Draft Banking Act 2009 (restriction of partial property transfers) (Recognised Central Counterparties) Order 2014
Draft Banking Act 2009 (Banking Group Companies) Order 2014
Draft Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014
Draft Banking Act 2009 (Third Party compensation Arrangements for Partial Property Transfers) (amendment) Regulations 2014
The Committee consisted of the following Members:
Blears, Hazel (Salford and Eccles) (Lab)
† Dakin, Nic (Scunthorpe) (Lab)
de Bois, Nick (Enfield North) (Con)
† Drax, Richard (South Dorset) (Con)
† Evans, Mr Nigel (Ribble Valley) (Con)
Godsiff, Mr Roger (Birmingham, Hall Green) (Lab)
† Hemming, John (Birmingham, Yardley) (LD)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Kaufman, Sir Gerald (Manchester, Gorton) (Lab)
† Leadsom, Andrea (Economic Secretary to the Treasury)
† Lefroy, Jeremy (Stafford) (Con)
Mactaggart, Fiona (Slough) (Lab)
† Rudd, Amber (Hastings and Rye) (Con)
† Russell, Sir Bob (Colchester) (LD)
† Stephenson, Andrew (Pendle) (Con)
† Tomlinson, Justin (North Swindon) (Con)
Wilson, Sammy (East Antrim) (DUP)
Wood, Mike (Batley and Spen) (Lab)
Fergus Reid, Committee Clerk
† attended the Committee
The following also attended, pursuant to Standing Order No. 118(2):
Wiggin, Bill (North Herefordshire) (Con)
First Delegated Legislation Committee
Monday 7 July 2014
[Mr Andrew Turner in the Chair]
Draft Banking Act 2009 (Restriction of Partial Property Transfers) (Recognised Central Counterparties) Order 2014
4.30 pm
The Economic Secretary to the Treasury (Andrea Leadsom): I beg to move,
That the Committee has considered the draft Banking Act 2009 (Restriction of Partial Property Transfers) (Recognised Central Counterparties) Order 2014.
The Chair: With this it will be convenient to consider the draft Banking Act 2009 (Banking Group Companies) Order 2014, the draft Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014, and the draft Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) (Amendment) Regulations 2014.
Andrea Leadsom: It is a pleasure to serve under your chairmanship, Mr Turner. I will refer to the instruments as the banking group company order, the investment firms order, the partial property transfer order, and the third party compensation regulations.
Since the financial crisis of 2007 to 2009, a programme of financial sector reform has been under way at domestic, European and G20 level. A key element of the reform has been ensuring that Governments have the ability to resolve failing systemic financial institutions in an orderly manner, to protect financial stability without recourse to public funds. This has focused on not only banks, but other entities such as investment firms and central counterparties that have the potential to cause widespread disruption to the financial system.
As part of the reform in the UK, the special resolution regime was established by the Banking Act 2009 and currently applies to most deposit-taking institutions. The regime gives the UK authorities a permanent framework for resolving failing banks and building societies. The regime is designed to ensure that, were a bank to fail, it could be resolved safely without risk to the taxpayer or UK financial stability.
The Financial Services Act 2012 amended the 2009 Act to extend the special resolution regime to banking group companies, investment firms and central counterparties. The special resolution regime gives the Bank of England, as resolution authority, the following tools in relation to investment firms and banking group companies: first, to transfer some or all of the securities or business of a firm or company in the same group to a commercial purchaser; and secondly, to transfer some or all of the firm or company in the same group to a bridge bank, which is a company owned and controlled by the Bank of England. To deal with failing central
counterparties, the Bank of England has the following tools: first, to transfer some or all of a firm or company in the same group to a bridge central counterparty, which is a company owned and controlled by the Bank of England, or a commercial purchaser; or secondly, to transfer ownership of a central counterparty to any person.The 2012 Act also extends the bank administration procedure to investment firms and banking group companies. The bank administration procedure is applicable when, during the resolution of a bank, a partial transfer of property takes place and the residual bank—the part left behind—is insolvent. The procedure ensures that the residual bank continues to provide the services and facilities required to enable the transfer business to operate effectively. The same procedure will be available for the residual part of an investment firm or banking group company.
The four draft instruments before the Committee today are necessary to extend the scope of the special resolution regime to central counterparties, investment firms and banking group companies, as well as the application of the bank administration procedure to investment firms and banking group companies. The bank recovery and resolution directive requires resolution tools to be in place for investment firms and banking group companies, and the instruments presented today are consistent with the directive.
I shall take each of the instruments in turn. The investment firms order excludes certain investment firms from the scope of the special resolution regime and bank administration procedure. Under the order, only investment firms required to have initial capital of €730,000 are within the scope of the regime. That is because the Government consider that the failure of these firms could threaten financial stability due to the activities that the firms may carry out—in particular, dealing in financial instruments on their own account and underwriting of financial instruments. The value of assets held on those investment firms’ balance sheets is also likely to be significant. Firms that do not carry out those activities are required to hold initial capital of €125,000 and are outside the scope of the special resolution regime.
