Bank Resolution (Recapitalisation) Bill [HL] Debate
Full Debate: Read Full DebateLord Vaux of Harrowden
Main Page: Lord Vaux of Harrowden (Crossbench - Excepted Hereditary)Department Debates - View all Lord Vaux of Harrowden's debates with the HM Treasury
(1 day, 20 hours ago)
Grand CommitteeMy Lords, as we have heard, this group of amendments, including my Amendment 10, probes the reasons for including all banks in the scope of the Bill, rather than just the smaller banks, as originally envisaged in the consultation that started in January. The first sentence of the consultation was very clear:
“This consultation sets out the government’s intention to enhance and keep up to date the UK’s Special Resolution Regime … providing a new mechanism to facilitate use of certain existing stabilisation powers to manage the failure of small banks”.
But, as we have heard, it is not restricted to small banks. Most of the amendments in this group would remove from the scope of the Bill those banks that are required to hold MREL and would be subject to bail-in procedures using those MREL resources. I think the number of separate but similar amendments that we seem to have is probably down to the fact that this all happened in recess, and we did not have the opportunity to get together. I am sure that if the Minister is not able to satisfy us, we will be able to coalesce around something in common.
It is worth quoting from paragraph 7 of the Explanatory Notes:
“This means taxpayers are exposed if a small bank failure is judged to require resolution action but the firm in question does not possess sufficient MREL resources to provide for recapitalisation, unlike larger banks that do possess these resources”.
If larger banks possess those resources, as they are required to do, why do we need them to be subject to the process envisaged by the Bill? The noble Baroness, Lady Noakes, talked about the glide path situation where a bank has not quite got there—yes, I see that point—but for those that are there, does this not imply that we are not confident that the existing MREL scheme is sufficient? If there is a problem with the MREL scheme, surely it would be better to fix that rather than adding a new process on top of it.
So could the noble Lord please clarify under exactly which circumstances he sees the recapitalisation process in the Bill being used for a failing MREL bank? Is there a concern that the MREL resources are insufficient? Other than glide path situations, that is the only logical reason I can see to include big banks in the scope of the Bill.
Secondly, not having the expertise of the noble Baroness, Lady Bowles, I do not really understand how the two processes would work together. Is this an either/or situation; is it either a bail-in using MREL resources or a recapitalisation? If that is the case, surely there is a risk that the industry would be required to fund the recapitalisation of banks with large balance sheets instead of the costs being borne by the failed bank’s shareholders and subordinated debt holders. That would create a potential moral hazard. Or is it a combined process where the MREL resources would be used first and, if insufficient, the recapitalisation would follow on top? If that is the case, it implies that there is a concern that the MREL funds are insufficient. The best way forward would be to fix that problem rather than add another process, as I said before.
So could the noble Lord please clearly explain how he sees the two processes working together? I am drawn to the suggestion by the noble Baroness, Lady Bowles, of a worked example between now and Report to help us see how that could work. In particular, can he clearly confirm that the recapitalisation process can never be used to reduce the losses of a failing bank’s shareholders or creditors?
In the absence of a strong explanation of why, contrary to the originally stated intention, the scope of the Bill has been extended to larger banks, I would be minded to support amendments on Report that restrict its scope to exclude MREL banks.
My Lords, my Amendment 11 also—I think rather neatly—confines the Bill to what are defined as small banks. However, my concern is somewhat different from those voiced by noble Lords until now. It is that the whole approach to the resolution regime suggests that banks fail one at a time and not all together. Anyone who went through the experience of 2007 to 2009 knows that, in a systemic crisis, it is possible for all the banks in the country to be suffering major problems at the same time. In the circumstances of a systemic crisis, I fear that the mechanism proposed in the Bill could be a source of contagion, in the sense that the cost of the collapse of a bank, or of many banks together, would be seen by the market as imposing costs, which are now unbearable, on other parts of the banking sector.
This comes down to two issues—that of contagion and, I am afraid, that of persistent complacency. The Treasury and the Bank of England refuse to face up to the fact that, in the end, it is the taxpayer who will pay in a systemic crisis.
I will deal first with contagion. The levy links the financial failure of a bank or number of banks to the banking sector as a whole. Does this create a contagion effect? It must be remembered that much of contagion is created by the expectation of a cost, not just the reality. Expectation then becomes the parent of reality. It can reasonably be expected that the failure of a small bank would be manageable under the resolution regimes set out by the Bank of England and discussed in this Bill and its explanatory documents.
However, there are two fundamental problems where one could have significant contagion. One would be multiple failures, an issue I will address in a moment. The other is the potential failure of a big bank, because the Bill and the Explanatory Notes explicitly refer these mechanisms to big banks as well as small ones.
