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
