Bank Resolution (Recapitalisation) Bill [HL]

Baroness Noakes Excerpts

Committee stage
Thursday 5th September 2024 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I am pleased to open the Committee stage of this Bill. I expect this to be the only longish speech that I will make, so noble Lords should not worry about getting six of this length.

I have two amendments in this group but, first, for the benefit of anybody following these discussions either now or later, I shall mention the scope issue that has reared its head for several noble Lords in trying to formulate amendments. The Long Title, which defines scope, is:

“A Bill to make provision about recapitalisation costs in relation to the special resolution regime under the Banking Act 2009”.


The Bill’s provisions have effects that reach into resolution decisions, bail-in and capital structures, but various amendments’ attempts to take that into account in other relevant ways have been ruled out of scope. Indeed, in the light of this amendment-drafting experience, I wonder whether all the bits of the Bill pass the scope test; that may become clearer as we work through the amendments, in particular my Amendment 22 in this group and Amendment 23 in the final group.

I turn to my Amendment 1 and the similar amendments in the rest of the group. They have a common theme: making sure that the provisions really are limited in application to small or smaller banks, which is what we have been told they are about following on from the actions taken for Silicon Valley Bank. However, there is no such small bank limitation in the Bill. Clearly, the question arises: how small is “small or smaller”? Like other noble Lords, I have taken the view that the only clear distinction is for non-systemic banks—that is, those required to hold MREL, bail-in bonds or whatever you wish to call them, which represent the only regulatory division we have.

Of course, as raised by me and others at Second Reading, we then have the issue that the PRA has extended the MREL requirements far lower down the bank size range than systemic banks, well into the “smaller bank” range. This may well be the reason that there is no differentiation in the Bill: so that, in theory, the Bill applies to any bank and everything rests on the Bank of England’s decision. It seems that the majority of us here disagree with that and think that it should be limited by a defined measure; the obvious one is the level at which MREL is required. If the PRA causes the resolution provisions to be impeded by its MREL choices, that will be something for it and the Bank of England to consider and live with.

My Amendment 1 has another little tweak, in which I suggest that the cutoff is linked to the index-linked value of the net assets at which MREL was originally set in 2016: £15 billion. In numbers, that would mean the size now would be £22 billion if it were index linked, not £15 billion, and it would not continue to dwindle, relatively speaking, as is happening with the PRA MREL threshold. My amendment therefore overlaps with regimes that can do bail-in, although my real hope, as I have already suggested, is to make the PRA see that, for various good reasons, it should increase the MREL threshold at least by indexation, and ideally to the level where it applies only to banks that have full capital market access, so that bail-in instruments are not disproportionately expensive for them. However, if we want to coalesce around MREL as the dividing line, I am not going to rock the boat. Indeed, I tabled an amendment to that effect, but it got lost somewhere. I think the Bill Office thought that my other amendment was an amendment to my amendment.

I turn to my Amendment 22. This deletes Clause 4(3), which is not needed in the event that there is limitation to application only to non-MREL banks. I will explain how I came to that conclusion. The subsection references Section 12AA of the Banking Act 2009, which in turn references Article 47.3(b) and (c) of the EU’s Resolution and Recovery directive. Most compliance with EU directives has been put into the 2009 Act.

I happen to think, especially nowadays, that it would be much better to say more clearly what we actually meant in Clause 4(3) than to have to pedal all the way back to a European directive. I have another amendment on it, Amendment 23, right at the end of our considerations next week. I will let noble Lords know what it is all about. Article 47.3(b) of BRRD is the amount by which the authorities assess that common equity tier 1 items must be reduced to the relevant capital instruments written down or converted, pursuant to Article 61. The latter gives the order of writing down priority. Article 47.3(c) is the aggregate amount assessed by the resolution authority, pursuant to Article 46. To save noble Lords the misery of me reading out Article 46, it is the sum of write-down and recapitalisation.

To cut this long story short, the subsection refers to things that happen only when you are in a bail-in situation. So, if we limit it to non-MREL banks, it would seem to be superfluous, because there cannot be any bail-in as they are not required to hold MREL. Of course, if we use my Amendment 1 with the index threshold of MREL, we might need it or need to rewrite it.

However, thinking about it further, I also query whether this subsection is properly in scope as it seems to relate to changing bail-in requirements and not to recapitalisation. That is made clear in the Explanatory Notes, which state that Clause 4(3) basically amends the bail-in sequence and conversion of capital instruments to allow adjustment to the contribution of shareholders and creditors when exercising the bail-in write-down tool. We should bear in mind that there are other parts of legislation that tell you the sequence in which you must do one, and how you exhaust the first before you move on to the next, and all those kinds of measures.

The end result that it has a knock-on effect of increasing recapitalisation costs that are then to be met by the FSCS. As I said, that seems to depart from what I envisaged was the purpose of the Bill. I did not have in my mind that it was about levying banks to help rescue shareholders or bail-in bond holders of another bank. I understood that it would be more like the Silicon Valley Bank rescue, where the point would be to rescue unprotected depositors.

Overall, we can do without this clause in all circumstances and I wait to hear the Minister’s explanation. It would be useful, before we get to Report, if we could have some kind of laid-out worked examples of where this might come in and what might happen. I understand why the Government wish for flexibility but it is a flexibility that goes way beyond what I have understood to be the intents of the Bill. I beg to move.

