Clause 149: Property transfer from temporary public sector ownership

351.     This clause applies in the case where the Treasury brings a bank into temporary public ownership and later makes an onwards property transfer order from the transferred bank.

352.     Subsection (2) provides that the bank administration procedure applies to the residual bank left in temporary public ownership following the transfer under the property transfer order.

353.     Under subsection (3) the Treasury may make regulations modifying the application of the bank administration procedure. The regulations are subject to the affirmative procedure, or in the first instance the 28 day procedure, as provided by clause 249.

Termination

Clause 150: Successful rescue

354.     This clause provides a way to terminate a bank administration where objective 1 has been achieved and the bank has also, in the opinion of the bank administrator, been rescued as a going concern.

Clause 151: Winding-up or voluntary arrangement

355.     This provision allows for the dissolution of the residual banking company where the objectives of the bank administration procedure have been achieved and the bank’s affairs have been fully wound up.

356.     Alternatively, where it would be in the best interests of creditors, the bank administrator may make proposals to creditors for a company voluntary arrangement under Part 1 of the Insolvency Act 1986. These provisions mirror some of the current exit routes from an ordinary administration.

357.     As the bank administrator is given some additional powers usually only available to a liquidator (see the note to clause 142), it is not necessary to provide for conversion to a creditors’ voluntary liquidation to effect a distribution to unsecured creditors.

Miscellaneous

Clause 152: Disqualification of directors

358.     As with the bank insolvency procedure (see the note to clause 118) and normal administration proceedings, the provisions of the Company Directors Disqualification Act 1986 are applied to the bank administration procedure.

Clause 153: Application of other law

359.     This clause provides for future amendments to insolvency legislation (including administration) to be applied, with any required modifications, to the bank administration procedure; and provides a power (to be exercised by the Secretary of State and the Treasury) to amend other existing insolvency provisions (including administration) as a consequence of the introduction of the bank administration procedure. Any such amendments may be effected by secondary legislation subject to the affirmative procedure, or in the first instance the 28 day procedure, as provided by clause 249.

Clause 154: Other processes

360.     The Financial Services and Markets Act 2000 gives the Financial Services Authority powers to present an administration application to the court, or file a winding-up petition, against a bank. Given the Bank of England’s role as the authority responsible for the SRR, the FSA will only be able to make such an application or file such a petition against a residual bank where appropriate notice has been given to the Bank of England. The Bank of England will also be entitled to appear at any consequent court hearing and make representations.

Clause 155: Building Societies

361.     This gives the Treasury a power to apply the bank administration procedure to building societies (with any necessary modifications) by secondary legislation subject to the affirmative procedure, or in the first instance the 28 day procedure, as provided by clause 249.

Clause 156: Credit Unions

362.     This gives the Treasury a power to apply the bank administration procedure to credit unions (with any necessary modifications) by secondary legislation subject to the affirmative procedure.

Clause 157: Rules

363.     This clause amends section 411 of the Insolvency Act 1986 to allow secondary legislation to be made to make the bank administration procedure work in practice. The first set of Rules will be consulted on with an appropriate panel of experts rather than the Insolvency Rules Committee.

Clause 158: Fees

364.     Section 414 of the Insolvency Act 1986, which deals with the setting of fees to apply to insolvency proceedings, is amended to ensure that those provisions apply to the bank administration procedure.

Clause 159: Evidence

365.     Section 433 of the Insolvency Act 1986 which deals with the admissibility of statements of affairs as evidence is applied to the bank administration procedure.

Clause 160: Partnerships

366.     This allows the Lord Chancellor, with the agreement of the Secretary of State and Lord Chief Justice, to modify the provisions of the bank administration procedure for banks that are partnerships rather than limited companies. This reflects existing powers under section 420 of the Insolvency Act 1986.

Clause 161: Scottish partnerships

367.     This gives the Secretary of State the power to modify the bank administration procedure in its application to Scottish Partnerships

Clause 162: Co-operation between courts

368.     Section 426 of the Insolvency Act 1986, which provides for co-operation between certain insolvency courts in different jurisdictions, is amended to ensure that these provisions apply to the bank administration procedure.

Clause 163: Interpretation: general

369.     Due to the size and complexity of the UK’s banks and the nature of the partial transfer tool, subsection (1) provides that only the higher courts may make a Bank Administration Order and that they will supervise the process.

