Bank Resolution (Recapitalisation) Bill [HL]

Report

Clause 1: Recapitalisation payments

Amendment 1

1: Clause 1, page 1, line 18, leave out “another” and insert “a relevant” Member’s explanatory statement See the explanatory statement for my second amendment to Clause 1.

My Lords, in moving government Amendment 1, I shall speak also to government Amendment 4. The Government have tabled these amendments after considering the concerns raised in Grand Committee by the noble Baronesses, Lady Noakes, Lady Bowles, and Lady Vere, and the noble Lord, Lord Vaux. I am extremely grateful to all of them for all of the points they have raised.

Reflecting in particular on the points made by the noble Baroness, Lady Noakes, the Government have decided to clarify in the Bill whose expenses can be covered by a recapitalisation payment from the Financial Services Compensation Scheme. I am grateful to the noble Baroness for her engagement on this matter since Grand Committee.

The Bill as introduced permitted a recapitalisation payment to cover the expenses that the Bank of England or another person has incurred, or might incur, in connection with the recapitalisation of the firm in resolution. These amendments replace that broad formulation with “relevant person”, then specify that “relevant person” means the Treasury, a bridge bank or an asset management vehicle. They further specify that “bridge bank” and “asset management vehicle” have the meanings given by Sections 12 and 12ZA of the Banking Act 2009 respectively.

In Grand Committee, the noble Baroness, Lady Noakes, indicated that she had no objection to the Treasury, the Bank of England and its entities having certain expenses covered by the new mechanism, but that this should be specified in the Bill. These amendments tabled by the Government seek to do just that; I hope that she and other noble Lords will be able to support them.

In Grand Committee, the noble Baroness, Lady Noakes, also asked questions about the specific expenses that would be in scope under the terms of the Bill. On this point, I should be clear that the Government maintain the position set out in Grand Committee: it is important that the Bill is not overly prescriptive, allowing the Bank to respond flexibly when costs arise. I refer to the explanations given in Grand Committee, in the Government’s response to the consultation and in the draft updates to the code of practice of the types of expenses that will be expected to be covered. The Government maintain that it is prudent to ensure that there is broad provision to cover these potential additional costs. Ultimately, it should be borne in mind that the alternative may be for such costs to be met by the taxpayer.

My Lords, I spoke in Committee. I draw attention to my interests as included on the register; in particular, I hold shares in a number of banks that could be affected by the contents of this Bill.

I thank the Minister for the comprehensive letters that he wrote to Members who took part in Committee—and, indeed, for the subsequent meeting that he organised. I also thank the Treasury for publishing the draft extra chapter for the code of practice, which has been very helpful to those of us trying to work through the Bill.

I certainly support the two amendments to which the Minister has just spoken, which go some way to limiting the wide power in new Section 214E(2), but I have some further questions for the Minister, building on the comments he has just made. These amendments constrain to whom payments can be made under that new subsection but they do not do anything to constrain the types of expenses that can be incurred. In Committee, I tried to explore what happens if litigation or regulatory actions arise in relation to issues that had occurred prior to the resolution action being taken but which do not emerge until a little later. We did not get very far, so I will spend just a couple of minutes on them here.

I am talking about material litigation or regulatory action. There could be shareholder litigation, which happened after RBS was bailed out by the Treasury. There could also be other kinds of issues that result in both regulatory action and civil litigation, as happened in relation to Libor, for example. Today’s hot issue is vehicle financing commissions, following the Court of Appeal’s decision recently, and no one knows how much it will cost.

Before this Bill, the working assumption was that smaller banks would be placed into the insolvency procedure and that, in that event, the kind of liabilities I am talking about would likely be extinguished as part of the insolvency because there would simply be insufficient money there to pay for them. However, once the recapitalisation power is used, it opens up the possibility that the Bank of England could use the power to raise capital in order to pay for litigation or regulatory costs that had arisen and were crystallising after the recapitalisation event.

My Lords, I too thank the Minister for the recent letters and documents he published in relation to the Bill. It was incredibly helpful to have them for the House to scrutinise the Bill properly. I am also grateful for these sensible amendments, which clarify the persons to whom the Bill’s measures apply as they relate to expenses. They are a bit technical, but they are improvements to the Bill and I am particularly pleased that the Minister has listened to concerns from across the House, including from my noble friends Lady Noakes and Lord Moylan.

I listened with great interest to the points raised by my noble friend Lady Noakes, and I urge the Minister to note what she said. I hope that some of these issues might be resolved in some way, either through the code of practice or by other means, as she seemed to me to make an awful lot of sense. However, on this basis, we support the Government’s amendments.

My Lords, I am grateful to noble Lords for their contributions today and, as I said previously, in Committee. As I said at the start of this debate, the purpose of the Government’s amendments is to clarify whose expenses may be covered under the mechanism in the Bill. I hope that noble Lords will be able to accept the amendments, and I am grateful to both noble Baronesses for saying that they will.

I will respond to the points raised by the noble Baroness, Lady Noakes. As she said, I wrote previously to the noble Lord, Lord Moylan, on this matter. I will briefly repeat some of the points I made to him. In relation to litigation being brought against the authorities themselves, the Bill allows the Bank of England to request that funds from the Financial Services Compensation Scheme cover expenses that have been incurred by it or by the Treasury, a bridge bank or an asset management vehicle in connection with the recapitalisation or the use of the stabilisation power. This may include litigation costs arising from the recapitalisation or use of the stabilisation power, such as from challenges to decisions made by the authorities.

