APPENDIX 1: BANKING (SPECIAL PROVISIONS)
BILL
Memorandum by Her Majesty's Treasury
Introduction
1. This Memorandum identifies the provisions
in the Banking (Special Provisions) Bill which confer power to
make delegated legislation. It explains the purpose of the delegated
powers proposed; why the matters are to be dealt with in delegated
legislation; and the nature of and justification for the parliamentary
procedure which applies where the powers are exercised.
Background
2. The Government is currently consulting on
long-term reforms to enhance financial stability and depositor
protection[5]. The consultation
includes a suite of measures to strengthen the stability and resistance
of the financial system and to reduce the likelihood of individual
banks facing difficulties. It also proposes a Special Resolution
Regime to reduce the impact of failing banks, especially where
they risk damaging financial stability. The SRR tools proposed
include powers for the authorities to direct and accelerate a
transfer of banking business to a third party; and powers to allow
the Tripartite Authorities to take control of all or part of a
failing bank (or of its assets and liabilities) through a 'bridge
bank' (as is possible in the United States and Canada).
3. However, this Bill is considered necessary
at this stage, as an interim measure, to give the Government temporary
powers for securing the continued stability of the UK financial
system and the protection of the public interest where financial
assistance has been provided to a deposit-taker for the purpose
of maintaining financial stability.
Overview of the Bill
4. The structure, nature of the business of banks
and their position in financial markets are varied and highly
complex. Moreover, the circumstances in which the Bill's powers
may need to be exercised in relation to a particular deposit-taker
will, by their nature, be exceptional both in terms of the prevailing
economic situation, the time available to make decisions to transfer,
and the likelihood of the Treasury having to act on incomplete
information about the business of the deposit-taker in question.
These facts have determined what powers a Bill of this nature
must include to give effect to, or provide for the consequences
of, a transfer of a bank into public ownership or to another private
sector entity.
5. Clauses 3 to 12 of, and the Schedules to,
the Bill give the Treasury options for dealing with UK authorised
deposit-takers (UK banks and building societies) in financial
difficulties where there are systemic implications. These options
include powers to transfer a deposit-taker (or all or part of
its business) to public and private sector bodies, and a power
to amend legislation that applies to building societies to facilitate
the provision of financial assistance by the Bank of England to
building societies.
6. The outline of the Bill is as follows:
- Introduction - clauses 1 and 2
define the circumstances in which, and purposes for which, the
Treasury's powers to transfer the securities or property, rights
and liabilities of a deposit-taker are exercisable and set out
which institutions qualify for purposes of those powers;
- Transfer of securities - clauses 3 to 5 and Schedule
1 deal with the power to transfer shares and other securities
to the Bank of England, the Treasury, a company owned by the Treasury
or the Bank of England, or any other body corporate; provide powers
for the Treasury to extinguish certain rights in relation to such
securities; and require the Treasury to provide for the determination
of the amount of any compensation or consideration payable to
the holders of such securities and to those whose rights have
been extinguished;
- Transfer of property etc. - clauses 6 and 7 and
Schedule 2 deal with the power to transfer property, rights and
liabilities of a deposit-taker to a company owned by the Bank
of England, the Treasury or to any other body corporate; and require
the Treasury to make an order providing for determining the amount
of any compensation or consideration payable to the deposit-taker;
- Further transfers - clause 8 provides powers
for the onward transfer of securities or property etc transferred
to the public sector by an order under clause 3 or 6;
- Supplementary matters - clause 9 contains supplementary
provisions about compensation orders, including in relation to
procedural matters; clause 10 enables the Treasury to make provision
in relation to tax in connection with the exercise of powers in
the Bill;
- Building societies - clause 11 gives the Treasury
a power to modify legislation to facilitate the giving of certain
financial assistance by the Bank of England to building societies;
- General - clauses 12 to 17 are general provisions
concerning consequential and supplementary provision, orders and
regulations made under the Bill, interpretation, financial provision
and extent; they include provision to modify primary and secondary
legislation and make a limited form of retrospective provision.
7. All of the powers in the Bill are conferred
on HM Treasury. The powers are exercisable by orders made by statutory
instrument, except the power relating to tax in clause 10, which
is exercisable by regulations made by statutory instrument. Some
of the powers granted may be exercised retrospectively.
Transfer powers: general
8. The transfer powers in the Bill may only be
exercised for the first time in relation to a particular deposit-taker
where the Treasury consider it desirable to make a transfer order
in relation to it for one (or both) of two specific purposes:
where the Treasury consider that there would be a serious threat
to the stability of the UK financial system if the transfer was
not effected, and protecting the public interest in circumstances
where the Treasury have provided financial assistance to the deposit-taker
for the purpose of maintaining that stability.
9. The Bill provides for transfers of the business
of a deposit-taker in two ways. The Treasury may transfer the
shares and other securities (defined in clauses 15(1) and (2))
of a deposit-taker (clause 3). Or, it may transfer all or part
of the deposit-taker's business (its property, rights and liabilities),
without acquiring its securities (clause 6). Either or both of
these approaches might be appropriate in particular circumstances.
The powers permit a transfer direct to another private sector
undertaking (clauses 3(1)(d) and 6(1)(b)), and the transfer of
a deposit-taker back into the private sector which has previously
been transferred into public ownership (clause 8).
