Memorandum submitted by the London Investment Banking Association (BAN 03)


A. Summary


1. LIBA is the principal trade association in the UK for firms which are active in the investment banking and securities industry. One of our objectives is to ensure that the UK continues to be an attractive location for the conduct of international business, so we pay particular attention to the overall legislative and regulatory framework here in which our Members operate and to the potential changes to it. It is from this viewpoint that we are examining the Banking Bill. Our Director General, Jonathan Taylor, gave evidence to the Banking Bill Committee on 21st October. The Banking Bill Committee debates on the second half of the Bill have now drawn to a close and, in the run-up to the publication of the forthcoming consultation on the secondary legislation, we thought that it would be helpful to draw together our Members' views at this stage on issues in Part 1.


B. Introduction: potential impact of the new legislation on the competitiveness of UK Banks - avoiding uncertainty


2. A key objective for LIBA, as explained previously, is the need to ensure that uncertainty about the likely effects of the exercise of the stabilisation powers to be introduced by the Bill does not prompt the counterparties and creditors of UK banks to undertake business on more demanding terms and/or will not encourage them to undertake business with non-UK Banks. Either outcome would have clear competitiveness implications for the UK and, at the heart of determining whether the new legislation would have such an adverse result, is the assessment of the extent to which the new framework will prompt the conclusion that the Special Resolution Regime could undermine the steps that counterparties and creditors take to safeguard their interests if a UK bank with which they are doing business becomes insolvent.


3. It is in this context that our Members have considered how best to address the uncertainty about the treatment of creditors to which the legislation could give rise. We have focused both on the provisions covering the circumstances in which SRR powers can be exercised, including the procedures which the Authorities will need to follow, and also on the treatment of particular types of transaction (in the latter case, as is now generally recognised, the most difficult issues arise from a partial transfer of a bank's business).


C. Exercise of Special Resolution powers and role of the Code of Practice (Clauses 4-9)


4. One way to reduce uncertainty about the impact of the new regime is to establish greater clarity about the circumstances in which the new powers will be used and the ways in which they will be used.


SRR triggers and objectives


5. Two important elements in this are clarifying that the powers will be used as a last resort and that, in protecting depositors, the interests of other creditors will not be lost sight of. Both Clauses 7 and 4 have been considered in this light.


6. Clause 7 determines the two Conditions which must be met before a stabilisation power may be exercised, and our Members support an amendment to Clause 7(3) - dealing with Condition 2 - designed to clarify that the FSA must be satisfied that it is "highly unlikely" that a bank will be able to satisfy the threshold conditions.


7. In addition, we note that Clause 7 refers to a bank failing to satisfy all the Financial Services and Market Act's threshold conditions, not just the adequate resources condition. It is not clear to us that whether or not a bank is meeting some of the threshold conditions is relevant to the assessment of whether a special resolution should be triggered (for example, the relevance of the conditions dealing with the location of offices is not obvious), and this prompts us to suggest that Clause 7 should refer just to the adequate resources condition and to non-compliance with the other threshold conditions where this would affect a bank's ability to meet that condition.


8. Clause 4 sets out the Special Resolution objectives, and our Members support the proposal to include protection and safeguarding the value of a bank's enterprise as a whole as an additional objective.


9. Given the need for flexibility, the detail of the operation of many aspects of the SRR is to be covered in secondary legislation or in the Code of Practice. This approach, though, ensures a high level of uncertainty about the operation of the regime at this stage, and potentially long-term as well. Our Members have concluded that although there is no "magic bullet" to deal with this difficulty, a number of steps - when taken together - will make the problem more manageable.


The Government have established the Banking Expert Liaison Group (ELG) to advice on the drafting of aspects of the legislation and the Code of Practice. It is welcome that it has been recognised that this body should have a permanent role and should be formally recognised within the statute accordingly (the establishment of the Practitioner Panel under Section 9 of the Financial Services and Markets Act provides an encouraging precedent). If the ELG were to be recognised formally, then the need to review the operation of the SRR measures with the Group going forward, and to agree modifications as necessary, would help to ensure that the law evolved in tandem with market developments and that unforeseen difficulties could be addressed. (For example, the consultative role of the ELG should be recognised in Clauses 5, 42, 43, 55 and 65.)