I will take the issue of the failure of multiple banks or a big bank. I wrote to the Financial Secretary about this and he very kindly wrote back a very valuable explanation. I presume that his letter has been circulated to the people who took part—no, I see that it has not. Well, I will quote a bit of it, because it seems to reveal the problem that I am identifying. He refers to multiple bank failures, but I would apply the same thing to a big bank failure. He says that there will be levies when the bank fails and adds:
“These levies are subject to an affordability cap”—
I did not know that—
“by the Prudential Regulation Authority based on how much the sector can safely be levied in a given year. This cap is currently set at £1.5 billion. If multiple firm failures resulting in a recapitalisation requirement is under £1.5 billion, the Government would expect the FSCS to borrow from its commercial borrowing facility and be able to safely levy from the banking sector and repay that commercial borrowing within 12 months. However, if the amount exceeds £1.5 billion, or if it is below £1.5 billion and the PRA has determined that the FSCS is unable to raise the levy on affordability grounds, the Government would expect levies to repay any borrowing from the National Loans Fund to be spread out over multiple years”.
But, no, you do not have multiple years in a systemic banking crisis; you have to operate now.
The cap of £1.5 billion is worth comparing with the measures that the Government had to take in 2007-08—Lloyds Bank, £20 billion and NatWest, £45 billion. So the failure of one of those banks could be somewhat above the affordability cap, as set out in the Financial Secretary’s letter to me. Indeed, today, those numbers could be multiplied by a factor of roughly five.
Even when MREL is taken into account, the £1.5 billion cap seems to me to expose the fact that this scheme is not applicable to large banks. For example, if we look at the largest MREL plus required capital, it is that of Barclays, which is 30% of risk weighted assets—the largest of all the major banks. That leaves 70% of risk weighted assets to which the taxpayer is exposed. There would not be a collapse of all of those, but there can be very large numbers very quickly. So the idea that with an affordability cap of £1.5 billion, one could handle the Lloyds Bank situation or the NatWest situation as the Government confronted them in 2007-08 is, it seems to me, fanciful.
This brings me to my final related point. There is a persistent reluctance in all the documents concerning the resolution regime to admit that the resolution of a large bank will always fall on the taxpayer. Given the need for the maintenance of confidence in the banking sector, this persistent reluctance and the pretence that MREL has eliminated the taxpayer from exposure is damaging to confidence. It would be valuable for the Purple Book to make clear that, in extremis, Bagehot’s rule comes into effect, the Bank lends without limit and the Treasury will step in to resolve those banks that are “too big to fail”. My amendment clears away a dangerous ambiguity in the Bill. The threat of multiple small failure will continue to exist, but it takes away the ambiguity that this could be involved in the resolution of a big bank in the circumstances of a systemic crisis similar to that which we have faced in the past.
Just to clarify, is there anything in the Bill that changes the effect on shareholders and creditors compared with if it had been done by just the bail-in approach?
I only need to say briefly that I am in agreement with the noble Baroness. This is drafted too widely. Part of me thinks that some of this should be covered by the ordinary banking levy, and that the PRA and the Bank of England have to manage their budget, as anybody else would have to, in expectation of sometimes having adverse effects, rather than there being some bottomless pit, or pool, of money into which they always have access. The truth of the matter might need to be somewhere half way in between, but it is too open at the moment.
My Lords, I briefly add my support to what the noble Baronesses have said. This is drafted extraordinarily widely. The words
“another person has incurred or might incur in connection with the recapitalisation”
could theoretically include the legal costs of the shareholders of the bank that is going bust, for example. We have to find some way of reducing that scope. I had attempted to deal with this in Amendment 12 on reporting, but having heard what the noble Baroness said I do not think that does it. We need to find some way of narrowing it.
I am grateful to my noble friend for tabling this amendment and I added my name to it. I am also grateful for the comments made by my noble friend Lord Moylan. He is not in his place but he raised this issue during Second Reading and set people thinking about it.
I do not have a huge amount to add. I agree with the comments made by my noble friend Lady Noakes, the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux, but I would also say that this will have to be a double-edged attack. Not only must we potentially do something on this but the reporting of it will have to be clear and go into great detail.
When it comes to expenses, all noble Lords will be aware that the costs of financial lawyers and other professional financial advisers are not de minimis. The total cost of expenses may well exceed the cost of the recapitalisation of the bank, so it is important that we ensure that there are some guard-rails around this, recognising as ever that these costs will end up falling not on the banks but on the people who bank with the banks.
Does the Minister have any view as to roughly how large an expense bill might be? I do not even want to guess, because I hope that he will be able to give me some idea of what we are looking at.
The noble Lord, Lord Vaux, mentioned the expenses incurred by another person. I think that all noble Lords who have spoken so far agree that that is extraordinarily broad, and we will need to consider what we might do about that. Potentially, one could put something in the code of practice but, again, is that sufficient? We might also protect ourselves by requiring Treasury consent—who knows? Again, we might want to think about that. Going back to the point raised by the noble Lord, Lord Eatwell, it is tempting to think about these things as a single event, and we might be talking about £10 million-worth of expenses, but if a whole bunch of such events happened at the same time, we could very soon be talking about real money. We need to get to the bottom of this. I look forward to the comments from the Minister.
