I beg to move Amendment 30, in Clause 16, page 20, line 28, after ‘ring-fencing)’ insert

‘or section (Bank bail-in regime)(2) (bank bail-in regime)’.

With this it will be convenient to discuss the following:

New Clause 19—Bank bail-in regime—

‘(1) The Bank of England must, at least once in every year, prepare an assessment of any progress which has been made towards the introduction of a bank bail-in regime in the United Kingdom or, once a bank bail-in regime has been introduced, of its operation.

(2) If a bank bail-in regime is not in force in the United Kingdom by the end of 2015, the Treasury must by regulations make provision for such a regime.

(3) an assessment under subsection (1) must include—

(a) an assessment of how much of the issued debt of banks would be covered by any proposed bank bail-in regime or is covered by the provisions of the bank bail-in regime in force;

(b) (if a bank bail-in regime is in force) an account of the sorts of companies within groups which have creditors who are covered by the bank bail-in regime and of the sorts of persons who are creditors who are so covered;

(c) a review of the descriptions of creditors who would be covered by any proposed bail-in regime or are covered by the provisions of the bank bail-in regime in force, and

(d) an account of progress towards international co-operation in relation to bail-in regimes.

(4) The Bank of England must send the assessment to the Treasury.

(5) The Treasury must lay the assessment before Parliament.

(6) The Bank of England must publish the assessment in such manner as they think fit.

(7) In this section “bank bail-in regime” means provisions under which losses incurred by a bank are to be met by certain descriptions of creditors of the bank should the bank encounter financial difficulties which might otherwise lead to the taking of action which would be likely to have implications for public funds.

(8) For the purposes of subsection (7) “action having implications for public funds” has the same meaning as in section 78(1) of the Banking Act 2009.

(9) In this section “bank” means a UK institution which has permission under Part 4A of FSMA 2000 to carry on the regulated activity of accepting deposits, other than a building society (within the meaning of the Building Societies Act 1986) or any description of institution excluded by virtue of subsection (2)(b) of section 142A of that Act from being a ring-fenced body as defined in subsection (1) of that section.’.

Amendment 31, in title, line 4, after ‘insolvency;’, insert

‘to make provision in relation to a bank bail-in regime;’.

The amendments relate to the bail-in regime. We talked a little about the potential of bail-in arrangements earlier when looking at the preference given to depositors, but having seen the dreadful events in Cyprus, the issue has become more serious, with more popular understanding of what could befall depositors in a bank if there are particular difficulties. The amendments would provide for a bank bail-in tool to be created in the event of a bank finding itself in financial difficulties, and would ensure that there was a process for creating a bail-in arrangement that is robust and able to cope with a number of different circumstances.

Our principal change would be to amend Clause 16 to allow the addition of new clause 19, which would ensure that every year the Bank of England prepared

“an assessment of any progress which has been made towards the introduction of a bank bail-in regime in the United Kingdom or, once a bank bail-in regime has been introduced, of its operation.”

New clause 19 would also ensure that proper assessment was undertaken by the Bank, particularly in respect of how much of the issued debt of banks would be covered by any proposed bail-in regime, and would make sure that such a review considered the sorts of persons who are creditors to be covered by that scheme. The Bank of England would then forward the assessment to the Treasury, which in turn would lay it before Parliament, so that the Bank and others could respond in due course.

The Parliamentary Commission on Banking Standards helped to inspire this group of amendments. It was very concerned that the Bill had been brought forward without an adequate bail-in arrangement. That is why we find ourselves in this slightly unusual terrain—I do not think that I have encountered this situation before in my many years of service on Bill Committees—where we are proposing an Amendment not to a clause, but to the long title of the Bill. I am assured that we sometimes discuss the long title in Committee, at the very end: the long title would need to be amended to make the scope of the Bill cover the provisions in new clause 19; amendment 31 is therefore consequential to the new clause.

