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Banking Bill

These amendments concern Clause 168, which provides for the FSCS funding of the SRR. I know that this matter has been the subject of much interest and debate, in the other place as well as here. Before I turn to the amendments, let me set out why the FSCS should be required to contribute to the SRR. Intervention under the SRR will, in the vast majority of cases, be undertaken only if necessary to prevent disruptions to financial stability. This is provided for by the specific conditions of Clauses 8 and 9, without which the authorities may not act, and by the SRR objectives which govern the way in which authorities act. While undoubtedly of crucial importance to the general public interest, financial stability also directly benefits the banking sector and the financial services industry more widely. A stable financial system is an essential condition for the financial services industry to operate efficiently and competitively. Thus, where the authorities have intervened in a firm for the purposes of preserving stability, there is a strong argument that banks and the financial services industry more widely should contribute to the cost of the intervention. The financial services industry will benefit directly from the authorities taking action in furtherance of the SRR objectives, in particular, the objective of enhanced financial stability and confidence in the banking system. Therefore, it is entirely appropriate that the sector should contribute to measures that achieve these objectives. The second consideration is that the trigger for entry into the SRR, which we have discussed in debating Clause 7, is that the firm has either already failed its threshold conditions or is reasonably likely to do so. I have agreed to look at these provisions again to consider whether additional clarity is needed on the wording around the degree of likelihood involved, but I have made it clear that the test should be one in which the prospect of a voluntary or regulatory turnaround of the firm is remote. In other words, the SRR can be triggered only in cases in which, in the judgment of the regulator, the only alternative would have been a default that would have led to a payout under the FSCS. Therefore, but for the use of a resolution tool, the FSCS levy payers would have had to fund the cost of compensation to depositors arising as a result of the failure of a deposit-taker through the FSCS. It is entirely appropriate that the Treasury may provide that the FSCS levy payers should contribute to the costs arising from an exercise of the special resolution regime tools. I believe—or, at the very least, I hope—that the noble Baroness may have some sympathy with this proposal. However, it is my understanding from the apparent intended purpose of the amendment that the noble Baroness is concerned that other persons, in particular a private sector purchaser or the insolvent estate, should contribute to the costs of a resolution before the FSCS is called on. I entirely agree that, in some circumstances, a private sector purchaser should be called on to contribute towards resolution costs. For example, if the private sector purchaser were acquiring some of the failing bank’s assets or, at a later stage in a resolution, a bridge bank’s assets, we would expect it to pay a purchase price reflecting the value of those assets. Where the authorities’ intervention had led to an increase in the value of those assets, the purchase price would in most cases reflect it. The purchaser would thus have effectively contributed to the cost of the resolution through the increased price paid. However, there are also certain circumstances where it would not be appropriate for the private sector purchaser to be required to contribute to resolution costs. For example, there may be administrative costs or additional compensation costs that a private sector purchaser would not be willing to pay, and a requirement that they do so may reduce the likelihood of a successful private sector solution. Therefore, I do not believe that the private sector purchaser should in all cases pay resolution costs before the FSCS or the authorities. I turn to the proposal that the insolvent estate of the residual company left behind after the exercise of the stabilisation power should also fund resolution costs before the FSCS. I have a significant concern about this provision. Taking money out of the estate to fund resolution actions would lead to a smaller pot of money from which creditors and other counterparties left in the residual company would benefit. This is an outcome that we wish to avoid, as demonstrated by the ““no creditor worse off”” safeguard and objective 5 of the SRR, which emphasises the importance of minimising interference with property rights. In the case of one of the more likely resolution actions—a deposit book transfer, as was carried out in the case of Bradford & Bingley—funding the resolution out of the insolvent estate would result in a de facto depositor preference regime. The Government, with the support of banks and investors in banks, have sought to avoid this outcome. Of course there will be a cap on the levy payer’s contribution through the FSCS, fixed at the cost levy payers would have paid had the bank failed and the FSCS had had to pay out depositors. This cap will ensure that any recoveries which the FSCS would have been able to recover from the insolvent estate had it paid out in a normal way will be taken into account because the FSCS will not be required to pay more than it would have paid under a normal payout. The approach taken in the Bill, whereby the FSCS may bear some of the costs of the SRR, is also consistent with the approach to the costs that the FSCS incurs when paying out depositors should a bank fail. The administrative expenses of the FSCS are not funded by the insolvency estate; these costs are borne by the levy payers. I hope that I have provided sound arguments to support the view that, while in some circumstances the private sector purchaser may be called upon to contribute, this should not in all circumstances be the first port of call and why there are also risks in requiring the insolvent estate to be called upon before the FSCS. In the case of requiring a private sector purchaser to contribute to the resolution costs, as I have set out, the Government are more inclined to consider funding from a private sector purchaser before FSCS funds, but I do not believe that such signalling is required in the Bill. Such arrangements will naturally form part of any commercial agreement between the parties involved and I therefore do not believe that this part of the amendment is necessary. Finally, I recognise and agree with the intention to protect the use of the FSCS’s funds which is why we have included a number of safeguards over the use of such money, including a cap and independent verification of any resolution costs. I do not believe, however, that the amendments, which the noble Baroness, Lady Noakes, described as ““probing””, are the right way to protect the use of such funds. Therefore, I beg her to withdraw the amendment.