My Lords, it is me again, I am afraid. That is the trouble with getting enthusiastic about amendments during recess—you pay for it when you get back.
Amendment 3 is a probing amendment to find out the Government’s approach to using the recapitalisation power on more than one occasion. The amendment uses the technique of requiring the Treasury’s consent to the use of the recapitalisation power more than once in respect of the same financial institutions. My purpose in this amendment is not to debate the formal involvement of the Treasury, as I will return to that broader topic in a later group. I am using the amendment as a technique to find out whether there are any constraints at all on the use of the recapitalisation power on multiple occasions.
When the Bank of England decides to use the recapitalisation power, it works out what sum of money it needs to put the bank in a position where it can be sold on. We discussed in our debate on the previous amendment the kinds of expense that can count as recapitalisation costs for the purposes of the power. My own view is that the Bank must try at the outset to reach as clear a view as possible on the amount of the whole that the recapitalisation payment is designed to fill because, if the Bank does not do that properly at the outset—making a good, honest assessment of what the total cost will be—it cannot reach a realistic judgment about whether to proceed with a bridge bank or to initiate an insolvency process.
So I find it disturbing that the drafting of new Section 214E seems to allow the Bank to double-dip into the FSCS without any other process or consideration. If the Bank runs out of recapitalisation cover, it probably means that it did its sums wrong in the first place or that additional facts have emerged, increasing the costs in ways that were not anticipated at the outset. In either event, that can call into question whether the initial decision to use the bridge bank instead of the bank insolvency procedure was the correct one. It may also raise the question of whether the bridge bank strategy should be continued or replaced with the bank insolvency procedure.
It also brings into question the nature of the additional hole in the finances of the failed bank, which is covered in part in the previous amendment. It may not be clear that the incentives are in the right place for the correct judgments to be made about whether any additional costs arising from regulatory action or litigation should be accepted or challenged. If the costs are down to PRA action, there are clear conflicts of interest involved.
I completely understand the need for flexibility in legislation. I hope that the Minister will also appreciate that the open-ended nature of the Bank’s powers in the use of the recapitalisation payment technique carries particular problems when a second or subsequent attempt is made to obtain a recapitalisation payment. I hope that the Minister can explain how the Government see this power being used, if it is to be used more than once, and whether—including to what extent—there are mechanisms in place to ensure that the way in which the Bank uses that power is fair to the banking sector.
The Bill makes the banking sector pick up the costs. The sector itself will probably have had no involvement whatever in the failure of a bank yet it has to pick up the tab, ultimately borne by its own customers; that is whenever the Bank decides to use the recapitalisation powers. So it is only fair and reasonable that there should be some checks and balances in return. I hope the Minister can reassure the Committee that there are checks and balances and that, when the Bank uses the power in what has to be quite an unusual situation—for example, it has got the sums wrong or something else has caused a requirement for more to be put in—it raises the need for additional safeguards in order to satisfy the banking sector that the costs that will be loaded on to it are reasonable.
I beg to move.
My Lords, I rise again briefly. The noble Baroness has made some really important points. Once again, I have attempted to deal with this as a reporting question in Amendment 12, which states that a report would be required each time a recapitalisation payment was made; that should stand anyway.
This can become quite significant if, for example, there is a situation where the Bank of England expects to be able to sell a bank immediately but that falls over and then goes into a bridge bank for two years—or, indeed, more—and picks up all those costs along the way. One can see a situation where you could have, for example, an annual payment covering the costs of the bank until the Bank eventually decides to put it into insolvency. The critical factor must be that, any time a recapitalisation payment is being considered, whether it is the first one or a subsequent one, the insolvency route is reconsidered at each point and this does not become an open-ended default drag on costs—but the reporting point, which we will come on to later, stands as well.
The noble Baroness, Lady Noakes, made a good point. I agree entirely with what the noble Lord, Lord Vaux, said.
I raised double-dipping at Second Reading and got the answer, “Well, yes, you could double-dip”. Of course, if you go from thinking that you are going to do the bridge bank or whatever to having to move into insolvency, there will be another dip if there are deposits to cover; I have a later amendment on that but it is all part of the same conversation. I am sure that the noble Lord, Lord Vaux, knows a lot more about this than I do because he is an accountant, but things always get worse than you expect. How is the Bank going to deal with that? Initially, it is probably going to have to ask for more than it thinks it could possibly ever need.
Some kind of structure around this, with points at which it is revisited and good reporting, appears to be the only solution. I initially thought, “Yes, maybe HMT intervention is the solution”, but I take the point that the Minister made earlier on about HMT intervention and independence. The fact is that, really, they are all in it as a club taking the decisions together already, so I am not sure that that would necessarily be the decisive factor one would want. It is about what the procedures are; the way things are being done and being understood; and how the reviews and reporting happen so that, when the worst happens and another dip comes along, one is not totally taken by surprise.