10. The Bill sets the following conditions for
the exercise of these powers:
a) the transfer powers may only be exercised
in respect of deposit-takers which are authorised by the Financial
Services Authority (FSA) to accept deposits; deposit-takers that
are exempt from the requirement to be authorised, or that accept
deposits only as part of their main investment business, are excluded
(clause 1);
b) a deposit-taker (or its property, rights or
liabilities) may only be transferred into public ownership, or
to a private owner, where one or both of the purposes set out
in clause 2 are met;
c) the transfer powers may only be exercised
for 1 year after the Act is passed (clause 2(8)); and
d) where a transfer is effected, whether of securities
or of property, rights or liabilities, the Treasury must, within
3 months, make an order providing for the determination and payment
of any amount of compensation to the holders of such property.
(clauses 5(1), 7(1) and 9).
Clause 3: transfer of securities
11. Subsection (1) confers a power on the Treasury
to make provision for, in connection with, or in consequence of,
the transfer of securities issued by a deposit-taker to the Bank
of England, a nominee of the Treasury, a company wholly owned
by the Treasury or the Bank, or any other body corporate. The
power may only be exercised in relation to a particular deposit-taker
if it appears to the Treasury to be desirable for one or both
of the purposes in clause 2(2). These purposes both concern the
stability of the UK financial system; the second purpose also
concerns the protection of the public interest. That interest
includes, but is not limited to, the interest of taxpayers.
12. The purpose of this power is to enable the
Treasury to take a deposit-taker into public ownership, or to
transfer it directly to a privately owned body corporate, by transferring
any securities (including shares) of the deposit-taker. This power
gives the Treasury options for dealing with deposit-takers whose
position in the financial system is such that the Treasury consider
that there would be a serious threat to its stability if the transfer
were not effected or, where the Treasury has already provided
financial assistance to a deposit-taker, it did so for the purpose
of maintaining that stability, to protect the public interest.
13. The power in clause 3 is to transfer "securities".
This includes shares, bonds, warrants and other securities (clause
15(1)). It also includes rights (not otherwise falling within
the definition of securities in clause 15(1)) granted by the deposit-taker
which form part of its regulatory capital resources. If the deposit-taker
is a company with issued ordinary share capital, transferring
all of the ordinary shares issued by the company to a public sector
body will have the effect of bringing it into public ownership.
Following such a transfer, the Treasury's nominee (or other public
owner) would be able to exercise all the normal rights of such
shareholders. The purpose of including all forms of regulatory
capital is that certain forms of debt may confer a degree of control
over the company on its holders. An example is certain Tier 1
notes which, when payment of a coupon is deferred, entitle their
holders, in some situations, to be issued with ordinary shares
of an amount equal to the value of the deferred coupon.
14. A deposit-taker may be brought into public
ownership by a transfer to the Bank of England, a nominee of the
Treasury, or a company wholly owned by the Bank or the Treasury
(clause 3(1)(a)-(c)). Because the Treasury has no legal personality,
any transfer to it must be to a nominee of the Treasury (such
as the Treasury Solicitor[6])
rather than to the Treasury itself.
15. A transfer under clause 3 can also be made
to any other body corporate (clause 3(1)(d)). This enables the
Treasury to transfer a deposit-taker directly to a third party,
outside of normal commercial mechanisms, and removes any need
for the members of the deposit-taker (where it is a company) to
approve a transfer. This power could be used in a variety of ways,
including the making a direct transfer to another deposit-taker,
or to effect a corporate restructuring of the deposit-taker concerned.
16. An order under clause 3 may in particular
make provisions of the kind specified in Schedule 1. The purpose
of making such provisions would be to ensure that a transfer of
securities is effective and that all ancillary matters are dealt
with. The provisions which may be made include:
a) provision relating to the securities transferred
(paragraph 1). The purpose is to ensure that securities (including
those issued in and held in bearer form) are transferred effectively,
even though the normal procedures for transferring shares or other
securities are not followed;
b) provision for securities held in one form
to be converted to another form (paragraph 2). This would enable
securities held in uncertificated form, or bearer securities,
to be converted to certificated or registered form, which may
facilitate management of the company after a transfer;
c) provision for securing that the listing of
securities is discontinued (paragraph 3). The purpose is to ensure
that, from the effective time, the listing of securities issued
by the relevant deposit-taker (whether transferred or not) is
cancelled and the deposit-taker is not obliged to comply with
listing rules of the regulated market;
d) provision for altering the terms of securities
issued by, or contracts entered into by, the deposit-taker (paragraph
4). This power could serve a number of purposes. In particular,
it would enable rights in securities or contracts (e.g. rights
to terminate, or require early (re)payment) which are (or may
be) triggered by a transfer order or later events which occur
while the deposit-taker is in public ownership, to be modified
so that such rights could not be exercised by their holders in
a way which could frustrate the purposes of the transfer. For
example, it may be necessary to alter the terms of securities
(e.g. some types of bonds) which confer the right on the holder,
in certain circumstances, to be issued with new shares of the
deposit-taker. Any transfer whose purpose was to obtain full ownership
and control of the equity of the deposit-taker may be frustrated
by the exercise of such rights. Another example might be to nullify
the terms of an 'event of default' clause in a security or contract.
