Memorandum submitted by Investment Management Association (BAN 01)

 

Evidence submitted by the IMA to the Scrutiny Committee of the UK Parliament in relation to the Banking Bill as introduced to the House of Commons on 7th October 2008 (Bill 147)

 

1. The IMA represents the asset management industry operating in the UK. Our Members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of 3.4 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles.

 

2. Since the Tripartite Authorities first consulted on a permanent replacement of the Banking (Special Provisions) Act 2007, the IMA has called for an early introduction of an SRR regime. In evidence to the Treasury Committee the IMA expressed a hope that a mechanism could provide for continued access to cashpoints, and other bank services, despite a bank failure. This Bill probably goes as far as practicable in achieving this. We have arranged comments in accordance with the structure of the Bill and have highlighted clause references for ease of reading.

 

Part 1 - Special Resolution Regime

3. Clause 5(4) - confidence is critical to the efficient operation of any market. The level of confidence is impacted by expectations that the exercises of power will be impartial, predictable and understandable. The powers in Part 1 need to be drawn widely; no-one wants to find the next Banking crisis can only be addressed by further emergency legislation. This width imposes huge weight upon the specific exercise of judgement by any or all of the Tripartite Authorities in any particular case. The Code is a critical description of that judgement exercise; until the Code is seen, there will remain concern that the requirement to "have regard" to its contents is an insufficiently strong formulation to secure both long-term confidence amongst savers and investors and also the regional competitiveness in the banking industry.

 

4. Clause 8 - the Bank of England's role. Balancing the public law powers between the FSA and the Bank of England is not easy, but an appropriate balance needs to be struck. The role now given to the Bank of England will have at least three advantages:

 

a. the interdependence of consultation by FSA of the Bank of England in clause 7(5) and vice versa in clause 8(3) ought to secure early and iterative engagement between these parties as issues escalate;

b. importantly, the proposal ensures the Bank of England exercises the stabilising power and the FSA supervises the bank - segregation of these functions ought to provide a more robust conflict management solution than were FSA in both roles immediately before and after a bank failure; and

c. the Bank of England will need to ensure it has sufficient and competent resource effectively to exercise these new powers at short notice, and so consequently this ought to have advantages more widely in terms of the Bank of England's ability to assist, consider and question the FSA's judgement as supervisor of banks prior to the crisis moments. In this regard, the Select Committee's comments (Banking Reform 17th Report of Session 2007-08) para 69) about the risk of regulatory capture and the need for a more explicit power of direction for the Bank of England will need to be considered again when the draft Code is made available to Parliament.

 

5. It is in relation to the operation of the stabilising powers that there is the greatest perceived risk. Principally, this relates to

a. "fire sale" issues (see 6 below)

b. The ability to alter terms of existing instruments (see 7 below)

c. Partial transfers (see 8 below)

 

6. On their face, the Objectives (clause 4) do not require the Authorities to get the best price for any transfer. The concern that a transfer may occur at any cost so as to protect depositors, when with some more thought (and perhaps a small measure of time) an option could be considered that might achieve the same as regards depositors and public funds but leave residual creditors, and even shareholders, in a better position. Clause 53(5) (resolution fund order) addresses this in part but it is always subserviated to the Code's provisions. Additionally it is only mandatory for transfers to bridge banks (clause 46), is discretionary for nationalisations (clause 47) and does not apply to sales to private sector purchasers (clause 45). The Code or the Bill needs to address the "fire-sale" issue perhaps by including a provision akin to clause 53(5) within clause 4.

 

7. The ability to alter terms of existing instruments (clause 35). Again, the Code will be critical in understanding how this power will be used and markets will look for certainty and predictability. To date, terms that have been changed have been to prevent subordinated debt holders from exercising default rights in the wind-down of Bradford & Bingley plc, which arguably could have prevented an orderly wind-down.

 

8. As regards partial transfers, in summary, we wish to make the following points:

a. The fact that there are real technical challenges should not deflect efforts from introducing clauses 41 to 43; the counterfactual, no action, is unacceptable in the present climate and would severely damage the UK's standing.

b. It is important to note that partial transfers have been used with apparent success in relation to Bradford & Bingley plc, the Heritable Bank plc and Kaupthing Singer & Friedlander Limited. These partial transfers (along with the use of bridge banks in the last two failures) have ensured the continued operation of some 22.2bn of retail deposits.

c. Many comments about partial transfers have been made without regard to the important safeguards proposed in the Bill and other safeguards provided by EU legislation and are generally directed at market operations, such as collateralised financial transactions. However clauses 42 to 43 ought to be capable of protecting many market operations and international business conducted under industry standard agreements such as produced by ISDA.

d. IMA proposed what is now the Banking Liaison Group and encouraged Government to publish draft secondary legislation so as to narrow the debates and to ensure that the industry would have to "put its money where its mouth is". IMA will participate in this work at senior level.

e. Additional safeguards in the Bill include

i. Compensation (clauses 44 to 56)

ii. Secured liabilities would not (generally) be separated from the assets (and EU law also protects rights in rem)

iii. Creditors claims moved out from a failing bank to a bridge bank would not be sent back (clause 40(5))

iv. The existing ranking and recovery level of creditors will be preserved through the very important protection given at clause 55(2) and which was developed following consultations over Summer (whilst effectively providing long-stop precedence to depositors through compensation by the FSCS).

 

 

Parts 2 and 3 - Bank Insolvency and Bank Administration

 

9. The provisions relating to insolvency appear technically competent and rightly directed. We have been involved in their preparation and comments raised over summer have been reflected in the draft; not least by inserting clause 89 which now provides that the Tripartite Authorities must determine whether to pursue a transfer of the deposit book or to compensate depositors.

 

Part 4 - Financial Services Compensation Scheme

 

10. For some time, the IMA was the only financial services trade association calling for deposit protection to be raised to 50,000 and for some measure of pre-funding by banks. As regards pre-funding, it would be wrong for the wider economy always to have to fund cashflow payments by the FSCS because of fears over the next few years that banks' balance sheets may not be sufficiently strong. Many of the public may consider that their own "balance sheets" are also under strain. The point is not who is in a weaker position presently, but what should be seen axiomatically as a cost of doing business. The purpose of these contributions to the compensation scheme would be to ease the burden on the FSCS from its obligation to pay out promptly; this would further build confidence amongst depositors. IMA considers that this is a cost of doing banking business that should be borne by the banking sector. Indeed at present the result of the 17bn of compensation payments in the last few weeks is that banks are now to bear almost 1bn p.a. in interest payments and the Government has chosen to announce that it stands behind the FSCS.

 

11. Accordingly, we support the Clause 156 proposal for contingency funding but would like confirmation that only the banking sector will bear this cost. A provision akin to section 213(5) FSMA 2000 should be included; this requires rules for imposing levies on industry groups to "take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised person reflects, so far as practicable, the amount of the claims made, or likely to be made, in respect of that class of person".

 

Part 7 - Miscellaneous

 

12. Clause 226 provides a wide-ranging alteration to FSA's powers which directly affects the entitlement for a business to carry on existing activities. It is not limited by any words that explain its purpose or delimit its use to circumstance connected with financial stability or the use of powers under the Banking Bill. The Bill should not be used to effect changes to FSA's powers across sectors other than banking or in connection with issues covered under the Bill. The clause should be amended to apply to circumstances connected with exercises of power under the Banking Act 2008.

 

 

October 2008