This amendment is about not just changing the culture and standards but helping the safety and soundness of companies. It was a responsibility given to us, the Parliamentary Commission on Banking Standards, by the Government to give recommendations to change the culture. This is a sound way of doing that and I would have expected a more sympathetic and engaging response from the Minister than we received tonight.

Lord Phillips of Sudbury: My Lords, I should quickly make clear that the whistleblowing charity, Public Concern at Work, is not mine; I was merely the lawyer who set it up. However, it does wonderful work. I am delighted to hear that there is a public consultation. I am very anxious indeed that it may not have reached the parts that it should have reached. I ask the Minister if it possible for him to look into that and, if necessary, extend the consultation period for, say, a month.

Amendment 98A (to Amendment 98) withdrawn.

Amendment 98B (to Amendment 98) not moved.

Amendment 98 withdrawn.

Amendment 99

Moved by Lord Lawson of Blaby

99: Before Clause 16, insert the following new Clause—

“Abolition of UKFI

(1) All property, rights and liabilities of UKFI are, by virtue of this section, transferred to the Treasury.

(2) Immediately after the transfer effected by subsection (1) UKFI is dissolved.

(3) “UKFI” means UK Financial Investments Limited, company registered number 06720891.”

Lord Lawson of Blaby: My Lords, the noble Lords, Lord Turnbull and Lord McFall, also have their names to this amendment. It is the simplest amendment that we have before us. It may be because it is so simple that it was the first one that my right honourable friend the Chancellor rejected after the commission had published

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its recommendations. I think that he was hasty and I therefore hope that the Government will reconsider this.

Briefly, as a result of the crisis that broke in 2008, the Government felt obliged to rescue a number of our biggest banks. The Government took control of these banks to the extent of more than 80% in the Royal Bank of Scotland, which was their biggest stake. This was the previous, Labour Government, and instead of straightforwardly taking this stake which the taxpayer owned—and the Government is a trustee for the taxpayer—they interposed this curious body called UK Financial Investments Ltd. We all know why this was done; I fully understand it and am extremely sympathetic. There is always a fear that a Labour Government might be engaged in a policy of bank nationalisation. In order to demonstrate that this was just a rescue operation and not bank nationalisation, they created this body, UKFI, to stand between the Government and the bank itself.

Clearly, that no longer applies. There is no longer a thought that somehow this is nationalisation by the back door. Whatever else the coalition may be guilty of, it is not seeking to do that. So the whole rationale—the whole raison d’être—of UKFI has gone. Incidentally, not only was it a conclusion of the commission that UKFI should be abolished but it was also the strong view of the previous Governor of the Bank of England, now the noble Lord, Lord King. He made it absolutely plain.

The reason is clear. UKFI gets the Government off the hook in a way that they should not be off the hook and obscures what can really go on. What has happened in practice is that when the Government have had difficult decisions to take, they say, “Oh, we can’t do it. UKFI owns the controlling stake”. When, however, the Government want to intervene—for example, the removal of Stephen Hester from the job of chief executive of RBS—they use their muscle. When it is convenient to act directly, they do; when it is not convenient, they have this charade of UKFI to give them an excuse for not doing what needs to be done.

If, as a Government, you have the responsibility of the controlling shareholding, that should be quite clear and you should exercise that responsibility properly and be held to account for it. The Government say, “But we don’t have banking expertise”. Of course they do not have banking expertise. It does not matter because they can appoint the right people to the boards of the banks that they hold and, as we have suggested, they can also have a cadre of banking experts within the Treasury who can advise them on how to handle the situation.

Like the previous Governor of the Bank of England, we have said that quite simply UKFI should be abolished. I suspect that many people secretly—or at least without admitting it—realise that that should have been done long ago, but it is not too late. The case of the Royal Bank of Scotland is particularly to the point. If UKFI had not existed, the Government would have had to face up earlier to the question of what to do about the Royal Bank of Scotland Group. The commission has said that there is a very strong case, which we have advocated, for the classic good bank/bad bank split.

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The good bank/bad bank split is a classic technique for dealing with major banking problems: put all the bad loans into the bad bank, as was done with Northern Rock, and not only can the good bank be privatised much more quickly than the group as a whole, it can get back to lending to SMEs much more effectively.

One of the biggest economic problems we have is the difficulty of lending to SMEs. Some people say, “Money is very cheap. The rates could not go any lower: they are 0.5%”. They are not 0.5% for SMEs. A good SME is lucky if the rate of interest, including the charges it has to pay, is in single figures. Very often it is 10%, 11% or 12%. There is a real problem in this country that the banks have so much bad debt on their books, and are so scared of having any further bad debts—particularly since they have been told they have to strengthen their balance sheets and so on—that they are far too reluctant to lend. This is a real problem for the British economy.

I am very glad that my right honourable friend the Chancellor has said that he will set up an inquiry and that he has asked the Rothschild Group to look into this, given that that was the recommendation of the banking commission. I hope that this evening my noble friend the Minister can tell us the outcome of the Rothschild investigation and what the Government’s intentions are. This is important to the British economy, bearing in mind the huge size of the Royal Bank of Scotland Group.

As we have recommended, the way to clean this up is to abolish UKFI, which was there for a purpose that no longer exists. I very much hope that the Government will reconsider the Chancellor of the Exchequer’s overly hasty rejection of the modest and sensible recommendation of the commission. I beg to move.

9.30 pm

Lord Garel-Jones (Con): My Lords, I rise with some trepidation to take part in this debate. Earlier in Committee my noble friend Lord Lawson referred to Paul Volcker as a “wise old bird”. Someone like me is bound to observe that most of the wise old birds in this particular field in our country have taken part in this Committee, so I feel slightly out of my depth. I want to introduce a small piece of anecdotal evidence that casts some dubiety on the amendment just moved by my noble friend.

I also declare an interest, in that I work for UBS. UBS was one of the lead banks in the recent transaction that placed £3.2 billion of shares in Lloyds Bank into the market, although I was not part of the team working on that transaction. When it was all over I spoke to one of the team and congratulated him on the success of the operation. Without any prompting, and for no reason at all, he said to me that UKFI had played a crucial part throughout the whole process. He had no need to say that to me; I had no connection with UKFI whatever. Although I am simply an observer in these matters and no expert, it makes sense to me for there to be some sort of independent buffer between the banks themselves and the Treasury. Your Lordships will no doubt be aware that UKFI has recently recruited James Leigh-Pemberton, who has a distinguished career

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in the City, as its chairman. I very much hope that the Minister will convey the message that UKFI is well regarded and has a secure future.

Baroness Noakes (Con): My Lords, I will comment briefly on this amendment and will not comment, of course, from the perspective of the Royal Bank of Scotland. I will take your Lordships back to when I first worked at the Treasury, many years ago, when I was on secondment from my firm at the time. That was when there were lots of nationalised industries in the public sector. Worthy civil servants—and worthy Treasury civil servants, too—thought they knew how to manage the relationships between these large, complex, commercial organisations. They did not do it well. It was the right decision, therefore, when the previous Labour Government started to accrete new, substantial holdings in commercial organisations, to set up an arm’s length relationship to professionalise the handling of those organisations and their ultimate disposal, and to recognise, as that Government did at the time, that those holdings were not to be long-term holdings. I criticised the previous Government because it was not set up by statute, but in a shroud of secrecy without proper accountability arrangements in place. I believe, however, that the principle that civil servants are not the right people to manage these complex relationships with sophisticated organisations is the right one.

Lord Turnbull (CB): My Lords, there was a similar organisation set up in my time, the Shareholder Executive. The Shareholder Executive is a body attached to BIS, as it is now called, and it creates a centre of expertise for the management of shareholders. What it does not do is claim to be the decision-maker. It is all very well to have the expertise—we need the expertise—but there is a pretence that decisions relating to RBS and LBG are being taken by UKFI as opposed to being taken by the Treasury on the advice of UKFI. It is a pretence that when it suits you, you can decide, and when it suits you, you can hand it on to someone else.

At the moment, with the change of leadership in RBS—the noble Baroness, Lady Noakes, may not want to comment on this—we do not know whether that was a decision of the RBS board, UKFI or the Treasury. It ought to be clear who took that decision. You can have an advisory body—in this case, almost an executive body—but not one that claims to be the decision-maker, which is the pretence of the UKFI situation.

The Commercial Secretary to the Treasury (Lord Deighton) (Con): My Lords, the intention of the amendment is to transfer into HM Treasury the function of managing the Government’s shareholdings, in particular in RBS and Lloyds. As my noble friend Lord Lawson has pointed out, the Chancellor of the Exchequer, in his Mansion House speech in June, has already made it clear that he rejects this particular PCBS recommendation.

As has been pointed out in a number comments already, UKFI was not a creature set up by this Government; it was set up by the previous Government when they made the initial capital injections into RBS, Lloyds, Northern Rock and Bradford and Bingley,

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with the idea of being able to manage these investments on an arm’s-length commercial basis. So that was the genesis.

This group works closely with the management of RBS and Lloyds to assure itself of their approach to the strategy and to hold management to account for their performance. RBS and Lloyds are led by their management and board in the interests of all shareholders, including the taxpayer. So, while it may be possible to imagine different arrangements to fulfil these objectives—you can make the arguments and the pros and cons of the different ways of doing it—the current ones work well, as my noble friend Lord Garel-Jones has said, and it would not make sense to change them at this stage. So, just as my noble friend Lord Lawson said it is a simple amendment, there is a simple reason to reject it—it does not make any practical sense. UKFI is working fine and the time and effort it would take to pull it back into the Treasury and to reorient all that work there would distract our efforts on the important work that is currently going on.

My noble friend Lord Lawson referred to the review at RBS in particular, which we are two-thirds of the way through, and the bad bank/good bank option. I am afraid I am going to disappoint my noble friend. I am not going to tell him what the result is but it will be ready this autumn and we will announce the outcome and the rationale behind it. The matter is being pursued with great urgency and the last thing we want to do at the moment is to destabilise the arrangements for conducting that important analysis, which is really the most important thing.

I reiterate that UKFI is staffed by some very good top people. I have worked with them and I have seen the work that they do. Frankly, we have been able to recruit top-class people to do this work on our behalf. I can assure the Committee that the Government continue to value the role that they play. It was demonstrated again, as my noble friend pointed out, by the role they played in advising the Chancellor on the successful divestment of 15.5% of the Government’s shareholding in Lloyds at 75p per share. They will carry on looking at the full range of options for RBS and managing the timing of the subsequent tranches of the sale of Lloyds back into private ownership.

I am grateful to the PCBS and the noble Lord for raising these issues, but the Government consider that UKFI has a vital role to play which it is performing well. I therefore cannot support the amendment and I urge the noble Lord to withdraw it.

Lord Lawson of Blaby: My noble friend will not be surprised to hear that I am wholly unconvinced by his reply; nevertheless I shall please him by withdrawing the amendment.

Amendment 99 withdrawn.

Amendment 100 not moved.

Amendment 101

Moved by Lord Eatwell

101: Before Clause 16, insert the following new Clause—

“Duty of care

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At all times when carrying out core activities, a ring-fenced body shall—

(a) be subject to a fiduciary duty towards its customers in the operation of core services; and

(b) be subject to a duty of care towards its customers across the financial services sector.”

Lord Eatwell: My Lords, Amendment 101 in my name and the names of my noble friends Lord Tunnicliffe and Lord McFall goes to the heart of the change in culture which all of us wish to see in the relationship between banks and their customers, particularly their retail customers. Our objective is for banks to see their relationship with their retail customers as ensuring the financial success and security of those customers as far as may be possible, rather than seeing them as entities from which to make profits. A ring-fenced body should have a fiduciary duty towards its customers in the operation of core services, and a duty of care towards its customers across the financial services sector with respect to other duties.

Following the passing of the Financial Services and Markets Act 2000, the Financial Services Authority developed the notion that customers should be treated fairly. It did an enormous amount of work developing various rules, instructions and procedures whereby customers would be treated fairly. This was a dismal failure. PPI and the interest rate swap stories demonstrate that beyond all reasonable doubt. This was not a failure because of the failure of the regulators as such and their intentions. They were well intentioned, and they were focused on important issues. It was a failure because the culture of the banks was to see customers as entities with which to trade and from which profits would be made. We need to change that.

The amendment will put us in tune with developments that have also been perceived to be necessary in the United States, where the SEC now has the authority to impose a fiduciary duty on brokers who give investment advice. It is the same thematic development. A stronger duty of care would ensure that industry has to take customers’ interests into account when designing products and has to provide advice and support throughout the product life cycle, something which has clearly been lacking in recent scandalous events. This will increase consumer protection and help to restore confidence of the retail customer in banks. It will raise standards of conduct because banks will know they are responsible for acting according to these duties.

I am well aware that there is a general common law responsibility for duty of care, but the importance of this amendment is that the fiduciary duty would be reflected in the activities, responsibilities and powers of the regulators, not simply something enforceable under common law. That is why a fiduciary responsibility akin to that elsewhere in financial legislation, but here expressed generally within the context of the ring-fenced bank, would add significantly not just to consumer protection but to the character, behaviour and culture of ring-fenced banks. I beg to move.

Baroness Noakes: Can the noble Lord, Lord Eatwell, explain how this fiduciary duty and duty of care would be enforced? I think he mentioned a moment ago that it would somehow draw regulators in, but I

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cannot find anything in his amendment that places any corresponding powers or duties on regulators. I cannot see that a duty of care will make any difference whatever if ordinary consumers—ordinary customers of the banks—are expected to litigate personally on the basis of it.

9.45 pm

Lord Eatwell: Surely the point is that by establishing a fiduciary duty a regulated entity would be expected to pursue exactly those duties. Therefore a regulated entity or other authorised person would be deemed by the regulator to be required to follow exactly those duties. If the noble Baroness thinks that this is too weak, I will be very happy to bring a stronger duty of care back on Report.

Lord Phillips of Sudbury: My Lords, the noble Lord, Lord Eatwell, asked an extraordinary question because there is no more onerous duty than the fiduciary duty. It is a novel and maybe a highly effective way of dealing with a great many of the concerns that have occupied this House over the last few days in Committee. An important part of the amendment is that the core activities and services are subject to a fiduciary duty, and other services to a duty of care. Given the big difference in responsibility, is it sufficiently clear what is and what is not a core duty?

Lord Eatwell: Core duties are defined in the Bill.

Lord Phillips of Sudbury:I thank the noble Lord.