The provisions on Code of Practice procedure in Clause 6 should be amended to provide for public consultation except where urgent action for public interest reasons was essential and, in such a case, Clause 6(1) should be amended to require consultation with the ELG (as well as with the FSA, Bank and FSCS).

Clause 5(4) should require the Authorities to publish an explanation of why they were unable to comply with the Code.

In addition, the legislation should make provision for compliance with parts of the Code to be mandatory. A similar approach was adopted in Section 122 FSMA which confirms the position of a person adhering to the Code that provides guidance on whether or not behaviour amounts to market abuse: a new Clause 5(3A) should be introduced for this purpose, with Clause 5(4) of the Bill being amended to refer to the Authorities having to have regard to "other parts of the Code". (An example of a matter that could be covered under (3A) would be issues to be addressed by the Authorities when deciding whether to implement a partial transfer and when deciding if such a transfer should go beyond the bank's deposit book only.)

It should be clear to what extent Clause 5(2) could limit the scope of the Code or whether the elements listed there are for illustrative purposes only.

Provided that adequate consultation procedures are established, we do not consider it to be necessary for changes in the Code to be subject to Parliamentary approval.


D. Safeguards for creditors: areas to be covered by secondary legislation

(Clause 42, 43 and 55)


10. As noted previously, very important areas dealing with the establishment of safeguards for creditors are to be addressed through secondary legislation, drafts of which are only starting to emerge. We welcomed, therefore, the Government's decision to delay discussion of Part 1 of the Bill until this material is ready. It will remain the case, though, that it is likely that the primary legislation will be settled before the secondary legislation has been finalised, and we continue to be concerned - given the wish to bring the regime into operation to coincide with the lapsing of the Banking (Special Provisions) Act's powers next February - that there is a substantial risk that there will be insufficient time to ensure that the legislation, taken as a whole, works as planned. We think it is important, therefore, that the Government does not rule out implementing the legislation in two stages so as to allow all the matters related to partial transfers to be brought into force at a later stage if this proves to be necessary.


11. As regards the Order-making powers under Clauses 42 and 43, the first drafts of the crucial regulations are to be published shortly, but it is hoped that they will recognise the breadth of the arrangements that creditors make to protect their interests in the event of the insolvency of the bank with which they are dealing. In the absence of the draft legislation, it is impossible to comment on the current drafting of the Bill's provisions at this stage, but we aim to provide a supplementary summary of our Members' views in due course.


12. The same is true of the regulations about third party compensation arrangements in the case of partial property transfers, referred to in Clause 55(1)/(2): we understand that the purpose here is to include terms to ensure that no creditor is worse off after a partial transfer in comparison to the position under theoretical "whole bank" insolvency. We are still considering, more generally, the Clauses dealing with compensation including how the valuation principles would be applied in practice (in particular, and as regards Clause 52(3), we do not understand how a valuer can be expected to disregard "potential financial assistance" provided by the Bank/Treasury unless this reference is limited to the continuation of assistance already provided).


13. There is an important point to flag at this stage, though, about Clause 65 - the Henry VIII Clause. This Clause has the potential to undermine the value to market participants of the safeguards to be provided by other parts of the legislation. On the assumption, though, that the Government will wish to maintain this provision in spite of this danger in order to deal with unexpected problems that may emerge in the structure of the regime, it will be important to clarify that any changes to the legislation made under the Clause 65 powers cannot apply retrospectively to contracts entered into before the Order is laid or is made under 65(9).


E. Group Contracts (Clauses 57-60)


15. It is not clear to us how Clause 57(4) works with 57(6) given that the terms of the latter appear potentially to override the former, and the position is confused further by Clause 58(3). We will be considering this aspect further, but the aim should be to ensure that the Group company is able to provide services on market terms unless there are overriding public interest ground reasons for dictating different terms. We would expect the Code of Practice to provide a comprehensive explanation of what the latter conditions might be.


November 2008