My Lords, I note that this amendment from the noble Baroness, Lady Noakes, is one of several concerning whether Treasury consent is needed when the Bank of England is exercising its powers—in this case, when the mechanism is used more than once for a particular institution.
Addressing the specific case of the amendment, although I think we can agree that it would usually be desirable to have to use the mechanism only once in respect of a particular institution, this may not always be the case. As an example, if a failed bank is transferred to a bridge bank, there is a risk of further deterioration in its balance sheet over time. It is foreseeable that, if that were the case, the Bank of England may need to use the mechanism again in order to recapitalise the institution; this would allow the Bank of England to maintain confidence in the firm, promoting financial stability.
The Government believe that it is important for the Bank of England to have reasonable flexibility to do so, reflecting that the full implications of a bank failure are hard to anticipate in advance. In addition, if further approvals are required, this may undermine market confidence in the original resolution action given that such approvals cannot be presumed in advance.
However, I note a few important pieces of context to this broader position. First, as required by statute, the Treasury is always consulted as part of the Bank of England’s formal assessment of the resolution conditions assessment. In practice, there is also frequent and ongoing dialogue between the authorities. Therefore, the Government are confident that there are proper and robust channels by which it could raise concerns if it had any.
Secondly, given that the new mechanism is ultimately funded by industry, we would expect the Bank of England to consult the Prudential Regulation Authority on any additional request to use the new mechanism. This is important as the Prudential Regulation Authority determines what is considered affordable to be levied on the sector in any given year.
Finally, if additional use of the mechanism had implications for public funds, such as requiring use of the National Loans Fund, provision of this additional funding would be subject to Treasury consent. Overall, the Government believe that this strikes the right balance in preserving the Bank of England’s freedom of action while ensuring the appropriate level of Treasury input into decision-making.
I hope that this provides some comfort to the noble Baroness and respectfully ask that she withdraw her amendment.
The one thing the Minister did not cover there was the question of whether, on a second or subsequent recapitalisation payment, the Bank would have to look again at whether the insolvency route is the one it should go down, rather than a secondary payment.
It would always look at the situation at the time and make each individual decision on that basis.
My Lords, this is another probing amendment. In this, I want to probe the circumstances in which the Treasury believes it would be appropriate for the UK banking industry to stump up for the recapitalisation of a foreign-owned bank. This amendment uses the technique of Treasury consent, as some of my other amendments do, but this is not what I am trying to talk about in this amendment. I am trying to probe the substance of using the recapitalisation power for the subsidiary of a foreign company.
Of course, I know that SVB UK was a foreign-owned bank and the simple answer to my question might be that this gives the Bank another way of avoiding what happened in that case: SVB was gifted to HSBC with the additional present of permanent exemptions from the ring-fencing regime. If we accept that we should avoid being held over a barrel by HSBC in future, this would be a good use of the power. So can the Minister say whether, if presented with the same facts as those relating to SVB UK, the Bank would have preferred to recapitalise SVB via a bridge bank and then sell it on a timescale consistent with achieving better value for money from the UK? The heavens are opening as we are discussing these important things.
More broadly, is it not the case that the Bank should satisfy itself that the foreign subsidiary banks are either adequately capitalised in their own right or parts of groups that are expected to be resolvable via bail-in-able capital, in line with international expectations? In general, the regulatory system for banks following a financial crash is designed to ensure that they hold capital or bail-in liabilities, which avoids the need for extraordinary support. When a UK bank subsidiary of a foreign company fails and requires money to keep it going, there has been at least a prima facie case that there has been some element of regulatory failure, either in the UK or elsewhere. There should not be an expectation that the failure of a foreign bank would impose costs on the UK banking sector—nor, indeed, the UK taxpayer, if that is the alternative.
It would be helpful if the Minister could explain in what circumstances the Government would consider it appropriate for the Bank to use the recapitalisation power in relation to foreign-owned banks and, perhaps more importantly, when the Government would not consider it appropriate to use the power. Can he also say whether any of this is likely to be covered in the code of practice? I beg to move.
My Lords, this weather sounds like the reason I ended up tabling a load of amendments in south-west Scotland: I had nothing better to do for a few days.
Again, the noble Baroness, Lady Noakes, raises a really important point. I have tried to attack it in a different way in Amendment 16, where I look at the recovery of money from shareholders. I will be interested to hear what the Minister has to say. I had in mind the sort of scenario where a foreign company sets up a bank in the UK, it does not go very well and it decides just to walk away from it, having perhaps removed all the assets in the meantime. Clearly, it does not seem fair that the costs of sorting that out should fall on the industry or, indeed, the British taxpayer. It would be really interesting to understand how we can ensure that foreign shareholders behave properly and how, when it does go wrong, we can recoup the money from them.
My Lords, I am somewhat puzzled by the amendment in the name of the noble Baroness, Lady Noakes, in this case. Surely, under the Basel accord, the UK regulator is responsible for the regulation of a subsidiary that is legally established in the UK. If “subsidiary” were changed to “branch”, the foreign regulator would indeed be responsible for regulation in that case. It seems to me that this particular amendment would violate the Basel accord to which His Majesty’s Government are committed.
