Bank Resolution (Recapitalisation) Bill [ Lords ] (First sitting)

Mark Garnier Excerpts

Committee stage
Tuesday 11th February 2025 Public Bill Committees

[Emma Reynolds]

It is a pleasure to serve under your chairmanship for the first time, but I am sure not the last, Ms Jardine. Government amendment 1 ensures that the Bank of England will have the flexibility to use the mechanism provided in this Bill in a broad range of circumstances. It does that by removing the provision added in the other place that prevents the Bank of England from using the new mechanism in relation to firms that have been directed to hold additional loss-absorbing resources, also known as MREL, or minimum requirement for own funds and eligible liabilities. I will also speak to amendment 3, tabled by the hon. Member for Wokingham, which aims to ensure that the mechanism is used only for small banks.

I appreciate that this issue is of interest to many hon. Members, as we discussed it on Second Reading, and also to those in the other place, where it was debated. However, the Government’s position on the matter is clear: as I set out on Second Reading, the intention is for the mechanism to be used primarily to support the resolution of smaller banks. The Government reaffirmed that position in their draft updates to the code of practice to which the Bank of England must have regard when using its resolution powers, and in the written statement that my predecessor, my hon. Friend the Member for Hampstead and Highgate (Tulip Siddiq), made to the House on 15 October 2024.

The Government appreciate the intent of the amendment passed in the other place and of amendment 3, and are conscious of the intent to preserve flexibility to use the mechanism on firms transitioning towards holding their full allocation of MREL. I also appreciate the remaining key concern that, without restriction on the scope of the mechanism, the Bank of England could use it on the largest banks. I make it absolutely clear that that is not the Government’s primary policy intention. The Bank of England should always, first and foremost, rely on a firm’s MREL resources, ensuring that its shareholders and investors bear the losses, rather than turning to this mechanism.

However, having considered the matter carefully, the Government believe that it is still not desirable to limit the mechanism’s scope in the Bill. That would in effect hardwire in legislation the principle that the mechanism is unavailable for larger banks, and it is that hardwiring that the Government are concerned about. As we have seen and experienced, bank failures are highly unpredictable. The Government’s concern is that if the legislation is overly restrictive, that might mean that the mechanism is unavailable in the very unlikely circumstances of large bank failures in which public funds may still be exposed. We must remember, in relation to this Bill, that the primary objective is to protect the taxpayer. The Government consider it important that the mechanism’s use is not overly constrained in the legislation, ensuring that it provides comprehensive protection for public funds—that is, the taxpayer.

To explain the Government’s thinking on this issue in more detail, I will make three points. First, there may be very limited circumstances in which the flexibility to use the mechanism on larger firms would help to protect public funds. The largest and most complex firms are required to hold additional resources to be bailed in—known as MREL—which aim to provide a robust level of self-insurance for larger firms. The Bill’s mechanism can be used only where a firm is transferred to a buyer or a bridge bank upon failure—something that is not envisaged for a large bank, which is expected to be bailed in instead. To take the points together, large banks should therefore have sufficient of their own resources to meet their recapitalisation costs, and the mechanism is unlikely to be available for use on large banks, even with the scope in the Bill remaining broad.

However, it is theoretically possible that circumstances could emerge for which a larger bank is not sufficiently resourced, although these are highly unlikely. One example would be if the firm were subject to a large redress claim, resulting in a higher recapitalisation amount than envisaged. Another example would be if the market value of the firm’s assets changed over time. That could result in more losses than expected at the point of failure—again, resulting in a higher amount of recapitalisation. Those examples, however unlikely they may be, show that there is a clear benefit in having the flexibility to source additional resources from the mechanism, having already written down the firm’s available MREL. Restricting the scope in the Bill would prevent the mechanism from being available in these types of scenario, leaving public funds and therefore the taxpayer exposed instead.

Secondly, I reiterate that the Bank of England would first look to write down or otherwise expose to loss available MREL and would then consider use of the mechanism only if a sale to a buyer or transfer to a bridge bank were needed. Funds from industry are therefore not expected to be used to cover a large bank’s full recapitalisation amount. Instead, they are expected to be needed only for an additional shortfall over and above that which the firm’s resources could fulfil and once these resources have been written down or exposed to loss. Use of the mechanism would simply be a “top-up” to achieve recapitalisation, rather than covering all of a firm’s recapitalisation costs.

