Compensation

Clause 49: Orders

131.     This clause describes three types of orders which may be made for the purposes of providing compensation in consequence of the exercise of the stabilisation powers.

132.     Subsection (2) describes a compensation scheme order. It may establish a scheme simply for paying compensation to transferors, or it may establish a scheme for determining whether transferors should be paid compensation. The identity of the transferor or transferors depends on the stabilisation power exercised. In the case of share transfer powers, the transferors will be the holders of the securities which were transferred under the order. In the case of property transfer powers, the transferor will be the bank from whom property, rights or liabilities were transferred.

133.     Subsection (3) describes the resolution fund order, which establishes a scheme under which the transferors may become entitled to the proceeds of resolution of a bridge bank or of a bank in temporary public sector ownership.

134.     Subsection (4) describes a third party compensation order, which establishes a scheme for paying compensation to third parties (persons who are not transferors), for example counterparties of a bank whose property rights are interfered with in a compensatable way (under Article 1 of the First Protocol to the European Convention on Human Rights) as a result of the transfer.

Clause 50: Sale to private sector purchaser

135.     This clause requires the Treasury to make a compensation scheme order, on the exercise by the Bank of England of the private sector purchaser stabilisation option (clause 11) (a property or share transfer instrument to such a purchaser). Subsection (3) sets out that the order may include a third party compensation order.

Clause 51: Transfer to bridge bank

136.     This clause requires, on the exercise by the Bank of England of the bridge bank stabilisation option (clause 12), the Treasury to make a resolution fund order (further considered under clause 58 below). Subsection (3) provides that the order may include a compensation scheme order and a third party compensation order.

Clause 52: Transfer to temporary public ownership

137.     This clause requires, on the exercise by the Treasury of the temporary public ownership stabilisation option, the Treasury to make either make a resolution fund order (which may include a compensation scheme order) or a compensation scheme order. In either case, the order may include a third party compensation scheme order.

Clause 53: Onward and reverse transfers

138.     Where there is an onward or reverse transfer from either a bridge bank or a bank in temporary public sector ownership, this clause enables the Treasury to make a compensation order or a third party compensation order.

Clause 54: Independent valuer

139.     Subsection (1) allows a compensation scheme order and a third party compensation order (by virtue of subsection (6)) to include provision for the amount of compensation to be determined by an independent valuer. Subsection (2) requires the Treasury to appoint a person to appoint the independent valuer, and in practice the Government anticipates that an appointments panel will be convened for this purpose. Two different methods for appointing the valuer are provided in subsection (3); namely, for the Treasury to arrange to identify candidates or provide that another person will arrange to appoint a valuer.

140.     Subsection (4) states that the independent valuer can be removed only on grounds of incapacity or serious misconduct. The removal must be made by a person specified by the Treasury in accordance with the order. Subsection (5) states that the order must include provision for resignation and replacement of the independent valuer.

Clause 55: Independent valuer: supplemental

141.     Subsection (1) enables the independent valuer to do anything necessary or desirable in relation to the performance of his functions. Subsections (2) to (4) enable the Treasury by order to make provision to assist the independent valuer in the discharge of his functions, for example by providing him with certain powers.

142.     Subsection (4) gives the independent valuer the power to appoint staff.

143.     Subsection (6) requires the order to provide for the reconsideration of the decisions of the valuer, and for onward rights of appeal from the valuer to a court or tribunal.

144.     Under Subsection (7) the independent valuer and his staff are not servants of the Crown, and subsection (8) provides that the records of the independent valuer are public records for the purposes of the Public Records Act 1958.

Clause 56: Independent valuer: money

145.     Subsection (1) allows the order to make provision for the remuneration and allowances of the independent valuer, his staff, appointing persons or monitors. Although such payments will be made by the Treasury, the order will require the Treasury to appoint a person to monitor the arrangements made for the remuneration and allowances (subsection (2)). Further functions may be conferred on the monitor, such as requiring his approval to certain actions.

146.     Subsections (2)(c)and (d) give the Treasury a power to include provision in the order about records, accounts and staff resources. This clause also provides that the independent valuer and his staff are not liable for damages for anything done in good faith when undertaking their respective roles in relation to independent valuation (save in respect of awards of damages under the Human Rights Act 1998, for unlawful actions under that Act).

Clause 57: Valuation principles

147.     Subsection (1) allows a compensation scheme order and a third party compensation order (by virtue of subsection (6)) to specify valuation principles to be applied during the determination of the amount of compensation. Subsection (2) establishes that valuation principles may require an independent valuer to apply specific methods of valuation, assess values at specified dates or periods, take specified matters into account or not take specified matters into account.