My Lords, Amendment 9 deals with moral hazards, which, if anything, are multiplying. The amendment seeks to restrain excessive risk-taking by imposing possible personal penalties on bank directors.
The recent legal developments have actually multiplied financial moral hazards and the related risks. For example, the Financial Services and Markets Act 2023 reintroduced the secondary regulatory objective to promote the growth and international competitiveness of the finance industry. In effect, it dilutes the regulator’s remit to protect customers. On 12 August, the Chancellor said that she and the Economic Secretary to the Treasury were constantly asking regulators, “What are you doing in practice to meet that secondary objective?” The meeting of that secondary objective will necessarily increase moral hazards.
Secondly, further deregulation is coming in—reforms of Solvency II, for example—with the claim that this will somehow conjure up an additional £100 billion of investment by reducing capital requirements. There is no pot of gold sitting in a corner in any bank boardroom that people can simply empty and get £100 billion out of. All of that is underpinning bank resilience and insurance company resilience. All of that is invested in some safety buffers. All of that will have to be liquidated. Yet the consequences for how the directors might behave have not really been outlined.
The cap on bankers’ bonuses has been lifted, so there are now economic incentives for bank directors to be reckless and take excessive risks, as that would maximise executive pay and bonuses—all done in the full knowledge that the bank would be rescued, restructured, recapitalised or bailed out, be it through the mechanism of the Financial Services Compensation Scheme or, eventually, some reconstruction. There are no great pressure points on bank directors to be risk-averse and prudent or to act in a responsible manner.
The risk-boosting effects of moral hazards are ignored by this Bill, yet they are highly relevant to any form of stability. We have a whole history showing how this happens. In the 2007-08 banking crash, attention was drawn to moral hazards or conflicts of interest between the interests of shareholders and managers, debt holders and the public purse. Bank directors took on excessive leverage because the state incentivised them to do so. It continues to incentivise them to do so, for example by giving tax relief on interest payments, which reduces both the cost of debt and the weighted average cost of capital while increasing shareholder returns, providing a justification for greater executive bonuses and remuneration.
Numerous studies have shown that shareholders were, and remain, focused on short-term returns. In any case, they still do not get good-enough information to invigilate directors; perhaps at some point, when we are discussing the world of accounting, I will point out how almost useless company accounts are in enabling shareholders or anybody else to invigilate directors. Back at the time of the last crash, directors accepted excessive risks from not only financing the organisation but risky investments. For example, numerous varieties of derivatives and complex financial bets were made because of explicit guarantees about depositor protection, central banks providing liquidity and support, and, ultimately, publicly funded bailouts.
If the bets made with other people’s money paid off, directors got mega payoffs; if they did not, somebody else picked up the loss, leading ultimately to rescue bailouts—now we are using the term “recapitalisation”. This Bill adds another string to publicly funded bailouts—though it likes to use different language. Yes, the cost of the FSCS levies is borne ultimately by the people, as has already been pointed out, and not necessarily by other banks.
If the Government succeed in persuading the banks to lend more to facilitate additional investment, as they are trying to do, that will add to the risks and strain the capital adequacy requirements of those banks. In boom times, banks tend to lend more freely, because they do not want to miss out on the opportunity to make more profits, and they relax credit standards, but there are inevitably consequences, as we saw with the last crash. Directors are rarely held personally liable, and that remains the position today.
Amendment 9 would address this gap by requiring the Bank of England and the scheme managers to consider a clawback of directors’ pay and bonuses paid during the previous 12 months. In case the Minister might refer to other clawback arrangements, let me pre-empt those. Paragraph 37 of the UK Corporate Governance Code states:
“Remuneration schemes … should include … provisions that would enable the company to recover and/or withhold sums or share awards and specify the circumstances in which it would be appropriate to do so”.
That is of no help whatever, because such codes do not apply to large private companies, of which Wyelands Bank, which came to an end recently, is a good example. The codes are also voluntary and cannot be enforced in the courts. They do not empower stakeholders in any way; they do not require the clawed-back amounts to be handed to regulators or to be used for recapitalisation of banks.
The FCA handbook also has a section on possible clawback, but it applies to what it calls “variable remuneration”, which is generally taken to mean bonuses. It states that in certain circumstances the clawed-back funds need to be handed back to the institution. This does not cover entire remuneration; it does not require that the clawed-back amounts be used for the recapitalisation and reconstitution of banks. So, in the interests of clarity and certainty, a statutory approach to clawbacks is needed, not a mishmash of voluntary arrangements. I beg to move.
My Lords, I shall speak to Amendment 16, which would do a certain amount of what the amendment from the noble Lord, Lord Sikka, would do, but in a slightly different way. It is intended as a probing amendment to obtain clarification on what ability there would be to recover all or some of the costs of failure from either management or shareholders of the failed entity when it is recapitalised rather than being put into insolvency—there seem to be two different things there.
