Consideration of Bill, as amended in the Public Bill Committee
New Clause 3
Credit Unions accessing Bank of England liquidity facilities
“(1) The Chancellor of the Exchequer must, within twelve months of this Act coming into force, prepare and lay before Parliament a report on the impact of this Act on credit unions.
(2) The report must include—
(a) an assessment of the arguments for granting credit unions access to Bank of England liquidity facilities, considering their similarity to small building societies;
(b) an analysis of the competitive disadvantages faced by credit unions compared to start-up banks, particularly concerning access to liquidity and resolution mechanisms;
(c) recommendations for any legislative or regulatory changes to support the stability and competitiveness of credit unions.”—(Mark Garnier.)
This new clause requires the Chancellor of the Exchequer to prepare a report on the impact of the Bank Resolution (Recapitalisation) Act on credit unions.
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—
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.
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.
Finally, I turn to the Liberal Democrat’s growth amendment, amendment 4. Here we find ourselves in a familiar and supportive position. This amendment, which seeks to place a further objective on the Bank of England to consider the competitiveness and growth of the market before directing the recapitalisation of a fail small bank through a levy on the banking sector, echoes concerns raised in the House of Lords. We were happy to support the proposal there, and in Committee.
The Government frequently repeat the point that their focus is on economic growth. That is a goal that all of us in this House share. The decision to place a levy on the banking sector to cover the cost of a competitor’s failure must be carefully weighed against the broader growth objectives. This is an economic climate in which taxes and borrowing are up, and business confidence, jobs and growth are down, but the Government have an opportunity to demonstrate their commitment to economic growth through this legislation—and we, of course, hope that they will.
In conclusion, we support the overall aim of the Bill. It will strengthen our banking system and our banking resolution framework. As I said, the Bill was originally drafted by the previous Government and retains cross-party support. We have highlighted several key areas that require further consideration, and I hope the Minister will consider them. From ensuring that the mechanism is not extended to MREL banks to protecting mutual societies and credit unions and safeguarding the Financial Services Compensation Scheme against inflation, our amendments aim to improve the Bill’s effectiveness and fairness, which is entirely in line with the promises made by the Labour party before the general election. I very much look forward to Labour supporting its own manifesto promises.
I rise to speak in opposition to amendments 1, 3 and 4. Under the previous Government, the country was subjected to years of economic chaos. This Government have made restoring stability a cornerstone of our strategy to boost long-term growth. Ensuring macroprudential stability, underpinned by an effective recovery and resolution regime, is a key part of that. Changes undertaken in the UK and globally through the Basel III reforms have made our large banks safer and more resilient, and we should welcome that. The reforms have improved solvency and reduced risks for the taxpayer.
However, the collapse of Silicon Valley Bank in 2023 has demonstrated the need for new tools to help minimise the risk to consumers, taxpayers and broader financial stability posed by small bank failures. We need an approach that goes beyond the bank insolvency procedure, and that is why the proposals in the Bill enjoy so much support across our financial services sector, as I know from my role as chair of the all-party parliamentary group on financial markets and services. But in designing this new approach, we must make sure that the proposals reflect the lessons of experience. In all candour, I am concerned that the amendments do not do that, and will impede the functioning of the new regime, rendering it less effective at moments of crisis.
I was an adviser in the Treasury to Alistair Darling during the global financial crisis, when we had to resolve and recapitalise a number of major banks. The action that the Labour Government took then—often in the face of resistance from Conservative Members—helped to save our financial sector from catastrophe and stabilise not just the UK, but the global economy. There are many lessons to be learned from that period, but in relation to the Bill, one stands out. When we had to act to save our banking sector, we learned that successful resolution relies, among other things, on two key factors: speed and flexibility. It was the combination of those factors that was so important in 2008, and since then, I would argue, they have only become more important.
In 2008, we watched banks’ liquidity and solvency deteriorate by the day, but now, as the collapse of Signature Bank in the US in 2023 shows, the combination of banking apps and social media mean that a full-scale banking run can develop in hours or even minutes. If we are to resolve banks successfully, regulators must be able to move as quickly. Speed has become more important than ever. So, too, has flexibility. As we see increasing financial innovation and diversification among banks, with new challengers, new forms of institutions and new types of markets and assets emerging, allowing regulators sufficient flexibility has become more essential, not less.
The Liberal Democrats are supportive of the Bill, because the last thing taxpayers need to worry about are the consequences of an under-regulated banking sector. I have brought amendment 3 back from Committee, because the size of banks eligible for the new mechanism has been a key debate through the Bill’s passage.