Lord McFall of Alcluith: My Lords, I will briefly speak in support of this amendment. My noble friend Lord Eatwell spoke of treating customers fairly. I remember, going back to 2002, when the FSA, bless its heart, introduced this to the industry. The FSA told me that it was a hugely uphill struggle. I well remember having a conversation with the chairman of one of the banks, who said to me, “Treating customers fairly? I don’t know what that FSA is up to, because I’ve always treated my customers fairly”. The gap between what the FSA was trying to do and the mentality of some people in the industry was huge. I remember being at a seminar with John Kay, who has written a great article in today’s Financial Times that I have already referred to. He said that a duty of care, if it was imposed on the banks, would be “transformational”. I think he said that for the following reason. There is today an imbalance between the customer and the bank—the term for that is symmetry of knowledge—which has led to many of the scandals.

Time after time on the parliamentary banking standards commission, when we ask chairmen and chief executives exactly why mis-selling occurred or why the grievous omissions took place in their organisation, they say that they did not know anything about it. There is, therefore, a hiatus between the top and below. One of the amusing aspects of my time as chair of the Treasury Committee was speaking informally to senior executives in the banks who came along to the Treasury Committee and said, “What you did to

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the chairman today was good because it allows us to educate him”—or her, although it is largely him—“about what is happening in the organisation”. A lot of them do not know what is happening. If we had this duty of care, that responsibility would lie at the very top.

During the deliberations of the parliamentary banking standards commission, I suggested that there should be an annual meeting between the chairmen and chief executives of these institutions, and the regulatory authorities, so that there was a sign-off on how they do their duty and how they serve the interests of their institution and their employees in the wider society. That information is not made public, but at least there is that accountability at the top between the regulator and the chief executive. At present, we do not have that. Having the duty of care would make those at the top much more alive to what is going on in their organisation. I have received evidence in the banking commission, particularly from the lawyers who were advising us, that the term “duty of care” has a specific legal meaning in the law of torts, and tests to establish whether a duty of care exists and whether it has been breached are a fundamental tenet of common law. In the context of banks and their customers, it is not clear what a duty of care would look like in practice. I know that there are huge legal hurdles to overcoming that, but there is a basic, common-sense and moral purpose to the concept of duty of care, and I think it is one that we will refer to again on Report.

I would like the Minister seriously to consider this amendment and ensure in some way or other that, as the Parliamentary Commission on Banking Standards stated in paragraph 416:

“Banks need to demonstrate that they are fulfilling a duty of care to their customers, embedded in their approach to designing products, providing understandable information to consumers and dealing with complaints”.

Lord Brennan: My Lords, perhaps I may take up the points raised by the noble Baroness, Lady Noakes. Paragraph (a) of the proposed new clause refers to a “fiduciary duty” by the ring-fenced body. In practical terms that means a duty exercised by, ultimately, the board of directors. The body acts through it. The practical consequences of such a duty, which does not involve enforceability by the regulators, are twofold. First, if the board of a bank breaches its fiduciary duty to customers in this way, it is perfectly reasonable for the shareholders to refuse to indemnify it in respect of any claims made by customers on the basis that it has breached a statutory duty, which could not conceivably be said to have been acting in the shareholders’ interests. That is the first practical consequence. It is a deterrent. Secondly, although I have not checked this yet, I suspect that in the field of commercial insurance you would not be able to get D&O insurance for protection in respect of a fiduciary duty until you have satisfied the insurability test of having acted reasonably and in accordance with commonly accepted standards of probity and good behaviour in the commercial sector. Therefore, the point is answered, I suspect, by practical consequences.

Lord Deighton: My Lords, this amendment is an opportunity to revisit the imposition of fiduciary duties or duties of care on financial services firms. The other

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place debated the same amendment at the Committee and Report stages of this Bill. Of course, no one in this House is going to disagree with the proposition that customers need a better deal from their banks, whether we call it treating customers fairly, having better standards or putting customers first. The Government have been keen, for example, to see more competition between banks as another way of addressing this concern. We all want to see better standards in the banking industry and a return to the days when the customer relationship mattered and the customer came first. We want the leadership of banks to appreciate that it is also in their long-term interests in building successful banking businesses. The Government’s amendments so far, which implement the recommendations of the PCBS, will be an important step in the round in that respect.

However, I note that the commission did not itself recommend the introduction of either a fiduciary duty or a duty of care. To cut to the chase, the Government do not consider that the introduction of either a fiduciary duty or a duty of care in legislation would help to drive up these standards within ring-fenced banks. First, banks are already subject to a wide range of legal duties. Most obviously, they are subject to contractual obligations to their customers. Any banking relationship or transaction is subject to a contract between the bank and the customer. Of course, a bank is subject to obligations under FiSMA and the regulator’s rules. Further, the Government’s amendment on banking standards rules means that in future senior managers and ordinary employees will also be subject to conduct rules. Therefore, it is not clear that imposing a fiduciary obligation on a bank would add any value. The fiduciary obligation is the kind of obligation that a director owes to a company, or a trustee owes to a beneficiary under a trust. It is an appropriate obligation when one person is acting on behalf of another or dealing with another’s property on their behalf. However, deposits with a bank are not property held on trust, so a fiduciary obligation would have no place in the contractual relationship between a bank and its customer.

Similarly, it is not clear what a duty of care—

Lord Phillips of Sudbury: I hesitate to interrupt my noble friend at this time of night, but there is an important issue in relation to what he said that needs clarification. He said a couple of times that the relationship between a bank and its customer is a contractual one, and therefore that that was sort of QED. The problem is that until not long ago all banks, in the small print of their contracts, which they knew full well that customers would not read, put material which, had the customers read it, would have led them to not agree the contract. In that situation, the contract said such and such, but the purport was wholly antithetical to the real interests of the customer. How does my noble friend deal with that situation, if he is rejecting the fiduciary concept?

Lord Deighton: It is clear that the essential contractual relationship still exists, regardless of the fine print. It is not clear what a duty of care would add to the existing contractual obligations or regulatory requirements to which the ring-fenced body is subject. The primary

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duty of a ring-fenced bank is to repay its borrowings, such as deposits, when they fall due, in accordance with the terms of its contracts. If a ring-fenced bank does that and complies with its regulatory obligations, such as those relating to ring-fencing or leverage, it is hard to see what a duty of care would do to make it care more for its customers, inside or outside the financial services industry.

Therefore, the Government firmly believe that it would be better to impose specific and focused requirements, and standards of business, on banks, than to rely on high-level, generic concepts such as a duty of care. Banks can comply more easily with specific requirements. Customers and regulators can more effectively hold to account the banks, and, if appropriate, their senior managers, when they do not comply. Moreover, if our ultimate objective is to improve the deal that customers get from their banks, one of the most effective and direct ways to achieve this is surely by enhancing competition. Banks must be spurred to treat their customers better by the threat of the customers voting with their feet. Through the introduction of the measures in this Bill, including the changes to the regulator’s objectives and powers, and the new payments regulator, we believe that a better deal can be achieved.

Imposing a duty of care or a fiduciary duty would not give banks or their senior managers a clear understanding of what conduct is expected of them. It would not provide a viable and effective means of holding banks to account, and it would not benefit consumers. Therefore, I hope that the noble Lord will agree to withdraw the amendment.

Lord McFall of Alcluith: On the duty of care, at the present moment if an individual opens a bank account, they get 170 pages of dense text to look through. No one is going to look through that. If a duty of care were imposed, does the Minister not think that banks would look at that again and perhaps fillet a lot of the information, so that the information that went to the customer would be readily understood?

Lord Deighton: I certainly agree with the noble Lord’s observation that sometimes the way in which business is done clearly is not in the interests of the customer. However, the Government do not believe that the duty of care is the right way to address those kinds of problems.

10 pm

Lord Eatwell: My Lords, that was a very unsatisfactory answer. It was both analytically weak and unsatisfactory in terms of the noble Lord’s argument. Let us first deal with the economics. As the noble Lord well knows, in the face of asymmetric information, competition is not necessarily efficient. He knows that: he learnt that at Cambridge. In those circumstances, to argue simply that competition will be an effective means of establishing a satisfactory relationship between the bank and its customers is simply analytically wrong. We ought to take that into account.

Then the noble Lord said that there was a series of relationships: contractual duties, the relationships set out in FiSMA and the senior manager regulations.

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The first two of those have existed since 2000. They did not work, so let us not rely on contractual duties which have been there all the time and have been happily beavering away. Did they protect the customer from PPI? No, they did not do that successfully. Did they protect the customer from interest rate swap selling? No, they did not do that either. It is no good relying on these contractual duties or on various elements of treating customers fairly in FiSMA. The senior manager regime, although it stiffens up the responsibilities of managers, does not change the actual structure of the relationship.

The noble Lord said something towards the end of his reply that was really quite extraordinary. He said that if bankers were told that they had a fiduciary duty and a duty of care, they would not have a clear understanding of what they were required to do. I find that quite astonishing. I have a sense that trustees have a very clear understanding of the fiduciary issue of what they have to do and all these terribly clever bankers ought to be able to suss that out as well. The idea that they do not have a clear understanding is just unbelievable.

Then the noble Lord said, “But of course, the trustee relationship applies to a situation which is appropriate only when one person is acting for another”. The majority of retail customers who deposit their money in the bank think the bank is going to be operating for them. They think that is what is happening. I know that many bankers therefore regard them as naïve, but that is what people actually believe. That is what we, on this side, believe should actually be the case. The noble Lord then said, “Well, of course, I do agree there should be a duty of care, but it should be specific and focused”. We all know that when you try to make specific lists of issues, the endeavour goes wrong because of the things left off the list. The things that are left off the list are the areas where we will see further consumer scandals appearing.

It is the responsibility of this Government to protect consumers in this country and to protect bank depositors within ring-fenced banks. It is a responsibility that this Government are clearly shirking. This amendment would provide a significant cultural change within the banking system—a cultural change which is desperately needed. I can assure the noble Lord that we will return to this forcefully on Report. For the moment, I beg leave to withdraw the amendment.

Amendment 101 withdrawn.

Amendment 102 not moved.


Amendment 103

Moved by Lord Eatwell

103: Before Clause 16, insert the following new Clause—

“Sale of state-owned banking assets

(1) Before any sale of banking assets in the ownership of HM Treasury, the Treasury shall lay before Parliament a report setting out—

(a) the manner in which the best interests of the taxpayer are to be protected in connection with such sale;

(b) the expected impact that any sale might have on competition for the provision of core services, customer choice and the rate of economic growth; and

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(c) an appraisal of the options for potential structural changes in the bank concerned including—

(i) the separation of the provision of core services from the provision of investment activities,

(ii) the retention of a class of assets in the ownership of HM Treasury,

(iii) the impact of any sale on the creation of a regional banking network.

(2) A copy of the report in subsection (1) shall be laid before Parliament and sufficient time shall be given for the appropriate committees of both Houses of Parliament to consider its findings before any sale decision.”

Lord Eatwell: My Lords, I have commented on a number of occasions that despite all the considerable endeavours since the financial crisis by the Treasury itself, by the FSA as it then was—not by the Bank of England—by the Independent Commission on Banking and now by the parliamentary commission, there has been no significant thought applied to the manner in which the banking system could be fundamentally restructured. All those discussions have taken place within the context of the banking system as it is currently structured. There has been no, let us say, Standard Oil approach to breaking up that company or an AT&T approach to say that there should be some fundamental restructuring of the overall banking system. Instead, we have taken the structure as it is and examined how we can make it work better: for example, by a ring-fence, bail-in clauses, resolution regimes or whatever. The only significant change in the structure of the banking industry—the separation of TSB from Lloyds—was done under the instructions of the European Union. It was not a policy developed here in the UK.

This amendment does not propose anything dramatic such as a break-up of the larger banks so that they are small enough to fail, but instead says that when there are sales of banking assets which are in Treasury ownership, the Treasury ought at least to go away and think about this. It ought to tell us how the structure of the sale is in the best interests of the taxpayer and think about the impact on competition—I am sure the noble Lord would like that—on customer choice and, indeed, on the rate of economic growth. It ought also to look at the relationship to the ring-fence and whether there might be a development of regional banking, an idea suggested by a number of commentators. All that the amendment seeks is to say, “Let us please have some thought about the overall structure of the banking industry in this respect”.

We know that the industry consists of entities which are too big to fail. We have one degree of separation with the TSB. There is an endeavour to encourage entry into the banking industry but we all know that it will take a long time for new entities to achieve the scale to be significantly competitive, except perhaps in the occasional niche of the industry. Before we rush further into selling the state-owned banking assets, let us at least consider whether those assets could be used and deployed in a significant restructuring of the banking industry. That would achieve the goals of making the industry more stable and a more effective entity in the overall operation of the UK economy. I beg to move.

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Lord Deighton: Noble Lords will know that the Chancellor has already set out at the Mansion House the next stage of the Government’s plan to take the banking system from rescue to recovery. For Lloyds, the Chancellor has taken the first steps to return Lloyds to the private sector and will continue to consider options for further share sales. Value for money for the taxpayer will be the overriding consideration for disposals. There is no pre-fixed timescale for share sales and, given the size of the taxpayer’s stake in Lloyds, the disposal process is likely to involve further multiple stages over time.

For RBS, however, share sales are still some way off. We discussed this earlier when we debated my noble friend Lord Lawson’s amendment. The Treasury is currently examining the case for creating a bad bank for RBS risky assets. As discussed, this review is still ongoing and will be published later in the autumn. Setting out public options for structural change may be advisable in some cases, as the Chancellor’s announcement of the RBS bad bank review makes clear. However, the Government will need to judge in each case whether to do so, given the risk of generating uncertainty and speculation about likely outcomes.

Similarly, selling large numbers of shares in the market is a very commercially sensitive matter: for example, in the case of Lloyds. Any communications from government in advance of placing shares could be destabilising and affect the price that the Government get for the shares. Publication of a report as outlined in the proposed amendment could undermine the Government’s ability to sell shares quickly in favourable market conditions. This could significantly reduce value for money for the taxpayer in that case.

The Government firmly agree that all the topics set out in the amendment need to be carefully considered by any Government in making their decisions relating to the sale of banking assets. UKFI, which we talked about earlier, was established with a very clear emphasis on value for money in executing its core mandate of devising means of exiting the Government’s shareholdings in the banks. In doing so, it is required to pay due regard to the maintenance of financial stability and act in a way that promotes competition.

