Bank Resolution (Recapitalisation) Bill [HL]

Baroness Vere of Norbiton Excerpts

Committee stage
Thursday 5th September 2024 Grand Committee

[Baroness Vere of Norbiton (Con)]

My Lords, it is a great pleasure to be back in this Room—sadly, standing on this side. Nevertheless, it is an interesting experience being in opposition and doing my first Committee—a learning experience. I am grateful to all noble Lords who have participated in scrutinising the Bill. I recognise that we are at the beginning of the Session and sometimes it takes a while for things to get into place. There has been quite a lot of work done and I think we have made some very good progress. I, too, did not speak on Second Reading, and I blame that entirely on the Prime Minister, because he extended Parliament and I was already on holiday, so therefore I could not do that. I am very grateful and put on record my thanks to my colleague, my noble friend Lady Penn, who did it in my stead.

The Bill was originally developed by the previous Government and was waiting for parliamentary time, so I think my role today is to test the thinking of the new Government to make sure that they are still on the same page. I am very grateful to the noble Baroness, Lady Bowles, for kicking off this debate so eloquently and knowledgeably. I note her concerns about the scope of the Bill. I would love to say that she did not slightly lose me, but she did, so I will come back to that if it seems to be a problem that we need to look at.

I want to go back—to be helpful, possibly to me—to first principles on this. Having listened to the contributions that have gone before me, I think I have got it right that there are three groups of financial institutions. I am going to call them “banks”, because “financial institutions” is long and it takes a while to get my tongue around.

The first group are the MREL—the big eight banks. These are the ones that have been directed by the Bank of England to hold MREL, and they must also submit a resolvability assessment framework, or RAF, to regulators. The RAF is structured so that these firms can think about how their business works and what capabilities they need to achieve the three resolvability outcomes: having adequate financial resources; being able to continue business through resolution restructuring; and effective communication and co-ordination.

I read somewhere that the 2024 assessment of these documents was due to be published in September, and I should like an update as to whether it has been published. Can the Minister comment on the outcomes of this scrutiny: is the system working? I understand that one bank was not quite there yet. Let us see whether we are going to try to exclude the largest banks from the scheme or whether we follow the suggestion of my noble friend Lady Noakes of getting the involvement of the Treasury. We need to test whether those banks which are deemed too big to fail have a coherent and funded plan in place should they get into financial difficulty. If that were the case, there would be some argument for potentially excluding them from the Bill, but there should at least be some safeguards in place.

Then there is the second group. This was raised with me by UK Finance, and this is why my amendment is slightly different to those of other people. There are those banks in the second group that are on the glide path to full MREL status. These institutions will get there, but it would be helpful to get an update from the Minister as to how many institutions make up this second group so that we can consider further whether there is a substantial risk and where that risk might reasonably lie—and so how long they will take to reach their destination.

Finally, there is the third group. These are the important ones. They are the ones that the Bill should be focused on. These are the smaller banks, and they are often innovative, they are often very high growth and sometimes that in itself can lead to challenges. It is these banks that the Bill seeks to target. Indeed, it was my understanding, as it was that of the noble Lord, Lord Vaux, that they would exclusively benefit from this scheme.

If things start to go awry, due to either a business-specific issue or wider market turmoil, these proposed powers would create this mechanism where the banking sector itself, in its entirety—all three groups—would fund the recapitalisation of the relevant bank or banks, and the taxpayer would be relieved of that burden. So that all makes perfect sense to me.

Then we come to the reasonable worst-case scenario, which I think is what the noble Lord, Lord Eatwell, was referring to. It is not beyond our imagination that things could get very bad very quickly, with a number of small or even medium-sized banks getting into trouble at the same time. The first group would, I hope, have their MREL in place; they would have their plan, which has been approved by the regulators to make sure that they continue.

I am slightly less clear what would happen to the second group—those on the glide path to MREL—were there to be a market-wide event. These are significant institutions and if they are to be included in this mechanism, we get into issues of how the banking sector then repays that through the levy, which I will come on to. There might well be a situation where one, two or more quite substantial institutions need recapitalisation from the FSCS in the same financial year. Have the Minister’s officials done any sort of assessment of how bad that could possibly get and any thinking about what the plan would be if it were to get that bad? Also, what would the hurdle be for declaring this sort of state of emergency?

While the FSCS might have a looming potential liability from the second group, there is also the third group to be considered. These ones are the potential future lifeblood of our financial sector in the United Kingdom and they would most likely need a relatively small amount of recapitalisation funding to get them through the turmoil. This is why parity is needed around the applicability of the scheme proposed in the Bill, but also the circumstances in which the scheme would reasonably and rationally be used—and, frankly, the circumstances in which it would not be, because it would just not work. In a reasonable worst-case scenario, how is anyone going to decide which ones get saved and which do not? One has to rely upon the amount of funding that could be affordable over several years of a levy applied to the UK banking sector, but that is not going to be enough money. How would that resolve itself and what would that process look like?

As mentioned by the noble Lord, Lord Eatwell, which I picked up in one of the briefings as well, the FSCS will have significant powers to apply the levy, not only in the financial year when the event or events take place but in subsequent financial years. If I am in the UK banking sector and things have gone pretty bad, and I suddenly have this massive weight of a levy going over several years to repay the events of one financial year, that to me is concerning.

It is also concerning because, of course, things are done differently in the EU, so you would get a slight mismatch from a competitiveness perspective. I would be worried about that. Has the Minister done an assessment of the impact of this potential multiyear hit, once we have an idea of the reasonable size and then the potential maximum size? Has he assessed the competitiveness of the UK banking sector, should this multiyear levy suddenly be required? How much could the UK’s system cost our banking sector and over what period of time? Are there circumstances, and in which circumstances, when rationally there is a systemic failure and the only person who could step in would be the taxpayer? I do not want the taxpayer to step in, trust me, but that would prevent permanent damage to one of our most important sectors.

The other key consideration is the impact on the FSCS and its ability to meet its obligations under the deposit guarantee insurance scheme, because if that has all gone to recapitalisation funding, there will be nothing left. I believe we will come on to that later in Committee.

This is a range of thoughtful amendments tabled by noble Lords and I am grateful for them. As many noble Lords pointed out, they very much go along the same sorts of lines. I look forward to hearing the Minister’s response to them. I will not go into a great amount of detail on them, but I note that my Amendment 8 takes into account those on the glide path, which we need to recognise. I am grateful to the noble Baroness, Lady Bowles, for the fine case she made for Amendment 22; I will move quickly on from that.

That brings me to the remaining amendment in the group: Amendment 18, which is in my name. Here, in essence, I am probing whether the Minister is content with the current imbalance between the banks liable to pay the levy versus the ones that, realistically, will make use of the new powers. Does he feel it is fair that the entire banking sector pays to recapitalise what, I feel, the Committee hopes will be smaller banks only? Does he accept and is he comfortable with the largest banks paying twice, in essence—particularly as they will have to have limited or no input in or influence on many of the events that might cause a resolution event or events? These largest banks will pay twice: once for their MREL and associated requirements, and again in the event of a resolution event or events of which they would not be able to take advantage.

Context is important here. We will come back to costs again but banks already pay a plethora of taxes, levies and charges, both to regulators and directly to Treasury funds. There is the bank levy, the bank corporation tax surcharge, the economic crime levy, the FSCS levy and the FCA/PRA fees. That is a lot—and let us recall that these costs are never borne by the banks themselves; they will always be borne by the businesses and consumers who use them.

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

My Lords, I am grateful to all noble Lords for taking part in this debate on the first group of amendments. I note that the scope of the mechanism is a key and central issue, both for noble Lords and for the wider banking sector. I hope to offer some reassurance to the noble Baroness, Lady Bowles, and other noble Lords regarding this concern.

I start by addressing Amendment 1, tabled by the noble Baroness, Lady Bowles, which would prevent a recapitalisation payment involving a bank that has issued minimum requirements for own funds and eligible liabilities, otherwise known as MREL. I stress that the Government’s strong policy intention is for the mechanism provided by the Bill to be used primarily to support the resolution of small banks. The Government therefore do not generally expect the mechanism set out in this Bill to be used on the type of firms that these amendments would seek to exclude.

