is just worth having another look with those eyes, maybe after a period of time, to see whether some kind of adjustment is needed because this safeguard check that exists around the use of public money has been taken away. It has not been replaced by anything; it has not even necessarily been replaced by more transparency. With those comments I beg leave to withdraw my amendment.

European Investment Bank

Debate between Lord Livermore and Baroness Bowles of Berkhamsted

Wednesday 24th July 2024 Lords Chamber

[Lord Livermore (Lab)]

I agree with the substantive points that the noble Lord is making. We need to reset our relationship with the European Union. The Government are committed to doing this in order to strengthen ties, reinforce our commitment to security and tackle barriers to trade. We also need, as he says, to increase investment in our economy, so we have set out significant steps to unlock billions of pounds in private sector investment in the industries of the future through a national wealth fund, planning reform, a pensions review and a modern industrial strategy.

The noble Lord asked specifically about a third-party relationship with the European Investment Bank. Although it is possible to agree such an arrangement, it is unlikely that such an arrangement would provide anything like as much investment into the UK as membership of the EIB did.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, there are substantial links through the financial sector, legacy projects and joint development funding with the EIB at present, and I think there are opportunities that the Government could investigate further in the areas of defence and energy security, which have increased in significance since Brexit and where there is obviously mutual advantage. Will the Government look to explore those areas and make significantly greater political engagement by means of higher-level Civil Service relationships with the EIB and possibly the secondment of staff between the UKIB and the EIB, which could be mutually beneficial? These could all be measures where we could move forward and obtain greater funding or greater joint projects.

[Lord Livermore (Lab)]

The noble Baroness is correct that there are continuing projects in the UK that were financed by the EIB prior to leaving the EU and which it continues to support. I agree with her that there is merit in improving our relationship with the European Union. We have not yet set any plans on working with the European Investment Bank, but I will absolutely consider the point she makes.

Alternative Investment Fund Designation Bill [HL]

Debate between Lord Livermore and Baroness Bowles of Berkhamsted

3rd reading
Friday 10th May 2024 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my interest as a non-executive director of the London Stock Exchange, and as a shareholder in investment trusts. I thank everyone who has involved themselves in this Bill and on this topic; we had a remarkable and united Second Reading debate.

The Bill is a catalogue of where listed investment companies have been squeezed into fund legislation without any tailoring to their listed company structure, from which a single solution could be selected to solve current market disruption ahead of replacement EU legislation. Reporting formats for management charges were designed for the huge open-ended fund industry and the price formation structure of equity listing and trading never got considered, yet the UK uses that same format for listed investment companies. Therefore, investors are wrongly told at the point of sale that expenses already baked into the share price will be deducted annually from their investment holding—producing severe economic effects, and decimating share prices, IPOs and follow-on funding.

The EU does not consider this format of cost disclosure applicable to listed investment companies, and Swiss regulators now explicitly state that it does not apply, in an open invitation to list there instead of London. Correction does not mean that expense ratios cannot be presented at point of sale; they just need a true explanation. Suggestions on how to do that already exist, and they are better explained, for example, in Australia.

However, Treasury officials and the FCA say that we can wait a year or so for adjustments, claiming it is chiefly macroeconomic circumstances. But if it is all macroeconomic, why have investment trust NAVs been performing well? Unfortunately, NAV is not what the shareholder owns, even if the FCA and its CEO do not understand that, as exhibited at the Treasury Select Committee this week.

Really, it just will not do, and it will not do because the people being hurt are retail consumers owning shares. Mainstream ex 3i discount to NAV is now at minus 15% compared to minus 4% in January 2022. That is way out of line with anything that has happened through crises, or when there have been comparable interest rates to now. Retails consumers owning half of listed investment company shares have suffered a value decline against NAV of £22 billion since the misleading disclosure format started. Another year or more of this retail consumer harm could be avoided, even just by selectively advancing the MiFID proposal contained in the Bill—recognising the truth that, with listed shares, value owned is share value. Let expense ratios be disclosed in their true light, not deceptively described as a deduction from holdings.

[Lord Livermore (Lab)]

My Lords, I congratulate the noble Baroness, Lady Altmann, on the success of her Bill. I pay tribute to her for raising this issue to the prominence it deserves, and for the hard work that I know she has put in to get her Bill to this stage.

Throughout the passage of the Bill, the noble Baroness has made an extremely compelling case for action. It is a timely piece of legislation, exposing a significant problem that has been left unsolved for too long, at considerable cost to both the sector and the wider economy. The Bill unarguably makes the case that urgent action is required. I wish it well in the other place. I hope it will help to expose the issues involved, and that it might compel the Government and regulators to move further and faster than has so far been the case.