Hospitality Industry: VAT

Lord Vaux of Harrowden Excerpts

Monday 14th September 2026 Lords Chamber

[Lord Pitt-Watson (Lab)]

As the noble Lord says, I am not going to give him a sneak preview of the Budget.

[Lord Vaux of Harrowden (CB)]

My Lords, the greatest impact of this tourist tax will be on those who have to go on holiday during the most expensive weeks of the year—in other words, families with school-aged children. Does the Minister agree? Can he give us an indication of how much it is likely to cost such a family? I assume the impact assessment does this.

[Lord Pitt-Watson (Lab)]

We have not made a specific assessment of that number, no.

Financial Services and Markets Bill [HL]

Lord Vaux of Harrowden Excerpts

Report stage
Wednesday 9th September 2026 Lords Chamber

[Lord Stockwood (Lab)]

My Lords, it is a privilege to make my first contribution as a Back-Bench Member of this House in a slightly more relaxed environment than the last time I spoke on Clause 17 in the Moses Room. Indeed, I am told that some of the colour has started to return to my face, which is entirely due to the Recess rather than having to face-off against the rather formidable experience across the House.

Having spent a considerable amount of time before the summer defending Clause 17, I want to say a few words about this group, in particular Amendment 37. I argued then, and continue to believe, that the basic architecture of Clause 17 is right. We need regulators capable of exercising expert judgment, and we should be cautious about responding to every legitimate concern by adding another statutory duty or layer of prescription. However, I also heard clearly the arguments made across Committee that greater regulatory discretion must be accompanied by proportionality and meaningful parliamentary accountability. That is why I welcome the direction of these amendments. They reflect the concerns that were raised repeatedly before the summer, while preserving the regulators’ ability to exercise judgment. Amendment 37 is particularly important because there is a practical problem underneath the question of accountability. Parliament is scrutinising institutions such as the FCA, PRA and Bank of England with enormous analytical, policy and research resources. By comparison, even the Financial Services Regulation Committee operates with a very small team across an extraordinarily broad agenda. That imbalance matters, and we heard that.

Better accountability cannot simply mean regulators producing more information. Parliament must be able to interrogate that information, track what regulators have previously said and promised, and challenge them when the evidence does not match the rhetoric. I have written to the noble Baroness, Lady Noakes, offering some practical help, including exploring whether new analytical tools and AI, using publicly available information, could help to narrow that resource gap and do some of the analytical heavy lifting for the committee. To be clear, technology will not replace the judgment of those members or the expertise of committee staff, but it can potentially make that judgment better informed.

There is also a broader lesson in this group. One thing I learned during those six sittings in Committee is that scrutiny works best when government is prepared to listen. There may have been moments when I appeared rather attached to the drafting in front of me, which may be putting it mildly, but the purpose of this House is not simply to test the Minister’s powers of endurance, although sometimes it felt like that. It is to improve legislation. The group demonstrates that process working well. The Government have listened without abandoning the principles of the Bill and the House has helped strengthen the framework around proportionality and accountability. I particularly welcome Amendment 37 and support the approach represented by this group.

[Lord Vaux of Harrowden (CB)]

My Lords, while they do not go quite as far as I would have preferred, I welcome the Government’s amendments that will bring the essential regulatory principle of proportionality back into the discharge of the regulators’ general functions. I think it is a reasonable compromise to have met.

I have added my name to Amendment 62, tabled by the noble Baroness, Lady Neville-Rolfe, which emphasises the particular importance of proportionality to small and medium-sized enterprises, on which the regulatory burden can have a much greater impact than on large companies with dedicated compliance departments. I raised this on Monday in relation to the concern that the transfer of AML supervision to the FCA might disproportionately impact smaller firms.

I very much hope that the Minister can say something that will give us comfort that the regulators will take size, as well as other factors, into consideration when deciding what is proportionate regulation and supervision.

[Baroness Young of Old Scone (Lab)]

My Lords, I welcome the Minister’s statement that he was committed to bringing forward amendments at Third Reading. I think it is relevant to this group of amendments. I simply want to draw the House’s attention to two sessions we have had in the last three or four days with the FCA. The Minister very kindly organised a session with the FCA about its role in climate and environment. To be honest, the kindest thing I can say is that I was underwhelmed. I think that it is doing a lot more than it displayed that day. The defensiveness that it demonstrated in front of a bunch of really friendly, helpful and not at all terrifying Baronesses, was a bit of worry to me, to be honest, because I felt there was real defensiveness and push-back against a responsibility. I thought perhaps we had just given it a hard time and it was having a bad day—but we had another session with it yesterday, organised by Peers for the Planet, and I was horrified.

I have the quote here because I wrote it down and then went home and wept. A fairly senior representative of the FCA said, in terms: “The FCA does not have a mandate to tell businesses what they should do on climate and the environment”. I would like the House to know that and the Minister to bear that in mind when he comes forward with his Third Reading amendments, because there is a real need for a stronger line in guidance than we might otherwise imagine.

--- Later in debate ---

[Noble Lords]

Oh!

[Lord Vaux of Harrowden (CB)]

My Lords, I am not sure how to follow that. I have added my name to Amendment 98. Clause 50 is a very broad, catch-all Henry VIII power. Given that the Bill already has over 50 delegated powers in it, this seems entirely superfluous and it should be removed.

[Lord Pitt-Watson (Lab)]

My Lords, Amendment 98 would remove the consequential power contained in Clause 50. The Government understand the concern that delegated powers should be used appropriately and should not become a vehicle for making substantive policy changes without parliamentary scrutiny. Indeed, I think that, on Monday, in response to issues to do with Henry VIII powers, I gave some sympathy to that argument. However, the power in Clause 50 is not a power to introduce new policy, nor is it a power to revisit the policy that Parliament will have approved by passage of the Bill; it is a narrow, regulation-making power limited to dealing with matters that arise as a consequence of the provision that Parliament has already approved within the Bill.

It is common and often necessary for legislation of this scale and complexity to require consequential adjustments elsewhere on the statute book, so that provisions operate as intended. Without such a power, relatively minor or technical changes would require further primary legislation, creating unnecessary delay and complexity. For these reasons, the Government do not believe that removing this clause would improve the Bill. I would also note that this was not a point raised by the Delegated Powers Committee about the Bill.

Finally, I assure the noble Baroness that parliamentary committees will of course be able to call the Government to appear in front of them and account for the use of consequential power or, indeed, any other power in the Bill. I therefore ask the noble Baroness to withdraw this amendment.

Financial Services and Markets Bill [HL]

Lord Vaux of Harrowden Excerpts

Report stage
Monday 7th September 2026 Lords Chamber

[Lord Vaux of Harrowden (CB)]

My Lords, I have added my name in support of Amendment 17, which the noble Baroness, Lady Kramer has already explained, I have also tabled Amendment 19. Both amendments relate to the continuing problem of fraud. As noble Lords are probably aware, the last Financial Services and Markets Act led to the introduction of the compulsory reimbursement for APP fraud losses by the banks, split 50:50 between the paying bank and the receiving bank.

This has had two effects. First, it has increased reimbursement to victims; but also, importantly, by imposing the financial costs of fraud on to the banks, it has given them a strong incentive to take steps to protect their customers from fraud, and they have done so. There are some valid concerns about how this might change victims’ behaviour—the question of moral hazard—and I hope the FCA will keep that under review; but it is fair to say that the requirements to reimburse customers in respect of fraud has generally been seen to be successful.

The logic for pushing the obligation on to the banks is that almost every fraud has to be cashed out through the banking system at some point in the chain. It is also true, however, that very little fraud arises from the banks themselves. As we have just heard, most APP fraud starts online or on a telecoms service—around 66% online and 17% from telecoms. Once again, I will namecheck Meta, from whose platforms the greatest amount of such fraud originates. Surely, it would be better to try to prevent fraud where it originates than to just reimburse it. Despite various voluntary charters, this is not improving at all. Your Lordships’ Fraud Act 2006 and Digital Fraud Committee, of which I was a member, recognised this in its report four years ago. We said:

“Until all fraud-enabling industries fear significant financial, legal and reputational risk for their failure to prevent fraud, they will not act”.


We were right: they have not acted. The Government's most recent fraud strategy also recognised this. It says:

“if industry partnership and market incentives alone remain insufficient to drive improvements, the Government will take legislative action within this Parliament”.

There have been no improvements. It is time to legislate.

I am sure the Minister is going to explain that the Online Safety Act is going to deal with all this, and it does help, but only to a certain extent. It is quite limited on what is covered and where in relation to fraud, primarily paid-for advertising, which is only a small area from where fraud originates. Amendment 17 would make the tech companies directly liable for their share of the cost of the fraud arising on their platforms. This Bill gives us the perfect opportunity to take the legislative action the Government have themselves committed to: to make the tech and telco companies take their responsibilities to their customers seriously without further delay. It is four years, as I said, since the committee reached its conclusion on this. So, I urge noble Lords to support the noble Baroness, Lady Kramer, if she decides to press Amendment 17, as I hope she will do.

My Amendment 19 is very simple. During the passage of the last Financial Services and Markets Bill, the then Government agreed to ensure that the Payment Systems Regulator should prepare a report every six months that sets out how the payment services providers are performing in relation to paying out and receiving fraudulent payments, as well as their reimbursement performance. Since the compulsory reimbursement scheme started, that reporting has stopped, but the reports were very helpful—not only in relation to reimbursement performance under the then voluntary scheme, but also in identifying and publicising which of the payment providers were the riskiest. It led to some being closed down because their performance in identifying and preventing fraud was so poor.