The principal issue here is whether that intention should be set out in the Bill. The Government’s considered view is that it is right for the Bill to contain some flexibility for the Bank of England to be able to use the mechanism more broadly in some circumstances. That is because firm failures can be unpredictable and there could be circumstances in which it would be appropriate to use the mechanism on such firms.

For example, this may be relevant in situations where a small bank has grown but is still in the process of reaching its end-state MREL requirements. Firms in this position would have at least some MREL resources to support recapitalisation but the new mechanism could be used to meet any remaining shortfall if judged necessary. Without the proposed mechanism, there would be a potential gap in this scenario, creating risks to public funds and financial stability.

Ultimately, the decision to use the mechanism would rest with the Bank of England, having assessed the resolution conditions. The Bank of England is required by statute to consult the Treasury before any use of resolution tools, providing an effective and legally binding window for the Treasury to raise concerns if it had any.

I also point out that, during the Government’s consultation period, more respondents were in favour of the scope set out in the Bill than opposed. I appreciate noble Lords’ concerns about this issue and am happy to commit to exploring how to provide further reassurance on the Government’s intent via the code of practice.

The noble Baroness, Lady Bowles, asked whether the Bank of England should reduce MREL requirements in the knowledge that it could instead use FSCS funds. The Bank of England sets MREL requirements independently of government but within a framework set out in legislation. Any changes to firms’ MREL requirements would therefore be a decision for the Bank of England. The Bank of England will consider, in the light of this Bill and wider developments, whether any changes to its approach to MREL would be appropriate.

I turn briefly to Amendment 8, tabled by the noble Baroness, Lady Vere, which similarly aims to exclude from the new mechanism those firms that are required to hold MREL. I hope that I have already fully responded to her concerns in that regard; the Government are clear that this Bill is primarily intended for small banks, but that it is right to retain flexibility.

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[Lord Livermore (Lab)]

It may be best if I write to noble Lords to clarify this point.

Amendment 11, tabled by the noble Lord, Lord Eatwell, would exclude from the scope of the new mechanism those firms whose MREL requirement exceeds their minimum capital requirement. This would include both firms expected to be transferred to a private sector purchaser and those bailed in when they fail.

I stress to the noble Lord, as I have to others, that the Government’s intention is for the mechanism to be used primarily for small banks. That is ultimately central to the Bill’s purpose, but I emphasise the importance of having flexibility in the legislation for the Bank of England’s ability to respond effectively in a crisis. As I have noted, this may, for example, be relevant if a firm is still in the process of building up its MREL requirements to be able to fully implement a bail-in strategy.

I also note the amendment from the noble Baroness, Lady Noakes, which intends to ensure that, if the Bank of England seeks to use the new mechanism on a bank required to hold bail-in liabilities, it must first get the consent of the Treasury.

I am conscious that there are other amendments related to the subject of Treasury approval for the use of the Bank of England’s powers and that we will turn to this matter more substantively later. What I will say now to the noble Baroness is that the Government consider it important for the Bank of England to be able to take decisions in a resolution independently and decisively.

I will mention two important safeguards. First, as required by statute, the Treasury will always be consulted as part of the Bank of England’s formal assessment of the resolution conditions. Secondly, if using the mechanism on larger banks had implications for public funds, such as requiring the use of the National Loans Fund, this would be subject to Treasury consent. But I repeat that the Government’s strong policy intention is ultimately for the mechanism to be used primarily on small banks.

Amendment 18 was tabled by the noble Baroness, Lady Vere. It seeks to clarify the rationale for the scope of financial institutions liable to pay the levy for the new mechanism delivered by the Bill, given the expectation that the new mechanism would apply primarily to small banks. The Government believe there to be benefits to mirroring the existing process for recouping the costs of paying out depositors in insolvency and maintaining a broad-based levy. In particular, as noted in the Government’s cost-benefit analysis, the exclusion of larger banks would raise concerns about the affordability of the levy for other banks, which would in turn increase risks to public funds and the overall viability of the new mechanism.

In addition, in cases where the new mechanism may be used, the counterfactual would be for the failed bank to enter insolvency. As a result, the sector would already be liable to contribute to the costs of a small bank failure. As set out in the Government’s cost-benefit analysis, while highly case-specific, the upfront costs of an insolvency are generally expected to be greater than those under the new mechanism delivered by the Bill. The Government therefore feel it is right to mirror the arrangements in place for an insolvency and to maintain a broad-based levy.

The noble Baroness asked about the Bank’s resolvability assessment framework. I am told that the latest update was published in August. She asked how many firms were on the glide path. I will write to her with specific details, and if any of her other questions are not answered in my speech today, I will write to her also on those points.

[Baroness Vere of Norbiton (Con)]

One concern was raised in the document that has been published, so I would be grateful for the Minister’s comments on that.

[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.

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[Lord Vaux of Harrowden (CB)]

My Lords, I briefly add my support to what the noble Baronesses have said. This is drafted extraordinarily widely. The words

“another person has incurred or might incur in connection with the recapitalisation”

could theoretically include the legal costs of the shareholders of the bank that is going bust, for example. We have to find some way of reducing that scope. I had attempted to deal with this in Amendment 12 on reporting, but having heard what the noble Baroness said I do not think that does it. We need to find some way of narrowing it.

[Baroness Vere of Norbiton (Con)]

I am grateful to my noble friend for tabling this amendment and I added my name to it. I am also grateful for the comments made by my noble friend Lord Moylan. He is not in his place but he raised this issue during Second Reading and set people thinking about it.

I do not have a huge amount to add. I agree with the comments made by my noble friend Lady Noakes, the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux, but I would also say that this will have to be a double-edged attack. Not only must we potentially do something on this but the reporting of it will have to be clear and go into great detail.

When it comes to expenses, all noble Lords will be aware that the costs of financial lawyers and other professional financial advisers are not de minimis. The total cost of expenses may well exceed the cost of the recapitalisation of the bank, so it is important that we ensure that there are some guard-rails around this, recognising as ever that these costs will end up falling not on the banks but on the people who bank with the banks.

Does the Minister have any view as to roughly how large an expense bill might be? I do not even want to guess, because I hope that he will be able to give me some idea of what we are looking at.

The noble Lord, Lord Vaux, mentioned the expenses incurred by another person. I think that all noble Lords who have spoken so far agree that that is extraordinarily broad, and we will need to consider what we might do about that. Potentially, one could put something in the code of practice but, again, is that sufficient? We might also protect ourselves by requiring Treasury consent—who knows? Again, we might want to think about that. Going back to the point raised by the noble Lord, Lord Eatwell, it is tempting to think about these things as a single event, and we might be talking about £10 million-worth of expenses, but if a whole bunch of such events happened at the same time, we could very soon be talking about real money. We need to get to the bottom of this. I look forward to the comments from the Minister.

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[Baroness Vere of Norbiton (Con)]

I rise only to celebrate the fact that my noble friend Lady Noakes had so much time during recess in which to draft all these marvellous amendments because they certainly get the little grey cells going. I appreciate her eloquent explanation of her amendment and the very practical example of what could happen that was provided by the noble Lord, Lord Vaux. This goes back to a topic that was raised earlier about there being a certain feeling of a blank cheque in terms of certain elements of the scheme and wanting to ensure that there are appropriate guard-rails.

I will not go much further; I will come on to my observations about the sharing of powers and responsibilities between Ministers and regulators in due course. I look forward to hearing from the Minister.

[Lord Livermore (Lab)]

My Lords, I note that this amendment from the noble Baroness, Lady Noakes, is one of several concerning whether Treasury consent is needed when the Bank of England is exercising its powers—in this case, when the mechanism is used more than once for a particular institution.

Addressing the specific case of the amendment, although I think we can agree that it would usually be desirable to have to use the mechanism only once in respect of a particular institution, this may not always be the case. As an example, if a failed bank is transferred to a bridge bank, there is a risk of further deterioration in its balance sheet over time. It is foreseeable that, if that were the case, the Bank of England may need to use the mechanism again in order to recapitalise the institution; this would allow the Bank of England to maintain confidence in the firm, promoting financial stability.