[Baroness Noakes (Con)]

My Lords, I have Amendment 5 in this group, to which I will speak. I regret that I was unable to take part at Second Reading in July, but I have read the Hansard report of the debate and I can see that there is a lot of common ground on the Bill between those of us not on the Government Benches.

As this is the first time that I have spoken in Committee, I draw attention to my interests as recorded in the register of interests, in particular that I hold shares in banks which, under the terms of the Bill, will end up footing the bill if the bank recapitalisation power is used.

My Amendment 5 is slightly different from Amendment 1 in the name of the noble Baroness, Lady Bowles, and slightly different from Amendments 8, 10, 12 and 18 in the names of other noble Lords. Those amendments basically seek to confine the use of this power to small banks—typically using MREL as the deciding point. Mine does not rule out using the power for larger banks but instead inserts the requirement for Treasury consent.

The Government clearly sold this legislation, as the noble Baroness, Lady Bowles, explained, as being about smaller banks, referring to it as being a better route for a better outcome compared to using the bank insolvency procedure, which is the current default assumption for smaller banks. As is often the case with legislation, however, the stated aim then gets converted into a very broad power. This power is so broad that if the RBS failure happened again it could cover the recapitalisation of RBS, which, I remind noble Lords, cost £45.5 billion in 2008. The Bank would have that power with nothing in the Bill to prevent it.

There is a constraint on the amount of annual FSCS payments set by the PRA, which I think is £1.5 billion a year, but that can be changed by the PRA at any time, and the PRA is not, of course, independent of the Bank of England; it is fully part of it.

I am not surprised that the Treasury does not want to narrow the drafting of the Bill to cover only those banks that do not have MREL. The Government have themselves talked about wanting to cover the case where MREL has been set but the banks are on a glide path and have not yet achieved the full amount of their MREL. It seems reasonable for the power to be used in those circumstances, but the Government have not even offered to amend the Bill to confine it in that way.

I broadly accept that there may be a good case for using recapitalisation schemes beyond non-MREL banks or those that have not yet raised their full amount of MREL, because it is genuinely difficult to predict circumstances where such a power would be extremely useful. However, when the Government draft broad and unconstrained powers, they have a duty to put checks and balances in place, and there are none in the Bill. If they do not put checks and balances in place, we must take that on as part of our duties in scrutinising legislation. My amendment has opted for Treasury consent, but there could well be better ways of putting guard rails in place. Treasury consent is not an onerous requirement when the Bank of England is handling a potential bank failure. It inevitably works closely with the Treasury; the Treasury has to be consulted whenever a stabilisation power is used, and we should be in no doubt that when, for example, SVB UK was in trouble, the Treasury was intimately involved in the arrangements to deal with HSBC very rapidly. Therefore, obtaining Treasury consent need not cause a delay or any other real problems.

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[Lord Livermore (Lab)]

I will write to the noble Baroness on that point.

I turn finally to Amendment 22 in this group, tabled by the noble Baroness, Lady Bowles, which concerns the use of the bail-in resolution tool. Section 12AA of the Banking Act 2009 sets out the principles by which the Bank of England calculates the shortfall amount when the bail-in tool is used and, as a consequence of that calculation, how much of a failed firm’s resources needs to be bailed in. The addition to Section 12AA in Clause 4, which this amendment seeks to prevent, ensures that any available funds from the Financial Services Compensation Scheme via the new mechanism could be taken into account when calculating the shortfall amount and, as a consequence, how much of a firm’s resources would need to be bailed in when the new mechanism is used alongside the bail-in tool.

This change to Section 12AA is important as there are some circumstances where bail-in may be the preferred tool for the Bank of England to use as a precursor to transfer of the firm to a bridge bank or private sector purchaser, even if the bank is small. This is because the bail-in tool permits the writing down of subordinated debt or other liabilities, to which mandatory reduction under the bridge bank or private sector purchaser tools does not apply. There may be circumstances in which it is appropriate to write down the subordinated debt or other liabilities of a small bank. The intention is therefore for the bail-in tool to be available alongside use of the new mechanism.

In such circumstances, this amendment would preclude the Bank of England, when calculating the shortfall amount, from being able to take into account any funds that were available from the Financial Services Compensation Scheme under the new mechanism. As a consequence, when determining how much of the firm’s subordinated debt and other liabilities should be bailed in, the Bank of England would be obliged not to factor in those external funds and would have to write down more of the firm’s resources than it needed to. In certain circumstances this would be undesirable and could undermine the wider goals of a resolution process. The noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux, suggested worked examples. We will of course take that idea away for further consideration ahead of Report.

I hope that these explanations have been helpful and that I have provided some reassurance on these points. I will of course write where I have indicated that I will do so. In the circumstances, I hope that the noble Baroness will withdraw her amendment.

[Baroness Noakes (Con)]

My Lords, before the noble Baroness decides what to do with her lead amendment, I will raise two points. The first is that the noble Lord referred fairly briefly to the code of practice. Could he explain, first, how he sees the code of practice being used for the issues that we have identified in this group of amendments? Secondly, will he update the Committee on when we expect to see a revision to the code of practice? At Second Reading, my noble friend Lady Penn asked whether she could have sight of the draft updates. The noble Lord responded very positively to that, but clearly no draft updates have yet appeared. My additional question is: are we likely to get those draft updates? Clearly they have not arrived before Committee; will we get them ahead of Report? Seeing codes of practice, or updates of codes of practice, helps us to understand exactly what the Government are doing.