--- Later in debate ---

Amendment 20, tabled by the noble Lord, Lord Holmes, was also discussed in Committee—

[Lord Vaux of Harrowden (CB)]

I am terribly sorry to interrupt the Minister, but perhaps he could explain why the FCA has stopped the reports that the PSR was previously providing.

[Lord Pitt-Watson (Lab)]

I am unable to answer the noble Lord’s question; might I write to him with an answer?

Amendment 20 was discussed in Committee and the Government’s position remains unchanged. As set out in Committee, a range of measures is already in place and further work is under way across government, regulators and industry. This includes firms using increasingly sophisticated fraud detection systems, confirmation of payee checks, work to improve data sharing between payment service providers and steps to ensure that fraud prevention is built into the design of future retail payments infrastructure.

Turning now to Amendment 95, concerning the protection of intellectual property, I agree that weak protections can be a drag on competitiveness. On non-compete clauses, in particular, there are no provisions in the Employment Rights Act 2025 that would affect the use of non-compete clauses by financial services firms. The Government published a working paper on options for reform of non-compete clauses in employment contracts at Budget 2025. We are currently reviewing responses and will respond to the working paper in due course. The focus of the paper was on options for reform of non-compete clauses in employment contracts. It does not consider reform to intellectual property law or other means to protect confidential information. The Government understand that a well-designed, balanced intellectual property system offers confidence for business investors and consumers to contribute to growing our economy.

Turning finally to Amendment 97 in the name of the noble Baroness, Lady Bennett, I recognise the continued threat posed to the UK by ransomware criminals. Following public consultation last year, this Government are already taking forward work through the Home Office to break the business model of ransomware and provide law enforcement with the information it needs to understand, investigate and disrupt ransomware activity. This includes proposals for a targeted ban on ransomware payments and mandatory reporting for businesses above a certain size. Taken together, the Government consider that the objectives of these amendments are already addressed through the existing framework and work that is under way and do not believe that further statutory requirements are needed. With that in mind, I ask noble Lords not to press their amendments.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I am afraid that all the amendments in this group are mine. Amendment 29 has also been signed by the noble Lord, Lord Vaux, for which I am most grateful. I will be brief as the hour is late.

In this Bill, the Government will transfer all supervision of professional service firms in respect of anti-money laundering and counterterrorism financing from the current professional bodies to the FCA. Members of this House have received representation from a wide range of professional groups which are, frankly, utterly dismayed. They recognise that the FCA is trying to respond to their needs and issues, but it seems to have very little idea how to fund or resource the complex guidance and education required as part of that supervisory and monitoring process. It seems, as far as I can understand, that the FCA now says that it would like the professional bodies themselves to continue to provide all that work but, in essence, on an unpaid basis. That is not realistic.

The FCA has produced a high-level road map, but I hear universally that it is very short of information and low on timing details. I can agree that the current system has historically suffered from fragmentation, but I am not sure that we needed a remedy on the scale of the changes that are in the Bill. The fragmentation issue was being dealt with reasonably effectively by OPBAS—the Office for Professional Body Anti-Money Laundering Supervision—that had been created to sit above the professional bodies to provide co-ordination standards and make them effective. Where OPBAS had a weakness was in its communication with enforcement agencies, but this issue could have been remedied without the radical change on the scale represented in the Bill.

My amendments require an assessment of this transition process, particularly on issues such as education guidance and compliance support, timetables, regional coverage and supervisory fees. There is real concern now that with an additional layer of supervision brought into the picture, fees are going to increase very significantly. My amendment would also require the FCA to have regard to having the appropriate expertise on hand to provide that support and guidance—that is significant expertise ranging from accounting to taxation. It has not really taken on these issues historically.

I will not be pressing this issue because the FCA is trying to find ways to make this system work. I honestly do not think that the FCA would have wished this upon itself; nor would the professional bodies have wished it upon themselves. It really is important that the Government understand that they need to think much more carefully when they introduce radical change when, frankly, much more modest and targeted change would have served the purpose better.

[Lord Vaux of Harrowden (CB)]

My Lords, I support the noble Baroness, Lady Kramer, on her Amendment 29, to which I have added my name. The noble Baroness has already explained with her usual clarity the concerns that lie behind this group of amendments so I will try not to repeat what she said.

The changes proposed by the Bill to the AML supervisory regime will move the AML elements of supervision from the relevant professional body to the FCA. This means that firms will now have to deal with two separate regulators rather than one: the FCA for AML and the professional body for everything else. It seems inevitable that this will have cost impacts for those firms even if, as the FCA argues, the regulatory rules themselves will not change. That is likely to be especially true for smaller firms.

The impact assessment that accompanies the Bill on this section is, frankly, almost laughably poor, relying almost entirely on the statement that the AML rules themselves will not change. It does not address, in any meaningful way, the question of moving from one supervisor to two. It must, therefore, be sensible to carry out an assessment of what the impact of the changes will be on firms and to ensure that the costs remain proportionate to the benefits that the FCA and the Government argue will accrue, before going ahead with the changes. That is what Amendment 29 is looking to achieve.

The Government are commendably keen to reduce the regulatory burden on businesses, so I look forward to hearing what the Minister has to say on this. Does he agree that there is likely to be an increase in costs to firms from having to deal with two supervisors rather than one? How will he ensure that that is proportionate to any benefits that will arise?

Bank Resolution (Recapitalisation) Bill [HL]

Lord Vaux of Harrowden Excerpts

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

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, with the leave of the House, I will also speak to Amendment 2. I would like to thank noble Lords for their continued interest and engagement in this important legislation. I know that some noble Lords will be disappointed to see the other place overturn the amendment inserted by your Lordships’ House, relating to the scope of the new mechanism, but I hope that I can offer some reassurance today on this matter.

As noble Lords will know, this Bill is intended to enhance the toolkit that the Bank of England has to manage the failure of a banking institution. In particular, it seeks to provide a new source of funding to cover certain costs associated with resolution and, in doing so, to strengthen the protections for the taxpayer, given the importance of protecting public funds in the event that a bank fails.

That said, I do understand the concerns that noble Lords have about any potential costs that would be placed on the banking sector if the Bill’s mechanism were used to support the resolution of some of the largest banks. Here, I would reiterate that it is the Government’s strong expectation that this mechanism would not be used to support the failure of the largest firms.

Noble Lords will recall that the Government published draft updates to its code of practice in October last year, which contained important language clarifying this expectation. I also met with many noble Lords in person during the Bill’s passage to listen carefully to concerns and to seek to explain the Government’s views on this matter.

Ultimately, the other place has taken the view that the scope of the mechanism should not be limited. The Government continue to believe that it is important to retain some flexibility for the Bank of England. I would like to make three further points to help explain that position.

First, as I have mentioned, the Government published draft updates to the code of practice to clarify our expectation that the Bank of England would bail in all readily available MREL that a bank holds, on top of the regulatory capital that must be bailed in, before using this mechanism. The Government therefore envisage that the mechanism would only be used on larger banks as a backstop, and any funds required would be only a top up to these other sources of recapitalisation.

Secondly, allowing the Bank of England the option of using the recapitalisation mechanism on larger banks means that it will be more able to respond to unexpected factors when resolving a bank. While of course the Bank of England works hard to ensure that it is fully prepared for a failure scenario, the manner in which banks fail is always highly uncertain. It is therefore important to ensure that the Bill is not overly restrictive in curtailing the Bank’s ability to use the mechanism flexibly.

As we have discussed in previous debates, there are some circumstances where retaining that flexibility could help to protect public funds. Although unlikely, there are circumstances in which larger banks may not be sufficiently capitalised to self-insure against their own failure, even if the bank in question has been directed to maintain end-state MREL requirements. An example of that might be if the firm was subject to a large redress claim, resulting in larger recapitalisation requirements than envisaged. Similarly, changes in the market value of the firm’s assets over time could result in higher losses than expected at the point of failure, again resulting in higher recapitalisation requirements to manage the failure of the firm in question.

While unlikely, those examples demonstrate a clear benefit in having the flexibility to source additional resources from the mechanism, having already written down the firm’s available MREL. Restricting the scope of the Bill would prevent the mechanism from being available in such scenarios, leaving public funds and therefore the taxpayer exposed instead. The Government therefore consider the theoretical possibility of using the recapitalisation mechanism on a larger bank a prudent step, providing comprehensive protection for public funds.

Thirdly, any levying by the Financial Services Compensation Scheme to recover funds provided to the Bank of England will be subject to an affordability cap set by the Prudential Regulation Authority, which is currently £1.5 billion per year. In line with its safety and soundness objective, the PRA carefully considers the affordability of the FSCS levy for firms, providing an important safeguard against the sector being hit by unaffordable levies to prop up the largest firms.

I hope those points will go some way to reassuring noble Lords, and that they will be able to support the Bill as it now stands. Noble Lords will note that Amendment 2 is a straightforward amendment to remove the financial privilege amendment that was inserted by this House at Third Reading. I beg to move.

[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?

Spring Statement

Lord Vaux of Harrowden Excerpts

Thursday 27th March 2025 Lords Chamber

[Lord Livermore (Lab)]

My noble friend very well draws attention to two key problems with the party opposite: the first is its record and the second is its future plans. Its record on growth is an absolute catastrophe. We saw austerity, followed by Brexit, followed by the Liz Trust mini-Budget. Growth was one of the biggest failures among a whole litany of failures of the previous Government. Looking forward, it has absolutely no plan for growth. All it can do is oppose. It has no plan of its own. It has no alternative policies. It opposes our measures to get stability, to get investment into the economy and to reform our economy. All it wants to do is criticise and talk down the economy. If the party opposite is going to criticise, it must come up with an alternative plan.

