Lord Sassoon
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(12 years ago)
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Lord Desai
My Lords, before the Minister replies, I am puzzled, given what the noble Baroness has said, when I read the clause. What are the circumstances under which the Government will not order an inquiry? Are they things like when we had the fiasco with RBS, where an inquiry was conducted, hushed up and not published until we literally marched in the streets for the FSA to do so? Can the Minister explain under what circumstances the Treasury would not order an inquiry if such events had happened?
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I will try to address a number of those points. I will stick to the amendments that have been moved or spoken to rather than those that have not.
This group of amendments, as we have heard, relates to two of the mechanisms by which the PRA and the FCA can be held to account for regulatory failures. One of the key lessons learnt from the crisis, of course, is that we need greater openness and transparency about where things go wrong and about what lessons can be learnt. In that context, I think that my noble friend has got it completely right about the circumstances in which an independent inquiry might be called for, as opposed to self-investigation. I will leave that one at that.
I would also just say to my noble friend that Section 14 of FiSMA is being repealed. That is dealt with in Clause 5(1). However, the Treasury can use the new power in Clause 64 to arrange an inquiry into action that predates the Bill.
Baroness Kramer
I appreciate the Minister giving way. I request some clarification. He talked about investigations into the FCA and the PRA, but surely the regulatory body referred to in subsection (3)—the clearing house—is actually the Bank of England. Can he confirm that it is included in this rubric, as it were?
Lord Sassoon
I believe that that is the case. If it is not, I will clarify things as I reply to my noble friend Lady Noakes.
Lord Peston
My Lords, I did not catch the last few words that the Minister said before the noble Baroness asked her question. I thought he said that if the Bill is enacted, this part would enable the Treasury to set up inquiries into what happened in the past few years. Did he actually say that?
Lord Sassoon
In so many terms, yes. In reply to my noble friend’s question about the repeal of Section 14 of FiSMA, I wanted to make it clear that a gap is not left in the Treasury’s ability to arrange inquiries into events, even though they might be ones that predate the coming into force of the Bill.
Lord Peston
The provision would then become much more significant. If we pass this Bill into law and it becomes an Act then the disasters of the past few years could be inquired into by a major independent committee, which might tell us who were the real architects of the disaster and where policy failed. If the Bill is to enable that to happen—and it seems to me overwhelmingly that it must happen—then we really do need the word “must” in this case.
Lord Sassoon
I will get there eventually. If the Committee will permit me, I will address the point. I will not necessarily give complete satisfaction but we will get there.
The Bill makes a number of provisions that are intended to deliver greater accountability and carries forward the power of the Treasury to arrange independent inquiries into regulatory failures. It also provides for new duties on the two authorities to carry out investigations of their own—if necessary, at the instigation of the Treasury—and report their findings to the Treasury where there has been regulatory failure and certain other criteria are met.
I turn first to Amendments 190B and 192ZA, which probe why, if the public interest test is met, the Bill provides that the Treasury “may” require an inquiry. By changing “may” to “must”, their intended effect—as we have heard—is that in all cases where the test is met, the Treasury should have to require an inquiry. Amendment 190AA achieves the same end by a different means, specifying that the Treasury must arrange an inquiry where the two conditions in Clause 64 are met unless there is a public interest in not doing so. I agree with my noble friend that, if there is an overwhelming public interest in having an independent inquiry or in the regulator carrying out an investigation, the Treasury should step in to ensure that that happens. As it stands, the Bill gives the Treasury a little bit of discretion here. This is not about wriggling out of the need to call for an inquiry; it simply acknowledges that in reality, circumstances may dictate that even though the test is met, an inquiry or an investigation under this Bill is not necessarily the best course of action.
For example, there may already be an alternative independent inquiry going on—perhaps a parliamentary commission or other parliamentary inquiry—or an inquiry under the Inquiries Act. In the case of the provisions relating to investigations carried on by the regulator, the regulator itself may already be carrying on an investigation under Clauses 69 or 70. However, as my noble friend is aware, and as the noble Lord, Lord Barnett, has reminded us, I have already confirmed that I am giving careful thought to the wider use of “may” and “must” throughout the Bill. This is a huge exercise, taking up some mighty brains. All I would say at this stage is that although there are certainly not many cases that deserve intense scrutiny, this is certainly one of the instances that merit serious consideration. I will leave it at that. We will come back if we find any suitable candidates for changing.
Amendment 193 to Clause 79 seeks to place an explicit duty on the regulators to ensure that when a complaint against a regulator needs to be investigated, they appoint an investigator who is suitably qualified and experienced. This amendment is not necessary; it has also not been spoken to by the noble Lord, Lord McFall of Alcluith, so I will leave it at that. I shall turn to Amendments 192ZZA, 192ZZB and 192C.
Lord Barnett
Perhaps I misheard the Minister on the must/may argument, which he did not seem fully to explain. He must have had a major reply from officials to his request on a Bill as huge as this, with so many musts and mays throughout. What exactly did they recommend? Did they recommend, as always, that there must be agreement with the noble Lord or was there a point at which they said that it is possible that must might be better than may? Is this one of them?
Lord Sassoon
My Lords, I do not want to get the Committee too excited about this matter because, as any noble Lord, including the noble Lord, Lord Barnett, will know, it is very rare for a piece of considered legislation, particularly coming from the Treasury, to get any of these matters wrong in the drafting. I really do not want to raise false expectations.
All I would say is that the exercise is carrying on and that the matter raised by my noble friend Lady Noakes is certainly one of the may/must instances that merits serious consideration. When there is any more news to report to Peers who are interested in this Bill, we have plenty of ways of communicating it. If there is anything to say, the noble Lord, Lord Barnett, will be among the first to hear.
The group of amendments on which the noble Lord, Lord Davies of Oldham, spoke rather modestly towards the end of this discussion nevertheless are ones which we need to take seriously. Amendment 192ZZA would provide that if the Treasury issues a direction to the FCA not to proceed with an investigation into possible regulatory failure, that direction must be laid before Parliament. Amendment 192ZZB makes similar provision for such investigations by the PRA.
Amendment 192C would provide that where the Treasury issues a direction specifying the parameters of an investigation into regulatory failure by the PRA or FCA, or suspending or halting such an investigation, that direction must be laid before Parliament.
The Bill is drafted to give the Treasury some discretion here and, all things being equal, we had wished to preserve this. However, in this instance I am somewhat persuaded by the case that noble Lords have made. The Government are very much committed to greater openness and transparency in our regulatory architecture. With that in mind, I am happy to confirm that I will be taking on board the insightful comments of this Committee and will return to this issue on Report, placing the Treasury under a duty to disclose any directions issued under Clause 74, unless doing so would not be in the public interest.
I know that the noble Lord, Lord Davies of Oldham, is looking a bit surprised by this turn of events. On previous occasions he has compared himself and his batting average to the late, great Sir Donald Bradman and I really did not want to disappoint this Committee by seeing his batting average going down too far. I do not think that the noble Lord does himself justice: he is a great strike bowler when it comes to this type of thing. By my reckoning, the noble Lord’s success rate is now back up to around 20%. I have no idea how one translates that into a conventional bowling average but I think that it is pretty good. I note that his fellow Lancastrian, Jimmy Anderson, is on 30.41 for his test average. I think we can say that the noble Lord, Lord Davies of Oldham, is close to that. However, I am left with the question as to why the noble Lord is not being promoted to the strike bowler role. He comes on as the first change bowler day after day; we want to see him, like Jimmy Anderson, as the strike bowler from hereon.
I hope I have reassured the Committee that we share its desire to see accountability and transparency in the system, and that my noble friend will be prepared to withdraw her amendment.
Baroness Noakes
My Lords, despite having spent a couple of years in the Treasury in the dim and distant past, I could never do cricketing talk so I shall not try to follow my noble friend the Minister. I am sure that the noble Lord, Lord Davies of Oldham, is thrilled with his success in this opening group of amendments. I am very grateful for the support of noble Lords opposite for my amendments and I was pleased to hear what my noble friend had to say. I look forward, as do we all, to the outcome of the may/must investigations which are clearly occupying the great brains that live in the Treasury night and day. With that, I beg leave to withdraw the amendment.
Lord Sassoon
Lord Sassoon
“Objectives and conditions
(1) The Banking Act 2009 is amended as follows.