The triggering of such clauses may, in turn, trigger cross-defaults
and, ultimately, a petition by a security-holder or creditor to
put the deposit-taker into administration.
e) provision for the creation of new rights and
liabilities (paragraph 5). The purpose of this power is to put
in place appropriate arrangements between the transferred undertaking
and its former group companies, where the whole group is not transferred.
This would be relevant where the former group companies provided
essential services (e.g. treasury operations, IT services, staff,
ownership of branches or other premises and property management)
to the deposit-taker, without which the deposit-taker may be unable
to operate or its operations severely limited;
f) provision affecting pension schemes, including
modifying rights and liabilities and transferring property or
accrued rights (paragraph 6). The purpose of this power is to
ensure that pensions arrangements can be dealt with appropriately
in, for example, a case where only part of a group is transferred,
so that assets and liabilities of the group pension scheme can
be apportioned between a new scheme for the company transferred
and the existing scheme for the rest of the group;
g) provisions relating to directors of the deposit-taker,
including provision removing or appointing them, determining their
remuneration, and terminating or varying their conditions of service
(paragraph 7). The purpose of this power is to ensure that immediate
and effective control is taken after a transfer of the deposit-taker
without the need to effect the removal of existing directors under
the procedures set out in section 168 of the Companies Act 2006
or the constitution of the company;
h) provision for disputes arising in relation
to the order to be determined in a specified manner (paragraph
8(3)). The purpose is to provide, if and where appropriate, a
specific dispute resolution mechanism for certain issues relating
to a transfer under clause 3. This is often provided for in relation
to statutory transfer schemes (see for example paragraph 7(5)
of Schedule 21 to the Energy Act 2004) and could be used, for
example, to require certain disputes to be referred to arbitration.
17. A second or subsequent order made under clause
3 may make provision in connection with, or in consequence of,
the transfer, even though it does not itself provide for the transfer
of any securities (clause 3(3)). This allows for any consequential,
connected or ancillary matters which are not dealt with in the
initial transfer order to be dealt with in subsequent orders.
Provision as to a related pension scheme is a good example of
a provision that will almost always need to be made some time
after an order effecting a transfer of shares. It is highly unlikely,
in any rapidly developing situation concerning a deposit-taker,
that the Treasury would have sufficient information about related
pension schemes to make adequate provision in the first transfer
order.
18. A second or subsequent order may also be
made in relation to a particular deposit-taker whether or not
the transfer is to the same or a different person (clause 3(4)).
The purpose of this is to provide flexibility for a subsequent
transfer of securities, which might be securities of a different
kind to those previously transferred (such as preference shares
or bonds), to a different person within the public or private
sector, if that is considered appropriate.
19. The Treasury does not need to be satisfied
that a second or subsequent exercise of the clause 3 (or clause
6) power in relation to a particular deposit-taker is desirable
for one of the clause 2(2) purposes (see clause 2(7)). This is
because by the time the second order is made, the serious economic
circumstances that justified and allowed the making of the first
transfer order may (and hopefully would) no longer exist. The
serious threat to stability may have lessened or disappeared.
These powers ensure that the Treasury's ability to make further
orders in relation to the particular deposit-taker is not constrained
by that change in circumstances. For a similar reason, a body
that was an authorised UK deposit-taker before an order was first
made in relation to it under clause 3 or 6 is to be regarded as
continuing to be such a deposit-taker for the purposes of the
Act, whether or not it would be apart from that subsection (clause
15(4)).
20. Subsection (5) provides that any provision
made under section (1) in relation to any transaction or event
taking place while the securities transferred are held by a public
sector body is to be regarded as provision made in consequence
of the transfer. This extension of the meaning of in consequence
of is necessary because an event may occur after a transfer
into public ownership which triggers undesirable consequences
that undermine or frustrate the purposes of the transfer. For
example, it is not uncommon to find a 'cessation of business'
or 'threatening to cease business' term in a security issued or
contract entered into by a deposit-taker. If that deposit-taker
is transferred into public ownership with a view to continuing
its operations but, several months later, a decision is taken
to close to new business, this may be a cessation of, or at least
a threat to cease, the deposit-taker's business. This fact might
entitle a security-holder or creditor to demand early repayment
and take enforcement action to recover sums owing, including presentation
of a petition for the appointment of an administrator. Strictly,
it might be said that this consequence is triggered, not by the
transfer itself, but by the decision or threat to close. The Treasury
considers that this extension of the natural meaning of the words
in consequence of may be necessary because a further order
under section 3 might need to be made to modify or nullify any
'cessation of business' or 'threatening of cessation of business'
terms. The extension has been limited, however, to transfers into
public ownership; no similar extension has been made for transfers
to private sector entities.
21. Delegated legislation is considered appropriate
for the transfer of securities of a deposit-taker for several
reasons. The power in clause 3 may be exercised on more than one
occasion, whether in relation to the same deposit-taker, or in
relation to different deposit-takers, should the circumstances
require it.
22. Effecting transfers of individual deposit-takers
in delegated legislation ensures that the Bill is a public bill
and not a private, or hybrid bill,[7]
which would be inappropriate in the circumstances because of the
need for swiftness and certainty of execution to avoid financial
instability, promote market and public confidence and the need
for the transferee to assume effective and immediate control.
It also ensures that all appropriate provision and detail required
to effect the transfer can be provided for in an order and, if
needed, in second or subsequent orders.