The Government believe that it is important for the Bank of England to have reasonable flexibility to do so, reflecting that the full implications of a bank failure are hard to anticipate in advance. In addition, if further approvals are required, this may undermine market confidence in the original resolution action given that such approvals cannot be presumed in advance.

However, I note a few important pieces of context to this broader position. First, as required by statute, the Treasury is always consulted as part of the Bank of England’s formal assessment of the resolution conditions assessment. In practice, there is also frequent and ongoing dialogue between the authorities. Therefore, the Government are confident that there are proper and robust channels by which it could raise concerns if it had any.

Secondly, given that the new mechanism is ultimately funded by industry, we would expect the Bank of England to consult the Prudential Regulation Authority on any additional request to use the new mechanism. This is important as the Prudential Regulation Authority determines what is considered affordable to be levied on the sector in any given year.

Finally, if additional use of the mechanism had implications for public funds, such as requiring use of the National Loans Fund, provision of this additional funding would be subject to Treasury consent. Overall, the Government believe that this strikes the right balance in preserving the Bank of England’s freedom of action while ensuring the appropriate level of Treasury input into decision-making.

I hope that this provides some comfort to the noble Baroness and respectfully ask that she withdraw her amendment.

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[Baroness Vere of Norbiton (Con)]

I rise briefly to build on the comments made by previous speakers. This is an important issue. Again, it is worth recalling that this will not just be the recapitalisation funding; there might also be associated expenses. I note the point made by the noble Lord, Lord Eatwell, about the Basel accord and it being a subsidiary et cetera, but it strikes me that this is of a different level of political salience than a purely domestic collapse might be, where one has established structures. It could get incredibly uncomfortable for the Government if we do not have a better and fuller understanding of what safeguards exist already to make sure that banks are appropriately capitalised by their parents abroad and of how we avoid the perception of the Bank of England acting in interests which are not necessarily aligned with those of Daily Mail readers—let us put it that way. It is not that they have to align with Daily Mail readers, but one might imagine that this could be very problematic.

I would like some reassurance about what we would do if it were to be a significant amount rather than the very small amount for Silicon Valley Bank and how we would seek to address the concerns that would inevitably arise from the general public.

[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.

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[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.

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[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.

[Baroness Vere of Norbiton (Con)]

My Lords, I am particularly grateful to the noble Lord, Lord Vaux, and to my noble friend Lady Noakes for thinking carefully about reporting and tabling amendments accordingly. I had to support one of these amendments and I am afraid that I picked the noble Lord’s on this occasion. This is not favouritism; I was purely trying to spread the love a little. But as we approach Report, we might want to go back and check that whatever we end up putting into the Bill is future-proofed.

Sometimes one can put in too much detail, then people can slide round the edges by saying, “Oh, you didn’t tell us to do that”. Alternatively, there is being too broad, when people slide round another edge by not putting in the detail that you want to see. There is a balance, but this is certainly worth taking forward and looking at. Obviously, the accountability element is key here.

Another thought I had around this was on timing. Again, sometimes one can go too far and have a report too far in the distance, so by the time it comes out no one remembers what the problem was in the first place. The amendment tabled by the noble Lord, Lord Vaux, says “three months”; I was thinking “as soon as practical” or, in any event, within six months. I do not know, but in very complicated and complex circumstances there might still be issues and context to resolve to produce a report that is relevant in timing terms, but also incorporates everything that stakeholders wish to see.

When I was a Minister, my heart would sink when an amendment was put down about producing a report. I would think, “Another report—are we really going to read it?” To me, the question is: we might produce a timely report in a good fashion and with the right amount of detail, et cetera, but how do we then ensure the scrutiny of that report? It goes back to the issue of expenses which, as we agreed, could be quite significant. But who is going to look at those expenses and suck their teeth? Will they look at the legal fees of firm XYZ and say, “Do you know what? That’s too much”. Who is going to do that? Is there any body at all—not anybody—which would be able to look at it and do that? It has been suggested to me that the National Audit Office might occasionally pay attention to this sort of thing. This is about trying to get us beyond “Just produce a report”. Well, just produce a report and then somebody can look at it. I am sure that these are going to be great reports, but even so it is a concern.

I am looking forward to the response of the Minister. I believe that this should be our last group today, fingers crossed, but I am not sure that many of us want to go outside, given the weather.

[Lord Livermore (Lab)]

My Lords, I fully understand the substantial focus on the reporting requirements that will apply when the new mechanism is used. I shall start by addressing Amendment 12 on this point, tabled by the noble Lord, Lord Vaux.

The Government agree that, should the new mechanism be used, it is right for there to be a reporting mechanism to hold the Bank of England to account for its decisions, and that this should encompass estimates of the costs of different options. However, the Government intend to achieve the principles of scrutiny and transparency in a different way; namely, through the existing requirements placed on the Bank of England under the Banking Act 2009. As set out in their response to the consultation, it is the Government’s intention to use these existing reporting mechanisms to ensure that the Bank of England is subject to appropriate scrutiny when using the mechanism. The Government have committed to updating their code of practice to provide further details on how these reporting requirements will apply when the mechanism is used; I can re-confirm that the Government intend to include in the code confirmation that, after the new mechanism has been used, the Bank of England will be required to disclose the estimated costs that were considered as part of these reports.

The Government consider that using the code of practice is an appropriate approach to hold the Bank of England to account for its actions, rather than putting these requirements in the Bill. The Bank of England is legally required to have regard to the code and the Government are required to consult the Banking Liaison Panel, made up of regulatory and industry stakeholders, when updating it. Using the code will therefore ensure that a full and thorough consultation is taken on the approach. Given the complex and potentially fast-moving nature of bank failures, this is important to ensure that any approach is sufficiently nuanced to account for the range of possible outcomes under insolvency or through the use of other resolution tools. The Government believe that amendments to the code of practice are more likely to be successful in achieving this outcome. As I committed at Second Reading, the Government will share drafts of these updates to the code of practice as soon as is practicable and will provide sufficient opportunity for industry stakeholders to be consulted on them.

I acknowledge the further amendment from the noble Lord, Lord Vaux—Amendment 24—which would make such reports available to Parliament when the new mechanism was used to facilitate a transfer to another buyer. It is the Government’s clear intention that any such reports required under the Banking Act, following the use of the mechanism, will be made public and laid before Parliament. The Government would not make reports public only if there were clear public interest grounds not to do so, such as commercial confidentiality reasons. This may particularly be the case when exercising the power to sell a failing bank to a commercial buyer. While such cases would hopefully be limited, it is important that they are allowed for.

I appreciate the intent of Amendment 14 in the name of the noble Baroness, Lady Noakes, which would require the Bank of England to report to the Treasury more swiftly than under the current requirements. The use of resolution powers is complex; in some cases, the Bank of England may be executing a resolution over a long period, particularly when placing a firm into a bridge bank. It is therefore sensible for the Bank of England to report a reasonable period of time after exercising its powers, ensuring that its report provides a full and meaningful assessment. On reporting more broadly, I repeat the points made in response to the amendment tabled by the noble Lord, Lord Vaux.

Finally, Amendment 25 in the name of the noble Baroness, Lady Bowles, would require the Chancellor to assess in the light of the Bill the appropriateness of the thresholds used by the Bank of England to determine which firms are required to hold additional loss-absorbing resources, known as MREL. As before, I should start by noting that the Government recognise the important role played by smaller and specialist banks in supporting the UK economy. I appreciate the concerns raised by the noble Baroness at Second Reading.

The Government have carefully considered the perspective of such banks in developing the mechanism in the Bill, which is intended to be a proportionate solution. On MREL, the Bank of England is responsible for determining MREL requirements for individual firms within a framework set out in legislation; that is an important principle, as the resolution authority, the Bank of England, is ultimately best placed to judge what resources banks should hold so that they can fail safely. I point out to the noble Baroness that, as set out in the Government’s consultation response, the Bank of England has committed to consider the potential case for changes to its indicative thresholds. Specifically, it has noted that it will consider whether any changes are appropriate in light of this Bill and other wider developments.