The Minister has regularly set out that the Bill’s stated aim is to enhance the resolution regime, so that we can respond to the failure of small banks. However, the Bill does not restrict the regime to small or medium-sized banks. If applied to large banks, it would create high costs for banks and customers. The costs would persist for many years, adding a significant long-term burden on the banking sector and consumers. Amendment 3 would ensure that the Bill does not apply to banks that have reached the end-state minimum requirement for own funds and eligible liabilities—put more simply, the largest UK banks. That would mean that only small and medium-sized banks could be supported by the mechanism. That would protect consumers and the banking sector from unnecessary financial burden.
Amendment 4 has also been brought back from Committee. It would place a further objective on the Bank of England to consider the competitiveness and growth of the market before directing the recapitalisation of a failing small bank through a levy on the banking sector. We believe that further consideration of the effect on the competitiveness and growth of the market is important before directing the recapitalisation of failing small banks.
To conclude, I would be grateful if the Minister could expand on the remarks made in Committee and explain how precisely the amendment would complicate the process of managing a bank failure.
It is always a pleasure to serve under your chairmanship, Mrs Cummins. I thank the hon. Members for Wyre Forest (Mark Garnier) and for Wokingham (Clive Jones) for their amendments and their constructive engagement throughout the Bill’s passage. The Bill will ensure that the Bank of England remains equipped with the necessary tools to effectively manage bank failures in a way that minimises risk to the taxpayer and to UK financial stability, protecting the taxpayer.
While there may be some disagreements on the finer detail of the Bill, what we have heard today, and on Second Reading and in Committee, demonstrates that there is cross-party support for the principles and overall objectives of the Bill. I thank the hon. Member for Wyre Forest and the hon. Member for Wokingham for supporting those.
The amendments cover a broad range of issues, and I will explain the Government’s position on them in turn, but first I thank my hon. Friend the Member for Hendon (David Pinto-Duschinsky) for setting out his experience of the banking crisis and stressing that the mechanism we are seeking to provide through the Bill must allow the Bank of England, in close consultation with the Treasury and other financial services regulators, to act with speed and flexibility at times of crisis. There are hours, not days, in which to make decisions during crises, and at the forefront of our minds when discussing the Bill should be that they often happen over the weekend, as happened under the previous Government with Silicon Valley Bank. I will turn to that example shortly, but I wanted to thank my hon. Friend the Member for Hendon for setting out his concerns about the amendments that would essentially stymie the effectiveness of the Bill.
I note that the shadow Minister, the hon. Member for Wyre Forest, raised a number of issues on new clause 3, on the Bill’s impact on credit unions. Some were not strictly relevant to the Bill, but I will come on to them. As he noted, the Government absolutely support credit unions. They play a vital role in providing saving products and affordable credit in local communities across the country. However, they are not in scope of the resolution regime that we are discussing, and therefore not in scope of the new recapitalisation payment mechanism introduced by the Bill. That is a benefit to the credit union sector. Indeed, it asked the Government to ensure that it was not included in the payment mechanism. Credit unions will therefore not be liable to pay towards the cost of a failure where the mechanism is used.
I will set out the detail of the resolution regime and remind the shadow Minister and others why credit unions are not involved in this case. Under the resolution regime, the Bank of England has a set of powers it can use to manage the failure of banking institutions in order to protect financial stability and public funds. In order for the Bank of England to use these powers, certain conditions must be met, including that resolution action is necessary and in the public interest. It is unlikely that these conditions would be met in the case of credit union failures, given their size and the reduced likelihood of contagion if they fail. It is therefore appropriate and proportionate that these firms are out of scope of the resolution regime and placed into insolvency when they fail instead.
The Government do not therefore believe that it is necessary for a report to be produced on the impact of the Bill on credit unions. Nevertheless, I appreciate the points the shadow Minister raised about access to liquidity facilities. Credit unions are not currently eligible to access the Bank of England’s liquidity facilities, but the Bank does continually assess the types of firms that are eligible. I would gently say to him that with eligibility to these liquidity facilities comes additional responsibilities on behalf of the firms that benefit from them. That is worth bearing in mind.
I reiterate the Government’s clear, strong support for the credit union sector. We continue to engage regularly with the sector to understand the barriers it faces to being able to grow and compete.