Even after ring-fencing, the failure of a large bank could still pose a risk to public funds. Both ring-fenced and investment banks have the potential to shake financial stability, which is why the Parliamentary Commission was so keen to advance a bail-in regime that would apply to both ring-fenced and investment banks. A bail-in regime is a regulatory tool that allows bonds to be converted into capital when a bank is in financial difficulty, which would allow for the resolution of banks without recourse to the public purse. It would work by capitalising a bank through the conversion of debt into equity or through debt write-down; it would occur when a bank is put into resolution, and so would need to be triggered by the regulator. It could allow some of the bank’s operations to continue as a going concern, or could facilitate a solvent wind-down in resolution. There is a growing feeling that the banks and the bankers obviously contributed significantly, or even wholly, to the financial crisis and left the taxpayer to bear the burden. A bail-in tool would help to prevent that from happening in the future.

As I understand it, the Government have accepted the principle of the bail-in. However—and this is a pity—they seem to have been dragging their heels a bit, not just in failing to put such an arrangement in the Bill but in the way in which they have been waiting for the European Union to determine this particular set of rules through the recovery and resolution directive—a directive that might not have been that well known until recent weeks. Events can move at great speed but, as we know, there is always the possibility with European legislation that it might take a phenomenal amount of time. Especially given the situation in Cyprus, there could well be wrangling and disagreements about how the process will work for quite a long time to come. I therefore think that Britain needs to settle its own bail-in arrangements at the earliest possible opportunity. It would be far better for us to have our home-grown variant. If Europe follows later down the line, let them follow where we have led, in my humble opinion.

The introduction of a bail-in regime would mean that a resolution of a failing bank could be carried out in just days, such as over a weekend, rather than over weeks, as we have seen in Cyprus. It would be far better to prepare and think about such things in advance. Hopefully the scenario will never occur, but a stitch in time saves nine, as my mother always said.

HSBC’s evidence states that

“while ring-fencing adds clarity to different parts of the banking model and makes explicit the risks being borne by creditors to each portion, it has less practical impact on the ‘sorting out’ of failed banks: it is financial bail-in which provides the solvency  support to allow for a more considered restructuring of the firms at the necessary granular level using the information from the resolution planning process rather than the structural separation of activities.”

The Parliamentary Commission commented:

“An effective and credible bail-in tool would represent a major step towards eliminating the implicit guarantee and ensuring that the costs of resolving a failing bank are not borne by the taxpayer. It is notable that bail-in is at the heart of the resolution strategies currently being designed for large systemically important banks, and will remain important even after the ring-fence is introduced.”

If the Government want to introduce a bail-in regime, now is the time to be getting on with it. Some paving provisions in the Bill would be sensible and prudent. Sitting back, not taking the opportunity, and waiting for the European Union to resolve the issue is not necessarily the wisest course of action. It would be better for us to shape our own destiny on such issues.

As the Parliamentary Commission highlighted, there are significant risks that the EU-wide measures could be watered down and delayed, and the measures really ought to be in place by the end of 2015. Standard Chartered bank, whose chief executive is Peter Sands, said:

“We strongly urge the Government to adopt a statutory regime for the application of bail-in covering all existing senior unsecured debt in issue irrespective of residual maturity. We believe this provides a good foundation for a global regime.”

Sir John Vickers, who also gave evidence to the Commission, said that he believed that a European solution was possible but agreed that the UK should implement such a change in national legislation “in any event”. Even the august incoming Governor of the Bank of England, Mark Carney—for it is he—acknowledged that, on its own, the ring-fencing arrangements would not be sufficient. He described the creation of a credible bail-in mechanism as critical and essential to prevent taxpayers from being on the hook.

When the Commission says to the Minister that Parliament needs assurances that bail-in is not a paper tiger—markets need that assurance too—the Bank of England’s role to report on the development and functioning of the bail-in arrangement is an important recommendation. I hope that the Minister will accept that.