148.     Subsection (3) requires the valuer to disregard actual or potential financial assistance provided by the Bank of England or Treasury (other than ordinary market assistance offered by the Bank on its usual terms).

149.     Subsection (4) sets out assumptions as to the position of the bank that can or may be required to be taken into account by the valuer. These include that the bank has had a permission under Part 4 of Financial Services and Markets Act 2000 varied or cancelled; that it is unable to continue as a going concern; that it is in administration; or that it is being wound up. Subsection (5) provides that there is nothing to prevent the application of valuation principles from resulting in no compensation being payable.

Clause 58: Resolution fund

150.     A resolution fund order may provide for persons to share in the proceeds of the disposal of things transferred (for example, the full or partial sale of a bridge bank whether through business or share transfer). Subsection (1) further provides for the order to provide for how proceeds and shares are to be calculated.

151.     Subsection (2) allows for any payments to be net of resolution costs, which include public financial assistance or administrative expenses.

152.     Subsection (3) provides that a third party compensation order may include provisions for arranging to appoint an independent valuer and to apply the valuation principles. Subsection (4) provides that a resolution fund order can confer discretion on persons and subsection (5) may include provision for the determination of disputes about the application of its provisions.

153.     Subsection (6) allows the Treasury to place a management duty on the Bank of England in managing the bridge bank and set out how the Bank is to meet this duty. This management duty will be subservient to the SRR objectives. Subsection (7) enables a similar duty to be imposed on the Treasury, in cases where the Treasury elects to make a resolution fund order following a transfer of a bank to temporary public ownership.

Clause 59: Third party compensation: discretionary provision

154.      Subsection (1) provides that a third party compensation order is about setting up a scheme for determining any compensation to be paid to persons other than a transferor, for example, any creditors of the failed bank who have suffered compensatable interference with a property right. Compensation for transferors is dealt with under compensation scheme orders.

155.     Subsection (2) provides that a third party compensation order can be a part of a compensation scheme order or a resolution fund order or may be separate.

156.     Subsection (3) provides that a third party compensation order may include provisions for arranging to appoint an independent valuer and to apply the valuation principles.

Clause 60: Third party compensation: mandatory provision

157.     This clause contains a power to make regulations about third party compensation orders made in the circumstances where a partial transfer of the property of a failed bank has taken place.

158.     Subsection (2) sets out the principle that where a residual bank enters an insolvency procedure following such a transfer, pre-transfer creditors (defined in subsection (3)(b)) should not receive less favourable treatment they would have received than had the bank entered an insolvency procedure prior to the partial transfer. The Treasury are to have regard to the principle in making regulations under the clause.

159.     Subsection (4). The regulations may require a third party compensation order to be made. The regulations may also require a third party compensation order to include certain provisions or the regulations may make provisions that are deemed to be a part of the third party compensation orders.

160.     Subsection (5) enables the regulations to provide for whether compensation is to be paid, its amount and the factors upon which the determination of the amount is to be made. Any factors could be included, particular factors are, in part, the amount payable under a resolution fund order, contingent events and a determination by an independent valuer.

161.     The regulations are to be made by the affirmative procedure, or in the first instance the 28 day procedure, as provided by clause 249.

Clause 61: Sources of compensation

162.     This clause confers an express power on the Treasury to make provision as to who should pay compensation under a compensation scheme order, resolution fund order, third party compensation order or under regulations made under clause 60. It enables provision to be made for the FSCS, the Treasury or another person (e.g. a purchaser) to pay compensation. Any provision requiring the FSCS to pay compensation is subject to the provisions of clause 168 of the Bill.

Clause 62: Procedure

163.     The procedure for a compensation scheme order, a resolution fund order and a third party compensation order is that they must be made by statutory instrument subject to the draft affirmative procedure.

Incidental functions

Clause 63: General continuity obligation: property transfers

164.     This clause provides for services to be provided to a transferee from the transferor and other companies within the group through means of a general obligation, following a transfer of property. Subsection (5) provides that the obligation is not limited to the provision of services and facilities directly to the transferee.

165.     Subsection (2) provides that the residual bank and each group company (as defined in subsection (1)) must provide such services and facilities as required to enable the transferee to operate the transferred business effectively. This duty may be enforced as a contract (subsection (3)).