(2) In section 3 (interpretation: other expressions), after “this Part—” insert—
““client assets” means assets which an institution has undertaken to hold for a client (whether or not on trust, and whether or not the undertaking has been complied with),”.
(3) In section 4 (special resolution objectives), after subsection (8) insert—
“(8A) Objective 6, which applies in any case in which client assets may be affected, is to protect those assets.
(8B) Objective 7 is to minimise adverse effects on institutions (such as investment exchanges and clearing houses) that support the operation of financial markets.”
(4) In section 8(2) (Condition A: private sector purchaser and bridge bank)—
(a) in paragraph (b) for “the banking systems of the United Kingdom, or” substitute “those systems,”, and(b) after paragraph (c) insert “, or(d) the protection of any client assets that may be affected.”(5) In section 47 (restriction of partial transfers), for subsection (3) substitute—
“(3) Provision under subsection (2) may, in particular, refer to—
(a) particular classes of deposit;(b) particular classes of client assets.”(6) In the Table in section 261 (index of defined terms), after the entry relating to “central counterparty clearing services”, insert—
“Client assets (Part 1) | 3”.” |
Lord Sassoon
My Lords, last week I introduced the first set of amendments that seek to extend the UK’s resolution regime for banks to investment firms, group companies and UK clearing houses. Today, I am introducing the remaining amendments, which put in place a regime that gives the Government and the Bank of England the powers to take action when one of these institutions is likely to fail, allowing them to resolve the situation in an orderly manner in order to maintain the financial stability of the UK.
Amendment 193BA adds two new special resolution regime objectives. The collapse of Lehman Brothers in 2008 and MF Global in late 2011 highlighted the difficulties and uncertainties surrounding the treatment of client assets and money when an investment firm enters insolvency. During normal business, client assets and money are held by the investment firm on behalf of the client, in segregated or non-segregated accounts. Firms also rehypothecate client assets, borrowing them to use for their own purposes. There can be complex arrangements to unwind if a firm enters insolvency or resolution.
The new objective 6 is intended to ensure that the resolution authorities look to protect not only cash deposits but also shares and other assets. The new objective will apply to any resolution where client assets are held by the firm, whether it is a bank that offers investment services or an investment firm which is not a bank. To complement this legislation, the FSA has recently launched a wide-ranging consultation on client money and client asset rules. The Government will report to Parliament on the review of the special administration regime—the bespoke insolvency regime for investment firms —by February 2013.
The new objective 7 will help minimise the adverse effect on financial market infrastructure, such as investment exchanges and clearing houses, when stabilisation powers are used. For example, in resolving an investment firm, this objective will require the resolution authorities to consider the impact of their actions on exchanges and clearing houses in which the investment firm was a participant.
Under the Banking Act 2009, no special resolution scheme objective is prioritised over any other—the regulator must take each into account equally. The same will apply to the new objectives inserted by these amendments, so the resolution authority will have to balance the objective of protecting client assets with the objective of minimising the adverse effects on financial market infrastructure.
The public interest test in Section 8 of the Banking Act 2009 for the exercise of stabilisation powers currently refers to the protection of depositors. Subsection (4) of the proposed new clause therefore adds reference to the protection of client assets. In line with the extension of the special resolution regime beyond banks, the proposed new clause also amends the reference to the “banking systems” of the UK in the public interest test in Section 8 into a reference to the UK’s financial systems. This makes Section 8(2)(b) of the Banking Act suitable for the resolution of all the types of firm that we propose to be eligible for the special resolution regime.
The effect of the new clause inserted by Amendment 193F is to extend the resolution tools under the special resolution regime to investment firms and their group companies. In doing so, it is important that this legislation captures only those firms that are deemed systemic to the financial stability of the UK. Casting the net too wide, and unnecessarily capturing firms whose failure would not pose a threat, could adversely affect the UK’s competitiveness. On the other hand, we do not want to exclude from the special resolution regime those firms that, in normal market circumstances, would not be seen as systemic but which, in times of market crisis, might pose systemic risks.
This is a difficult balancing act. With an eye to developments in Europe, particularly the European Commission’s recovery and resolution directive, the legislation adopts a wide definition of “investment firm” from European law but also confers on the Treasury a power to exclude categories of firm from the special resolution regime. In this way, we can ensure that smaller firms that clearly do not pose a threat to financial stability—such as a small stockbroker or financial adviser—will not be subject to the new regime, while on the other hand providing the necessary flexibility to react as circumstances change. I beg to move.
Lord Sassoon
My Lords, I am very grateful to the noble Lord, Lord Davies of Oldham, because he has got it exactly right. The previous Administration brought forward the 2009 Bill, which necessarily came forward in a hurry as a proper part of the response to the crisis. This Bill picks up a lot of other lessons from the crisis, but the Banking Act 2009 put in place some arrangements for banks. We have now seen through the examples of what happened in the crisis and, regrettably, to MF Global and others since, that the 2009 Act, although it put in place some important new powers, did not cover the waterfront. We are therefore seeking to ensure that we learn the lessons and that arrangements are made that cover other very important parts of the sector.
As I said to the Committee last week, I think that we would be very severely criticised as a Government and as a House of Parliament if we were to delay putting in place an extension of a regime that is already based on one that is in law in the 2009 Act. The banking reform Bill has not yet started its passage in another place and it will be some time after the completion of this Bill that it comes into law. We really should get on and make proper provision, as I said last week, for situations that we do not anticipate. In this very uncertain environment one can never be sure what may next hit the system. It is important, therefore, that we get on to it. In answer to my noble friend Lady Kramer, if there are changes coming out of the banking reform Bill or out of Europe, then in due course we will amend these provisions to take account of that. However, we would be putting ourselves in a terrible position if we said that we can only move at the speed of Europe or at the speed of some slower Bill that is coming on. It is better to put these necessary clauses and arrangements in place now and change them later if we have to.
Lord Lawson of Blaby
What my noble friend has said is most helpful. Can he give us an indication of when the banking reform Bill is likely to reach this House? I am sure that noble Lords on all sides will be greatly interested in this.
Lord Sassoon
I shall probably get into trouble if I say anything that is terribly helpful. However, the Government want to get on with it as quickly as we reasonably can. I would like to think that it will not be very many months before the Bill gets here. But, whenever it arrives, it is no excuse for not getting on with these clauses.
Lord Barnett
My Lords, perhaps I may make it clear that I do not disagree with the two new clauses. I was saying that we will have a banking Bill in this House shortly. This Bill relates to banks and investment firms. However, if the banking Bill is amended to allow two separate companies, as I hope it will be, so that investment firms are handled quite separately from the way they are handled in the present situation, it would change the whole process. The Minister says that we must get on with it. But this Bill will not be an Act until approximately the end of the year. The new Bill will be before us a few months later. Does the Minister know of some crisis that we do not know about?
Lord Sassoon
No, my Lords. I have already answered these questions. I know of no crisis. However, we would be remiss if, having identified a sensible, consulted-on extension of the regime that came in under the Banking Act 2009 to cover these other, systemically important parts of the system, we did not act. If we left even a few months, having identified what needed to be done, we would be open to very heavy criticism as a House and as a Government. Now is not the time to discuss the ins and outs of the banking reform that is proposed. However, it is certainly not the case that—as the noble Lord, Lord Barnett, put it—investment firms and banks will be in separate groups. They will not be.
As I say, if the detail of the resolution arrangements changes, then of course these clauses can be amended to take account of the new structure. We have future-proofed them as far as we can, in the sense that my noble friend, quite rightly, talks about the European approach. As I said last week but will say again, of course we are going to remain fully consistent with the European approach to these matters and indeed we are actively taking part in shaping it. The fact that we have a worked-out solution ahead of others in Europe itself puts us in a very good position to influence things, and the legislation—the proposals that we are introducing and considering today—is consistent with what is set out in the Financial Stability Board’s document on key attributes for an effective resolution regime. We have taken every possible step to ensure consistency with Europe.
Lord Peston
I am sorry to interrupt the Minister but I want to ensure that noble Lords understand what he is saying. He is saying that the Treasury has discovered two problems that can be dealt with rapidly by mending the Banking Act 2009 and he is therefore using this Bill, which is not specifically about banking, as a convenient vehicle to put those into law. That is the result of the Treasury's work; it has found those two things and feels that it ought to act rapidly. I also therefore infer, validly, that the Treasury has not found any other changes that need to be made rapidly and could well have been dumped in this Bill as well—just these. That is my interpretation—that they have found these two and we must get a move on. Am I right?