23. The negative resolution procedure is considered
most appropriate for orders under clause 3. Any initial order
transferring the securities of a deposit-taker is likely to need
to be made urgently, at short notice, possibly within days of
the circumstances of the particular deposit-taker coming to the
attention of the Tripartite Authorities.[8]
A requirement for each House to approve a draft order would cause
a delay (particularly where Parliament was in recess, for example)
which would undermine legal certainty and the confidence of consumers
and the markets and could create, or impact adversely on, existing
financial instability. Any form of affirmative procedure, for
example a requirement for a resolution within 28 days of the order
being made, risks uncertainty during that period as to the effectiveness
of the transfer or other provision. The serious practical, legal
and economic consequences (including the possible impact on financial
stability and public confidence) of being required to unwind a
transfer as complex as that of a depositor-taker, where a 28-day
order is not subsequently affirmed strongly militates against
the use of such a procedure. The negative resolution procedure
does require the instrument to be laid before both Houses, and
gives both Houses the opportunity to debate the instrument. However,
the procedure leaves no room for doubt as to the effectiveness
of the transfer and other provision made at the time the transfer
order is made. Any such order will remain in force unless a Member
introduces a negative resolution and the resolution is agreed
to.
Clause 4 (extinguishment of subscription rights)
24. Subsection (2) gives the Treasury a power
to extinguish rights to subscribe for, or otherwise acquire, securities
of a deposit-taker, or any of its subsidiaries. Conditions also
attach to the exercise of this power:
a) it is only exercisable where the Treasury
make, or have made, a transfer order under clause 3;
b) where rights are extinguished, the Treasury
must, within 3 months, make an order providing for the determination
and payment of any amount of compensation to those whose rights
have been extinguished (clauses 5(2) and 9).
25. The purpose of this power is to enable rights
such as company-issued share options to be extinguished. If not
extinguished, they might be exercised by their holders who would
acquire a right to be issued with new shares or other securities
of the deposit-taker. As any transferee is likely to require full
control of the company without the presence of minority shareholders,
the possibility that these options might be exercised and converted
into shares needs to be removed.
26. Where an initial order has extinguished such
rights in relation to a particular deposit-taker, a subsequent
order may make consequential provision even though it does not
itself extinguish rights (subsection (4)). This power is analogous
to clause 3(3). Its purpose is to ensure that any connected, consequential
or ancillary matters can be dealt with a in later order, if necessary.
27. The taking of this power, and adoption of
the negative resolution procedure, are considered appropriate
for the reasons given in relation to the clause 3 power. Further,
as it is likely that the clause 4 power would be exercised at
the same time as, and in the same instrument as the clause 3 power
(although it need not be), there is a practical reason why the
same Parliamentary procedure should apply to both.
Clause 5 (compensation etc. for securities transferred
etc.)
28. Subsection (1)(a) imposes a duty on the Treasury
to make a scheme for determining the amount of any compensation
payable by the Treasury to persons who held securities immediately
before they are transferred to the public sector by an order under
clause 3. Subsection (1)(b) imposes a duty on the Treasury to
make similar provision for determining the consideration payable
by the transferee in a transfer to the private sector. Subsection
(1)(c) makes similar provision where an order has transferred
securities both to public and private sector bodies.
29. Subsection (2) imposes a duty on the Treasury
to make provision for determining the amount of compensation payable
to persons whose rights are extinguished by an order under clause
4. The compensation is payable by the Treasury in the case of
a transfer to the public sector, by the transferee in the case
of a transfer to a private sector body, or by one, the other or
both in the case of a transfer to both.
30. Subsection (3) gives the Treasury a power
to make a compensation scheme for the benefit of other persons
affected by any provision made in an order under section 3 or
4. This significant power is necessary because provision made
in these orders may interfere with the property rights of persons
other than those provided for in subsections (1) and (2). In some
cases, the interference may constitute a deprivation of property.
Such interference may only be justified if compensation is provided
for. This gives the Treasury power to make a compensation scheme
for such persons. For example, a contractor who has entered into
a contract with the deposit-taker, whose contractual rights are
modified by provision made in an order might, if the modification
gives rise to a significant interference with his property rights,
require compensating for his loss.
31. The purpose of these powers is to require
and enable the Treasury to put appropriate compensation mechanisms
in place and, in the case of a public sector transfer, to pay
any such compensation. The powers in clause 9(1) in particular
are intended to be wide enough to allow the secondary legislation
to deal with all relevant aspects of the compensation procedure.
Such provision is, however, subject to the mandatory assumptions
as to the withdrawal of financial assistance from the Bank of
England and Treasury in clause 5(4), but does not constrain the
Treasury's power to include those assumptions in other cases (clause
9(3)).
32. The duty on the Treasury to make a scheme
for the determination of the amount of any compensation or consideration
will ensure that any exercise of the clause 3 or 4 powers can
meet the Government's obligations under the European Convention
on Human Rights, and specifically Article 1 of Protocol 1 to the
Convention.
33. Clause 9(2) allows the Treasury to include
additional assumptions about the deposit-taker that may, in some
cases, follow (amongst other things) the mandatory assumption
in clause 5(4) that the public financial assistance provided is
withdrawn.
