Financial Services (Banking Reform) Bill (HL Bill 62)

(b) the period of 3 months beginning with the notification has
elapsed.”

Section 14

SCHEDULE 2 Bail-in stabilisation option

5Part 1 Amendments of Banking Act 2009

1 The Banking Act 2009 is amended as follows.

New stabilisation option: bail-in

2 After section 12 insert—

“12A 10Bail-in option

(1) The third stabilisation option is exercised by the use of the power in
subsection (2).

(2) The Bank of England may make one or more resolution instruments
(which may contain provision or proposals of any kind mentioned in
15subsections (3) to (6)).

(3) A resolution instrument may—

(a) make special bail-in provision with respect to a specified
bank;

(b) make other provision for the purposes of, or in connection
20with, any special bail-in provision made by that or another
instrument.

(4) A resolution instrument may—

(a) provide for securities issued by a specified bank to be
transferred to a bail-in administrator (see section 12B) or
25another person;

(b) make other provision for the purposes of, or in connection
with, the transfer of securities issued by a specified bank
(whether or not the transfer has been or is to be effected by
that instrument, by another resolution instrument or
30otherwise).

(5) A resolution instrument may set out proposals with regard to the
future ownership of a specified bank or of the business of a specified
bank, and any other proposals (for example, proposals about making
special bail-in provision) that the Bank of England may think
35appropriate.

(6) A resolution instrument may make any other provision the Bank of
England may think it appropriate to make in exercise of specific
powers under this Part.

(7) Provision made in accordance with subsection (4) may relate to—

(a) 40specified securities, or

(b) securities of a specified description.

(8) Where the Bank of England has exercised the power in subsection (4)
to transfer securities to a bail-in administrator, the Bank of England
must exercise its functions under this Part (see, in particular, section
548V) with a view to ensuring that any securities held by a person in
the capacity of a bail-in administrator are so held only for so long as
is, in the Bank of England’s opinion, appropriate having regard to
the special resolution objectives.

(9) References in this Part to “special bail-in provision” are to provision
10made in reliance on section 48B.

12B Bail-in administrators

(1) The Bank of England may, in a resolution instrument, appoint an
individual or body corporate as a bail-in administrator.

(2) A bail-in administrator is appointed—

(a) 15to hold any securities that may be transferred or issued to
that person in the capacity of bail-in administrator;

(b) to perform any other functions that may be conferred under
any provision of this Part.

(3) The Bank of England may appoint more than one bail-in
20administrator to perform functions in relation to a bank (but no more
than one of them may at any one time be authorised to hold securities
as mentioned in subsection (2)(a)).

(4) Securities held by a bail-in administrator (in that capacity, and
whether as a result of a resolution instrument or otherwise) are to be
25held in accordance with the terms of a resolution instrument that
transfers those, or other, securities to the bail-in administrator.

(5) For example, the following provision may be made by virtue of
subsection (4)—

(a) provision that specified rights of a bail-in administrator with
30respect to all or any of the securities are to be exercisable only
as directed by the Bank of England;

(b) provision specifying rights or obligations that the bail-in
administrator is, or is not, to have in relation to some or all of
the securities.

(6) 35A bail-in administrator must have regard, in performing any
functions of the office, to any objectives that may be specified in a
resolution instrument.

(7) Where one or more objectives are specified in accordance with
subsection (6), the objectives are to be taken to have equal status with
40each other, unless the contrary is stated in the resolution instrument.

(8) See sections 48I to 48K for further provision about bail-in
administrators.”

3 After section 8 insert—

“8A Specific condition: bail-in

(1) The Bank of England may exercise a stabilisation power in respect of
a bank in accordance with section 12A(2) only if satisfied that the
5condition in subsection (2) is met.

(2) The condition is that the exercise of the power is necessary, having
regard to the public interest in—

(a) the stability of the financial systems of the United Kingdom,

(b) the maintenance of public confidence in the stability of those
10systems,

(c) the protection of depositors, or

(d) the protection of any client assets that may be affected.

(3) Before determining whether that condition is met, and if so how to
react, the Bank of England must consult—

(a) 15the PRA,

(b) the FCA, and

(c) the Treasury.

(4) The condition in this section is in addition to the conditions in section
7.”

20Further provision about the bail-in option

4 After section 48A insert—

“Bail-in option

48B Special bail-in provision

(1) “Special bail-in provision”, in relation to a bank, means any of the
25following (or any combination of the following)—

(a) provision cancelling a liability owed by the bank;

(b) provision modifying, or changing the form of, a liability
owed by the bank;

(c) provision that a contract under which the bank has a liability
30is to have effect as if a specified right had been exercised
under it.