I hope that these points provide reassurance to noble Lords. On that basis, I respectfully ask the noble Lord to withdraw his amendment.

Bank Resolution (Recapitalisation) Bill [HL]

Baroness Vere of Norbiton Excerpts

Committee stage
Tuesday 10th September 2024 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, it falls to me to open proceedings again. This is very much a “what it says on the tin” amendment. If it were phrased as the question “Will the deposit guarantee always be honoured?”, I would expect the answer to be yes.

Last week, we discussed that there may be more than one recapitalisation dip. For a moment, let us imagine a worst-case scenario where there is more than one but things are worse than expected due to market circumstances—maybe contagion or other unforeseen circumstances—and the insolvency route has to be taken. Can we be certain that there would be no change to bank depositors’ entitlement—I do not think that is intended in any way, but I would like to hear the Minister say it—and that the system would have the capacity for whatever is thrown at it, if not cash capacity then some form of underwriting in addition to whatever borrowing is available? Does the overall capacity extend beyond the borrowing that is already set up or is it fundamentally underwritten by the Government? As they will get it back, I do not object to that; I am just inquiring as to what the mechanism is, although maybe one does not want to think about that until we get there, if we do.

Are the state of the Financial Services Compensation Scheme and the affordability of the levy, if there had already been recent large calls, for example, a factor in the analysis of whether to mount a recapitalisation rather than allowing the insolvency? There could be public interest factors that relate not merely to the bank under consideration per se. Does the public interest consideration also extend to the state of the compensation scheme? I beg to move.

[Baroness Vere of Norbiton (Con)]

My Lords, I rise to make a few comments about this, many of which have already been made by the noble Baroness, Lady Bowles. I am determined to make my comments none the less, so I shall use different words in a different order. The amendment does what it says on the tin—that is absolutely right—and I am confident that the Minister will state that there will be no diminution in the benefit of the deposit guarantee scheme, but is that in and of itself sufficient comfort? The framing of this Bill and the Minister’s exposition of it are shaped by a mindset that there will be a single resolution event; it will be an isolated occurrence; it will clearly be in the public interest, and it will be a single financial institution following specific issues relating only to that bank. That seems to be the vibe that I get when I read the information, particularly that which accompanies the Bill, and I remain concerned that there are insufficient checks and balances in place to enable Treasury input when the measures are used as envisaged, but also where there are multiple failures during a wider systemic event—a reasonable worst-case scenario.

A reasonable worst-case scenario can develop quickly, or it may become apparent only over time. In a slow burn and developing situation, decisions relating to banks facing challenges early on in a prolonged event will be made in a very different context from those whose challenges perhaps developed over a longer period. In essence, decisions will be made, but in very different environments, given what might have happened in the intervening period. It may well be that there is significantly less money left with which to play, so to speak, to ensure financial sustainability.

Whether a reasonable worst-case scenario is a one-off event or a slow burn, FSCS resources are going to come under significant pressure should two or more banks face insolvency or resolution, and choices will surely have to be made. Who makes those choices and based on what guidance? Will the FSCS prioritise DGI entitlements over the resolution of a bank or banks? What would happen in circumstances where the public interest test is at best marginal? There will be many circumstances when it is very clear, black and white, but there will be some when it is not quite so clear. On one hand, one might have a bank which needs to go through the insolvency procedure and therefore one set of obligations fall on the FSCS and, on another, a bank could go through resolution and it is a bit marginal whether the public interest test has been met. How are all those decisions going to be worked through, given the lack of direct oversight from the Treasury?

We have been told that the FSCS will be unfettered when it comes to decisions relating to the allocation of existing resources and borrowing from sources other than the Treasury for DGI or recapitalisation. Therefore, it seems that until the FSCS needs to go cap in hand to the Treasury to get more money over and above what it can already borrow, there is an obligation on the FSCS only to consult the Treasury and others and the decision-making essentially remains beyond the reach of Ministers. I will be interested in the Minister’s response.

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[Baroness Bowles of Berkhamsted (LD)]

Not surprisingly, I too support this amendment. I congratulate the noble Baroness, Lady Noakes, on her exposition of the genesis of the terms of Section 38 of the 2023 Act. Of course, I am a member of the committee that came as a consequence of that. In her presentation, although not in the amendment—wisely so—she suggested that maybe there would be some hearings and questions, and the possibility that they would be in camera.

I urge the Minister, the Treasury and, indeed, the Bank not to shy away from such suggestions, because it would not be the first time that I have heard mutterings about things being confidential and not wanting to talk about them to parliamentary committees. In Germany, its parliamentary committees can look into the books of the banks and get all kinds of confidential information and—do you know?—it does not leak out. It is quite possible for committees of this House to behave just as well. I put that in as some impetus for how you can get better accountability, oversight and, I suggest, help from the committees, where everybody, ultimately, is pulling in the same direction.

[Baroness Vere of Norbiton (Con)]

My Lords, there is not an awful lot more to say. This is a very elegant amendment from my noble friend Lady Noakes, and it was very elegantly explained. I am the sole member of this Committee today who is not a member of the Financial Services Regulation Committee—no, neither is the Minister—and I am sorry about that. All noble Lords involved in getting the committee set up have an enormous amount of experience in the field of financial services regulation and, looking at the inquiries that it is already doing, I think it will be a very valuable part of our regulatory infrastructure. I look on this amendment with warmth and favourability and I should imagine that the Minister will do so, too.

[Lord Livermore (Lab)]

My Lords, the amendment tabled by the noble Baroness, Lady Noakes, focuses on the important theme of how the Bank of England is accountable to Parliament. As I have said in response to other amendments, the Government agree that it is right that the Bank of England is held to account for the actions it takes in resolution. That includes being accountable, as appropriate, to Parliament, so I do look warmly, in the words of my noble friend Lord Eatwell, at the intent of this amendment. I also stress that it is right that the Bank of England can act quickly and decisively when exercising its powers. That is particularly important in a crisis situation.

That said, the Government expect that the Bank of England would engage with Parliament after taking resolution action, including when the mechanism under the Bill is used. Specifically, under the existing provisions of the Banking Act, when the Bank of England exercises its resolution powers it must provide a copy of the relevant legal instrument to the Treasury. The Treasury must then lay that instrument in Parliament and the Bank of England must also publish it. This will continue to apply under the new mechanism and ensure that Parliament is notified when resolution action is undertaken. I shall give one specific example. In the case of SVB, the Bank sent to the Treasury the copy of the legal instrument the same morning as it exercised its power. The Treasury then laid the relevant document in Parliament on the very same day.

I also reiterate points I have made elsewhere about the Government’s commitment to require the Bank of England to produce reports in the event that the mechanism is used. The Government strongly expect such reports to be made public and laid in Parliament unless there are clear public interest grounds for not doing so, such as issues of commercial confidentiality. I hope this provides some comfort to the noble Baroness and, on that basis, I respectfully ask her to withdraw her amendment.

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[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.

[Lord Livermore (Lab)]

My Lords, the amendment tabled by the noble Baroness, Lady Noakes, seeks to introduce a new objective into the special resolution regime. The new objective would state that the costs in using the new mechanism should not exceed those that would be incurred in the counterfactual of placing the firm into insolvency. This amendment therefore touches on an important point raised both in consultation and during Second Reading, which is whether there should be a formal test or objective that seeks to prevent the use of the new mechanism, or make its use significantly more challenging, where the cost is higher than insolvency.

I also note that the noble Lord, Lord Vaux, raised similar points on the first day of Committee, which he alluded to today, making the case that the Bank of England should be required to present an assessment of costs in reports to the Treasury and to Parliament.

The Government carefully considered the case for inclusion of various forms of such a safeguard, sometimes referred to as a least-cost test, in response to feedback received during the consultation. In considering this matter, it is important to strike the right balance between ensuring that the Bank of England can respond quickly and flexibly to a firm failure and ensuring that costs to industry are properly considered. Having considered this, the Government concluded that the existing public interest test and special resolution regime objectives remained the appropriate framework for deciding whether the mechanism in this Bill could be used.