In our view, the report should include: the quantity and issue of debt, which can easily be subject to bail-in; whether bail-in-able debt is being issued over the correct part of the banking group; the distribution of holdings of bail-in-able bank debt in the rest of the financial system; and the feasibility of ways to bail in creditors beyond long-term unsecured bonds such as corporate depositors, uninsured household depositors and derivative counterparties. We would also like the report to include progress on tackling global legal barriers that might exist to the recognition of bail-in regimes.

Given the size of the UK’s financial sector, which makes up an estimated 75% of the EU’s financial services sector, taxpayers here face higher levels of risk than elsewhere in Europe. The implementation of a bail-in mechanism is therefore particularly important in our own jurisdiction. It is important that the Government show that steps are being taken before 2015 so that we can make some progress. I do not see any excuse for not doing what the Commission has recommended, and I commend its arguments to the Committee.

I have a great deal of sympathy for the arguments of the Commission and the case that the hon. Gentleman put. Bail-in is incredibly important and the events of the past couple of weeks in Cyprus emphasise the importance of having sure knowledge in advance of what happens in the event of failure, and of which creditors are in line to have their capital bailed in to help a bank be resolved. The confusion of recent days reinforces the case for that knowledge.

Recent events also underline the importance of the international perspective. Even in a small country such as Cyprus, the international spread of banks raised questions for other jurisdictions, particularly for Greece. There are discussions about the resolution of the Greek branches, which are particularly exposed to both economies. International arrangements, given the international nature of some of the banks, are the first best solution. They commend themselves, and we should aim for them.

My reservations about the Amendment are not to do with the desirability of having bail-in provisions. It is important that there should be those and that they are credible and reliably cover the kinds of creditors that need to be bailed in.

On the negotiations on the recovery resolution directive, the hon. Gentleman implied that we were the passive recipients of whatever comes out of Europe, but we feel particularly strongly about the issue for all the reasons that he identified. Most people in the EU would concede that we are one of the driving forces behind the dossier and its progress. I do not know about you, Mr Bone, but I spent my lunchtime looking at a note on the progress that we are making on the resolution and recovery directive, such is our constant desire to move it forward.

We are making progress. The Irish presidency of the EU has prioritised completion of the resolution and recovery directive and good progress is being made. Given that the Independent Commission on Banking recommended that the bail-in power should not come in until 2019, we see every prospect that it will be agreed at the European level well in advance of that. We hope to secure agreement under the Irish presidency, for which the issue is a priority.

Members of the ICB gave advice to the Parliamentary Commission. Martin Taylor, who was a member of the ICB, said:

“A common international standard is also very desirable. If we can do that through the European work, that would be the best answer”.

Sir John Vickers, whom the hon. Gentleman quoted, said that he had

“no reason to think that the European processes would move as slowly” as to require a separate approach. That continues to be our assessment, but the question is reasonable—what would happen if that stalled and our ambitions, expectations and the sacrifice of our lunch hours were in vain and we were not able to secure progress? Given that the Irish presidency lasts until June, we will certainly know on Report in the Commons how well we are progressing. By the time the Bill reaches the House of Lords, we will have a clear idea of whether the matter has been agreed.

My preference would be to consider the issue at that stage, rather than to establish a mechanism that triggers a review; agreement at a European level is identified by most commentators as being the most desirable outcome.  If we are unable to agree, we will know that relatively soon, while the Bill is before Parliament. We could reflect then on the measures that we could include in the Bill to make sure that we had a credible bail-in mechanism that, for all the reasons the hon. Gentleman identified, is very necessary.

I am glad to hear that the Minister spent his lunchtime looking over the resolution recovery directive papers that the Irish presidency had approved. I do not know whether he had the spaghetti bolognese on offer in the Members’ Tea Room—100% beef, I am assured. It must be fun to dine with the Minister on occasion, although perhaps not today.

The Minister makes a point about waiting to see how the European arrangements progress and says that Britain can be in the driving seat of the resolution recovery directive. I hope so too, given the size of our financial sector relative to the remainder of the European Union.