The amendment seeks to improve accountability. Many mechanisms already provide accountability. On value for money, the Government are scrutinised against the general principles set out in the Green Book. UKFI is also accountable to Parliament through the Chancellor of the Exchequer, and has a mandate to secure value for money for the taxpayer. Moreover, the Treasury and UKFI are accountable directly, through the accounting officer mechanism, to the National Audit Office and to the Public Accounts Committee. Indeed, UKFI published a report, following the sale of Northern Rock, setting out the rationale for returning the bank to the private sector at that time. The National Audit Office completed a review of the sales process and published a lengthy report on it, which was considered at a session of the Public Accounts Committee.

The sale of Northern Rock demonstrated the Government’s commitment to transparency on the sale of their banking assets and the ability for bodies such as the National Audit Office and Parliament to

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scrutinise the decisions of government on these matters. Finally, the Government are accountable for their decision to Parliament, including through the Treasury Select Committee and in public debate. Overall, it is not clear what value would be added by this mandatory reporting requirement and it might well be detrimental to the objectives it aims to deliver, particularly to value for money. I hope that the noble Lord will therefore agree to withdraw the amendment.

Lord Turnbull (CB): The first half of a paragraph in the PCBS report asked for a report on the good bank/bad bank option by September: it is going to be a bit late but we are told it is coming soon. The next two or three sentences were on the same subject as the amendment: looking at a wider range of options. Is the Minister telling the House that the Government will fulfil the first half of this PCBS recommendation but not the second half?

Lord Deighton: The Government will announce the conclusions of the good bank/bad bank review and the rationale for why that is the option being pursued. We will be addressing the second half of the undertaking in describing the rationale.

Lord Turnbull: The Government have got to good bank status with RBS. Are they not proposing to do any further analysis on what might happen to the good bank bit that remains?

Lord Deighton: The first thing we have to determine is what we are proposing to do with the good bank/bad bank. Does the split make sense and on what basis does it work? We will subsequently look at what we do with the separate parts.

Lord Eatwell: My Lords, that was not a very satisfactory answer. First, market sensitivity is an extraordinary red herring. Whoever wrote that bit should not be allowed to write any bits again. This is not about market sensitivity: it is about the overall structure of the banking sector and any issues of market sensitivity would, of course, be kept carefully out. Anybody would do that, so it is a really silly argument.

Turning to the good bank/bad bank story, value for money with respect to the disposal of assets is obviously an important component, but so is the future of the banking industry and its performance in relation to the UK economy as a whole, especially its support of the real economy in the provision of financial services. That aspect does not seem to have been considered. After all, the good bank/bad bank story is essentially a defensive move. It is dealing with a bank which is hampered—or potentially hampered; we will see what the report says—by its current mixture of assets and liabilities, particularly non-performing assets. The good bank/bad bank split is a defensive measure; a device for ensuring that you have an operation in the good bank which we hope can start increasing lending, as the noble Lord, Lord Lawson, said, particularly to the SME sector.

However, Amendment 103 is asking for something different, which the Minister did not actually address. It is asking for some thought about what the structure

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of the banking industry should look like in future. Are we simply going to repair what we have in the best way we can or do we want something really different? Could progress towards that “something different” be made in the sale of state-owned assets? It seems to me that that was what the noble Lord, Lord Turnbull, was talking about when he referred to the second element of the banking commission’s recommendations. Clearly, this recommendation has not been taken on board by the Government. Perhaps it has simply been overlooked; they might look at it now and think more seriously about it. I am sure that we will be returning to this issue later. In the mean time, I beg leave to withdraw the amendment.

Amendment 103 withdrawn.

10.15 pm

Amendment 104

Moved by Lord Eatwell

104: Before Clause 16, insert the following new Clause—

“Portable account numbers

(1) Within 12 months of the passing of this Act, the Treasury shall lay before Parliament a report considering—

(a) the adequacy of voluntary arrangements made by UK ring-fenced bodies to facilitate easier customer switching of bank account services; and

(b) legislative options for the introduction of portable account numbers and sort codes for retail bank accounts provided by UK ring-fenced bodies.

(2) The Chancellor of the Exchequer may, by affirmative resolution procedure, confer powers upon the appropriate regulator to require UK ring-fenced bodies to comply with any specified scheme to establish the use of portable account numbers and sort codes.”

Lord Eatwell: My Lords, this amendment refers to portable account numbers. I am sure that noble Lords will have read in yesterday’s Financial Times the story about the voluntary endeavour by the banks to increase the possibility of customers switching their accounts from one bank to another. The current switching drive does not include portability of account numbers. As the Financial Times boldly declared:

“Account switching drive fails to dislodge customers”.

The general assessment is that the complications associated with the non-portability of account numbers—that is, the complications of changing account numbers—are a significant disincentive to customers to switch their account from one bank to another. This is of course a considerable diminution of competition. The Government have argued very strongly that they are in favour of competition and choice in the retail sector. The noble Lord has repeated that position in discussing some of the amendments that we have already looked at this evening. However, here there is a clear opportunity to increase the possibility of competition in a very concrete way through the portability of account numbers.

The noble Lord will recall how successful this process has been in the telephone industry. The portability of telephone numbers has very evidently provided a significant competitive boost, which suggests that being able to move a number would increase competition significantly in the banking industry as well. I understand that this would be more difficult within the banking

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industry. For example, the amendment refers specifically to both portable account numbers and sort codes. That makes the issue more difficult because two individuals who bank at different banks may have the same account number but, of course, different sort codes; their entire identification is in the combination of the two. Therefore, a new means of identifying the core bank would have to be developed, and I understand that that would have various knock-on effects.

However, the idea that this would all cost £5 billion, as has been argued by the banking industry, seems to be vastly overstated. We had the same situation with telephony. We were told that this process was going to cost an enormous amount but, in the end, introducing transferable telephone numbers resulted in a tiny proportion of the costs which the industry had said it would need to incur.

Therefore, if we are really going to get competition and choice for the consumer, this seems to be a necessary step. The attempt to develop such competition through facilitating switching but without portability has, it seems, failed. Given that, if the Government are really going to put themselves on the side of the consumer in a competitive market, it is their responsibility to require the possibility of portable account numbers. I beg to move.

Lord Newby: My Lords, it goes without saying that the Government are fully behind the objective of increasing competition in banking and making sure that customers who wish to switch banks can do so without impediment. The notion of portable account numbers was considered by the Independent Commission on Banking and in its final report the ICB chose to recommend a new account switching service over portable account numbers. It considered that such a service, if designed correctly, would provide the majority of the same benefits as portability, but with significantly reduced risk and cost.

The Government acted quickly on this recommendation to secure a commitment from the banking industry to deliver current account switching in two years. This was an ambitious timetable for such a big project, but the banks have met the challenge. The new current account switching service was launched on schedule in September and covers almost 100% of the current account market. It has been designed to meet all the ICB’s criteria for tackling customer concerns over switching and to give customers the confidence they need to make the banks improve their services by ensuring that their customers can vote with their feet.

However, it is important that the new system delivers on its promises. That is why the Government continue to engage closely with the Payments Council, which has delivered the service on behalf of the industry, on the progress of switching.

Lord McFall of Alcluith: The noble Lord mentioned the Parliamentary Commission on Banking Standards and talked about account portability. But that was not as firm a recommendation as he has suggested, because one of the questions we asked was: why can the banks not allocate an account number that works in the way that mobile telephone numbers do, so that people can swap them around in the same way? The banks replied

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that the IT costs would be too high, but a cursory examination—that is all we did—of the IT aspect indicated that there were legacy problems with the IT. As we have seen with the horrendous examples involving RBS and others, the IT system is in a very poor state. So now is the ideal time to raise our ambitions and ensure that we get for bank customers the portability that telephone customers have.

Lord Newby: My Lords, I did not mention the parliamentary commission; I was referring to the Independent Commission on Banking. None the less, I shall come to the substantive point that the noble Lord has just made.

As I was saying, to aid transparency we have asked the Payments Council to publish statistics regularly, including switching volumes on a monthly basis and more detailed statistics every quarter, which include data on awareness and confidence in the new service. The Government consider that making this information public is the best way to hold the current account switching service to account. As has been mentioned, the Payments Council has just published the first set of data, covering the four-week period following the switching service becoming fully operational. The numbers show that 89,000 switches were completed—an 11% increase on the 80,000 completed during the same period last year. I am a great fan of the Financial Times, but to describe a scheme that has been running for a month as a failure, when it has already got 9,000 extra people to switch, is clearly complete rubbish.

Account portability is a more complicated issue. I am not necessarily disagreeing with the noble Lord, Lord McFall, but the only way to make a properly informed assessment as to whether, or how, steps towards portable account numbers should be taken is to conduct a comprehensive analysis. I must say, almost in parenthesis, that I do not believe that the analogy with telephone numbers takes us as far as might appear at first sight. For a start, as an individual I am quite happy if lots of people know my telephone number —but I am very unhappy if anybody knows my bank account details. This means that I have a completely different view about how I want to deal with that account. That is one of a number of different reasons why this is a complicated issue. It is not, however, an issue that the Government have just pushed to one side. We have made a commitment to ask the new payment systems regulator to undertake the comprehensive analysis that is required.

There has not yet been a proper study of account portability in the UK, but it is clear that operating the payments systems alongside account portability would be one of the significant challenges. That is why we think that the payment systems regulator is the right body to carry out this work. It will have the appropriate expertise and will be able to give an independent view. To be clear, the payment systems regulator will have the powers described in subsection (2) of the proposed new clause. There would be no need to confer new powers on the regulator in order to implement the recommendations of a review. In order to get a complete picture of what benefits account portability could bring, the experience of the current account switching service will need to be fully considered. Therefore, the

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Government expect the success of the switching service to be firmly within the scope of the payment systems regulator’s view of portability. The switching service is new and the regulator is not yet established. In our view, the logical step is to let them both become properly established and bedded in and then have a proper and comprehensive analysis. On the basis of that, a decision can be taken.

Lord Eatwell: The noble Lord just said that the payment systems regulator is going to be asked to do this. What timetable is the regulator going to be given?

Lord Newby: The regulator will be asked to make this one of its top priorities once it has been established, but it is impossible to say at this point that it will have to do it within three or six months. We think that that would be overly prescriptive. However, it is one of the priority tasks that it will be given from its inception.

Lord Eatwell: My Lords, that is why the amendment specifies 12 months. It seems that what the Government are saying is that they are behind the concept of competition but they are not behind the means of making that concept actually work. However, I must say that it is encouraging that the payment systems regulator is being asked to study this matter. It would be more encouraging if we were given some clarity that this will not simply be kicked into touch but will actually be presented to Parliament within a given timescale.

This is a matter of considerable importance if the Government are serious about competition and giving competitive advantage to consumers. It is therefore a matter to which we must inevitably return. In the mean time, I beg leave to withdraw the amendment.

Amendment 104 withdrawn.

Amendment 104A

Moved by Lord Sharkey

104A: Before Clause 16, insert the following new Clause—

“High-cost credit agreements

(1) The Secretary of State shall by order provide for each local authority in England and Wales to regulate high cost credit agreements entered into by any person whose registered address for the purpose of obtaining credit is within the area of that authority.

(2) An order under this section shall—

(a) set a maximum level for—

(i) the amount of any loan;

(ii) the rate of interest that may be charged; and

(iii) the associated fees that may be levied

as part of any such agreement;

(b) limit the number of times and specify the terms on which such an agreement can be rolled over for any individual to whom this section applies; and

(c) require the lender to demonstrate that the borrower has no outstanding high-cost loans.

(3) Any local authority choosing not to exercise its powers of regulation once an order is made under this section shall publish a report setting out its reasons for not doing so, and shall make a similar report in each subsequent year in which it chooses not to exercise its powers of regulation.

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(4) For the purposes of this section—

(a) “high-cost credit agreement” means a regulated credit agreement as defined by section 137C of the Financial Services and Markets Act 2000 (as inserted by the Financial Services Act 2012) that provides for—

(i) the payment by the borrower of charges of a description from time to time specified by the FCA; or

(ii) the payment by the borrower over the duration of the agreement of charges that, taken with the charges paid under one or more other agreements which are treated by the FCA’s rules as being connected with it, exceed, or are capable of exceeding, an amount specified by the FCA;

(b) “charges” means charges payable, by way of interest or otherwise, in connection with the provision of credit under the regulated credit agreement, whether or not the agreement itself makes provision for them and whether or not the person to whom they are payable is a party to the regulated credit agreement or an authorised person;

(c) “authorised person” has the same meaning as in the Financial Services and Markets Act 2000.

(5) An order under this section shall be made by statutory instrument subject to approval by resolution of each House of Parliament.”

Lord Sharkey (LD): My Lords, I will briefly argue in favour of four propositions. The first is that payday loan charges are much too high; secondly, that the current action on payday loans, although it is welcome, will not fix the central problem; thirdly, that we already have plenty of evidence for how to fix this problem; and fourthly, it is possible to act now to benefit payday loan customers and there is no need to wait.

The first proposition is that payday loan charges are much too high, and there is probably no need for me to argue the point extensively in this Chamber. Many Members of the Committee will agree that the scale of the charges amounts to exploitation of the poorest and the most desperate, and perhaps even that these charges are an affront to social justice, or even a sense of common humanity. In fact, there are established markets where the payday loan business flourishes with much smaller charges, of which the United States is a prime example. I shall talk more about the regulatory regime in the United States in a moment.

The second proposition is that the current action, although it is welcome, will not fix the central problem. The FCA, which will take over regulatory responsibility for the sector in April next year, published a consultation paper earlier this month. The paper noted that:

“We consider that the high-cost short-term credit sector poses a potentially high risk to consumers in financial difficulty”.

It put forward five key proposals that would require lenders to,

“assess the potential for a loan to adversely affect the customer’s financial situation; limit the number of times they can seek payment using a continuous payment authority; limit the number of times a loan can be ‘rolled over’; inform customers about sources of debt advice before refinancing a loan; put risk warnings on loan adverts”.

All these requirements were broadly welcomed, but there was no proposal to address the very high cost of payday loans themselves. The FCA confined itself to saying only that:

“After we start regulating consumer credit, our supervision teams will consider firms’ fees and charges practices to decide if we need to intervene further”.

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That was it, but it is these fees and charges that are the cause of the present hardship and difficulty. Why wait until next April? The charges are obviously too high. They are lower elsewhere, and they could be lower here, too.