Lord Sassoon
First, my Lords, these clauses fall properly in the Bill because essentially we are giving powers to the Bank of England to resolve things. I would not like to leave the thought that we were somehow using the Bill as a Christmas tree to add on other unrelated things; this is definitely related to the purpose of the Bill because we are talking about the powers of the authorities.
Secondly, the noble Lord, Lord Peston, could be mistaken for giving the impression that somehow we just discovered these things last week or last month. As I have already said, very important new powers were put in place in the Banking Act 2009. Over a period it was then, partly after seeing the collapse of other investment firms and partly by talking to the market, a consultation process, so this is not something that has just emerged. In this area, we have nothing else up the Treasury’s sleeve, as it were. If anyone identifies any other gaps in the regime, of course we will consult on them and do all the proper things that Parliament would expect us to do.
That leaves one area that my noble friend Lord Flight asked about: the doctrine of “lender of last resort”. Fascinating and important though it is, I am reluctant to get into this area because it does not directly impact on where the lender of last resort doctrine, as he puts it, has now got to. It was the Banking Act 2009 that made sure that the authorities, including the Bank, had the full suite of powers. The Bill further improves those tools and clarifies responsibilities, but of course it does not alter the basic premise that the Bank will continue to be the lender of last resort to the banking sector and to the resolution authority for a variety of firms. As for the precise doctrine of how they operate, that is a matter for the Bank of England and should remain so. I recognise that that is clearly called into question by the events in 2007 and 2008, but I assure my noble friend that it is not affected by the substance of the clauses that we are discussing today.
Baroness Kramer
Will the Minister basically send me a note on how the resolution process is going to work with the clearing houses? I have an outstanding concern. In our discussions in Committee last week, he was very keen to assure the House that, in a resolution situation, clearing houses would not turn to their members and ask for additional funds in order to meet their outstanding obligations. He made it clear that the resolution process would contain the liability that would fall on members. However, we have had no discussion of what happens with an outstanding contract entered into in good faith by a party with that clearing house for, say, the future delivery of FX, or foreign currency. What happens to the person with that outstanding contract in a case of resolution? Where do they stand in that process? We need some clarity at some point on who is carrying the liability. Of all the innocent parties involved, they would seem to be the main one.
Lord Sassoon
I apologise to my noble friend because I forgot to answer her question. The answer to her question on whether contracts will be torn up is an unequivocal no. Contracts will not be torn up. That is quite clear. In answer to the other question—
Lord Sassoon
If my noble friend will forgive me I will answer the other question first. It is an important question about the call on members and shareholders of firms. I thought that I had made the position completely clear last week: there will be no new powers here to call on shareholders and members to put up new funds, except in circumstances where there are already agreements in place for contingent calls or other ways of calling down funds in arrangements that exist before this situation kicks in. I know very well that there are one or two clearing houses and others who do not seem happy to accept that assurance of last week. I can only give it again—that is the position under the clauses that we have been debating. There is nothing here that causes calls to be made on members if it is not under an existing arrangement.
Baroness Kramer
I am afraid that the Minister misunderstands where my concern is coming from. I recognise that there are some in this House who are very concerned to give that kind of assurance to the various members of the clearing house—that there will be no further call other than that which has been agreed in their fundamental arrangements. However, that leaves open the question of the open contracts that are left if a clearing house fails. This becomes very serious as we move to a limited number of extremely large clearing houses with a very significant number of contracts in their hands. Who will meet the obligation under those outstanding contracts? If it is not going to be the members of the clearing house, because there can be no further call on them, will it be the taxpayer? If the taxpayer is not standing behind this then we are in a “tear up contract” situation. We really need to understand how that waterfall is going to work rather than end up in the actual situation in life and find that we have lawsuits served from every direction and some real undermining of the whole system. That is what I am trying to get to the bottom of. If the Minister has not really sat down and addressed that question, perhaps somebody in his team could send me a note.
Lord Sassoon
My Lords, we have addressed the situation. First, the contracts are the contracts. They need to be enforced by the appropriate mechanisms, whatever they are, which may require legal routes to be gone through. What we are trying to do here is to make sure that, as far as possible, we put in place arrangements and tools which mean that some of the difficult unwinding of contracts, such as were seen in MF Global, for example, can be dealt with more quickly and effectively.
As for who pays up at the end of the day, there are well established procedures to make sure that, first, the shareholders pay, subject to the limitations on shareholders as we understand them—my noble friend is not challenging that. Then, of course, there may be holders of debt. Beyond that, the normal arrangements that exist through the financial services system will apply as regards where the liability falls. Nothing we are doing in these clauses makes any changes to the arrangements that are generally in place about the split between the taxpayer and other parts of the financial services industry to pick up liabilities.
Lord Sassoon
“Groups
(1) The Banking Act 2009 is amended as follows.
(2) In section 1 (overview), for the entry in the Table relating to sections 82 and 83 substitute—
“Sections 81B to 83 | Groups”. |
“(1A) Subsection (1) also applies to a director of any undertaking which is a banking group company in respect of a specified bank.”
(4) After section 36 insert—
“36A Directors
(1) A property transfer instrument may enable the Bank of England—
(a) to remove a director of a specified bank;(b) to vary the service contract of a director of a specified bank;(c) to terminate the service contract of a director of a specified bank;(d) to appoint a director of a specified bank.(2) Subsection (1) also applies to a director of any undertaking which is a banking group company in respect of a specified bank.
(3) Appointments under subsection (1)(d) are to be on terms and conditions agreed with the Bank of England.”
(5) For the italic heading before section 82 substitute “Groups”, and after that heading insert—
“81B Sale to commercial purchaser and transfer to bridge bank
(1) The Bank of England may exercise a stabilisation power in respect of a banking group company in accordance with section 11(2) or 12(2) if the following conditions are met.
(2) Condition 1 is that the PRA is satisfied that the general conditions for the exercise of a stabilisation power set out in section 7 are met in respect of a bank in the same group.
(3) Condition 2 (which does not apply in a financial assistance case) is that the Bank of England is satisfied that the exercise of the power in respect of the banking group company is necessary, having regard to the public interest in—
(a) the stability of the financial systems of the United Kingdom,(b) the maintenance of public confidence in the stability of those systems,(c) the protection of depositors, or(d) the protection of any client assets that may be affected.(4) Condition 3 (which applies only in a financial assistance case) is that—
(a) the Treasury have recommended the Bank of England to exercise a stabilisation power on the grounds that it is necessary to protect the public interest, and(b) in the Bank’s opinion, exercise of the power in respect of the banking group company is an appropriate way to provide that protection.(5) Condition 4 is that the banking group company is an undertaking incorporated in, or formed under the law of any part of, the United Kingdom.
(6) Before determining whether Condition 2 or 3 (as appropriate) is met, the Bank of England must consult—
(a) the Treasury,(b) the PRA, and(c) the FCA. (7) In exercising a stabilisation power in reliance on this section the Bank of England must have regard to the need to minimise the effect of the exercise of the power on other undertakings in the same group.
(8) In this section “financial assistance case” means a case in which the Treasury notify the Bank of England that they have provided financial assistance in respect of a bank in the same group for the purpose of resolving or reducing a serious threat to the stability of the financial systems of the United Kingdom.
81C Section 81B: supplemental
(1) In the following provisions references to banks include references to banking group companies—
(a) section 10(1), and(b) section 75(5)(a).(2) Where the Bank of England exercises a stabilisation power in respect of a banking group company in reliance on section 81B, the provisions relating to the stabilisation powers and the bank administration procedure contained in this Act (except sections 7 and 8) and any other enactment apply (with any necessary modifications) as if the banking group company were a bank.
(3) For the purposes of the application of section 143 (grounds for applying for bank administration order), the reference in subsection (2) to the Bank of England exercising a stabilisation power includes a case where the Bank of England intends to exercise such a power.
81D Interpretation: “banking group company” &c.
(1) In this Part “banking group company” means an undertaking—
(a) which is (or, but for the exercise of a stabilisation power, would be) in the same group as a bank, and(b) in respect of which any conditions specified in an order made by the Treasury are met.(2) An order may require the Bank of England to consult specified persons before determining whether the conditions are met.
