Bank Resolution (Recapitalisation) Bill [HL]

Debate between Lord Vaux of Harrowden and Lord Sikka

Committee stage
Thursday 5th September 2024 Grand Committee

[Lord Sikka (Lab)]

My Lords, Amendment 9 deals with moral hazards, which, if anything, are multiplying. The amendment seeks to restrain excessive risk-taking by imposing possible personal penalties on bank directors.

The recent legal developments have actually multiplied financial moral hazards and the related risks. For example, the Financial Services and Markets Act 2023 reintroduced the secondary regulatory objective to promote the growth and international competitiveness of the finance industry. In effect, it dilutes the regulator’s remit to protect customers. On 12 August, the Chancellor said that she and the Economic Secretary to the Treasury were constantly asking regulators, “What are you doing in practice to meet that secondary objective?” The meeting of that secondary objective will necessarily increase moral hazards.

Secondly, further deregulation is coming in—reforms of Solvency II, for example—with the claim that this will somehow conjure up an additional £100 billion of investment by reducing capital requirements. There is no pot of gold sitting in a corner in any bank boardroom that people can simply empty and get £100 billion out of. All of that is underpinning bank resilience and insurance company resilience. All of that is invested in some safety buffers. All of that will have to be liquidated. Yet the consequences for how the directors might behave have not really been outlined.

The cap on bankers’ bonuses has been lifted, so there are now economic incentives for bank directors to be reckless and take excessive risks, as that would maximise executive pay and bonuses—all done in the full knowledge that the bank would be rescued, restructured, recapitalised or bailed out, be it through the mechanism of the Financial Services Compensation Scheme or, eventually, some reconstruction. There are no great pressure points on bank directors to be risk-averse and prudent or to act in a responsible manner.

The risk-boosting effects of moral hazards are ignored by this Bill, yet they are highly relevant to any form of stability. We have a whole history showing how this happens. In the 2007-08 banking crash, attention was drawn to moral hazards or conflicts of interest between the interests of shareholders and managers, debt holders and the public purse. Bank directors took on excessive leverage because the state incentivised them to do so. It continues to incentivise them to do so, for example by giving tax relief on interest payments, which reduces both the cost of debt and the weighted average cost of capital while increasing shareholder returns, providing a justification for greater executive bonuses and remuneration.

Numerous studies have shown that shareholders were, and remain, focused on short-term returns. In any case, they still do not get good-enough information to invigilate directors; perhaps at some point, when we are discussing the world of accounting, I will point out how almost useless company accounts are in enabling shareholders or anybody else to invigilate directors. Back at the time of the last crash, directors accepted excessive risks from not only financing the organisation but risky investments. For example, numerous varieties of derivatives and complex financial bets were made because of explicit guarantees about depositor protection, central banks providing liquidity and support, and, ultimately, publicly funded bailouts.

If the bets made with other people’s money paid off, directors got mega payoffs; if they did not, somebody else picked up the loss, leading ultimately to rescue bailouts—now we are using the term “recapitalisation”. This Bill adds another string to publicly funded bailouts—though it likes to use different language. Yes, the cost of the FSCS levies is borne ultimately by the people, as has already been pointed out, and not necessarily by other banks.

If the Government succeed in persuading the banks to lend more to facilitate additional investment, as they are trying to do, that will add to the risks and strain the capital adequacy requirements of those banks. In boom times, banks tend to lend more freely, because they do not want to miss out on the opportunity to make more profits, and they relax credit standards, but there are inevitably consequences, as we saw with the last crash. Directors are rarely held personally liable, and that remains the position today.

Amendment 9 would address this gap by requiring the Bank of England and the scheme managers to consider a clawback of directors’ pay and bonuses paid during the previous 12 months. In case the Minister might refer to other clawback arrangements, let me pre-empt those. Paragraph 37 of the UK Corporate Governance Code states:

“Remuneration schemes … should include … provisions that would enable the company to recover and/or withhold sums or share awards and specify the circumstances in which it would be appropriate to do so”.


That is of no help whatever, because such codes do not apply to large private companies, of which Wyelands Bank, which came to an end recently, is a good example. The codes are also voluntary and cannot be enforced in the courts. They do not empower stakeholders in any way; they do not require the clawed-back amounts to be handed to regulators or to be used for recapitalisation of banks.

The FCA handbook also has a section on possible clawback, but it applies to what it calls “variable remuneration”, which is generally taken to mean bonuses. It states that in certain circumstances the clawed-back funds need to be handed back to the institution. This does not cover entire remuneration; it does not require that the clawed-back amounts be used for the recapitalisation and reconstitution of banks. So, in the interests of clarity and certainty, a statutory approach to clawbacks is needed, not a mishmash of voluntary arrangements. I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, I shall speak to Amendment 16, which would do a certain amount of what the amendment from the noble Lord, Lord Sikka, would do, but in a slightly different way. It is intended as a probing amendment to obtain clarification on what ability there would be to recover all or some of the costs of failure from either management or shareholders of the failed entity when it is recapitalised rather than being put into insolvency—there seem to be two different things there.