My third proposition is that we already have plenty of evidence about how to fix the high charge problem. I have heard it said that, in fact, self-regulation by payday loan lenders is the best way forward. Quite apart from the fact that it is difficult to see this bringing down costs, the evidence at the moment is that self-regulation is not working. Earlier this month, BIS published a large-scale and comprehensive review of how well the payday loan industry had been complying with its revised July 2012 customer charter and codes of practice. What BIS found was this:

“Overall, the results of the survey show that 9 months after the industry said they would comply fully with the charter and the improved codes of practice, self-regulation is not working effectively and compliance with key provisions is not good enough … lenders appear to fall down significantly in meeting the requirements … overall in relation to rollovers, Continuous Payment Authority (CPA) and the treatment of customers in financial difficulty”.

10.30 pm

I have also heard it frequently said that putting a cap on payday loan costs would drive borrowers into the arms of loan sharks. In fact, this seems to be put forward as the only serious objection to a cap. The Bristol University study of March this year is often cited in support of it. This is just wrong. The Bristol study does not conclude that a cap would drive people to loan sharks. What it says is that a cap may cause access to credit to reduce, particularly for low-income, rather vulnerable customers. Then it explicitly says,

“if customers could not access short-term loans, most would either go without or turn to a friend or relative for help. A small number would try and borrow from somewhere else, including from another short-term lender. Using an illegal lender was not an option that the vast majority of customers in the Consumer Survey would currently consider”.

There is no compelling evidence, nor even any marginally credible evidence, that a cap on costs will drive people to illegal lenders. If there is no such evidence, why do we not act now?

That brings me to my fourth proposition, that it is possible to act now, to the great benefit of payday loan customers. The evidence for this can be found in the United States, where there is a long-established set of regulating systems which cap costs. They control rollovers and restrict loan periods. All this happens without destroying the market for payday loans. In the US, payday loan regulation is a matter for individual states and 41 of them have some regulation in place. In three states and in the district of Columbia payday lending is prohibited. In 26 states, borrowing is limited to $600 or less. There is a range of permitted interest rates; 17 states limit interest to 15% or less.

The recent House of Commons Select Committee report on debt management recommended that the Government studied Florida to see what lessons could be learnt for UK regulation. That is because there is a very great deal to learn from what happened in Florida. Florida has 19 million residents. New payday lending regulation was introduced in 2001. The state limits loans to $500. The interest rate is 10%. No single

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transaction fee may be more than $10. Rolling-over is banned. Loans are restricted to a maximum of 31 days. There is a mandatory cooling-off period between loans. Critically, there is a real-time database paid for by the lenders. This database prevents any borrower taking out multiple loans at the same time.

This has had dramatic results. There is still a flourishing payday loan market in Florida. There were 7 million loans in 2009-10, but not a single loan was extended beyond contract for an additional fee. More than 90% of borrowers repaid within 30 days of the due date and 70% paid on time. The levels of consumer complaint of mis-selling and over-indebtedness had dropped dramatically. Complaints about high interest rates have all but disappeared. Not one loan issued in 2011 violated the regulations. Not one borrower was indebted for more than $500 at any given time.

All the information technology for doing this in the UK exists already. All that is missing is the regulation and, perhaps, the will. However, if we do not act now or very soon, the problem will get worse. More people will find themselves paying huge charges on small loans. The payday loan business continues to grow very fast. For Wonga alone, lending rose 68% in the last reported year. The UK is seen by investors to have huge potential growth in payday lending. JMP Securities, an American investment bank, predicts that UK payday lending volumes and fees will grow by 212% and 246% between 2010 and 2016. We need to act now. If we wait for the FCA to look at costs, if we wait for the Competition Commission to report, we will have allowed many thousands more people to suffer these appallingly high charges. We will have allowed them to do so entirely unnecessarily. That is what my amendment seeks to prevent.

The amendment would give local authorities the power to set a maximum amount for a loan, to set the total cost that may be charged for a loan, to limit the number of times and the terms on which a loan may be rolled over, and to limit borrowers to one outstanding loan at any given time. This is all modelled very closely on the Florida regulations, with local authorities substituted for states, on the grounds that they are more likely to properly assess local conditions and needs than the FCA.

High-cost and short-term credit oppresses the least well-off and the most financially desperate. To charge so much is wrong, morally and socially, and we do not need to allow it to continue. The amendment would put a stop to it. I beg to move.

Lord Eatwell: My Lords, I am delighted that the Liberal Democrats are coming behind the proposals developed by my noble friend Lord Mitchell. I hope they acknowledge his success in having the various clauses limiting payday loans and high-cost credit agreements inserted during the passage of the Financial Services Act 2012.

Given that that Act is now in place and the measures advanced by my noble friend Lord Mitchell are on the statute book, the argument of the noble Lord, Lord Sharkey, as I understand it, is about why nothing is happening and why there is a lack of movement towards getting appropriate regulation in place. If he is indeed

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correct that things are moving so slowly—I have no reason to believe that he is not—the Government owe him an explanation as to why that is the case. Obviously, one is sympathetic to getting my noble friend Lord Mitchell’s measures going as fast as possible, but I have a couple of questions about the amendment.

First, do we really feel that there is a simple read-over between state government in the United States and a local authority in the UK? It seems that we pile responsibilities on local authorities without giving them sufficient funding, in many cases, to fulfil their responsibilities. I do not see that the amendment provides for any resources to go to local authorities to enable them to do the job.

Secondly, as far as I understand it, quite a lot of payday lending is done online. The amendment will do absolutely nothing to address loans that are made online because it is all geographically defined. A payday lender may have a registered address but that may have absolutely nothing to do with the location of the customers of that payday lender. The disjuncture between the registered address and the location of the customers suggests that knowledge of local needs would not necessarily be very relevant in such a case.

I am very sympathetic to the need to get things moving and look forward to the Government telling noble Lords how energetic they are being and giving us some concrete evidence of how my noble friend Lord Mitchell’s measures are being effectively brought into being. I would also like the Government to consider whether the noble Lord, Lord Sharkey, has, with the notion of the local authority—or indeed any other authority—identified a means of getting things moving more quickly.

Lord Newby: My Lords, the Government wholeheartedly agree with my noble friend that consumers must be protected when they borrow from payday lenders and use other high-cost forms of credit. As noble Lords have pointed out, the Government fundamentally reformed the regulatory system governing these lenders to protect borrowers by transferring the regulation of consumer credit to the Financial Conduct Authority in the Financial Services Act 2012.

The FCA takes up this new regulatory responsibility on 1 April but has already demonstrated that it is serious about cracking down on high-cost lenders. It is absolutely unfair on it to say that nothing has happened since the Act was passed last year.

On 3 October, as the noble Lord, Lord Sharkey, has pointed out, the FCA set out an action plan on high-cost lending to protect consumers, with tough new rules covering a number of issues, including a limit on rollovers and restricting the use of continuous payment authorities. These proposals have won widespread support and will profoundly change how this industry operates. I completely agree with the noble Lord, Lord Sharkey, that self-regulation has failed, but the industry is not going to be self-regulated any more.

Turning now to the noble Lord’s amendment specifically, I am surprised that he thinks that local authorities should be given additional responsibility for regulating high-cost lenders. I can see why it might work in the States, and having looked at the Florida

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scheme I completely agree that it has been an extremely successful scheme there. I hope that there are a number of additional elements of that scheme that might, in time, be introduced into the UK. However, I frankly cannot see the case for duplicating regulatory effort within such a small geographic area of the UK, especially as consumers will find this confusing. Nor can this be considered a good use of public funds, given that the FCA, which is fully funded by the industry, already has this responsibility.

Most payday lenders have a national reach, especially the biggest players which dominate the market and, by definition, those which are online, so it does not make sense to permit scores of local authorities, in addition to the FCA, to all regulate the same lender. We believe that a well-resourced and empowered single national regulator will provide the best outcome for consumers. Consumers will be better protected by having a regulator with the resources, expertise and national consistency of the FCA. I am not convinced of the benefits for consumers of a federal approach to regulation. In fact, this could lead to more consumer harm; payday lenders are more likely to target consumers in local authority areas where the authority is less active.

The nub of the amendment is, of course, that the noble Lord has framed it to ensure that the Secretary of State imposes a cap on the cost of high-cost credit. While I entirely support the noble Lord’s ambition to bring down the cost of such loans, I am not convinced that the best way to do that is via a mandatory cap. The Government do not believe that current evidence provides sufficient justification to support a cap on the cost of credit.

The noble Lord has referred to the work commissioned by the Government from the University of Bristol. It does not, as he says, say that the main arguments against a cap on the rate relate to loan sharks. It does point out that although that may happen in some cases, lenders may try to bypass the cap by introducing other charges or fees which are not subject to it. Evidence shows that, with a cap in place, lenders may be less likely to show understanding if customers get into repayment difficulties.

While the Government are not convinced that a mandatory cap is the best overall solution for consumers now, they have made it clear that the FCA has a specific power to impose a cap in future, should it decide that it is needed to protect consumers. The FCA has already committed to start analysis on use of this power from April 2014.

Capping the cost of credit is a major intervention with potentially profound consequences for consumers, so it is right that the FCA contemplates use of this power in a responsible and evidence-based way, which is what it will now do. Noble Lords should not be in any doubt about the FCA’s commitment to using its powers to protect consumers whenever it feels it is necessary. The Government stand ready to support the FCA to ensure the best overall outcome for consumers.

I know it is extremely frustrating that we have not got a comprehensive solution in place, but the Government have moved with considerable alacrity in setting up a new, effective regulatory framework. The regulator has

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acted quickly to set out proposals and on that basis, I hope that the noble Lord will feel able to withdraw his amendment.

10.45 pm

Lord Sharkey: I am happy to acknowledge the achievements of the noble Lord, Lord Mitchell. As the noble Lord, Lord Eatwell, may know, when I spoke to the noble Lord, Lord Mitchell, about my amendment, he said that, if he could, he would be happy to speak in support—qualified support, no doubt.

The question of local authorities is a red herring. I would happily trade off local authorities for the FCA if the Government would agree to the substance of the amendment. I do not intend to pursue the notion or the comments that have been made about local authorities by the noble Lord, Lord Eatwell, and my noble friend the Minister.

I am puzzled by the notion of there not being sufficient evidence to introduce a cap. I am hard put to understand how the situation in the United States—we mentioned only Florida but there are 17 other states with low interest rate caps; these systems work well—does not constitute something close to entirely sufficient evidence. I note in passing that Australia introduced the same system last year and there is evidence available from there as well. I also note in passing that this issue about payday lenders being able to avoid any cap by writing in additional charges is explicitly dealt with in the regulations that exist in Florida and the other states that cap these things. It is the total cost of any charges connected in any way with the loan that is capped; it is not just the interest rate.

I listened carefully to what my noble friend the Minister said and I will read it carefully again tomorrow morning. If we can dismiss the notion of local authorities for the moment, there may be merit in returning to this issue and of getting something done more quickly than April and afterwards so that we do not continue to have people taking on these loans at appalling costs. There may be merit in returning to that on Report but in the mean time I beg leave to withdraw.

Amendment 104A withdrawn.

Amendment 104B

Moved by Lord McFall of Alcluith

104B: Before Clause 16, insert the following new Clause—

“Restriction on disclosure of confidential information by FCA, PRA etc

In section 348 of FSMA 2000 (restriction on disclosure of confidential information by (FCA, PRA) etc), after subsection (4)(b) insert—

“(c) it is made available, without imposing any requirement of confidentiality, to a consumer (as defined in section 425A), or to a person imitating a consumer, or to persons who include consumers;”.”

Lord McFall of Alcluith: My Lords, while many aspects of competition, culture and behaviour in the industry are addressed by the Financial Services (Banking Reform) Bill, these amendments focus on the lack of transparency and public disclosure of poor products,

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practices, individuals and institutions, which remains unaddressed. The focus of these amendments is to open up this aspect of transparency. The amendments would enable the FCA to publish the instructions it gives to firms when it finds that consumers have been unfairly treated. It would improve the accountability of the regulator and of the regulated firms.

Most people are agreed that the FSA was not a transparent regulator. Indeed, in 2009, when the Treasury Select Committee investigated the treatment of customers in mortgage arrears, it concluded that,

“the balance between disclosure to the public and the need to protect firms before they have been found guilty of wrongdoing may have tilted too far towards the interests of the industry”.

More importantly, Section 348 of FiSMA placed a blanket prohibition on the FSA publishing information received from firms without the firms’ permission. The question has to be asked: are any banks going to voluntarily agree to the publication of their poor practice? I would suggest that is highly unlikely.

I will give one example. In the case of PPI, HFC Bank was fined by the FSA in 2007 for mis-selling of PPI. It issued instructions about the steps the bank needed to take to contact customers and review its previous conduct. However, when consumer groups asked for full details of the instructions, the answer given was that the instructions issued by the FSA contained information from HFC and the FSA was therefore prohibited from disclosing them by Section 348 of FiSMA.

This amendment empowers the FCA to release the instructions given to firms. Genuinely confidential information still will be protected, but the regulator will no longer be able to use Section 348 as an excuse for not disclosing the instructions it gives to firms. There are safeguards for firms, requiring the regulator to consult firms on the notice it will issue and to take account of their representations. Indeed, when the managing director of supervision at that time, Jon Pain of the FSA, appeared before the Commons Treasury Committee in March 2010, he was asked if he would like to have the ability to publish names of firms to which the FSA has sent a warning notice on disciplinary process. He said that that process struck the right balance between transparency and process.

The FSA itself would like that facility to be looked at. Indeed, when the Parliamentary Commission on Banking Standards looked into it, we stated that:

“Amendment of Section 348 … is likely to be required to facilitate the publication of appropriate information about the quality of service and price transparency.”

The amendment argues that the definition of “confidential information” should be modified to exclude firm-specific results of mystery-shopping exercises and thematic work. That would prevent consumers being kept in the dark and ensure that firms are not able to get away with not treating their customers fairly without suffering any practical penalty.

The definition should also be modified to exclude price data for certain markets, such as annuities—a very hot topic at the moment—which would make it easier for consumers to shop around to get the best rate and spot when they are getting a bad deal. It would also assist consumer organisations in warning consumers about products to avoid.

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Complaints data for individual firms should also be excluded, which would allow the FCA to react swiftly to emerging problems by disclosing specific information about individual product areas to consumers. The legacy of mis-selling which exists happened because of a lack of speed in telling consumers and ensuring that individual companies undertook the remedies which the then FSA asked them to undertake.

If the definition also excluded enforcement activity against firms, that would allow for greater regulatory transparency. That must include the FCA publishing information on the number of cases referred to enforcement, broken down by subject—including product and practice involved—and industry sector; the outcome of cases, including how many resulted in a fine, public censure or were dealt with informally; and the names of firms and individuals involved in cases.