The second point I wish to address is a mechanical one. The noble Lord has already said he will write on a number of things; I expect he will say that quite a lot as we go through Committee. It would be very helpful if those letters were copied to all the Members who are taking part in Committee, or that the mechanism of “will write” letters on the publications page of the Parliament website is used promptly so that all noble Lords who have an interest in the areas get an opportunity to see the correspondence.

[Lord Livermore (Lab)]

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

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Moved by

[Baroness Noakes]

2: Clause 1, page 1, line 18, leave out lines 18 to 20
Member’s explanatory statement
This amendment probes the nature of “other expenses” and the persons other than the Bank which could incur expenses.

[Baroness Noakes (Con)]

My Lords, Amendment 2 is a probing amendment. It would delete new Section 214E(2)(b) of FSMA. Under new subsection (2), a “recapitalisation payment” includes the cost of recapitalisation; that is at new paragraph (a). There is clearly no issue there because that is what the Bill is about. However, new paragraph (b) would allow the Bank to include

“any other expenses that the Bank or another person has incurred or might incur in connection with the recapitalisation of the institution or the exercise of the stabilisation power”.

This raises a number of questions.

First, who are these other persons who can incur expenditure in connection with the recapitalisation? The Government’s consultation referred to the Treasury, the Bank of England and a bridge bank. If that is the case, it seems that the paragraph ought to be confined to those persons, as I could not think of any other person who could make a case for receiving money under the auspices of the recapitalisation payments power.

Secondly, why is there not more precision about exactly which costs could be covered? Again, the response to the Treasury’s consultation gives the sorts of expenses that could be covered—legal fees, consultancy fees and the like—but is virtually silent on what should not be covered. The only example cited for what is not covered is the cost of preparing in parallel for an insolvency process, but that leaves a huge swathe of costs that could well be brought within the ambit of the recapitalisation payments. As drafted, it could certainly include many expenses that no one could reasonably label as being related to recapitalisation.

The Minister will be aware that UK Finance has expressed very real concerns that the banking sector will be left exposed to litigation or regulatory costs that emerge once a failed bank is in a bridge bank. In a bank insolvency procedure, such litigation or regulatory action would lead nowhere, as there would almost certainly not be any spare funds to cover any costs arising in that way. However, once the possibility of financing via the recapitalisation power arises, a new deep pocket appears, which could act as a magnet for litigation. Does this legislation mean that the banking sector is writing a blank cheque for whatever litigation emerges and which the Bank then chooses to engage in? Can there be any constraints on the Bank’s decision to fight or concede litigation? What are the incentives for the Bank to seek the optimal outcome, which may or may not be to concede a case in litigation? How is the banking sector to be protected in these circumstances?

Costs arising from regulatory action is even trickier. Let us assume that, following a small bank failure, the FCA decides to take regulatory action in relation to non-compliance with the consumer duty prior to the failure. As anybody who has been involved in one of the regulatory actions taken by the FCA, or indeed the PRA, will know, these are long, drawn-out and very expensive processes. Who should decide whether to fight regulatory action or concede and pay fines or redress? These could end up being funded by the recapitalisation payments. If the PRA were involved in regulatory action, rather than the FCA, how can the conflict of interest within the Bank be dealt with so that the costs falling on the banking sector are seen to be fair?

Lastly, new paragraph (b) allows the Bank to include costs that “might” be incurred. I completely understand why, when the recapitalisation calculations are made at the outset, that will involve an element of forecasting, because the formulation is not confined to, say, costs that are reasonably expected to be incurred. Instead, the Bank is allowed to include any costs that “might” be incurred, however improbable that might be. An overly conversative approach to working out what costs might be incurred will result in the banking sector bearing too much cost up front. It is not good enough to just say that, if there is a surplus left at the end of the day, it will be returned via the FSCS.

To sum up, the formulation in new subsection (2)(b) is simply too wide. As I said at the outset, this is a probing amendment and I shall listen carefully to what the Minister says, but my instinct is that new subsection (2) needs some guard-rails drafted into it. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

I only need to say briefly that I am in agreement with the noble Baroness. This is drafted too widely. Part of me thinks that some of this should be covered by the ordinary banking levy, and that the PRA and the Bank of England have to manage their budget, as anybody else would have to, in expectation of sometimes having adverse effects, rather than there being some bottomless pit, or pool, of money into which they always have access. The truth of the matter might need to be somewhere half way in between, but it is too open at the moment.

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[Baroness Noakes (Con)]

My Lords, first, many thanks go to the noble Lords who supported my amendment. I thank the Minister for his response but, with the greatest respect, he did not go much beyond what is in the Treasury’s response to the consultation document. He reiterated that the Bank and the Treasury, or the Bank and its entities, are likely to be the ones that have their costs covered. I have no real problem with that—put it in the Bill.

Similarly, the Minister talked about the Bank needing to be reasonable but I am not sure that being reasonable about the kinds of expenses that could occur via litigation is going to satisfy the banking sector, which fears that judgments working significantly to its disadvantage are going to be made and that it will have no way of influencing those decisions. There is not even the kind of protection that you get in insolvency, where you get, for example, creditors’ committees that act as a constraint on what liquidators can do. So I do not think that the Minister has really given a proper response on how the sector, which is going to pick up the tab—ultimately borne, as my noble friend Lady Vere pointed out, by the customers of banks—can be satisfied about the judgments made about the huge range of costs that could emerge during the course of handling a failed bank using the recapitalisation power; and how those costs can be seen to be properly incurred and not acting against the interests of the banks.

