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These notes refer to the Banking Bill as introduced in the House of Commons
on 7th October 2008 [Bill 147]
BANKING BILL
EXPLANATORY NOTES
INTRODUCTION
1. These explanatory notes relate to the Banking Bill as introduced in the House of Commons on 7th October 2008. They have been prepared by the Treasury in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.
2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
BACKGROUND TO BILL
3. In 1997, the Government proposed a new system of financial regulation in the UK. A tripartite structure for overseeing the UK financial system was created, with distinct roles for HM Treasury (the Treasury), the Bank of England (the Bank) and the Financial Services Authority (the FSA) (together, the Authorities) and distinct responsibilities for overall financial stability issues, which are set out in a memorandum of understanding between the Authorities.
4. The Bank of England Act 1998 established the arrangements for the Bank’s current monetary policy responsibilities. Under the 1998 Act, the banking supervision function that had previously been undertaken by the Bank was transferred to the FSA.
5. The Financial Services and Markets Act 2000 set out the framework within which the FSA operates, as the single regulator for the financial services industry. It also established the framework for the Financial Services Compensation Scheme (the FSCS) to provide compensation for consumers in the event that a financial services firm is unable to meet its obligations to them.
SUMMARY AND OVERVIEW OF THE STRUCTURE
6. In October 2007 the Authorities published a discussion paper Banking reform - protecting depositors, which explored ways to strengthen the existing framework for financial stability and depositor protection. In three subsequent consultation documents, in January and July 2008, the Government developed its proposals for reform and announced its intention to bring forward legislation on the following:
Bill 147—EN 54/3
Part 1: Special resolution regime (SRR)
7. The United Kingdom does not currently have a permanent statutory regime for dealing with failing banks. The Banking (Special Provisions) Act, passed in February 2008, provides the Treasury with powers to facilitate an orderly resolution to maintain financial stability or protect the public interest. However the substantive powers provided by the Act are temporary and lapse in February 2009, a year after the Act was passed.
8. The Banking Bill establishes a permanent special resolution regime (SRR), providing the Authorities with tools to deal with banks that get into financial difficulties. Part 1 describes the special resolution objectives and how the SRR is triggered. It sets out the three stabilisation options of the SRR (transfer to a private sector purchaser, transfer to a bridge bank and transfer to temporary public sector ownership). The bank administration procedure, which is used where the partial transfer tool has been exercised, is set out in Part 3 of the Bill. The stabilisation options are exercised through the stabilisation powers, which are the powers to effect the transfer of shares and other securities or property, rights and liabilities, by operation of law. Part 1 also covers the arrangements for assessing such compensation as may be payable to transferors for the shares or other property transferred and for other (third) parties affected by a transfer. The application of the SRR to building societies is also set out along with a power to apply the SRR to credit unions.
Part 2: Bank insolvency
9. This part establishes the other SRR tool, a new bank insolvency procedure (BIP), based on existing liquidation provisions, to provide for the orderly winding up of a failed bank and to facilitate rapid FSCS payments to eligible claimants or a transfer of such accounts to another financial institution. There are also powers to extend the procedure to building societies and credit unions.
Part 3: Bank Administration
10. This establishes a new bank administration procedure for use where there has been a partial transfer of business from a failing bank. A bank administrator may be appointed by the court to administer the affairs of an insolvent residual bank created where part of a bank has been transferred to a private sector purchaser or to a bridge bank under the SRR.
Part 4: Financial Services Compensation Scheme
11. The FSCS operates under powers conferred by Part 15 of the Financial Services and Markets Act 2000. Under these provisions, the Financial Services Authority has the power to set the rules for the scheme, including rules which determine the eligibility for compensation under the scheme and the amounts of compensation payable. These powers are extensive and the majority of changes to the scheme that are being considered may be implemented by the Financial Services Authority under these existing powers. Part 4 of the Bill therefore largely amends the Financial Services and Markets Act 2000 to enable changes to the scheme to be made, which fall outside the scope of the existing powers.
12. However, it also makes possible three more substantial changes, including powers for the Treasury to make detailed provision by regulations in relation to:
- the introduction of pre-funding;
- the use of the Financial Services Compensation Scheme to contribute to the costs of the use of the Special Resolution Regime (see Part 1); and
- the use of the National Loans Fund to make loans to the Financial Services Compensation Scheme.
Part 5: Inter-bank payment systems
13. Payment systems are networks involving sets of rules, procedures and arrangements for the electronic transfer of money or credit between participating members of the systems. In some cases, payment systems are embedded in clearing and settlement systems for transferring securities and these involve payments in relation to the securities.