[Lord Vaux of Harrowden (CB)]

My Lords, the Minister has mentioned several times this £1 billion re-investment, which is not included in the OBR forecast. Can he confirm that the impacts of the Employment Rights Bill, which we are soon to discuss, are also not included in the OBR forecast, including the £5 billion cost to business that it will create? The OBR says that:

“Employment regulation policies that affect the flexibility of businesses and labour markets or the quantity and quality of work will likely have material, and probably net negative, economic impacts on employment, prices, and productivity”.


Does he agree with that?

[Lord Livermore (Lab)]

I am grateful to the noble Lord for his question. I hate to correct him, but I did not say that the £1 billion is not included in the OBR’s forecast. I said that it is not included in the OBR’s impact assessment; that is something different. The £1 billion is included in its forecast, and he is right to say that the Employment Rights Bill is not. The OBR gives a commentary on it, which he quotes from, but the Employment Rights Bill is not included in the forecast because it is still working its way through Parliament—it has its Second Reading today. We are confident that the Bill will result in ordinary working people having more money in their pockets and the security to spend that money by not having to worry, from week to week, whether they will be in work or how many hours they will get.

Register of Overseas Entities (Protection and Trusts) (Amendment) Regulations 2025

Lord Vaux of Harrowden Excerpts

Monday 3rd February 2025 Grand Committee

[The Minister of State, Department for Business and Trade and Treasury (Baroness Gustafsson) (Lab)]

My Lords, noble Lords will be aware that, since 2022, the UK has kept a beneficial ownership register of overseas entities owning property in the UK, which I will refer to as the ROE. The regulations that we are debating today will strengthen the transparency of trust information on the ROE, improving transparency around the control and ownership of land.

The Economic Crime (Transparency and Enforcement) Act 2022, which I will refer to as the 2022 Act, created the legislative basis for the ROE. The ROE requires overseas entities owning or buying property in the UK to give information about their beneficial owners and/or managing directors to Companies House. Currently, there is no public access to information on trusts related to overseas entities on the ROE, other than the name of the trustee. This approach protects the right to privacy for those who operate trust structures for a variety of legitimate reasons. However, the Government understand the concerns around the use of trusts to facilitate economic crime, partly because their anonymity makes assets easier to hide; that is why we have brought these measures forward for your Lordships’ consideration.

I will now set out the two measures contained in the regulations. First, they will enable anyone to apply to access trust information held on the ROE, through applications to Companies House. This marks a significant step forward in transparency, empowering the public and civil society to scrutinise trust beneficiaries on the ROE. Applicants must provide their personal information; the name of the trust related to the relevant protected trust; and the overseas entity’s name and ID.

Applicants seeking trust information related to minors or more than one overseas entity in a single application, also known as bulk access, must show a legitimate interest in the requested information. This safeguard protects personal information while providing that critical information is available to those with a valid need, such as investigative journalists. For an applicant to demonstrate that they have a legitimate interest, they must: show that they are investigating money laundering, tax evasion, terrorist financing or the breaching of sanctions; provide a statement that they are requesting the disclosure to further that investigation; and provide a statement of how they are planning to use the information disclosed to them. If no such interest can be demonstrated, the registrar of Companies House may withhold some or all information. The registrar will notify the applicant of the decision with reasons. If a legitimate interest can be demonstrated, the registrar will release any unprotected information.

As an additional safeguard, the registrar will have the discretion to impose conditions under which the trust information is disclosed, such as restricting its use or further disclosure. Failure to comply with these conditions will be a criminal offence. The registrar may also refuse an application where that disclosure may prejudice an ongoing criminal investigation or adversely affect national security, or where the trust is a pension scheme.

I turn to the second measure. This involves provisions for the protection of sensitive information, which will come into force before the disclosure provisions go live. We are expanding the category of individuals who can apply to Companies House to have their information protected. This ensures that those connected to a trust—settlors, trustees and beneficiaries—who are at risk of violence or harm can have their information protected. Those who are aged under 18 or lack capacity can also apply to have their information protected.

The protection measures will come into force on 28 February this year, while the disclosure provisions will come into force on 31 August. This will allow time for those who are eligible to apply to Companies House for protection. An application for protection does not exempt an overseas entity from full compliance with the requirements of the ROE in general, such as the update duty and filing with Companies House. The registrar will still be able to use their general information-sharing power to share protected information with law enforcement agencies and public authorities for purposes connected to the exercise of their functions.

These regulations further the Government’s mission to improve the transparency around beneficial ownership, driving confidence for investment in the UK and exposing bad actors who seek to take advantage of our open economy. I urge noble Lords to support these regulations and beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, I welcome the noble Baroness to her post, as it is the first time I have been across the table from her. She was not here when we were debating the two economic crime Bills, but I am sure she is aware that the subject of the use of trusts to obscure the beneficial ownership of UK property on the ROE and obscure ownership of UK companies, which this instrument does not cover, was one of the major areas of our debates at the time.

These regulations are a small step to improve transparency around the use of trusts to own UK property. I understand the balance around the protection of minors and others at risk, so I welcome the regulations, but slightly question how much difference they will make in practice. At least the progress is in the right direction.

I will ask a couple of questions about some general, related areas, if I may. I could not resist this opportunity. First, the latest information that I could find indicates that the true identity of the beneficial owner of UK properties owned by overseas entities—there are 152,000-odd—is not published in about 70% of cases, at the moment. For about 35% of cases, the true beneficial ownership is not known even to law enforcement agencies. There may be a number of reasons for that, including simple non-compliance, which accounts for about 10% in the last numbers I saw; the use of opaque corporate structures, which claim no beneficial ownership, or the use of nominees; and the use of trusts, which is the biggest one, particularly in our overseas territories. Transparency International’s latest numbers identify about £6 billion worth of suspicious transactions in UK property coming through our overseas territories, using trusts.

Could the noble Baroness provide up-to-date statistics on both level of compliance with the rules and the number of properties where the ultimate beneficial ownership remains unknown, for whatever reason? I am happy for her to write, if necessary, if she does not have the numbers to hand. Is she happy with the level of identification of beneficial ownership as it stands? What impact does she think these regulations will have on that? What further steps are planned to make sure that we know who beneficially owns the properties? In particular, what plans does she have to make the information from our overseas territories more transparent? The British Virgin Islands, in particular, appear to be the jurisdiction of choice for obscuring beneficial ownership, at the moment.

Of those entities that have not complied—10% was the number that I saw, which is about 15,000 entities—how many have been fined? Of those, how many have paid those fines and gone on to comply subsequent to payment? How many charges have been taken against the properties in relation to non-payment of the fines? In other words, does Companies House have sufficient powers to deal with non-compliance, and is it using those powers effectively?

Secondly—and I hope that the noble Baroness will forgive me for going slightly off-piste—another way to hide beneficial ownership is through the use of nominee shareholders. I notice the noble Lord, Lord Fox, smiling; I hate to be predictable, but there we go. This is particularly true for UK companies, where the persons with significant control or PSC rules can be sidestepped by the use of nominees. An entire industry has built up around that. The previous Government accepted that there was an issue around the use of nominees for this purpose and agreed to include a power in the Economic Crime and Corporate Transparency Act 2023 to take further action against the use of nominee shareholders and the industry that supports them, if they felt it was necessary. This is now Section 790IA of the Companies Act 2006. I want to take this opportunity to ask what assessment this Government have made of the use of nominees in that respect and whether they intend to make use of the powers they have under the Companies Act to address it.

[Lord Fox (LD)]

When the discussions were had with the noble Baroness about her becoming a Peer, I wonder whether they mentioned that she would be in the Moses Room presenting statutory instruments. I bet they did not. But I welcome her, and thank her for the clear explanation as well as the Explanatory Notes, which worked very well. To some extent, the Minister is at a disadvantage—or perhaps it is an advantage—in that the three speakers in this debate are the old gang getting together. We were all involved very extensively in both this and the predecessor Bill that came though.

--- Later in debate ---

[Lord Vaux of Harrowden (CB)]

Can I just follow up on that? It occurs to me that there is a potential issue here. What it does not say is who—so you do not have to be a journalist; you could be anyone looking at money laundering. For example, you could be a Russian person with a vendetta against another Russian person who owns a property, and you could simply say that you were looking at the money-laundering aspects of that. The noble Lord, Lord Sharpe, asked whether it had to be the Times of London or whether it could be some dodgy website—but it could go further than that. It could be another competing Russian oligarch, or something of that nature.

[Baroness Gustafsson (Lab)]

I think that you talk to the problem at hand, which is how you balance off disclosure from harm. There will often be legitimate reasons for wanting to access this information, but there are also legitimate reasons why you would not want someone to have that information. I do not think that this is a policy where you can describe a single selection, or parameters, that will defend both sides, which is the exact reason for this process, I believe.

The applicant who requires the information has to give full and detailed information as to their identity and why they would need the information, and the individual whose details are being disclosed has the opportunity to write and say that this is information that could cause them harm were it to be disclosed—and proactively make that statement, so that the registrar has the ability to protect those interests. Then it is the registrar’s role to take that information and ensure that they are getting that balance right. They have the information about the applicant, and they can make that judgment based on whether something is a legitimate interest and this is not a bulk access—someone trying to get the full list of all the trustees so that they can sell their local accountancy advice, or whatever that motivation is. On the other hand, they also have the register for people who believe that interest would be detrimental to their personal ability. Their role is to balance the two, providing that transparency but also protecting them from harm.

