Banking Bill

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Ian Pearson: Let me begin by restating why the Government believe, as a point of principle, that the financial services sector, through the FSCS, should contribute to the costs of the SRR. I will then address a number of points raised by the hon. Gentleman.
There are two strong arguments why the financial services sector should be contributing to the costs of the SRR through the FSCS. First, where intervention is necessary to prevent costs to the wider economy of the failure of a bank, we believe there is a compelling argument for banks to contribute to that cost because banks—and the financial services sector more widely—benefit directly from the achievement of the SRR objectives, particularly the objective of enhanced financial stability and confidence in the banking system. It is therefore entirely appropriate that the sector should contribute to measures that achieve these objectives. Secondly, but for the use of a resolution tool, the financial services sector would have to fund through the services of the FSCS the cost of compensation to depositors arising from the failure of a deposit taker. Therefore it is also entirely appropriate that the Treasury may provide that the banks contribute to the costs arising from the exercise of the special resolution regime tools that are designed to address a failing bank.
In response to consultations on the provision, the banking industry has consistently opposed our plans. In its view, the costs of resolution should be met by an acquiring company or the insolvent bank’s estate. However, industry should be called upon before taxpayers contribute to any shortfall.
Mr. Hoban: Is it the Minister’s view, therefore, that the acquirer or the estate of the failed bank should bear the costs initially, and that anything in excess of that should be borne by the wider financial services sector?
Ian Pearson: That probably depends on the circumstances and the particular transaction. I have tried to outline the general principles that underpin clause 157. The clause notes that the FSCS will be called upon to contribute to the resolution costs when a stabilisation power under part 1 of the Bill has been used, and when the Treasury considers that, but for the exercise of that power, the FSCS would have normally been triggered to pay out to depositors under the provisions of the Financial Services and Markets Act 2000.
I shall draw the Committee’s attention to a number of safeguards that the Bill puts in place around that power. First, as set out in subsection (4)—which the hon. Gentleman spent some time discussing—the Treasury will only contribute up to the hypothetical cost of depositor compensation payments. Secondly, as also set out in that subsection, if the FSCS pays out to depositors it should not be called upon to contribute to the costs of any other resolution tools for the same bank. Finally, as set out in subsection (3), there will be independent verification of the nature and amount of the expenses incurred.
The hon. Gentleman queried the meaning of “unable to satisfy claims against it”. I am advised that that is a standard term that refers to when the FSCS will be triggered. It is in part 5, chapter 15 of FSMA. The subsections regarding the resolution received many probing questions from the hon. Gentleman. I have already drawn particular attention to subsection (4), which outlines some of the requirements of the regulations, and subsection (3) sets out that the Treasury can make regulations to specify the expenses that the FSCS should contribute to. It is important to recognise that the regulations will be fully consulted on. To return to the hon. Gentleman’s example, we do not think that the operational costs of the bridge bank would be included.
While we will consult on the regulations, it might help to briefly indicate some examples of what resolution costs could include. We have in mind the market value of any guarantees provided by the authorities to the bank, financial assistance provided to support a resolution, the administrative costs of the SRR—for example, the cost of an advisory service procured by the authorities to effect a resolution—and certain compensation costs.
The hon. Gentleman also asked whether the acquirer pays the resolution costs. Yes, the acquirer will bear those costs. For example, under the bank resolution fund the proceeds of any resolution will flow back to compensation costs.
The hon. Gentleman also raised the issue of consultation. He asked whether the Treasury will consult with scheme members on the rules that will guide the independent valuer, and I want to be clear that the answer is definitely yes. We can consult on any principles, but we must recognise that valuation involves complex calculation of a hypothetical insolvency, so it might not be appropriate to involve FSCS members in all of the independent valuer’s procedures and calculations. I hope he appreciates that throughout the Bill we have always wanted to commit to working with the industry in a consensual, open and transparent manner, and that applies to the extent that it is possible to do so in this case, just as it has with other aspects of the Bill that we have discussed.
From the Minister’s comments about the limit on how much could be paid, I think we may take it that if the hypothetical cost was £10 million and the FSCS only paid out net £5 million, the contribution that members would make could still be a further £5 million; so the way in which that works is now clearer in my mind.