Any decision to request Financial Services Compensation Scheme funds for these purposes would be a decision for the Bank of England to take, but I stress that, in making this decision, the Bank of England would consider all relevant factors, including the fact that the alternative may be to use public funds. I note what the noble Baroness, Lady Noakes, said on that point. A decision to use insolvency depends on whether the conditions for resolution action are not met. If the conditions for action are met, public funds would be the alternative for covering these costs instead of FSCS funds.

I hope that the points I have made demonstrate that the Government have engaged in good faith with the concerns raised by noble Lords and have sought to address them where it has proved possible to do so. These amendments put beyond doubt which parties’ expenses may be covered by the new mechanism, and I hope that noble Lords will support them.

Amendment 1 agreed.

Amendment 2

2: 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.”Member’s explanatory statement This amendment seeks to prohibit the use of FSCS funds to recapitalise large financial institutions, defined as those which have reached end-state MREL.

My Lords, throughout the passage of this Bill, the issue of the size of the bank for which this new mechanism can be used has attracted significant comment and debate. In a letter to all noble Lords introducing the Bill, the Minister stated: “This Bill enhances the resolution regime to respond to the failure of small banks”. Yet that is not what the Bill does. The regime in the Bill is not restricted to small banks or even to small and medium-sized banks; it can be used for all banks, even the very largest. Despite the letter from the Minister on introduction, the Government have maintained their position that the mechanism should be available for use for the resolution of a bank of any size, including the very largest.

Using this mechanism in those circumstances would be astonishingly costly for banks and their customers, not only in the year in which the levy is first implemented but for many years thereafter, adding to a long-term and significant burden on the banking sector and its consumers. I concede that the Government clarified in a policy statement that the mechanism would be used for the largest banks only in exceptional circumstances, but the mechanism being given a statutory footing by the Bill will only ever be used, on a bank of any size, in exceptional circumstances. Therefore, I take only a small amount of comfort from the published statement.

As the noble Baroness, Lady Bowles, said in Committee, there is no differentiation in the Bill on bank size. It should be limited by a defined measure. My amendment, supported by the noble Baronesses, Lady Bowles and Lady Noakes, and the noble Lord, Lord Vaux, seeks to deliver that definition by making it clear that the Bill does not apply to banks that have reached end-state MREL—that is, the very largest banks in the UK. It would mean that only small and medium-sized banks, and those on the MREL glide path, can be supported by the mechanism. I believe that was the Government’s original intention.

My Lords, I add my support to Amendment 2 tabled by the noble Baroness, Lady Vere. From the outset of this process, the Bill was intended to cover only small banks. That was made clear in almost the first paragraph of the original consultation. It was then extended and now covers all banks, regardless of size. I thank the Minister for making sure that the draft code of practice was published by the Treasury before Report; it has been incredibly helpful in this process, and we are all very grateful for that. The draft code of practice is clear that the resolution mechanism is designed primarily to support the resolution of small banks and that the Bank of England will not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and the corresponding MREL requirements of a large bank.

So why does the Bill cover large banks? The argument from the Government seems to be along the lines of, “Well, it might be useful to have this flexibility”. That does not seem a very strong argument. As we have heard, larger banks are required to hold additional capital resources, known as MREL, effectively to ensure that they are able to bail themselves out—a process known as bail-in. If the Government are not confident that the MREL regime is sufficient for those larger banks, they should be looking to strengthen that regime rather than extending a measure that is designed specifically for smaller banks whose failure would not create systemic risk, to act as a further insurance policy for the big banks.

I am afraid that unless the Minister can come up with a stronger argument than he has so far, I will be minded to support the noble Baroness, Lady Vere, should she decide to test the opinion of the House.

My Lords, I add my support to my noble friend’s amendment.

If the power were used on a bank that had already achieved the MREL set for it, that use of the mechanism would raise questions about whether MREL and the minimum capital requirements had been set correctly—and whether there had been a regulatory failure. In either event, the Bank is conflicted, whether through the setting of MREL in its capacity as a resolution authority or through setting capital levels through its PRA arm. I am clear that the Bank should not have the power to cover up regulatory failure, which this unconstrained provision allows. There is no way for the Treasury to stop the Bank using the power other than by using the power of direction that exists but has never been used in the existence of the Bank since nationalisation. Unconstrained powers are unhealthy. That is why I support my noble friend’s amendment.

My Lords, I concur with what other noble Lords have said about this amendment: that is why I have added my name. It cannot be left as a possibility for any size of bank; if it needs to apply to a larger bank, perhaps the MREL level should have been set higher. We have this rather unusual situation in the UK where we set MREL at a much lower level; it is set at about a quarter of the level of other countries. If there is a nervousness about needing to use it for a bank that is a little bit larger, perhaps some other fundamentals about where MREL is being set are wrong.

The premise of this Bill is based on it being an alternative to insolvency, where that would have been the normal end result. Maybe the compensation scheme would have had to pay out on deposit guarantees and so there is the happy thought that the money could be perhaps put to different use this way round. But the assumption should still be insolvency and we need a public interest test before we go looking at the Financial Services Compensation Scheme. It is already an extraordinary event—so how extraordinary are extraordinary events? I do not think one can layer extra extraordinariness on top of it: there has to be a line somewhere.

We do not know how many dips into the Financial Services Compensation Scheme there are going to be. In insolvency, there is one dip for the deposits that are guaranteed. It does not say that there cannot be multiple dips. There is already the notion that there is this enormous pot of money. Maybe it looks like a bank tax—and everybody hates banks and it is a pot to raid—but it is a very good way to cause more issues within the wider banking sector. Frankly, it is unfair if there are not some bounds somewhere. So I think this is the right one and, if the Minister is not going to incorporate the amendment, which I think would be a jolly good idea, we on these Benches will be supporting the noble Baroness, Lady Vere.