I support wholeheartedly what the Minister has said about credit unions, because credit unions have a big role to play in Northern Ireland, as they do in other parts of the United Kingdom. My concern when it comes to crises in banks is that credit unions belong to their members, but banks have a different hierarchy—they have chief executives and directors to pay. I believe it is unfair for bankers to retain their bonuses while the pensioner who has saved his pennies all his life suffers. No matter what the crisis is, the executives still get their dividends and bonuses. I have a simple question: within this legislation and the rules we have here, can we be assured that the bankers—the ones at the top who may be responsible for the banks, or certainly act responsible for them—will find that their bonuses are not delivered to them?
The hon. Gentleman draws me on something that is not pertinent to the amendments, but I understand why he has asked the question. When a bank fails, there is a hierarchy of creditors. I can write to him with that hierarchy, as I do not have it in my head at the moment. The hierarchy ensures that if, for example, the bank is bailed in, those who have already invested in the bank become stakeholders, although it depends on the resolution scenario and where they are in that process. The people who have deposits in the bank—in more simple language, people who have bank accounts—are protected up to £85,000. Soon that will increase in the way that the shadow Minister suggested.
Amendments 1 and 3 in the names of shadow Minister, the hon. Member for Wyre Forest, and the hon. Member for Wokingham respectively both relate to the scope of the Bill, which has been discussed at length during the Bill’s passage through this House and in the other place. The Government’s position remains that the mechanism in the Bill is not intended to support the resolution of the largest banks. The hon. Member for Wyre Forest set that out in his speech, as did the hon. Member for Wokingham. The largest banks will continue to be required to hold MREL to self-insure against their own failure. For banks that are required to hold MREL, the Bank of England should in the first instance use those resources to recapitalise such a firm in resolution rather than resorting to the new mechanism in the Bill. It is right that shareholders and investors in the firm should bear losses before anyone else, which goes to the point made by the hon. Member for Strangford (Jim Shannon).
I return to the primary purpose of the Bill, which is to protect the taxpayer. Bank failures are by their nature highly unpredictable, as my hon. Friend the Member for Hendon said. In the unlikely circumstances where a top-up is needed to resolve a bank once all its MREL resources have been used, hon. Members must consider whether they want those costs to be borne by the taxpayer. It is the Government’s belief that the taxpayer should not be on the hook for those costs.
I appreciate that the Bill’s scope is limited, and the Minister is making an excellent case for the Government. I realise that bank collapses are unusual and that the Government take a range of steps to try to protect the interests of consumers, but could she write to reassure me on the related point of bank branches there were a bank collapse?
Perhaps my hon. Friend and I could have a discussion outside the Chamber so that I can better understand his question. The mechanism in the Bill is about what happens when the resolution regime is triggered. Four different conditions have to be met for that to happen. The Bill seeks to continue the work that the Opposition started to take forward when they were in government before the election about what we do in cases like that of Silicon Valley Bank. In that case, there was not any recourse to public funds, but this is about how we protect the taxpayer in a scenario where there is. Perhaps we can have a discussion about bank branch closures, which is obviously of great concern to Members across the House.
I appreciate that amendment 3, tabled by the hon. Member for Wokingham, aims to introduce an additional safeguard by permitting the Bank of England to use its new power on the largest banks only if the Treasury permits that through regulations. He talked about that in his speech. However, there may be risks associated with that approach, particularly if the Bank of England needed to take a decision at pace in a crisis. Indeed, my hon. Friend the Member for Hendon was in the Treasury when many such situations arose. [Interruption.] Well, let us not rake over the history. We discussed some of these issues in Committee.
As the shadow Minister suggested, we are trying to avoid a window of uncertainty during which a statutory instrument would be laid. The Bank of England, working in close partnership and consultation with the Treasury and the other financial services regulators, needs to be able to act swiftly and decisively—often over the weekend. I ask hon. Members, and the hon. Member for Wokingham in particular, to cast our minds back to the weekend when Silicon Valley Bank UK was failing. The Bill derives from the lessons learned from that event.
What we saw from that incident is how quickly the authorities—the Bank of England in consultation with the Treasury, the PRA and the FCA—must move to find a solution before markets open and resolve a failing firm in a way that protects financial stability, depositors and the taxpayer. That has to be at the forefront of our minds when we are thinking about the amendments.
I am grateful to the shadow Minister for raising the issue in the amendment. The chief executive of the Building Societies Association has written to me about it, and we are engaging with him and the broader sector on the issues related to the Bill, as well as on many other issues that are relevant to financial services and the role that the sector plays in providing vital services to people throughout the country and as an engine of growth for the wider economy.