(3) An order—
(a) is to be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.(4) If an order contains a statement that the Treasury are of the opinion that, by reason of urgency, it is necessary to make the order without complying with subsection (3)(b)—
(a) the order may be made, and(b) the order lapses unless approved by resolution of each House of Parliament during the period of 28 days (ignoring periods of dissolution, prorogation or adjournment of either House for more than 4 days) beginning with the day on which the order is made.(5) The lapse of an order under subsection (4)(b)—
(a) does not invalidate anything done under or in reliance on the order before the lapse and at a time when neither House has declined to approve the order, and(b) does not prevent the making of a new order (in new terms).(6) Undertakings are in the same group for the purposes of sections 81B, 81C and this section if they are group undertakings in respect of each other.
(7) Expressions defined in the Companies Act 2006 have the same meaning in section 81B and this section as in that Act.”
(6) In the Table in section 259 (statutory instruments), in Part 1 after the entry relating to section 78 insert—
“81D | Meaning of “banking group company” | Draft affirmative resolution (except for urgent cases)” |
“Banking group company | 81D”.” |
Lord Sassoon
My Lords, the purpose of Amendment 193E is to extend powers available under the special resolution regime, or SRR, to group companies. It will grant the Bank of England the power to exercise share and property transfer powers in respect of companies in the same group as the failing entity in order to facilitate the resolution of the failing entity. We believe that extending these powers is necessary because the situation could arise where exercising powers over only the failing entity may not be sufficient to fully protect the public interest.
For example, the business of a failing bank may rely on assets or services provided by another group company which is itself in trouble and the only way to preserve a viable and coherent business may be to transfer those assets or facilities out of the other group company. Having said what I said about the previous amendments and clauses, we now move on to another area which will be of interest to my noble friend Lady Kramer, because we think that, in particular circumstances, it is also right to call in assets or facilities out of another related group company.
The legislation will give the Treasury the power to set conditions to the exercise of powers over group companies. The Government intend, for example, to set the condition that the group in question must be engaged primarily in financial services in order for these powers to be exercisable. We will also set a requirement that the Bank of England exercise powers at the lowest level of the group. The clauses also give the Bank powers similar to those available to the Treasury to remove or vary the appointments of directors of failing entities and, if necessary, to group companies where it exercises stabilisation powers.
It may be useful for me to give an example of how this power might be exercised. There could be a large listed entity—a retailer, for example—that has subsidiaries engaged in banking or other financial services as well as in traditional retail businesses. The extension of powers that we are introducing will ensure that the Bank of England has the ability to exercise share and property transfer powers over financial subgroups operating under the listed retailer, but not in respect of the retailer itself.
The legislation we are debating today contains further safeguards. The Bank of England will only be able to exercise powers over group companies where necessary in the public interest, and it must have regard to the need to minimise any adverse effect of its actions on the rest of the group. Therefore, although these are broad powers, the Bank will only exercise them where necessary, and must do so proportionately.
The order-making power will be subject to approval by both this House and the other place, either on a draft order or, where the power is exercised in an emergency, within 28 sitting days. I beg to move.
Lord Sassoon
“Application to investment firms
(1) The Banking Act 2009 is amended as follows.
(2) In section 1 (overview), after the entry in the Table relating to sections 84 to 89 insert—
“Section 89A | Investment firms”. |
(4) In section 75(5) (power to change law: application to other institutions), omit the “or” following paragraph (c) and after that paragraph insert—
“(ca) to investment firms,”.(5) After section 89 (and in Part 1) insert—
“Investment firms89A Application to investment firms
(1) This Part applies to investment firms as it applies to banks, subject to the modifications in subsection (2).
(2) Ignore sections 1(2)(b), 4(2)(b) and (6), 5(1)(b), 7(7), 8(2)(c) and 14(5).”
(6) After section 159 insert—
“159A Application to investment firms
This Part applies to investment firms as it applies to banks.”(7) After section 258 insert—
“258A “Investment firm”
(1) In this Act “investment firm” means a UK institution which is (or, but for the exercise of a stabilisation power, would be) an investment firm for the purposes of Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions.
(2) But “investment firm” does not include—
(a) an institution which is also—(i) a bank (within the meaning of Part 1),(ii) a building society (within the meaning of section 119 of the Building Societies Act 1986), or(iii) a credit union (within the meaning of section 31 of the Credit Unions Act 1979 or Article 2(2) of the Credit Unions (Northern Ireland) Order 1985), or(b) an institution which is of a class or description specified in an order made by the Treasury.(3) An order—
(a) is to be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.(4) If an order contains a statement that the Treasury are of the opinion that, by reason of urgency, it is necessary to make the order without complying with subsection (3)(b)—
(a) the order may be made, and(b) the order lapses unless approved by resolution of each House of Parliament during the period of 28 days (ignoring periods of dissolution, prorogation or adjournment of either House for more than 4 days) beginning with the day on which the order is made.(5) The lapse of an order under subsection (4)(b)—
(a) does not invalidate anything done under or in reliance on the order before the lapse and at a time when neither House has declined to approve the order, and(b) does not prevent the making of a new order (in new terms).(6) In subsection (1) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom.”
(8) In the Table in section 259 (statutory instruments), in Part 7 after the entry relating to section 257 insert—
“258A | Meaning of “investment firm” | Draft affirmative resolution (except for urgent cases)”. |
“Investment firm | 258A”. |
Lord Sassoon
“Application to UK clearing houses
(1) The Banking Act 2009 is amended as follows.
(2) In section 1 (overview), after the entry in the Table relating to section 89A, insert—
“Sections 89B to 89G | UK clearing houses”. |
(4) After section 39 insert—
“39A Banks which are clearing houses
Sections 89C to 89E (clearing house rules, membership and recognition) apply in relation to a bank which would be a UK clearing house but for section 89G(2) (exclusion of banks etc from definition of UK clearing house) as they apply in relation to a UK clearing house.”(5) In section 75(5) (power to change law: application to other institutions), after paragraph (ca) insert—
“(cb) to UK clearing houses, or”.(6) After section 89A (and in Part 1) insert—
“UK clearing houses89B Application to UK clearing houses
(1) This Part applies to UK clearing houses as it applies to banks, subject to—
(a) the modifications specified in subsections (2) to (5), and in the Table in subsection (6), and(b) any other necessary modifications.(2) For section 13 substitute—
“13 Transfer of ownership
(1) The third stabilisation option is to transfer ownership of the UK clearing house to any person.
(2) For that purpose the Bank of England may make one or more share transfer instruments.”
(3) For sections 28 and 29 substitute—
“28 Onward transfer
(1) This section applies where the Bank of England has made a share transfer instrument, in respect of securities issued by a UK clearing house, in accordance with section 13(2) (“the original instrument”).
(2) The Bank of England may make one or more onward share transfer instruments.
(3) An onward share transfer instrument is a share transfer instrument which—
(a) provides for the transfer of—(i) securities which were issued by the UK clearing house before the original instrument and have been transferred by the original instrument or a supplemental share transfer instrument, or(ii) securities which were issued by the UK clearing house after the original instrument;(b) makes other provision for the purposes of, or in connection with, the transfer of securities issued by the UK clearing house (whether the transfer has been or is to be effected by that instrument, by another share transfer instrument or otherwise).(4) An onward share transfer instrument may not transfer securities to the transferor under the original instrument.
(5) The Bank of England may not make an onward share transfer instrument unless the transferee under the original instrument is—
(a) the Bank of England, (b) a nominee of the Treasury, or(c) a company wholly owned by the Bank of England or the Treasury.(6) Sections 7 and 8 do not apply to an onward share transfer instrument (but it is to be treated in the same way as any other share transfer instrument for all other purposes, including for the purposes of the application of a power under this Part).
(7) Before making an onward share transfer instrument the Bank of England must consult—
(a) if the UK clearing house is a PRA-authorised person, the PRA, and(b) the FCA.(8) Section 26 applies where the Bank of England has made an onward share transfer instrument.
29 Reverse share transfer
(1) This section applies where the Bank of England has made a share transfer instrument in accordance with section 13(2) (“the original instrument”) providing for the transfer of securities issued by a UK clearing house to a person (“the original transferee”).
