Clause 226: National Loans Fund

497.     This clause allows the Treasury to draw money from the National Loans Fund for the purpose of making a loan to a bank or other financial institution. It may do this when the loan is required urgently, for example in circumstances where it would not be possible to delay the loan until Parliament had approved an Estimate for the purpose of making a loan under clause 225.

Clause 227: “Financial institution”

498.     This clause allows the Treasury to define “financial institution” for the purposes of clauses 225 and 226 by statutory instrument.

Bank of England

Clause 228: UK Financial Stability

499.     This clause amends Part 1 of the Bank of England Act 1998, which relates to constitution of the Bank and the functions of the Court of Directors, to include provision relating to a financial stability objective. Subsection (1) inserts three new sections as 2A to 2C and subsection (2) amends the current section 2.

500.     New section 2A(1) provides that the Bank has an objective of contributing to the protection and enhancement of financial stability in the United Kingdom.

501.     New section 2A(2) provides that the Bank’s strategy in relation to Financial Stability shall be determined and reviewed by the Court of Directors of the Bank of England. The Court must consult the Treasury before it sets the strategy. (See also new section 2B(2) in relation to recommendations from the Financial Stability Committee.)

502.     New section 2B(1) requires there to be a new sub-committee of the Court of directors of the Bank of England - the Financial Stability Committee. This Committee is to be chaired by the Governor of the Bank of England (when present), with other membership consisting of the two deputy Governors and 4 directors of the Bank’s Court, who are to be appointed by the Chair of the Court of Directors.

503.     New section 2B(2) sets out the functions of the Committee. One function is to make recommendations to the Court regarding the Bank’s financial stability strategy, which the Court must consider. Other functions include advising the Bank whether and how it should use the stabilisation powers conferred on it as part of the special resolution regime in Part 1 of this Act and advise on the actions the Bank should take in respect of a particular institution. This is most likely to be necessary in the case of a bank or building society that has entered, or is about to enter, the SRR. Another function of the committee is to monitor the Bank’s oversight of inter-bank payment systems. It also provides for the Court of Directors to delegate other functions to the Committee, as it considers appropriate for pursuing the Financial Stability Objective.

504.     New section 2B (3) and (4) allow the Treasury to appoint a non-voting member to the Committee and the Committee to co-opt other non-voting members.

505.     New subsection 2B (5) allows the Chair of Court to replace the ‘non-executive’ members of the Committee, drawn from the membership of the Court of Directors.

Financial stability committee: supplemental

506.     New section 2C (2) and (3) set the procedure to be followed if a member of the Committee has an interest in a matter to be considered by the Committee. Any such interest must be disclosed and the member has no vote unless the Committee resolves that there is no conflict of interest. Members must not vote and must be absent during any debate of any matter in which the member is concerned.

507.     New section 2C(4) provides for the Committee to delegate certain of its functions to two or more of the voting members on the Committee.

508.     Subsection (2) amends section 2 of the Bank of England Act 1998 by adding a new subsection (5) which makes the Bank’s powers to determine its objectives subject to the statutory objectives relating to monetary policy and financial stability.

Clause 229: Number of Directors

509.     This clause amends the Bank of England Act 1998, and provides that the maximum size of the Court of Directors reduces from nineteen to twelve. As well as the Governors and two deputy Governors of the Bank of England it allows for there to be a maximum of nine other directors. In practice, these are likely to be non-executive directors, who are not employees of the Bank.

510.     Subsection (4) provides that when this provision comes into force, the then current directors of the Bank must vacate office (but will be eligible for re-appointment).

Clause 230: Meetings

511.     This clause amends the Bank of England Act 1998 (at paragraph 12 of Schedule 1) to provide that the Court of Directors of the Bank of England must meet at least 7 times in each calendar year, rather than monthly as at present.

512.     Subsection (3) enables the Governor or, in his absence, a Deputy Governor or the Chair of Court to summon a meeting of the Court.

Clause 231: Chair of Court

513.     This clause amends the Bank of England Act 1998 (at paragraph 13 of Schedule 1) with a new sub-paragraph (3) which provides that the Chancellor of the Exchequer designates a member of Court as the Chair of Court (the current Act required the Governor to be the chair of Court). It also provides for the Chancellor to designate deputies to serve in the absence of the Chair.

514.     Subsection (2) substitutes a new section 3(4) of the Act to provide that the Chair of Court (when present) is to chair the sub-committee of non-executive directors established under the Bank of England Act.