I understand that the sector’s interest in this matter stems from a provision in clause 7 that gives the Bank of England an explicit power to require the issuance of securities by the firm in resolution where the new mechanism in the Bill is used. This provides a means for the Bank of England to give effect to a recapitalisation under the new mechanism established by the Bill. Its purpose is to provide additional operational certainty that, if the Bank of England needs the failing firm to issue shares as part of its resolution, doing so will not be put at risk by the usual administrative process of share issuance.
Of course, mutuals have a different ownership model, with no shares, so the use of the power with respect to a mutual would require the firm to be demutualised. That brings me to amendment 2, which would require further detail to be included in the code of practice in relation to demutualisation. Specifically, it would require the Treasury to include guidance in the code in respect of the Bank of England’s exercise of its resolution powers in respect of a building society in circumstances where the use of the recapitalisation power may result in demutualisation. The guidance would require the Bank of England to give due consideration to the impact of such demutualisation on members of the building society in resolution and on the mutual sector, particularly when the Bank of England could select a buyer from the mutual sector to avoid demutualisation. The Bank of England is required to have regard to the code, so would be required to have regard to such new guidance when exercising its resolution powers.
In responding to the concerns raised by the amendment, I note first that the Bank of England already has the power to require the demutualisation of a mutual firm when exercising its powers, if that is necessary to execute a resolution effectively in the public interest. The Bill does not change that. There are also circumstances in which demutualisation would not be necessary, such as the transfer of a mutual firm’s assets to another mutual acquirer. We saw that back in 2009, with the transfer of the Dunfermline building society’s assets to Nationwide. Indeed, if the Bank of England is seeking to resolve a failing building society, its assets may well prove an attractive acquisition for another mutual, so a sale within the mutual sector may already be a likely outcome under the existing regime, whether in resolution or in recovery in the period prior to resolution.
It is worth remembering, however, that the issues we are considering relate to banks and building societies once they have failed. In such circumstances, the alternative to demutualisation as part of a resolution may be insolvency, which may have far more adverse consequences for members of the mutual, as well as for the wider mutual and banking sector.
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.
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.
174|14:06|88|212|The House divided:|Question accordingly negatived.||0|0
Clause 5
Code of practice
Amendment proposed: 2, 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.”—(Mark Garnier.)
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.
Question put, That the amendment be made.
175|14:20|89|230|The House divided:|Question accordingly negatived.||0|0
I beg to move, That the Bill be now read the Third time.
We can hopefully do Third Reading in a more relaxed fashion. As we have discussed through the Bill’s passage, the Bank Resolution (Recapitalisation) Bill will strengthen the UK’s bank resolution regime by providing the Bank of England with a more flexible toolkit for responding to the failure of banking institutions.
As volatility over recent weeks has shown, global uncertainty can have a real impact on financial markets across the world. That is why it is important that the UK remains equipped with an effective financial stability toolkit. The primary objective of the recapitalisation mechanism introduced by the Bill is to protect the taxpayer; it will provide more comprehensive protection for public funds when banks fail. I think both sides of the House can agree that this is of vital importance to ensure that our constituents are not left on the hook when a bank collapses. The Bill achieves that without placing new up-front costs on the banking sector, and therefore strikes the right balance between protecting financial stability and supporting the Government’s No. 1 priority of driving economic growth.
I would like to thank all those in this House and the other place who have contributed to the scrutiny of the Bill. In particular, I would like to thank the Opposition for their constructive engagement. As I said on Report, there is broad agreement on the primary objectives and principles of the Bill, but differing views have been expressed on the scope of the mechanism and certain finer details. I reiterate the Government’s position: it is important to learn the lessons from the case of Silicon Valley Bank UK, which demonstrates that the implications of a firm’s failure cannot always be anticipated, and things move very quickly. It is important that the legislation avoids overly restricting the Bank of England’s ability to use the mechanism in unpredictable and fast-moving failure scenarios, and can achieve its primary objective of protecting the taxpayer. I hope that those in the other place will agree with the Government’s position when the Bill returns there for their consideration.
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.
(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.
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—
The value of flexibility was demonstrated in the case of Silicon Valley Bank’s UK subsidiary. The creative use of powers to resolve that bank through a sale, rather than putting it into the bank insolvency procedure, protected consumers, minimised market turbulence and shielded the public purse. Contrast that with the US regulators’ approach to the parent company, SVB. There, rigidity and a mechanistic failure to apply major bank rules led to failures of regulatory oversight that contributed—as US regulators have acknowledged—to the bank’s failure. I raise this matter because I fear that amendments 1, 3 and 4 will militate against speed and flexibility, and will reduce the effectiveness of the Bill, especially in acute crisis situations.