Adding a specific objective for the Bank of England to ensure that the costs to industry from using the new mechanism do not exceed insolvency could prevent it taking the most appropriate action to advance its broader resolution objectives. Those objectives include protecting financial stability, certain depositors and public funds. It is right that these aims are prioritised at a time of significant risk, which is part of the reason why the Government have not proposed changes to the broader resolution framework.

There is also the potential for such a change to impose important practical challenges. Resolution would likely take place in an uncertain and fast-paced context. Estimating the costs of different approaches during this period will be highly challenging and could change over time. There is therefore a risk that such an objective could create legal uncertainty around any resolution action, which in turn may undermine the usability and effectiveness of the new mechanism in situations where it is justified. This could have significant and undesirable consequences, including crystallising a set of indirect costs for the financial services sector and the wider economy. Further, it should be borne in mind that the alternative if the new mechanism is not available may be to use public funds.

However, I appreciate the intent behind the noble Baroness’s amendment and hope that I can provide some reassurance by reiterating previous points on the subject of the scrutiny and transparency of the Bank of England’s actions. As I have noted, the Bank of England is required under the Banking Act 2009 to report to the Treasury when exercising some of its stabilisation powers and, as was set out in response to the consultation, it is the Government’s clear intention to use these existing reporting mechanisms to ensure that the Bank of England is subject to appropriate scrutiny when using the mechanism provided by the Bill. However, I take the point that the noble Baroness made in response to my earlier point.

The Government have committed to updating the code of practice to provide further details on how these reporting requirements will apply when the mechanism is used. I reaffirm that the Government intend to include confirmation in the code that, after the new mechanism has been used, the Bank of England would be required to disclose the estimated costs to industry of the options considered, including the comparison with insolvency. The Government consider that using the code of practice in this way, rather than putting these requirements in the Bill, is the best approach to hold the Bank of England to account for its actions.

The Bank of England is legally required to have regard to the code and the Government are required to consult the Banking Liaison Panel, made up of regulatory and industry stakeholders, when updating it. Using the code will therefore ensure that a full and thorough consultation is taken on the approach. Given the complex and potentially fast-moving nature of bank failures, this will also ensure that any approach is sufficiently nuanced to account for the range of possible outcomes under insolvency or through the use of other resolution tools.

As I have previously said, the Government will share drafts of the updates to the code of practice as soon as practicable and provide sufficient opportunity for industry stakeholders to be consulted on them. The noble Baroness also made the case that insolvency should be a preferred strategy for small banks and I stress that this is the case. I hope that I have provided some helpful explanation to her of the Government’s position on this matter and respectfully ask that she withdraws her amendment.

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[Lord Eatwell (Lab)]

I should like to pick up on the request for detail put forward by the noble Baroness, Lady Noakes. I am concerned that the powers that the Bank of England has to act in an emergency, which this would presumably be, should not be constrained to any degree other than that which is absolutely necessary. In other words, we should not load up the code with detail, the reason being that the next crisis will be one that none of us has anticipated. It will be completely different.

If we look at the financial crises that have occurred, the major one in 2007-09 and some minor ones since, they have appeared in completely unexpected directions. The Bank must then have the freedom to adapt its procedures to whatever new challenge arises. I quite understand that we do not want just to say it can do anything it likes, but I feel strongly that we must be very careful about loading the code, and indeed the legislation, with excessive detail.

[Baroness Vere of Norbiton (Con)]

My Lords, I added my name to the amendment in the name of my noble friend Lady Noakes about the code of practice because it is important that we have this debate. I recognise what the noble Lord, Lord Eatwell, says, but it slightly struck fear into my heart because it is about those circumstances where there is not sufficient guidance or a code of practice. Essentially, this is not necessarily just for the Bank of England; it is for all those stakeholders who will be involved in the other side of a resolution. A lot of people will read the code of practice and internalise it. When it is needed, it will therefore already be in their hearts because they will have read it, so I am not as concerned as the noble Lord is about putting in too much detail. The simple fact is that we have not seen anything, so we do not really know what we are dealing with.

It struck me that in the slight rush to bring forward some legislation to keep Parliament occupied, perhaps, the Government are not providing all the information that the House needs to consider this Bill fully. It is complex, and as noble Lords go through it, it is clear that we are all picking up new nuances that we consider might be of concern in the future. The code of practice makes up an important component of the regime and the Committee is slightly flying blind, having not seen a draft of the changes—not only a draft of what would happen as a result of the Bill, but also potentially to fill gaps that we know are not going to be part of the Bill. We know that the code is potentially the only protection between anybody who uses banks—essentially, the taxpayer—and the Bank being able to perform maximum adaptation to a situation. There has to be something in the middle that stops that happening.

I am warming to my noble friend Lady Noakes’s suggestion that the Bill should not come into force until the code of practice is finalised, but I sense that that might be a little churlish. The amendment itself is a little anodyne. I think all noble Lords agree that the Government will, of course, make changes to the code of practice, but I would appreciate hearing more information from the Minister about what changes are anticipated—specifically, what will be left out—and the timing for any code of practice because while it remains outstanding, even in draft form, there is a significant lack of clarity.

At Second Reading, the Minister stated that the update will happen in due course. How many times have I used that phrase? I know exactly what it means. It means “when we are sort of ready”. We need to be a bit more ambitious than that. Can the Minister give any further guidance on timing? If he cannot, would it be helpful if I tabled an amendment on Report that required the code of practice to be updated within, say, three months and subject to approval by both Houses? I am happy to do that if it is helpful.

As my noble friend Lady Noakes and the noble Lord, Lord Vaux, pointed out, the Minister has referred to these things being addressed in the code of practice. Many of the elements in the reporting are also supposed to be in that code. My concern is that six weeks have now passed since the Minister said “in due course” and the House rises at the end of the week for Conference Recess. I presume that the Treasury is still working, so that would be a further window during which progress on a draft code of practice could be made. Therefore, I very much hope that the Minister can commit to having a draft document available for review before Report stage is scheduled. I look forward to hearing from the Minister.

[Lord Livermore (Lab)]

My Lords, I should state at the outset that the Government have no objections to the principle under discussion. Indeed, the Government have already stated publicly in our response to the consultation on these proposals that we intend to update the code of practice to reflect the measures in the Bill. I have already committed to share a draft of the proposed updates at the earliest opportunity, and I am happy to reaffirm that commitment today. I am aware that this is not the answer that the Committee is looking for, but I am afraid that I cannot commit to providing that before Report. However, I expect it to be available before the Bill comes into force.

As set out in the Government’s consultation response, the updates to the code will do three things: first, they will ensure that the code appropriately reflects the existence of the new mechanism; secondly, they will set out that the Bank is expected to set out estimates of the costs of the options considered and, as noted elsewhere, this is expected to include the case of insolvency; and thirdly, they will set out the expectation that any use of the mechanism is subject to the ex post scrutiny arrangements that I have described elsewhere.

The noble Baroness, Lady Noakes, perfectly fairly asked for a series of clarifications of what the code will include. She asked about two points specifically. The first was whether the code will confirm the mechanisms intended for small banks and the expenses covered? Yes, it is the intention that it will. She also asked whether the code will cover multiple uses of the mechanism. Yes, the code will cover that. I will answer other specific questions in writing.

In preparing these updates, the Government are mindful to ensure that they are done efficiently and carefully to ensure that they achieve the intended effect within the wider resolution framework, for instance, ensuring that the right set of costs is considered on the appropriate basis.

The Government will ensure sufficient opportunity for industry stakeholders to be consulted on these proposed updates to the code of practice. In particular, the final wording of any proposed updates would be subject to review by a cross-section of representatives from the authorities and the industry on the statutory Banking Liaison Panel, which advises the Treasury on the resolution regime. As noted, the Government will aim to progress these updates and make the proposed changes available for consultation with industry as soon as practicable.

Finally, I note that the Banking Act 2009 already imposes an implicit requirement on HM Treasury to update the code of practice, even without this amendment. Addressing the operation of the new mechanism would therefore already fall within the scope of this requirement.

I know that this explanation may not be sufficient, but I respectfully ask the noble Baroness to withdraw her amendment.