14. Payment systems are important for the functioning of financial markets and the economy. The inter-linkages between payment systems, banks and other financial intermediaries mean that problems with payment systems have the potential to spread through the financial system, ultimately affecting businesses and consumers.
15. At present, payment systems are not subject to formal regulation. Currently, the Bank of England undertakes oversight on a non-statutory basis, focusing on promoting the robustness and resilience of key UK payment systems, while the FSA has a statutory responsibility for the regulation of Recognised Clearing Houses, which contain embedded payment systems.
16. This Part aims to formalise the Bank of England’s role in the oversight of payment systems. This Part also allows the Bank of England to retain its power of informal oversight where it considers it appropriate (and where it does not have an obligation for formal oversight).
Part 6: Banknotes: Scotland and Northern Ireland
17. Pursuant to the Bank Notes (Scotland) Act 1845, the Bankers (Ireland) Act 1845 and the Bankers (Northern Ireland) Act 1928, as amended (together, “the 1845 legislation”), a limited number of commercial banks retain the right to issue their own banknotes in Scotland and Northern Ireland1.
1 The relevant banks in Scotland are: Bank of Scotland, Clydesdale Bank and Royal Bank of Scotland. The relevant banks in Northern Ireland are: Bank of Ireland, First Trust Bank, Northern Bank and Ulster Bank.
18. The government stands behind notes issued by the Bank of England, as the UK’s central bank, but does not guarantee notes issued by commercial banks. Such notes are liabilities of the issuing banks themselves.
19. This part:
- Repeals the 1845 legislation insofar as it relates to the issue of banknotes in Scotland and Northern Ireland, and makes consequential legislative amendments and repeals.
- Prohibits the issue of banknotes in Scotland and Northern Ireland other than by the Bank of England and those commercial banks that, immediately before the coming into force of this Part, were authorised under the 1845 legislation to issue banknotes.
- Provides that, if an issuing bank chooses to discontinue the business of issuing its own banknotes, its note-issuing privilege cannot thereafter be revived.
- Empowers the Treasury to make banknote regulations. In particular, these regulations may include suitable provision protecting noteholders in the event a commercial issuing bank encounters financial difficulties. The regulations:
o Must require commercial issuing banks to maintain backing assets;
o May define the purpose and status of the backing assets in connection with the insolvency of a commercial issuing bank; and
o May change the existing regulatory framework for commercial bank issuance of banknotes, including establishing new regulatory responsibilities to be assumed by the Bank of England and providing a power for the Bank to make banknote rules.
- Makes further provision for specific matters in relation to the issue of banknotes by the authorized commercial banks.
Part 7: Miscellaneous
20. This part includes provisions relating to the governance of the Bank of England, including a new statutory financial stability objective and the establishment of a Financial Stability Committee (FSC) as a subcommittee of a smaller court of directors of the Bank. As part of the measures to permit short-term nondisclosure of the provision of emergency liquidity, the requirement for the Bank to publish a weekly return is removed. This part also covers greater information sharing between the Authorities and repeals the “funds attached” rule concerning Scottish cheques. Measures to widen the disapplication of the prohibition of building societies granting floating charges to central banks and arrangements regarding financial collateral are also covered in this section.
TERRITORIAL EXTENT
21. The Bill extends to the whole of the UK, except Clause 231 (funds attached rule) which extends to Scotland only.
ANNEXES
22. Annex A lists the standard abbreviations of enactments and technical terms used in these notes.
COMMENTARY ON CLAUSES AND SCHEDULES
PART 1: SPECIAL RESOLUTION REGIME
Clause 1: Overview
23. This clause introduces the main features of the special resolution regime. The Special resolution regime includes the three stabilisation options (transfer to a private sector purchaser, transfer to a bridge bank and transfer to temporary public sector ownership), the bank insolvency procedure and the bank administration procedure. The stabilisation options are exercised through the stabilisation powers, which are the powers to effect the transfer of shares and other securities or property, rights and liabilities, by operation of law. These stabilisation powers include the onward and supplemental transfer powers referred to below. Each of the Tripartite Authorities—the Bank of England, the Treasury and the Financial Services Authority—has a role in the operation of the special resolution regime.
Clause 2: Interpretation: “bank”
24. This clause defines a bank as a UK institution that has a regulatory permission, granted by the FSA under the Financial Services and Markets Act 2000, to accept deposits. It states that bank does not include a building society or a credit union, but provides how the special resolution regime is, or may be, applied to such institutions. The Treasury may, by order, add to the exclusions from this definition of bank.