(2) The Bank of England may make one or more reverse share transfer instruments in respect of securities issued by the UK clearing house and held by the original transferee (whether or not they were transferred by the original instrument).
(3) If the Bank of England makes an onward share transfer instrument in respect of securities transferred by the original instrument, the Bank may make one or more reverse share transfer instruments in respect of securities issued by the UK clearing house and held by a transferee under the onward share transfer instrument (“the onward transferee”).
(4) A reverse share transfer instrument is a share transfer instrument which—
(a) provides for transfer to the transferor under the original instrument (where subsection (2) applies);(b) provides for transfer to the original transferee (where subsection (3) applies);(c) makes other provision for the purposes of, or in connection with, the transfer of securities which are, could be or could have been transferred under paragraph (a) or (b).(5) The Bank of England may not make a reverse share transfer instrument under subsection (2) unless—
(a) the original transferee is—(i) the Bank of England,(ii) a company wholly owned by the Bank of England or the Treasury, or(iii) a nominee of the Treasury, or(b) the reverse share transfer instrument is made with the written consent of the original transferee.(6) The Bank of England may not make a reverse share transfer instrument under subsection (3) unless—
(a) the onward transferee is— (i) the Bank of England,(ii) a company wholly owned by the Bank of England or the Treasury, or(iii) a nominee of the Treasury, or(b) the reverse share transfer instrument is made with the written consent of the onward transferee.(7) Sections 7 and 8 do not apply to a reverse share transfer instrument (but it is to be treated in the same way as any other share transfer instrument for all other purposes including for the purposes of the application of a power under this Part).
(8) Before making a reverse share transfer instrument the Bank of England must consult—
(a) if the UK clearing house is a PRA-authorised person, the PRA, and(b) the FCA. (9) Section 26 applies where the Bank of England has made a reverse share transfer instrument.”
(4) For sections 45 and 46 substitute—
“45 Transfer of ownership: property transfer
(1) This section applies where the Bank of England has made a share transfer instrument, in respect of securities issued by a UK clearing house, in accordance with section 13(2) (“the original instrument”).
(2) The Bank of England may make one or more property transfer instruments.
(3) A property transfer instrument is an instrument which—
(a) provides for property, rights or liabilities of the UK clearing house to be transferred (whether accruing or arising before or after the original instrument);(b) makes other provision for the purposes of, or in connection with, the transfer of property, rights or liabilities of the UK clearing house (whether the transfer has been or is to be effected by the instrument or otherwise).(4) The Bank of England may not make a property transfer instrument in accordance with this section unless the original instrument transferred securities to—
(a) the Bank of England,(b) a company wholly owned by the Bank of England or the Treasury, or(c) a nominee of the Treasury.(5) Sections 7 and 8 do not apply to a property transfer instrument made in accordance with this section.
(6) Section 42 applies where the Bank of England has made a property transfer instrument in accordance with this section.
(7) Before making a property transfer instrument in accordance with this section, the Bank of England must consult—
(a) if the UK clearing house is a PRA-authorised person, the PRA, and(b) the FCA.46 Transfer of ownership: reverse property transfer
(1) This section applies where the Bank of England has made a property transfer instrument in accordance with section 45(2) (“the original instrument”).
(2) The Bank of England may make one or more reverse property transfer instruments in respect of property, rights or liabilities of the transferee under the original instrument.
(3) A reverse property transfer instrument is a property transfer instrument which—
(a) provides for transfer to the transferor under the original instrument;(b) makes other provision for the purposes of, or in connection with, the transfer of property, rights or liabilities which are, could be or could have been transferred. (4) The Bank of England must not make a reverse property transfer instrument unless—
(a) the transferee under the original instrument is—(i) the Bank of England,(ii) a company wholly owned by the Bank of England or the Treasury, or(iii) a nominee of the Treasury, or(b) the reverse property transfer instrument is made with the written consent of the transferee under the original instrument.(5) Sections 7 and 8 do not apply to a reverse property transfer instrument made in accordance with this section.
(6) Before making a reverse property transfer instrument in accordance with this section, the Bank of England must consult—
(a) if the UK clearing house is a PRA-authorised person, the PRA, and(b) the FCA. (7) Section 42 applies where the Bank of England has made a reverse property transfer instrument in accordance with this section.”
(5) For section 81 substitute—
“81 Transfer of ownership: report
(1) This section applies where the Bank of England makes one or more share transfer instruments in respect of a UK clearing house under section 13(2).
(2) The Bank must report to the Chancellor of the Exchequer about the exercise of the power to make share transfer instruments under that section.
(3) The report must comply with any requirements as to content specified by the Treasury.
(4) The report must be made as soon as is reasonably practicable after the end of one year beginning with the date of the first transfer instrument made under section 13(2).”
(6) The table mentioned in subsection (1)(a) is as follows—
Provision | Modification |
|---|---|
Section 1 | Ignore subsection (2)(b) and (c). |
In subsection (3)(c), for “to temporary public ownership” substitute “of ownership”. | |
In subsection (4)(a), for “15, 16, 26 to 31 and 85” substitute “15, 26 and 28 to 31”. | |
Section 4 | Ignore subsection (2)(b) and (c). |
Ignore subsection (3)(a), (b) and (ba). | |
In subsection (5), for “banking” substitute “financial”. | |
In subsection (6), for “protect depositors” substitute “maintain the continuity of central counterparty clearing services”. | |
Ignore subsections (8A), (8B) and (9). | |
Section 5 | Ignore subsection (1)(b) and (c). |
In subsection (3)— (a) for “Sections 12 and 13 require” substitute “Section 12 requires”, and (b) ignore the words “and temporary public ownership”. | |
Section 6 | In subsection (4)— (a) after “Before” insert “issuing or”, and (b) ignore paragraph (d). |
In subsection (5) after “after” insert “issuing or”. | |
Section 7 | In subsection (1), for “PRA” substitute “Bank of England”. |
In subsection (2), for the words following “satisfy the” substitute “recognition requirements”. | |
The Bank of England may treat Condition 1 as met if satisfied that it would be met but for the withdrawal or possible withdrawal of critical clearing services by the UK clearing house. | |
In subsection (3), for “satisfy the threshold conditions” substitute “maintain the continuity of any critical clearing services it provides while also satisfying the recognition requirements”. | |
In subsection (4), for “PRA” substitute “Bank of England”. | |
Ignore subsection (4A). | |
In subsection (5)— (a) for “PRA” substitute “Bank of England”, and (b) ignore paragraph (a) unless the UK clearing house is a PRA-authorised person, in which case for “Bank of England” substitute “PRA”. | |
Ignore subsections (7) and (8). | |
For the purposes of section 7— (a) “critical clearing services” means central counterparty clearing services the withdrawal of which may, in the Bank of England’s opinion, threaten the stability of the financial systems of the United Kingdom, and (b) “recognition requirements” means the requirements resulting from section 286 of the Financial Services and Markets Act 2000. | |
Section 8 | In subsection (1), omit “in accordance with section 11(2) or 12(2)”. |
Ignore subsection (2)(c) and (d). | |
In subsection (3), ignore paragraph (a) unless the UK clearing house is a PRA-authorised person. | |
In subsection (4), ignore the words “in accordance with section 11(2) or 12(2)”. | |
Section 9 | Ignore section 9. |
Section 11 | Ignore subsection (2)(a). |
Section 13 | See above. |
Section 14 | Ignore subsection (5). |
Section 16 | Ignore section 16. |
Section 20 | Ignore subsections (2) and (4). |
Section 24 | In subsection (1), ignore paragraph (c) unless the UK clearing house is a PRA-authorised person. |
Section 25 | Ignore section 25. |
Section 26 | In subsection (1), for “11(2)” substitute “13(2)”. |
In subsection (5), ignore paragraph (a) unless the UK clearing house is a PRA-authorised person. | |
In subsection (6), for “11(2)” substitute “13(2)”. | |
Sections 26A and 27 | Ignore sections 26A and 27. |
Sections 28 and 29 | See above. |
Section 30 | In subsection (5), ignore paragraph (a) unless the UK clearing house is a PRA-authorised person. |
Section 31 | In subsection (4), for “7, 8 and 51” substitute “7 and 8”. |