Clause 232: Quorum

515.     This clause amends the Bank of England Act 1998 to allow for the Committee of non-executive directors, and the Court of Directors to determine their own quorums.

Clause 233: Tenure

516.     Subsection (1) of this clause provides for someone appointed as a Governor of the Bank or a Deputy to serve no more than two terms in either role. This does not stop a person serving in one role for two terms subsequently serving in another.

517.     Subsection (3) provides that those members of the Monetary Policy Committee who are appointed by the Chancellor, rather than those appointed by the Governor, may serve a maximum of two terms.

Clause 234: Immunity

518.     This clause provides that the Bank of England has legal immunity in its capacity as a monetary authority, which includes its functions as a central bank and its financial stability functions. This provides immunity from legal claims for damages. The clause protects the Bank, its directors, officers, and servants (or purporting to act as such). The immunity does not extend to actions taken in bad faith or actions taken in contravention of the European Convention on Human Rights.

519.     The Government does not intend that the Bank of England shall have statutory immunity in its role as an employer, procurer of contracted services or in other roles not related to its statutory duties, as laid out in the Bank of England Act, 1998, or in this Bill.

Clause 235: Weekly return

520.     This clause removes the requirement, established in the Bank Charter Act, 1844, that the Bank of England must produce a weekly return of accounts. As a result, the Bank of England will be able to determine whether, and in what form, it produces a return.

Clause 236: Information

521.     This clause permits the Bank of England to disclose information relating to the financial stability of the individual financial institutions or aspects of the financial system of the United Kingdom. It may disclose information to HM Treasury, the Financial Services Authority, the Financial Services Compensation Scheme, and overseas central banks and regulators. The provision overrides other confidentiality requirements and is without prejudice to any other power to disclose information.

522.     This will enable the Bank of England to share relevant information that it may have received in relation to its financial stability functions, for example from an institution administered under the special resolution regime.

Clause 237: Bank of England Act 1946

523.     This clause states that nothing in the Bill affects the generality of the powers in section 4 of the Bank of England Act 1946.

Financial Services Authority

Clause 238: Variation of permission

524.     This clause amends section 45(1)(c) of the Financial Services and Markets 2000 to specify when the Financial Services Authority can use its power on its own initiative to vary the permission relating to the regulated activities which an authorised person may has permission to undertake, or to impose or change a restriction upon the authorised person. The Authority may use this power if it considers it desirable to do so to protect the interests of consumers. The amendment specifies that this means consumers relating to the authorised person in question or other authorised persons.

Clause 239: Functions

525.     This clause modifies the application of references to the functions of the Financial Services Authority to encompass the functions in the Bill.

526.     Subsection (1) specifies that references to functions of the Authority by or under the Financial Services and Markets Act, 2000 are taken to include a reference to functions conferred under the Bill.

527.     Subsection (2) specifies that any other references to functions of the Authority in an enactment are taken to include a reference to the functions under the Bill.

528.     Subsection (3) enables the Treasury by Order to disapply subsections (1) or (2), in case of a reference to functions which needs to be given a narrower meaning.

Clause 240: Information

529.     This clause requires the Financial Services Authority to collect information relevant to financial stability of financial institutions or the financial system and enables it to use its powers in section 165 of the Financial Services and Markets Act 2000 for this purpose. The Authority may also use other existing powers to collect information as it sees fit. This information (which the Authority will be able to share under its existing powers) will be used to support the Authorities’ oversight of financial stability and will inform the work of the Financial Stability Committee of the Bank of England which is established in this Bill.

Central banks

Clause 241: Financial assistance to building societies

530.     This clause provides HM Treasury with power to make amendments to the Building Societies Act, 1986 and certain consequential amendments with regard to the provision of financial assistance to building societies.

531.     Subsection (1) provides a power to modify the Building Societies Act 1986 and that the financial assistance under the clause may be provided by HM Treasury, the Bank of England, and other central banks (including the European Central Bank).

532.     This clause concerns the facilitation of those listed in subsection (1) to provide liquidity assistance to building societies where necessary.

533.     The Building Societies Act 1986 (c.53) includes various provisions that deal with the ability of building societies to grant floating charges and other provisions which impose limits on what building societies can lend and how they fund themselves.

534.     Section 11 of the Banking (Special Provisions) Act 2008 (c.2) makes similar provision to this clause, but in relation to financial assistance provided by the Bank of England, the new provisions applies in addition to the Treasury and other central banks (including the ECB) and removes the reference to financial assistance provided for the purpose of maintaining financial stability, which in the context of a provision which removes restrictions where there is a public interest in providing financial assistance to building societies may be too narrow.