[Lord Fox (LD)]

I am sorry to labour the point, but the way in which it is being depicted is as if people will accept the registrar’s ruling and say, “Oh, yeah, right, I understand why you’re not letting me do this”, or, “I understand why you’re letting this person look at my identity”. It seems to me that human nature will operate in exactly the opposite direction and that there will quickly be a huge backlog of people who do not agree with the registrar’s decision, one way or the other. There does not seem to be a defined appeal process. If it is all getting lumped into judicial review, we all know how long that takes and what it leads to—and if there is no system and it all ends at the registrar, there is huge pressure on the registrar to be right every time, which will be extraordinarily difficult. While I can understand how it is being described, my sense is that it will be a lot messier than that.

[Lord Vaux of Harrowden (CB)]

Just to add to that, I cannot see anywhere in the regulation where the registrar has to inform the subject of the application that an application is being made. I can see that they can, but I do not see that they have to.

Crown Estate Bill [HL]

Lord Vaux of Harrowden Excerpts

Report stage
Tuesday 5th November 2024 Lords Chamber

[Lord Vaux of Harrowden (CB)]

My Lords, I rise briefly to support Amendment 5 in the name of the noble Earl, Lord Kinnoull. In passing, I still am rather confused by this Bill, which covers Scotland but not Crown Estate Scotland. That seems a bit of a contradiction, but it is clear there is a degree of overlap between the two. There certainly is an overlap of opportunity—we have heard about Great British Energy et cetera.

It is also clear that, while devolution must be respected and that is extremely important, Crown Estate Scotland and the Scottish Government want to have the same levels of flexibility. This simple amendment keeps the matter on the table and that is the key here, so I hope the Minister will be able to accept it.

[Lord Forsyth of Drumlean (Con)]

My Lords, I rise very briefly to speak to Amendment 5 in the name of the noble Earl, Lord Kinnoull. This is an entirely sensible proposal that I cannot imagine for a moment the Government would wish to resist, and which respects the autonomy of the devolution settlement. If I were a commissioner on the Crown Estate in England or the Crown Estate in Scotland, I would very much welcome this provision, and I congratulate the noble Earl on his ingenuity in tabling an amendment that would enable us to deal with this lacuna. I entirely understand why the Liberal Benches would not want to be accused of doing anything that undermined devolution. The noble Earl has found an elegant way of dealing with this, and I very much hope that the Government will support it.

Bank Resolution (Recapitalisation) Bill [HL]

Lord Vaux of Harrowden Excerpts

Report stage
Monday 4th November 2024 Lords Chamber

[Baroness Vere of Norbiton (Con)]

My Lords, throughout the passage of this Bill, the issue of the size of the bank for which this new mechanism can be used has attracted significant comment and debate. In a letter to all noble Lords introducing the Bill, the Minister stated: “This Bill enhances the resolution regime to respond to the failure of small banks”. Yet that is not what the Bill does. The regime in the Bill is not restricted to small banks or even to small and medium-sized banks; it can be used for all banks, even the very largest. Despite the letter from the Minister on introduction, the Government have maintained their position that the mechanism should be available for use for the resolution of a bank of any size, including the very largest.

Using this mechanism in those circumstances would be astonishingly costly for banks and their customers, not only in the year in which the levy is first implemented but for many years thereafter, adding to a long-term and significant burden on the banking sector and its consumers. I concede that the Government clarified in a policy statement that the mechanism would be used for the largest banks only in exceptional circumstances, but the mechanism being given a statutory footing by the Bill will only ever be used, on a bank of any size, in exceptional circumstances. Therefore, I take only a small amount of comfort from the published statement.

As the noble Baroness, Lady Bowles, said in Committee, there is no differentiation in the Bill on bank size. It should be limited by a defined measure. My amendment, supported by the noble Baronesses, Lady Bowles and Lady Noakes, and the noble Lord, Lord Vaux, seeks to deliver that definition by making it clear that the Bill does not apply to banks that have reached end-state MREL—that is, the very largest banks in the UK. It would mean that only small and medium-sized banks, and those on the MREL glide path, can be supported by the mechanism. I believe that was the Government’s original intention.

My amendment is fairly simple. It does what it says on the tin. I will listen very carefully to what the Minister has to say when he comes to wind up.

[Lord Vaux of Harrowden (CB)]

My Lords, I add my support to Amendment 2 tabled by the noble Baroness, Lady Vere. From the outset of this process, the Bill was intended to cover only small banks. That was made clear in almost the first paragraph of the original consultation. It was then extended and now covers all banks, regardless of size. I thank the Minister for making sure that the draft code of practice was published by the Treasury before Report; it has been incredibly helpful in this process, and we are all very grateful for that. The draft code of practice is clear that the resolution mechanism is designed primarily to support the resolution of small banks and that the Bank of England will not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and the corresponding MREL requirements of a large bank.

So why does the Bill cover large banks? The argument from the Government seems to be along the lines of, “Well, it might be useful to have this flexibility”. That does not seem a very strong argument. As we have heard, larger banks are required to hold additional capital resources, known as MREL, effectively to ensure that they are able to bail themselves out—a process known as bail-in. If the Government are not confident that the MREL regime is sufficient for those larger banks, they should be looking to strengthen that regime rather than extending a measure that is designed specifically for smaller banks whose failure would not create systemic risk, to act as a further insurance policy for the big banks.

I am afraid that unless the Minister can come up with a stronger argument than he has so far, I will be minded to support the noble Baroness, Lady Vere, should she decide to test the opinion of the House.

[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.

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Moved by

[Lord Vaux of Harrowden]

5: Clause 1, page 2, line 3, at end insert—
“(6) When the Bank exercises its power in subsection (1), the Bank must make a report to the Chancellor of the Exchequer within 28 days of the date of any recapitalisation payment being made.(7) The report must comply with any requirements specified by the Treasury, but must include—(a) the reasons why the Bank decided to make a recapitalisation payment in preference to allowing the financial institution to go into insolvency;(b) a breakdown of the costs referred to in subsection (2);(c) a comparison of the expected recapitalisation payment or payments that will be paid by the Financial Services Compensation Scheme, compared with the expected costs to the Scheme in an insolvency process.(8) The Bank must make a further report to the Chancellor of the Exchequer within three months of the date of the sale of the institution to a private sector purchaser, or the sale, closure or winding up of the institution or bridge bank, providing such information as the Treasury may require, including the breakdown of the actual recapitalisation payment or payments and the reasons for any differences to the expected costs referred to in subsection (7)(b).(9) The Chancellor of the Exchequer must lay a copy of each report under subsection (7) or (8) before Parliament.”Member’s explanatory statement
This amendment is intended to ensure that the reasons for decisions of the Bank to follow a resolution process in preference to an insolvency process are explained and the explanation laid before Parliament, both at the time of the decision and once the resolution process has been completed, and that the costs can be compared to what would have been expected if the institution had been placed into insolvency.

[Lord Vaux of Harrowden (CB)]

My Lords, this group covers reporting and accountability to Parliament on the use of the resolution mechanism, which was probably the greatest area of discussion in Committee. The Bill gives significant rights to the Bank of England to impose costs on the banking industry. It can only be right, therefore, that the Bank should have to explain the reasons for its decisions and the outcome to both the Treasury and Parliament.

A number of concerns have been expressed throughout the process, and again today, about how the Bank might use the mechanism. At Second Reading, the noble Lord, Lord Macpherson of Earl’s Court, said:

“I can foresee circumstances where the Bank will choose to recapitalise a small bank rather than put it into a bank 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.]


The noble Baroness, Lady Noakes, said something similar earlier today. The noble Lord and others have pointed out that there is nothing in the Bill that would incentivise the Bank to control the expenses of the process; again, we discussed this to an extent earlier. Those expenses will be picked up by the FSCS, by the wider financial services industry and, ultimately, by the customers of that industry.

As we have just seen, the Government have tabled amendments to clarify that last point, which we have already discussed—but the point remains. Fears, which I share, have been raised that this resolution mechanism could become the default, rather than insolvency. I believe—others share this view, I think—that, in principle, a failing institution should be allowed to fail unless it is in the public interest for it to be bailed out. The draft code attempts to deal with this but the concern remains.

For all these reasons, it is essential that the Bank should have to explain its decisions and that Parliament should have the ability to scrutinise those decisions. For that reason, I have tabled Amendment 5, which would require the Bank to make a report to the Chancellor that must then be laid before Parliament every time a recapitalisation payment is made. The amendment sets out some minimum requirements for what the report should cover, including why the Bank chose to make a recapitalisation payment rather than allowing the institution to go into insolvency; the costs that will be incurred; and how those costs compare to the costs the FSCS would incur in an insolvency situation. It would also require a final report explaining what actually happened—and, if different, why—at the end of the resolution process.

Since I tabled Amendment 5, I am pleased to say that the Government have issued the draft code of practice—for which we are all grateful, as I said—and tabled Amendment 8. I am extremely grateful to the Minister for his constructive approach on this. Given that the two together deal with most of the areas covered by my Amendment 5, I will not push that.

However—there is always a “but” in these things—there is one important omission in the Minister’s Amendment 8. Although it requires the Bank to report within three months of any recapitalisation payment, it does not require a final report on what actually happened at the end of the resolution process. Although the resolution will happen quickly in many cases—the example of Silicon Valley Bank, where it happened over the weekend, is a good one—that may not always be the case. Under these rules, a bank can be put into a bridge bank for up to two years, which can be extended further. We can have multiple recapitalisation periods during that period, so the process can last a number of years. If the Bank reports within three months of each payment, we may never see a report on what actually happened at the end—for example, if the failing institution is put into insolvency two years later.