It is possible to imagine a situation where members of the management team responsible for the failure are paid large bonuses or dividends prior to that failure. As the noble Lord, Lord Sikka, pointed out, that is more possible now that the cap on bonuses has—rightly, in my view—been lifted. Can the Minister clarify in what circumstances it would be possible to recoup those bonuses or dividends to offset the recapitalisation costs? In an insolvency situation, where there is fault—for example, in cases of wrongful trading—it may be possible to recoup those payments, but I cannot see how that would work if the bank was recapitalised. To me, it must make sense that management should not see the risk of having to repay bonuses or dividends as being lower than it would have been if the bank had been put into insolvency just because the bank has been recapitalised.
My Lords, I turn first to the amendment tabled by the noble Lord, Lord Sikka, which seeks to ensure consideration is given to a clawback of executive pay and bonuses from a failed firm before using the new mechanism. I note that while the bank resolution regime does not set out powers allowing the Bank of England to claw back money from shareholders or management, it does provide an extensive and proportionate set of powers to the Bank of England to impose consequences on the shareholders and management of a failed firm in resolution.
First, on placing a firm in resolution, we expect that any existing shareholder equity would be cancelled or transferred. This is an important principle that ensures the firm’s owners must bear losses in the case of failure. In many circumstances, this will affect directors and management who hold shares or other instruments of the failed firm.
In addition, the Bank of England has the power to remove or vary the contract of service of its directors or senior managers. The Bank of England exercises its discretion in deciding whether to use this power. However, as set out in the Government’s code of practice, the Bank of England generally expects to remove senior management considered responsible for the failure of the firm and to appoint new senior management as necessary.
Finally, as reflected in the code of practice, it is a key principle of the resolution regime that natural and legal persons should be made liable under the civil or criminal law in the UK for their responsibility for the failure of the institution. This is delivered by Section 36 of the Financial Services (Banking Reform) Act 2013, which provides for a criminal offence where a senior manager of a bank has taken a decision which caused the failure of a financial institution, if the conduct of the senior manager
“falls far below what could reasonably be expected of”
someone in their position. Overall, this ensures that, as appropriate in the circumstances, there are material consequences for shareholders and senior management when a firm goes into resolution.
More broadly, I can further reassure the noble Lord that the Government recognise the importance of high standards in financial services regulation. The senior managers and certification regime supports high standards by ensuring individual accountability for senior individuals within firms, and by promoting high standards of conduct and governance. The Prudential Regulation Authority sets rules on remuneration and applies these to medium-sized and large banks, ensuring they are proportionate, and there are clear requirements in the PRA’s rules for firms to ensure they have policies on malus and clawback in place to align management incentives with that of the bank.
I should also note the intention of the amendment of the noble Lord, Lord Vaux, to ascertain under what circumstances the Bank of England may be able to recover all or part of remuneration to management and shareholders, or require a shareholder to cover all or part of the recapitalisation costs. If recoveries were made from management or shareholders of the failed firm, the amendment would make it clear that these types of remuneration could count towards these recoveries.
I hope I have addressed the broader point about the treatment of shareholders and former management in my earlier remarks. As a point of detail, I would add that the Government expect any recoveries not otherwise specified in the clause to be covered already by the catch-all phrase “or otherwise” at the end of proposed new subsection (2)(a). I hope that addresses the points raised and I respectfully ask the noble Lord to withdraw his amendment.
I think the Minister has answered the point about management, and I recognise that the words “or otherwise” are at the end of the new subsection. Where I am not sure that he has answered the point is on the inappropriate dividends paid to shareholders beforehand—the Thames Water situation, and how that would be dealt with. Just saying that the equity would be written down makes no difference; in this situation, the equity is already worthless. We are talking about recouping the costs of the recapitalisation rather than the fact that the worthless company is worthless.
I have managed to get through several groups without promising to write, but on this occasion I will write to the noble Lord.
My Lords, as we have heard several times already, the area of accountability around financial services Bills seems to always come to the fore, as the noble Baroness, Lady Noakes, pointed out. She referred in a recent group to the weak accountability that exists in the Bill. My Amendments 12 and 24 in this group aim to improve that.
One of the main concerns raised at Second Reading was to ensure that the Bank of England explains why it has decided to follow a recapitalisation process rather than allowing a failing bank to fail and go into insolvency, which was the previous default. In particular, several respondents to the consultation raised concerns that the costs of the recapitalisation should not be greater than those that the FSCS would face under an insolvency process. Concerns were raised, not least by the noble Baroness, Lady Penn, that recapitalisation might become the default approach to a failing bank, rather than insolvency. At Second Reading, the Minister then referred to the strong expectation that
“any reports required under the Banking Act to ensure ex-post scrutiny of the Bank of England’s actions when using the new mechanism would be made public and laid before Parliament ”. —[Official Report, 30/7/24; col. 933.]