34. Delegated legislation is considered appropriate
for dealing with the compensation mechanisms, procedures and principles
of assessment, as those issues need to be dealt with in an amount
of detail that is inappropriate for primary legislation. The Government
considers it appropriate to seek Parliament's approval of the
fundamental principle set out in clause 5(4), rather than set
those assumptions in the order under its delegated powers to set
the manner of assessment, methods of calculation, valuation dates
and matters to be left in and taken out of account when it sets
out the detail of how the compensation procedure will work.
35. The negative resolution procedure is considered
appropriate as it is in the interests of all parties that a compensation
order is made as soon as possible after an initial order transferring
securities under clause 3. Use of the affirmative resolution procedure
would risk creating delay or, in the case of the 28-day affirmative
procedure, uncertainty, to the potential detriment of those seeking
a compensation determination. The power should be capable of being
used alongside the clause 3 power and so should be governed by
the same procedure.
Clause 6: transfer of property, rights and liabilities
36. Subsection (1) gives the Treasury a power
to make provision for, in connection with, or in consequence of,
the transfer of property, rights and liabilities to a company
wholly owned by the Bank of England or the Treasury, or to any
other body corporate. Like the clause 3 power, this power may
only be exercised in relation to a deposit-taker if, in the Treasury's
view, it is desirable for one of the clause 2 purposes.
37. The purpose of this power is to allow the
Treasury to take some or all of a deposit-taker's business into
public ownership, or to transfer it directly to a private sector
body corporate. It gives the Treasury additional options for dealing
with deposit-takers whose position in the financial system is
such that the Treasury consider that there would be a serious
threat to its stability if the transfer were not effected or,
where the Treasury has already provided financial assistance to
a deposit-taker, it did so for the purpose of maintaining that
stability, to protect the public interest. It provides the power
to effect or accelerate a transfer of all or part of a banking
business to a private sector body corporate or to take control
of some or all of the assets and liabilities (e.g. depositors'
accounts) of a deposit-taker through a 'bridge bank'. This power
may also be exercised in relation to building societies, which
the clause 3 powers may not, as a change of ownership of a building
society is effected by a transfer of its business rather than
by a transfer of shares.
38. The property, rights and liabilities that
may be transferred may be defined in a number of ways (subsection
(2)), and paragraph 1 of Schedule 2, lists certain property, rights
and liabilities which may be transferred. The purpose of these
provisions is to give the Treasury the flexibility it may need
in any particular case where it is essential to act swiftly to
ensure that the necessary property, rights and liabilities are
transferred. In addition, subsections (6) and (7) provide for
property, rights or liabilities transferred to be transferred
back by a second or subsequent order. The Treasury consider that
this additional flexibility may be required in cases of urgent
transfers where particular property, rights or liabilities were
inadvertently transferred by the first transfer order.
39. The power may be used to make provisions
of the kind specified in Schedule 2, to ensure that the transfer
is effective and that all ancillary matters are dealt with. The
provisions which may be made include:
a) provision that interests or rights transferred
take effect despite the absence of any required consent or concurrence
to or with the transfer (paragraph 2(1)(a)). This provision may
be required to effect a transfer of deposit accounts to another
deposit-taker or 'bridge bank' without the need for consent from
each depositor;
b) provision modifying interests, rights or liabilities
of third parties (paragraphs 2(1)(c) and (e)). Such provision
may be required, for example, to modify rights in agreements between
third parties and the deposit-taker (or connected bodies). This
is intended to prevent a transfer triggering rights in contracts
(for example, a clauses giving a third party rights to terminate
a contract with the deposit-taker on a change of control) which
could be exercised in a way detrimental to the transfer or the
effective continuing operations of the deposit-taker. The triggering
of 'event of default' clauses may trigger cross-defaults and,
ultimately, a petition by a creditor to put the bank into administration.
Thus, in certain cases, the exercise of such rights might prevent
the deposit-taker carrying on its business to an extent that frustrates
the purposes of transfer;
c) provision for enabling the deposit-taker and
the transferee (e.g. the 'bridge bank' or private sector transferee)
to agree on a modification of the transfer order (paragraph 2(1)(j)).
Any such provision could allow those parties to agree, for example,
a change to the detail of some of the property, rights or liabilities
transferred. Any such modification must fall within the scope
of the order making power;
d) provision for the creation of rights and liabilities
(paragraph 3), for similar reasons to those given for paragraph
5 of Schedule 1, and further to enable any new arrangements resulting
from a transfer of part of the business of a deposit-taker to
be 'backed off' by appropriate contracts;
e) provision relating to pension schemes (paragraph
4), for similar reasons to those given for paragraph 6 of Schedule
1. Such provision may be particularly important after a partial
transfer of the business of the deposit-taker;
f) provision relating to foreign property (paragraph
5), to ensure, or assist, its effective transfer;
g) provision relating to authorisations and permissions,
including permission deeming the transferee to have authorisation
or permission under the Financial Services and Markets Act 2000
for carrying out a regulated activity (paragraph 6) or a licence
under the Consumer Credit Act 1974. The purpose is to ensure that
the transferee, even if it is a newly-formed company which has
not yet obtained the necessary permissions and authorisation,
has the permissions and authorisations it needs to carry on the
business transferred for a specified period until such are obtained.
40. There are similar provisions to clause 3
on second or subsequent orders, for similar reasons (subsections
(4) and (5)). Subsection (8) is analogous to clause 3(5). The
same reasons apply to these provisions.