Thirdly and finally, the Government agree with the intent behind amendment 3, in that it is important for there to be sufficient safeguards to prevent any inappropriate use of the new mechanism on larger firms. I reassure the hon. Member for Wokingham that a range of safeguards is already in place, which the Government believe provide the necessary checks and balances. For example, the Treasury is involved in the exercise of any resolution powers through being consulted about whether conditions for resolution have been met. The Treasury would also need to approve any resolution action with implications for public funds. If the Bank of England requested a large sum from the financial services compensation scheme, which it could not provide through its own resources, it would have implications for public funds, as the financial services compensation scheme would need to borrow from the Treasury. This means that, in practice, Treasury consent would be required if the Bank of England had requested a large sum.

The Bill also includes some important mechanisms to ensure transparency and parliamentary scrutiny. For example, the Bill now requires the Bank of England to report to the Chancellor on the use of the new mechanism, and it requires the Chancellor to lay those reports in Parliament. The Bill also requires the Bank of England to notify the Chairs of the relevant parliamentary Committees—namely, the Treasury Committee and the House of Lords Financial Services Regulation Committee—following the use of the mechanism. Those measures will ensure that Parliament can scrutinise the Bank of England’s actions in relation to the new mechanism. They were added to the Bill during the debate in the other place.

I hope that my explanations go some way to providing reassurance that the Government’s approach is the right one, and that ultimately, flexibility in the legislation is better for economic and financial stability, and for limiting the risk to public funds, which is what the Bill is all about. As a result, I hope that hon. Members can support the Government’s amendment, and I ask the hon. Member for Wokingham not to press his amendment.

[Mark Garnier (Wyre Forest) (Con)]

It is a great pleasure to serve under your chairmanship for the first time, Ms Jardine. I also thank the Minister, because we have had a fantastic time of agreement so far—but not on this particular point.

I will speak to Government amendment 1 and amendment 3 from the hon. Member for Wokingham. Government amendment 1 is aimed at reversing an amendment that was put in place by those in the other House. It was proposed by my colleague Baroness Vere, so we refer to it as “the Vere amendment”.

The Minister made quite a strong and convincing case for why the Bank of England feels that it needs the ability to use this type of financial services compensation scheme redress in the case of some of the larger banks. But what worried me, as I was listening to the Minister’s words, was that she was highlighting the fact that the MREL regime could fail. I spent three and a half years or so on the Parliamentary Commission on Banking Standards, coming up with this MREL stuff in the first place, and also on the Treasury Committee, analysing the banking crisis. We completely accept that there is no way we can legislate for any possible type of failure in the future. However, we can try to learn from mistakes. The Minister is suggesting that there is an exception—that the MREL regime is not right—but I would prefer the MREL regime to be looked at again to make sure that it operates properly.

The Minister makes the very good point that a bank could issue an MREL convertible bond, which converts into equity in the event of a default; and that the bank could be successful during the course of its life and the MREL bond is not, in fact, sufficiently big enough to meet the liabilities in the event of a default. To me, the answer is not to try to squeeze into place another bit of legislation that tries to fudge it. We should look more carefully at making sure that the MREL regime is right, although I completely understand her point that the regime is only going to make up the top-up. However, the problem is that if the Government are going for a growth agenda—we all know that the City of London and financial services institutions can grow quite quickly—we could end up with a situation in which quite a lot of money is being asked for by the other banks to be able to support this.

We will press this amendment to a Division and vote against it. I am glancing towards my Liberal Democrat friend, the hon. Member for Dorking and Horley, and I hope that enthusiastic nod means that we will not be by ourselves in doing so.

Liberal Democrat amendment 3 would bring back, in a slightly different form, the amendment proposed by Baroness Vere in the other place, but it adds something else that we are slightly worried about. Having looked at this on the Parliamentary Commission on Banking Standards for a number of years, I have become quite a purist about it. The amendment restores a fundamentally important point but what worries me is that it looks to have a negative resolution statutory instrument to ensure that that happens.

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[Emma Reynolds]

Coming on to the amendment, I am a little bit confused by the shadow Minister, because he rightly says—I agree with him about this—that it would not have been possible to use a negative SI, for example, during the weekend when everything was happening with Silicon Valley Bank. The Government at the time and the Bank of England rightly moved during that weekend to reassure the markets and everything was sorted, really—well, I say everything was sorted, but there was still more to do. However, the big decisions were made over that weekend.

If the Government had to lay an SI in order to give the Bank the permission to do that, it would not have been a good scenario. I think the shadow Minister is saying that he will back the other amendment, but not this one. I am a bit confused by his position.

[Mark Garnier]

To be absolutely clear, the Minister and I are absolutely as one on that particular point: to have a negative resolution SI, or indeed any SI, would hold up progress and create a lot of hassle. The substantive part of the amendment, which is the MREL bit, prevents us from being able to support the amendment, so we will vote against it. It is the other amendment—the growth amendment—that we will support. My apologies to the Chairman; I hope that is clear.