The Minister also did not engage with the issue of whether, in estimating future costs, you should constrain the costs to those that are reasonably foreseen, which is a natural formulation in legislation. Frankly, “any costs that might be incurred” is too big a definition to be used reasonably. I think that that formulation needs to be used again.

I will read carefully what the Minister has said in Hansard but my instinct is that he has not added to anything that is already in existence via the Treasury’s response to the consultation. I suspect that we will want to return to this on Report but obviously, for now, I beg leave to withdraw.

Amendment 2 withdrawn.

Moved by

[Baroness Noakes]

3: Clause 1, page 1, line 20, at end insert—
“(2A) The Bank may not exercise the power in subsection (1) more than once in respect of the same financial institution without the consent of the Treasury.”Member’s explanatory statement
This amendment requires the Bank to obtain Treasury consent before it can require the FSCS to make a second (or subsequent) recapitalisation payment in respect of an individual bank.

[Baroness Noakes (Con)]

My Lords, it is me again, I am afraid. That is the trouble with getting enthusiastic about amendments during recess—you pay for it when you get back.

Amendment 3 is a probing amendment to find out the Government’s approach to using the recapitalisation power on more than one occasion. The amendment uses the technique of requiring the Treasury’s consent to the use of the recapitalisation power more than once in respect of the same financial institutions. My purpose in this amendment is not to debate the formal involvement of the Treasury, as I will return to that broader topic in a later group. I am using the amendment as a technique to find out whether there are any constraints at all on the use of the recapitalisation power on multiple occasions.

When the Bank of England decides to use the recapitalisation power, it works out what sum of money it needs to put the bank in a position where it can be sold on. We discussed in our debate on the previous amendment the kinds of expense that can count as recapitalisation costs for the purposes of the power. My own view is that the Bank must try at the outset to reach as clear a view as possible on the amount of the whole that the recapitalisation payment is designed to fill because, if the Bank does not do that properly at the outset—making a good, honest assessment of what the total cost will be—it cannot reach a realistic judgment about whether to proceed with a bridge bank or to initiate an insolvency process.

So I find it disturbing that the drafting of new Section 214E seems to allow the Bank to double-dip into the FSCS without any other process or consideration. If the Bank runs out of recapitalisation cover, it probably means that it did its sums wrong in the first place or that additional facts have emerged, increasing the costs in ways that were not anticipated at the outset. In either event, that can call into question whether the initial decision to use the bridge bank instead of the bank insolvency procedure was the correct one. It may also raise the question of whether the bridge bank strategy should be continued or replaced with the bank insolvency procedure.

It also brings into question the nature of the additional hole in the finances of the failed bank, which is covered in part in the previous amendment. It may not be clear that the incentives are in the right place for the correct judgments to be made about whether any additional costs arising from regulatory action or litigation should be accepted or challenged. If the costs are down to PRA action, there are clear conflicts of interest involved.

I completely understand the need for flexibility in legislation. I hope that the Minister will also appreciate that the open-ended nature of the Bank’s powers in the use of the recapitalisation payment technique carries particular problems when a second or subsequent attempt is made to obtain a recapitalisation payment. I hope that the Minister can explain how the Government see this power being used, if it is to be used more than once, and whether—including to what extent—there are mechanisms in place to ensure that the way in which the Bank uses that power is fair to the banking sector.

The Bill makes the banking sector pick up the costs. The sector itself will probably have had no involvement whatever in the failure of a bank yet it has to pick up the tab, ultimately borne by its own customers; that is whenever the Bank decides to use the recapitalisation powers. So it is only fair and reasonable that there should be some checks and balances in return. I hope the Minister can reassure the Committee that there are checks and balances and that, when the Bank uses the power in what has to be quite an unusual situation—for example, it has got the sums wrong or something else has caused a requirement for more to be put in—it raises the need for additional safeguards in order to satisfy the banking sector that the costs that will be loaded on to it are reasonable.

I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, I rise again briefly. The noble Baroness has made some really important points. Once again, I have attempted to deal with this as a reporting question in Amendment 12, which states that a report would be required each time a recapitalisation payment was made; that should stand anyway.

This can become quite significant if, for example, there is a situation where the Bank of England expects to be able to sell a bank immediately but that falls over and then goes into a bridge bank for two years—or, indeed, more—and picks up all those costs along the way. One can see a situation where you could have, for example, an annual payment covering the costs of the bank until the Bank eventually decides to put it into insolvency. The critical factor must be that, any time a recapitalisation payment is being considered, whether it is the first one or a subsequent one, the insolvency route is reconsidered at each point and this does not become an open-ended default drag on costs—but the reporting point, which we will come on to later, stands as well.

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[Lord Vaux of Harrowden (CB)]

Okay.

[Baroness Noakes (Con)]

I am not sure who the “it” was.

[Lord Livermore (Lab)]

The Bank.

[Baroness Noakes (Con)]

Okay. We understand that the Bank has to make these decisions. The issue is what there is to provide a check or balance on the Bank. That has not been addressed by the Minister.