41. Delegated legislation, and the negative resolution
procedure, are considered appropriate for same reasons as are
set out above for orders made under clause 3.
Clause 7: compensation etc. for property etc.
transferred
42. Subsection (1)(a) imposes a duty on the Treasury
to make provision for determining the amount of any compensation
payable by the Treasury to the deposit-taker concerned, in the
case of a transfer to a company wholly owned by the Bank of England,
the Treasury or a subsidiary of such a company. Subsection (1)(b)
requires the Treasury to make provision for determining the amount
of consideration payable, in the case of a transfer to any other
body, by that body.
43. An order under clause 7 may also be extended
to other persons affected by any provision in an order under clause
6 (subsection (2)).
44. Similar assumptions apply to the assessment
of any compensation payable as apply under clause 5 (subsection
(3)). Clause 9 (supplementary provision about compensation schemes)
also applies to orders made under clause 7.
45. As with the powers in clause 5, the purpose
of these provisions is to require the Treasury to put appropriate
compensation mechanisms in place and, in the case of a transfer
to the public sector, to pay any compensation.
46. The duty on the Treasury to make a scheme
for the determination of the amount of any compensation or consideration
will ensure that any exercise of the clause 6 power can meet the
Government's obligations under the European Convention on Human
Rights, and specifically Article 1 of Protocol 1 to the Convention.
47. Delegated legislation, and the negative resolution
procedure, are considered appropriate for similar reasons as for
the clause 5 powers.
Clause 8: further transfers following transfer
to public sector
48. Subsection (2) applies where there has been
a transfer of securities to the public sector under clause 3.
It gives the Treasury the power to transfer to any person any
of the securities so transferred (or subsequently issued), or
any of the property, rights and liabilities of the deposit-taker
or its UK subsidiaries. Where the original transfer was to a company
wholly owned by the Treasury or the Bank of England, the Treasury
may transfer any securities issued by, or property, rights and
liabilities of, that company.
49. Subsection (4) applies where there has been
a transfer of property, rights and liabilities to a company wholly
owned by the Treasury or the Bank of England under clause 6. It
gives the Treasury a power to transfer to any person any property,
rights and liabilities of that company or of any UK subsidiary
of that company; and to transfer any securities issued by the
company.
50. Various provisions in sections 3 and 6 and
their respective Schedules apply in relation to such an order,
making the scope of those provisions available where such an order
is made.
51. Subsection (6) gives the Treasury a power
to make provision for determining the amount of consideration
payable by the transferee in respect of anything transferred under
clause 8.
52. The purpose of the powers in clause 8 is
to maximise the Treasury's flexibility to effect an onward transfer
of securities or of property, rights and liabilities, where it
has exercised its power under clause 3 or 6, for example, as part
of a corporate restructuring or transfer of the deposit-taker
back into the private sector. In particular, it allows the Treasury
to make provision of the kind specified elsewhere in the Bill
in relation to such a transfer (including that specified in the
Schedules and the consequential and supplementary provision specified
in clause 12). This may facilitate a quick and efficient onward
transfer and enable the interested parties to overcome any statutory
or other obstacles which might otherwise exist, in the interests
of all concerned. It does not preclude an onward transfer by contractual
or other means (subsection (7)).
53. As any onward transfer is likely to arise
from a negotiated commercial deal, if it is to be dealt with legislatively
then delegated legislation, rather than primary legislation, is
appropriate. Delegated legislation provides an appropriate vehicle
for the detail of any onward transfer (any onward transfer of
property, rights and liabilities is likely to require that property
to be set out at length in schedules), and could be put into place
quickly.
54. The negative resolution procedure is considered
appropriate for an order under clause 8 as it would enable the
order to be made and transfer to proceed quickly, whilst still
providing Parliament with the opportunity to scrutinise it.
Clause 10: tax consequences
55. Subsection (1) gives the Treasury a power
to make provision varying the effect of a relevant tax in relation
to a transfer made under clause 3, 4, 6 or 8, to securities, property,
rights or liabilities transferred, extinguished or otherwise affected,
and to other securities, property, rights or liabilities of a
transferor or a transferee. Various kinds of provision may be
made (as specified in subsection (2)); they include modifying
or disapplying tax provisions in an enactment in prescribed cases
(subsection (2)(a)).
56. The purpose of this power is to enable the
Treasury to deal with any tax consequences of a transfer made
under clause 3, 6 or 8. It is a broad power which is intended
to allow the Treasury to deal with any inappropriate tax consequences.
57. Delegated legislation is considered appropriate
as different tax provision would be needed depending on the nature
of the particular transfer. Such provisions are likely to need
different tax provision, which a general Bill could not provide.
The tax affairs of a deposit-taker are inherently complex and
such provisions are likely to descend into a level of detail which
is inappropriate for primary legislation. There are a number of
precedents for taking a power to modify tax provisions in this
way. Recent examples include section 67 of the Finance (No. 2)
Act 2005 and Schedule 13 to the Crossrail Bill, which is currently
before Parliament.
58. The power is exercisable by regulations,
in order to maintain the convention that tax matters are dealt
with by the House of Commons only.
