My Lords, the statutory instrument that I will discuss today follows the reforms introduced by the Government in 2015 to modernise and streamline the insolvency process. Those reforms were commenced in stages and these regulations cover the application of the 2015 reforms that came into effect in April 2017. The regulations will amend the financial sector insolvency regimes to take account of the April 2017 reforms.
For the benefit of noble Lords I will briefly set out where these regulations fit within the context of general insolvency law. As a starting point, insolvency law is based on the 1986 Insolvency Act which has been amended various times, including by the tranches of Government reforms instigated in 2015. This broader legal framework has been subsequently modified into specific insolvency regimes for different sectors, including for financial services. The insolvency regimes for financial services exist because general insolvency procedures are not always suitable for failed financial institutions. This is because general insolvency law does not necessarily reflect the complex nature of financial institutions and the impact that can arise from their failure.
I will now provide more detail on the 2015 reforms, explaining the genesis of the regulations before the House today. The 2015 reforms resulted in wide-ranging changes to the UK’s general insolvency regime, which broadly affected all sectors. These reforms were implemented in several stages: in May 2015, October 2015, April 2016 and the final tranche in April 2017.
The April 2017 reforms did multiple things. First, they removed the default requirement to hold a physical meeting of creditors as the decision-making mechanism in an insolvency proceeding. Instead, a deemed consent procedure has been introduced which allows actions to be taken in an insolvency unless the creditors oppose the action. If 10% or more of creditors object to the proposal then the office holder will use an alternative decision-making process, such as a virtual meeting, correspondence or electronic voting. These changes remove unnecessary burdens and enable the greater use of technology to reduce the cost of administering insolvency proceedings. Secondly, they enable creditors to opt out of certain notices for both company and individual insolvency. This reform reduces the expense of sending notices for the office holder and similarly reduces for the creditor the expense of dealing with unnecessary and unwanted notices. The regulations before the House today apply the reforms of April 2017 to the specific financial services insolvency regimes where appropriate.
I will now set out further detail on who the regulations will affect. For companies, partnerships or individuals carrying on insurance or other financial activities, the regulations work to align those specific regimes with the April 2017 reforms. By aligning the insolvency proceedings for these kinds of financial firms with the April 2017 reforms, the amended regulations ensure that the benefits of the broader 2015 reforms to UK insolvency law extend to the financial sector.
However, in the case of modified insolvency regimes for financial institutions which are not companies, partnerships or individuals, and specialised regimes such as those for banks and building societies, the regulations do not apply. Instead, the regulations keep the legislation as it was prior to the April 2017 reforms coming into force. Due to the considerable volume of legislation affected by the 2015 reforms, this approach is necessary while the impact of the reforms on these types of institutions is further assessed and decisions are made about their implementation.
These consequential amendments are required to update and maintain consistency in legislation that governs the insolvency regimes for financial sector firms. The Government are committed to improving public and business confidence in the insolvency process. Having clear legislation that governs this process is fundamental in achieving this confidence. I beg to move.
My Lords, I am grateful for that thorough and clear explanation by the Minister of what these regulations do. It took me a while to ponder them in order to reach the same kind of conclusion. It seems that everything in the instrument is technical and is required to smooth out the problems that can arise when there is insolvency in relation to financial services. I can understand how the legislation will benefit institutions with many creditors, such as a building society, a mutual or, indeed, a bank.
I have two questions for the Minister. No impact assessment has been produced for the regulations. I would be interested to know the reasons for that because if removal of the requirement for physical creditors’ meetings and allowing creditors to opt out of certain notices was explored in the insolvency red tape challenge, surely the conclusion must have been that this would make savings, otherwise why would you do it? Secondly, there are no plans to review these amendments. My question is this: how will the Government know that they have done their job and whether they are working? I have a bit of a bee in my bonnet about that because we should always look back at legislation to see whether it has in fact done its job. To some degree we have built in things like sunset clauses where it is clear that legislation is no longer required. If we are seeking to reduce red tape, I point out that assessing whether our legislation is working is a good way of enabling us not to have any extra red tape. There is plenty of it in HM Treasury, that is absolutely for sure. I would be grateful for the Minister’s comments on those points.