Let me start with proposed amendment 4. This would require the Bank of England to consider competitiveness and the growth impact on the market before directing resolution through the FSCS. However well-intentioned the amendment is, it could have a catastrophic effect. At a time of crisis—policymakers have sometimes just hours to act—it would place a duty on them to make a market assessment, which, by the way, could presumably be challenged. This is simply impractical and could fatally slow down action to restore financial stability. As someone who has sat in the room during a bail-out process, I have to tell the proposer of the amendment that spending time on this kind of exercise during a disorderly bank failure is simply a luxury that we do not have.
I am also concerned that such a requirement would have a chilling effect, staying regulators’ hands when they have to act quickly. This could not only increase the risk of disorderly collapse, but raise the cost to the FSCS of a recapitalisation if it does proceed. Experience tells us that the longer we put off a resolution, the more expensive it becomes. This is a recipe for higher risk and higher cost. Moreover, leaving aside the practical difficulties, the underlying logic is flawed. First, in seeking to analyse the market before deciding on whether to resolve an institution or wind it up, we are putting the cart before the horse. Surely a much better course of action is to prevent the potentially disorderly collapse of the institution, and then to work out its long-term future and the role, if any, it should play in the market.
Secondly, the amendment fails to take into account other objectives that the Prudential Regulation Authority should properly consider in deciding whether to act, including the protection of retail savers, the prevention of contagion and the safeguarding of macroprudential stability. As drafted, the amendment, however well-intentioned, could distort PRA decision making. Its intentions may be good, but its impact might not be.
The same is unfortunately true of amendments 1 and 3. Both seek to circumscribe the use of the FSCS via statute, to prevent it being used to bail out larger institutions. The amendments would rob regulators of the flexibility to use the instrument in unusual or unforeseen circumstances, in the name of solving a problem that does not exist.
The powers provided by the Bill are already aimed squarely at smaller banks, and there are various safeguards in the Bill to prevent the use of those powers for larger banks in most scenarios. For example, the Bill states that the FSCS-funded resolution may be used only for institutions that are placed in a bridge bank or transferred to a new institution, and this would not be applicable for larger bank in most scenarios, as they are expected to be resolved through an MREL bail-in. The Bill also provides for de facto Treasury sign off, requires the Chancellor to report to Parliament on the use of the powers and mandates the bank to inform the Chairs of the relevant parliamentary Committees whenever an FSCS-funded resolution is undertaken. As such, it is already well-policed and circumscribed. There is little danger of this approach being regularly or routinely used with large banks. Adding a statutory prohibition on using this approach with firms meeting their minimum MREL thresholds would add little, but it would create risk.
My experience in the Treasury during the global financial crisis, and in my work across financial services since then, is that we cannot say that the highly improbable will never happen, and we cannot always predict what form the next crisis will take, or what will trigger it. Conservative Members should surely understand this lesson better than most. After all, it was Liz Truss’s disastrous mini-Budget that sparked market chaos through a product—liability-driven investments—that most people had never even heard of, and were thought to be very stable and low risk. Given this, it would be exceptionally unwise to statutorily bar the Bank from being able to use all the tools at its disposal in exceptional circumstances. There are eventualities that, however unlikely, are possible, such as a well-capitalised bank suffering a very rapid deterioration of its position due to a mass redress event. We must allow the Bank flexibility to access the tools that the Bill provides in exceptional circumstances, in order to ensure stability and protect the taxpayer. We must not bind its hands in a crisis.
The power of the Government’s proposals lie in their ability to be deployed rapidly and with flexibility. That is what will give them their traction and help safeguard our financial stability. It is critical that we preserve those facets of the Bill. For that reason, I urge the House to join me in rejecting the amendments.
I made the point in Committee, and do so again today, that safeguards are in place to prevent inappropriate use of the mechanism. The Treasury, for example, is involved in the exercise of any resolution powers through being consulted about whether conditions for resolution have been met. It 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 that the scheme could not provide through its own resources, additional amounts would need to be borrowed from the Treasury and would therefore require the Treasury’s approval. Therefore, in practice, Treasury consent would be required if the Bank of England had requested a large sum.
The shadow Minister attempted to draw me into many different subjects related to MREL. You rightly reminded him, Madam Deputy Speaker, of the scope of the Bill and the amendments under discussion. I will always be happy to have those discussions with him—as he knows, the Bank of England recently consulted on the thresholds—and I note what he said before he was called to order. He also tried to draw me into questions about the Financial Services Compensation Scheme, which are also for a different day; as he said, there will soon be increases.