59. The negative resolution procedure is considered
to provide an appropriate level of Parliamentary scrutiny. It
is common for tax provisions to be made in this way as they are
largely technical in nature and do not allow textual amendments
of other statutory provisions.
Clause 11: modification of legislation applying
to building societies
60. Subsection (1) gives the Treasury a power
to make modifications of any enactment to facilitate the provision
of relevant financial assistance by the Bank of England to building
societies. An order may in particular modify the operation of
any of the provisions referred to in subsection (3); disapply
any statutory provision; or provide for any statutory provision
which would not otherwise apply in relation to building societies
to apply with modifications. "Relevant financial assistance"
is provided for the purpose of maintaining the stability of the
UK financial system (subsection (2)), and "financial assistance"
itself is given a wide definition in clause 15(1).
61. The purpose of this power is to enable the
Treasury to remove any legislative obstacles to the Bank giving
financial assistance to building societies, so that, should any
such assistance become necessary, statute does not prevent or
restrict the Bank from giving or a building society from receiving
financial assistance. The power is constrained by the definition
of "relevant financial assistance", although the wide
definition of "financial assistance" ensures that any
such assistance given in the circumstances specified, whatever
its form, will come within the scope of the modifications. Any
modifications to legislation could also enable transactions related
to giving financial assistance, such as a building society creating
a floating charge in favour of the Bank.
62. Delegated legislation is considered appropriate
here as there are a number of provisions in building society legislation
and other legislation which will need to be modified. The Treasury
intends to make an order under this power, as soon as possible
after the passing of this Bill. Delegated legislation provides
a more appropriate vehicle for the detail in this complex area.
It would also be possible to exercise the power on more than one
occasion, should circumstances require it. There are other provisions
in building societies legislation which confer powers to modify
primary legislation. The most recent example is the Building Societies
(Funding) and Mutual Societies (Transfers) Act 2007 (sections
1 and 2). There are other examples in the Building Societies Act
1986 (for example sections 6(7) and 7(7), which confer the power
to modify the application of those sections in certain circumstances).
63. The negative resolution procedure is considered
appropriate as the powers should be exercised as soon as possible
after they are enacted to avoid any risk of instability to building
societies or doubts about the strength of the sector. The changes
to the legislation are being made purely as a precaution. However,
if there is any delay in the making of an order, it might be thought
that an order is being made in response to a problem at a particular
building society. This could have undesirable effects. If the
affirmative resolution procedure were used there would be a greater
risk of delay and uncertainty. Moreover, as these powers will
be used in respect of financial assistance "provided for
the purpose of maintaining the stability of the financial system
in the United Kingdom", in line with the general financial
stability objective of the Bill, it is appropriate that they can
be exercised on short notice and without delay.
64. There are precedents for using the negative
resolution procedure for modifications of the application of building
societies primary legislation - see sections 6(7) and 7(7) of
the Building Societies Act 1986 for an example. Moreover the Treasury
does not intend to use the power to make direct textual alterations
to primary legislation (compare section 1(2) of the Building Societies
(Funding) and Mutual Societies (Transfers) Act 2007).
Clause 12: consequential and supplementary provision
65. Subsection (1) gives the Treasury a power
to make supplementary, incidental, consequential and other ancillary
provision for the purposes of the Bill or any provision made under
it.
66. The power may be used to disapply any statutory
provision or rule of law, or to apply a specified statutory provision
with modifications. It may also be used to impose a moratorium
on any legal process, and provide certain exceptions from such
a moratorium; or to dissolve any body in relation to which an
order has been made under clause 3 or 6 (or any UK subsidiary
of such a body). It may also exempt directors of a deposit-taker
or of any group undertaking of such deposit-taker from liability
in connection with acts or omissions in relation to the deposit-taker
or undertaking, or make provision for the payment of compensation
by the Treasury by persons affected by an order under the clause.
67. The purpose of this power is to ensure that
the Treasury are able to make any necessary consequential or supplementary
provision to give full effect to the Bill and any order made under
it. As mentioned in opening, the structure of deposit-takers and
nature of their business can vary greatly. The laws to which they
are subject are numerous. The commercial background in which they,
connected entities (such as structured investment vehicles) and
counterparties in financial markets operate is sophisticated.
The terms of securities they issue and agreements they enter into
are often complex. The circumstances in which the Bill's powers
may first need to be exercised in relation to a particular deposit-taker
will, by their nature, be exceptional both in terms of the prevailing
economic situation, the time available to make decisions to transfer,
and the likelihood of there being incomplete information available
to the Treasury about the business of the deposit-taker in question.
By their nature, orders under the Bill may need to be made in
very urgent situations at short notice.
68. To effect or facilitate a smooth transfer
and ensure the effective operation of the deposit-taker it may
be necessary to disapply or modify provisions of primary and secondary
legislation and rules of common law. For example, laws which might
present obstacles to a transfer include provisions in the Companies
Acts, the Financial Markets and Services Act 2000, the Insolvency
Act 1986, secondary legislation concerning uncertificated securities,
financial collateral arrangements, the reorganisation and winding
up of credit institutions and common law rules of company or contract
law.
69. Where the purpose of a transfer is to continue
the operations of the deposit-taker, the power to impose a moratorium
highly unlikely to be relevant. However, there may be circumstances
where imposition of a moratorium under subsection (3)(a) is justified.