In subsection (5), ignore paragraph (a) unless the UK clearing house is a PRA-authorised person. | |
Section 41 | In subsection (1), ignore paragraph (c) unless the UK clearing house is a PRA-authorised person. |
Section 42 | In subsection (5), ignore paragraph (a) unless the UK clearing house is a PRA-authorised person. |
Section 42A | In subsection (5), for “7, 8 and 50” substitute “7 and 8”. |
In subsection (6), ignore paragraph (a) unless the UK clearing house is a PRA-authorised person. | |
Section 43 | In subsection (6), for “7, 8 and 52” substitute “7 and 8”. |
In subsection (7), ignore paragraph (a) unless the UK clearing house is a PRA-authorised person. | |
Section 44 | In subsection (5), for “7, 8 and 52” substitute “7 and 8”. |
In subsection (6), ignore paragraph (a) unless the UK clearing house is a PRA-authorised person. | |
Sections 45 and 46 | See above. |
Sections 49 to 53 | Ignore sections 49 to 53. |
Section 54 | In subsection (1), for “A compensation scheme order” substitute “An order under section 89F”. |
In subsection (4)(b), for “compensation scheme order” substitute “the order under section 89F”. | |
Section 55 | In subsection (10), for “to which section 62 applies” substitute “under section 89F”. |
Section 56 | In subsection (6), for “to which section 62 applies” substitute “under section 89F”. |
Section 57 | In subsection (1), for “A compensation scheme order” substitute “An order under section 89F”. |
In subsection (4)(a), for “has had a permission under Part 4A of the Financial Services and Markets Act 2000 (regulated activities) varied or cancelled” substitute “no longer qualifies as a recognised body under Part 18 of the Financial Services and Markets Act 2000 (recognised investment exchanges and clearing houses) or is subject to a requirement imposed under that Part”. | |
Section 58 | In subsection (1), for “A resolution fund order” substitute “An order under section 89F that provides for transferors to become entitled to the proceeds of the disposal of things transferred”. |
Ignore subsection (3). | |
In subsection (4), for “A resolution fund order” substitute “An order under section 89F that provides for transferors to become entitled to the proceeds of the disposal of things transferred”. | |
In subsection (5), for “A resolution fund order” substitute “An order under section 89F that provides for transferors to become entitled to the proceeds of the disposal of things transferred”. | |
Ignore subsections (6) to (8). | |
Section 59 | Ignore section 59. |
Section 60 | In subsection (3)(c), ignore the references to bank insolvency and bank administration. |
In subsection (4)— (a) ignore paragraphs (a) and (b), and (b) in paragraph (c), for “a third party compensation order” substitute “an order under section 89F”. | |
In subsection (5)— (a) ignore paragraph (a), and (b) in paragraph (c), for “a compensation scheme order or resolution fund order” substitute “an order under section 89F”. | |
Section 61 | In subsection (1)— (a) ignore paragraphs (a) to (c), and (b) treat the subsection as including a reference to orders under section 89F. |
Ignore subsection (2)(b). | |
Section 62 | Ignore section 62. |
Section 65 | In subsection (1)(a)(ii), for “order” substitute “instrument”. |
In subsection (3)— (a) in paragraph (a), ignore the words “where subsection (1)(a)(i) applies”, and (b) ignore paragraph (b). | |
Section 66 | In subsection (1)— (a) in paragraph (a), ignore the reference to section 11(2)(a), (b) in paragraph (d)(i), ignore the words following “England”, and (c) ignore paragraph (d)(ii). |
Section 68 | In subsection (1)(a), for “order” substitute “instrument”. |
Section 69 | In subsection (4)— (a) in paragraph (a), ignore the words “in relation to sections 63 and 64”, and (b) ignore paragraph (b). |
Section 70 | In subsection (3)— (a) in paragraph (a), ignore the words “in relation to section 63”, and (b) ignore paragraph (b). |
Section 71 | Ignore subsection (1)(a). |
Section 72 | Ignore subsection (1)(a). |
Section 73 | Ignore subsection (1)(a). |
Section 79A | In subsection (2), ignore the words “share transfer instruments and”. |
Section 81 | See above. |
Section 81B | In subsection (1), for “or 12(2)” substitute “, 12(2) or 13(2)”. |
Ignore subsection (3)(c) and (d). | |
In subsection (6), ignore paragraph (b) unless the clearing house is a PRA-authorised person. | |
Section 81C | In subsection (2), ignore the words “and the bank administration procedure”. |
Ignore subsection (3). | |
Sections 82 and 83 | Ignore sections 82 and 83. |
(1) A property transfer instrument made in respect of a UK clearing house may make provision about the consequences of a transfer for the rules of the clearing house.
(2) In particular, an instrument may—
(a) modify or amend the rules of a UK clearing house;(b) in a case where some, but not all, of the business of a UK clearing house is transferred, make provision as to the application of the rules in relation to the parts of the business that are, and are not, transferred.(3) Provision by virtue of this section may (but need not) be limited so as to have effect—
(a) for a specified period, or(b) until a specified event occurs or does not occur.89D Clearing house membership
(1) A property transfer instrument made in respect of a UK clearing house may make provision about the consequences of a transfer for membership of the clearing house.
(2) In particular, an instrument may—
(a) make provision modifying the terms on which a person is a member of a UK clearing house;(b) in a case where some, but not all, of the business of a UK clearing house is transferred, provide for a person who was a member of the transferor to remain a member of the transferor while also becoming a member of the transferee.89E Recognition of transferee company
(1) The Bank of England may provide for a company to which the business of a UK clearing house is transferred in accordance with section 12(2) to be treated as a recognised clearing house for the purposes of the Financial Services and Markets Act 2000—
(a) for a specified period, or(b) until a specified event occurs.(2) The provision may have effect—
(a) for a period specified in the instrument, or(b) until the occurrence of an event specified or described in the instrument.(3) The power under this section—
(a) may be exercised only with the consent of the Treasury, and(b) must be exercised by way of provision in a property transfer instrument (or supplemental instrument).89F Clearing house compensation orders
(1) The Treasury may by order make provision for protecting the financial interests of transferors and others in connection with any transfer under this Part as it applies by virtue of section 89B.
(2) The order may make provision establishing a scheme—
(a) for determining whether transferors should be paid compensation, or providing for transferors to be paid compensation, and establishing a scheme for paying any compensation,(b) under which transferors become entitled to the proceeds of the disposal of things transferred in specified circumstances, and to a specified extent, and(c) for compensation to be paid to persons other than transferors.(3) An order—
(a) is to be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.89G Interpretation: “UK clearing house” &c.
(1) In this Part “UK clearing house” means a clearing house—
(a) which is incorporated in, or formed under the law of any part of, the United Kingdom,(b) which provides central counterparty clearing services, and(c) in relation to which a recognition order is in force under Part 18 of the Financial Services and Markets Act 2000.(2) But “UK clearing house” does not include a clearing house which is also—
(a) a bank,(b) a building society (within the meaning of section 119 of the Building Societies Act 1986),(c) a credit union (within the meaning of section 31 of the Credit Unions Act 1979 or Article 2(2) of the Credit Unions (Northern Ireland) Order 1985), or(d) an investment firm.(3) Where a stabilisation power is exercised in respect of a UK clearing house, it does not cease to be a UK clearing house for the purposes of this Part if the recognition order referred to in subsection (1)(c) is later revoked.
(4) In this Part—
“central counterparty clearing services” has the same meaning as in section 155 of the Companies Act 1989 (see subsection (3A) of that section), and
“PRA-authorised person” has the meaning given by section 2B(5) of the Financial Services and Markets Act 2000.”
(7) In the Table in section 259 (statutory instruments), in Part 1 after the entry relating to section 89 insert—
“89F | Clearing house compensation orders | Draft affirmative resolution”. |
(a) after the entry relating to “bridge bank share transfer instrument” insert—
“central counterparty clearing services | 89G”, |
“PRA-authorised person | 89G”, and |
“UK clearing house | 89G”.” |
Lord Sassoon
My Lords, as the Committee will see, we continue with a related group. Amendment 193G would apply the special resolution regime set out in Part 1 of the Banking Act 2009 to UK clearing houses with a number of important modifications. Where a UK clearing house is in serious financial difficulties that threaten its ongoing viability and pose a systemic threat, the Bank of England will be able to exercise stabilisation powers to ensure that financial stability is maintained.