It is essential that the Chancellor and Parliament have an opportunity to review how the resolution worked out and, most importantly, to ensure that any relevant lessons are learned. So I have tabled Amendment 9, as an amendment to the Minister’s amendment, to cover that point. I think that this may have been the Minister’s intention all along, but I cannot agree with him that his amendment, as drafted, actually achieves this. On the report it requires, his amendment says:

“The Bank must report to the Chancellor of the Exchequer about … the exercise of the power to require a recapitalisation payment to be made, and … the stabilisation power and the stabilisation option to which the payment relates”.


Nowhere does it talk about what happened at the end, which could be a number of years later.

I am alive to the concern that we should not have too many potentially repetitive reports, so my amendment would have effect only if the reports published by the Bank, in accordance with the Minister’s amendment, do not cover the final resolution results. I hope that this is not controversial and that the Minister will be able to accept Amendment 9 to his amendment. However, as I say, it is essential that the final outcome of any resolution is made transparent and open to scrutiny.

If the Minister is unwilling to accept my proposal, or accepts the principle but does not like some of the detail—he has mentioned to me that he is not terribly keen on the three-month timeframe—perhaps he could commit to coming back at Third Reading with his own version of the amendment that satisfies the guaranteed requirement to report on the final outcome. He can tweak it as he likes on timing and things—I cannot get too excited about that—but, if he is not prepared either to accept it or to do that, I will be minded, I am afraid, to test the opinion of the House on Amendment 9 when the time comes.

The other amendments in this group relate to notifying the relevant committees of both this House and the other place of the use of the recapitalisation power. The amendments tabled by the Minister, as well as the amendments to his amendments tabled by the noble Baroness, Lady Noakes, arose from amendments that the noble Baroness put down in Committee. I am pleased that the Government have accepted those amendments. However, all the amendments do is say that the committees must be notified. Those committees need something to look at; it makes it all the more important that we have the reports we are talking about, both on the use of the recapitalisation power and on what finally happens, at the end of the day. I beg to move.

[Baroness Noakes (Con)]

My Lords, I have Amendments 11 to 13 in this group; they are amendments to the Government’s Amendment 10, to which the noble Lord, Lord Vaux, has referred. Before I address those amendments, I shall refer briefly to the reporting amendments in this group. I certainly praise the Government for bringing forward their Amendment 8, as well as for beefing up the code of practice on reporting. However, I agree with the noble Lord, Lord Vaux, that the issue of the final report made by the Bank of England is outstanding; I therefore support his Amendment 9.

On Amendments 10 to 13, I start by thanking the Minister for listening to the case, made in Committee, that parliamentary committees should be notified of the use of the bank recapitalisation power. I had tabled an amendment that named the Treasury Select Committee in the other place and the Financial Services Regulation Committee in your Lordships’ House; this was supported in Committee by fellow Members of the latter committee, as noble Lords might imagine. I retabled my amendment for Report—the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux, added their names—but the Government then tabled Amendment 10, which was similar in principle to my amendment but drafted using the language of the Financial Services and Markets Act 2023. That Act did not refer to the Financial Services Regulation Committee for the simple reason that it did not exist at the time—indeed, it was that Act that led to creation of that committee. So, following the helpful meeting that we had with the Minister, I was told that the Government were happy to refer directly to the Financial Services Regulation Committee. They suggested that this be achieved by my tabling amendments to the Government’s amendments. So I hope that, when the Minister gets up to speak to his amendment, he will confirm that he accepts my Amendments 11 to 13.

Noble Lords who have joined the House in the past eight years might be mystified by the reference to the Chairman of Committees in my Amendment 13. Although the House has not used the title since 2016, the post to which we now refer as the Senior Deputy Lord Speaker technically remains the Chairman of Committees. One learns something every day in Parliament.

Let me conclude by saying that I hope the principle of requiring notification to the Treasury Select Committee in the other place and your Lordships’ Financial Services Regulation Committee is now regarded as a precedent for any future creation of significant or unusual powers granted to the Bank of England or any of the other regulators in future. The strength of parliamentary accountability for those bodies, with their massive powers, must always be maintained—and, indeed, enhanced.

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[Lord Livermore (Lab)]

My Lords, this large group includes a number of the Government’s proposed amendments to the Bill. I begin by responding to the amendment from the noble Lord, Lord Vaux, which is intended to ensure that there is transparency about the Bank’s use of the new mechanism. It does this by creating a requirement for the Bank to report to the Chancellor of the Exchequer within 28 days on certain matters where a recapitalisation payment is made, and for the Chancellor of the Exchequer to lay these reports in Parliament.

I assure noble Lords that the Government recognise absolutely the importance of transparency and accountability regarding the new mechanism and appreciate the strength of feeling in the House. The debates at Second Reading and in Committee were helpful and constructive and have informed the Government’s approach. The Government therefore agree that there should be an explicit requirement for the Bank of England to report to the Chancellor when it uses the new mechanism. To that end, government Amendment 8 means that the Bank of England must report to the Chancellor about the use of the mechanism in any circumstances where it is used.

The Government’s amendment outlines two elements to reporting. First, it would require the Bank of England to produce a final report at a time to be specified by the Treasury. This is intended to be a comprehensive account of the use of the new mechanism and to include an assessment of the relative costs to insolvency. Secondly, the amendment would require the Bank to provide an interim report within three months of using the mechanism in the event that a final report has not been provided within that time. This would ensure a prompt initial public justification for the use of the new mechanism, even if further details would follow later.

Government Amendment 14 would require the code of practice to include guidance on what should be included in the reports. Taking these points together, the Government’s approach has a broadly similar intent to that of the noble Lord’s amendment. However, there are some points of detail where the Government have taken a different approach in order to avoid unintended consequences. In particular, while recognising the importance of clear reporting arrangements, the Government believe that it is critical that the timing and content of any reports do not complicate a successful resolution.

I would highlight two challenges with the approach set out in Amendment 5 from the noble Lord, Lord Vaux. First, the Government believe that requiring an initial report as soon as 28 days after using the mechanism is likely to be too soon. As noble Lords know, the complexity of firm failures mean that they may not always be fully resolved within a short period of time. This is particularly the case when using the bridge bank tool, which is anticipated to be an interim step before an eventual sale. It is possible that a resolution process remains ongoing 28 days following a firm failure. It is therefore important that sufficient time is allowed so that the Bank can focus on its primary function of maintaining financial stability through managing the failure of the firm, before turning to the process of reporting. The Government therefore believe that providing an interim report within three months is a more proportionate approach to take, allowing the Bank more time to ensure that an interim report is as meaningful as possible while still ensuring that the Chancellor and Parliament are updated on use of the mechanism in short order.

This takes me to my second point, which is that disclosing certain information too early in the resolution process, especially information relating to the relative costs of different options such as insolvency, risks complicating a resolution because such information is either incomplete or highly sensitive. Regarding the noble Lord’s proposal to require an initial report to disclose certain costs, it is worth noting that when conducting the resolution conditions assessment, the Bank of England would make an assessment of the costs that the Financial Services Compensation Scheme may incur if the firm was placed into insolvency. However, by virtue of necessity, this would be only an initial assessment based on the information available at the time. It is therefore important that the Bank of England’s assessment of relative costs is reported on only once the resolution is fully complete. This will ensure that the Treasury, Parliament and industry are provided with a comprehensive and accurate account.

In addition, if the firm was in a bridge bank, as it may well be after just 28 days, the early disclosure of this interim financial information could complicate negotiations regarding a sale, especially if it was subsequently revised. It may also be market sensitive and increase speculation about the failed firm during a period of heightened sensitivity. Ultimately, therefore, the Government see risks in requiring the Bank to report too early and in too much detail during a highly unpredictable and sensitive situation. This is in part why the existing reporting provisions within the Banking Act in relation to resolution require reports as soon as reasonably practicable only after a year has passed.

The Government have sought to reconcile these different issues in our proposed amendment, while recognising the important substantive point of principle raised by the noble Lord, Lord Vaux. First, the Government have proposed an interim report to be provided within three months. While it is possible that a resolution process may not have concluded by this point, as the FSCS is likely to levy firms within this timeframe, it seems reasonable to expect the Bank to provide a public justification of the decision to use the new mechanism by this point. I note that, alongside the notification requirement covered in government Amendment 10, which I will turn to shortly, this will ensure that the Treasury and Parliament have a prompt explanation of why resolution has been undertaken.

Secondly, the Government’s amendment means that the Bank of England must provide a separate final report, in the event that this has not already been provided within three months of using the mechanism. This final report is where the Bank would outline its assessment of the relative costs of different options. This reflects the points that I have already made, namely that the Government believe that the key reporting obligation should fall once the resolution process has concluded. This reduces the risk that disclosure frustrates that process and ensures that any report can be meaningful.

To support this approach, the Government have also tabled an amendment requiring guidance on the content of such reports to be included in the code of practice. This will ensure that there is clear public understanding of the key issues that any interim or final report is expected to cover. As I have noted, both interim and final reports would be expected to provide a justification for the use of the mechanism, and as set out in the current draft of the code of practice, the final report would need to set out an assessment of the costs if the firm had entered insolvency. The current draft updates to the code of practice also make clear that the Government expect to require the Bank of England to provide an explanation of why ancillary costs were considered reasonable and prudent.

I am grateful for the helpful engagement that I have had with the noble Lord, Lord Vaux, who has rightly emphasised the importance of the Bank of England providing a comparison of the expected and actual costs in its final reports. I am happy to reassure the noble Lord that the Government intend to request that the Bank of England include this in final reports and will ensure that the final updates to the code of practice reflect this.

