Exemption for financial institutions in resolution

Finance (No. 3) Bill – in a Public Bill Committee at 2:15 pm on 4th December 2018.

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

Photo of Nadine Dorries Nadine Dorries Conservative, Mid Bedfordshire

With this it will be convenient to discuss the following:

Amendment 90, in clause 48, page 32, line 39, at end insert—

“85B Review of possible register

(1) Within three months of the passing of the Finance Act 2019, the Chancellor of the Exchequer shall review the viability of establishing a public register on the use of the exemption from stamp duty established under section 85A.

(2) A report of the review under this section shall be laid before the House of Commons as soon as practicable after its completion.”.

This amendment would require the Chancellor of the Exchequer to review the viability of a public register of financial institutions in resolution benefitting from the exemption from stamp duty for certain financial transactions.

Clause 48 stand part.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Clauses 44 and 48 will simplify and strengthen the current financial institution resolution regime by introducing an automatic exemption from stamp taxes on shares for public bodies and creditors whose interests are converted into shares, and stamp duty land tax—SDLT—for certain transfers of land arising from the exercise of resolution powers.

Under the Banking Act 2009, the Government have the power to exempt from stamp taxes on shares and SDLT transfers of property, in the form of shares or land that arise from an exercise of resolution powers. However, the current legislation requires the Government to pass secondary legislation exempting a defined set of transfers. This introduces potential timing challenges and creates additional complexity when resolving a failing financial institution.

The changes made by clause 48 avoid that by specifying exempt transfers in primary legislation. The stamp taxes on shares exemption will be limited to transfers of shares to a bridge entity or a public body that holds the shares temporarily while the institution is being resolved, and to the transfer of shares in exchange for temporary certificates issued to creditors that demonstrate their entitlement to the shares. The exemption does not cover the private sale and transfers of shares in a failing institution to a private sector purchaser, where stamp taxes on shares will be charged as usual.

Similarly, the changes made by clause 44 specify SDLT transfers in primary legislation. This exemption will be limited to transfers of land to a bridge entity or public body that holds the land temporarily while the institution is being resolved. The exemption does not cover the private sale and transfer of land of a failing institution to a private sector purchaser, where SDLT will be charged as usual.

The changes will simplify and strengthen the process of resolving a failed institution. In the event that a creditor is found to be worse off as a result of resolution action, when compared with an ordinary insolvency, they are entitled to compensation, which would be paid by the Treasury. The changes will protect taxpayers by reducing the risk of the Government having to compensate creditors in order to prevent the “no creditor worse off” principle being violated. They were announced in the autumn Budget 2017 and the draft legislation was subject to consultation. Officials from the Treasury and HMRC have worked closed with officials from the Bank of England to develop the legislation.

Turning to the amendments that have been tabled, amendment 90 seeks a review, within three months of the enactment of the Bill, of the viability of establishing a public register on the use of the exemption from stamp duty—something that I have already raised—and would require a report of the review to be laid before the House of Commons soon after its completion. The clauses do not create any tax exemptions for failing institutions themselves. The exemption would apply to creditors of failing financial institutions who see their debt holdings bailed in for equity, to ensure that affected creditors are not penalised inadvertently. The exemption also applies to the Bank of England, which may, in certain circumstances, need to take temporary ownership of a failing institution’s assets, in order to protect financial stability.

The clauses will strengthen and add transparency to the resolution process by providing further clarity for affected creditors and the taxpayer. The register would impose an additional and unnecessary burden on the Bank of England and provide no great benefit to the public. By creating an exemption from stamp taxes on shares and SDLT for certain transfers arising from the use of resolution powers, the Government are simplifying and strengthening the UK’s resolution regime, and I therefore commend the clauses to the Committee.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am grateful to the Minister for his explanation. As he intimated, clause 44 ensures that SDLT is not charged on transfers of land following the exercise of certain resolution powers under the special resolution regime. It is paralleled by clause 48 for stamp duty. As he has intimated, our amendment 90 would require the Government to produce a review and potentially introduce a register of financial institutions in resolution that might benefit from the exemptions for SDLT and stamp duty for certain financial transactions resulting from the measure.

We are asking for such a review to have a clearer understanding of which firms might be relieved of SDLT and stamp duty in this manner. This is without prejudice to the function of the clauses, which we understand and support. In other words, we support the concept that the Bank of England should be able to use its resolution stabilisation powers to manage failing financial institutions in an orderly manner and should as part of that, where required, be able to transfer property, potentially including land held by that body, to a temporary holding entity appointed by the Bank of England or to a temporary public body. In that context, we agree that it does not make sense for SDLT or stamp duty to be paid. We are willing to withdraw our amendment, because of the general acknowledgment of the importance of the measure.

However, I have a question about clauses 44 and 48. The explanatory notes state that they will reduce

“the need for specific regulations to be made under section 74 of the Banking Act 2009 to provide an exemption from a SDLT charge on each exercise of certain resolution stabilisation powers under the Banking Act 2009.”

Obviously, the same applies to stamp duty. In their words, this

“will strengthen and simplify the process of resolving a failing financial institution and help to uphold the ‘no creditor worse off’ principle by ensuring an exemption from SDLT”— or stamp duty—

“is available at the time of resolution announcement.”

That appears to imply that it would have been possible to create measures as amendments to the Banking Act to achieve that end through regulation. I wonder why it is implied that specific banking regulations are viewed as too onerous to create, whereas amendments to the Finance Act 2003, which established the current English SDLT and stamp duty system, are somehow simpler to enact. I am frequently informed by businesses and individuals, as I am sure many of us are, that they balk at the length and complexity of tax law, yet here we are adding to it when an alternative mechanism could perhaps have been found. In that connection, it would be helpful to know whether the Office of Tax Simplification was happy with the measure.

The Minister referred to the fact that the clause was transferring the tax treatment into primary legislation, seeming to suggest that putting measures in place through primary legislation was preferable to putting them in place via regulation. I dare to say that I hope the Minister will have discussions with his colleagues, who seem intent on avoiding the use of primary legislation when it comes to, for example, the UK’s withdrawal process, and in whom we often see not even a willingness to use the affirmative procedure for secondary instruments, let alone primary legislation.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 2:30 pm, 4th December 2018

Taking up the points made by the hon. Member for Oxford East, I will begin with her final point about why we have approached this by way of primary legislation rather than relying on existing powers to make regulations. At the heart of that is our ability to act quickly in the circumstances of the resolution powers being brought into effect, to ensure that everything goes smoothly and we do not end up in a situation where compensation might be due, where it could be shown that the measures we had taken had not been as effective as they might otherwise have been under a normal insolvency process. That is why relying on a general position in primary legislation would be preferable to a number of exercises of secondary powers.

The question of why we have made changes to the Finance Act 2003 rather than the Banking Act and the associated question that the hon. Lady asked about whether the Office of Tax Simplification was content with our approach are highly technical and certainly not questions to which that I have a ready answer, I am afraid. I undertake to the Committee to go away and ensure that I write to the hon. Lady with a full explanation on both those points.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Clause 45