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[Lord Eatwell (Lab)]

My Lords, I was rather enjoying being characterised as an old-fashioned central banker, until the noble Baroness, Lady Bowles, attributed to me to me the idea that selecting from whichever pot would be entirely at will, so to speak. I add my support to what the noble Lord, Lord Vaux, just said: in a recapitalisation, shareholders and MREL must clearly be used first, and FSCS money used simply when those pots have been exhausted.

[Baroness Vere of Norbiton (Con)]

My Lords, I simply make the same point. The noble Lord, Lord Vaux, was absolutely right to summarise the principle which I think all noble Lords on the Committee feel is the purpose of the Bill. There cannot be any circumstances by which there is MREL or whatever it might be left, yet money is going in from FSCS to ensure the resolution of the bank. I cannot see any circumstance in which that would happen—perhaps Treasury officials would be able to think of one—but I think all noble Lords are agreed on the need for some clarity on what would happen.

I appreciated the comments from the noble Baroness, Lady Bowles. I got about 60% of them, so I was really proud of myself; the other 40% went way over my head. I am going to try to understand her points. We are in quite a difficult situation, but the way that she has been so forensic about it has allowed the noble Lord, Lord Vaux, to state what the principle is. It is about combining those two things—the forensic attitude to “This is what the Bill could say if read in a certain way” versus “Just tell us whether the Bill abides by the very simple principle that basically FSCS money should be a last resort, not there for anybody else, but just to prop up a bank to make sure it gets through to the other side of resolution, for the public interest and no more”.

[Lord Livermore (Lab)]

My Lords, in response to the amendment tabled by the noble Baroness, Lady Bowles, I reassure her that the Bill does not seek to introduce measures to bail out shareholders. I note that she raised concerns about this point on the first day in Committee, about which I am about to write to her. I hope my response will provide the clarification she is seeking pending that letter and the worked examples that we have discussed.

The amendment relates to a subsection of the Bill that would amend Section 12AA of the Banking Act 2009. This sets out the definition of the shortfall amount, which is a figure calculated by the Bank of England when using the bail-in resolution tool. The shortfall amount determines how much of a firm’s resources need to be bailed in to restore its capital ratio to the extent necessary to sustain sufficient market confidence and enable it to continue to meet the conditions for authorisation for at least one year and to continue to carry out its authorised activities. The methodology for determining the shortfall amount is not changed by the Bill, and it remains the case that when using the bail-in tool a firm’s own resources and eligible liabilities—its shareholders and creditors—would bear losses.

The relevant provision is not intended as a means of reducing the amount of MREL that should be used when bailing in a firm. Instead, it is intended to ensure that, in the event the mechanism is used alongside the bail-in tool, funds from the Financial Services Compensation Scheme are taken into account and used rather than the Bank of England having to bail in other creditors further up the creditor hierarchy. As an example, without this provision, if a firm had insufficient MREL to meet its shortfall amount without being able to take into account Financial Services Compensation Scheme funds, it may need to bail in creditors, such as uncovered depositors. Retaining this provision therefore ensures that the Bank of England may exercise some discretion in not bailing in other liabilities beyond a firm’s MREL, such as uncovered deposits, where to do so might risk further destabilising the business of the firm, other participants in the banking sector or other sectors, or reducing wider confidence in the financial system. Therefore, the Government consider it important to maintain flexibility to respond to the relevant circumstances.

In this context, I also note that funds provided by the Financial Services Compensation Scheme under the new mechanism can be used to cover the costs of recapitalising the failed firm, the operating costs of a bridge bank, and Bank of England and HM Treasury costs in relation to the resolution.

It is important to note that Sections 6A, 6B and 12AA of the Banking Act 2009 require the Bank of England to ensure that shareholders and creditors bear losses when a banking institution fails. This is an important principle that will continue to apply where the new mechanism is used.

I can reassure the noble Baroness, Lady Bowles, that the regime provides an extensive and proportionate set of powers to the Bank of England to impose consequences on the shareholders of a failed firm in resolution. The bail-in tool specifically enables the Bank of England to impose losses on shareholders and to write down certain unsecured creditors. This is an important principle that ensures the firm’s owners and investors must bear losses in the case of failure.

This is of course a highly technical area, and I understand the noble Baroness’s concerns. To that end, I am happy to explore whether there is further material that the Government can make available, such as worked examples, to help illustrate how this approach may work in practice. I hope these points can reassure the noble Baroness and I respectfully ask her to withdraw this amendment.

Bank Resolution (Recapitalisation) Bill [HL]

Baroness Vere of Norbiton Excerpts

Report stage
Monday 4th November 2024 Lords Chamber

[Baroness Vere of Norbiton (Con)]

My Lords, I too thank the Minister for the recent letters and documents he published in relation to the Bill. It was incredibly helpful to have them for the House to scrutinise the Bill properly. I am also grateful for these sensible amendments, which clarify the persons to whom the Bill’s measures apply as they relate to expenses. They are a bit technical, but they are improvements to the Bill and I am particularly pleased that the Minister has listened to concerns from across the House, including from my noble friends Lady Noakes and Lord Moylan.

I listened with great interest to the points raised by my noble friend Lady Noakes, and I urge the Minister to note what she said. I hope that some of these issues might be resolved in some way, either through the code of practice or by other means, as she seemed to me to make an awful lot of sense. However, on this basis, we support the Government’s amendments.

[Lord Livermore (Lab)]

My Lords, I am grateful to noble Lords for their contributions today and, as I said previously, in Committee. As I said at the start of this debate, the purpose of the Government’s amendments is to clarify whose expenses may be covered under the mechanism in the Bill. I hope that noble Lords will be able to accept the amendments, and I am grateful to both noble Baronesses for saying that they will.

I will respond to the points raised by the noble Baroness, Lady Noakes. As she said, I wrote previously to the noble Lord, Lord Moylan, on this matter. I will briefly repeat some of the points I made to him. In relation to litigation being brought against the authorities themselves, the Bill allows the Bank of England to request that funds from the Financial Services Compensation Scheme cover expenses that have been incurred by it or by the Treasury, a bridge bank or an asset management vehicle in connection with the recapitalisation or the use of the stabilisation power. This may include litigation costs arising from the recapitalisation or use of the stabilisation power, such as from challenges to decisions made by the authorities.

Any decision to request Financial Services Compensation Scheme funds for these purposes would be a decision for the Bank of England to take, but I stress that, in making this decision, the Bank of England would consider all relevant factors, including the fact that the alternative may be to use public funds. I note what the noble Baroness, Lady Noakes, said on that point. A decision to use insolvency depends on whether the conditions for resolution action are not met. If the conditions for action are met, public funds would be the alternative for covering these costs instead of FSCS funds.

I hope that the points I have made demonstrate that the Government have engaged in good faith with the concerns raised by noble Lords and have sought to address them where it has proved possible to do so. These amendments put beyond doubt which parties’ expenses may be covered by the new mechanism, and I hope that noble Lords will support them.

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Moved by

[Baroness Vere of Norbiton]

2: Clause 1, page 1, line 20, at end insert—
“(2A) The Bank of England must not require the scheme manager to make a recapitalisation payment if it has directed the financial institution to maintain an end-state Minimum Requirement for Own Funds and Eligible Liabilities (MREL) exceeding minimum capital requirements.”Member’s explanatory statement
This amendment seeks to prohibit the use of FSCS funds to recapitalise large financial institutions, defined as those which have reached end-state MREL.

[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.

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[Lord Livermore (Lab)]

My Lords, I am grateful to all noble Lords, and to my noble friend Lord Eatwell for the points that he made. The scope of firms in relation to which the mechanism can be applied has been a key issue in all our deliberations to date. I am very grateful to noble Lords for their engagement on this topic since Grand Committee.

As I stated then, the Government’s policy intention is for the mechanism provided by the Bill to be used primarily to support the resolution of smaller banks. We have reaffirmed that intention by including it in the updates to the special resolution regime code of practice, drafts of which have now been published and shared with noble Lords. The Bank of England must have regard to the code of practice when exercising its resolution powers, and this is set out in statute.

