I have some general comments to make about the clause, so I shall be as quick as possible on the amendments, which relate to subsection (2). Amendment No. 152 attempts to tighten up the wording. Currently the clause refers to the Treasury having regard
to the desirability of ensuring that if a residual bank is wound up after transfer, pre-transfer creditors do not receive less favourable treatment than they would have received.
I suggest that the Treasury shall ensure that happens. Amendment No. 153 simply clarifies that the reference to it in the last line of the subsection is the residual bank that has been wound up. I think it is a stylistic point, unless I have misunderstood the clause.
The clause provides a safeguard to give creditors a degree of certainty about how they will be treated should they be left in the residual of a failing bank following the exercise of the property transfer powers to transfer some of the failing banks property, rights and liabilities. We have already discussed how that is an important safeguard. In effect, the clause provides that the creditors remaining in the residual bank will receive on the winding up of the residual bank, at a minimum, what they would have received had the whole of the bank gone into insolvency. Of course, through the mechanism of the bank resolution fund creditors may receive more than they would have otherwise received, but the clause provides that they shall receive no less.
A second purpose of the safeguard is to ensure that a partial property transfer does not create de facto depositor preference in insolvency. The Government remain committed to the existing insolvency priority rankings and do not propose to introduce a regime of depositor preference. The clause ensures that a partial transfer of depositors from a failing bank will not have the effect of preferring those creditors transferred out.
To provide context to the amendments proposed by the hon. Member for South-West Hertfordshire I shall briefly set out how the safeguard will work, while pointing out that we are currently consulting on the draft regulations and that matters may change as a result of the consultation. Following a partial transfer, creditors remaining in the residual bank will have a claim on the assets that have not been transferred. Realisations from those assets will be distributed by the bank administrator to the creditors in line with the standard insolvency priority order. In certain circumstances the payment received by those creditors may be less than they would have received if the bank had gone into an insolvency procedure. In such situations, the clause will provide a mechanism whereby affected creditors may receive compensation for the amount by which they have been made worse off as a result of the exercise of the stabilisation tools. That amount will be calculated by an independent valuer and will involve an estimation of what realisations would have been made had the whole bank been wound up.
I believe that the purpose of the hon. Gentlemans first amendment is to require the Treasury to ensure that pre-transfer creditors do not receive less favourable treatment than they would have received had the bank been wound up immediately before transfer. The clause as drafted requires the Treasury to
have regard to the desirability of ensuring that that is the case. It has been drafted that way on purpose. The regulations made under the clause will put in place a procedure to ensure that no creditor will be worse off. That procedure will include calculating hypothetical insolvency of the failing bank. Given the necessarily counterfactual nature of the calculation, it would not be appropriate for the Government to commit in statute to ensuring that creditors are no worse off under that procedure than if the bank had been wound up, because it is not possible to know definitively what that would mean. Therefore, the languageappropriately, I believehas been drafted in less concrete terms.
Having said that, I assure the hon. Gentleman that the Government are committed to providing adequate compensation to creditors to ensure that the safeguard is effective and provides confidence to creditors who invest in banks. I believe that the Governments provision under the clause and the draft regulations, on which we are consulting, provides that confidence.
Turning to amendment No. 153, the hon. Member for South-West Hertfordshire seeks to replace the term it with a reference to the residual bank. However, I do not believe that is correct. Replacing it with the residual bank would not refer to the correct counterfactual. As I have stated, the correct counterfactual is the winding up of the whole bank, not the residual bank, following a transfer. Having provided some background but withoutI hopetreading on the ground of a stand part debate, I invite the hon. Member for South-West Hertfordshire to withdraw his amendment.
Clause 55(6) states:
Regulations may make provision about payment including, in particular, provision for payments...on account subject to terms and conditions...by instalment...by the Treasury...by the Financial Services Compensation Scheme.
Earlier in the Committees deliberations, there was a lengthy debate about the Financial Services Compensation Scheme, which I have no desire to reopen. However, I ask the Minister whether regulations under the clause would amend or supplement provisions relating to the Financial Services Compensation Scheme elsewhere in the Bill. There is a question about the interaction between the third party compensation regime and the Financial Services Compensation Scheme. I am probing whether it is appropriate that regulations affecting the Financial Services Compensation Scheme should be made in clause 55, or whether that fits slightly oddly in the circumstances.
Clause 55(6)(c) and (d) provide that the payment of compensation to creditors is to be made by either the Treasury or the Financial Services Compensation Scheme. The hon. Gentleman has suggested that the FSCS should not be required to contribute to the cost of providing that safeguard. Let me explain why I do not agree with him.
The Government believe as a point of principle that the financial services sector, through the FSCS, should contribute to the costs of the SRR for two main reasons. First, where intervention is necessary to prevent the cost to the wider economy of a failure of a bank, there is a strong argument for banks to contribute to that cost. Banks in the financial services sector more widely benefit directly from the achievements of the SRR objectives, particularly the objective of enhanced financial stability and confidence in the banking system. It is entirely appropriate, therefore, that the sector should contribute to measures that achieve those objectives.
Secondly, but for the use of a resolution tool, the financial services sector would have to fund the cost of compensation to depositors arising as a result of the failure of a deposit taker through the FSCS. Therefore, it is also entirely appropriate that the Treasury may provide that the banks should contribute to the cost of compensating third parties arising from an exercise of SRR tools designed to address a failing bank. As we will discuss when we reach clause 157, safeguards have been put in place to ensure that the FSCS can contribute to the SRR only up to the amount that it would have had to pay out to depositors had the bank entered insolvency.
The hon. Gentlemans point about regulations on FSCS funding being made at this point in the Bill rather than later is a technical one, but I will certainly consider it. On a broader point, the Government have responded to strong stakeholder pressure from the banking industry and others for safeguards to be provided for partial transfers and for them to include compensation to creditors made worse off following a partial transfer. That compensation is a legitimate resolution cost because it is a necessary cost arising from the exercise of a resolution tool.
I know that in responding to consultations on that provision the banking industry has consistently opposed our plans. It argues that the cost of the resolution should be met by an acquiring company or the insolvent banks estate, but we strongly believe that the industry, before taxpayers, should be called upon first to contribute to any shortfall. There is a fundamental issue of principle in that regard. I appreciate the probing nature of the hon. Gentlemans amendments, but it will be up to him to decide the official view of the Opposition in the matter.