Bank Resolution (Recapitalisation) Bill [Lords]

Mark Garnier Excerpts

Report stage
Thursday 24th April 2025 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I beg to move, That the clause be read a Second time.

[Madam Deputy Speaker (Judith Cummins)]

With this it will be convenient to discuss the following:

Amendment 1, in clause 1, page 1, line 20, at end insert—

“(2A) The Bank of England must not require the scheme manager to make a recapitalisation payment if it has directed the financial institution to maintain an end-state Minimum Requirement for Own Funds and Eligible Liabilities (MREL) exceeding minimum capital requirements.”

This amendment seeks to prohibit the use of FSCS funds to recapitalise large financial institutions, defined as those which have reached end-state MREL.

Amendment 3, page 1, line 22, at end insert—

“(3A) No application to the scheme manager for recapitalisation payments may be considered by the Bank of England for a financial institution which has been directed to maintain an end-state Minimum Requirement for Own Funds and Eligible Liabilities (MREL) exceeding minimum capital requirements, unless permission has been given, through regulations, by the Chancellor of the Exchequer.

(3B) Regulations made by the Chancellor of the Exchequer, subject to subsection (4), shall be made through Statutory Instrument under the negative procedure.”

This amendment would ensure financial institutions that maintain an end-state Minimum Requirement for Own Funds and Eligible Liabilities exceeding minimum capital requirements are excluded from the provisions of the Bill, unless permission has been given through regulations.

Amendment 4, page 2, line 3, at end insert—

“(5A) As a further objective to the special resolution objectives in section 4 of the Banking Act 2009, when discharging its functions in respect of the exercise of recapitalisation payments under this section, the Bank of England must observe the competitiveness and growth objective.

(5B) The competitiveness and growth objective is facilitating, subject to aligning with relevant international standards—

(a) the international competitiveness of the economy of the United Kingdom, and

(b) its growth in the medium to long term.”

This amendment would place a further objective on the Bank of England to consider the competitiveness and growth of the market before directing the recapitalisation of failing small banks through a levy on the banking sector.

Amendment 2, in clause 5, page 4, line 14, at end insert—

“(2B) The code must include guidance to the Bank of England on the exercise of its functions in relation to building societies to ensure that, in circumstances where the use of a recapitalisation power may result in demutualisation, due consideration is given to the impact of such demutualisation on members and on the mutuals sector.

(2C) In preparing the guidance required under subsection (2B), the Treasury shall consider the feasibility of selecting a purchaser from the mutuals sector as a means of avoiding demutualisation, provided such a purchaser meets the resolution objectives.”

This amendment seeks to ensure that, where possible, the selection of a purchaser from the mutuals sector is considered to avoid demutualisation, provided this aligns with the Bank's resolution objectives.

[Mark Garnier]

Before speaking to new clause 3 specifically, let me reiterate that the Opposition welcome the Government’s decision to carry over the legislation from the previous Parliament, and that the principles underpinning the Bill continue to enjoy strong cross-party support. We all want and need confidence in our banking sector, yet the failure of Silicon Valley Bank UK exposed a gap in our resolution framework for smaller banks. Unlike larger institutions, they do not hold the bail and bond mechanism known as MREL—the minimum requirement for own funds and eligible liabilities—reserves to facilitate recapitalisation in the event of a crisis. By providing the Bank of England with new tools to manage small bank failures, the Bill remains both prudent and necessary to protect financial stability and public funds.

Moving on to the amendments we have tabled on Report, I want to make it clear that our approach is constructive and focused on strengthening the Bill, not obstructing its progress. As the Bill has made progress through both Houses, our intention has been to address a series of smaller but none the less significant issues that we believe require further attention. I appreciate that this might be a conversation we can continue in today’s debate, or beyond it, and I would certainly welcome conversations with the Minister, who has been incredibly open to direct conversations in her usual pragmatic style, to further discuss these matters.

We have three measures selected for discussion today. I will speak first to new clause 3, which addresses a critical gap in the Bill’s scope: the protection of credit unions. These community-focused institutions have seen significant growth in recent years, driven in part by the eradication of predatory payday lenders, and they continue to provide a vital role in delivering affordable finance to those underserved by traditional banks.

Membership of credit unions rose from 1.89 million in 2019 to 2.14 million in 2024—an increase of more than 260,000. However, while their importance has grown, their inclusion in our resolution framework has not kept pace. The Financial Services Compensation Scheme has paid £10.1 million in compensation to credit union depositors over the past three financial years, primarily due to small-scale failures, underscoring their potential vulnerability and the need for a tailored approach as the sector expands.

The growth of credit unions is a success story, but it demands proportional safeguards. The Bill, however, excludes credit unions from its recapitalisation mechanism. While their smaller size and unique nature may differentiate them from banks, questions remain. How does the current resolution regime account for credit union failures as the sector scales up? Is there scope to develop a mechanism that protects members without imposing undue burdens on these community institutions? New clause 3 seeks clarity on this matter, requiring the Minister to produce a report outlining how the resolution framework can be adapted to protect credit unions, ensuring that their growth does not outstrip their regulatory safeguards. The vast amount of legislation for credit unions was written back in the 1970s. The previous Government made significant reforms for credit unions through amendments to the Financial Services and Markets Act, and I welcome the common bond reform consultation, which closed last month.

