Bank Recovery and Resolution Order 2016

Lord Sharkey Excerpts

Monday 12th December 2016 Grand Committee

I would like to emphasise my thanks for the assistance I have had in looking at these orders. With respect to the buy-to-let order, I am content that the answers to my questions should come in a letter.

[Lord Sharkey (LD)]

My Lords, I will address myself to the order that is 56 pages long. I agree with the points made by the noble Lord, Lord Tunnicliffe—and I thank him for sharing with me the letter of 24 November from the Minister—but unlike him I am not convinced that the order should progress as it stands. It was discussed in the Commons a week ago and there was concern there about Article 15.4, which amends Section 48Z of the Banking Act 2009. In particular there was concern about the insertion of new subsection 6(b). This subsection, as Lord Tunnicliffe has pointed out, would give wide, apparently unlimited discretion to the Bank or HMT to decide which instruments were to be bailed-in.

The 24 November letter addresses the question but does not seem to provide certainty. It simply notes:

“The exceptions in the amendment of section 48(z) will only apply to a narrow range of contracts where doing so would add to the authorities’ efforts to meet the special resolution objectives”.

The Minister repeated that earlier this afternoon. The Minister went on to say the following in his letter:

“The government will provide further guidance in Chapter 7 of the Special Resolution Regime Code of Practice on which type of contracts could include clauses that are activated by the use of a crisis prevention or management measure”.

This inevitably raises the question of why we are being asked to approve this order, or at least consider it here, without seeing the guidelines. Would not it be much more sensible to wait until we have the guidelines in front of us? They are the substance of this issue, and Parliament should have the opportunity to discuss them. Perhaps in the absence of them, the Minister can help us by characterising the type of contracts that will be affected.

Then there is the question of timing. When will the guidelines be published? If it is to be soon, why not withdraw parts of this order and re-present them with the guidelines? If it is not to be soon, does this not unnecessarily prolong market uncertainty?

There is another area in which further guidance is promised. The order provides the power for the Bank to resolve branches of third-country institutions operating in the United Kingdom independently of the third-country resolution authority. The Explanatory Memorandum to the order notes that respondents to the consultation were “broadly supportive” of this power, but some were concerned about the broad definition of the “business of the branch”. It goes on to say that further guidelines—again, guidelines—will be provided in the code on how the bank will judge whether,

“conditions for the use of these powers are satisfied for branches”.

Without these guidelines, this part of the order can only generate considerable uncertainty. Again, surely it would have been more sensible to debate the order with the guidelines. As things stand, Parliament is being asked to give the bank powers without having a clear view of how they will be exercised. The same questions of timing arise. If the guidelines are to be published soon, would not it be better to postpone discussion on parts of this order until they are published? If they are not to be published soon, does this not create unsatisfactory uncertainty in the market?

On the whole, I feel that the uncertainties generated by the absence of these two sets of guidelines make this order significantly flawed. It would be much better to withdraw it now and re-present it when we have the guidelines before us, or to withdraw Article 15 and Part 3 and re-present when the guidelines are available. I suggest that course of action to the Minister.

I have one final point. The order is very long. It is also very technical, as the Government explicitly acknowledged in the Commons. Consolidation would help Parliament to debate it more efficiently and to understand future references and amendments. In his 24 November letter, the Minister said that the Government have no plans to consolidate the legislation and points out that consolidated versions can be bought from commercial providers. The Explanatory Memorandum repeats that consolidated versions are commercially available but adds that,

“given the limited amount of Parliamentary time available, there are currently no plans to consolidate the legislation amended by this Order”.

Is there, in fact, a limited amount of parliamentary time available, in any non-trivial sense? The current schedules suggest not, at least not up until the end of March. In the interest of the sanity of current and future parliamentarians, will the Minister reconsider consolidation?

[Lord Young of Cookham]

My Lords, I am grateful to both noble Lords who have spoken in this debate. It is a complex subject and I am grateful for what the noble Lord, Lord Tunnicliffe, said about the meetings that we arranged. I certainly found that the learning curve in understanding this had a fairly steep gradient. I am also grateful for what the noble Lord said about officials at the Treasury and the Bank of England. To put the measure in context, the heavy lifting was done back in 2015 when the BRRD was transposed into legislation. Today, we are looking at relatively minor improvements to that broad structure in the light of a review that has taken place over the last two years. As I think I said, there has been broad approval for the proposals that we have in mind. I will go through the particular issues that the noble Lord raised, starting with the powers to suspend the board of directors. The position at the moment, as set out in the Explanatory Memorandum, is as follows:

“The Order also gives stand-alone powers to the PRA and the FCA to require the removal and replacement of directors and senior managers in accordance with Article 28 of the BRRD, and to appoint temporary managers in accordance with Article 29”.

So the regulators already have the power to undertake these early intervention measures. The stand-alone powers we are discussing this afternoon provide greater clarity on the scope of those powers.