The noble Lord, Lord Vaux, has also tabled Amendment 9 to require the Bank to produce a report three months after the resolved firm has been sold or otherwise closed. I understand that the intent of this similarly reflects a desire to ensure that the Bank of England is compelled to report after a resolution process has fully concluded and provide an assessment of how the expected impacts of its actions compared to the actual events that took place in resolution. The Government of course appreciate the importance of the Bank of England reporting promptly. Reflecting on the noble Lord’s proposal, the Government intend to further update the code of practice to make clear that, where feasible and appropriate, the Treasury would expect the Bank of England to report soon after the sale or closure of the resolved firm.

The Government believe that it would be preferable not to put this expectation into legislation. This reflects the point I have already made: that the Bank of England should be required to provide final reports with the more detailed assessments only at the appropriate moment. While the Government do expect, as I have said, the Bank of England to be in the position to report soon after the end of the resolution process, this cannot always be guaranteed. For example, in the case of selling a firm, it may not have been possible in all cases to complete the full post-resolution independent valuation process within three months of a sale. I believe the Government’s approach still captures the intent of the noble Lord’s amendment, which is to ensure that full reports following the conclusion of a resolution process are presented expediently, with some discretion for the Treasury to ensure that reports are still provided only at the right moment.

I hope that, taken together, the Government’s amendments address the noble Lord’s concerns on both the timing and the content of reports, while retaining the flexibility necessary to avoid unintended consequences. On the specific additional point raised by the noble Lord’s Amendment 9, I agree of course with his intention and I will be happy to update the code of practice to this effect. However, the Government believe it would be preferable not to put this into legislation. I would be happy to consider this matter further and discuss it with my honourable friend the Economic Secretary to the Treasury, but I cannot give any firm additional commitments at this stage.

Turning to government Amendment 10, on notifying Parliament when using the power, I note that both the noble Baroness, Lady Noakes, and the Government tabled similar amendments on the theme of parliamentary scrutiny. I am extremely grateful to the noble Baroness for raising this issue and for her engagement on the matter; I am especially grateful to her for agreeing to withdraw her original amendment. The Government’s amendment reflects the point made by noble Lords in Grand Committee concerning parliamentary notification and the creation of the Financial Services Regulation Committee in your Lordships’ House as a result of passing the Financial Services and Markets Act 2023.

Building on that innovation in parliamentary scrutiny and accountability, the Government’s amendment seeks to harness the role played by that committee, as well as the Treasury Select Committee. It requires the Bank of England to notify the chairs of both committees as soon as reasonably practicable after the new mechanism under the Bill has been used. It includes provisions to future-proof this requirement following use of the new mechanism, such that if the names or functions of those committees change, the requirement for the Bank of England to notify the relevant committees by which those functions are exercisable would still stand.

The noble Baroness, Lady Noakes, has rightly argued that the Government’s amendment requires some tweaking, in particular to refer to the Financial Services Regulation Committee in the House of Lords by name. I am grateful to the noble Baroness for bringing this to my attention, and I note her amendments to the Government’s amendment—Amendments 11, 12 and 13—which attempt to address this point. I am of course very happy to agree to those amendments being made.

I hope that the Government’s approach across all the issues debated in this group demonstrates that the issue of accountability to Parliament is being taken seriously, ensuring that there will be transparency in use of the new mechanism. In particular, I hope that the Government’s amendments on the new reporting requirements address the noble Lord’s concerns on both the timing and content of the reports, while retaining the flexibility necessary to avoid unintended consequences. On the basis of these points, I hope noble Lords will be able to support both the Government’s amendments and those tabled by the noble Baroness, Lady Noakes, and I respectfully ask the noble Lord, Lord Vaux, to withdraw his amendment.

[Lord Vaux of Harrowden (CB)]

My Lords, first, I thank all noble Lords who have taken part in this debate, and the Minister for his constructive approach to it. I take on board everything he said about Amendment 5, which is why, as I have already indicated, I do not intend to push it to a vote.

However, I take issue with the Minister’s thinking it is appropriate that the relative costs of the recapitalisation process versus the insolvency process are looked at only after the event, at the very end of the process. It is quite important that we see why the Bank made decision it made at the time it made it, and that it has not reverse-engineered the results and facts to justify what it did. So I am not totally sure that I fully agree with the Minister on that point. Be that as it may, I am not going to push Amendment 5, because Amendment 8, along with the code of practice, covers most of what is needed.

However, as to Amendment 9, I am afraid that I did not hear anything particularly new there. The Minister has confirmed that his intention is that the reporting should cover the final result of the resolution process, which, as I say, could be a number of years later—but that is not what government amendment 8 says. The amendment specifically refers to

“the exercise of the power to”

recapitalise and

“the stabilisation power and stabilisation option to which”

it

“relates”.

It does not refer anywhere to what happens at the end. It is all very well saying that it might go in the code of practice and that there is an expectation that this will happen, but this is a really important issue.

We must know what actually happened, to be able to see how that compares with what we were told was going to happen, and to be able to learn the lessons arising from that. With the best will in the world, it may not be the Minister who is at the Treasury whenever this is used. I absolutely believe and trust that he would do exactly the right thing, but whoever comes next might not. It is important that this is in the Bill.

I am afraid that I intend to divide the House when the time comes, but in the meantime, I beg leave to withdraw the amendment.

Amendment 5 withdrawn.

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[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.

[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.

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Tabled by

[Lord Vaux of Harrowden]

9: After inserted subsection (5) insert—
“(5A) Unless already covered by the final report under subsection (3), the Bank must make a further report to the Chancellor of the Exchequer within three months of the date of the sale to a private sector purchaser of the financial institution to which the recapitalisation payment relates, or the sale, closure or winding up of the financial institution or bridge bank to which the recapitalisation payment relates, complying with such requirements as to content as the Treasury may specify.”

[Lord Vaux of Harrowden (CB)]

My Lords, I have had the opportunity to consider further, based on the discussions that we have had. The Minister made some helpful commitments to discuss the matter further with his boss back at the Treasury and that the issue would be covered in the code of conduct going forward. On that basis, I will not press my amendment.

Amendment 9 (to Amendment 8) not moved.

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Moved by

[Lord Vaux of Harrowden]

15: After Clause 2, insert the following new Clause—
“Treatment of recapitalisation payments on a winding up(1) In section 215 of the Financial Services and Markets Act 2000 (rights of the scheme in insolvency), after subsection (2A), insert—“(2AB) Any recapitalisation payment made by the scheme manager under section 214E in respect of a bank, building society or investment firm is to be treated, in the event of such bank, building society or investment firm or associated bridge bank being wound up, as a debt due to the scheme manager from that bank, building society or (as the case may be) investment firm.”(2) In Schedule 6 of the Insolvency Act 1986 (categories of preferential debts), after paragraph 15AA, insert—“15AB Any debt owed by the debtor to the scheme manager of the Financial Services Compensation Scheme under section 215(2AB) of the Financial Services and Markets Act 2000.””Member's explanatory statement
This amendment creates a mechanism that would allow the FSCS to recover its money in preference to creditors who would otherwise have no right to be bailed out. This mirrors the existing treatment of stabilisation payments made by the FSCS in Clause 215 (2A) of FSMA 2000.

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[Lord Vaux of Harrowden (CB)]

My Lords, we come to the end of this process; I am sure everyone will be relieved. I rise to speak to my Amendment 15, which is a somewhat technical and perhaps even slightly nerdy amendment, but it deals with an important wrinkle within this Bill.

When a failing bank is recapitalised under this Bill, the money is paid, by the Financial Services Compensation Scheme, partly to the Bank of England to cover the costs of the Bank and other parties, and the rest is then injected, as equity, into the failing bank by the Bank of England. In the case of the Bank putting the failing institution into a bridge bank, the recapitalisation is intended to cover the likely costs of the bridge bank for a full year. This has some quite important unintended consequences.

To give a simple example, if it is expected that the bridge bank will be sold quickly, but this does not happen for some reason, and, shortly afterwards, the Bank of England decides to put it into insolvency, it would still have a year’s worth of Financial Services Compensation Scheme money injected into it. We could then have a situation where that money gets used to pay off the liabilities of the bridge bank; these would be liabilities that, had it gone into insolvency in the first place, would not, and should not, have been paid.

This has two consequences. First, creditors who would otherwise have received nothing may get paid out just because of the recapitalisation. That is not the intention of this Bill, but it is the consequence. Secondly, it becomes highly unlikely, if not impossible, that the FSCS could ever recover any of its money in such a situation; it would be last in line to receive the money, after everyone else has been paid off, because its money would have been turned into the equity of the bank. Again, that does not feel right.

Clause 2 sets out that the Bank of England must reimburse any part of any recapitalisation payment that is not needed to cover the costs and expenses of the resolution. However, what I have just explained means that in reality Clause 2 is, in effect, redundant. There is no realistic chance, as it is structured, that any money could ever be recovered for the FSCS. It would go to pay off the creditors who should not otherwise have been paid off.

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[Lord Livermore (Lab)]

My Lords, the amendment tabled by the noble Lord, Lord Vaux, seeks to give the Financial Services Compensation Scheme rights with respect to the recapitalisation payment, in the event that the firm in resolution is subsequently placed into insolvency or wound up, by then requiring it to be treated as a debt. It also seeks to grant the Financial Services Compensation Scheme super-preferred status in the creditor hierarchy with respect to that debt, enabling it to recover that claim in an insolvency process before other unsecured creditors, uncovered depositors and shareholders.

I am grateful to the noble Lord for the constructive engagement that I have had with him on this matter prior to this debate, and I am especially grateful for his time and expertise on it. I assure him that my officials and I have spent considerable time considering the concerns that he raises, and I shall set out the Government’s position.