As I said on an earlier amendment, the balance is tilted too much towards the industry. The asymmetry of knowledge is in the industry’s favour. This amendment would help redress that by improving transparency. I ask the Minister to consider the long-standing commitment that I have had to that.

Lord Eatwell: My Lords, my noble friend has made a very strong case. He needed to add one other element to persuade the Government, which is that this would enhance competition. If one improved information in this way, then, given the enhancement of consumer choice, the competitive objective of the Government would be better served. This would be a diminution of some of the severe problems of asymmetric information that distort competition in financial services, especially retail financial services. If it was developed with care it would be a considerable boost to the overall efficiency of retail financial services in this country.

It is very easy to say, “The time is not ripe; it is not really quite the time; there are unintended consequences”. All that is required is a consistent bias towards transparency. The Government should approach this issue by saying, “In principle, we are in favour of transparency”. The argument should be made for not being transparent. In other words, the strong case has to be made for not revealing something. The fundamental prejudice should be that this information should be transparent. Effective transmission of information is a key element in creating an efficient market and enhancing the competitive goal that the Government claim to be their own.

Lord Newby: My Lords, as the noble Lord, Lord McFall, pointed out, we debated this issue at great length during proceedings on the previous Financial Services Bill. Sections 348 and 349 of FiSMA govern the treatment of confidential information obtained by the regulators and the ability of the regulators to disclose such confidential information. The noble Lord argued at the time, and repeated today, that there was inadequate transparency and insufficient disclosure of information in the financial services regulatory regime. This led to the argument that Section 348 should be amended to make it as unrestricted as possible.

In response, the Treasury undertook a careful review of Section 348 and its associated provisions. The review concluded, first, that it would be difficult to amend

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Section 348 without negative consequences. Scaling back Section 348 would increase the risk that firms would become less willing to share information with the regulators, undermining those important relationships and the regulators’ ability to protect consumers. Secondly, even with Section 348 in place, the FCA could and should do more to increase transparency.

With that in mind, the Government decided at the time not to amend or delete Section 348 but agreed with the FSA, as it then was, for it to carry out a fundamental review of how transparency would be embedded in the new FCA regime. This was published as a consultation in April of this year and received positive feedback from consumer groups—that is, the very people the new or changed approach was intended to benefit. The review covered use of disclosure as a regulatory tool by the regulator, disclosure of information by firms, both voluntarily and as a result of FCA rules, and transparency on the part of the regulator.

In terms of publishing details of enforcement action, the FCA is already required to publish details and information about decisions and final notices that it considers appropriate. It can also publish the fact that a warning notice has been issued in respect of disciplinary action. In response to the recent PCBS recommendation that it should require firms to publish more information, the FCA has outlined its plans to issue a call for evidence next year on data that it should require firms to publish to help consumers better understand the firm and product quality.

I hope the noble Lord will agree that this is exactly what the PCBS was seeking to achieve and that it can be done without further amendment to Section 348.

Lord McFall of Alcluith: My Lords, again the Government’s response is a little timid. However, the hour is late. It is an appropriate time to say, “Mañana” and we will fight it another day.

Amendment 104B withdrawn.

Amendments 104C and 104D not moved.


Amendment 104E

Moved by Lord Turnbull

104E: Before Clause 16, insert the following new Clause—

“Definition of “bank”

(1) In sections (Meetings between regulators and bank auditors, Leverage ratio, Proprietary trading, Remuneration code, Powers of regulator where Bank receiving State support, Special measures, and Regulatory accounts) “bank” means a UK institution which—

(a) has permission under Part 4A of FSMA 2000 (permission to carry on regulated activities) to carry on the regulated activity of accepting deposits; or

(b) is an investment firm within the meaning of that Act (see section 424A of that Act).

(2) But “bank” does not include an insurer.

(3) In this section—

(a) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom;

(b) “insurer” means an institution which is authorised under this Act to carry on the regulated activity of effecting or carrying out contracts of insurance as principal.

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(4) Subsections (1)(a) and (3)(b) are to be read in accordance with section 22, taken with Schedule 2 and any order under section 22.”

Lord Turnbull: My Lords, this is an amendment to which we have returned on a number of occasions and which is quite fundamental to the Bill. It raises the question of what is a bank and defines who comes within the scope of the various regimes, sanctions, penalties, or whatever. There was a feeling when we last discussed this that defining a bank around whether it took deposits was too narrow and that there could be people who could conduct, for example, trading activities without taking deposits and who ought to be subject to the senior managers’ regime, the criminal sanction or the remuneration regime.

The amendment is an attempt to widen that scope. It was tabled before the letter dated 22 October from the noble Lord, Lord Newby, to the noble Lord, Lord Eatwell, with its offer to set out a note. I think that that will probably deal with the question. I do not think that there is any real difference between us about what we want to cover. We want to make sure that we are covering not only ring-fenced banks but people running major investment bank trading operations, whether they be domestic, such as BarCap, or UBS or whatever.

11 pm

Lord Eatwell: Perhaps I can be of help to the noble Lord. I do not know whether he has had the opportunity to see the Bank of England response to the final report published today, where the Bank of England provides the answer which the noble Lord, Lord Newby, was unable to provide. It says:

“For the present, the Government’s legislative proposals in this area will apply only to deposit takers”—

Earl Attlee (Con): My Lords, we are slightly out of order because the noble Lord has not moved his amendment and started the debate. Perhaps the noble Lord would like to finish moving his amendment.

Lord Turnbull: I thought that I had started by begging to move Amendment 104E, but if I have not I shall do so now, and if that allows the noble Lord, Lord Eatwell, to offer his clarification I should be very grateful. I beg to move.

Lord Eatwell: I usually try to be difficult. When I try to be helpful I am stopped. I was referring to the Bank of England response, published today, in which it says that,

“the Government’s legislative proposals in this area”—

this is referring to the senior persons regime which we talked about last time—

“will apply only to deposit takers but not to investment banks and insurance companies”.

So the Bank of England is clear that both the senior persons regime and, I presume, also the offences issue—for which I remember the same issue arose as to the definition of a bank—do not apply to investment banks.

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Lord Turnbull: My response to that is that it is completely unsatisfactory. We shall need to come back to it. I hope that there can be some discussion, maybe with officials in the Bill team. I am not satisfied that applying these various provisions simply to deposit takers covers all the areas of conduct that really need to be covered.

One other issue came to light in the course of this evening’s discussions about the remuneration regime. The noble Lord, Lord Newby, read out a list of people who are covered. Those are the people who are covered by the current remuneration regime. What was being proposed in my amendment was in effect a senior tier particularly for banking. Once you do that, you have to find a definition of a bank. I thought that we were a bit nearer to getting an answer until I heard from the noble Lord, Lord Eatwell. It is something we need to sort out, otherwise we shall find a serious area of misconduct in an investment banking area only to be told that when we legislated we forgot to cover these kinds of people. That would be completely unacceptable.

Lord Newby: My Lords, I thought that I read out virtually verbatim last week what the noble Lord has read out from the Bank of England. We are going to confirm that in a letter. However the most important point is the one that the noble Lord, Lord Turnbull, raised about the scope of the senior managers regime and the criminal offence that goes with it. I can confirm now what I attempted to say last time, that my Treasury colleagues are considering the scope of the new regime and of the new criminal offence of reckless misconduct in the management of a bank in the light of the previous debate. I can assure the House that they take your Lordships’ views extremely seriously.

Lord Turnbull: I infer that I should pay more attention to the letter of the noble Lord, Lord Newby, of 22 October than I should pay to the Bank of England’s response, because I think the former is a more constructive response than that of the Bank of England. On that basis, I beg leave to withdraw Amendment 104E.

Amendment 104E withdrawn.

Clause 16 agreed.

Amendment 105

Moved by Lord Newby

105: Before Schedule 2, insert the following new Schedule—

ScheduleBail-in stabilisation optionPart 1Amendments of Banking Act 2009

1 The Banking Act 2009 is amended as follows.

New stabilisation option: bail-in

2 After section 12 insert—

“12A Bail-in option

(1) The third stabilisation option is exercised by the use of the power in subsection (2).

(2) The Bank of England may make one or more resolution instruments (which may contain provision or proposals of any kind mentioned in subsections (3) to (6)).

(3) A resolution instrument may—

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(a) make special bail-in provision with respect to a specified bank;

(b) make other provision for the purposes of, or in connection with, any special bail-in provision made by that or another instrument.

(4) A resolution instrument may—

(a) provide for securities issued by a specified bank to be transferred to a bail-in administrator (see section 12B) or another person;

(b) make other provision for the purposes of, or in connection with, the transfer of securities issued by a specified bank (whether or not the transfer has been or is to be effected by that instrument, by another resolution instrument or otherwise).

(5) A resolution instrument may set out proposals with regard to the future ownership of a specified bank or of the business of a specified bank, and any other proposals (for example, proposals about making special bail-in provision) that the Bank of England may think appropriate.

(6) A resolution instrument may make any other provision the Bank of England may think it appropriate to make in exercise of specific powers under this Part.

(7) Provision made in accordance with subsection (4) may relate to—

(a) specified securities, or

(b) securities of a specified description.

(8) Where the Bank of England has exercised the power in subsection (4) to transfer securities to a bail-in administrator, the Bank of England must exercise its functions under this Part (see, in particular, section 48V) with a view to ensuring that any securities held by a person in the capacity of a bail-in administrator are so held only for so long as is, in the Bank of England’s opinion, appropriate having regard to the special resolution objectives.

(9) References in this Part to “special bail-in provision” are to provision made in reliance on section 48B.

12B Bail-in administrators

(1) The Bank of England may, in a resolution instrument, appoint an individual or body corporate as a bail-in administrator.

(2) A bail-in administrator is appointed—

(a) to hold any securities that may be transferred or issued to that person in the capacity of bail-in administrator;

(b) to perform any other functions that may be conferred under any provision of this Part.

(3) The Bank of England may appoint more than one bail-in administrator to perform functions in relation to a bank (but no more than one of them may at any one time be authorised to hold securities as mentioned in subsection (2)(a)).

(4) Securities held by a bail-in administrator (in that capacity, and whether as a result of a resolution instrument or otherwise) are to be held in accordance with the terms of a resolution instrument that transfers those, or other, securities to the bail-in administrator.

(5) For example, the following provision may be made by virtue of subsection (4)—

(a) provision that specified rights of a bail-in administrator with respect to all or any of the securities are to be exercisable only as directed by the Bank of England;

(b) provision specifying rights or obligations that the bail-in administrator is, or is not, to have in relation to some or all of the securities.

(6) A bail-in administrator must have regard, in performing any functions of the office, to any objectives that may be specified in a resolution instrument.

(7) Where one or more objectives are specified in accordance with subsection (6), the objectives are to be taken to have equal status with each other, unless the contrary is stated in the resolution instrument.

(8) See sections 48I to 48K for further provision about bail-in administrators.”

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3 After section 8 insert—

“8A Specific condition: bail-in

(1) The Bank of England may exercise a stabilisation power in respect of a bank in accordance with section 12A(2) only if satisfied that the condition in subsection (2) is met.

(2) The condition is that the exercise of the power is necessary, having regard to the public interest in—

(a) the stability of the financial systems of the United Kingdom,

(b) the maintenance of public confidence in the stability of those systems,

(c) the protection of depositors, or

(d) the protection of any client assets that may be affected.

(3) Before determining whether that condition is met, and if so how to react, the Bank of England must consult—

(a) the PRA,

(b) the FCA, and

(c) the Treasury.

(4) The condition in this section is in addition to the conditions in section 7.”

Further provision about the bail-in option

4 After section 48A insert—

“Bail-in option

48B Special bail-in provision

(1) “Special bail-in provision”, in relation to a bank, means any of the following (or any combination of the following)—

(a) provision cancelling a liability owed by the bank;

(b) provision modifying, or changing the form of, a liability owed by the bank;

(c) provision that a contract under which the bank has a liability is to have effect as if a specified right had been exercised under it.

(2) A power to make special bail-in provision—

(a) may be exercised only for the purpose of, or in connection with, reducing, deferring or cancelling a liability of the bank;

(b) may not be exercised so as to affect any excluded liability.

(3) The following rules apply to the interpretation of subsection (1).

1. The reference to cancelling a liability owed by the bank includes a reference to cancelling a contract under which the bank has a liability.

2. The reference to modifying a liability owed by the bank includes a reference to modifying the terms (or the effect of the terms) of a contract under which the bank has a liability.

3. The reference to changing the form of a liability owed by the bank, includes, for example—

(a) converting an instrument under which the bank owes a liability from one form or class to another,

(b) replacing such an instrument with another instrument of a different form or class, or

(c) creating a new security (of any form or class) in connection with the modification of such an instrument.

(4) Examples of special bail-in provision include—

(a) provision that transactions or events of any specified kind have or do not have (directly or indirectly) specified consequences or are to be treated in a specified manner for specified purposes;

(b) provision discharging persons from further performance of obligations under a contract and dealing with the consequences of persons being so discharged.

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(5) The form and class of the instrument (“the resulting instrument”) into which an instrument is converted, or with which it is replaced, do not matter for the purposes of paragraphs (a) and (b) of rule 3 in subsection (3); for instance, the resulting instrument may (if it is a security) fall within Class 1 or any other Class in section 14.

(6) The following liabilities of the bank are “excluded liabilities”—

(a) liabilities representing protected deposits;

(b) any liability, so far as it is secured;

(c) liabilities that the bank has by virtue of holding client assets;

(d) liabilities with an original maturity of less than 7 days owed by the bank to a credit institution or investment firm;

(e) liabilities arising from participation in designated settlement systems and owed to such systems or to operators of, or participants in, such systems;

(f) liabilities owed to central counterparties recognised by the European Securities and Markets Authority in accordance with Article 25 of Regulation (EU) 648/2012 of the European Parliament and the Council;

(g) liabilities owed to an employee or former employee in relation to salary or other remuneration, except variable remuneration;

(h) liabilities owed to an employee or former employee in relation to rights under a pension scheme, except rights to discretionary benefits;

(i) liabilities owed to creditors arising from the provision to the bank of goods or services (other than financial services) that are critical to the daily functioning of the bank’s operations.

(7) The following special rules apply in cases involving banking group companies—

(a) a liability mentioned in subsection (6)(d) is not an excluded liability if the credit institution or investment firm to which the liability is owed is a banking group company in relation to the bank (see section 81D);

(b) in subsection (6)(i) the reference to creditors does not include companies which are banking group companies in relation to the bank.