These stabilisation powers are based on those applicable to the bank sector and will allow for part or all of the business of the failing UK clearing house to be sold to a commercial purchaser; for the transfer of all or part of the business of the failing UK clearing house to a company owned by the Bank of England; and for the transfer of ownership of the UK clearing house to another legal person.
The transferee could be an existing clearing house which agreed to take on the failing entity in the interests of the stability of the sector as a whole, a new entity created for the express purpose of supporting the resolution or, in extremis, a public sector entity. The transferee would ensure the continuity of vital services while the problems that necessitated the transfer were resolved. Such a transfer could be of the entirety of the equity, property, rights and liabilities of the clearing house.
The transfer of the ownership of a company does not, of itself, restore the financial condition of the clearing house. As such, in the event that a transferee is found, it is anticipated that the transferee would take steps to restore the clearing house to viability. The purpose of any such transfer is to eliminate contagion risk by ensuring the continuing function of the clearing services of the clearing house.
One of the main modifications made in the application of the special resolution regime to UK clearing houses is that the third stabilisation option provided under the SRR as it applies to banks that provides for the temporary public ownership of banks, is replaced by a power that allows for the transfer of ownership of a UK clearing house to any person by way of one or more share transfer instruments. In extremis, this could facilitate a share transfer to the Government—that is, a period of temporary public ownership. The other main modification is a reverse share transfer power to allow the Bank of England to transfer back ownership to the UK clearing house in question once the problems have been resolved. In much the same way as for the share transfer powers that I have just described, similar powers for the transfer and reverse-transfer of property rights and liabilities of UK clearing houses are also provided for.
Other modifications to the application of the SRR regime to UK clearing houses have also been provided for in this amendment, including the requirement that the Bank reports to the Chancellor when a share transfer has been enacted and provisions relating to the consequences of a share transfer on a UK clearing house’s membership. This amendment also confers power on HM Treasury to make compensation orders in respect of transfers made in respect of UK clearing houses.
Finally, I should make clear that this amendment could not be used by the Bank of England to direct owners and members of a clearing house to recapitalise or refund the default arrangements of that clearing house, which was a point that I made, even if I was not being directly asked to do so, in our earlier discussion.
As I explained last week, the envisaged power of direction could not be used to do so either, unless the UK clearing house had existing contractual rights that allowed it to do so. In that case, the Bank could direct the UK clearing house to exercise its rights. However, the Government remain of the view that taxpayers should not be expected to meet the cost of restoring a failed clearing house to viability. The Government therefore wish to build on the positive developments around loss allocation rules that are already taking place in the industry. This would see changes made to the recognition requirements that would require all UK clearing houses to have in place such loss allocation rules.
Again, that is important because, as regards my noble friend Lady Kramer’s quite proper points, these clauses are one part of making sure that we have the proper resolution tools in place around some of these really complex matters about how to resolve the contractual issues. The industry is, in parallel, working on loss allocation rules, which is another complementary part of what we want to see in place as a complete improvement to the picture. The authorities will consult industry further on those proposed changes in due course. I beg to move.
Baroness Kramer
Does the Minister have any sense of when we will have a feel for what these loss allocation rules are? I suspect that that is where my questions have generally been headed.
Lord Sassoon
Lord Sassoon
“(ga) enable the Department of Enterprise, Trade and Investment in Northern Ireland to institute proceedings in Northern Ireland for a relevant offence;”
Lord Sassoon
“Suspension of licences under Part 3 of Consumer Credit Act 1974
(1) The Consumer Credit Act 1974 is amended as follows.
(2) In section 32 (suspension or revocation)—
(a) in subsection (1), omit “or suspended”,(b) in subsection (2)—(i) in paragraph (a), omit “, as the case may be,” and “, or suspend it until a specified date or indefinitely,”, and(ii) in paragraph (b), omit “or suspension” and “or suspend”,(c) in subsection (3)—(i) in paragraph (a), omit “, as the case may be,” and “, or suspend it until a specified date or indefinitely,”, and(ii) in paragraph (b), omit “or suspension”,(d) in subsection (4)—(i) in paragraph (a), omit “, as the case may be,” and “, or suspend it until a specified date or indefinitely,”, and(ii) in paragraph (b), omit “or suspension”,(e) in subsections (6) and (7), omit “or suspension”,(f) omit subsection (8),(g) in subsection (9), omit “or to suspend”, and(h) for the title, omit “Suspension and”.(3) After section 32 insert—
“32A Power to suspend licence
(1) If during the currency of a licence it appears to the OFT to be urgently necessary for the protection of consumers that the licence should cease to have effect immediately or on a specified date, the OFT is to proceed as follows.
(2) In the case of a standard licence the OFT must, by notice—
(a) inform the licensee that the OFT is suspending the licence from the date of the notice or from a later date specified in the notice,(b) state the OFT’s reasons for the suspension,(c) state either—(i) that the suspension is to end on a specified date, which must be no later than the last day of the 12 months beginning with the day on which the suspension takes effect, or (ii) that the duration of the suspension is to be as provided by section 32B,(d) specify any provision to be made under section 34A, and(e) invite the licensee to submit to the OFT in accordance with section 34ZA representations—(i) as to the suspension, and(ii) about the provision (if any) that is or should be made under section 34A.(3) In the case of a group licence the OFT must—
(a) give general notice that the OFT is suspending the licence from the date of the notice or from a later date specified in the notice,(b) state in the notice the OFT’s reasons for the suspension,(c) state in the notice either—(i) that the suspension is to end on a specified date, which must be no later than the last day of the 12 months beginning with the day on which the suspension takes effect, or(ii) that the duration of the suspension is to be as provided by section 32B,(d) specify in the notice any provision to be made under section 34A, and(e) in the notice invite any licensee to submit to the OFT in accordance with section 34ZA representations as to the suspension.(4) In the case of a group licence issued on application the OFT must also—
(a) inform the original applicant of the matters specified under subsection (3)(a) to (d) in the general notice, and(b) invite the original applicant to submit to the OFT in accordance with section 34ZA representations as to the suspension.(5) Except for the purposes of sections 29 to 32 and section 33A, a licensee under a suspended licence is to be treated, in respect of the period of suspension, as if the licence had not been issued.
(6) The suspension may, if the OFT thinks fit, be ended by notice given by it to the licensee or, in the case of a group licence, by general notice.
(7) In this section “consumers”, in relation to a licence, means individuals who have been or may be affected by the carrying on of the business to which the licence relates, other than individuals who are themselves licensees.
32B Duration of suspension
(1) This section applies where a notice under section 32A provides for the duration of a suspension under that section to be as provided by this section.
(2) The suspension ends at the end of the period of 12 months beginning with the day on which it takes effect, but this is subject to—
(a) subsections (3) and (4) (where those subsections give a later time), and(b) the powers of the OFT under section 32A(6) and section 33.(3) Subsection (4) applies where—
(a) the OFT gives notice under section 32 that it is minded to revoke the licence, and(b) it gives that notice—(i) on or before giving the notice under section 32A, or(ii) after giving that notice but before the end of the period of 12 months mentioned in subsection (2).(4) The period of suspension is to continue until—
(a) the time of any determination by the OFT not to revoke the licence in pursuance of the notice under section 32, or (b) where the OFT determines to revoke the licence in pursuance of the notice, the end of the appeal period.” (4) In section 33 (application to end suspension), for subsection (1) substitute—
“(1) On an application made by a licensee the OFT may, if it thinks fit, by notice to the licensee end the suspension of a licence under section 32A, whether the suspension was for a fixed period or for a period determined in accordance with section 32B.”
(5) In section 33A (power of OFT to impose requirements on licensees) after subsection (6) insert—
“(6A) A requirement imposed under this section during a period of suspension cannot take effect before the end of the suspension.”
(6) After section 34 insert—
“34ZA Representations to OFT: suspension under section 32A
(1) Where this section applies to an invitation by the OFT to any person (“P”) to submit representations, the OFT must invite P, within 21 days after the notice containing the invitation is given to P or published, or such longer period as the OFT may allow—
(a) to submit P’s representations in writing to the OFT, and(b) to give notice to the OFT, if P thinks fit, that P wishes to make representations orally,and where notice is given under paragraph (b) the OFT must arrange for the oral representations to be heard.(2) The OFT must reconsider its determination under section 32A and determine whether to confirm it (with or without variation) or revoke it and in doing so must take into account any representations submitted or made under this section.