166.     As provided by subsection (6), the Bank of England may, with the consent of the Treasury, by notice to the residual bank or group company require specific activities to be undertaken (or provide that activities are to be undertaken on specific terms).

167.     Subsection (4) provides that the residual bank or group company has a right to reasonable consideration.

Clause 64: Special continuity obligations: property transfers

168.     This clause provides for the Bank of England, through a property transfer instrument, to create or vary rights and obligations between a transferee, a residual bank and group companies. It applies following the exercise of property transfer powers.

169.     Subsection (2) describes the particular provision which the Bank of England can make in a property transfer instrument in this connection.

170.     Subsection (3) provides that the Bank of England shall aim to preserve or include provision for reasonable consideration and terms.

171.     Subsection (4) provides that the powers under subsection (2) may be exercised only in so far as the Bank of England thinks it necessary to ensure the provision of such services and facilities as are required to operate the transferred business effectively. The Treasury must consent to the exercise of this power.

Clause 65: Continuity obligations: onward property transfers

172.     This clause provides for the Bank of England or the Treasury to extend the general continuity obligation of clause 63 or special continuity obligations of clause 64 in the circumstances of an onward transfer of property, rights or liabilities (so, for example, continuity obligations could be owed to the onward transferee).

173.     Subsection (1) defines the terms “onward transfer” and “onward transferee”. Subsection (4) provides onward obligations may be imposed on an original transferee, a residual bank, a bank transferred by share transfer or anything which is or was a group undertaking of the foregoing. Subsection (5) provides that onward obligations may be in addition to, or replace, initial obligations.

174.     The power under this clause may only be exercisable by giving a notice (both to each person on whom a continuity obligation is to be imposed, and the person who is expected to benefit from it). The Bank of England may exercise the power only with the consent of the Treasury.

Clause 66: General continuity obligation: share transfers

175.     This clause makes provision for services to be provided in respect of a bank transferred by share transfer from former group companies through means of a general obligation. Subsection (5) provides that the obligation is not limited to the provision of services and facilities directly to the transferee.

176.     Subsection (2) provides that each former group company (as defined in subsection (1)) must provide such services and facilities as required to enable the transferred bank to operate effectively. This duty may be enforced as a contract (subsection (3)).

177.     As provided by subsection (6), the Treasury or Bank of England (with the consent of the Treasury), may by notice to the former group company (as described in subsection (7)), state that specific activities on specific terms should be undertaken.

178.     Subsection (4) provides that the former group company has a right to reasonable consideration.

Clause 67: Special continuity obligations: share transfers

179.     This clause provides for the relevant authority, through share transfer instrument or order, to create or vary rights and obligations between a transferred bank and former group companies. It applies following the exercise of share transfer powers.

180.     Subsection (2) provides for how the Treasury or the Bank of England (with the consent of the Treasury) may create, modify or cancel contracts between the transferee, and the group company (as defined in clause 63).

181.     Subsection (3) provides that the continuing authority shall aim to preserve or include provision for reasonable consideration and terms.

182.     Subsection (4) provides that the powers under subsection (2) may be exercised only in so far as the Bank of England or Treasury thinks it necessary to ensure the provision of such services and facilities as are required to enable the transferred bank to operate effectively.

Clause 68: Continuity obligations: onward share transfers

183.     This clause provides for the Bank of England or the Treasury to extend the general continuity obligation of clause 66 or special continuity obligations of clause 67 in the circumstances of an onward transfer of securities (so, for example, continuity obligations could be owed to the transferred bank following the onward transfer).

184.     Subsection (1) defines the term “onward transfer”. Subsection (4) provides onward obligations may be imposed on the bank, anything which is or was a group undertaking of the bank, anything which is or was a group undertaking of a residual bank, or any combination. Subsection (5) provides that onward obligations may be in addition to, or replace, initial obligations.

185.     The power under this clause may only be exercisable by giving a notice (both to each person on whom a continuity obligation is to be imposed, and the person who is expected to benefit from it). The Bank of England may exercise the power only with the consent of the Treasury.

Clause 69: Continuity obligations: consideration and terms

186.     This clause provides the Treasury with a power, by order, to specify matters which are to be or not to be considered in determining what amounts to reasonable consideration for the purposes of general continuity obligations. Secondary legislation may also specify matters which are to be or not to be considered in determining what provisions would be expected in arrangements concluded between parties dealing at arm’s length (with regard to special continuity obligations).

