Small Business, Enterprise and Employment Act 2015 (Consequential Amendments, Savings and Transitional Provisions) Regulations 2017

Baroness Burt of Solihull Excerpts

Monday 22nd January 2018 Lords Chamber

[Baroness Burt of Solihull (LD)]

My Lords, I am grateful for that thorough and clear explanation by the Minister of what these regulations do. It took me a while to ponder them in order to reach the same kind of conclusion. It seems that everything in the instrument is technical and is required to smooth out the problems that can arise when there is insolvency in relation to financial services. I can understand how the legislation will benefit institutions with many creditors, such as a building society, a mutual or, indeed, a bank.

I have two questions for the Minister. No impact assessment has been produced for the regulations. I would be interested to know the reasons for that because if removal of the requirement for physical creditors’ meetings and allowing creditors to opt out of certain notices was explored in the insolvency red tape challenge, surely the conclusion must have been that this would make savings, otherwise why would you do it? Secondly, there are no plans to review these amendments. My question is this: how will the Government know that they have done their job and whether they are working? I have a bit of a bee in my bonnet about that because we should always look back at legislation to see whether it has in fact done its job. To some degree we have built in things like sunset clauses where it is clear that legislation is no longer required. If we are seeking to reduce red tape, I point out that assessing whether our legislation is working is a good way of enabling us not to have any extra red tape. There is plenty of it in HM Treasury, that is absolutely for sure. I would be grateful for the Minister’s comments on those points.

[Lord Tunnicliffe (Lab)]

My Lords, before I start I should apologise for what is going to be a rather scrappy and rambling speech. The reason for that is that rather lazily I started to look at this instrument only on Saturday, and I have to say that I pretty much regret that I did so. I had great trouble in trying to understand it, particularly the Explanatory Memorandum. Either these regulations are important or they are a trivial tidying-up exercise, but I could not work out which. They seem to centre on meetings and notices. I shall quote from the Explanatory Memorandum:

“insolvency law reforms enacted in sections 122 to 126 of, and Schedule 9 to, the Small Business, Enterprise and Employment Act 2015”.

Paragraph 7.4 sets out what the principal changes are. As the Minister said, they concern the removal of physical meetings for creditors and allowing them to opt out of receiving certain notices. That seems unobjectionable until one reads, together with paragraph 7.5, paragraph 7.6:

“This instrument therefore takes a staggered approach to the amendment of the Treasury’s financial services legislation, disapplying the reforms for the majority of its special insolvency regimes”.


The special insolvency regimes are enormously important. They culminate in the Bank of England’s approach to resolution, which is a combination of several Acts. I see the noble Lord, Lord Young, in his place. We have battled over the bits and bobs of these Acts—well, battled is not quite fair, but sought to understand them and how they fit together. Of course, the consequence of the Bank of England’s approach is that banks do not become insolvent. They are resolved before that. It is already quite complicated.

I thought, “Well, why don’t I break the normal rule and look at the regulations?”. It is pretty desperate when you have to look at the regulations because they are, as usual, pretty indecipherable, especially as they run to several pages, despite an apparently simple purpose of disapplying something in a particular place. Since it was so long I thought I would pick on something that I think I know a little about. That took me to page 5 of the regulations on the Banking Act 2009. Regulation 6(3)(a) requires that,

“the entry for section 141, in column 3 at the beginning insert … ‘Ignore the amendment made by paragraph 36 of Schedule 9 to the 2015 Act’”.

This is a form of legislation that I have never come across before. I am used to instruments changing the law and so on, but to say to disapply a law, or to read it as though it has not been amended, which is what this says, creates immediate problems. You can get into the Small Business, Enterprise and Employment Act and find out what is to be disapplied, but you then have to try to find what disapplying the Act means. It means going back to the Insolvency Act 1986 to see which particular amendments to that Act were in force before April came along and it was changed to something that these regulations want to change it back to. I failed. I could get a copy of Section 141 as enacted in 1986 and I could look up the section that now exists until these regulations become active. It proved why I am not a lawyer: while the words are different, I could not find any difference in the meaning.

It seems that the essence of this is: what is the damage if we do not approve? I hope that smiling and shaking of the head from the Minister means that he will write to me rather than try to answer me. I would like an answer to this in writing if the Minister cannot provide it tonight: what damage to the insolvency regime—particularly in the Financial Services and Markets Act 2000, the Banking Act 2009 and the other Acts mentioned in the regulations—would occur if we were not to approve these regulations? If the damage is trivial, that is fair enough. If the damage is that it puts in doubt the working of the special resolution regimes which the Treasury has developed and put into law, it is very serious. If those regimes are seriously damaged, the resolution approach which the Bank of England thinks it has may be at risk

One problem with bank resolution is that it is something that one never does. The trick is for the industry to know about it and think, “That is going to be so painful, we will be careful enough not to get into that position”. So we do not have any case law. However, we nearly had some case law: the Co-op Bank was within a whisker of going broke. The resolution regime worked in that the creditors, those who were owed money by the bank, thought that they would get an even worse deal under the resolution regime than by putting together their own deal, so they put their own deal together within hours of the point at which they would have run out of money. The resolution regime therefore worked by virtue of its existence, but is it fatally flawed until we approve this instrument?

If that is the case, it means that the 2015 Act contains a serious flaw, and we need to know how that happened. Was there not proper consultation in developing the Act? I assume that the original parent of the Act was BIS, as it was known then. The developer of the special resolution regimes is the Treasury. It seems to be either some trivial tidying-up or a serious mistake, for which I would look to the Minister to apologise. One thing I think I can ask him to apologise for is the Explanatory Memorandum. As a politician of average intelligence—you might call that a bear of little brain—I found it impossible to work out just how important this instrument is or is not.

--- Later in debate ---

[Baroness Burt of Solihull]

I am interested to know, since the Minister says that BEIS did quantify the costs, why that quantification was not included in the legislation itself, in this instrument.

[Lord Bates]

I shall double-check, but my feeling is that those impact assessments were published earlier in the sequence of legislation and reforms that I mentioned. I shall double-check but if that is not the case, impact assessments are normally a matter of public record and they will therefore be made available. The noble Baroness also asked how the financial sector will benefit from these changes. Where these regulations apply the reforms, firms in the financial sector will benefit from a modernised and streamlined insolvency process. The benefits include removing unnecessary burdens, such as requiring a physical meeting of creditors. Financial institutions will not be directly affected by these. As to the impact these regulations will have on the financial sector, these regulations apply the reforms where appropriate, ensuring that the benefits of the reforms are extended to the financial sector. Where the regulations do not apply the reforms, there will be no impact on the financial sector. As I mentioned, an impact assessment was undertaken.

I come to some points raised by the noble Lord, Lord Tunnicliffe. He focused on recalling the impact of the Banking Act 2009 and asked what the impact might be on the Bank of England’s resolution of banking problems to ensure smooth working. The insolvency regimes for financial sector firms that we are discussing today sit alongside the Bank of England’s powers under the special resolution regime established by the Banking Act 2009. Today’s regulations are required to update and maintain consistency in the legislation that concerns these special insolvency regimes. The regulations do not affect or amend the Bank of England’s powers under the special resolution regime.

The noble Lord also asked about the drafting of the statutory instrument, basically saying that it is not acceptable because you need to see the Banking Act 2009 before it was amended. Today’s regulations are consequential amendments that amend the financial sector insolvency regimes to take account of the April 2017 reforms. Given the limited amount of parliamentary time available, as I mentioned earlier, there are currently no plans to consolidate the regulations.