(2) “Special bail-in provision”, in relation to a bank, also includes any
associated provision (see subsection (3)) that the Bank of England
may think it appropriate to make in consequence of any provision
35under subsection (1) that—

(a) is made in the same resolution instrument, or

(b) has been made in another resolution instrument in respect of
the bank.

(3) “Associated provision” means provision cancelling or modifying a
40contract under which a banking group company has a liability.

(4) A power to make special bail-in provision—

(a) may be exercised only for the purpose of, or in connection
with, reducing, deferring or cancelling a liability of the bank;

(b) may not be exercised so as to affect any excluded liability.

(5) The following rules apply to the interpretation of subsection (1).

1. The reference to cancelling a liability owed by the bank includes a
reference to cancelling a contract under which the bank has a
5liability.

2. The reference to modifying a liability owed by the bank includes a
reference to modifying the terms (or the effect of the terms) of a
contract under which the bank has a liability.

3. The reference to changing the form of a liability owed by the bank,
10includes, for example—

• converting an instrument under which the bank owes a
  liability from one form or class to another,

• replacing such an instrument with another instrument of a
  different form or class, or

• 15creating a new security (of any form or class) in connection
  with the modification of such an instrument.

(6) Examples of special bail-in provision include—

(a) provision that transactions or events of any specified kind
have or do not have (directly or indirectly) specified
20consequences or are to be treated in a specified manner for
specified purposes;

(b) provision discharging persons from further performance of
obligations under a contract and dealing with the
consequences of persons being so discharged.

(7) 25The form and class of the instrument (“the resulting instrument”)
into which an instrument is converted, or with which it is replaced,
do not matter for the purposes of paragraphs (a) and (b) of rule 3 in
subsection (5); for instance, the resulting instrument may (if it is a
security) fall within Class 1 or any other Class in section 14.

(8) 30The following liabilities of the bank are “excluded liabilities”—

(a) liabilities representing protected deposits;

(b) any liability, so far as it is secured;

(c) liabilities that the bank has by virtue of holding client assets;

(d) liabilities with an original maturity of less than 7 days owed
35by the bank to a credit institution or investment firm;

(e) liabilities arising from participation in designated settlement
systems and owed to such systems or to operators of, or
participants in, such systems;

(f) liabilities owed to central counterparties recognised by the
40European Securities and Markets Authority in accordance
with Article 25 of Regulation (EU) 648/2012 of the European
Parliament and the Council;

(g) liabilities owed to an employee or former employee in
relation to salary or other remuneration, except variable
remuneration;

(h) liabilities owed to an employee or former employee in
5relation to rights under a pension scheme, except rights to
discretionary benefits;

(i) liabilities owed to creditors arising from the provision to the
bank of goods or services (other than financial services) that
are critical to the daily functioning of the bank’s operations.

(9) 10The following special rules apply in cases involving banking group
companies—

(a) a liability mentioned in subsection (8)(d) is not an excluded
liability if the credit institution or investment firm to which
the liability is owed is a banking group company in relation
15to the bank (see section 81D);

(b) in subsection (8)(i) the reference to creditors does not include
companies which are banking group companies in relation to
the bank.

48C Meaning of “protected deposit”

(1) 20A deposit is “protected” so far as it is covered by the Financial
Services Compensation Scheme.

(2) A deposit is “protected” so far as it is covered by a scheme which—

(a) operates outside the United Kingdom, and

(b) is comparable to the Financial Services Compensation
25Scheme.

(3) If one or both of subsections (1) and (2) apply to a deposit, the
amount of the deposit “protected” is the highest amount which
results from either of those subsections.

(4) In subsections (1) and (2) and section 48B(8)(a), “deposit” has the
30meaning given by article 5(2) of the Financial Services and Markets
Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544S.I. 2001/544), but
ignoring the exclusions in article 6.

48D General interpretation of section 48B

(1) In section 48B—

• 35“client assets” means assets which the bank has undertaken to
  hold on trust for, or on behalf of, a client;

• “contract” includes any instrument;

• “credit institution” means any credit institution as defined in
  Article 4.1(1) of Regulation (EU) No 575/2013 of the
  40European Parliament and of the Council, other than an entity
  mentioned in Article 2.5(2) to (23) of Directive 2013/36/EU of
  the European Parliament and of the Council;

• “designated settlement system” means a system designated in
  accordance with Directive 98/26/EC of the European
  45Parliament and of the Council (as amended by Directives
  2009/44/EC and 2010/78/EU);

• “employee” includes the holder of an office;

Financial Services (Banking Reform) BillPage 115

• “investment firm” means an investment firm as defined in
  Article 4.1(2) of Regulation (EU) No 575/2013 of the
  European Parliament and of the Council that is subject to the
  initial capital requirement specified in Article 28(2) of
  5Directive 2013/36/EU of the European Parliament and of the
  Council;

• “pension scheme” includes any arrangement for the payment of
  pensions, allowances and gratuities;

• “secured” means secured against property or rights, or
  10otherwise covered by collateral arrangements.