48C Meaning of “protected deposit”

(1) A deposit is “protected” so far as it is covered by the Financial Services Compensation Scheme.

(2) A deposit is “protected” so far as it is covered by a scheme which—

(a) operates outside the United Kingdom, and

(b) is comparable to the Financial Services Compensation Scheme.

(3) If one or both of subsections (1) and (2) apply to a deposit, the amount of the deposit “protected” is the highest amount which results from either of those subsections.

(4) In subsections (1) and (2) and section 48B(6)(a), “deposit” has the meaning given by article 5(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544), but ignoring the exclusions in article 6.

48D General interpretation of section 48B

(1) In section 48B—

“client assets” means assets which the bank has undertaken to hold on trust for, or on behalf of, a client;

“contract” includes any instrument;

“credit institution” means any credit institution as defined in Article 4.1(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council, other than an entity mentioned in Article 2.5(2) to (23) of Directive 2013/36/EU of the European Parliament and of the Council;

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“designated settlement system” means a system designated in accordance with Directive 98/26/EC of the European Parliament and of the Council (as amended by Directives 2009/44/EC and 2010/78/EU);

“employee” includes the holder of an office;

“investment firm” means an investment firm as defined in Article 4.1(2) of Regulation (EU) No 575/2013 of the European Parliament and of the Council that is subject to the initial capital requirement specified in Article 28(2) of Directive 2013/36/EU of the European Parliament and of the Council;

“pension scheme” includes any arrangement for the payment of pensions, allowances and gratuities;

“secured” means secured against property or rights, or otherwise covered by collateral arrangements.

(2) In subsection (1)—

“assets” has the same meaning as in section 232(4) (ignoring for these purposes section 232(5A)(b));

“collateral arrangements” includes arrangements which are title transfer collateral arrangements for the purposes of section 48.

(3) For the purposes of section 48B(6)(h), a benefit under a pension scheme is discretionary so far as the employee’s right to the benefit was a result of the exercise of a discretion.

48E Report on special bail-in provision

(1) This section applies where the Bank of England makes a resolution instrument containing special bail-in provision (see section 48B(1)).

(2) The Bank of England must report to the Chancellor of the Exchequer stating the reasons why that provision has been made in the case of the liabilities concerned.

(3) If the provision departs from the insolvency treatment principles, the report must state the reasons why it does so.

(4) The insolvency treatment principles are that where an instrument includes special bail-in provision—

(a) the provision made by the instrument must be consistent with treating all the liabilities of the bank in accordance with the priority they would enjoy on a liquidation, and

(b) any creditors who would have equal priority on a liquidation are to bear losses on an equal footing with each other.

(5) A report must comply with any other requirements as to content that may be specified by the Treasury.

(6) A report must be made as soon as reasonably practicable after the making of the resolution instrument to which it relates.

(7) The Chancellor of the Exchequer must lay a copy of each report under subsection (2) before Parliament.

48F Power to amend definition of “excluded liabilities”

(1) The Treasury may by order amend section 48B(6) by—The Treasury may by order amend section 48C or 48D.

(a) adding to the list of excluded liabilities;

(b) amending or omitting any paragraph of that subsection, other than paragraphs (a) to (c).

(3) The powers conferred by subsections (1) and (2) include power to make consequential and transitional provision.

(4) An order under this section—

(a) must be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.

(5) The Treasury must consult before laying a draft order under this section before Parliament.

48G Priority between creditors

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(1) The Treasury may, for the purpose of ensuring that the treatment of liabilities in any instrument that contains special bail-in provision is aligned to an appropriate degree with the treatment of liabilities on an insolvency, by order specify matters or principles to which the Bank of England is to be required to have regard in making any such instrument.

(2) An order may, for example, specify the insolvency treatment principles (as defined in section 48E(4)) or alternative principles.

(3) An order may specify the meaning of “insolvency” for one or more purposes of the order.

(4) An order may amend sections 44C(4) and 48E(4).

(5) An order —

(a) is to be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.

48H Business reorganisation plans

(1) A resolution instrument may require a bail-in administrator, or one or more directors of the bank, to—

(a) draw up a business reorganisation plan with respect to the bank, and

(b) submit it to the Bank of England within the period allowed by (or under) the instrument.

(2) “Business reorganisation plan” means a plan that includes—

(a) an assessment of the factors that caused Condition 1 in section 7 to be met in the case of the bank,

(b) a description of the measures to be adopted with a view to restoring the viability of the bank, and

(c) a timetable for the implementation of those measures.

(3) Where a person has submitted a business reorganisation plan to the Bank of England under subsection (1) (or has re-submitted a plan under subsection (4)), the Bank of England—

(a) must approve the plan if satisfied that the plan is appropriately designed for meeting the objective mentioned in subsection (2)(b);

(b) must otherwise require the person to amend the plan in a specified manner.

(4) Where the Bank of England has required a person to amend a business re-organisation plan, the person must re-submit the amended plan within the period allowed by (or under) the resolution instrument.

(5) Before deciding what action to take under subsection (3) the Bank of England must (for each submission or re-submission of a plan) consult—

(a) the PRA, and

(b) the FCA.

(6) A business reorganisation plan may include recommendations by the person submitting the plan as to the exercise by the Bank of England of any of its powers under this Part in relation to the bank.

(7) Where a resolution instrument contains provision under subsection (1), the instrument may—

(a) specify further matters (in addition to those mentioned in subsection (2)) that must be dealt with in the business reorganisation plan;

(b) make provision about the timing of actions to be taken in connection with the making and approval of the plan;

(c) enable any provision that the Bank of England has power under paragraph (a) or (b) to make in the instrument to be made instead in an agreement between the Bank of England and the bail-in administrator.

(8) For the purposes of subsection (2)(b) the viability of a bank is to be assessed by reference to whether the bank satisfies, and (if so) for how long it may be expected to continue to satisfy, the threshold conditions (as define in section 55B of the Financial Services and Markets Act 2000).

48I Bail-in administrator: further functions

(1) A resolution instrument may—

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(a) authorise a bail-in administrator to manage the bank’s business (or confer on a bail-in administrator any other power with respect to the management of the bank’s business);

(b) authorise a bail-in administrator to exercise any other powers of the bank;

(c) confer on a bail-in administrator any other power the Bank of England may consider appropriate;

(d) provide that the exercise of any power conferred by the instrument in accordance with this section is to be subject to conditions specified in the instrument.

(2) A resolution instrument may require a bail-in administrator to make reports to the Bank of England—

(a) on any matter specified in the instrument, and

(b) at the times or intervals specified in the instrument.

(3) If a resolution instrument specifies a matter in accordance with subsection (2)(a), it may provide for further requirements as to the contents of the report on that matter to be specified in an agreement between the Bank of England and the bail-in administrator.

(4) A resolution instrument may—

(a) require a bail-in administrator to consult specified persons before exercising specified functions (and may specify particular matters on which the specified person must be consulted);

(b) provide that a bail-in administrator is not to exercise specified functions without the consent of a specified person.

48J Bail-in administrator: supplementary

(1) A bail-in administrator may do anything necessary or desirable for the purposes of or in connection with the performance of the functions of the office.

(2) A bail-in administrator is not a servant or agent of the Crown (and, in particular, is not a civil servant).

(3) Where a bail-in administrator is appointed under this Part, the Bank of England—

(a) must make provision in a resolution instrument for resignation and replacement of the bail-in administrator;

(b) may remove the bail-in administrator from office only (i) on the ground of incapacity or misconduct, or (ii) on the ground that there is no further need for a person to perform the functions conferred on the bail-in administrator.

48K Bail-in administrator: money

(1) A resolution instrument may provide for the payment of remuneration and allowances to a bail-in administrator.

(2) Provision made under subsection (1) may provide that the amounts are—

(a) to be paid by the Bank of England, or

(b) to be determined by the Bank of England and paid by the bank.

(3) A bail-in administrator is not liable for damages in respect of anything done in good faith for the purposes of or in connection with the functions of the office (subject to section 8 of the Human Rights Act 1998).

48L Powers in relation to securities

(1) A resolution instrument may—

(a) cancel or modify any securities to which this subsection applies;

(b) convert any such securities from one form or class into another.

(2) Subsection (1) applies to securities issued by the bank that fall within Class 1 in section 14.

(3) A resolution instrument may—

(a) make provision with respect to rights attaching to securities issued by the bank;

(b) provide for the listing of securities issued by the bank to be discontinued.

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(4) The reference in subsection (1)(b) to converting securities from one form or class into another includes creating a new security in connection with the modification of an existing security.

(5) The provision that may be made under subsection (3)(a) includes, for example—

(a) provision that specified rights attaching to securities are to be treated as having been exercised;

(b) provision that the Bank of England, or a bail-in administrator, is to be treated as authorised to exercise specified rights attaching to securities;

(c) provision that specified rights attaching to securities may not be exercised for a period specified in the instrument.

(6) In subsection (3)(b) the reference to “listing” is to listing under section 74 of the Financial Services and Markets Act 2000.

(7) The provision that may be made under this section in relation to any securities is in addition to any provision that the Bank of England may have power to make in relation to them under section 48B.

48M Termination rights, etc

(1) In this section “default event provision” has the same meaning as in section 22.

(2) A resolution instrument may provide for subsection (3) or (4) to apply (but need not apply either).

(3) If this subsection applies, the resolution instrument is to be disregarded in determining whether a default event provision applies.

(4) If this subsection applies, the resolution instrument is to be disregarded in determining whether a default event provision applies except so far as the instrument provides otherwise.

(5) In subsections (3) and (4) a reference to the resolution instrument is a reference to—

(a) the making of the instrument,

(b) anything that is done by the instrument or is to be, or may be, done under or by virtue of the instrument, and

(c) any action or decision taken or made under this or another enactment in so far as it resulted in, or was connected to, the making of the instrument.

(6) Provision under subsection (2) may apply subsection (3) or (4)—

(a) generally or only for specified purposes, cases or circumstances, or

(b) differently for different purposes, cases or circumstances.

(7) A thing is not done by virtue of a resolution instrument for the purposes of subsection (5)(b) merely by virtue of being done under a contract or other agreement rights or obligations under which have been affected by the instrument.

48N Directors

(1) A resolution instrument may enable the Bank of England—

(a) to remove a director of a specified bank;

(b) to vary the service contract of a director of a specified bank;

(c) to terminate the service contract of a director of a specified bank;

(d) to appoint a director of a specified bank.

(2) Subsection (1) also applies to a director of any undertaking which is a banking group company in respect of a specified bank.

(3) Appointments under subsection (1)(d) are to be on terms and conditions agreed with the Bank of England.

48O Directions in or under resolution instrument

(1) A resolution instrument may—

(a) require one or more directors of the bank to comply with any general or specific directions that may be set out in the instrument;

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(b) enable the Bank of England to give written directions (whether general or specific) to one or more directors of the bank.

(2) A director—

(a) is not to be regarded as failing to comply with any duty owed to any person (for example, a shareholder, creditor or employee of the bank) by virtue of any action or inaction in compliance with a direction given under subsection (1)(a) or (b);

(b) is to be immune from liability in damages in respect of action or inaction in accordance with a direction.

(3) A director must comply with a direction within the period of time specified in the direction, or if no period of time is specified, as soon as reasonably practicable.

(4) A direction under subsection (1)(a) or (b) is enforceable on an application made by the Bank of England, by injunction or, in Scotland, by an order for specific performance under section 45 of the Court of Session Act 1988.

48P Orders for safeguarding certain financial arrangements

(1) In this section “protected arrangements” means security interests, title transfer collateral arrangements, set-off arrangements and netting arrangements.

(2) In subsection (1)—

“netting arrangements” means arrangements under which a number of claims or obligations can be converted into a net claim or obligation, and includes, in particular, “close-out” netting arrangements, under which actual or theoretical debts are calculated during the course of a contract for the purpose of enabling them to be set off against each other or to be converted into a net debt;

“security interests” means arrangements under which one person acquires, by way of security, an actual or contingent interest in the property of another;

“set-off arrangements” means arrangements under which two or more debts, claims or obligations can be set off against each other;

“title transfer collateral arrangements” means arrangements under which Person 1 transfers assets to Person 2 on terms providing for Person 2 to transfer assets if specified obligations are discharged.

(3) The Treasury may by order—

(a) restrict the exercise of any power within the scope of this paragraph in cases that involve, or where the exercise of the power might affect, protected arrangements;

(b) impose conditions on the exercise of any power within the scope of this paragraph in cases that involve, or where the exercise of the power might affect, protected arrangements;

(c) require any instrument that makes special bail-in provision to include specified provision, or provision to a specified effect, in respect of or for purposes connected with protected arrangements;

(d) provide for an instrument to be void or voidable, or for other consequences to arise, if or in so far as the instrument is made or purported to be made in contravention of a provision of the order (or of another order under this section);

(e) specify principles to which the Bank of England is to be required to have regard in exercising specified powers—

(i) that involve protected arrangements, or

(ii) where the exercise of the powers might affect protected arrangements.

(4) References to exercising a power within the scope of paragraph (a) or (b) of subsection (3) are to making an instrument containing provision made in reliance on section 12A(3)(a) or 44B (special bail-in provision).

(5) An order may apply to protected arrangements generally or only to arrangements—

(a) of a specified kind, or

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(b) made or applying in specified circumstances.

(6) An order may include provision for determining which arrangements are to be, or not to be, treated as protected arrangements; in particular, an order may provide for arrangements to be classified not according to their description by the parties but according to one or more indications of how they are treated, or are intended to be treated, in commercial practice.

(7) In this section “arrangements” includes arrangements which—

(a) are formed wholly or partly by one or more contracts or trusts;

(b) arise under or are wholly or partly governed by the law of a country or territory outside the United Kingdom;

(c) wholly or partly arise automatically as a matter of law;

(d) involve any number of parties;

(e) operate partly by reference to other arrangements between parties.

(8) An order—

(a) is to be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.

48Q Continuity

(1) A resolution instrument may provide for anything (including legal proceedings) that relates to anything affected by the instrument and is in the process of being done immediately before the instrument takes effect to be continued from the time the instrument takes effect.

(2) A resolution instrument may modify references (express or implied) in an instrument or document.

(3) A resolution instrument may require or permit any person to provide information and assistance to the Bank of England or another person, for the purposes of or in connection with provision made or to be made in that or another resolution instrument.

48R Execution and registration of instruments etc

(1) A resolution instrument (other than an instrument that provides for securities to be transferred) may permit or require the execution, issue or delivery of an instrument.