I thank noble Lords who supported this amendment. I agree with the noble Lord, Lord Vaux, that there has to be something that allows a proper judgment to be made if there is a second go. It is also important to consider at each stage whether the bank insolvency procedure should be the right route. It is not clear that that is written into the legislation. It appears not to be very transparent after the initial use of the powers. I think the Bank is required to consult the Treasury on the initial use of the powers, but it is not required to consult the Treasury on any subsequent use of the stabilisation powers or of the bank recapitalisation power itself. I think the Minister referred to the fact that there was a lot of contact between officials. I know that, but the issue is what is formally required.

The Minister’s response in respect of guarding the finances of the industry seemed to be that the PRA has to be consulted, but the PRA is not overinterested in the finances of individual institutions. Indeed, a big conflict of interest exists between the Bank of England and its component part of the PRA. The governor chairs both the Bank of England and the PRA and the deputy governor sits on the Court of the Bank of England. This is all very intertwined, so consulting the PRA does not provide a mechanism that gives comfort to the banking industry that its interests are being dealt with. This is another bit of unfinished business.

I have one question for the Minister: is any of this territory, such as using the mechanism more than once, likely to be covered in the code of practice?

[Lord Livermore (Lab)]

We can certainly take that away and look into doing so.

[Baroness Noakes (Con)]

That means you were not thinking about it, but you might think about it, so I will leave that for the time being.

I remain uncomfortable at the scale of the powers that the Bank has without any real practical constraints on how they are used. Given that we are using the banking industry to avoid amounts falling on taxpayers, which is reasonable and accepted by the industry up to a point, I think we need to make sure that it is protected in that, and I cannot see where the protections are.

I need to think about this further. I will certainly read what the Minister has said, but I suspect we will return to this in some way when we get to Report. I beg leave to withdraw the amendment.

Amendment 3 withdrawn.

Moved by

[Baroness Noakes]

4: Clause 1, page 1, line 20, at end insert—
“(2A) The Bank may not exercise the power in subsection (1) in respect of a financial institution which meets the condition in subsection (2B) without the consent of the Treasury.(2B) The condition is that the financial institution is a subsidiary of a company based outside the United Kingdom.”Member’s explanatory statement
This amendment requires the Bank of England to obtain Treasury consent before it can require the FSCS to make a capitalisation payment in respect of a bank which is a subsidiary of an overseas body.

[Baroness Noakes (Con)]

My Lords, this is another probing amendment. In this, I want to probe the circumstances in which the Treasury believes it would be appropriate for the UK banking industry to stump up for the recapitalisation of a foreign-owned bank. This amendment uses the technique of Treasury consent, as some of my other amendments do, but this is not what I am trying to talk about in this amendment. I am trying to probe the substance of using the recapitalisation power for the subsidiary of a foreign company.

Of course, I know that SVB UK was a foreign-owned bank and the simple answer to my question might be that this gives the Bank another way of avoiding what happened in that case: SVB was gifted to HSBC with the additional present of permanent exemptions from the ring-fencing regime. If we accept that we should avoid being held over a barrel by HSBC in future, this would be a good use of the power. So can the Minister say whether, if presented with the same facts as those relating to SVB UK, the Bank would have preferred to recapitalise SVB via a bridge bank and then sell it on a timescale consistent with achieving better value for money from the UK? The heavens are opening as we are discussing these important things.

More broadly, is it not the case that the Bank should satisfy itself that the foreign subsidiary banks are either adequately capitalised in their own right or parts of groups that are expected to be resolvable via bail-in-able capital, in line with international expectations? In general, the regulatory system for banks following a financial crash is designed to ensure that they hold capital or bail-in liabilities, which avoids the need for extraordinary support. When a UK bank subsidiary of a foreign company fails and requires money to keep it going, there has been at least a prima facie case that there has been some element of regulatory failure, either in the UK or elsewhere. There should not be an expectation that the failure of a foreign bank would impose costs on the UK banking sector—nor, indeed, the UK taxpayer, if that is the alternative.

It would be helpful if the Minister could explain in what circumstances the Government would consider it appropriate for the Bank to use the recapitalisation power in relation to foreign-owned banks and, perhaps more importantly, when the Government would not consider it appropriate to use the power. Can he also say whether any of this is likely to be covered in the code of practice? I beg to move.

[Lord Vaux of Harrowden (CB)]

My Lords, this weather sounds like the reason I ended up tabling a load of amendments in south-west Scotland: I had nothing better to do for a few days.

Again, the noble Baroness, Lady Noakes, raises a really important point. I have tried to attack it in a different way in Amendment 16, where I look at the recovery of money from shareholders. I will be interested to hear what the Minister has to say. I had in mind the sort of scenario where a foreign company sets up a bank in the UK, it does not go very well and it decides just to walk away from it, having perhaps removed all the assets in the meantime. Clearly, it does not seem fair that the costs of sorting that out should fall on the industry or, indeed, the British taxpayer. It would be really interesting to understand how we can ensure that foreign shareholders behave properly and how, when it does go wrong, we can recoup the money from them.

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[Lord Livermore (Lab)]

My Lords, in response to the amendment tabled by the noble Baroness, Lady Noakes, I hope I can provide some clarification on how the resolution regime operates currently with respect to subsidiaries of international banks, and therefore how the Government have approached the design of the new mechanism with respect to those banks.