535.     Subsection (2) sets out the purpose of the modifications of the 1986 Act, which is to modify provisions which would be capable of preventing, impeding or affecting the provision of financial assistance under the clause. The subsection sets out examples of the matters which may be modified in the 1986 Act, which include provisions about establishment, constitution or powers, restrictions on raising funds or borrowing, provision about security and the application of insolvency law and other legislation concerning companies to building societies.

536.     Subsection (3) provides that the order may disapply or modify the provisions referred to in subsection (2). The provisions can be by way of textual amendment or modification of the effect of a provision. An order to modify the Building Societies Act 1986 under this clause is subject to the affirmative resolution procedure.

537.     Subsection (7) provides that the Treasury may, by order, make further provision to modify or disapply the prohibition on floating charges in section 9B of the Building Societies Act 1986 beyond provision in relation to the institutions listed in subsection (1), if the Treasury think it is likely to help building societies to use, give effect to or take advantage of financial assistance offered by one of the institutions listed in subsection (1).

Clause 242: Registration of charges

538.     This clause disapplies the requirements in Part 25 of the Companies Act, 2006, that institutions must register certain charges that they enter into at Companies House and in a public register at their office. The clause provides that the requirements do not apply to charges granted in favour of the Bank of England, other central banks or the European Central Bank. This is because registration could otherwise lead to early disclosure of liquidity support.

539.     Subsection (2) provides that the reference to Part 25 of the Companies Act 2006 also covers related provisions in the 2006 Act with reference to the registration requirements placed upon overseas companies in relation to certain charges. The reference to the 2006 Act is also treated as including reference to the corresponding provisions of the Companies Act 1985, which will remain in force generally until 1st October 2009. Further, the subsection provides that this clause is also treated as referring to the corresponding provisions of companies law in Northern Ireland which remain generally in force until 1st October 2009.

Clause 243: Registration of charges: Scotland

540.     This clause is consequential to clause 242 above, and provides that the disapplication of Part 25 of the Companies Act (and related provisions) as provided for in clause 242, shall also apply to the Bankruptcy and Diligence (Scotland) Act 2007 (the 2007 Act) which introduces a registration scheme for Scottish floating charges. This clause therefore disapplies certain provisions of the 2007 Act, where these provisions would restrict the efficacy of clause 242 above and for the same reasons as Part 25 of the Companies Act 2006 is disapplied.

541.     Subsection (2) amends the 2007 Act such that, where floating charges covered by the Act are to be granted to a central bank, they are considered to have been created when the document creating the charge is executed. This alters the standard provisions with regard to the 2007 Act which stipulates that floating charges subject to the 2007 Act are created only when registered on the Scottish Register of Floating Charges. This provision will continue to apply except for cases where the charge is in favour of a ‘central institution’, that is, the Bank of England or another central bank (as defined in subsection (7)).

542.     Subsections (3) to (6) further amend the 2007 Act in such a way as to ensure that floating charges issued in favour of a central institution are not required to be registered, by disapplying the appropriate provisions of that Act.

Funds attached rule (Scotland)

Clause 244: Abolition for cheques

543.     Subsection (1) explains what is meant by the “funds attached” rule. It describes the rule of Scots law whereby, when a bill of exchange (e.g. a cheque) is presented for payment, the amount stated on the bill is assigned to the holder of the bill. Where insufficient funds are available to satisfy the bill, such lesser amount as is available is assigned to the holder of the bill.

544.     Subsection (2) provides for the abolition of the “funds attached” rule in relation to cheques. The abolition has effect only in relation to cheques presented for payment after this clause comes into force.

545.     Subsection (3) establishes that the meanings of terms used in this clause are as defined in the Bills of Exchange Act 1882. Specifically:

• “bill of exchange” has the meaning given in section 3 of the Act, namely “an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer”; and

• “cheque” means “a bill of exchange drawn on a banker payable on demand” as defined in section 73 of the Act.

546.     Subsection (4)(a) amends section 53(2) of the Bills of Exchange Act 1882, in which the “funds attached” principle is set out. The amendment provides that section 53(2) no longer applies in relation to cheques.

547.     Subsection (4)(b) repeals section 75A of the Bills of Exchange Act 1882, which was inserted by section 11 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 to deal with a problem that arose in relation to stopped cheques in the context of the operation of the “funds attached” rule. With the abolition of the rule in relation to cheques, the problem which section 75A addressed ceases to arise.

548.     Subsection (5) repeals section 11 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. See also paragraph 520 above.