I know that the Government are giving the sector serious consideration, and I am sure the Minister will agree that this is not about applying bank-style rules to mutuals, but about recognising their unique role and risks. Credit unions are more than financial institutions; they are engines of financial inclusion. They often serve small, working-class communities, whom I know the Government want to support specifically. As the sector evolves, so too must our approach. We must ensure that our regulatory framework grows. I hope the Government will support this amendment, which simply seeks to look more clearly at the options available when a crisis happens.

Amendment 2 seeks to address a concern that has been raised with me by the mutual and building society sector. These institutions are not relics of the past, but vital components of our financial ecosystem. Although the first known building society was set up in 1775 by ordinary working people helping themselves to build their financial resilience and get a home of their own, they remain current today. Building societies today hold more than £360 billion in assets and provide mortgages for more than 3 million people in the UK. They represent a significant proportion of the housing market and are a trusted source of savings for millions more. They provide a clear and important diversification in our financial markets, offering a clear alternative to shareholder banks.

The Labour party stood on a clear manifesto commitment to double the size of the co-operative and mutual sector, which the Opposition agree is a very good policy. Today presents a good opportunity for Labour Members to demonstrate that commitment to the sector by enshrining in the Bill a requirement that the Bank of England consider the risk of demutualisation when using the mechanisms enshrined therein. There is a genuine fear in the building society sector that, without proper safeguards, the recapitalisation mechanism offered by the Bill could inadvertently become a back door for demutualisation. When a mutual institution faces resolution, the selection of a purchaser from the plc sector risks permanently dismantling its mutual status, undermining the very ethos that makes these institutions unique.

Our amendment would provide a proportionate solution, requiring the Bank of England to consider the impact of demutualisation on members and the sector as a whole, while also exploring the feasibility of selecting a mutual sector purchaser, if one exists and meets the resolution objectives. This is not about privileging mutuals at the expense of financial stability; it is about ensuring that the Bank’s resolution tools do not inadvertently homogenise our financial landscape. Silicon Valley Bank demonstrated the need for agile resolution frameworks, but it also highlighted the importance of preserving institutional diversity.

Mutuals and building societies often serve communities and demographics that larger banks frequently overlook. Their potential loss would leave gaps in financial inclusion and weaken the resilience of the sector. Importantly, without the millions of mortgages provided by the building society sector, particularly for first-time homeowners, Labour’s house building plans would be simply impossible.

I hope the Minister appreciates that our amendment strikes a careful balance between safeguarding financial stability and honouring our commitment to a pluralistic banking system—one where mutuals continue to thrive as a cornerstone of community-focused finance. I remind Labour Members that it will be much harder to double the size of the mutual sector if, in the event of a failure, recapitalisation defaults towards the banking sector. I hope the Government will therefore demonstrate their manifesto commitment to the mutual and co-operative sector by voting today for new clause 3 and amendment 2.

There remains genuine concern—shared across this House and reflected in the debates in the other place—over the risk of the recapitalisation mechanism being applied too broadly and potentially capturing larger banks that already hold substantial loss-absorbing resources, such as MREL. We continue to believe that the mechanism should be limited in scope and targeted at smaller banks that do not have the same capacity to manage their own failure. Amendment 1 would limit the use of the mechanism to what it was always intended to be: a mechanism for smaller banks outside the MREL regime.

I appreciate that new clauses 1 and 2 have already been ruled out of scope, but it may be worth noting a couple of points on these measures. I wish to place on the record today that the Opposition believe the time has come for a review of how we set the threshold for MREL, as well as the protection ceilings for depositors under the Financial Services Compensation Scheme. The current static nature of MREL thresholds disproportionately affects smaller and mid-sized banks, particularly challenger banks. By indexing MREL thresholds to inflation, we can ensure that the regulatory framework remains robust over time without stifling competition. These institutions often operate on tighter margins and face significant barriers in meeting rigid capital requirements, hindering their ability to scale and compete effectively with larger incumbents. While we appreciate that the Bank of England’s consultation on MREL closed earlier this year, we hope that the Government will consider these points. Threshold limits should not stay static with time.

Likewise, we welcome the Government’s recognition of the need to review the Financial Services Compensation Scheme deposit limit. The recent announcement of the increase of the deposit protection scheme from £85,000 to £110,000, although very welcome, is certainly overdue. It is worth noting that if the limit had kept pace with inflation, it would be nearly two thirds higher, at around £140,000, according to the Federation of Small Businesses. It is worth noting that only 4.6% of Silicon Valley Bank’s UK deposits were insured by the Financial Services Compensation Scheme—

[Madam Deputy Speaker (Judith Cummins)]

Order. May I just remind the hon. Gentleman that we are discussing what is in scope, rather than what is not in scope and has not been selected?

[Mark Garnier]

My apologies, Madam Deputy Speaker. These are points that we feel are worth noting, but I take your comments.

