Draft Investment Bank (Amendment of Definition) and Special Administration (amendment) Regulations 2017

Simon Kirby Excerpts

Tuesday 7th February 2017 General Committees

[The Economic Secretary to the Treasury (Simon Kirby)]

I beg to move,

That the Committee has considered the draft Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017.

May I say, Mrs Moon, what a pleasure it is to serve under your chairmanship?

The investment bank special administration regime was introduced in 2011 following the failure of Lehman Brothers. It is a modified insolvency procedure for investment banks that sought to protect more adequately the interests of clients and those engaging in financial transactions.

Two years after the special administration regime came into force, the Treasury appointed Mr Peter Bloxham to carry out a comprehensive review of it. The review was published in 2014 and recommended a set of reforms to strengthen the regime. The draft regulations will implement the recommendations that fall within the Treasury’s remit. They are part of a wider insolvency regime, and should be considered alongside the work of the Financial Conduct Authority to improve client protections.

The draft regulations will improve the speed with which assets can be returned to clients and ensure that the administration process operates more efficiently and more effectively. They have been subject to widespread consultation with the different parts of the market that would be affected by the failure of an investment bank, including the creditors and clients of such banks as well as insolvency practitioners. We also took advice from the banking liaison panel on specific aspects of the regime, in particular to ensure that appropriate safeguards are in place.

I am happy to answer any questions that the Committee might have on the detail of the draft regulations but, in the interests of not detaining Members for much longer, I will do so in my closing remarks.

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[Simon Kirby]

I welcome the contributions made by both hon. Members during today’s discussion. It is right that we consider whether the special administration regime meets the aims set out for it in the legislation. Indeed, we rightly have a statutory obligation to do so under the Banking Act 2009, and that is why Mr Peter Bloxham was appointed to carry out a comprehensive review of the original regime. His recommendations have informed the reforms that we are discussing, and at this juncture I would like to pay tribute to Mr Bloxham’s hard work and tenacity in compiling such a constructive report.

The reforms seek to strengthen the administration process in three ways: by making it easier for client assets to be transferred, by simplifying the procedure for assets to be returned to clients and by providing increased legal certainty. It is important to note how far we have come since the special administration regulations were introduced in 2011. We have learnt lessons from the banks that have been put into the special administration regime, and in designing these reforms we have worked closely with regulators, the Financial Conduct Authority, and the Bank of England, as well as with expert administrators and lawyers. These regulations represent an important step forward as we continue to strengthen the UK’s important financial services sector, not only to ensure this country’s financial stability, but to help cement further our position as a world-leading financial centre.

Some important points have been raised today that I would like to address. First, the hon. Member for Stalybridge and Hyde asked why it has taken so long for these reforms to be implemented. We carefully considered the Bloxham review’s 72 recommendations, which were broadly technical in nature, and worked closely with regulators and expert insolvency practitioners to develop draft legislation. We consulted on those changes in 2016; over the consultation period, the Treasury engaged with representatives of firms, clients and insolvency practitioners. We tested the proposals with the banking liaison panel and participated in industry forums organised by the FCA. We also met representatives from most of the organisations that submitted formal consultation responses. That work was essential. Developing policies that will make a substantive difference was time well spent.

The hon. Gentleman asked why we are not implementing all the Bloxham recommendations. We have implemented the majority of them, and we consulted on our proposed approach in 2016, setting out our rationale as regards the recommendations that have not been adopted. In some cases, there are very good technical reasons for that; for example, the Treasury does not have the power to extend the use of schemes of arrangement. In other cases, our discussions with industry indicated that the reforms in question, such as the recommendation to limit the liability of administrators, would not be beneficial. He also asked about client money held on trust. The FCA is currently seeking feedback on proposed changes to the CASS—client asset sourcebook—rules on the return of client assets against the backdrop of amendments to the special administration regime regulations. He asked about banks’ duties and I am confident that the existing duties are effective in ensuring that clients can access their assets quickly and efficiently. It has become clear that that could not be done in a proportionate way. A specific duty would be disproportionate given the existing statutory duties on banks, custodians and counterparties. As for his very technical questions about regulations 10B, 10D and 10E, I will, with the Committee’s permission, write to him about them in some detail.

Finally, the hon. Gentleman asked about distinguishing assets held for the bank from assets held for clients. Since the financial crisis, the FCA has taken a number of steps to improve firms’ record keeping. These reforms have been extensively consulted on with practitioners who have experience in dealing with pooled accounts.

I will also write to the hon. Member for—for?

[Kirsty Blackman]

Aberdeen North.

[Simon Kirby]

Aberdeen North. I apologise—it is a very long way from Brighton.

In conclusion, the regulations make important reforms to implement Mr Bloxham’s recommendations and strengthen the regime that covers the administration of investment banks. The reforms they contain should be seen as part of the wider efforts that the Government and financial authorities are making to enhance the regulatory environment and protect financial stability, such as ring-fencing banks’ investment banking activities from their retail operations, and the forthcoming updates to the FCA’s client asset protection rules. Collectively, such measures represent important steps forward to address the problems of the past and strengthen financial stability. I hope that the Committee has found this morning’s sitting interesting and informative and that it will join me in supporting both our efforts and the regulations.

Question put and agreed to.