One of the strengths of the UK’s banking sector is that a number of international banks seek to operate within the UK, including by setting up subsidiaries. These are often providers of critical banking services, such as current accounts, business accounts and sources of working capital to businesses. It is therefore important that a robust system of regulation is in place to ensure that such subsidiaries can operate safely within the UK. This includes ensuring that in the event of their failure they can be managed in an orderly way. The resolution regime does not currently make a distinction between domestic UK banks and subsidiaries of international banks in terms of which authority is responsible for taking resolution action in the UK. In all cases, this responsibility falls to the Bank of England, except where there are implications for public funds. The Government continue to believe this is appropriate.

While the failure of banks is rare, the most recent example, and the genesis of this Bill, was Silicon Valley Bank UK, itself a subsidiary of an international bank. The Government consider that there were two key lessons from that event. First, it is critical that the Bank of England has the flexibility to move decisively during a crisis. Secondly, it is important to introduce the new mechanism delivered by the Bill in those cases where there is not a willing buyer. The Government do not therefore believe that there is a strong justification for treating subsidiaries differently from domestic UK banks and requiring a further set of approvals. To do so would create additional obstacles to efficient resolution decisions, which recent experience suggests can be necessary.

The noble Baroness asked whether the Bank would have used the mechanism on SVB. I cannot comment on an individual case or decision that it may have taken, but the case showed the usefulness of the option of having a mechanism provided to the Bank.

The noble Baroness also asked whether this issue will be covered in the code. The code updates will cover a broad range of issues following the Bill’s passage. We will progress and publish that code swiftly.

The noble Baroness further asked whether a parent company should be able to support the failure of a subsidiary. While the parent company may be able to recapitalise its subsidiary outside of resolution, there may be circumstances where that is not possible, as was the case with SVB UK. It is important that the Bank of England has the necessary tools to deal with a failing firm regardless of its home jurisdiction. In practice, the mechanism uses the Bank of England’s transfer and writedown powers, so the parent company would suffer losses on its investment in a subsidiary.

I therefore respectfully ask the noble Baroness to withdraw her amendment.

[Baroness Noakes (Con)]

I thank noble Lords who have taken part in this debate. I found what the Minister said very helpful. What the noble Lord, Lord Eatwell, said, was also helpful, although I had understood that, where there are large groups, the group parent will be responsible for ensuring the capitalisation of the subsidiaries, in particular by holding MREL at the top level, but I may need to check my facts on that. I thought colleges of regulators would be working among themselves towards the health of the group overall, so I did not I think it was entirely located in the UK, but I will check that out.

What the Minister said is very helpful and I will reflect carefully on it. If the case is that there is no difference between a UK-owned and a foreign-owned bank, no issue arises. But if there are any differences in the way that a foreign-owned bank is treated in the UK, then that would be a case. I will go away and think about that further and I beg leave to withdraw the amendment.

Amendment 4 withdrawn.

--- Later in debate ---

Moved by

[Baroness Noakes]

6: Clause 1, page 1, line 20, at end insert—
“(2A) The Bank may not exercise the power in subsection (1) without the consent of the Treasury.”Member's explanatory statement
This amendment requires the Bank of England to obtain Treasury consent before it can require the FSCS to make a capitalisation payment.

[Baroness Noakes (Con)]

I rise to move Amendment 6. Noble Lords will be pleased to know that I get a bit of a break after this one.

This amendment would require the Bank of England to obtain Treasury consent before it uses the recapitalisation power. When I introduced my last two amendments, which contained a requirement for Treasury consent, I explained that they were a device to probe issues about the use of the recapitalisation payment power. In this amendment, my use of Treasury consent is not a probing device and I am focusing on the role of the Treasury in the broader context of accountability.

The Minister is a newcomer as far as the passage of financial services legislation in your Lordships’ House is concerned; some of us are older hands at it. When the Financial Services and Markets Act 2023 went through this House, accountability was one of the key themes which was debated on and off throughout its passage. This amendment and a later amendment return to that theme of accountability.

The Bank of England has been given huge powers by successive Governments, which we debated at length in passing the 2023 Act, but, like many other bodies which have accumulated in the public sector, it has relatively weak accountability. The governor may need to turn up to the Treasury Select Committee for an uncomfortable couple of hours from time to time, but that is just about it. One great outcome from the 2023 Act has been the creation of the Financial Services Regulation Committee in your Lordships’ House, which is chaired by my noble friend Lord Forsyth of Drumlean and on which several noble Lords on this Committee sit. I hope that our new committee will add significantly to parliamentary scrutiny of financial services quangos, but neither House of Parliament has any real powers in relation to these public sector bodies that have been given very significant powers.

This problem is not confined to the Bank of England or to financial services. The Industry and Regulators Committee of your Lordships’ House produced a report earlier this year, Who Watches the Watchdogs?, which will be debated in this House next week. One of its findings was that regulators, as a particular kind of public sector body

“exercise substantial powers on behalf of Parliament and the public, but are not subject to the same forms of accountability as ministers; to quote one witness, ‘the people can replace their elected representatives, but they can’t vote out bad regulators’”.

That applies, mutatis mutandis, to many other forms of public sector body.

The report noted that there was a

“widespread perception … that regulators’ accountability to Parliament is insufficient”.