Amendment 3 could add a further stage to that process, whereby the Treasury must lay regulations to enable the Bank of England to act. That may well—it is most likely that it would—hamper those efforts to implement a solution swiftly to achieve those objectives. Had Silicon Valley Bank UK been caught by such requirements, that certainly would have made achieving the solution by Monday morning, before the markets opened, much more challenging. Again, the priority is to protect the depositors and to protect financial stability.
Overall, the Government firmly believe that it is better to leave flexibility for the Bank, noting the safeguards in place that I have already mentioned. On the basis of those points, I hope that hon. Members will be persuaded to support the Government’s position on this matter; I know that it is an issue of some contention.
Amendment 4, also in the name of the hon. Member for Wokingham, is on whether the Bank of England should have a growth and competitiveness objective when exercising its new power—another topic that we have discussed previously during the Bill’s passage. Growth and competitiveness are fundamental priorities for the Government, and as I stated in Committee, a disorderly bank failure could pose a serious risk to the growth and competitiveness of the sector and to the UK economy. The Bill seeks to mitigate that risk.
Bearing that in mind, the Government do not believe that they should impose a requirement on the Bank of England to consider growth and competitiveness when it is taking urgent crisis management action in relation to an individual distressed or failing firm. At such a time, the situation that it would have to manage would be challenging enough without an additional broad objective of that kind. The resolution objectives set out in the Banking Act 2009 already provide a solid basis on which it must make its decisions, including protecting financial stability, protecting covered depositors and protecting the taxpayer. As my hon. Friend the Member for Hendon reminded us, the Bank of England, in close partnership with the Treasury and the other financial services regulators, needs to act with speed and flexibility to maintain financial stability. Those considerations are very different from those that the PRA and the FCA make in their policymaking roles. The Government strongly support the existence of their secondary objective on facilitating growth and competitiveness.
I note and accept that there is a broader question about how the Bank of England can support growth and competitiveness, but this is a complex matter, and one that is well beyond the scope of the Bill. We will be resisting the amendment for those reasons.
Finally—[Interruption.] I see that our debate has attracted quite a lot of discussion around the edges; if I could hear myself think, it would be nice. I turn briefly to amendment 2, tabled by the shadow Minister. First, I reiterate that the Government have made clear their strong commitment to support the mutual sector, and I reassure him that we take our commitment in the manifesto to double the size of the mutual and co-operative sector very seriously. Many hon. Members on the Government Benches who serve as Labour and Co-operative MPs have a great interest in this matter, as has been demonstrated.
I also direct the shadow Minister—to be fair, he referred to a couple of them—to the package of measures that the Chancellor set out at Mansion House, which included the consultation on the potential to reform common bonds for credit unions in Great Britain. The Chancellor asked the Financial Conduct Authority and the Prudential Regulation Authority to produce a report on the mutuals landscape by the end of the year. She also welcomed the establishment of an industry-led mutual and co-operative business council, the first meeting of which I attended earlier this year.
Question put, That the clause be read a Second time.
I thank the shadow Minister, the hon. Member for Wyre Forest (Mark Garnier), the hon. Members for Dorking and Horley (Chris Coghlan) and for Wokingham (Clive Jones), and others who were on the Committee. I thank the right hon. Member for North West Hampshire (Kit Malthouse), and the hon. Members for St Albans (Daisy Cooper) and for Bridgwater (Sir Ashley Fox), for their contributions on Second Reading. I thank the Minister with responsibility for pensions, my hon. Friend the Member for Swansea West (Torsten Bell), who assisted me on Second Reading, and my hon. Friend the Member for Newcastle-under-Lyme (Adam Jogee) for his input. I thank my hon. Friend the Member for Hendon (David Pinto-Duschinsky) for his speech on Report.
I would like to extend my gratitude to my officials in the Treasury for their hard work in developing this highly technical Bill, which could not easily be rushed, and for supporting me throughout the Bill’s passage. I am also grateful to the House staff, parliamentary counsel and all other officials involved in the passage of the Bill.
This Bill supports the UK economy’s resilience to the risks posed by bank failures. We all remember the damage caused by the financial crisis, and the Bill, alongside other measures that allow failures to be managed in an orderly way, upholds the economic and financial stability that will deliver on the Government’s growth mission. I am pleased that the Bill has received broad cross-party support in this House and the other place, and I look forward to its enactment. I commend it to the House.