(2) A resolution instrument may provide for any provision in the instrument to have effect irrespective of—

(a) whether an instrument has been produced, delivered, transferred or otherwise dealt with;

(b) registration.

(3) A resolution instrument may provide for the effect of an instrument executed, issued or delivered in accordance with the resolution instrument.

(4) A resolution instrument may—

(a) entitle a person to be registered in respect of a security;

(b) require a person to effect registration.

48S Resolution instruments: general matters

(1) Provision made in a resolution instrument takes effect despite any restriction arising by virtue of contract or legislation or in any other way.

(2) A resolution instrument may include incidental, consequential or transitional provision.

(3) In relying on subsection (2) a resolution instrument—

(a) may make provision generally or only for specified purposes, cases or circumstances, and

(b) may make different provision for different purposes, cases or circumstances.

48T Procedure

(1) As soon as is reasonably practicable after making a resolution instrument in respect of a bank the Bank of England must send a copy to—

(a) the bank,

(b) the Treasury,

(c) the PRA,

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(d) the FCA, and

(e) any other person specified in the code of practice under section 5.

(2) As soon as is reasonably practicable after making a resolution instrument the Bank of England must publish a copy—

(a) on the Bank’s internet website, and

(b) in two newspapers, chosen by the Bank of England to maximise the likelihood of the instrument coming to the attention of persons likely to be affected.

(3) Where the Treasury receive a copy of a resolution instrument under subsection (1) they must lay a copy before Parliament.

48U Supplemental resolution instruments

(1) This section applies where the Bank of England has made a resolution instrument (“the original instrument”) with respect to a bank.

(2) The Bank of England may make, with respect to the bank, one or more resolution instruments designated by the Bank of England as supplemental resolution instruments.

(3) Sections 7 and 8A do not apply to a supplemental resolution instrument (but it is to be treated in the same way as a resolution instrument for all other purposes, including for the purposes of the application of a power under this Part).

(4) Before making a supplemental resolution instrument the Bank of England must consult—

(a) the PRA,

(b) the FCA, and

(c) the Treasury.

(5) The possibility of making a supplemental resolution instrument in reliance on subsection (2) is without prejudice to the possibility of making a new instrument in accordance with section 12A(2) (and not in reliance on subsection (2) above).

48V Onward transfer

(1) This section applies where the Bank of England has made a resolution instrument (“the original instrument”) providing for securities issued by a specified bank to be transferred to any person.

(2) The Bank of England may make one or more onward transfer resolution instruments.

(3) An onward transfer resolution instrument is a resolution instrument which—

(a) provides for the transfer of—

(i) securities which were issued by the bank before the original instrument and have been transferred by the original instrument or a supplemental resolution instrument, or

(ii) securities which were issued by the bank after the original instrument;

(b) makes other provision for the purposes of, or in connection with, the transfer of securities issued by the bank (whether the transfer has been or is to be effected by that instrument, by another instrument or otherwise).

(4) An onward transfer resolution instrument may not transfer securities to the transferor under the original instrument.

(5) Sections 7 and 8A do not apply to an onward transfer resolution instrument (but it is to be treated in the same way as any other resolution instrument for all other purposes, including for the purposes of the application of a power under this Part).

(6) Before making an onward transfer resolution instrument the Bank of England must consult—

(a) the PRA,

(b) the FCA, and

(c) the Treasury.

(7) Section 48U applies where the Bank of England has made an onward transfer resolution instrument.

48W Reverse transfer

(1) This section applies where the Bank of England has made an instrument (“the original instrument”) that is either—

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(a) a resolution instrument providing for the transfer of securities issued by a bank to a person (“the transferee”), or

(b) an onward transfer resolution instrument (see section 48V) providing for the transfer of securities issued by a bank to a person (“the onward transferee”).

(2) In a case falling within subsection (1)(a) the Bank of England may make one or more reverse transfer resolution instruments in respect of securities issued by the bank and held by the transferee (whether or not they were transferred by the original instrument).

(3) In a case falling within subsection (1)(b), the Bank of England may make one or more reverse transfer resolution instruments in respect of securities issued by the bank and held by the onward transferee.

(4) A reverse transfer resolution instrument is a resolution instrument which—

(a) provides for transfer to the transferor under the original instrument;

(b) makes other provision for the purposes of, or in connection with, the transfer of securities which are, or could be or could have been, transferred under paragraph (a).

(5) Except where subsection (6) applies, the Bank of England may make a reverse transfer resolution instrument under subsection (2) only with the written consent of the transferee.

(6) This subsection applies where the transferee is—

(a) a bail-in administrator, or

(b) a person who is not to be authorised to exercise any rights attaching to the securities except on the Bank of England’s instructions.

(7) The Bank of England may make a reverse transfer resolution instrument under subsection (3) only with the written consent of the onward transferee.

(8) Sections 7 and 8A do not apply to a reverse transfer resolution instrument (but it is to be treated in the same way as any other resolution instrument for all other purposes including for the purposes of an application of a power under this Part).

(9) Before making a reverse transfer resolution instrument the Bank of England must consult—

(a) the PRA,

(b) the FCA, and

(c) the Treasury.

(10) Section 48U applies where the Bank of England has made a reverse transfer resolution instrument.”

Transfers of property

5 (1) After section 41 insert—

“41A Transfer of property subsequent to resolution instrument

(1) This section applies where the Bank of England has made a resolution instrument.

(2) The Bank of England may make one or more property transfer instruments in respect of property, rights or liabilities of the bank.

(3) Sections 7 and 8A do not apply to a property transfer instrument under subsection (2).

(4) Before making a property transfer instrument under subsection (2) the Bank of England must consult—

(a) the PRA,

(b) the FCA, and

(c) the Treasury.”

(2) In section 42 (supplemental property transfer instruments)—

(a) in subsection (1) for “12(2)” substitute “12(2) or 41A(2)”;

(b) in subsection (4) for “and 8” substitute “, 8 and 8A”;

(c) in subsection (6) for “or 12(2)” substitute “, 12(2) or 41A(2)”.

(3) After section 44 insert—

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“44A Bail in: reverse property transfer

(1) This section applies where the Bank of England has made a property transfer instrument in accordance with section 41A(2) (“the original instrument”).

(2) The Bank of England may make one or more bail-in reverse property transfer instruments in respect of property, rights or liabilities of the transferee under the original instrument.

(3) A bail-in reverse property transfer instrument is a property transfer instrument which—

(a) provides for a transfer to the transferor under the original instrument;

(b) makes other provision for the purposes of, or in connection with, the transfer of property, rights or liabilities which are, or could be or could have been, transferred under paragraph (a) (whether the transfer has been or is to be effected by that instrument or otherwise).

(4) The Bank of England may make a bail-in reverse property transfer instrument only with the written consent of the transferee under the original instrument.

(5) Sections 7 and 8A do not apply to a bail-in reverse property transfer instrument (but it is to be treated in the same way as any other property transfer instrument for all other purposes, including for the purposes of the application of a power under this Part).

(6) Before making a bail-in reverse property transfer instrument the Bank of England must consult—

(a) the PRA,

(b) the FCA, and

(c) the Treasury.

(7) Section 42 (supplemental instruments) applies where the Bank of England has made a bail-in reverse property transfer instrument.

44B Property transfer instruments: special bail-in provision

(1) A property transfer instrument under section 12(2) or 41A(2) may make special bail-in provision with respect to the bank (see section 48B).

(2) In the case of a property transfer instrument under section 12(2), the power under subsection (1) to make the provision described in section in section 48B(1)(b) (see also rule 3(a) and (b) of section 48B(3)) includes power to make provision replacing a liability (of any form) of the bank mentioned in subsection (1) with a security (of any form or class) of the bridge bank mentioned in section 12(1).

(3) Where securities of the bridge bank (“B”) are, as a result of subsection (2), held by a person other than the Bank of England, that does not prevent B from being regarded for the purposes of this Part (see particularly section 12(1)) as being wholly owned by the Bank of England, as long as the Bank of England continues to hold all the ordinary shares issued by B.

44C Report on special bail-in provision

(1) This section applies where the Bank of England makes a property transfer instrument containing provision made in reliance on section 44B.

(2) The Bank of England must report to the Chancellor of the Exchequer stating the reasons why that provision was made in the case of the liabilities concerned.

(3) If the provision departs from the insolvency treatment principles, the report must state the reasons why it does so.

(4) The insolvency treatment principles are that where an instrument includes special bail-in provision—

(a) the provision made by the instrument must be consistent with treating all the liabilities of the bank in accordance with the priority they would enjoy on a liquidation, and

(b) any creditors who would have equal priority on a liquidation are to bear losses on an equal footing with each other.

(5) A report must comply with any other requirements as to content that may be specified by the Treasury.

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(6) A report must be made as soon as reasonably practicable after the making of the property transfer instrument to which it relates.

(7) The Chancellor of the Exchequer must lay a copy of each report under subsection (2) before Parliament.”

(4) In section 48A (creation of liabilities), in subsection (1), after “44(4)(c)” insert “, 44A(3)(b)”.

Compensation

6 (1) In section 49 (orders)—

(a) in subsection (1), for “three” substitute “four” and for “and property transfer instruments” substitute “, property transfer instruments and orders and resolution instruments”;

(b) after subsection (2) insert—

“(2A) A “bail-in compensation order” is an order establishing a scheme for determining, in accordance with section 52A, whether any transferors or others should be paid compensation.”

(2) After section 52 insert—

“52A Bail-in option

(1) Subsection (2) applies if the Bank of England makes—

(a) a resolution instrument under section 12A(2),

(b) a property transfer instrument under section 41A(2), or

(c) a supplemental resolution instrument under section 48U(2).

(2) The Treasury must make a bail-in compensation order (see section 49(2A)).

(3) A bail-in compensation order may include provision for—

(a) an independent valuer (in which case sections 54 to 56 are to apply);

(b) valuation principles (in which case section 57(2) to (5) is to apply).”

(3) In section 53 (onward and reverse transfers), in subsection (1)—

(a) after paragraph (f) insert—

“(fa) the Bank of England makes a reverse property transfer instrument under section 44A(2),

(fb) the Bank of England makes a supplemental property transfer instrument by virtue of section 44A(7),”;

(b) omit the “or” after paragraph (g);

(c) after paragraph (h) insert—

“(i) the Bank of England makes an onward transfer resolution instrument under section 48V(2),

(j) the Bank of England makes a reverse transfer resolution instrument under section 48W(2) or (3), or

(k) the Bank of England makes a supplemental resolution instrument by virtue of section 48V(7) or 48W(10).”

(4) In section 54 (independent valuer)—

(a) in subsection (1), after “compensation scheme order” insert “or bail-in compensation order”;

(b) in subsection (4)(b), after “order” insert “or bail-in compensation order”.

(5) In section 56 (independent valuer: money), in subsection (2)(b) for “or third party compensation order” substitute “, third party compensation order or bail-in compensation order”.

(6) In section 57 (valuation principles), in subsection (1), after “order” insert “or bail-in compensation order”.

(7) After section 60 insert—

“60A Further mandatory provision: bail-in provision

(1) The Treasury may make regulations about compensation arrangements in the case of—

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(a) resolution instruments under section 12A(2) and supplemental resolution instruments under section 48U(2), and

(b) instruments (made under any provision) that include special bail-in provision.

(2) Regulations may—

(a) require a compensation scheme order, a third party compensation order or a bail-in compensation order to include provision of a specified kind or to specified effect;

(b) make provision that is to be treated as forming part of any such order (whether (i) generally, (ii) only if applied, (iii) unless disapplied, or (iv) subject to express modification).

(3) Regulations may provide for whether compensation is to be paid, and if so what amount is to be paid, to be determined by reference to any factors or combination of factors; in particular, the regulations may provide for entitlement—

(a) to be contingent upon the occurrence or non-occurrence of specified events;

(b) to be determined wholly or partly by an independent valuer (within the meaning of sections 54 to 56) appointed in accordance with a compensation scheme order or bail-in compensation order.

(4) Regulations may make provision about payment including, in particular, provision for payments—

(a) on account subject to terms and conditions;

(b) by instalment.

(5) Regulations—

(a) are to be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.

60B Principle of no less favourable treatment

(1) In making regulations under section 60A the Treasury must, in particular, have regard to the desirability of ensuring that pre-resolution shareholders and creditors of a bank do not receive less favourable treatment than they would have received had the bank entered insolvency immediately before the coming into effect of the initial instrument.

(2) References in this section to the initial instrument are—

(a) in relation to compensation arrangements in the case of property transfer instruments under section 12(2), to the first instrument to be made under that provision with respect to the bank;

(b) in relation to compensation arrangements in other cases, to the first resolution instrument to be made under section 12A with respect to the bank.

(3) The “pre-resolution shareholders and creditors” of a bank are the persons who held securities issued by the bank, or were creditors of the bank, immediately before the coming into effect of the initial instrument.

(4) References in this section to insolvency include a reference to (i) liquidation, (ii) bank insolvency, (iii) administration, (iv) bank administration, (v) receivership, (vi) composition with creditors, and (vii) a scheme of arrangement.”

(8) In section 61(1) (sources of compensation),—

(a) omit the “and” at the end of paragraph (c);

(b) after paragraph (c) insert—

“(ca) bail-in compensation orders,”;

(c) after paragraph (d) insert, “, and

(e) regulations under section 60A.”

(9) In section 62(1) (procedure), omit the “and” at the end of paragraph (b), and after that paragraph insert—

“(ba) bail-in compensation orders, and”.

Groups

7 (1) After section 81B insert—

“81BA  Bail-in option

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(1) The Bank of England may exercise a stabilisation power in respect of a banking group company in accordance with section 12A(2) if the following conditions are met.

(2) Condition 1 is that the PRA is satisfied that the general conditions for the exercise of a stabilisation power set out in section 7 are met in respect of a bank in the same group.

(3) Condition 2 is that the Bank of England is satisfied that the exercise of the power in respect of the banking group company is necessary, having regard to the public interest in—

(a) the stability of the financial systems of the United Kingdom,

(b) the maintenance of public confidence in the stability of those systems,

(c) the protection of depositors, or

(d) the protection of any client assets that may be affected.

(4) Condition 3 is that the banking group company is an undertaking incorporated in, or formed under the law of any part of, the United Kingdom.

(5) Before determining whether Condition 2 is met, and if so how to react, the Bank of England must consult—

(a) the Treasury,

(b) the PRA, and

(c) the FCA.

(6) In exercising a stabilisation power in reliance on this section the Bank of England must have regard to the need to minimise the effect of the exercise of the power on other undertakings in the same group.”