I will turn to amendment 3, tabled by the Liberal Democrats. Although we share the intent behind the amendment, which mirrors the Conservatives’ amendment on MREL limits for banks, there is a critical difference in its approach that gives us pause. Like us, the Liberal Democrats recognise that end-state MREL banks should not be the primary target of this legislation. However, their amendment introduces a requirement for a statutory instrument under the negative procedure that we believe would create more problems than it solves.

Our concern lies in the potential impracticality of this approach. Banking crises can unfold rapidly, as we saw with Silicon Valley Bank UK, where decisions were made in a matter of hours, not days. A statutory instrument subject to the negative procedure becomes law the moment the Minister signs it, which is a good thing, and it remains in law unless either House rejects it within 40 sitting days. That creates a window of uncertainty. If Members were to pray against the statutory instrument, particularly in a hung Parliament, it could trigger market instability, which is precisely what this Bill seeks to avoid, so although we agree with the principle of limiting the Bill’s scope, we worry that the mechanism could tie the hands of a future Chancellor, hindering their ability to respond swiftly and decisively in a crisis. For those reasons, we cannot support the Liberal Democrat amendment.

--- Later in debate ---

[Emma Reynolds]

We have not come to that yet; my hon. Friend can intervene on Third Reading. [Laughter.]

Taking what I was saying into account, although the Government appreciate the point raised by the sector and by the shadow Minister, we do not believe it is necessary to hardwire in legislation a requirement to update the code of practice on this matter. I understand, however, that the mutual sector feels strongly about this issue, and my officials and I will continue to engage with the sector on it. I commend to the House our position on the new clauses and amendments, which is to resist them.

[Mark Garnier]

With the leave of the House, I wish to address one or two of the points made in the debate. The hon. Member for Hendon (David Pinto-Duschinsky) is an incredibly valuable contributor to the debate because of his experience back in the days of the 2008 financial crisis. If I remember correctly, that was largely a result of the Financial Services and Markets Act 2000, which almost compounded the problem by having a tripartite regime that looked after the banking sector at the time. If I remember rightly, the Chancellor of the Exchequer at the time found it so scary that his eyebrows nearly turned white. One of the surprising things about that crisis was that just 10 years earlier we had seen the Asian banking crisis, which basically laid the groundwork for what subsequently happened in the west. Perhaps we in the west were too arrogant to believe that it could happen to us, yet it sure did.

In my role as a member of the Treasury Committee from 2010 to 2016, and on the Parliamentary Commission on Banking Standards, I looked at all these issues very extensively. It is incredibly important that we resolve the issue. As it has turned out, the Financial Services Act 2012 and the Financial Services (Banking Reform) Act 2013 have worked well in respect of some of this resolution.

On the point about LDIs and the financial crisis as a result of the Budget, we dealt with the problem pretty swiftly and pretty brutally. When one of our leaders gets it wrong, we get rid of them fairly quickly. I suggest to the Labour party that if Government Front Benchers get things wrong, it is worth cauterising the problem and moving on.

On credit unions and mutuals, we absolutely recognise the point about the mutual sector. We are not asking for demutualisation to be ruled out; we are asking for the prospect of avoiding demutualisation to be part of that very swift process. That is why we will press amendment 2 to a Division. I met the credit unions yesterday, and they are keen that the principle of new clause 3 is voted on, so we will press that as well.

Question put, That the clause be read a Second time.

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[Madam Deputy Speaker (Ms Nusrat Ghani)]

I call the shadow Minister.

[Mark Garnier]

May I first say a hearty congratulations to the Minister on bringing through her first Bill in the new Government? She was parachuted into the job rather recently, but she has done a magnificent job, and it has been a pleasure to engage with her. We share the aim of working in the interests of the wider economy, and we have worked together on the Bill. We may differ on a few tiny details, but we agree on its overall objective.

As I mentioned on Report, I spent some time on the Parliamentary Commission on Banking Standards looking at how we can stop another banking crisis, and on the Treasury Committee doing pre-legislative work on the Financial Services Act 2012. This is an iterative and organic process. We will never be able to stop financial crises happening, but working together, we can ensure that there are no more instances of contagion flooding through the system. This Bill is extraordinarily good in following that iterative process, in order to make the banking system unsinkable, I hope—and I do not use that term lightly, as someone might have done in the film “Titanic”; this is genuinely very important.

I pay credit to the former Chancellor, my right hon. Friend the Member for Godalming and Ash (Sir Jeremy Hunt), and the former Economic Secretary to the Treasury, my hon. Friend the Member for Arundel and South Downs (Andrew Griffith), and their officials, who worked tirelessly to ensure that Silicon Valley Bank UK was transferred to HSBC over that weekend, which undoubtedly avoided wider disruption to the financial system. We are delighted that the Bill was introduced in the previous Parliament, and we welcome the Government’s decision to carry it over into this Parliament. I was about to say that our swords will cross in the coming months and years, but I do not think they will; I think we will almost certainly agree on things. We will engage with the Minister and her officials to ensure that we have a world-class financial system that is the envy of the world.

Question put and agreed to.

Bill accordingly read the Third time and passed.