The Treasury is involved in the exercise of any resolution powers, either by being required to provide a response to consultation or by consent. Nevertheless, the Government maintain that it is right for the Bill to contain some flexibility for the Bank of England to be able to use the mechanism more broadly in some circumstances. That is because firm failures can be unpredictable and there could be circumstances in which it would be appropriate to use the mechanism on other firms. To repeat the example I gave in Grand Committee, this may be especially relevant in situations where a small bank has grown but is still in the process of reaching its end-state MREL requirements. Firms in this position would have at least some MREL resources to support recapitalisation, but the new mechanism could be used to meet any remaining shortfall if judged necessary. Without the proposed mechanism, there will be a potential gap in this scenario, creating risks to public funds and financial stability.

There is, of course, a counterargument here that the scope could instead be constrained, such that firms on the glide path to their full MREL requirement remain in scope of the mechanism but firms that have met their end-state MREL are excluded. The Government note that this is the desired intent of the noble Baroness’s amendment and it is an argument that we have considered carefully.

Ultimately, noting what has been set out in the code of practice and the strong expectation that the mechanism will be used on small banks, the Government’s view is that it is still right for the tool to have additional flexibility for unpredictable circumstances. To narrow the scope would constrain the Bank of England’s optionality, particularly where it might be necessary to supplement the resources bailed in with additional capital resources.

I note that these are considered unlikely outcomes, rather than a central case. However, given the uncertainty and unpredictability of a crisis scenario, the Government consider it important to avoid constraining that optionality.

None of the Bank of England’s other stabilisation powers are constrained for use on a specific type of in-scope firm and that the choice of stabilisation option used remains a decision for the Bank of England to take, having considered the resolution conditions and objectives. The Government believe that it is right for a similar approach to be taken in relation to the new mechanism. To be clear, the Government’s clear view remains that this mechanism should be intended for smaller banks and that the Bank of England should not assume the use of this mechanism for larger firms. In that regard, I agree with the noble Baroness on the crux of the issue she is raising. The Government simply do not wish to hard-wire that principle into the Bill.

Since we last debated this issue in Grand Committee, the Bank of England has published a consultation on proposed changes to the MREL regime. These proposals include the removal of the additional MREL requirement associated with the transactional accounts threshold for being set to the transfer strategy, given the availability of FSCS funds under the mechanism in the Bill as an alternative. There are currently only a limited number of firms with a transfer strategy, and firms with such a strategy would typically be expected to have a relatively small balance sheet. As such, the proposed change to the MREL regime is modest, consistent with the policy intention for the Bill mechanism to be intended primarily for smaller banks and it has the additional benefit of seeking to ensure that the MREL regime is proportionate for growing firms.

I reiterate the message delivered in the Written Ministerial Statement I made on the day the Bank of England’s consultation was published. As I have already said, the Government and the Bank of England agree that the Bank should not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and corresponding MREL requirements for larger banks.

Recognising the level of interest rightly expressed in Peers being able to scrutinise the changes to the code of practice before the Bill begins its passage in the other place, the Government published updates of that document on 15 October. Notably, on the issue of scope, these updates to the code of practice explicitly state 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 for a large bank. Those updates to the code also made it clear that the Bank of England is still expected to abide by the so-called 5% and 8% rules in the case of larger banks.

I hope the explanations I have given have been helpful. Throughout the commitments I have given today and in Committee, in publishing draft updates to the code of practice, in the Written Ministerial Statement and in the engagement I have had with noble Lords, I have sought to reassure noble Lords on the question of scope, the primary intention for the mechanism in the Bill and the importance of maintaining flexibility for the Bank of England to act in the public interest. I recognise that I may not have been successful and that strong views remain, but I hope that the noble Baroness may feel able to withdraw her amendment as a result.

[Baroness Vere of Norbiton (Con)]

My Lords, I am grateful to all noble Lords who have contributed to this debate, particularly those who have spoken in favour of my amendment. This has been the subject of numerous discussions with the Minister. I listened carefully to what he had to say, and I still cannot quite understand why the Government will not accept this amendment and are unfortunately still using terms such as “It is the strong expectation that it would be used for X, Y, Z-type of bank”, or “It’s primarily for smaller banks”. That does not give me comfort, as we may be storing up significant challenges for the future. Therefore, I am not encouraged by the Minister’s response, and I wish to test the opinion of the House.

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[Lord Sikka (Lab)]

My Lords, a wise man once said that history repeats itself, first as tragedy and secondly as farce. So it is with successive Governments’ obsession with going easy on the banking industry. We are sleepwalking into the next financial crash, but this modest amendment seeks to check some of the moral hazards by imposing personal costs on bank directors through a possible clawback of their remuneration.

History shows that moral hazards give rise to heavy economic and social costs. The secondary banking crash of the mid-1970s forced the state to bail out banks and insurance and property companies. We have had a banking crisis every decade since the 1970s but Governments continue to indulge the City of London. The big bang, the Financial Services Act 1986 and the Banking Act 1987 formalised light-touch regulation. Then came the banking crash of 2007-08. The obedient state dutifully provided £133 billion of cash and £1,029 billion of guarantees to bail out banks. It also provided £895 billion of quantitative easing to support capital markets.

The reforms that were introduced after the crash have been gradually reversed and the race to the bottom is accelerating. The regulators once again have the secondary objective of promoting the growth and competitiveness of the industry. The Bank of England has watered down the capital requirement rules that were meant to shock-proof the banking system from another 2007-08 style crash. Banks would now have to increase their current capital buffers by less than 1% to abide by the Basel 3.1 standards. That is down from the previous proposal for a 3.2% rise last year, as the Government are now more interested in getting the banks to help to promote growth.

Research by my colleagues at Sheffield University shows that between 1995 and 2015 the scandal-ridden finance industry made a negative contribution of £4,500 billion to the UK economy. No questions have been asked about that, and Governments have done their best to conceal the criminal activities of banks. Documents relating to the 1991 closure of the Bank of Credit and Commerce International are still a state secret. No one has explained why in 2012 the Chancellor and the regulators urged US authorities to go easy on HSBC after it admitted in writing to “criminal conduct”, along with money laundering for criminals. To this day, no Statement about that has been made to Parliament. However, in Committee on the Bill, the Minister urged the House to trust the regulators.

Due to the absence of personal sanctions, there is no urgency for dealing with banking fraud. Thousands of people suffered from frauds at HBOS; these date back to 2003. The Government washed their hands of the matter and left it to Lloyds Bank to investigate its own failures. Dame Linda Dobbs was appointed by Lloyds Bank in 2017 and a report was promised by 2018. To date, no report has been published and no regulator or Minister has inquired into the reasons for the delay or done anything to help the victims of those frauds.

Despite warnings, swathes of banking remain unregulated. The shadow banking system, which is now bigger than retail banking and is enmeshed with the regulated sector, remains unregulated. The cap on bankers’ bonuses has been abolished and bankers are free to be reckless as they pursue personal riches. This Bill ensures that the banks will be bailed out, therefore there are even fewer incentives for the directors to behave in a responsible way. There are virtually no pressure points on directors to curb predatory practices and it takes years to disqualify any company director. Prosecutions for predatory practices are rare and the Government say that the prisons are already full, so we cannot send these people to prison either.

On 5 September, in opposing my amendment during Committee, the Minister said that

“it is a key principle of the resolution regime that natural and legal persons should be made liable under the civil or criminal law in the UK for their responsibility for the failure of the institution. This is delivered by Section 36 of the Financial Services (Banking Reform) Act 2013, which provides for a criminal offence where a senior manager of a bank has taken a decision which caused the failure of a financial institution”.—[Official Report, 5/9/24; col. GC 41.]

Following that exchange, on 12 September 2024 I tabled a Written Question to the Ministry of Justice. The reply on 23 September said:

“The Ministry of Justice Court Proceedings Database has not recorded any prosecutions under section 36 of the Financial Services (Banking Reform) Act 2013 since its introduction”.


There is no pressure on directors; they are not prosecuted —although they may get some honours.

I am not really persuaded that there are sufficient pressure points upon bank directors to curb predatory practices. I urge the Government to accept my modest amendment. The Government can stand up to the banking industry or perhaps, one day, they may well have to pick up the tab from the next banking crash. I beg to move.