It went on to recommend that there should be a new independent statutory body to support Parliament in holding regulators to account. All of this will sound familiar to those of us who took part in debates on the 2023 financial services Bill, because my noble friend Lord Bridges of Headley tabled amendments trying to set up something similar for the main public sector bodies in financial services—the PRA, the Bank of England, the FCA and so on. I hardly ever support setting up new public sector bodies, so I did not support my noble friend last year, and I would not support the Industry and Regulators Committee’s recommendation either. It does not form an approach that I think is the right one, but I wholeheartedly agree with the analysis that accountability is a real issue for these public sector bodies.

By enjoining the Treasury in any decisions as to the use of the recapitalisation power, Parliament gains the additional ability to question Treasury Ministers about the use of the power and the circumstances that surround the use of it. At the moment, it is easy for the Treasury Minister to say, “Nothing to do with me; it’s all down to that lot up in Threadneedle Street”. We have had many frustrating exchanges with Treasury Ministers along these lines, including when SVB UK was given away to HSBC. Treasury consent would be an important enhancement of the process of parliamentary accountability.

As I said in the earlier group, I do not believe that getting Treasury consent is necessarily an onerous part of the process, but it would be a small price to pay for an increase in accountability, so I regard this as a modest addition to the framework created by the Bill. Obviously, I have drafted this in connection with a specific power in the Bill, but it is a principle which could be applied to many uses of significant powers by the Bank of England, the PRA and the FCA.

The use of the power by the Bank of England could be entirely straightforward, in which case it is unlikely to engage the interest of Parliament, but there are likely to be some cases where the use of the power is controversial or where there are questions to be asked about whether bank failure is associated with some form of regulatory failure. Parliament should be very much engaged in cases of this nature, and my amendment would provide the platform for such engagement.

I know that the Minister will be briefed by his officials to resist this amendment, and I am sure that it suits the Treasury to be able to operate behind the scenes with the Bank of England but in a largely deniable way. I appeal to the Minister’s instincts, which I am sure are sound, about the need for effective parliamentary accountability. I beg to move.

[Baroness Vere of Norbiton (Con)]

My Lords, I am incredibly grateful for all the amendments from my noble friend Lady Noakes, but particularly this one. It gives the Committee the opportunity to consider the overarching balance of power and I think it is right that we start to do so—or continue to do so, as my noble friend pointed out.

I am the poacher turned gamekeeper. I am no longer a Treasury Minister. I have just spent many glorious months at the Treasury and prior to that I spent eight years as a Minister in government. I was in the Department for Transport for a long time and a Lords Whip, which many noble Lords will know puts one in touch with all sorts of government departments and various people giving you briefings and all sorts of things. One learns quite a lot about things and it is all very interesting. I am grateful for the opportunity to touch on the bigger picture, which my noble friend has allowed us to do.

The scrutiny and accountability of regulators is somewhat lacking. It was possibly the biggest surprise that I had as a Minister over the years. Having said that, each regulator is very different, and I have worked with a wide variety of them. Each wears the independence cloak in a different manner: some regulators, despite claiming independence, will actually work very closely with and listen to the Minister; other regulators, when I tried to ask them a question, literally slammed the door. It is really not on. Something needs to change.

It is entirely natural that operational decisions, based on a set of detailed regulations, should sit with regulators. Of course they should; that is unarguable. Ministers do not really have the time or the knowledge. They could do it, because they could have the knowledge as Ministers can be briefed, but they would not have the time to do it and it would gum up the system. That is fine. However, the balance between who takes the operational decisions and the broader operations of regulators is somewhat awry, in my view.

We have handed over a large amount of policy-development, policy-making, regulation-drafting, code of practice-drafting and consultation-issuing activities to regulators, over which Ministers have no insight. I know that officials from the Treasury will recall some issues that happened under the last Government fairly recently, when one of the regulators just took off on a path. I asked, “Why are you going down that path? That’s not a path you should be on. Come back”. They replied, “But we’re independent”.

How are we going to fix this? I have a niggling feeling that the Bill continues a trend to which I see no end. Fairly broad-brush powers are being given to a regulator or regulators that are then subject to interpretation and implementation. Often that interpretation and implementation cause the problems. There is mission creep. The regulators add another team of officials; the Minister never sees these officials and does not know what they do. They interpret the policy slightly differently, because they were not involved in its original development and so on. All this happens with little or no oversight.

I used to sit on the other side and would happily stand up to say—my goodness—the best thing that a Minister can say: “I’m sorry; I cannot comment on that. Regulators are independent”. It is really easy. The second thing I would say, if that did not wash, is that, “Ministers are accountable to Select Committees in Parliament”. Are they really? No, they are not really. I have appeared before Select Committees and it can be a bit uncomfortable for a while. They might ask you a couple of difficult questions, but it is not going to cause you to lose more than a couple of nights’ sleep.

Quite often, by the time you get to a Select Committee appearance by AN Other head of a regulator, it is too little, too late. The policies have already been devised, developed and put in place. The damage has already been done.

Furthermore, there seems to be no mechanism by which recommendations from these accountability sessions in Parliament are mandated for action by the relevant regulator. Many regulators can be told or asked by the Select Committee, “Please can you do X, Y and Z”, but they can basically take no insight from that at all.

I feel this quite personally, having recently lived through it, because throughout my time as a Minister I had the fear that if things go horribly wrong—sadly, sometimes they do—it is not the regulator that feels the heat. It is the Minister. One cannot go to the media and say, “The regulator is independent. I had nothing to do with it”. That does not wash with the public. Now that we have broken the connection between Ministers and regulators, we are in a very difficult situation. The Minister has no power—and that is why the fear exists—to make sure that things cannot go horribly wrong, even if they spot things that need to be improved.