The third party compensation regulations set out the compensation arrangements for third parties in the event that some but not all of an investment firm has been transferred during resolution, ensuring that third parties are no worse off than they would have been if the entire investment firm had entered insolvency.
The banking group companies order specifies the types of entity that will be considered to be a “banking group company” for the purposes of the special resolution regime. The aim of using resolution tools in respect of banking group companies is to ensure that resolution in relation to a failing bank in the same group as the company is effective and, in particular, to ensure that any intra-group service provision to the failing bank remains in place while it is in resolution.
Lastly, the partial property transfer order applies safeguards in relation to partial property transfers made with respect to a central counterparty during resolution. The order provides legislative safeguards for the benefit of direct and indirect users of clearing services provided by central counterparties. Those safeguards will provide them with greater certainty as to how a partial property
transfer might affect their contractual rights, and ensure that there are appropriate restrictions and limitations on the making of a partial property transfer.Our consultation on the measures showed widespread support for the extension of the special resolution regime to investment firms, central counterparties and banking group companies. The measures therefore reflect the views and comments received during consultation.
The four instruments are necessary to underpin the widened scope of the special resolution regime. They will help to ensure that central counterparties, investment firms and banking group companies are resolvable in an orderly manner without risk to the taxpayer or UK financial stability. I therefore commend the measures to the Committee.
4.38 pm
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): I thank the Minister for her explanation of the measures, which we will support today. I will certainly not divide the Committee, nor do I feel the need to repeat word for word the information in the explanatory notes, because the Minister has done a good job of outlining the main provisions. However, I think it is worth putting one or two points on the record.
It is of course worth noting that the Banking Act 2009, passed under the previous Government, established for the first time a permanent statutory regime for dealing with failing banks. It amended the existing legislation and made new provision for the governance of the Bank of England. The Minister referred to the special resolution regime, which essentially gave the authorities tools to deal with banks that get into financial difficulties. The options are to transfer to a private sector purchaser, to transfer to a bridge bank, or to transfer to temporary public sector ownership. The Act also created new bank insolvency procedures and a new bank administration procedure for use where there had been a partial transfer of business from a failing bank, and made consequential amendments to the Financial Services and Markets Act 2000.
As the Minister correctly said, the four instruments have been consulted on, and the Government provided a fairly extensive written response to the consultation. There were 10 respondees, which suggests to me that the industry is generally content with the measures. However, it did raise a couple of issues about the definition of financial holding companies and about banking group companies. It is worth noting that there was no particular response on the third party compensation regulations, which are very much a technical change.
As the Minister outlined, the investment firms order essentially excludes smaller investment firms from the scope of the SRR. The respondents to the consultation agreed with the measure on the basis that the failure of smaller firms would not, in itself, be a threat to the UK’s overall financial security. On the banking group companies order, some respondents disagreed with some of the proposals in the previous draft, but the Government listened to their concerns and redrafted it to address them. Indeed, they consulted the banking liaison panel before they did so. The restriction of partial property transfers order was, by and large, welcomed by the industry, and people saw no particular reason to change it.
In summary, the Opposition are not opposed to the measures, and we give the Minister our support today. However, I have one question—I always like to ask a question about the future. The review provisions in the Banking Act 2009, which relate to the measures we are about to approve, require the Treasury to make arrangements for the banking liaison panel to advise it about the SRR’s effect on banks and so forth. The panel will keep the measures before us under review and, where appropriate, advise the Treasury about them. The Treasury will also keep the measures under review. Will the Minister confirm what plans are in place to monitor and to report back if it is felt that action is required? With that, however, I am happy to support the provisions.
4.43 pm
Andrea Leadsom: I am grateful to the hon. Lady for allowing a short and punchy debate. I am particularly grateful to all the stakeholders who engaged with us in developing the new resolution regime. As the hon. Lady said, the responses were largely positive, and there seems to be a good degree of support for the SRR.
As I said at the outset, it is essential that the Government have the statutory tools in place to deal with the failure of systemically important financial institutions. Furthermore, resolution should be achieved without recourse to public funds.
On the hon. Lady’s question about a review, there will be a requirement to review all these measures in due course. I can assure her that my officials will do that and will consult in due course on how the measures have been implemented.
The Government already have tools in place to deal with banks and building societies. This legislation expands the toolkit to systemically important non-banks—investment firms, central counterparties and banking group companies. In these statutory instruments, we have the right framework for an effective resolution regime. On that basis, I commend them to the Committee.
Draft Banking Act 2009 (Banking Group Companies) Order 2014
That the Committee has considered the draft Banking Act 2009 (Banking Group Companies) Order 2014.—(Andrea Leadsom.)
Draft Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014
That the Committee has considered the draft Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014.—(Andrea Leadsom.)
Draft Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) (Amendment) Regulations 2014
That the Committee has considered the draft Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) (Amendment) Regulations 2014.—(Andrea Leadsom.)