[Baroness Vere of Norbiton (Con)]

My Lords, I thank the noble Lord, Lord Sikka, for bringing his amendment and for explaining it so well. We on these Benches are concerned that a statutory requirement to make assessment of potential clawbacks of executive pay may simply hinder the efficient use of the recapitalisation mechanism, which of course usually has to be done in a very timely fashion. Having considered his amendment, we feel that it would not be an improvement to the Bill and will not be supporting it.

[Lord Livermore (Lab)]

My Lords, the amendment tabled by my noble friend Lord Sikka replicates the one he tabled in Committee. I hope that my noble friend will therefore forgive me for repeating some of the points that I made when we discussed this amendment then.

Amendment 3 seeks to ensure that the Bank of England and the Financial Services Compensation Scheme consider whether there should be a clawback of executive pay and bonuses from a failed firm before using the new mechanism. Although the bank resolution regime does not set out powers allowing the Bank of England to claw back money from management, it does provide it with an extensive and proportionate set of powers to impose consequences on the management of a failed firm in resolution.

First, we expect that any existing shareholder equity would be cancelled or transferred when a firm is placed into resolution. This ensures that the firm’s owners bear losses, which is an important principle of the resolution regime. In many circumstances, this will affect directors and management who hold shares or other instruments of the failed firm.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, I think that everything that needs to be said about these amendments has probably already been said. I have added my name where I could; one came in very late, so I could not. I congratulate the noble Baroness, Lady Noakes, on her diligence in getting the committee name in properly so that everybody knows where to go, with all these hundreds of people who are going to be reading this legislation. Nevertheless, we are an institution, as it were, so it is good to see our name there.

I also congratulate the noble Lord, Lord Vaux, on his diligence in hounding to a conclusion the final report, because it is, as he said, very important. In the meeting we had recently, those present from the Bank of England wondered why we might want this and suddenly nodded when I said, “Because otherwise Parliament may never find out what really happened”: that is what it is all about. They might think we do not want to know, many years on, if it is a long period. The sorts of people who sit on these committees do want to know, because we are the ones who have to learn and have to ask the questions, to make sure that it is not going wrong again. It is very important, and I hope the Minister will accept it. If votes are called, these Benches will be supporting the noble Lord, Lord Vaux.

[Baroness Vere of Norbiton (Con)]

I am enormously grateful to all noble Lords who have spoken today. I too add my thanks to the noble Lord, Lord Vaux, for tabling his amendment. This group epitomises what is so good about your Lordships’ House: a lot of movement has happened to date on these issues from the Minister, and we are grateful for his engagement and for the fact that we have been able to get a little further down the road. However, like terriers with very sharp teeth, noble Lords are not quite willing to let it go just yet, and I too support the amendments in the name of the noble Lord, Lord Vaux, and of course those of my noble friend Lady Noakes, who has also done a fantastic job in ensuring that the issues she raised, and which most noble Lords agreed with in Committee, come to the fore. Helpfully, the noble Lord, Lord Vaux, has tabled Amendment 9, which plugs a big gap, and I hope the Minister will accept that and the amendments in the name of my noble friend Lady Noakes.

[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.

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[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.

[Baroness Vere of Norbiton (Con)]

I rise briefly to speak to Amendment 7 in the name of the noble Baroness, Lady Bowles of Berkhamsted, and Amendment 16 in the name of my noble friend Lady Noakes.

On Amendment 7, I will not reiterate the points raised. I deeply appreciated the explanation by the noble Baroness, Lady Kramer, as to how she got to her supportive position. From our perspective, we feel that Amendments 7 is a reasonable objective that would ensure the Bank facilitates the international competitiveness of the UK economy and economic growth in the medium term—that is very clear. It also has the ability to look at the level of risk within the banking sector over the medium term. Given the Government’s stated objective of focusing on economic growth, I am very interested to hear the Minister’s view on these amendments.

Amendment 16 in the name of my noble friend Lady Noakes, which I have signed, seeks to minimise the net costs recouped from the banking sector via this mechanism. Again, it is a very sensibly drafted amendment that would improve the Bill, and I look forward to hearing the Minister’s response.

[Lord Livermore (Lab)]

My Lords, I start by noting that the Government fully understand the concerns raised by noble Lords regarding the objectives the Bank of England should adhere to when taking resolution action.

Amendments 6 and 7 tabled by the noble Baroness, Lady Bowles, seek to ensure that the Bank of England considers growth and competitiveness when using the new mechanism, by introducing a new objective that the Bank of England would need to consider. In the case of Amendment 6 this would be alongside the existing special resolution objectives, while in the case of Amendment 7 it would be a secondary objective. This objective would be to facilitate the competitiveness and growth of the UK economy, subject to aligning with relevant international standards.

I appreciate wholly the intent of the noble Baroness’s amendments. The Government have reflected carefully on this issue in the weeks running up to Report. Growth and competitiveness are, of course, fundamental priorities for this Government. The Government are resisting these amendments because, while we understand and appreciate their intent, they would pose challenges within the specific context of this Bill. I intend to make three main points—about the wider context of the Bill; the particular challenges a new objective may pose in the case of the new mechanism; and the steps the Government are taking to ensure that costs to industry are properly considered.

First, I note that the aim of the Bill is to enhance the resolution regime, but in a way that avoids making more fundamental changes to the regime or to the way in which the Bank of England exercises its resolution powers. This reflects a key conclusion from the Government’s consultation, which is that the regime already broadly works well. This was demonstrated by the successful resolution of Silicon Valley Bank UK.

As noble Lords are aware, the resolution regime has been developed over a number of years to align with international best practice. The relevant authorities have invested considerable time and energy in contingency planning to use the existing powers within their existing framework of objectives. As it stands, the regime therefore reflects a carefully calibrated judgment about the key priorities that should be considered in what is an emergency, firm-specific failure scenario.

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[Baroness Vere of Norbiton (Con)]

I wholeheartedly support the noble Lord, Lord Vaux, in his work in this area. Over the course of our scrutiny of the Bill, we have had some happy and quite nerdy discussions around this amendment. It is clear to me that it is a complicated situation. There is clearly an issue to be solved, but unfortunately the issue may not be exactly the same for each case of resolution that one might be addressing, so it needs further thought.

I am pleased that we will not be voting on this, but I impress upon the Minister that if there is something we can do in this area, whether that be in the code of practice or by other mechanisms, it is important. It is unconscionable to me that, because a particular entity goes down the route of resolution rather than insolvency, certain creditors could be significantly better off. That cannot happen and we must do something about it.

[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.

Bank Resolution (Recapitalisation) Bill [HL]

Baroness Vere of Norbiton Excerpts

3rd reading
Tuesday 12th November 2024 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I also thank the officials and other noble Lords, the Minister and, notable among those who did most of the heavy lifting, the noble Lord, Lord Vaux, and the noble Baronesses, Lady Vere and Lady Noakes. This Bill contains useful measures improved by amendments but is notable for diverting private bank money to addressing a matter of public interest in place of public funds. For that reason, I hope that the Government will reflect on the wisdom of keeping the amendment limiting the mechanism to small banks.

[Baroness Vere of Norbiton (Con)]

My Lords, I am pleased that this Bill leaves your Lordships’ House to wend its way to the House of Commons for further consideration. The Bill has widespread support and has been somewhat improved by the deliberations in your Lordships’ House over the last few months.

I am extremely grateful to the core crack team pulled together specifically for this Bill: my noble friend Lady Noakes, the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux, whose expertise—far greater than mine—ensured that the roughest edges were smoothed away. I am also grateful to my noble friend Lady Penn, who so skilfully stepped up for Second Reading, and to the new opposition research team for their support.

Last but certainly not least, I am enormously grateful to the Minister and his officials, who were as accommodating as they felt able to be in improving the Bill. All noble Lords will share my hope that this mechanism is never, ever used but if it is, the statutory framework is now there to support one or more small banks through the resolution process and ensure that the first port of call is not taxpayers’ funds.

[Lord Livermore (Lab)]

I thank again all noble Lords who have participated in debates on the Bill. I look forward to working together in the future on similar issues.