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Banking Act 2009 (Exclusion of Insurers) Order 2009

My Lords, the order excludes insurance companies from the scope of the special resolution regime established by the Banking Act 2009. The regime provides the authorities with powers to resolve banks that are failing. The regime is also applied to building societies, and may be applied, by order, to credit unions. The usual way of defining a "bank" in legislation is to refer to a UK institution that has a regulatory permission granted by the FSA to accept deposits, and then to refine that definition excluding bodies that are not to be regarded as banks. Sections 2 and 91 of the Banking Act adopt exactly that approach, but give the Treasury the power to add to the exclusions from the definition of bank by making orders. The reasons for excluding insurers are clear. The special resolution regime was not designed for insurance companies. The Banking Act is, of course, an, ""Act to make provision about banking"," not insurance. This is also clear from the special resolution objectives. These refer explicitly to "banking services", "banking systems" and "protection of depositors", none of which are applicable to insurance companies. The key provisions of the special resolution regime would not be suitable for use in the resolution of an insurance company and would require significant modifications if they were to be applied effectively to insurers. This reflects the differences in the structure of insurance and banking institutions, and the different ways in which they carry on their businesses, as well as the significant difference between banking and insurance as financial services. While the Banking Act provides powers to deal with mutual banks—building societies—there is no similar power to deal with mutual insurers, which perform an important role in the insurance industry in the UK. The statutory code of practice issued under Section 5 of the Banking Act refers only to banks and building societies. The banking reform consultation documents essentially referred only to banks and other institutions that carry out deposit-taking business. However, it may be helpful if I explain why insurance companies often have a deposit-taking permission, which is why they are potentially caught by the definition of "bank" and the scope of Parts 1 to 3 of the Banking Act. Under the Financial Services and Markets Act 2000, institutions can apply for permission to carry on a number of regulated activities, such as accepting deposits and dealing in investments as principal or agent. Where an institution meets the conditions for authorisation, the FSA will issue a permission that lists all the regulated activities that the institution may undertake, and any restrictions that apply to those activities. A view has been taken historically that, in some instances, the business of providing insurance might require a firm to accept deposits. Consequently, most institutions that are authorised by the FSA to carry on insurance business have the permission to accept deposits. This permission is granted for the purposes of carrying on insurance business. Let me give an example of where an insurance company may need a deposit-taking permission. A life insurer may need to hold the proceeds of a matured policy while waiting for instructions from the policyholder as to what to do with the proceeds. To do this will require the insurer to hold a deposit-taking permission, but it can be used only in the course of carrying on its insurance business. I must emphasise, however, that even if an insurer has a deposit-taking permission, it does not carry out banking business. Indeed, insurers are prevented from carrying out deposit taking by European law. This is recognised in the limitation that the FSA applies to these permissions, under which insurers are limited to accepting deposits in the course of carrying on insurance business. Like many industries, the UK insurance sector has been affected by the financial crisis. However, both the insurance industry and the UK’s prudential regulation regime for the insurance sector have so far stood up well to testing economic conditions, and the insurance industry continues to provide a vital contribution to the UK economy. As I have made clear, the special resolution powers are not designed to deal with insurance companies, and the Government believe that it is appropriate that insurers should be expressly excluded from the scope of the definition of a bank in Sections 2 and 91. I apologise if I have repeated elements of the Banking Act, with which I know that the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, are all too familiar, given their exertions on the Act when it went through this House. I beg to move.