Question put and agreed to.
Clause 157, as amended, ordered to stand part of the Bill.

Clause 77

Question proposed, That the clause stand part of the Bill.
Mr. Hoban: This point might seem rather trivial to the Minister, but I would like to know why in subsection (1) the procedure is described as insolvency. The normal procedure is either liquidation or administration, so insolvency seems to be a new term invented for the purposes of the Bill to describe the process. Indeed, it becomes clear in subsection (2)(b) that the order appoints a “bank liquidator,” and that term is used thereafter fairly regularly. Indeed, clauses 86 to 89 deal with the process of bank liquidation.
I am not sure why the Government have chosen to introduce the word “insolvency.” Someone rather crudely suggested that, given that these things are normally matters for the Department for Business, Enterprise and Regulatory Reform, the Treasury was a little more lax in its language, but knowing the Minister’s dual role, I am sure that he would not have allowed that to happen. It would be helpful to know why “insolvency” was used in this case rather than the more traditional liquidation.
1.30 pm
Sir Peter Viggers (Gosport) (Con): I should like to probe the thinking behind the clause. My understanding is that in some jurisdictions a failed bank is subject to the general corporate insolvency laws, as is the case in this country. I understand that there are special regimes in other countries, including Italy, Norway, Canada and the United States. The Government’s principal reason for bringing in a special regime, as stated in the explanatory notes, is that depositors who are eligible claimants under the terms of the FSCS are paid out promptly when a bank fails. As I understand it, the Government intend that to be the main thrust of the proposed new insolvency regime. Then there are some other objectives which were listed in the Government’s consultative document earlier this year. The first is that depositors might be deprived of access to their accounts at very short notice if there is no special regime. The second is that no objectives exist around the fast pay-off of depositors. The third is the likely destruction of any residual franchise value. The fourth is the risk of contagion to other banks.
I can see why the Government gave consideration to the creation of a special regime. However, I draw to the Minister’s attention the fact that the majority of correspondents to the January 2008 consultation felt that wholesale changes to current insolvency provisions were not required to ensure rapid payments to eligible FSCS claimants. Several parties suggested that any new procedure should be closer to liquidation than the creation of a new regime. But the Government have proceeded to create this new regime.
To what extent has the Minister consulted with other international bodies responsible for bank supervision in order to try to ensure that the globalisation of banks is reflected by a similarity of treatment? To what extent has he had discussions with the responsible bodies in our European colleague countries, with responsible bodies in the United States and in other countries that are becoming increasingly important in a globalised market? While these provisions for a new regime in the United Kingdom are before us, I should like to know a bit about the Government’s thinking in arriving at this conclusion and putting these proposals before us. In particular, can the Minister tell us about any discussions he has had to try to ensure that our regime does not stand alone, but is carefully co-ordinated and preferably made similar to those of other countries?
Ian Pearson: The clause introduces part 2, which sets out a new insolvency procedure for banks, based on existing liquidation provisions. I should like to respond directly to the question posed by the hon. Member for Fareham about the use of the term “insolvency” here. We use it because the draftsman thought that it would be a more natural, modern term in this context than liquidation.
Mr. Hoban: Why, then, is the draftsman inconsistent later in this part of the Bill? Clauses 86 to 92 are headed “Process of bank liquidation”, which seems a very archaic use of words.
Ian Pearson: I suspect that the answer is that insolvency can involve liquidation and administration too. We would need to refer to existing law. In due course the draftsman may put words into my mouth so that I can respond further.
I want to respond the point made by the hon. Member for Gosport about the importance of the existing insolvency law. There has been extensive consultation between the Government and insolvency practitioners in this area. We believe that we have the right sort of balance in terms of ensuring a fast payout procedure, while having a system of law with which insolvency practitioners are already familiar. The fact that there has not been a flood of suggested amendments to the clauses from those outside who follow these matters shows that there is strong consensus in this area.