My Amendments 12 and 24 aim to strengthen the required reporting and to make it a requirement that those reports will be made public and laid before Parliament. Amendment 12 adds some detail around the contents of the report. In particular, it would require the Bank to explain why it chose recapitalisation over insolvency; to provide a breakdown of the expected costs, which we talked about in an earlier group; and to provide a comparison of the expected recapitalisation cost with what would have been expected to have been the cost under an insolvency situation. It allows the Treasury to stipulate other matters but, importantly, it also sets a shortish timetable for that report of 28 days. This really does have to be done on a timely basis.
Also, importantly, the requirement to report—again, we discussed this earlier—will apply to any subsequent recapitalisation payments made to the same failing institution. Again, this overlaps with Amendment 3 in the name of the noble Baroness, Lady Noakes, which we have already debated. As I said at the time, it is critical that, any time we further recapitalise, we look again at whether that is the appropriate thing to do or whether insolvency is the appropriate option.
To cover the ex-post scrutiny that the Minister referred to at Second Reading, the amendment also requires further reports to be issued and laid before Parliament once the resolution process comes to an end, whether that is through a sale or through an insolvency process. The whole process could be two years after the resolution process starts—indeed, it can be extended beyond two years—so it is important that what actually happens is scrutinised after the event and that any differences to what we were originally told was going to happen are explained.
Amendment 14 laid by the noble Baroness, Lady Noakes, does something similar but leaves the detail of what must be included in the report up to the Treasury. I would be keen to provide the Treasury with some minimum requirements for the report; what I have laid out are the important aspects.
Amendment 24 in my name simply tries to fix an anomaly, as I see it, in the Banking Act 2009. Under Section 80 of that Act, if a failing bank is transferred to a resolution company, the Bank of England must make a report to the Chancellor of the Exchequer and that report must be laid before Parliament. However, rather oddly—the Minister referred to this previously—according to Section 79A of the Banking Act, if all or part of the failing bank is sold to a private sector purchaser, the Bank of England must still report to the Chancellor but that report does not have to be laid before Parliament.
The eagle-eyed among you in this Committee may have noticed that my initial version of this amendment simply stated that the report had to be laid before Parliament. We are getting to the point of the scope issues that the noble Baroness, Lady Bowles, referred to in her opening of the debate. That amendment was, at the last minute, ruled as being out of scope of this Bill. I find that hard to understand, particularly given that I felt that the Minister rather firmly put it in scope in his Second Reading speech, but it was decided that it was too broad to be in scope. I had to change it so that it refers only to the situation where a recapitalisation payment has been made. I ask the Minister to consider seriously whether he can use his influence to change that. It seems mad to do it only in this circumstance and not in the wider circumstance of a bank being sold to a private sector player. The officials have perhaps been a little overzealous with their interpretation of scope in this case—and in this Bill, more generally.
As I said, in his Second Reading speech, the Minister pointed out the importance of Section 79A for scrutiny of the Bank of England’s actions. He also referred to the fact that there is no requirement for reports under Section 79A to be laid before Parliament. However, he went on to say that he could
“reassure your Lordships that in any event where the new mechanism was used the Treasury would intend to ensure that any such reports were made available to Parliament and the public”.—[Official Report, 30/7/24; col. 933.]
My amendment simply makes that intention a requirement; I hope that I am not pushing at a closed door and that it is not seen as controversial.
However we go forward, it is essential that the actions of the Bank of England are subject to full scrutiny and transparency. At Second Reading, the noble Lord, Lord Macpherson, eloquently described the potential for a conflict of interest in the position of the Bank of England, pointing out that the Bank might choose to recapitalise rather than put a bank into an insolvency process
“less because it is in the national interest and more as a way of minimising the reputational damage of regulatory failure”.—[Official Report, 30/7/24; col. 914.]
Any decision to recapitalise should be explained to avoid possible creep to this process becoming the default. The noble Lord also raised his concerns that there is little incentive for the Bank to minimise the costs of resolution—after all, the industry, not the Bank, will pay. He gave the example of the Dunfermline Building Society incurring greater costs than the Treasury incurred in resolving the Icelandic banks.
So I think it is essential that we strengthen the scrutiny of the Bank when it exercises these new powers, to ensure that any decisions it takes are clearly justified at the time and examined publicly once the resolution is complete so that any lessons can be learned. These amendments, or amendments like them, would achieve that. The Minister has said he expects all reports to be made public and laid before Parliament, so I hope he will simply accept them.
Finally, I add my support to Amendment 25 from the noble Baroness, Lady Bowles, which is also in this group. We discussed in the first group the concerns around the MREL regime that are raised by the Bill, so it seems entirely appropriate that an assessment should be made of the impact of the Bill on the MREL regime. I beg to move.
My Lords, I fully understand the substantial focus on the reporting requirements that will apply when the new mechanism is used. I shall start by addressing Amendment 12 on this point, tabled by the noble Lord, Lord Vaux.
