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Investment Bank Special Administration Regulations 2011

My Lords, I beg to move that the draft regulations and the draft order laid before the House be approved. The global financial crisis and ensuing economic woes have shown us all the huge costs of inappropriate regulation, excessive risk-taking and overconfidence in the banking system. This was no more apparent than with the collapse of Lehman Brothers in 2008, where widespread panic gripped the financial markets and where clients in the United Kingdom were unsure as to whether they would ever recover the billions of pounds-worth of assets and money that they had invested. In fact, that is still being resolved. We simply cannot afford a repeat of what flowed from the Lehman collapse. It is now our responsibility to develop an insolvency regime robust enough to handle the failure of investment banks. This is essential if we are to maintain the UK’s position as the world’s leading centre for financial services. However, let us be clear: while the regime being debated today is a step towards addressing this issue, the new regime by itself is not enough. That is why the Government are undertaking comprehensive reforms on both the domestic and international stage. At home, we are overhauling the failed tripartite structure of financial regulation and strengthening our resolution frameworks. We have also set up the Independent Commission on Banking to advise on how to mitigate systemic risk in our financial system. We are looking forward to receiving the commission’s recommendations in September. Internationally, the Government are working closely with the Financial Stability Board and the European Commission to develop a globally consistent approach to resolving systemic firms. This will help to create a level playing field, which is important to ensuring that UK competitiveness does not suffer. Let me now turn to the focus of this afternoon’s debate, which is the special administration regime. The current insolvency arrangements under the Insolvency Act 1986, although perfectly suitable for winding up most firms, do not take into account the complexities and conflicts that an administrator faces when winding up an investment bank. The administrator does not have an explicit objective to return client assets or to co-operate with market infrastructure bodies. Instead, the administrator must act solely under its objective to either rescue the company or maximise returns to creditors before winding it up. This potentially places the administrator in a difficult position if additional focus is required to return client assets or to resolve counter-party positions. The administrator is likely to require frequent directions from the court before taking the necessary actions, and this is extremely costly. The existing regime also creates uncertainty for investors as it is not clear that the administrator has a duty to work to return their assets and money. This is harmful to the UK’s reputation as a safe place for investors to entrust their assets. The special administration regime we are debating today addresses this uncertainty by giving the administrator a specific objective to ensure the return of client assets. It will also reduce the length of a potential administration and minimise the costs for creditors and for the wider economy, and it has undergone extensive public scrutiny to ensure that this will be the case. The proposed regime has benefited from the input of an advisory panel of over 30 industry practitioners. We have also consulted on the regulations themselves, and the introduction of the regime has the full support of many in the financial sector. This is because no one wants to see another failure like Lehman Brothers, where the administration is entering its third year with substantial sums of client assets still to be returned. I shall now provide a brief summary of the two statutory instruments we are considering today, starting first with the Investment Bank Special Administration Regulations 2011. These regulations provide administrators with three statutory objectives. The first objective will give the administrator a duty to return client assets because it is essential that client assets are returned as quickly as possible to prevent any undue suffering and financial hardship. Having this first objective will allow the Financial Services Authority, if necessary, to instruct an administrator to prioritise the return of client assets above the other aims, a power I will return to later. Under these regulations, in order to achieve objective 1, the administrator will also be able to set a bar date for claims to client assets. This will significantly improve the speed at which client assets can be returned. The bar date will include safeguards to reduce the possibility of a client losing out from its implementation—for example, by failing to submit a claim. These safeguards will be set out in the insolvency rules which will be laid separately before Parliament shortly after these regulations come into force. The second objective ensures that an administrator shares information with market infrastructure bodies. It is essential that when an institution becomes insolvent, the administrator works with the relevant clearing houses and exchanges, and with the authorities, to resolve all failed trades and all open positions. Without this co-operation, market confidence and the stability of our financial markets would be seriously undermined. It is also important that the administrator works with the FSA to facilitate any actions the authorities might need to take as a result of an investment bank becoming insolvent. Moving on to the third special administration objective, this follows the example set out under the Insolvency Act 1986 to ensure that, in the event of an investment bank special administration, the administrator will continue to work in the best interests of all creditors in either rescuing the investment bank, if that is at all possible, or in winding it up. Having this objective means that the administrator is unlikely to be successfully challenged for working in the best interests of the creditors in winding up the firm. Under the new regime, the Financial Services Authority will have the power to direct the administrator to prioritise one or more of the special administration objectives over the others, although I should stress that the regulations make it clear that this power can only be used if it is in the interests of financial market stability. Another important part of this regime is that if the administrator continues to meet payments, suppliers of key services to that investment bank will not be allowed to terminate their services. The proposal is relevant to all suppliers of equipment used by the investment bank in connection with the trading of securities or derivatives; suppliers of financial data and infrastructure permitting electronic communications services; suppliers of secure data networks provided by an accredited network supplier; and suppliers of data processing capabilities. On the secondary statutory instrument, the Investment Bank (Amendment of Definition) Order, the Banking Act currently stipulates that only firms holding client assets are within the scope of the special administration regime. This order widens the scope of the special administration regime to ensure that firms holding client moneys are also included. This is because the Government and their investment banking advisory panel agree that it does not make sense to have two different insolvency regimes—one for firms holding client assets and one for firms holding client money. It is right that the new regime should apply in both instances as it is suitably flexible to do so. Separate insolvency regimes for firms holding client money versus those holding client assets would serve only to complicate further what is already a complicated process. The Government have, however, excluded from the scope of the special administration regime institutions that hold client assets only for the purpose of carrying out an insurance mediation activity. We have done this for the simple reason that the special administration regime is not designed for these types of business activity. Firms conducting these activities will enter the same insolvency proceedings as before. This legislation will help preserve the UK’s reputation as a leading destination for investment banking. It is a clear demonstration that we have learned from past mistakes, that we are serious about financial reform and that we will do everything in our power to ensure that financial stability is placed at the heart of our regulatory agenda. The legislation is good for the industry and good for the customer.