The point about allowing depositors fast access to their funds in the event of a bank failure is an important one. As my hon. Friends on the Treasury Committee noted, it is not just the level of FSCS compensation payout that is important—the speed of payout is also vital. The Chairman of the Committee, referring to moves to raise the compensation limit to £50,000, stated:
“It is far more important that banks be able to identify who their insured depositors are, and that the FSCS be able to process compensation claims quickly.”
Making fast payout to depositors is indeed crucial. For depositors of UK banks to have confidence in the system, they need to be sure that the payment will be made quickly, and that they will be able to access their deposits quickly. Measures to enable depositors to access their funds quickly are important for their own sake, but also to build confidence in the banking system as a whole, and for the maintenance of financial stability.
In response to comments by the hon. Member for Gosport, I shall talk briefly about how the new bank insolvency procedure has been developed. An established feature of the UK insolvency system is the existence of special insolvency regimes for industries where failure poses unique challenges—for example, water, energy and rail. Those special regimes are based on provisions of the Insolvency Act 1986. Like those special insolvency regimes, the bank insolvency procedure is a unique process. However, it is based largely on existing provisions in UK insolvency law and practice, particularly relating to the compulsory liquidation of companies. It is worth emphasising the point that, during our consultation process, stakeholders constantly referred to the strength of the existing insolvency regime in the UK, noting its advantages over other insolvency regimes internationally.
The Financial Markets Law Committee put it very well in its response to the April consultation paper:
“The existing corporate insolvency laws in England and Wales...provide for one of the most versatile and effective insolvency regimes in the world. They are often used as a model for jurisdictions improving or developing their laws.”
That is a fairly comprehensive endorsement; other stakeholders made similar points about the insolvency provisions. They were anxious, therefore, that the Government should not make substantial changes. Bearing that in mind, we are confident that our approach is the right one.
The bank insolvency procedure builds on the strength and effectiveness of the UK’s existing insolvency regime, closely following existing insolvency law and practice. It will be familiar to companies and their professional advisers. We have not changed the statutory priority order of creditors. Consistent with existing special insolvency regimes, it is a court-based procedure, which means that it can be commenced only by a court order, and the whole process will be subject to the overall supervision of the court. That will ensure transparency, legitimacy and compliance with the Human Rights Act and provide a forum for dispute resolution. Many other provisions remain substantially the same as existing insolvency law, as we shall note when we come to the relevant clauses.
As with the existing special insolvency regimes, the bank insolvency procedure has some specific features to reflect the unique challenges of winding up a bank, and the Government’s specific objectives of protecting depositors and maintaining financial stability. As I have mentioned, the key difference from normal insolvency is that as well as providing for the winding up of a bank’s affairs, the process will enable prompt FSCS payments to eligible depositors, or else allow for a bulk transfer of their accounts to another institution. To that end, the liquidator of the bank will have specific statutory objectives: to work with the FSCS to enable prompt payouts to eligible depositors or to facilitate the bulk transfer of accounts to another institution; and to wind up the affairs of the failed bank in the interests of creditors as a whole. The authorities and the FSCS will have a key role in the early stages of the proceedings to oversee and work with the bank liquidator to ensure that those objectives can be met.
I have used the word “liquidator”. Let me explain. The word “liquidation” has to be used later in the Bill, because it is the technical, legal term. In the overview clause, we can be looser, more familiar and clearer with the readers, but we have to be precise when it comes to the details of the Bill.
Clause 77 outlines the bank insolvency procedure in broad terms. A bank enters the process by court order, appointing a bank liquidator. The bank liquidator aims to arrange for the bank’s eligible depositors to have their accounts transferred or to receive compensation from the FSCS. To achieve that, the bank liquidator will work with the initial liquidation committee, made up of the authorities and the FSCS. When that is done, the bank liquidator winds up the bank. To carry out those functions, the bank liquidator has the powers and duties of a liquidator in normal insolvency as applied and modified by clauses that we shall discuss subsequently.
I hope that by giving a lengthy introduction to clause 77, I have set out clearly the Government’s thinking and the principles that were applied in framing the subsequent clauses. They have been consulted on to a very large extent and have the broad support of insolvency practitioners.
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