As the noble Lord said, these are serious powers of intervention. He raised a number of questions about whether they would be exercised in a fair and proportionate manner. The new stand-alone early intervention powers are proposed with procedural safeguards for the firms, banks and individuals affected, and the powers may be exercised only if the conditions set out in Section 71D are satisfied. The PRA is required to give notice of its intentions to the firm, the directors and the senior executives who would be affected by the proposed use of these powers, and to give them time to make representations to the PRA. If, having considered any representations made to it, the PRA still decides to exercise these powers, the firm and any directors or senior executives affected have a right to have the decision reviewed by the Upper Tribunal, which will be completely independent of the regulators. The PRA’s general governance procedures should also ensure that these powers are exercised in a fair and proportionate manner.

In non-urgent cases, which in practice means in the vast majority of circumstances, decisions will be taken by the appropriate PRA decision-making committee, made up of at least three people. In urgent cases, if it is necessary to take a decision before a recommendation can be made to the appropriate decision-making committee, the PRA will require decisions to be made by at least two persons. In that case, the decision will be taken only if the two decision-makers are unanimous. At least one of the two individuals will not have been directly involved in establishing the evidence on which that decision is based.

Both the noble Lords, Lord Tunnicliffe and Lord Sharkey, raised issues about Article 15 and asked to which categories of contracts the amendment in Article 15 would apply. As I said when I introduced this debate, the amendment in Article 15 would apply only to a narrow range of contracts. To date, the Bank of England has identified two categories of contracts for which the amendment would be likely to apply. One category, mentioned by the noble Lord, Lord Tunnicliffe, is contractual bail-in instruments: debt instruments that qualify for the minimum requirement for own funds and eligible liabilities where the contract specifies that the instrument may be written down or converted to the extent required on the occurrence of a specified event, for example, when the bail-in tool is applied. I think that the noble Lord, Lord Tunnicliffe, accepted that that was a reasonable provision. With foreign law-governed debt instruments, it is necessary, for example, to ensure that the bail-in will take effect on a contractual basis because the application of the statutory bail-in power may not be enforceable on a cross-border basis.

The other category is certain service contracts specifying the terms on which services will continue to be provided following a resolution. These contracts therefore support operational continuity in an institution following resolution. Service contracts would also include certain contracts with financial market infrastructure, such as payment and settlement systems, where it is important to ensure that they continue to offer access to a firm after it has entered resolution.

Both noble Lords asked why Article 15 was not more specific about the categories. The answer is that resolution planning is an iterative process and banks are complex. It is possible that additional types of contracts could be identified at the advanced planning stage, where the Bank of England is preparing for the failure of a particular bank, so a broad formulation of the new power that Article 15 inserts into Section 48Z is appropriate.

--- Later in debate ---

[Lord Young of Cookham]

The noble Lord raises an important point, which I will of course pass on to the Bank of England. It is an independent body, but I am sure that it would like to respond to his point about updating the guidance, which, as he said, is now a little old.

Will the legislation be consolidated? Again, I am afraid, there is disappointing news. As a former Leader of the House, I can say that there was always enormous pressure on parliamentary counsel to draft legislation—it is a scarce commodity. Given the limited amount of parliamentary time available, there are currently no plans to consolidate the legislation. Stakeholders who are directly affected by the legislation and will therefore need a more granular understanding will be able to purchase consolidated versions of the legislation from commercial providers. In addition, HM Treasury’s special resolution regime code of practice will be updated to reflect the changes made by the order.

On the issue of third countries and the independent resolution powers, the powers that we are taking are in line with the Financial Stability Board’s “Key Attributes of Effective Resolution Regimes for Financial Institutions”. These key attributes recognise the need for resolution authorities to have, as a fallback option, the ability to take independent action with respect to local operations of foreign banks in certain circumstances, although, as I said at the beginning, every effort will be made for resolution by co-operation.

The noble Lord, Lord Sharkey, asked about the code of conduct. It will be published in the new year. I think that I covered the contracts under Article 15 in my introductory remarks.

The noble Lord, Lord Tunnicliffe, talked about the macroprudential issues and said that he would be happy to have a response to those in a letter, an offer that I gratefully accept. Now that the in-flight refuelling has arrived, I can say, on the macroprudential measures, that the FPC has included all previous recommendations and directions in the statements that follow its meetings. Implementation will depend on the specific direction and the regulators must consult on any rules that would implement these powers. The FPC may make recommendations regarding the timing of implementation. As I said when I introduced these instruments, we have already put on the statute book a similar regime for owner-occupiers, with whom I imagine the same sorts of issues have already arisen. Broadly, the same regime will apply for buy-to-let.

The noble Lord, Lord Tunnicliffe, asked about the cost. The cost reflects enhanced data collection, which is necessary for the regulators to monitor compliance with these powers and other prudential requirements.

I hope that I have covered most of the issues raised.

[Lord Sharkey]

When the Minister says that the guidelines on the definitions of the business of branches will be available in the new year, does he mean January or sometime in 2017? Also, I do not think that I heard him give a date for the guidelines for Article 15.

[Lord Young of Cookham]

At this stage I am not sure that I can take it any further than I did in my earlier remarks. However, I would like to make further inquiries and, if it is acceptable to the noble Lord, I will write to him when I have definitive information on those timelines.