It is possible to imagine a situation where members of the management team responsible for the failure are paid large bonuses or dividends prior to that failure. As the noble Lord, Lord Sikka, pointed out, that is more possible now that the cap on bonuses has—rightly, in my view—been lifted. Can the Minister clarify in what circumstances it would be possible to recoup those bonuses or dividends to offset the recapitalisation costs? In an insolvency situation, where there is fault—for example, in cases of wrongful trading—it may be possible to recoup those payments, but I cannot see how that would work if the bank was recapitalised. To me, it must make sense that management should not see the risk of having to repay bonuses or dividends as being lower than it would have been if the bank had been put into insolvency just because the bank has been recapitalised.

Economic Crime (Transparency and Enforcement) Bill

Debate between Lord Vaux of Harrowden and Lord Sikka

Committee stage
Monday 14th March 2022 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I rise to speak to a number of amendments in my name in this group—there are eight of them—and I will be fairly brief.

First, Amendments 5 and 13 basically ask the beneficial owners and various other parties to provide their former names. In Part 4 of Schedule 1, the Bill requires managing officers who are managing the beneficial owner’s interest to provide their former names. But the same is somehow not required for registerable beneficial owners where they are persons other than individuals—which could be companies that are forever changing their names, or other parties. What I am seeking to do through Amendments 5 and 13 is to, as it were, align the various provisions in the Bill, and I hope that the Government will be agreeable to that.

Amendments 8, 12 and 14 require the beneficial owners, or their managing agents et cetera, to provide a list of any criminal convictions and sanctions against them. At the moment, the Bill does not ask for that kind of information, so it is perfectly possible for somebody to look at this proposed register of property ownership and not know that the ultimate beneficiaries have various convictions, which may well be abroad. It really exerts pressure on them to either come clean or to avoid the UK altogether—which perhaps would be more preferable. Again, it is a fairly straight forward suggestion asking the Government to act upon that.

The meatier part of my eight amendments relate to Amendments 18, 19 and 20, which take issue with the Government’s provision of the definition of registrable beneficial interest, generally taken to be 25% of the shares or voting rights, or somebody having significant influence or control. As it is now defined it is too wide. Indeed, the provision of any number is too wide. If you say it is 25%, it is not inconceivable that half a dozen people will get together and make sure that nobody gets to 25%. If you specify 20%, that will be exactly the same. So four, five or six drug traffickers can get together and own a fraction of a company, and through that they can invest their proceeds in a property. Under this kind of approach, none of them would be identified as a beneficial owner or count as a person of significant control, because they do not meet the thresholds specified in the Bill.

The Bill as presently drafted leaves open the possibility that companies holding UK property would continue to hide the identity of true owners by claiming that there was no beneficial owner. This is already a major problem at Companies House for the companies already registered in the UK. That has been identified by a number of whistleblowers and a number of leaks that we have had. However, rather than tackling the issue, the Government have imported these problems into the Bill, and it is quite likely that the Bill will not achieve its assumed objectives.

So I suggest that there should be no numerical specification of the beneficial interest definition; rather, any interest should be disclosable. It is not every day that ordinary individuals want to buy UK property through opaque offshore companies. They have a reason why they want to do this, so we must make sure that absolutely no door is open to them. By leaving this definition, the danger is that the Bill simply will not achieve its objectives. I therefore recommend my amendments to the Government in the hope that this will help to end the abuses.

[Lord Vaux of Harrowden (CB)]

My Lords, I support most of the amendments in the group, including the government amendments, which are generally very helpful.

I will speak to Amendment 24 in my name and to the similar Amendment 23, in the name of the noble Baroness, Lady Chapman, both of which are intended to address the possibility of there being a very long period between a change in the ownership of the entity and that change being reported in the annual update. I thank the noble Lord, Lord Cromwell, for his support in this. Amendment 23 would require an update to be filed within 14 days of when a person has become or has ceased to be a registrable beneficial owner. My Amendment 24 is slightly wider, requiring any changes in registered information to be reported within 14 days. However, both amendments seek to bring the overseas entity regime into line with the persons of significant control regime that UK companies must follow. To be honest, I would be content either way.

As the Bill is currently drafted, an overseas entity could register and then immediately change its beneficial ownership and we would not get to know about that for a full year, during which time any number of actions could take place, including the sale of the property to an innocent third party who unwittingly might find themselves enriching a criminal or someone subject to sanctions.

The Bill rightly puts restrictions on the disposition and registration of property, but it does nothing to deal with the more likely scenario of the overseas entity itself, or indeed an entity further up the ownership chain, being sold; indeed, this 12-month grace period almost wilfully ignores that. It seems rather perverse that the overseas entity regime should be more benign than the regime that applies to persons of significant control for UK companies.

In his helpful all-Peers letter of Friday, the Minister explained that the reason they have done it this way is to protect innocent third-party buyers from not being able to register the purchase of a property if the overseas entity turns out to be in breach of the requirement to report a change. That is obviously extremely important. However, a very simple solution is already built into the Bill. The overseas entity has the ability, under Clause 7(8), to shorten the update period and file an update immediately before it sells. Any innocent buyer would simply insist that this happens before the sale is completed, and that would deal with the problem that the Minister explained. Accordingly, I see no reason why one of Amendments 23 or 24 should not be accepted, so that overseas entities would have the same reporting requirements as UK companies have. The whole point of the overseas entity register is that we should know who beneficially owns UK properties. Allowing that information to be potentially up to 12 months out of date cannot make sense. I cannot think of any other corporate register that would allow such a long period to notify changes.