187.     The power is subject to the negative resolution procedure.

Clause 70: Continuity obligations: termination

188.     This clause provides that the continuity authority may by notice terminate a general continuity obligation.

Clause 71: Pensions

189.     This clause allows for a share transfer instrument or order or a property transfer instrument to make provision in relation to pensions. The power may be exercised to make provision about the consequences of a transfer of securities or property etc. for pension schemes. For example, the need to make such provision could arise when the pension schemes of employees who are subject to the transfer form part of the pension scheme of a wider corporate group.

190.     Subsection (5) provides that this power may be exercised only by the Bank of England, with the consent of the Treasury.

Clause 72: Enforcement

191.     The purpose of this clause is to enable provision to be made as to the enforcement obligations arising under share transfer instruments and orders and property transfer instruments.

192.     It allows for provision to be made for enforcement of an obligation under the share transfer order or instrument.

193.     Provision may not include creating a criminal offence or impose a penalty, but may impose jurisdiction on a court or tribunal, this may include a creating an enforceable private law right or statutory duty.

Clause 73: Disputes

194.     This clause makes provision for share transfer orders or instruments or property transfer orders made by the Treasury to include a method for disputes to be determined. Such a method may include conferring jurisdiction on a particular court or tribunal or discretion on a specified person.

Clause 74: Tax

195.     This clause enables the Treasury to make regulations including provision in relation to tax in connection with the exercise of powers in this Part of the Bill.

196.     Subsection (2) sets out the taxes in relation to which provision may be made.

197.     Subsections (3), (4), (5) and (6) set out the effects which the regulations may have. The regulations may have retrospective effect but only up to three months before the date the stabilisation power is first exercised in relation to the bank concerned.

198.     Subsection (7) allows the Treasury to change the taxes listed in subsection (2) by order. Subsections (8), (9) and (10) set out the procedures to be followed in making regulations and orders.

Clause 75: Power to change law

199.     This clause enables the Treasury to modify legislation (both primary and secondary, excluding, however, the provisions of the Bill, and secondary legislation to be made under it) and the provisions of common law for the purpose of enabling the powers in Part 1 to be used effectively, having regard to the objectives of the special resolution regime. Subsection (3) establishes that such an order may make provision which has retrospective effect.

200.     The power is to be exercised by order and is subject to the affirmative procedure. In cases of necessity (in practice, where the power needed to be exercised urgently), the clause makes provision for the Treasury to make the order immediately, following which there are 28 days for both Houses of Parliament to approve the order, failing which, the order would lapse.

Treasury

Clause 76: International obligation notice: general

201.     This clause describes the role of the Treasury in meeting international obligations when the stabilisation powers are being exercised

202.     Subsection (1) provides that the Treasury, by notice in writing, may require the Bank of England not to exercise a stabilisation power where that exercise would be likely to contravene an international obligation of the UK. Subsection (2) sets out the procedure for such notices. Subsection (3) provides that, if the Treasury gives notice that an action would be likely to contravene an international obligation, then the Bank of England must consider alternative actions, which both pursue the SRR objectives and avoid the objections on which Treasury’s notice or refusal was based. Subsection (4) allows the Treasury, by notice, to disapply the requirement to consider alternative actions (as set out in subsection (3)). Such notice may be revoked.

Clause 77: International obligation notice: bridge bank

203.     This clause describes the role of the Treasury with regard to meeting international obligations when controlling a bridge bank.

204.     Subsection (2) states that the Bank of England must comply with any notice provided by the Treasury, for the purpose of ensuring compliance by the UK with its international obligations, to take or not to take specified action in respect of a bridge bank

205.     Subsection (3) sets out the procedure for such notices

206.     Subsection (4) provides that a notice may include requirements on timing

Clause 78: Public funds: general

207.     This clause describes the role of the Treasury with regard to public funds when the stabilisation powers are being exercised. It provides that the Bank of England may not exercise a stabilisation power without the Treasury’s consent if the exercise would be likely to have implications for public funds.

208.     Subsection (2) defines public funds and implications for public funds

209.     Subsection (3) provides the Treasury with the power, by order, to specify considerations that should or should not be taken into account in determining whether action has implications for public funds

210.     Subsection (4) requires the Bank to consider another exercise of the stabilisation powers if the Treasury has refused consent. In doing so the Bank must pursue the special resolution regime objectives and avoid the objections that the Treasury first made.

211.     Subsection (5) allows the Treasury, by notice, to disapply the requirement to consider alternative actions (as set out in subsection(4)). Such notice may be revoked.