370.     Subsection (3) defines “inability to pay debts” and applies existing definitions from sections 367(4) and (5) of the Financial Services and Markets Act 2000 (as applied by subsection 4(a)) and section 123 of the Insolvency Act 1986 (as applied by subsection (4)(b)).

371.     Subsections (4) to (5) provide that the expressions used generally throughout this part of the bill and also in insolvency and company legislation have the same meaning.

Clause 164: Northern Ireland

372.     This clause makes specific provisions in the application of the bank administration procedure to banks registered in Northern Ireland.

Clause 165: Consequential provisions

373.     The Treasury may, by secondary legislation, make any consequential provisions required to legislation required as a result of the creation of the bank administration procedure.

PART 4: FINANCIAL SERVICES COMPENSATION SCHEME

Clause 166: Overview

374.     This clause introduces Part 4 of the Bill.

Clause 167: Contingency Funding

375.     This clause inserts new section 214A into the Financial Services and Markets Act 2000.

376.     This new section confers a power on the Treasury to make regulations to permit the Financial Services Compensation Scheme (the FSCS) to impose levies to build up contingency funds in advance of possible defaults by firms which would give rise to the payment of compensation under the scheme (“pre-funding”). It also sets out certain matters which may be covered in those regulations and allows the Financial Services Authority (the FSA) to make rules relating to contingency funds provided they are compatible with the regulations the Treasury has made.

Clause 168: Special resolution regime

377.     This clause inserts new section 214B into the Financial Services and Markets Act 2000.

378.     This new section confers a power on the Treasury to require the FSCS to contribute to the costs incurred in applying the stabilisation powers of the special resolution regime (see Part 1 of the Bill) to banks which are encountering financial difficulties. The clause allows upfront payments if deemed appropriate. It imposes a duty on the Treasury to make regulations setting out the costs for which a contribution may be required, how the contribution is to be calculated and other matters, including provision for the costs to be independently verified. New section 214B (4) requires that the scheme’s contributions must not exceed the amount of the compensation which the scheme would have had to pay to eligible claimants if the bank had been unable to satisfy claims against it, taking into account any amounts the scheme is likely to have recovered from the insolvent bank’s estate. New section 214B(5) requires the appointment of an independent valuer to calculate this amount of recovery. This person may be the same person as the independent valuer appointed under clause 52 of Part 1 of the Banking (No.2 ) Bill. New section 214B(7) allows the Financial Services Authority to make rules relating to contingency funds provided they are compatible with the regulations the Treasury has made.

Clause 169: Investing in National Loans Fund

379.     This clause inserts new section 223A into the Financial Services and Markets Act 2000.

380.     This section enables the FSCS to invest the levies collected to build up contingency funds in the National Loans Fund and provides for that investment to be treated as money borrowed by the Treasury.

Clause 170: Borrowing from the National Loans Fund

381.     This clause inserts new section 223B into the Financial Services and Markets Act 2000.

382.     This section allows the Treasury to make loans from the National Loans Fund to the FSCS and to make regulations about the amount that can be borrowed and the collection of levies to secure its repayment. It also allows the FSA to make rules relating to borrowing from the National Loans Fund provided they are compatible with the regulations the Treasury has made.

Clause 171: Procedure for claims

This clause inserts new sections 214(1A), 214(1B) and 214(1C) into the Financial Services and Markets Act 2000. The purpose of these provisions is to facilitate the speedy payment of compensation to depositors or to facilitate the speedy transfer of their accounts to another bank under Part 2 of this Bill.

383.     New section 214(1A) allows the FSA to make rules to enable the FSCS to deem claims under the scheme to have been made, to avoid the need to wait for actual claims to be made.

384.     New section 214(1C) allows the FSA to make rules to enable the FSCS to deal with certain kinds of claim without having to make calculations of the entitlement of individual claimants.

Clause 172: Rights in insolvency

385.     This clause amends section 215 of the Financial Services and Markets Act 2000 to make it clear that the FSA may make rules which enable the FSCS to recover compensation it has paid from any person from whom a claimant under the scheme could have obtained damages in respect of the loss he had suffered.

Clause 173: Information

386.     This clause inserts new section 218A into the Financial Services and Markets Act 2000 and amends section 219.

387.     New section 218A confers a power on the FSA to make rules allowing it to obtain information that will assist the FSCS in carrying out its work, or in preparing for a possible need to pay compensation (even when no default is imminent). It also allows the FSA to use its existing power to require individual authorised persons to provide information to obtain information that would be of use to the FSCS.