(2) In subsection (1)—

• “assets” has the same meaning as in section 232(4) (ignoring for
  these purposes section 232(5A)(b));

• “collateral arrangements” includes arrangements which are title
  15transfer collateral arrangements for the purposes of section
  48.

(3) For the purposes of section 48B(8)(h), a benefit under a pension
scheme is discretionary so far as the employee’s right to the benefit
resulted from the exercise of a discretion.

48E 20Report on special bail-in provision

(1) This section applies where the Bank of England makes a resolution
instrument containing special bail-in provision (see section 48B).

(2) The Bank of England must report to the Chancellor of the Exchequer
stating the reasons why that provision has been made in the case of
25the liabilities concerned.

(3) If the provision departs from the insolvency treatment principles, the
report must state the reasons why it does so.

(4) The insolvency treatment principles are that where an instrument
includes special bail-in provision—

(a) 30the provision made by the instrument must be consistent
with treating all the liabilities of the bank in accordance with
the priority they would enjoy on a liquidation, and

(b) any creditors who would have equal priority on a liquidation
are to bear losses on an equal footing with each other.

(5) 35A report must comply with any other requirements as to content that
may be specified by the Treasury.

(6) A report must be made as soon as reasonably practicable after the
making of the resolution instrument to which it relates.

(7) The Chancellor of the Exchequer must lay a copy of each report
40under subsection (2) before Parliament.

48F Power to amend definition of “excluded liabilities”

(1) The Treasury may by order amend section 48B(8) by—

(a) adding to the list of excluded liabilities;

(b) amending or omitting any paragraph of that subsection,
45other than paragraphs (a) to (c).

(2)

The Treasury may by order amend section 48C or 48D.

(3) The powers conferred by subsections (1) and (2) include power to
make consequential and transitional provision.

(4) An order under this section—

(a) 5is to be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and
approved by resolution of each House of Parliament.

(5) The Treasury must consult before laying a draft order under this
section before Parliament.

48G 10Priority between creditors

(1) The Treasury may, for the purpose of ensuring that the treatment of
liabilities in any instrument that contains special bail-in provision is
aligned to an appropriate degree with the treatment of liabilities on
an insolvency, by order specify matters or principles to which the
15Bank of England is to be required to have regard in making any such
instrument.

(2) An order may, for example, specify the insolvency treatment
principles (as defined in section 48E(4)) or alternative principles.

(3) An order may specify the meaning of “insolvency” for one or more
20purposes of the order.

(4) An order may amend sections 44C(4) and 48E(4).

(5) An order—

(a) is to be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and
25approved by resolution of each House of Parliament.

48H Business reorganisation plans

(1) A resolution instrument may require a bail-in administrator, or one
or more directors of the bank, to—

(a) draw up a business reorganisation plan with respect to the
30bank, and

(b) submit it to the Bank of England within the period allowed by
(or under) the instrument.

(2) “Business reorganisation plan” means a plan that includes—

(a) an assessment of the factors that caused Condition 1 in
35section 7 to be met in the case of the bank,

(b) a description of the measures to be adopted with a view to
restoring the viability of the bank, and

(c) a timetable for the implementation of those measures.

(3) Where a person has submitted a business reorganisation plan to the
40Bank of England under subsection (1) (or has re-submitted a plan
under subsection (4)), the Bank of England—

(a) must approve the plan if satisfied that the plan is
appropriately designed for meeting the objective mentioned
in subsection (2)(b);

(b) must otherwise require the person to amend the plan in a
specified manner.

(4) Where the Bank of England has required a person to amend a
business re-organisation plan, the person must re-submit the
5amended plan within the period allowed by (or under) the resolution
instrument.

(5) Before deciding what action to take under subsection (3) the Bank of
England must (for each submission or re-submission of a plan)
consult—

(a) 10the PRA, and

(b) the FCA.

(6) A business reorganisation plan may include recommendations by
the person submitting the plan as to the exercise by the Bank of
England of any of its powers under this Part in relation to the bank.

(7) 15Where a resolution instrument contains provision under subsection
(1), the instrument may—

(a) specify further matters (in addition to those mentioned in
subsection (2)) that must be dealt with in the business
reorganisation plan;

(b) 20make provision about the timing of actions to be taken in
connection with the making and approval of the plan;

(c) enable any provision that the Bank of England has power
under paragraph (a) or (b) to make in the instrument to be
made instead in an agreement between the Bank of England
25and the person required to draw up the business
reorganisation plan.