Clause 3: Interpretation: other expressions
25. This clause defines the terms FSA and financial assistance (which term includes guarantees and indemnities and any other kind of financial assistance, actual or contingent)
Objectives and code
Clause 4: Special resolution objectives
26. This clause sets out the SRR objectives and requires the FSA, Bank of England and the Treasury to have regard to these objectives in using or considering the use of the stabilisation powers, bank insolvency procedure or bank administrative procedure. The SRR objectives are to protect and enhance the stability of the UK’s financial systems, to protect and enhance public confidence in the stability of the UK’s banking systems, to protect depositors, to protect public funds and to avoid interfering with property rights in contravention of the Convention rights (of the Human Rights Act 1998, principal amongst which, in this context, is the right to the peaceful enjoyment of property, under Article 1 of the First Protocol of the European Convention on Human Rights). Subsection (9) makes clear that these objectives are not listed in order of priority; rather they are to be balanced in the circumstances of any given case.
Clause 5: Code of practice
27. This clause requires the Treasury to issue a code of practice about the use of the stabilisation powers, the bank insolvency procedure and the bank administration procedure. It notes the areas that the code may provide guidance on and requires that the FSA, Bank of England and HM Treasury must have regard to the code.
Clause 6: Code of practice: procedure
28. This clause requires the Treasury to consult with the FSA, the Bank of England and the FSCS before issuing the code and to lay it before Parliament as soon as possible following issue. It also gives Treasury the power to revise the code as appropriate.
Exercise of powers: general
Clause 7: General conditions
29. This clause provides that stabilisation powers can be exercised only in respect of a bank if the conditions set out in the clause are met. Those conditions essentially demarcate the boundary that must be crossed before the stabilisation powers, the bank administration procedure and (normally) the bank insolvency procedure may be applied to a bank.
30. The first condition, set out in subsection (2), is that, in the opinion of the FSA, the bank is failing, or is likely to fail, to satisfy its regulatory threshold conditions (as provided in the Financial Services and Markets Act 2000).
31. The second condition, set out in subsection (3), is that, in the opinion of the FSA, it is not reasonably likely that action will be taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions, having regard to timing and other relevant circumstances.
32. Subsection (4) provides that, in making this judgement, the FSA are required to discount any financial assistance provided by the Treasury or Bank of England (disregarding ordinary market assistance offered by the Bank on its usual terms). Before confirming that the second condition is met the FSA must consult the Bank of England and the Treasury. Subsection (6) provides that the special resolution regime objectives are not applicable to the FSA’s decisions on whether a bank meets either of these conditions.
Clause 8: Specific conditions: private sector purchaser and bridge bank
33. This clause sets out alternative conditions one of which must be satisfied before the Bank of England can exercise stabilisation powers so as to effect a transfer of a bank or banking business to a private sector purchaser or to a bridge bank. It provides that the Bank of England can exercise a stabilisation power only if it is satisfied that the exercise of the power is necessary having regard to certain public interest conditions, set out in subsection (2), namely the stability of the UK’s financial systems, the maintenance of public confidence in the stability of the UK’s banking systems and the protection of depositors. Subsection (3) states that before exercising such powers the Bank must consult both the Treasury and the FSA.
34. Subsection (4) provides for the position where the Treasury has provided financial assistance to a bank in order to resolve or reduce a serious threat to the stability of the UK’s financial systems. In this situation, as set out in subsection (5), the Bank of England may only exercise a stabilisation power following a recommendation from the Treasury on the basis of it being necessary to protect the public interest. The Bank then retains the discretion to consider whether the exercise of such a power is an appropriate way to provide that protection. Subsection (6) provides that these conditions are in addition to the conditions in clause 7.
Clause 9: Specific conditions: temporary public ownership
35. This clause provides for alternative conditions one of which must be satisfied for the Treasury to exercise stabilisation powers to take a bank into temporary public ownership.
36. Subsection (2) provides that the first condition is that the exercise of the power is necessary to resolve or reduce a serious threat to the stability of the financial systems of the UK.
37. Subsection (3) sets the second, alternative, condition as follows: if the exercise of the power is necessary to protect the public interest, where the Treasury has provided financial assistance in respect of the bank for the purposes of resolving or reducing a serious threat to the stability of the UK’s financial systems. Subsection (4) provides that the Treasury must consult the FSA and the Bank of England before determining whether this condition is met. Subsection (5) provides that these conditions are in addition to the conditions in clause 7.