388.     The amendments to section 219 allow the FSCS to obtain information from authorised persons or certain other persons from the time the authorised person could be declared in default for the purposes of the scheme. They also allow the FSCS to obtain information from a bank which is subject to the special resolution regime (or from the Bank of England) to enable the maximum amount the FSCS would be able to contribute to the costs of the special resolution regime to be calculated.

Clause 174: Payments in error

389.     This clause inserts new section 223C into the Financial Services and Markets Act 2000.

390.     This section provides that levies collected by the FSCS can be used to cover the costs of any compensation payments made in error. The new provision does not cover payments made in bad faith.

Clause 175: Regulations

391.     This clause amends section 429 of the Financial Services and Markets Act 2000 to provide that regulations made by the Treasury under new sections 214A and 214B are subject to the affirmative resolution procedure (Regulations under the new section 223B will be subject to the negative resolution procedure.).

Clause 176 Delegation of functions

392.     This clause inserts new section 221A into the Financial Services and Markets Act 2000.

393.     This section provides that the FSCS can make arrangements with a third party to carry out any of its functions. This does not change the scheme’s responsibility for the decisions that are taken. Before entering into an arrangement the FSCS must be satisfied that the person is competent to carry out the function and has been given sufficient directions.

Clause 177: Functions under this Act

394.     This clause inserts new section 224A into the Financial Services and Markets Act 2000.

395.     This section provides that the new functions of the FSCS conferred in this Bill, for example, those functions of the Financial Services Compensation Scheme under Part 2, are to be regarded as among its functions under the Financial Services and Markets Act 2000.

PART 5: INTER-BANK PAYMENT SYSTEMS

Introduction

Clause 178: Overview

396.     This clause summarises the purpose of this Part. This Part establishes a new regulatory regime for the oversight of inter-bank payment systems, in particular, it confers on the Bank of England a formal role of oversight over such systems.

Clause 179: Interpretation: “inter-bank payment system”

397.     Subsection (1) defines the use of the term “inter-bank payment system” in Part 5. It refers to arrangements that enable the transfer of money (including credit, see subsection (4)) between participant financial institutions (defined in subsection (3) as banks and building societies). It does not include internal bank systems or correspondent banking arrangements.

398.     Subsection (2) provides that the fact that non-financial institutions participate in a payment system does not prevent it being considered to be an inter-bank payment system.

399.     Subsection (5) ensures that the definition extends to payment systems operating wholly or mainly outside of the United Kingdom.

Clause 180: Interpretation: other expressions

400.     This clause defines other terms used in this Part.

401.     In particular, subsection (a) defines the use of the term “operator” of an inter-bank payment system as a person with “responsibility under the system for managing or operating it”.

Recognised systems

Clause 181: Recognition order

402.     Subsection (1) gives the Treasury the power to designate an inter-bank payment system as a recognised system. Once a payment system is ‘recognised’, the Bank of England’s powers of formal oversight apply.

403.     Subsection (2) provides that a recognition order must include as much detail as possible of the arrangements that constitute the inter-bank payment system.

404.     Subsection (3) provides that a payment system operated solely by the Bank of England (for example, the Real Time Gross Settlement System), is not to be recognised.

Clause 182     Recognition criteria

405.     Subsection (1) provides that the Treasury may make a recognition order only if it is satisfied that any deficiencies in the design of the inter-bank payment system, or any disruption of its operation, would be likely to threaten the stability of, or confidence in the UK financial system (consequences of a “systemic nature”) or could have serious consequences for business or other interests throughout the United Kingdom (“system-wide consequences”).

406.     Subsection (2) stipulates the considerations that the Treasury must have regard to when deciding whether to make a recognition order in relation to an inter-bank payment system. These criteria include the volume and value of the transactions processed (or potentially processed) by the system (see subsection (2)(a)), the nature of these transactions (see subsection (2)(b)), the availability of alternative systems that could handle the transaction in the case of a system failure (see subsection (2)(c)), the relationship of the system with other systems (such as interdependence), (see subsection (2)(d)) and whether the Bank of England uses the system in its role as a monetary authority (as defined in clause 234(2)(c)).

Clause 183 Procedure

407.     This clause sets the procedure for the making of recognition orders. In particular, the Treasury must first consult the Bank of England and the operator of the inter-bank payment system and consider representations made (see subsection (1)). It must also consult the FSA where the operator is or has applied to become a recognised investment exchange, a recognised clearing house or has, or has applied for, a Part 4 permission under FSMA (see subsection (2)).