The Government’s concern about the amendment is that it could frustrate the primary intention of the Bill to achieve recapitalisation in a way that restores financial stability and, as such, could potentially result in the resolution failing. The Government’s view is that the amendment could create uncertainty as to how such a payment would be perceived by the market when a firm was operating, rather than only in the unlikely circumstance of the firm winding up.

The effect of the amendment would be to create a shadow claim on the recapitalisation. Potential purchasers, investors and unsecured lenders to the firm would be aware that in the event of insolvency a new debt would materialise above them in the creditor hierarchy. Indeed, the shadow claim would follow the firm in perpetuity for as long as it was a going concern, even after the resolution was complete and the firm had been sold to a buyer.

It would also follow the firm even where the original shareholders and creditors were no longer involved with the business, creating a series of risks. That raises a number of potential issues. First, it could inhibit the sale of the firm in resolution. While the insolvency position would not be a primary consideration for potential buyers, it would naturally be part of the potential purchaser’s due diligence to understand the risk to its investment in a subsequent failure. That risk may be substantially greater with the existence of this debt, which may in turn impact potential interest in purchasing the firm and any purchase price.

Secondly, both while the firm was in the bridge bank and once it had been sold, current and potential future creditors and investors in the firm could be deterred from investing in and engaging with the firm for similar reasons. That would frustrate a key goal of the resolution, which is to maintain continuity. For example, uncovered depositors would have an additional incentive to withdraw deposits as they may perceive a potential risk to the seniority of their claim in insolvency. Thirdly, it could potentially undermine restoring market confidence in the resolved firm.

As a result of the issues that I have outlined, the amendment could make it more expensive to run the firm, putting it at a competitive disadvantage. It may perpetuate the circumstances that the resolution is intended to address; namely, uncertainty around how and to whom potential future losses would fall. It may also make it difficult to secure the agreement of directors, who may not be comfortable running a firm under such a shadow while it was in a bridge bank.

In addition, existing legislation means that instruments may currently be classified only as common equity tier 1, the highest form of capital, if they are not subject to any arrangement, contractual or otherwise, that enhances the seniority of claims in insolvency or liquidation. The noble Lord’s amendment would mean that a capital injection arising from a recapitalisation payment under the Bill may not count as the highest form of capital, as it creates a seniorised claim for the Financial Services Compensation Scheme in the event of a subsequent insolvency. That brings into doubt whether it would have the desired effect of restoring market confidence in the firm.

Overall, the effect of granting the Financial Services Compensation Scheme a super-preferred claim over the recapitalisation payment, even if only at the point of insolvency, would be to increase the risk of the resolution not achieving its objectives. Therefore, while the Government absolutely understand the noble Lord’s concerns, we have concluded, for the reasons I have outlined, that the amendment may end up doing more harm than good.

I appreciate that this is a matter that the noble Lord feels extremely strongly about, but I hope this explanation has provided some clarity over the risks attached to the amendment and that as a result he feels able to withdraw it.

[Lord Vaux of Harrowden (CB)]

My Lords, I thank every noble Lord who has taken part in this short debate. It is a fairly nerdy and technical subject, and the Minister has just described very well why it is a complicated situation. I am sorry that he was unable to say that the Government would keep it under review —to keep an eye on the situation—because there is a problem. This process could lead to creditors being preferred unreasonably over the FSCS money in some circumstances, and that is not desirable. It comes back to some of the moral hazard points that the noble Lord, Lord Sikka, made earlier as well, albeit in a different context, so I am sorry that the Minister was unable to say anything on that front.

I agree with the Minister that it is complicated and that there probably are unintended consequences to my amendment. I again urge him to keep this under review and to look at whether anything might be done on it under the code of conduct. On that basis, I beg leave to withdraw the amendment.

Amendment 15 withdrawn.

Independent School Fees: VAT

Lord Vaux of Harrowden Excerpts

Monday 21st October 2024 Lords Chamber

[Lord Livermore (Lab)]

The answer to the noble Lord’s question is no, because the assumptions underlying that report are incorrect. We expect that a large number of private schools will take steps to absorb a significant proportion of this VAT liability, so the majority of that fee will not be passed through.

[Lord Vaux of Harrowden (CB)]

My Lords, 3,000 military families take advantage of the continuing education allowance and send their children to private school. In previous answers, the Minister has said that no decision will be taken on how the impact of the VAT rise will be dealt with for those families until the spending review. The Armed Forces are facing a retention crisis, as is well known. Why does the Minister think that leaving those families with this level of uncertainty is going to help with that retention?

[Lord Livermore (Lab)]

The core answer to the noble Lord’s question is that very many private schools will take steps to absorb a proportion, if not all, of the new VAT liability, so there may actually be no increase in fees in such circumstances, which is why it is right that we leave it until the spending review. It is worth pointing out that very many military personnel send their children to state schools and want them to benefit from the improvements that will happen in those schools.

Bank Resolution (Recapitalisation) Bill [HL]

Lord Vaux of Harrowden Excerpts

Committee stage
Tuesday 10th September 2024 Grand Committee

I hope that the Treasury is proud of its new creation, via Section 28 of the 2023 Act, and will want to make use of this brilliant new way of keeping Parliament’s committees informed and capable of exercising their scrutiny powers on a timely basis. I hope that the Minister will support anything that increases the effectiveness of parliamentary accountability for the Bank. I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, very briefly, I support the noble Baroness’s amendments. Perhaps I would say that as a member of the Financial Services Regulation Committee—as one of the majority of us in this Room, I should say, who are members of that committee.

I see this as working closely alongside the reporting amendments that we discussed on Thursday. When we were talking about the reporting requirements the noble Baroness, Lady Vere, mentioned that it is all very well issuing reports, but not if there is no one to read them. This gives us somebody to read them. It is a fairly light-touch requirement: it is an obligation to notify but does not give any obligation on anybody to do anything with it, unless they feel they need to and that it is important. I hope that this simple measure, alongside the reporting discussions we had last week, will be something that the Minister is minded to accept.

[Lord Eatwell (Lab)]

My Lords, perhaps I might suggest that it would be wise of the Minister, if I may be so bold, to look warmly on the amendment. Discussions around the accountability issue were a persistent theme in the debates on what is now the Financial Services and Markets Act 2023, and led as the noble Baroness, Lady Noakes, pointed out, to the creation of the Financial Services Regulation Committee of your Lordships’ House, charged with the responsibility for maintaining parliamentary accountability of financial services regulators. I can assure him that if the Treasury does not accept this amendment, he will become weary of the number of times that it will come back again and again—the reason being simply that the committee feels strongly that its role is now a crucial part of the regulatory framework in the UK and that the reports to the committee effectively establish the groundwork of its role in pursuing the accountability agenda.

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Moved by

[Lord Vaux of Harrowden]

17: Clause 2, page 2, line 20, at end insert—
“(aa) on a winding up of the institution, any recapitalisation payment is to be treated as a debt of the institution and paid out of the institution’s assets in preference to all other claims except any prescribed fees or expenses of the official receiver;”Member’s explanatory statement
Because the recapitalisation payment is not paid by the FSCS to the institution, but is paid to the Bank of England, it is not clear how it would be treated on a winding up of the institution. This probing amendment aims to ensure that it is treated as a debt of the institution and to ensure that recapitalisation payments are recovered first in any insolvency process, in preference to other creditors or shareholders, other than the expenses of the receiver.

[Lord Vaux of Harrowden (CB)]

My Lords, this amendment is simply intended to try to obtain some clarification on how a recapitalisation payment that has been made by the FSCS to the Bank of England will be treated if the failing bank eventually gets into insolvency. This could occur if the bank is transferred to a bridge bank, the buyer is not found and the bank’s financial situation does not improve. There is a two-year deadline for the bridge bank although that can be extended in certain circumstances but, eventually, the process can end up with the bank being wound up.

If that happens, the recapitalisation payments should be treated as a debt of the bank and should rank ahead of all other liabilities, debts or other claims other than the fees of the official receiver when it comes to distributing any value that might be left in an insolvency situation. This is related to other discussions that we have already had and partially to Amendment 23, tabled by the noble Baroness, Lady Bowles, which we will debate later.

The principle should be that the shareholders, lenders and other creditors should not be put in a better position as a result of the recapitalisation. To put it another way, the industry-funded compensation scheme should not, in effect, be bailing out the losses of shareholders and creditors other than the depositors who will be compensated under the scheme should their deposits be lost in the insolvency. However, that is not clear in the proposed Bill, although it is entirely possible that I have missed something in the interplay between the various Acts that apply here. I would therefore be most grateful if the Minister could explain exactly how the amount provided by the FSCS would be treated in such a situation. It might most easily and clearly be dealt with by including it in the worked example that the Minister agreed to consider providing during our discussions on Amendment 1 on Thursday.

I should say that I suspect that my amendment as it is currently drafted probably does not work, and that it may require some changes to be made to insolvency legislation to work properly if there is an issue. Rather than worrying about the specifics of the amendment, I hope that the noble Lord will concentrate on the principle and explain how the recapitalisation payment would be treated in an insolvency process, as it stands, in particular in making sure that it does not advantage shareholders and lenders, and ideally point me to the relevant clauses of the relevant legislation. If I am right that the situation is unclear, we can sort the details out on Report. I beg to move.

[Baroness Noakes (Con)]

I support the amendment that the noble Lord, Lord Vaux, has put forward, and in particular the request for worked examples, preferably with numbers in, because the noble Lord, Lord Vaux, and I are accountants and we like looking at numbers rather than words. Having read the proceedings of the first Committee day in Hansard, I realised that I did not know how some of these things work in practice, so I think that it is important to have those worked examples.