(3) The OFT must give notice of its determination under this section to the persons who were required to be invited to submit representations about the original determination under section 32A or, where the invitation to submit representations was required to be given by general notice, must give general notice of the confirmation or revocation.”
(7) In section 34A (winding-up of standard licensee’s business), in subsection (2)—
(a) in paragraph (c), omit “suspend or”, and(b) after paragraph (c) insert—“(d) a determination to suspend such a licence under section 32A (including a determination made under section 34ZA on reconsidering a previous determination under section 32A);”.(8) In section 41 (appeals) after subsection (1) insert—
“(1ZA) References in the table to a determination as to the suspension of a standard licence or group licence are to be read as references to a determination under section 34ZA to confirm a determination to suspend a standard licence or group licence.”
(9) Nothing in this section affects the powers conferred by section 22 of FSMA 2000 or section 91 of this Act.”
Lord Sassoon
My Lords, Amendment 196A inserts into the Bill a new clause which gives the OFT a new power to suspend a consumer credit licence with immediate effect if the OFT considers it urgently necessary to do so to protect consumers. Amendment 202 makes a consequential change to commencement provisions to accommodate this power.
This new licence suspension power is the first step on the road to greater consumer protection in the consumer credit market. It will make sure that bad practice is tackled and that consumers are protected even before the move of consumer credit regulation from the OFT to the powerful new FCA in April 2014.
Noble Lords may ask why the Government are bothering with this change now, given the move to the FCA in 2014. We think it is worth ensuring that the OFT can act as a strong and credible regulator in the interim, particularly to protect vulnerable consumers.
The power has been very well received by those working closely with consumers. For example, the consumer organisation Which? stated:
“Our research has found that people taking out payday loans are often caught in a downward spiral of debt so it is important that the Office of Fair Trading will have the power to instantly suspend the credit licences of unscrupulous lenders caught breaking the existing rules.
This is a good step towards ensuring the regulator has the powers it needs to be a more proactive consumer watchdog. The Government must now … make sure the regulator has the resources it needs, and ensure there is no gap in supervision as these powers transfer to the Financial Conduct Authority”.
The current regime does not allow the OFT to do its job properly in this area. At present, where the OFT calls into question a licence holder’s fitness to hold a credit licence it can take various measures, including suspending, varying or revoking the credit licence. However, under the current regime a licence holder’s credit licence remains in effect until all rights of appeal have been exhausted, and the licence holder can continue to trade during this period. The appeal process may take up to two years to be completed; we saw that in the case of Yes Loans. The potential for detriment during that time is immense, particularly as rogue operators who are aware that they may soon lose their licence are incentivised to operate even more unscrupulously to maximise profits.
Amendment 196A amends the Consumer Credit Act 1974 to provide for an enhanced licence suspension power which will enable the OFT to suspend a licence with immediate effect or at a specified date, and the test is that the OFT considers it urgently necessary to protect consumers. It would be used in cases where there was an urgent need to take action in order to stop actual, or prevent further, consumer detriment.
The sorts of factors that the OFT might take into account when deciding whether or not to use the power would include evidence that the business has engaged in violence or threats of violence, fraud or dishonesty, or is targeting particularly vulnerable consumers with harmful practices. In fact the OFT issued a consultation document yesterday that sets out a number of examples of when and how they might apply the new tool.
It is important to note that the new power will have no adverse impact on businesses that comply with existing law and do not cause serious actual or potential consumer detriment. However, the Government expect it to have an important deterrent effect.
In addition, the power includes a number of safeguards. First and foremost, any suspension can only be in effect for 12 months from the date it is issued, unless during that time the OFT issues a notice that it is “minded to revoke” a licence. If no “minded to revoke” notice is issued, the suspension expires, and it cannot simply be made again.
There are also a number of procedural safeguards included in the power, setting out what notices must be given and what representations the licence holder must be permitted to make. Finally, the licence holder has the usual appeal routes open to them, although crucially a licence remains suspended while appeals are being heard.
In conclusion, this is a crucial step towards affording consumers in the credit market greater protection, a matter that we have discussed in a number of contexts during Committee. It strengthens the OFT in the interim period before the FCA takes over. During that period, it will allow the OFT to take firm action against those who may be mistreating their customers. I beg to move.
Lord Borrie
My Lords, I find the Minister’s explanation exceedingly clear and well justified. The case that he has put for being able to suspend a licence instantly is something that will only be rarely exercised. However, most importantly, as the Minister said, this power if exercised even once or twice will have a deterrent effect on others. Its value in the exceptional case is undoubted. I am so glad that the Minister has not been persuaded by those who say, “Oh, well, it’s all disappearing into the FCA shortly so why bother at this stage?”. I am glad that this has been done. It will send a message and it is very helpful for this to be put into law now.
Lord Stevenson of Balmacara
My Lords, as we have heard, this amendment would ensure that a decision by the OFT to suspend a consumer credit licence could take effect before an appeal process ends. This follows widespread concerns that appeals from consumer credit licence holders can take up to two years, as the noble Lord said, and the current law allows the trader to continue with any bad practice while the appeal is pending. We warmly welcome these amendments and are very grateful for them. The consultation paper that came out only yesterday is a very useful contribution to the debate.
However, perhaps the Minister could answer two questions—one small point and a larger one. The amendment sets up the legislation so that the OFT would suspend the whole licence; in other words, all activity covered by the licence. That generally makes sense. However, there may be circumstances where the OFT has concerns with a particular feature of a credit licence holder’s business activities—say, a lender whose lending practices are all right but who perhaps has problems with debt collection practices—and the right decision might be to close down one part of the business. The noble Lord may be able to point me to where these powers already exist or, if necessary, perhaps he would reflect on this point. There may be a slight issue here, but it is not a major one. If in doubt, the right thing is to withdraw the licence.
The second point is slightly broader. To date, the OFT has done a very good job in this area, and perhaps does not receive as much thanks as it should for that. It seems to us that the main problem is that it has never had the resources that it needs to do the job it wants to do. There is little point in providing powers to a body, as in this amendment, if the resources to do the job are not also provided. So my second question is about the transition: the OFT will probably have jurisdiction on credit in this relationship for only another 18 months or so. What will happen over the transition? I would be grateful if the Minister can give us a reassurance that the transfer arrangements will be such that this amendment will survive the transfer, and that the FCA will be willing and able to provide the necessary resources so that there is a seamless handover.
Lord Sassoon
My Lords, I am very grateful to the noble Lord, Lord Borrie, for giving his clear welcome to this provision. It is always gratifying to have his agreement on such things, as he has immense background experience in this area.
I turn to the two points made by the noble Lord, Lord Stevenson of Balmacara. I believe that there is no way of partly suspending a licence; it is an all-or-nothing situation. I note his suggestion to reflect on this, and I will check that it has been taken fully into account, as I suspect it has. It reinforces the point made by the noble Lord, Lord Borrie, that it is hoped that this power is not used very often and that it will be used in what are clearly extremely egregious cases.
On the second point, I can certainly assure the noble Lord that the planning relates to the transfer being seamless and appropriate—not only that the appropriate powers are taken into account but also the appropriate resources. My understanding is that people are clearly working to ensure that we achieve the objective that he and I share in this area.
Lord Sassoon
“In section 177 (offences), in subsection (2), after “director or” insert “other”.”
Lord Sassoon
“(aa) make provision treating any relevant instrument which was made, issued or given by the Financial Services Authority under any enactment before section 5 is fully in force and is designated by the FCA, the PRA or the Bank of England (or any two or more of them) in accordance with the order—(i) as having been made, issued or given by the designating body or bodies;(ii) as having been made, issued or given (or also made, issued or given) under a corresponding provision of this Act or of an enactment as amended by or under this Act;(ab) make provision enabling a body which makes a designation by virtue of paragraph (aa) to modify the instrument being designated;(ac) make provision treating anything done before section 5 is fully in force by persons appointed by the Financial Services Authority with the approval of the Treasury as having been done by the FCA;(ad) make provision treating anything done before section 5 is fully in force by persons appointed by the Prudential Regulation Authority Limited with the approval of the Treasury and the Bank of England as having been done by the PRA;”
Lord Sassoon