(2) After section 81C insert—

“81CA  Section 81BA: supplemental

(1) This section applies where the Bank of England has power under section 81BA to exercise a stabilisation power in respect of a banking group company.

(2) The provisions relating to the stabilisation powers and the bank administration procedure contained in this Act (except sections 7 and 8A) and any other enactment apply (with any necessary modifications) as if the banking group company were a bank.

(3) Where the banking group company mentioned in subsection (1) is a parent undertaking of the bank mentioned in section 81BA(2) (“the bank”)—

(a) the provisions in this Act relating to resolution instruments are to be read in accordance with the general rule in subsection (4), but

(b) that is subject to the modifications in subsection (5);

and provisions in this Act and any other enactment are to be read with any modifications that may be necessary as a result of paragraphs (a) and (b).

(4) The general rule is that the provisions in this Act relating to resolution instruments (including supplemental resolution instruments) are to be read (so far as the context permits)—

(a) as applying in relation to the bank as they apply in relation to the parent undertaking, and

(b) so, in particular, as allowing any provision that may be made in a resolution instrument in relation to the parent undertaking to be made (also or instead) in relation to the bank.

(5) Where the banking group company mentioned in subsection (1) is a parent undertaking of the bank mentioned in section 81BA(2) (“the bank”)—

(a) section 41A (transfer of property subsequent to resolution instrument) applies as if the reference in subsection (2) to the bank were to the parent undertaking, the bank and any other bank which is or was in the same group;

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(b) section 48V (onward transfer)—

(i) applies as if the references in subsection (3) to “the bank” included the bank, the parent undertaking and any other bank which is or was in the same group, and with the omission of subsection (4) of that section, and

(ii) is to be read as permitting the transfer of securities only if they are held by (or for the benefit of) the parent undertaking or a subsidiary company of the parent undertaking;

(c) section 48W (reverse transfer) applies as if the references in subsections (2) and (3) to “the bank” included the bank, the parent undertaking and any other bank which is or was in the same group.

(6) Where section 48B (special bail-in provision) applies in accordance with subsection (4) (so that section 48B applies in relation to the bank mentioned in section 81BA(2) as it applies in relation to the parent undertaking mentioned in subsection (3)), the provision that may be made in accordance with section 48B(1)(b) (see also rule 3(a) and (b) of section 48B(3)) includes provision replacing a liability (of any form) of that bank with a security (of any form or class) of the parent undertaking.

(7) Where the banking group company mentioned in subsection (1) is a parent undertaking of the bank mentioned in section 81BA(2)—

(a) section 214B of the Financial Services and Markets Act 2000 (contribution to costs of special resolution regime) applies, and

(b) the reference in subsection (1)(b) of that section to the bank, and later references in that section, are treated as including references to any other bank which is a subsidiary undertaking of the parent undertaking (but not the parent undertaking itself).”

(3) In section 81D (interpretation: “banking group company” etc)—

(a) in subsection (6), for “, 81C” substitute “to 81CA”;

(b) in subsection (7) for “section 81B” substitute “sections 81B to 81CA”.

Banks regulated by the Financial Conduct Authority

8 In section 83A (modifications of Part 1 as it applies to banks not regulated by the Prudential Regulation Authority), in the table in subsection (2) insert the following entries at the appropriate places—

“Section 8A

Subsection (3)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”

“Section 41A

Subsection (4)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”

“Section 44A

Subsection (6)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”

“Section 48H

Subsection (5)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.

Section 48U

Subsection (4)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.

Section 48V

Subsection (6)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.

Section 48W

Subsection (9)(a) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”

“Section 81BA

Subsection (5)(b) does not apply unless the bank has as a member of its immediate group a PRA-authorised person.”

Recognised central counterparties

9 In section 89B (application of Part 1 of the Act to recognised central counterparties)—

(a) in subsection (1), before paragraph (a) insert—

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“(za) subsection (1A),”;

(b) after subsection (1) insert—

“(1A) The provisions relating to the third stabilisation option (bail-in) are to be disregarded in the application of this Part to recognised central counterparties.”;

(c) in subsection (2), in the substituted section 13(1), for “third” substitute “fourth”.

Insolvency proceedings

10 In section 120 (notice to Prudential Regulation Authority of preliminary steps to certain insolvency proceedings)—

(a) in subsection (7)(b)(ii), after “Part 1” insert “(and Condition 5 has been met, if applicable)”;

(b) after subsection (8) insert—

“(8A) Condition 5—

(a) applies only if a resolution instrument has been made under section 12A with respect to the bank in the 3 months ending with the date on which the PRA receives the notification under Condition 1, and

(b) is that the Bank of England has informed the person who gave the notice that it consents to the insolvency procedure to which the notice relates going ahead.”

(c) in subsection (10), omit the “and” at the end of paragraph (b), and after paragraph (c) insert “, and

(d) if Condition 5 applies, the Bank of England must, within the period in Condition 3(a), inform the person who gave the notice whether or not it consents to the insolvency procedure to which the notice relates going ahead.”;

(d) After subsection (10) insert—

“(11) References in this section to the insolvency procedure to which the notice relates are to the procedure for the determination, resolution or appointment in question (see subsections (1) to (4)).”

State aid

11 After section 256 insert—

“State aid

256A State aid

(1) This section applies where—

(a) the Treasury are of the opinion that anything done, or proposed to be done, in connection with the exercise in relation to an institution of one or more of the stabilisation powers may constitute the granting of aid to which any of the provisions of Article 107 or 108 of the Treaty on the Functioning of the European Union applies (“State aid”), and

(b) section 145A (power to direct bank administrator) does not apply.

(2) The Treasury may, in writing, direct any bail-in administrator, or any director of the institution, to take specified action to enable the United Kingdom to pursue any of the purposes specified in subsection (3) of section 145A (read with subsection (9) of that section).

(3) Before giving a direction under this section the Treasury must consult the person to whom the direction is to be given.

(4) The person must comply with the direction within the period of time specified in the direction, or, if no period of time is specified, as soon as is reasonably practicable.

(5) A direction under this section is enforceable on an application made by the Treasury, by injunction or, in Scotland, by an order for specific performance under section 45 of the Court of Session Act 1988.”

Other amendments of the Act

12 (1) Section 1 (overview) is amended as follows.

(2) In subsection (2)(a), for “three” substitute “four”.

(3) For subsection (3) substitute—

“(3) The four “stabilisation options” are—

(a) transfer to a private sector purchaser (section 11),

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(b) transfer to a bridge bank (section 12),

(c) the bail-in option (section 12A), and

(d) transfer to temporary public ownership (section 13).”

(4) In subsection (4)—

(a) for “three” substitute “four”;

(b) before paragraph (a) insert—

“(za) the resolution instrument powers (sections 12A(2) and 48U to 48W),”;

(c) in paragraph (b), after “33” insert “, 41A”.

13 In section 13 (temporary public ownership), in subsection (1), for “third” substitute “fourth”.

14 In section 17 (share transfers: effect)—

(a) in subsection (1), after “order” insert, “or by a resolution instrument”;

(b) in subsection (5), after “order” insert “or a resolution instrument”;

(c) in subsection (6), after “order” insert “or a resolution instrument”.

15 In section 18 (share transfers: continuity), after subsection (5) insert—

“(6) This section applies to a resolution instrument that provides for a transfer of securities as it applies to a share transfer instrument (and references to transfers, transferors and transferees are to be read accordingly).”

16 In section 21 (ancillary instruments: production, registration etc), after subsection (5) insert—

“(6) This section applies to a resolution instrument that provides for a transfer of securities as it applies to a share transfer instrument.”

17 In section 44 (reverse property transfer)—

(a) in subsection (2), after “more” insert “bridge bank”;

(b) in subsection (3), after “more” insert “bridge bank”;

(c) in subsection (4), for “A reverse” substitute “A bridge bank reverse”;

(d) in subsection (4A)—

(i) after “make a” insert “bridge bank”, and

(ii) in paragraph (b), for “the reverse” substitute “the bridge bank reverse”;

(e) in subsection (5), for “a reverse” substitute “a bridge bank reverse”;

(f) in subsection (6), for “a reverse” substitute “a bridge bank reverse”;

(g) in subsection (7), for “a reverse” substitute “a bridge bank reverse”;

(h) in the heading, for “Reverse” substitute “Bridge bank: reverse”.

18 In section 63 (general continuity obligation: property transfers), in subsection (1)(a), for “or 12(2)” substitute “, 12(2) or 41A(2)”.

19 In section 66 (general continuity obligation: share transfers)—

(a) in subsection (1)(a), after “13(2)” insert “, or which falls within subsection (1A)”;

(b) in subsection (1)(d)(i), after “11(2)(a)” insert “, or in a case falling within subsection (1A)”;

(c) after subsection (1) insert—

“(1A) A bank falls within this subsection if a resolution instrument (or supplemental resolution instrument) has changed the ownership of the bank (wholly or partly) by providing for the transfer, cancellation or conversion from one form or class to another of securities issued by the bank (and the reference in subsection (1)(b) to “the transfer” includes such a cancellation or conversion).”

20 In section 67 (special continuity obligation: share transfers), in subsection (4)(c), after “order” insert “or resolution instrument”.

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21 In section 68 (continuity obligations: onward share transfers), in subsection (1)(a), after “transferred by” insert “a resolution instrument under section 12A(2) or supplemental resolution instrument under section 48U(2) or a”.

22 In section 71 (pensions), in subsection (1)—

(a) omit the “and” at the end of paragraph (b);

(b) after paragraph (c) insert “, and

(d) resolution instruments.”

23 In section 72 (enforcement), in subsection (1)—

(a) omit the “or” at the end of paragraph (b);

(b) after paragraph (c) insert “, or

(d) a resolution instrument.”

24 In section 73 (disputes), in subsection (1)—

(a) omit the “and” at the end of paragraph (b);

(b) after paragraph (c) insert “, and

(d) resolution instruments.”

25 In section 74 (tax), in subsection (6), for “or 45” substitute “, 45, 48U or 48V”.

26 After section 80 insert—

“80A Transfer for bail-in purposes: report

(1) This section applies where the Bank of England makes one or more resolution instruments under section 12A(2) in respect of a bank.

(2) The Bank of England must, on request by the Treasury, report to the Chancellor of the Exchequer about—

(a) the exercise of the power to make a resolution instrument under section 12A(2),

(b) the activities of the bank, and

(c) any other matters in relation to the bank that the Treasury may specify.

(3) In relation to the matters in subsection (2)(a) and (b), the report must comply with any requirements that the Treasury may specify.

(4) The Chancellor of the Exchequer must lay a copy of each report under subsection (2) before Parliament.”

27 In section 81A (accounting information to be included in reports under sections 80 and 81)—

(a) in subsection (1), for “or 81” substitute “, 80A(2)(b) or 81”;

(b) in the heading, for “and 81” substitute “, 80A(2)(b) and 81”.

28 In section 85 (temporary public ownership), in subsection (1), for “third” substitute “fourth”.

29 In section 136 (overview), in the Table in subsection (3), for “152” substitute “152A”.

30 After section 152 insert—

“152A Property transfer from transferred institution

(1) This section applies where the Bank of England—

(a) makes a resolution instrument that transfers securities issued by a bank (or a bank’s parent undertaking), in accordance with section 12A(2), and

(b) later makes a property transfer instrument from the bank or from another bank which is or was in the same group as the bank, in accordance with section 41A(2).

(2) This Part applies to the transferor under the property transfer instrument made in accordance with section 41A(2) as to the transferor under a property transfer instrument made in accordance with section 12(2).

(3) For that purpose this Part applies with any modifications specified by the Treasury in regulations; and any regulations—

(a) are to be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.”

31 In section 220 (insolvency etc), after subsection (4) insert—

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“(4A) The fact that ownership of an authorised bank is transferred or otherwise changed as a result of a resolution instrument (or an instrument treated as a resolution instrument) does not itself prevent the bank from relying on section 213.”

32 In section 259 (statutory instruments)—

(a) in the Table in subsection (3), in Part 1, in the entry relating to section 60 for “Third party compensation” substitute “Third party compensation: partial property transfers”;

(b) in the Table in subsection (3), in Part 1, at the appropriate places insert—

“48F(1) and (2)

Power to amend definition of “excluded liabilities”

Draft affirmative resolution

48G

Insolvency treatment principles

Draft affirmative resolution

48P

Safeguarding of certain financial arrangements

Draft affirmative resolution

52A

Bail-in compensation orders

Draft affirmative resolution”

“60A

Third party compensation: instruments containing special bail-in provision

Draft affirmative resolution”;

(c) in the Table in subsection (3), in Part 3, at the appropriate place insert—

“152A

Property transfer from transferred institution

Draft affirmative resolution”;

(d) in subsection (5), after paragraph (d) insert—

“(da) section 60A (special resolution regime: instruments containing special bail-in provision),”;

(e) in subsection (5), after paragraph (k) insert—

“(ka) section 152A (bank administration: property transfer from transferred institution),”.

33 In section 261 (index of defined terms), in the Table, at the appropriate places insert—

“Bail-in compensation order

49”

“Resolution instrument

12A”

“Special bail-in provision

48B”.

Part 2Modification of Investment Bank Special Administration Regulations 2011

34 (1) This section modifies the application of the Investment Bank Special Administration Regulations 2011 (S.I. 2011/245) (“the regulations”) in cases where a resolution instrument has been made under section 12A of the Banking Act 2009 with respect to the investment bank in the relevant 3-month period.

(2) In subsection (1) “the relevant 3-month period” means the 3 months ending with the date on which the FCA receives the notification under Condition 1 in regulation 8 of the regulations.

(3) In their application to those cases, the regulations have effect with the modifications in sub-paragraph (4); and any enactment that refers to the regulations is to be read accordingly.

(4) In regulation 8 (in its application to those cases)—

(a) in paragraph (5)(c)(ii), for “appropriate regulator” substitute “Bank of England” and after “notice” insert “and the appropriate regulator”;

(b) in paragraph (6), omit sub-paragraph (a) (but continue to read “that” in sub-paragraph (b) as a reference to the insolvency procedure to which the notice relates);

(c) after paragraph (6) insert—

“(6A) Where the FCA receives notice under Condition 1, it must also inform the Bank of England of the contents of the notice.

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(6B) Where the Bank of England receives notice under subsection (6A), it must, within the period in Condition 3, inform the person who gave the notice and the appropriate regulator whether or not it consents to the insolvency procedure to which the notice relates going ahead.””

Amendment 105 agreed.

Amendments 106 to 110

Moved by Lord Newby