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[Lord Livermore (Lab)]

My Lords, I am about to write to the noble Lord, Lord Vaux, on the matter that he raises in his Amendment 17, following a commitment that I gave on the first day in Committee. I will also happily reflect any points raised in this debate in that letter, if helpful. In the meantime, I will set out some of the content of that letter, while providing some additional clarity on the points he raises. Again, I hear the request for worked examples that we discussed on day one.

The Bill extends the role of the Financial Services Compensation Scheme to include providing funds at the Bank of England’s request, which the Bank of England could then use to recapitalise the firm in question. As I have set out previously, the intention would be to achieve that recapitalisation by injecting equity into the failed firm, helping to restore it to viability. In the event that the Bank of England places the failed firm into a bridge bank, the Bank of England would become the sole shareholder for that bridge bank.

It is therefore possible that the Bank of England would receive recoveries in a subsequent winding-up of the bridge bank if all other claims were met, reflecting its position in the creditor hierarchy as a shareholder. The Bill provides for any such recoveries to be returned to the Financial Services Compensation Scheme. The Government consider this to be an appropriate method for dealing with funds used in a resolution and in keeping with the existing principles of the creditor hierarchy. I note four further important points.

First, by ensuring an injection of equity, it achieves the core purpose of the new mechanism, which is to restore the firm to solvency. By contrast, if such a payment were classified as debt—even if that had a more favourable ranking in the creditor hierarchy— there is a risk that it would not restore the firm to the necessary level of balance-sheet health.

Secondly, I note that the primary intention in deploying resolution tools using the new mechanism would be to sell the firm. It is therefore the Government’s expectation that a sale should be the outcome in the majority of cases, rather than placing the firm into insolvency and winding it up from a bridge bank.

Thirdly, I point out that, if the firm entered insolvency from a bridge bank and there were still eligible depositors, the Financial Services Compensation Scheme would pay compensation to those depositors and take on their position in the creditor hierarchy, as it usually does. That of course is the right approach, ensuring depositors maintain their super-preferred status in an insolvency. It is important to note that changes to the creditor hierarchy must be considered carefully to ensure there is clarity for investors and market participants as to how they would be treated in a failure scenario. Treating the funds provided by the Financial Services Compensation Scheme as a debt only at the point of winding up the firm, and not prior to that, might create uncertainty as to its interaction with insolvency law more broadly.

Finally, I note that the super-preferred status in the creditor hierarchy that the Financial Services Compensation Scheme currently enjoys in insolvency reflects a different set of objectives. In those circumstances, the Financial Services Compensation Scheme is standing in the shoes of depositors and that preferred status is seeking to protect depositors’ interests. That is different to the intent of the mechanism delivered by the Bill, which is to provide a source of resolution funding to recapitalise a failing firm.

I appreciate the Committee’s interest in what is a technical but important matter. I hope that I have been able to clarify the intent of the Bill and that the noble Lord is able to withdraw his amendment as a result.

[Lord Vaux of Harrowden (CB)]

I understand what the Minister says about the equity of the original shareholders being effectively written down to zero, but what happens with, for example, lenders who are transferred into the bridge bank? It cannot be right that they probably lose everything in the event of an insolvency situation, but if the FSCS, via the Bank of England, has injected a load of money into the failing bank and it then goes into insolvency, there is more money there and therefore those lenders will receive a share of their cash, if there is enough, which they would have lost in an insolvency situation. However, the FSCS gets nothing back because there is nothing to recoup as it has gone to the lenders. In effect, in certain circumstances the lenders to the failing bank may be bailed out by the FSCS through the Bank of England. That does not seem right to me. Those lenders took a risk in the first instance that was not predicated on being bailed out. I think there is something here that needs to be followed up. Have I got that right?

[Lord Livermore (Lab)]

In the letter I will write, we will set out exactly what would happen in the example that the noble Lord gives.

[Lord Vaux of Harrowden (CB)]

I thank the Minister for that explanation and look forward to receiving the letter with the details and, I hope, a detailed worked example. However, an issue remains. The principle must be that a recapitalisation of the bank by the FSCS will not, in effect, bail out the existing shareholders—which it seems it does not do—or existing creditors, with the exception of the depositors, who are protected separately. There is something that needs looking at quite carefully here. I think we will come back to this on Report, but for the moment I beg leave to withdraw the amendment.

Amendment 17 withdrawn.

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[Baroness Bowles of Berkhamsted (LD)]

I have mixed feelings about this amendment. I am grateful for the comments of the noble Baroness on why it was an objective; I understand that. Very definitely, the costs should not be disproportionately larger, but, if it was a relatively small amount larger than an insolvency and there was a good public interest case, I would not want to bar it. I am not quite sure whether the words used and having it as an objective necessarily convey that; if we were to proceed further with it, we could somehow make it a little more explicit in that regard. It needs to be in the same order of magnitude, not hugely more. With that caveat, I am probably in the same position as the noble Baroness, Lady Noakes.

[Lord Vaux of Harrowden (CB)]

I was not going to speak on this amendment, but I am also slightly in two minds. One hesitation is that it is very hard to know on the day you do the recapitalisation payment what the cost of an insolvency situation would be. However, I understand where the noble Baroness is heading with this, and there is a lot of sense in the sentiment behind it. This gives more ammunition to the question around reporting—we need the Bank of England to give a very clear explanation as to why it has chosen recapitalisation over insolvency. That might be my preferred way of going about it, but I understand absolutely what the noble Baroness said and support the sentiment behind it.

[Baroness Vere of Norbiton (Con)]

I also support the sentiment in the amendment from my noble friend Lady Noakes. I think all noble Lords here, including the Minister, would agree that this has the right intention but, as the noble Baroness, Lady Bowles, mentioned, there will be edge cases which we cannot foresee at this time. The question is: should such a statement of intent be in the special resolution objectives and, if not, where should it go? I do not know—perhaps in a code of practice, or perhaps not. I am interested to hear what the Minister has to say.

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My Amendment 21 makes sure that the code of practice will cover the bank recapitalisation power, and the Government should have no difficulty in accepting that, since they have already said that they are going to issue an updated code. My amendment does not cover the content of the code or the timing of its issue, but I hope the Minister will understand that content and timing are important to this Committee and will also be important to the House on Report. I hope that he can give us more detail today or soon after the conclusion of this Committee. By the time we get to Report, the House will want to know as much as possible about the code, especially if it is going to be relied upon to avoid the need to accept more detailed amendments. I say gently to the Minister that it is in the Government’s interest to be as clear as possible about the code’s update and what exactly it will contain. I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, on this amendment I agree with every word that the noble Baroness has just said. Like most noble Lords, I have an inherent preference that things should appear in a Bill, rather than relying on slightly woolly statements of Ministers that this is what they intend to do. There are circumstances when that is appropriate but in a case like this, where the code will be so important, there should be an obligation that the code is updated to take account of the recapitalisation process.

To repeat what I said on Thursday, and what the noble Baroness has said, it is deeply unsatisfactory that the Minister seems to be relying on the existence of the code and its updating to avoid detailed amendments being put down on Report and pushed through. If that is the case, it is surely important that we get a chance to look at the revised code before then, or at least a draft of it—or, at the very least, clear details of what Ministers are expecting to include in it. I urge the noble Lord to see what we can do to achieve that. Otherwise, he will face detailed amendments to deal with the issues that we have discussed, because we have nothing else on which to base our position.

[Baroness Bowles of Berkhamsted (LD)]

I agree with what both previous noble Lords have said. We cannot rely just on the fact that something is going to be revised. It is the same old problem that we have with primary legislation a lot of the time: it lays out something that could be good or bad, but it says, “Trust me, we will get it right when we come to secondary legislation or something else down the track”. That is not satisfactory and, in the absence of some more detail, we have to see something about the code of practice or similar—whatever one calls it—in the Bill, just to make sure that there is an understanding of the direction of travel for the sort of detail that we are asking about.

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[Baroness Noakes (Con)]

My Lords, I will be brief. The noble Baroness raises some important issues in her amendment. I think the Minister confirmed earlier that shareholders would disappear because the Bank of England would take over their share capital, so they could not benefit from the use of the recapitalisation, but if there is any suggestion that the recapitalisation amount will excuse the bail in of some of the bail-inable liabilities, that would be pretty unacceptable. I hope that the worked examples that I hope the Treasury will enjoy working on while we are on Recess can illuminate how all this is going to work.

[Lord Vaux of Harrowden (CB)]

My Lords, I find my head spinning a little about some of this. It comes back to the confusion about how the various flows here work, so that worked example is becoming more and more crucial. I come back to the principle that I raised before: recapitalisation by the industry should not bail out those who should be at risk in the case of a failure. MREL capital et cetera must surely be used up first before we take recourse to the industry. It is similar to, but slightly different from, the point we made in Amendment 17 that, again, people who are creditors of the failing bank should not be bailed out by the recapitalisation in the event that it all goes wrong. It seems rather confused, so I look forward to the worked example, and I wish the Minister good luck with getting something that covers all the aspects.

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[Lord Vaux of Harrowden (CB)]

The noble Lord has just confirmed the point that we talked about in Amendment 17, that there are situations where the use of the recapitalisation payment can, in effect, bail out some types of creditors. Indeed, he referred to unprotected deposits as being one area that might make sense. This is quite complex and I suspect that when we have seen the worked examples and so on, there is going to be more to discuss. Would he be prepared to meet with officials and Members of the Committee to go through these things prior to Report, so that we can make sure that we all really understand in what circumstances that that could happen and in what circumstances it cannot?

[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.