(8) For the purposes of subsection (2)(b) the viability of a bank is to be
assessed by reference to whether the bank satisfies, and (if so) for
how long it may be expected to continue to satisfy, the threshold
30conditions (as defined in section 55B of the Financial Services and
Markets Act 2000).

48I Bail-in administrator: further functions

(1) A resolution instrument may—

(a) authorise a bail-in administrator to manage the bank’s
35business (or confer on a bail-in administrator any other
power with respect to the management of the bank’s
business);

(b) authorise a bail-in administrator to exercise any other powers
of the bank;

(c) 40confer on a bail-in administrator any other power the Bank of
England may consider appropriate;

(d) provide that the exercise of any power conferred by the
instrument in accordance with this section is to be subject to
conditions specified in the instrument.

(2) 45A resolution instrument may require a bail-in administrator to make
reports to the Bank of England—

(a) on any matter specified in the instrument, and

(b) at the times or intervals specified in the instrument.

(3) If a resolution instrument specifies a matter in accordance with
subsection (2)(a), it may provide for further requirements as to the
contents of the report on that matter to be specified in an agreement
between the Bank of England and the bail-in administrator.

(4) 5A resolution instrument may—

(a) require a bail-in administrator to consult specified persons
before exercising specified functions (and may specify
particular matters on which the specified person must be
consulted);

(b) 10provide that a bail-in administrator is not to exercise
specified functions without the consent of a specified person.

48J Bail-in administrator: supplementary

(1) A bail-in administrator may do anything necessary or desirable for
the purposes of or in connection with the performance of the
15functions of the office.

(2) A bail-in administrator is not a servant or agent of the Crown (and,
in particular, is not a civil servant).

(3) Where a bail-in administrator is appointed under this Part, the Bank
of England—

(a) 20must make provision in a resolution instrument for
resignation and replacement of the bail-in administrator;

(b) may remove the bail-in administrator from office only (i) on
the ground of incapacity or misconduct, or (ii) on the ground
that there is no further need for a person to perform the
25functions conferred on the bail-in administrator.

48K Bail-in administrator: money

(1) A resolution instrument may provide for the payment of
remuneration and allowances to a bail-in administrator.

(2) Provision made under subsection (1) may provide that the amounts
30are—

(a) to be paid by the Bank of England, or

(b) to be determined by the Bank of England and paid by the
bank.

(3) A bail-in administrator is not liable for damages in respect of
35anything done in good faith for the purposes of or in connection with
the functions of the office (subject to section 8 of the Human Rights
Act 1998).

48L Powers in relation to securities

(1) A resolution instrument may—

(a) 40cancel or modify any securities to which this subsection
applies;

(b) convert any such securities from one form or class into
another.

(2) Subsection (1) applies to securities issued by the bank that fall within
45Class 1 in section 14.

(3) A resolution instrument may—

(a) make provision with respect to rights attaching to securities
issued by the bank;

(b) provide for the listing of securities issued by the bank to be
5discontinued.

(4) The reference in subsection (1)(b) to converting securities from one
form or class into another includes creating a new security in
connection with the modification of an existing security.

(5) The provision that may be made under subsection (3)(a) includes, for
10example—

(a) provision that specified rights attaching to securities are to be
treated as having been exercised;

(b) provision that the Bank of England, or a bail-in
administrator, is to be treated as authorised to exercise
15specified rights attaching to securities;

(c) provision that specified rights attaching to securities may not
be exercised for a period specified in the instrument.

(6) In subsection (3)(b) the reference to “listing” is to listing under
section 74 of the Financial Services and Markets Act 2000.

(7) 20The provision that may be made under this section in relation to any
securities is in addition to any provision that the Bank of England
may have power to make in relation to them under section 48B.

48M Termination rights, etc

(1) In this section “default event provision” has the same meaning as in
25section 22.

(2) A resolution instrument may provide for subsection (3) or (4) to
apply (but need not apply either).

(3) If this subsection applies, the resolution instrument is to be
disregarded in determining whether a default event provision
30applies.

(4) If this subsection applies, the resolution instrument is to be
disregarded in determining whether a default event provision
applies except so far as the instrument provides otherwise.

(5) In subsections (3) and (4) a reference to the resolution instrument is
35a reference to—

(a) the making of the instrument,

(b) anything that is done by the instrument or is to be, or may be,
done under or by virtue of the instrument, and

(c) any action or decision taken or made under this or another
40enactment in so far as it resulted in, or was connected to, the
making of the instrument.

(6) Provision under subsection (2) may apply subsection (3) or (4)—

(a) generally or only for specified purposes, cases or
circumstances, or

(b) 45differently for different purposes, cases or circumstances.