Clause 1
Banking Bill
10:30 am
Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)
I will circulate the names of the members of the group to the Committee.
Returning to the overview of the SRR, part 1 of the Bill includes provisions on compensation, incidental functions, the role of the Treasury and how the regime applies to building societies. The special resolution regime also includes the bank insolvency procedure and the bank administration procedure, which the Committee will consider when we come to parts 2 and 3. The special resolution regime outlined in clause 1 is at the heart of the Bill; it establishes a permanent and credible framework for authorities to resolve a failing bank. The SRR provides the authorities with the tools to deal with banks in financial difficulty in a manner that supports the public interest in financial stability, confidence in the banking system and depositor protection.
In most situations, normal regulatory interventions or voluntary action by the management of the bank can resolve an individual bank’s difficulties. However, bank failures will sometimes occur and can damage confidence, disrupt financial markets, harm depositors and generate significant costs to businesses and to the economy as a whole. Bearing that in mind, it is worth taking a couple of moments to outline the background to the development of the special resolution regime and the genesis of this part of the Bill.
The recent period of sustained disruption in global financial markets, starting in the United States in the summer of 2007, has had a widespread impact on financial markets, firms and economies across the world. In the UK, the most visible consequence of that has been the financial difficulties faced by a number of financial institutions, including Northern Rock plc.
In summer 2007, Northern Rock found itself unable to finance its activities, due, among other things, to a business model that was heavily reliant on funding from the wholesale money market. In the light of those severe difficulties, the Government took action to maintain financial stability, while protecting consumers and the interests of the taxpayer.
In February 2008, when it became clear that, in the light of prevailing market conditions, no institution was prepared to make an offer to take over Northern Rock that was judged adequate to protect the taxpayer, the Government took the decision to take the bank into temporary public ownership. To that end, legislation to give the Government powers to transfer the shares or property of a failing bank was brought forward in the Banking (Special Provisions) Act 2008, which received Royal Assent on 21 February of this year. The main transfer powers expire, under the terms of that Act, on 20 February 2009. That Act provided the Government with temporary powers should further action be needed while permanent legislation—this Bill—was being prepared and passed.
The prudence of that approach has been demonstrated by events concerning Bradford & Bingley plc. On Monday 29 September the Government used both the share and property transfer powers provided by the 2008 Act to bring the bank into temporary public ownership and then to transfer the deposit book to a private sector purchaser. The special resolution regime outlined in clause 1 replaces the 2008 Act with a permanent framework for the authorities to resolve a failing bank, with objectives that include protecting and enhancing financial stability and confidence in the banking system, and protecting depositors and public funds. Those objectives will be considered under clause 4. By setting out a clear and credible statutory resolution regime to address a failing bank, which removes control from the bank’s management by overriding the powers of shareholders and directors, the regime also provides a strong incentive for banks and their directors to take action to prevent their business from getting into difficulties.
Unlike the 2008 Act, the SRR has been designed as permanent legislation and therefore provides a framework with strict conditions that must be met before the powers are exercised, clear objectives that the authorities must have regard to in exercising those powers, and refined stabilisation powers that are targeted in their effect alongside new tools such as the bank insolvency procedure. Clause 1 also establishes that each of the tripartite authorities—the Bank of England, the Treasury and the Financial Services Authority—has a role in the operation of the special resolution regime. The powers and responsibilities of those bodies are extended by the Bill, in line with each institution’s current mandate and responsibilities, to enhance the UK framework for financial stability and depositor protection. The SRR also provides the authorities with a wide range of tools to meet the above objectives, by resolving a failing bank or facilitating fast payout to depositors. The establishment of the special resolution regime was widely supported by stakeholders throughout the consultation process; I am also grateful for the support from Opposition Members.
As I have said, clause 1 clearly sets out the framework for the whole package of SRR tools—we will debate the tools later—giving the authorities the full range of options for dealing with a bank that is experiencing difficulties. I appreciate that the Committee will wish to discuss many of the provisions that the clause summarises, and which I have just briefly run through. I am looking forward to debating the provisions in detail over the remaining sittings. However, I propose that detailed consideration of those provisions be reserved until we reach the corresponding clauses. I will be guided on that by you, Mr. Gale. Given that clause 1 is a broad summary clause, intended to provide users of the Bill with a clear understanding of its contents, I urge that the clause stand part of the Bill.