[Emma Reynolds]

I thought that was what the shadow Minister was saying, but it is good to get some clarification. I think I am not the only one who was a little confused.

As I said in my opening remarks, we do not support the amendment that the hon. Member for Wokingham tabled, but I understand the intent behind it and the concern that the hon. Member for Dorking and Horley raised.

A couple of other issues were raised; they go slightly beyond the bounds of the Bill, but I will respond to them anyway. As the hon. Member for Dorking and Horley knows, there is a consultation by the Bank of England on the MREL thresholds. That consultation closed recently and, as he would expect, the Treasury is working very closely with the Bank as it looks through the feedback to that consultation. That is not in the substance of this Bill, but it is a relevant consideration and I hope that reassures the hon. Gentleman that we are working closely with the Bank on this issue.

I hope that I have addressed the concerns raised by Opposition Members, but I am sure that they will tell me if I have not done so.

[Mark Garnier]

Yes.

[Emma Reynolds]

I think we will get on to the amendment on growth and competitiveness in the next stage of line-by-line consideration of the Bill.

Question put, That the amendment be made.

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[Emma Reynolds]

Clauses 2, 3 and 5 relate to the reporting and accountability requirements on the Bank of England when it uses the recapitalisation mechanism. The Government added these clauses to the Bill in the other place, reflecting the understandable concerns raised about how the Bank of England will be held to account when using the new mechanism. Together, they aim to ensure that there is effective transparency and scrutiny when the mechanism is used, helping to provide important assurances following a resolution to the Chancellor, Parliament, industry and the public.

Clause 2 requires the Bank of England to report to the Chancellor following its use of the mechanism. These reports must relate both to the exercise of the mechanism and the stabilisation option it is used in connection with. The “final report” produced by the Bank of England is intended to be a comprehensive account of the use of the mechanism, with the content and timing of the report to be specified by the Treasury.

As alluded to in the published draft updates to the Bank of England’s code of practice, the Government expect such final reports to include a number of important points: first, an explanation of the choice to use the new mechanism; secondly, how the resolution conditions and objectives were considered and given regard to; thirdly, an assessment of the costs of using the mechanism compared with placing the firm into insolvency; and finally, an explanation of why any ancillary costs were considered reasonable and necessary.

Clause 2 also requires the Bank of England to produce an interim report within three months of using the mechanism, if the final report has not been provided within that period. This guarantees that scrutiny of the Bank of England’s actions takes place in short order after a resolution involving the mechanism. The Chancellor will be required to lay any reports before Parliament, ensuring that there is appropriate transparency and accountability regarding the use of the mechanism. The Chancellor, however, will have the discretion to omit certain information from such reports when they are published if doing so is deemed to be in the public interest—for example, if reports contain commercially confidential information, or if disclosure could potentially frustrate an ongoing resolution process.

Clause 3 requires the Bank of England to notify the Chairs of the Treasury Committee of this House and the Financial Services Regulation Committee of the other place as soon as is reasonably practicable after the recapitalisation mechanism has been used. This means that Parliament will be engaged promptly following the use of the mechanism. Finally, clause 5 requires the Government’s code of practice, which sets out how the resolution regime is expected to work in practice, to include guidance on the contents of the reports of the Bank of England, which it is required to produce under clause 2. Clause 5 places an important obligation on the Treasury to ensure that there is transparency over what the Bank of England should expect to include in such reports.

At this point, I note that the Government published draft updates to the code of practice, which set out the sorts of things that are expected to be included in reports by the Bank of England. For example, reports would be expected to include an explanation of the choice to use the recapitalisation mechanism, as well as an assessment of the costs of using the mechanism compared with putting the failing firm into insolvency. The Government will issue a full update to the code of conduct in line with the provisions in the Bill that are coming into force. As mentioned at the start, these clauses provide important clarity for the Bank of England, industry and Parliament on the accountability mechanisms that apply when the recapitalisation mechanism is used. I therefore commend clauses 2, 3 and 5 to the Committee.

[Mark Garnier]

I will be brief, because I do not want to take up too much of the Committee’s time. I reiterate that accountability is an incredibly important part of the Bill; accountability of the Bank of England and the Treasury to Parliament is absolutely crucial. Having had the experience of spending my first five years in Parliament scrutinising this sector, the more information Parliament has when making legislation, the better it is for us all in producing good legislation.