This is but one amendment in a whole series. Yes, it was a useful device for getting amendments down for other elements for debate, but this is serious. My noble friend Lady Noakes is trying to take back control from the regulators and rebalance the system to enable Ministers to input at an appropriate point. She has a point.

--- Later in debate ---

[Baroness Bowles of Berkhamsted (LD)]

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

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

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

[Baroness Noakes (Con)]

My Lords, I thank all noble Lords who have taken part. The predictions made by my noble friend Lady Vere on the content of the noble Lord’s response were pretty accurate in places. The noble Lord has not really engaged with the weak accountability that exists. The noble Baroness, Lady Bowles, is absolutely right about the use of the Bank of England as the resolution authority and giving it all those powers with almost no constraints whatever, other than consultation. Whoever chose to do that back in 2009—whichever Government were in power then—did not set up the right accountability environment for the use of those powers to exist. Once you put something inside the Bank of England, it is very difficult to engage in those issues, because it guards its independence on practically everything.

This is one of the big issues that will need to be addressed at some stage. There may not have been an instance yet that has caused people generally to realise how dangerous it is to have large, unaccountable bodies in the public sector with huge powers but relatively weak accountability. That is because we are still muddling through, and it is frustrating to some people who are dealing with these regulators, including Ministers, that they cannot fully engage. We have not had one of those big instances where everybody says that we have the wrong model. In a sense, I know that my pleas for a greater level of accountability to be included in statute are not really being heard, but that will not stop me raising them at every single opportunity I can. Indeed, I have some more amendments through which to talk about accountability further.

This has been a useful exchange. I will think about it further, having read the Minister’s response in Hansard. I will think further about whether I take this forward again on Report. For now, I beg leave to withdraw the amendment.

Amendment 6 withdrawn.

--- Later in debate ---

[Baroness Noakes (Con)]

My Lords, as the noble Lord, Lord Vaux, has said, I have Amendment 14 in this group. In substance, it is the same as the noble Lord’s amendment. The only real difference, as he pointed out, is that mine is less prescriptive. I am entirely happy with either version, but it is important that we deal with the specific reporting requirements, because the existing provisions are simply not adequate. At Second Reading, the Minister basically said that the Government would use the existing reporting requirements in the Banking Act, but the time involved is simply too long. It could take at least a year after the powers have been exercised. When the recapitalisation powers are used, that deserves more immediate scrutiny and, unless there is awareness of it by way of a report, that is simply not going to happen. So I stand completely behind whichever of these amendments the Minister cares to choose.

I also completely support what the noble Lord, Lord Vaux, has tried to do with his Amendment 24. It is a pity he cannot do it more generally in relation to Section 79A, but at least it rectifies what is clearly an anomaly that Parliament should not have allowed through when the Act was brought in. When the recapitalisation power has been used, it should be a requirement to lay a report before Parliament. This is in line with what the Minister said at Second Reading would happen, so I expect the Minister to accept the amendment with alacrity.

I am not quite sure why the noble Baroness, Lady Bowles, allowed her amendment to be brought into this group. That said, I do think it is an important opportunity to look again at MREL, in particular because those banks that do not have MREL now become potentially subject to the use of the bank recapitalisation power. There ought to be more transparency about how banks can be categorised in that way and more understanding by those in the banking sector of which institutions they might have to pick up the tab for in due course.

It is generally a contentious issue in the banking sector, and the way in which banks trip from no MREL to MREL can be a deciding factor in whether they can scale up, because the cost of raising MREL when you are a very small bank, if you trip over into needing to raise it, can have a very significant impact. I have certainly heard smaller start-up institutions say that they deliberately do not grow above a certain size in order to avoid coming within the MREL provisions, and that cannot be good for the UK. So I am not quite sure about the wording of the noble Baroness’s amendment, but I completely support the principle.

[Baroness Bowles of Berkhamsted (LD)]

The noble Baroness, Lady Noakes, asked why I allowed my amendment to be grouped in this way. I was simply trying to expedite matters for us and I thought we did not need another whole group, which would get the Minister up and down again. I agree with the other amendments and everything that has been said on this group. They deal with issues around conflicts and so on, and transparency is one of the best weapons we have that presumably will be allowed or in scope.

My amendment is one of those that do not read as I originally wrote it, because again we came into scope issues. I could not get the exact amendment that I wanted, so this was the best that I could do. Obviously, it is a companion to the amendments in the first group, which were saying that the majority of us want to limit to a threshold equal to MREL. If you therefore want to resolve banks that are a little bigger, you would have to shift MREL. I am not going to cry over that; I will cheer.

That may be an improper tactic but we do not have any other tactics to try to focus the PRA on the damage being done to the growth of smaller banks by putting MREL where it was not intended to be. We are out of line internationally and we do not really have any good justification for that. If there is a division between those banks that can be resolved and those that cannot, I still think that it goes there and the Bank will therefore have to give its view as to why. Perhaps it wants an extension in some way, so that it can get at bigger banks. What do we get back from that? That is the thought process that lies behind my amendment.

I support all these amendments. If they are knocked into a format that is suitable for Report, they would be very good additions to the Bill.