I happen to think that the bail-in arrangements are mission-critical—not just to our future as a financial services industrial sector, but to the economic well-being of a nation state in its own right. Saying, “Well, we hope that these will come into force well in advance of 2019” does not quite cut it—that is six years from now. “Well in advance”? How long is a piece of string? We should make efforts to think these things through for ourselves and make progress under our own steam now. We do not know what is around the corner. Say, for the sake of argument, the eurozone situation becomes even more of a swirling morass. It is difficult to envisage what situations could occur.

To be prepared, it would be better to kick off rather than say, “Let’s wait until June and see how well the Irish have done.” I am not sure who is taking over the presidency after the Irish; perhaps the Minister can let us know. What I am saying is perfectly realistic. It is not asking a massive amount to say that the Bank of England should be encouraged to assess the progress being made towards introducing an adequate bail-in regime. That is all new Clause 19 would do, incidentally; it does not specify the full details and dimensions of what that bail-in process would do. It just puts a needle into the Bill that says, “Come on. Let’s encourage this process. Let’s move it forward that little bit more.” That would be a worthwhile area for the Bill to cover. The Parliamentary Commission has expressed strong views on the issue.

As I said, we expect the EU negotiations to make progress during the life of the Bill in Parliament. If they failed to do so, against our expectations, we would want the Bill to reflect that.

If we accepted the new Clause, we could end up with a paradoxical situation. We would have a requirement for the Bank of England to review within a year after Royal Assent, which is some months ahead, something that duplicated an aspect that we might have addressed with immediate effect. Far from advancing the discussion, it would be a curious and eccentric provision in the Bill to require a review of something that had already been addressed and whose powers had already been provided for.

That might not be the case. By extension, if further developments had taken place, it would be possible to remove the provision on Report or in the other place as the Bill progressed. Including the new Clause would be a stitch in time to make it clear that bail-in is incredibly important.

The Commission has very strong views, and those who expressed their views in evidence to the Commission also felt that we need to move things forward rather than taking a wait-and-see approach. Such an approach might have been appropriate before Cyprus, but that situation is a wake-up call that we cannot ignore. I would like to press Amendment 30 to a vote to make that point.

Question put, That the amendment be made.

The Committee divided: Ayes 7, Noes 10.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Clause 16 provides that the Treasury shall exercise by statutory instrument the powers conferred on it by the Bill. That is the standard way in which powers given to the Government to make Delegated legislation are exercised.

The clause also provides that the affirmative procedure should be used in relation to regulations made under clause 8, which we discussed earlier today, applying ring-fencing provisions to building societies. The affirmative procedure is used because the power given in clause 8 will permit the Treasury to amend primary legislation—in particular, the Building Societies Act 1986.

Subsection (3) of clause 16 sets out the parliamentary procedure that applies to orders made under clause 18, which permits the Treasury to make transitional or savings provisions in connection with the commencement of any provision in the Bill. In general, such orders will be subject to the negative procedure, as is usual for this class of statutory instrument. However, where provisions made under clause 18 will be included in the same statutory instrument as provisions made under sections that are subject to the affirmative procedure, they will also be subject to the affirmative procedure. That is necessary to enable provisions under clause 18 and other enabling powers in the Bill to be included in the same statutory instrument.

Question put and agreed to.

Clause 16 accordingly ordered to stand part of the Bill.

With the leave of the Committee, we will take Clause 17 stand part with clauses 18 to 20 stand part, unless any Committee member wishes to speak separately to clause 19, in which case I propose that we take clauses 17 and 18 stand part together.

I have one question for the Minister on one of those clauses.

We can debate them together. Is that okay with the Committee? I call the Minister.

This is an unexpected development, Mr Bone. I will describe the principle of Clause 17—

Order. Just so that the Minister is clear, what we have just decided is that we will debate clauses 17 to 20 stand part together and then deal with them at the end of the debate.