Where serious instability is present a moratorium may assist the
Treasury to manage the orderly payment out to depositors of their
funds. It may also be used to prevent the presentation of petitions
appointing an administrator, or petitions seeking the appointment
of a liquidator or the winding-up of the company (vexatious or
otherwise). Such steps (and others) may trigger 'event of default'
clauses in securities and contracts issued by the deposit-taker.
Where these are governed by foreign laws it is unlikely that an
exercise of the powers in Schedules 1 and 2 to nullify their terms
will be effective. In that case, a possibility may be to impose
a moratorium on legal process.
70. Where significant property, rights or liabilities
of a deposit-taker had been transferred, a moratorium might provide
the deposit-taker from which business had been transferred with
a period to allow it to reorganise its affairs after the transfer.
71. Provision made in clause 12(3)(b) for exceptions
in respect of any moratorium imposed ensures that winding-up or
other insolvency proceedings or legal process may be commenced
with the leave of the court or the consent of the Treasury or
the Bank of England. This qualification provides an important
safeguard for creditors by ensuring that the possibility of legal
process is not completely excluded.
72. The power in subsection (1) might be used
to dissolve a body in relation to which an order has been made
where all of the business was transferred away from that body
under clause 6 (subsection (3)(c)). This would ensure that no
further action was required on the part of the body's members
to dissolve it.
73. The power might also be exercised to exempt
directors of a deposit-taker or of any group undertaking of such
deposit-taker from liability in connection with acts or omissions
in relation to the deposit-taker or undertaking. This power may
be considered necessary to secure the services of suitably experienced
persons prepared, subject to obtaining such an exemption, to undertake
the unusually difficult and exposed task of managing the deposit-taker
after a transfer.
74. The power might be also used to make provision
in relation to compensation where the exercise of the broad supplementary
power (including the imposition of a moratorium) might give rise
to interference with property rights to the extent that compensation
is required.
75. Delegated legislation is considered appropriate
for this power as it may need to be used to make specific provision
in relation to specific orders made under other powers in the
Bill (especially under clauses 3, 6 and 8). It is also likely
to make detailed, technical provision.
76. The negative resolution procedure is considered
appropriate as the power does not allow textual amendments of
primary or other legislation and because the power is a technical
one, likely to be used to make specific provision in specific
cases on short notice.
Clause 14: orders and regulations: retrospective
provisions
77. Clause 14 provides that an order under clause
3, 4, 6 or 12 may be made so as to have retrospective effect as
from the "appropriate time" or any later time, and may
nullify the effect of transactions or events taking place after
that time. The appropriate time is the time of a statement published
by the Treasury that they intend to make an order having that
effect, or the time at which a transfer under a previous transfer
order had effect.
78. This provision effectively widens the scope
of the clauses on transfers, extinguishment of subscription rights
and consequential and supplementary provision, so they can be
used to make provision having effect from the time of an announcement
by the Treasury of an intention to legislate in a particular case
(or from a later time, for example the start of the next working
day).
79. In the case of a deposit-taker in respect
of which a decision had been taken to exercise a transfer power,
the Treasury might, taking into account the impact on consumers,
financial stability, participants in financial markets and others
affected, create greater legal certainty, confidence and stability.
Alternatively, the Treasury might consider that retrospectivity
was not necessary, or achieved less certainty or stability and
greater market confusion.
80. Specifically, retrospection could provide
the greatest degree of certainty and simplicity in this period
for-
a) those holding the securities transferred by
the order or derivatives (including share options) based on them;
b) holders of securities issued by the distressed
bank that are not transferred (for example, the holders of listed
debt securities);
c) depositors of the bank;
d) other creditors of the bank;
e) the Treasury; and
f) financial markets and depositors generally.
81. An order dated from the time of the announcement
could effectively put these parties back in the position they
were in at the time of the announcement, and nullify any transactions
or events occurring in the intervening period, in particular transactions
relating to the ownership of shares.
82. Retrospectivity, accompanied by the power
to nullify, might be used, for example, where announcement of
the intention to use the power triggered rights to terminate loans
to a deposit-taker or other relevant contracts.
83. In the case of the first exercise of these
powers, the order might have effect from a time before the passing
of the Bill, for similar reasons of clarity and certainty (clause
14(4) provides for this).
84. Later orders may have effect from the effective
time of a transfer made by a previous order. This might be used,
for example, if a later order makes supplementary provision in
relation to a transfer made by an earlier order.
85. Subsection (5) provides that regulations
under clause 10 (tax consequences) may provide for any of their
provisions to have retrospective effect as from any time which
is not earlier than 3 months before the date on which the Act
is passed. This provision gives the Treasury the flexibility to
deal with the tax consequences of any transaction which occurs
before the date of the transfer order. Three months is considered
a reasonable and appropriate period for this purpose.
HM Treasury
February 2008
5 Financial stability and depositor protection: strengthening
the framework. Cm. 7308, January 2008. Back
6
Incorporated by the Treasury Solicitor Actc1857. Back
7
Any public Bill which affects a particular private interest in
a different manner from private interests of persons in the same
class is hybrid. Generally, the procedure for hybrid Bills is
longer and more complex. Back
8
The Treasury is also unlikely, when first making a transfer order
in respect of a particular bank, to be able to comply with the
rule that secondary legislation should not come into force within
21 sitting days of it being made and laid. Back
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