The stabilisation options
Clause 10: Private sector purchaser
38. Where both the general conditions of clause 7 and the specific conditions for the private sector purchaser stabilisation option of clause 8 are met, subsection (1) allows the Bank of England to sell all or part of the business of a bank to a commercial purchaser.
39. Subsection (2) establishes that this transfer may be effected through either a transfer of the bank’s shares and other securities, or its property, rights and liabilities. Both types of transfer are executed by instruments made by the Bank (a share transfer instrument (see clause 14) or a property transfer instrument (see clause 30)).
Clause 11: Bridge bank
40. Subsection (1) provides that, where the general conditions (clause 7) and the specific conditions (clause 8) for the bridge bank stabilisation option are met, the Bank of England may transfer all or part of the business of a bank to a bridge bank. Subsection (2) establishes that a transfer to a bridge bank may be effected only through a transfer of the bank’s property, rights and liabilities and is executed by one or more instrument(s) made by the Bank. As defined in subsection (1), a bridge bank is a company wholly owned by the Bank of England.
41. The code of practice to be made under clause 5(1) must address matters relating to the management and control of bridge banks, which must address certain matters specified in subsection (3).
42. Under Subsection (4), where a property transfer is made from a bridge bank (whether or not through means of a property transfer instrument) to a company wholly owned by the Bank of England, that company shall be treated as an ‘onward bridge bank’. Subsection (5) provides for the nature of an onward bridge bank (by setting out the provisions of Part 1 which do and do not apply to onward bridge banks).
Clause 12: Temporary public ownership
43. Where the general conditions (clause 7) are satisfied and the Treasury is satisfied that the specific conditions for the temporary public ownership stabilisation option are met as provided in clause 9, the Treasury may take a bank into temporary public ownership.
44. Subsection (2) provides that the transferee may either be a nominee of the Treasury (such as the Treasury Solicitor) or a company wholly owned by the Treasury. A transfer to temporary public ownership may only be effected through a transfer of shares and securities, and is made by a share transfer order made by statutory instrument subject to the negative procedure (see clause 24).
45. Subsection (3) provides that the code of practice must include provision about the content of share transfer orders and the management of a company in temporary public ownership.
Transfer of securities
Clause 13: Interpretation: “securities”
46. Share transfer powers may be used to effect the transfer of securities. This clause defines securities widely. The definition includes shares and stock; debentures; warrants or other instruments that entitle the holder to acquire such securities; and other rights granted by a deposit-taker which form part of its own funds for the purposes of Section 1 of Chapter 2 of Title V of the Banking Consolidation Directive (2006/48/EC). The definition in this clause ensures that share transfer powers can be exercised to transfer complete control of a bank.
Clause 14: Share transfer instrument
47. Share transfer instruments are made by the Bank of England to effect the transfer of a bank to a private sector purchaser (that stabilisation option as described in clause 10). This clause describes provision that a share transfer instrument may make. The instrument may relate to either specified securities or securities with a specified description.
Clause 15: Share transfer order
48. Share transfer orders are made by the Treasury to effect the transfer of a bank to temporary public ownership. This clause describes the provision that a share transfer order may make. The order may relate to either specified securities or securities of a specified description.
Clause 16: Effect
49. This clause makes further provision about the effects of a share transfer instrument or order. Subsection (2) makes clear that the transfer of securities takes place by operation of law. Subsection (3) makes provision for the transfer to take effect regardless of any restriction (including any requirement for consent and restrictions arising by contract—such as a non-assignment clause—or legislation). Provision is also made for the share transfer instrument or order to be carried out free from any encumbrances (such as a trust), which may be extinguished under the order (subsection (5)). Subsection (6) allows for the extinguishment of rights to acquire securities (for example, such as share options).
Clause 17: Continuity
50. This clause states that when a share transfer instrument or order is made, provision can be made to ensure the continuity of arrangements operating in respect of a bank.
51. Subsection (1) enables the share transfer instrument or order to include provision that the transferee can be treated as the same person as the transferor for any purpose connected with the transfer.
52. Subsection (2) enables the share transfer instrument or order to include provision that agreements made or other things done by or in relation to a transferor are treated as made or done by or in relation to the transferee. This provision would enable for example, the transferred deposit taker to continue to benefit from arrangements entered into by the transferors, notwithstanding any rights triggered on the transfer.
53. Subsection (3) allows for transitional provision about things transferred to be continued. This can include continuation of legal proceedings by or in relation to the transferee. Subsection (4) allows for the modification of references to the transferor in
instruments or documents. Subsection (5) allows for provision of information to be required or permitted between the transferor and the transferee of a share transfer instrument or order.
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