The Government agree that, should the new mechanism be used, it is right for there to be a reporting mechanism to hold the Bank of England to account for its decisions, and that this should encompass estimates of the costs of different options. However, the Government intend to achieve the principles of scrutiny and transparency in a different way; namely, through the existing requirements placed on the Bank of England under the Banking Act 2009. As set out in their response to the consultation, it is the Government’s intention to use these existing reporting mechanisms to ensure that the Bank of England is subject to appropriate scrutiny when using the mechanism. The Government have committed to updating their code of practice to provide further details on how these reporting requirements will apply when the mechanism is used; I can re-confirm that the Government intend to include in the code confirmation that, after the new mechanism has been used, the Bank of England will be required to disclose the estimated costs that were considered as part of these reports.
The Government consider that using the code of practice is an appropriate approach to hold the Bank of England to account for its actions, rather than putting these requirements in the Bill. The Bank of England is legally required to have regard to the code and the Government are required to consult the Banking Liaison Panel, made up of regulatory and industry stakeholders, when updating it. Using the code will therefore ensure that a full and thorough consultation is taken on the approach. Given the complex and potentially fast-moving nature of bank failures, this is important to ensure that any approach is sufficiently nuanced to account for the range of possible outcomes under insolvency or through the use of other resolution tools. The Government believe that amendments to the code of practice are more likely to be successful in achieving this outcome. As I committed at Second Reading, the Government will share drafts of these updates to the code of practice as soon as is practicable and will provide sufficient opportunity for industry stakeholders to be consulted on them.
I acknowledge the further amendment from the noble Lord, Lord Vaux—Amendment 24—which would make such reports available to Parliament when the new mechanism was used to facilitate a transfer to another buyer. It is the Government’s clear intention that any such reports required under the Banking Act, following the use of the mechanism, will be made public and laid before Parliament. The Government would not make reports public only if there were clear public interest grounds not to do so, such as commercial confidentiality reasons. This may particularly be the case when exercising the power to sell a failing bank to a commercial buyer. While such cases would hopefully be limited, it is important that they are allowed for.
I appreciate the intent of Amendment 14 in the name of the noble Baroness, Lady Noakes, which would require the Bank of England to report to the Treasury more swiftly than under the current requirements. The use of resolution powers is complex; in some cases, the Bank of England may be executing a resolution over a long period, particularly when placing a firm into a bridge bank. It is therefore sensible for the Bank of England to report a reasonable period of time after exercising its powers, ensuring that its report provides a full and meaningful assessment. On reporting more broadly, I repeat the points made in response to the amendment tabled by the noble Lord, Lord Vaux.
Finally, Amendment 25 in the name of the noble Baroness, Lady Bowles, would require the Chancellor to assess in the light of the Bill the appropriateness of the thresholds used by the Bank of England to determine which firms are required to hold additional loss-absorbing resources, known as MREL. As before, I should start by noting that the Government recognise the important role played by smaller and specialist banks in supporting the UK economy. I appreciate the concerns raised by the noble Baroness at Second Reading.
The Government have carefully considered the perspective of such banks in developing the mechanism in the Bill, which is intended to be a proportionate solution. On MREL, the Bank of England is responsible for determining MREL requirements for individual firms within a framework set out in legislation; that is an important principle, as the resolution authority, the Bank of England, is ultimately best placed to judge what resources banks should hold so that they can fail safely. I point out to the noble Baroness that, as set out in the Government’s consultation response, the Bank of England has committed to consider the potential case for changes to its indicative thresholds. Specifically, it has noted that it will consider whether any changes are appropriate in light of this Bill and other wider developments.
I hope that these points provide reassurance to noble Lords. On that basis, I respectfully ask the noble Lord to withdraw his amendment.
I will ask the Minister for one point of clarification. He referred to the reports under the Banking Act that will be provided as covering the costs and expenses. I do not think that he talked about the comparison with the counterfactual of the costs of insolvency, which is a critical aspect of this. Would those reports cover that?
If the noble Lord does not mind, I shall add that to the letter to him.
My Lords, I thank all noble Lords who have spoken in this short debate and apologise to the noble Baroness, Lady Vere, for failing to thank her beforehand for signing her name to my amendment.
A number of points were raised. The noble Baroness was right when she discussed the timings. They were put in as a starting point; I would be very happy to look at what is appropriate. I still think that we need to beef up the reporting clauses in the Bill. I am encouraged by what the Minister said about the reports that exist being laid before Parliament, but, as the noble Baroness, Lady Noakes, referred to, there is more to do on the timings.
There is some merit in trying to put in the Bill at least some minimum requirements on what those reports should include. That will be important because, although I acknowledge what the Minister said about the code, we will not see it before Report. If we were able to see the proposed changes to the code before Report we might be able to take a different view. It happens quite regularly that we are told that something will be in a code of conduct, a future statutory instrument or whatever else, but we do not see it before we have to make the decisions on the amendments themselves. In the absence of that, I feel that we will probably want to come back to this on Report. In the meantime, I beg leave to withdraw my amendment.