Draft Bank Recovery and Resolution Order 2016 Draft Bank of England Act 1998 (Macro-Prudential Measures) Order 2016

Jonathan Reynolds Excerpts

Monday 5th December 2016 General Committees

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

What a pleasure it is to see you in the Chair, Mr Pritchard. I thank the Minister for his introductory remarks.

The Opposition support measures to protect and enhance the stability of the financial system, including plans to avoid another banking crisis. Recent history has unfortunately revealed that the insolvency rules and legislative framework that applied to all companies were highly unsuited to the particular circumstances of bank failure. As the Minister said, this bank recovery order follows on from the Banking Act 2009. It is absolutely vital that we as legislators get this right. There is simply no room for error. These are measures that will be used only once in the event of a bank failure. There is an incredible duty on our shoulders to protect the people we serve—indeed, the Labour party takes that responsibility with the seriousness it commands.

In that light, we have concerns that the guidance for these orders is not as accessible and transparent as it might be. Not only does that make it challenging for the Opposition to provide effective scrutiny, but it raises questions about how usable the regulations will be by the industry itself and, indeed, the wider public.

Article 15 of the banking recovery order amends section 48Z of the 2009 Act to allow the Bank of England or the Treasury to activate default event provisions. The order states that the

“Bank of England…or the Treasury (in the case of a share transfer order)”

need to

“consider that such provision would advance one or more of the special resolution objectives.”

We have previously raised concerns that that will give considerable discretion to the relevant authorities. In a letter to my Front-Bench colleague in the other place dated 24 November 2016, the Government promised further guidance on the types of contracts, which could include clauses that are activated by the use of a crisis prevention or management measure. Will the Minister update us on whether any progress has been made in that regard?

Given that the power to remove directors is significant, we would want some oversight of a kind not covered by this provision of the people chosen by the regulator to serve as replacement directors. We would also like clarity about the tribunal under proposed new section 71G, which will presumably sit under the FCA. Are we to understand that it is to be a police force, a judge and a jury in all cases? I wonder whether anyone might claim it is unlawful, either via a judicial review or a human rights appeal, for the regulator to be able to make all those decisions using its own people when taking a bank from its shareholders.

What consideration have the Government given to providing for a periodic report back to Parliament or a review by an outside oversight committee to see what the regulator has done? More generally, we would like a clear assurance from the Government that the measures do not represent the risk of a spaghetti of committees—perhaps the FCA, the PRA, the FPC—making decisions in various contexts.

Moving on to the shorter macro-prudential measures order, I want to probe concerns about the power that the FPC will gain. If I understand the Minister’s remarks correctly, the FPC now has the ability to interfere with mortgage business on the basis of a cost-benefit analysis. Will he elaborate on this, as some fear that article 3 is somewhat vague? Is the idea to empower the FPC to constrict the buy-to-let mortgage market as much as possible? Although we support restricting that market, we have concerns about a committee of the Bank of England doing so without external oversight and without parliamentary referral. It would therefore be helpful to have assurances that any oversight is transparent, meaningful and democratic.

We are all aware that the issues raised by the orders have a topical significance. The decisive victory of the no side against proposed constitutional changes in the Italian referendum followed by the resignation of Prime Minister Matteo Renzi represents a challenge to ongoing efforts to break Europe’s economic malaise. Despite major changes for the better, there are those who fear that the European banking system remains one with large and unresolved problems. As the Bank of England UK bank stress tests last week emphasised, Government and financial authorities must ensure that precautionary measures are ready for use if needed to prevent contagion and to protect depositors and taxpayers.

We know that people and society want and need banks in which they can safely deposit their money and savings, which lend responsibly and provide credit to finance investment and growth across the country. We will support financial services where they deliver a clear benefit to the whole community and we will work with the finance sector and the Government to develop this new deal with finance for the British people.