549.     In accordance with clause 253 in Part 8, this section will come into force automatically two months after the Banking Bill receives Royal Assent.

Financial collateral arrangements

Clause 245: Regulations

550.     This clause concerns a power to make regulations concerning financial collateral arrangements. Financial collateral arrangements are arrangements between specified types of persons, often involved in the financial markets, where the obligations under an agreement are secured by the provision of collateral (under the Directive, cash and financial instruments, such as shares) either by way of creating security over collateral or by title transfer of the collateral.

551.     The background to the power is the EU Financial Collateral Arrangements Directive (2002/47/EC). The Directive covers the ground of removing formalities in relation to financial collateral arrangements, making provisions in relation to how such arrangements may be enforced, how they must be capable of taking effect, in particular in relation to the effect of insolvency proceedings and of choice of law in relation to particular forms of financial collateral arrangements.

552.     This Directive is implemented in UK law by the Financial Collateral Arrangements (No.2) Regulations 2003, S.I. 2003/3226 (the 2003 Regulations). The power exercised to make the regulations was section 2(2) of the European Communities Act 1972 (ECA). The power under the ECA relates to the scope of the Directive and the new power, as noted in subsection (3), extends beyond provision in connection with the Directive.

553.     Subsection (2) sets out the scope of what are financial collateral arrangements, that collateral may be cash, securities or in any other form and that an arrangement can be by way of security or title transfer.

554.     Subsection (3) sets out that the power enables the Treasury to cover the ground relating to the Directive, but also to go beyond that field to include provisions that the Treasury thinks are necessary or desirable for the purpose of enabling financial collateral arrangements to be commercially useful and effective.

555.     Subsection (4) sets out examples of the provision that may be made under the power to disapply or modify legislation, the scope relates to the scope of the Directive and the 2003 Regulations.

556.     The clause also includes power to make provision on a retrospective basis.

Clause 246: Supplemental

557.     This clause provides the Parliamentary procedure applicable to the regulations made under the previous clause concerning financial collateral arrangements together with incidental, consequential and transitional provision that may be made.

PART 8: GENERAL

Clause 247: “Financial assistance”

558.     This clause provides a partial definition of financial assistance and allows the Treasury further to define financial assistance for the purposes of the Bill by statutory instrument.

Clause 248: “Enactment”

559.     This clause defines the meaning of enactment to include Acts of the Scottish Parliament, Scottish subordinate legislation and Northern Ireland legislation.

Clause 249: Statutory instruments

560.     This clause provides that the statutory instruments made under this Act can apply generally or to specific cases and can be of any type or form, but that they cannot be treated as hybrid instruments.

561.     This clause also provides a list of powers which may be exercised by the 28 day affirmative procedure instead of the draft affirmative procedure. This will be possible only the first time that the power is exercised and where the person exercising the power is satisfied that it is necessary to do so.

Clauses 250-255: General

562.     This part gives an index of which sections contain important definitions.

563.     The short title of the legislation is the Banking Act 2008.

FINANCIAL EFFECTS OF THE BILL

564.     The financial effects of this Bill are largely related to the administration of the special resolution regime. As described in the Impact Assessment (which will be placed in the Vote Office), the Bank of England, given its central role in the SRR tools, is likely to need to invest in additional resources to enable it to carry out its functions. However, dealing with failing banks is already a responsibility of the Authorities and, as such, this should not impose an additional cost on total public expenditure.

565.     In terms of the costs associated with resolving failing banks, it is anticipated that the provisions in this Bill will lessen the risk posed to public expenditure by the need to resolve failing banks. First, allowing the resolution to take place in the most orderly and efficient manner possible and second, by providing that, where appropriate, the Financial Services Compensation Scheme will fund the resolution costs, capped to the amount that it would have paid out to depositors if the bank had gone into insolvency or administration.

566.     Allowing the National Loans Fund to make loans to the FSCS would occasion expenditure on the part of the NLF only if the FSCS were to take out a loan or loans. This is clearly a contingent cost and will vary depending on the magnitude and terms of the particular loans.

567.     There are no other significant financial effects of the Bill.

EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER

568.     As discussed in the Impact Assessment, the Bank of England is continuing to work up its operational plan as the lead SRR authority, liaising closely with international counterparts to learn from best practice. At this time, however, the Bank of England estimates that the model will be based on a limited standing staff whose role will be to monitor situations and contingency plans for the SRR tools. When the SRR is invoked, these staff will be supplemented by external professionals such as lawyers, insolvency professionals and banking experts.