My Lords, before I start I should apologise for what is going to be a rather scrappy and rambling speech. The reason for that is that rather lazily I started to look at this instrument only on Saturday, and I have to say that I pretty much regret that I did so. I had great trouble in trying to understand it, particularly the Explanatory Memorandum. Either these regulations are important or they are a trivial tidying-up exercise, but I could not work out which. They seem to centre on meetings and notices. I shall quote from the Explanatory Memorandum:
Paragraph 7.4 sets out what the principal changes are. As the Minister said, they concern the removal of physical meetings for creditors and allowing them to opt out of receiving certain notices. That seems unobjectionable until one reads, together with paragraph 7.5, paragraph 7.6:
The special insolvency regimes are enormously important. They culminate in the Bank of England’s approach to resolution, which is a combination of several Acts. I see the noble Lord, Lord Young, in his place. We have battled over the bits and bobs of these Acts—well, battled is not quite fair, but sought to understand them and how they fit together. Of course, the consequence of the Bank of England’s approach is that banks do not become insolvent. They are resolved before that. It is already quite complicated.
I thought, “Well, why don’t I break the normal rule and look at the regulations?”. It is pretty desperate when you have to look at the regulations because they are, as usual, pretty indecipherable, especially as they run to several pages, despite an apparently simple purpose of disapplying something in a particular place. Since it was so long I thought I would pick on something that I think I know a little about. That took me to page 5 of the regulations on the Banking Act 2009. Regulation 6(3)(a) requires that,
“the entry for section 141, in column 3 at the beginning insert … ‘Ignore the amendment made by paragraph 36 of Schedule 9 to the 2015 Act’”.
This is a form of legislation that I have never come across before. I am used to instruments changing the law and so on, but to say to disapply a law, or to read it as though it has not been amended, which is what this says, creates immediate problems. You can get into the Small Business, Enterprise and Employment Act and find out what is to be disapplied, but you then have to try to find what disapplying the Act means. It means going back to the Insolvency Act 1986 to see which particular amendments to that Act were in force before April came along and it was changed to something that these regulations want to change it back to. I failed. I could get a copy of Section 141 as enacted in 1986 and I could look up the section that now exists until these regulations become active. It proved why I am not a lawyer: while the words are different, I could not find any difference in the meaning.
It seems that the essence of this is: what is the damage if we do not approve? I hope that smiling and shaking of the head from the Minister means that he will write to me rather than try to answer me. I would like an answer to this in writing if the Minister cannot provide it tonight: what damage to the insolvency regime—particularly in the Financial Services and Markets Act 2000, the Banking Act 2009 and the other Acts mentioned in the regulations—would occur if we were not to approve these regulations? If the damage is trivial, that is fair enough. If the damage is that it puts in doubt the working of the special resolution regimes which the Treasury has developed and put into law, it is very serious. If those regimes are seriously damaged, the resolution approach which the Bank of England thinks it has may be at risk
One problem with bank resolution is that it is something that one never does. The trick is for the industry to know about it and think, “That is going to be so painful, we will be careful enough not to get into that position”. So we do not have any case law. However, we nearly had some case law: the Co-op Bank was within a whisker of going broke. The resolution regime worked in that the creditors, those who were owed money by the bank, thought that they would get an even worse deal under the resolution regime than by putting together their own deal, so they put their own deal together within hours of the point at which they would have run out of money. The resolution regime therefore worked by virtue of its existence, but is it fatally flawed until we approve this instrument?
If that is the case, it means that the 2015 Act contains a serious flaw, and we need to know how that happened. Was there not proper consultation in developing the Act? I assume that the original parent of the Act was BIS, as it was known then. The developer of the special resolution regimes is the Treasury. It seems to be either some trivial tidying-up or a serious mistake, for which I would look to the Minister to apologise. One thing I think I can ask him to apologise for is the Explanatory Memorandum. As a politician of average intelligence—you might call that a bear of little brain—I found it impossible to work out just how important this instrument is or is not.
I am grateful for those contributions and for your Lordships displaying your usual assiduousness in these matters, which, as I outlined in my opening remarks, are technical in nature.
We should be clear that “technical” does not mean “trivial”. “Technical” can be at the essence of whether the law is working.
I absolutely agree with that. Often in legislation we deal with the overarching principles and leave the technical aspects, which are not trivial but very significant, to be worked out through secondary legislation, which is the purpose of our discussion here.