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[Emma Reynolds]

I will briefly speak to clauses 6, 7 and 8, which cover the more technical aspects of the Bill. Clause 6 makes amendments to the Financial Services and Markets Act 2000. It ensures that, where the FSCS makes a recapitalisation payment to the Bank of England, its ability to levy the banking sector is extended to cover such a payment. This is key to recouping the FSCS’s funds, and thus achieving the Bill’s aim of reducing potential risk to public funds in a resolution. The clause also stipulates that credit unions are exempt from levies for this purpose, which I am sure Members will agree is a sensible and proportionate approach, given that credit unions are out of scope of the resolution regime.

The rest of clause 6 makes minor amendments to existing legislation. It clarifies that a recapitalisation payment is not classed as a management expense of the FSCS, and it clarifies that payments that are made in error, in connection with the recapitalisation funds provided to the Bank of England, can be levied for, which is consistent with the approach for the other statutory functions of the FSCS.

Clause 7 makes amendments to the Banking Act 2009. It makes it explicit that funds provided by the FSCS, in resolution in connection with the new mechanism, would not count as extraordinary public financial assistance, reflecting that the new mechanism is intended to reduce risk to the kind of public funds described within this definition. The clause allows the Bank of England to take into account the funds provided by the FSCS when calculating the extent to which certain liabilities are bailed in, when the Bank of England exercises its bail-in tool alongside executing a transfer. Without this, the Bank of England would not be able to consider the funds provided by the FSCS in instances where it exercises its bail-in tool. That might mean that the Bank of England would have to continue to write down certain liabilities, potentially including uncovered deposits, where doing so could negatively impact and destabilise the continued operation of the failed firm.

Clause 7 also gives the Bank of England the express ability to require the failing firm to issue new shares, allowing FSCS funds to then be used to pay for those shares, thereby injecting the funds into the firm. This will ensure that the Bank of England can move swiftly to recapitalise the failing firm. The clause also ensures that funds provided by the FSCS can be taken into account appropriately when deciding whether sale proceeds or compensation are due to those who owned the firm before it was transferred. This would avoid including value that was contributed by the banking sector in any assessment of the compensation payable to former shareholders and creditors, which would clearly be inappropriate and increase the cost of compensation to taxpayers.

Finally, clause 7 disapplies a requirement for the Bank of England to notify the Treasury as to whether a certain condition for providing financial assistance to a failing firm has been met, otherwise known as the 8% rule. The 8% rule states that resolution financing arrangements may be used only where the shareholders and creditors of the bailing institution have made a contribution equal in value to at least 8% of the institution’s liabilities. The Government have disapplied that requirement in their updates to the code of practice, as it is unlikely that the condition could be met by small banks since they will not hold sufficient loss-absorbing resources to reach the threshold. As such, the statutory notification requirement is redundant.

Finally, clause 8 sets out the procedural matters of the Bill, which I trust will cause no concern to hon. Members. At this point, I should note the Government’s second amendment, which removes the financial privilege amendment inserted in the other place. That is standard procedure and I trust that hon. Members will raise no objections. I hope hon. Members agree that the clauses are sensible provisions to ensure that the Bill works as intended and, as such, I commend them to the Committee.

[Mark Garnier]

You will be delighted, Ms Jardine, as I am sure the whole Committee will be, to hear that my contribution will be even shorter than the last one. The Minister rightly says that we are considering a lot of procedural-type amendments to do with the delivery of the Bill. I thank the Government for listening to industry over excluding credit unions from falling within the scope. It is incredibly important that we do not find lots of other people emerging into these sectors and suddenly finding themselves being part of a much more complicated area. On the procedural point of the Government amendment, we will absolutely support that.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7 ordered to stand part of the Bill.

Clause 8

Extent, commencement and short title

Amendment made: 2, in clause 8, page 6, line 1, leave out subsection (5).—(Emma Reynolds.)

This amendment removes the privilege amendment inserted by the House of Lords.

Clause 8, as amended, ordered to stand part of the Bill.

Question proposed, That the Chair do report the Bill, as amended, to the House.

[Emma Reynolds]

I commend the Bill to the Committee.

[Mark Garnier]

I thank everybody for their work. It is a great pleasure to see so many new Members of Parliament and former hedge fund managers; it is terrific. On so many occasions, I have joked about being a former investment banker and hedge fund manager, and now that I am a politician, I have the hat trick of the three most unpopular jobs known to humanity. For a next job, I will be a traffic warden. I thank everyone for their hard work.

[Emma Reynolds]

May I also take the opportunity to thank the officials of the House and you, Ms Jardine, as well as the Treasury officials who have worked so hard on the Bill? We still have some stages to go, but it is an opportune moment to do that.

Question put and agreed to.

Bill, as amended, to be reported.