408.     Subsection (3) allows the Treasury to rely on information supplied to it by the Bank of England to inform its consideration of whether to recognise a particular inter-bank payment system.

Clause 184: De-recognition

409.     Subsection (1) gives the Treasury the power to revoke a recognition order.

410.     Subsection (2) provides that the Treasury must revoke a recognition order if the criteria under which recognition was made (clause 182) are no longer met.

411.     Subsections (3) and (4) set out the process involved in revoking a recognition order. This process involves the same consultation process as required for the making a recognition order.

412.     Subsection (5) ensures that if an operator of a recognised payment system requests that its recognition order made under this Part be revoked, the Treasury must consider the request.

Regulation

Clause 185: Principles

413.     Subsection (1) gives the Bank of England the power to publish principles that operators of recognised payment systems must have regard in the operation of their systems. This formalises an aspect of the existing structure of oversight, under which the Bank of England currently expects payment systems to take account of the Committee on Payment and Settlement Systems’ “Core Principles for Systemically Important Payment Systems”. The Bank of England will be able to reflect such principles and other relevant internationally agreed recommendations and best practice in setting its principles.

414.     The publication of such principles must first be approved by the Treasury (see subsection (2)).

Clause 186: Codes of practice

415.     This clause gives the Bank of England the power to publish codes of practice for recognised inter-bank payment systems. Codes of practice are intended to set out binding requirements on operators, whereas principles (made under clause 185) are intended to provide high-level over-arching guidance. Codes of general application may be published, alternatively, codes of practice may be tailored to particular operators.

Clause 187: System rules

416.     Payment systems operate by way of rules for their members. This clause gives the Bank of England power to require the operator of a recognised inter-bank payment system to establish or change system rules, to notify the Bank of changes and to make changes only with the approval of the Bank.

Clause 188: Directions

417.     This clause gives the Bank of England power to give directions to the operator of a recognised inter bank payment system (See subsection (1)). This may include requiring or prohibiting the taking of certain actions in relation to the system or setting standards to be met in the operation of the system (See subsection (2)).

Clause 189: Role of FSA

418.     Subsection (1) ensures that the Bank of England, when exercising its powers under this Part, has regard to the powers of the FSA for taking action. Subsection (2) specifies that the Bank of England must consult the FSA before taking action in respect of an embedded inter-bank payment system. Subsection (3) specifies that if the FSA gives the Bank of England notice that it is considering taking action on an issue that affects an embedded payment system, the Bank may not take action itself without the FSA’s consent or unless the notice is withdrawn.

Enforcement

Clause 190: Inspection

419.     This clause gives the Bank of England the power to appoint inspectors, whose role it is to inspect the operation of a recognised inter-bank payment system (See subsection (1)). This power allows the Bank to appoint an inspector to check that codes of practice, principles, system rules or directions are being complied with, or that the recognised inter-bank payment system is being operated in a satisfactory manner.

420.     Subsection (2) requires the co-operation of the operator of the recognised inter-bank payment system with an inspector, including granting access to the premises on or from which a payment system is operated.

Clause 191: Inspection: warrant

421.     This clause provides that an inspector may apply for a warrant for the inspector or a constable to enter premises from which any part of a recognised payment system is operated. The application is to a justice of the peace (or in Scotland, to a justice of the peace or a sheriff; in Northern Ireland, to a lay magistrate), who can issue the warrant only if any of the conditions set out in subsections (2), (3), (4) and (5) are fulfilled:

• Condition 1: If the Bank of England has issued a notice under Information clause 201 and the requirement has not been complied with, and it is reasonable to believe that required documents or information are on the premises;

• Condition 2: If an information requirement were to be imposed under clause 201, there is reason to suspect that it would not be complied with or that the documents or information would be destroyed or tampered with;

• Condition 3: If an inspector appointed under clause 190, having given reasonable notice, has been refused entry to the premises of a payment system or infrastructure provider;

• Condition 4: If the payment system or infrastructure provider has failed to co-operate with the inspector.

422.     Subsection (6) provides for the warrant to allow the inspector or constable to enter the premises, to search and take possession of relevant documents or information, take copies and require explanation of documents or information, and for a constable to use reasonable force.

423.     Subsection (7) incorporates sections 15(5) to (8) and 16 of the Police and Criminal Evidence Act 1984 that allows a warrant to authorise persons to accompany the constable executing it and for that person to have the same powers as the constable in relation to the warrant. Subsections (8) and (9) make provision about the application of this clause in Scotland and Northern Ireland.