I shall come on later to the points raised by the noble Lord but want first to address those made by the noble Baroness, Lady Burt, who asked about the general genesis of the regulations. Due to the considerable volume of legislation affected by the 2015 reforms, this approach is necessary while the impact of reforms on these types of institution is further assessed and decisions are made about implementation. In many ways, that is about trying to learn as we implement so that we do not overcorrect what we seek to introduce. Today’s regulations are consequential amendments to the financial sector insolvency regimes to take account of the April 2017 reforms. Given the limited amount of parliamentary time available, there are currently no plans to consolidate the legislation. Stakeholders who are directly affected by the legislation and therefore need a more granular understanding will be able to purchase consolidated versions of it from commercial providers.
I come to the point raised by the noble Baroness about impact assessment. BEIS carried out an extensive consultation before bringing forward the insolvency reforms. BEIS received information in this consultation which refined the policy, and it helped the impact assessment process to quantify the cost of these regulations. BEIS further undertook a full impact assessment for the changes brought in by the wider reforms and for the impact on the economy as a whole. It is a very important part of those principles that that is considered in that way.
I shall double-check, but my feeling is that those impact assessments were published earlier in the sequence of legislation and reforms that I mentioned. I shall double-check but if that is not the case, impact assessments are normally a matter of public record and they will therefore be made available. The noble Baroness also asked how the financial sector will benefit from these changes. Where these regulations apply the reforms, firms in the financial sector will benefit from a modernised and streamlined insolvency process. The benefits include removing unnecessary burdens, such as requiring a physical meeting of creditors. Financial institutions will not be directly affected by these. As to the impact these regulations will have on the financial sector, these regulations apply the reforms where appropriate, ensuring that the benefits of the reforms are extended to the financial sector. Where the regulations do not apply the reforms, there will be no impact on the financial sector. As I mentioned, an impact assessment was undertaken.
I come to some points raised by the noble Lord, Lord Tunnicliffe. He focused on recalling the impact of the Banking Act 2009 and asked what the impact might be on the Bank of England’s resolution of banking problems to ensure smooth working. The insolvency regimes for financial sector firms that we are discussing today sit alongside the Bank of England’s powers under the special resolution regime established by the Banking Act 2009. Today’s regulations are required to update and maintain consistency in the legislation that concerns these special insolvency regimes. The regulations do not affect or amend the Bank of England’s powers under the special resolution regime.
The noble Lord also asked about the drafting of the statutory instrument, basically saying that it is not acceptable because you need to see the Banking Act 2009 before it was amended. Today’s regulations are consequential amendments that amend the financial sector insolvency regimes to take account of the April 2017 reforms. Given the limited amount of parliamentary time available, as I mentioned earlier, there are currently no plans to consolidate the regulations.
The thing that worries me is that the language the Minister uses suggests a progressive improvement while in fact this instrument disapplies—it does not update; it “undates”, for want of a better term, although I do not think that there is such a word. It suggests that the conclusion has been reached that the application of the 2015 Act in the area of financial services is actually doing harm. Nobody is going to disagree with the 2015 Act to the extent to which it reduces bureaucracy, but this instrument says, if I have read it properly, that it will not apply in these circumstances. It seems a very unusual instrument for that reason, and the only logic for it is that there is harm in it applying—unless I have totally misunderstood the instrument and the Explanatory Memorandum.
The noble Lord has not misunderstood it, but in my opening speech I said that what is proposed here is to disapply while application of the other measures referenced went ahead. I would have thought that that could be supported. I accept the noble Lord’s point that it is perhaps unusual to do it in that way. However, it has been done in consultation with the businesses that are affected, which believe that this is an effective way forward. Clearly, that is why we are legislating in this way.
May I press the Minister just a little more? I recognise that we will not resolve this tonight—and, of course, as ever, we will not cause a constitutional crisis and vote against it. However, I would be grateful if I could have a detailed response by letter from the Minister setting out what would happen if this instrument were not passed. What harm is being done by the fact that the 2015 Act currently applies and has to be disapplied to the position before the Act in a set of particular circumstances, with particular reference to the Banking Act and the resolution regime?
I am happy to do that. I will write in detail to set this out, and I hope that that will be helpful for the record. I am also happy to copy that to the noble Baroness, Lady Burt, as some comments were made about the Explanatory Memorandum, which I hope will be covered as well.
I reiterate that the impact assessments have already been published, and I will provide in my letter to the noble Lord, Lord Tunnicliffe, a copy of—or more probably a link to—that impact assessment. I hope that, with those reassurances and the commitment to write, noble Lords will accept these regulations, which I commend to the House.