DPRR/13-14/39
Financial Services (Banking Reform) Bill
Supplementary Memorandum of H M Treasury to
the Delegated Powers and Regulatory Reform Committee
Bail-in amendments
INTRODUCTION
1.
This supplementary memorandum relates to the Government amendments that
would insert the following into the Financial Services (Banking Reform) Bill
(the “Bill”)—
(1)
new Clause “Bail-in stabilisation option”, after clause 12;
(2)
new Schedule “Bail-in stabilisation option”, before Schedule 2.
Together, the “bail-in amendments” (Government amendments [35] and [78]).
2.
It identifies the provisions in those amendments that confer the power to make
delegated legislation. It explains the purpose of the delegated powers proposed,
why the matters are to be dealt with in delegated legislation, and the nature and
justification for the parliamentary procedure for the delegated powers.
3.
Many of the delegated powers are analogous to delegated powers conferred by
the Banking Act 2009 (the “Banking Act”), providing for the special resolution
regime for failing banks. These powers were comprehensively explained in the
memorandum of the then Government to the Committee on the Bill which
became the Banking Act (the “Banking Act Memorandum”).1 Copies of the
Banking Act Memorandum are being made available to the Committee with this
supplementary memorandum.
4.
Where appropriate, this supplementary memorandum describes relevant powers,
identifies analogous provisions in the Banking Act and refers to the
consideration of those powers in the Banking Act Memorandum.
5.
Any questions can be addressed, in the first instance, to—
(1)
Alec Brown of Treasury Legal Advisers, in relation to this supplementary
memorandum (alec.brown@hmtreasury.gsi.gov.uk; 020 7270 6384);
(2)
Nicola Pittam of Treasury Legal Advisers, in relation to delegated powers
in the Bill generally (nicola.pittam@hmtreasury.gsi.gov.uk; 020 7270
4422).
PART 1: BACKGROUND
Introduction
6.
The Government agreed with the recommendations of the Independent
Commission on Banking and, more recently, the Parliamentary Commission on
Banking Standards that bail-in powers should be brought in to enable the
authorities to impose losses on a failing bank’s creditors. This is an important
Appended to the Committee’s First Reports of Session 2008-09 (Appendix 1). See also the
Committee’s Second Report of that Session (Appendix 2).
1
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component in the Government’s reforms to tackle the “too big to fail” problem
and help ensure that UK taxpayers are not in future required to shoulder the
burden of failing banks.
Option introduced by the bail-in amendments
7.
The bail-in amendments provide a new resolution power to address the position
of failing banks (and certain other financial firms). This is the “bail-in”
stabilisation option. This will allow the Bank of England, as resolution
authority, to cancel, write down or convert the liabilities of the failing bank to
enable the position of a failing bank to be stabilised.2 Bail-in may also involve
the transfer of the ownership of the failing bank to bail-in administrator (on a
temporary basis) or another person.
8.
This will add to the resolution toolkit for failing banks and is consistent with the
range of tools that Member States will be required to make available to bank
resolution authorities under the European Commission’s proposal for a
Directive establishing a framework for the recovery and resolution of credit
institutions and investment firms3 (the “BRRD”). Although this Directive
remains under negotiation, the Government considers that key design features of
the bail-in tool, which will be required to be conferred on resolution authorities
in all Member States under that Directive, are now at a sufficiently advanced
state4 that bail-in tool can be introduced in domestic legislation at this stage
without risking having to adapt to a radically different regime when the BRRD
is implemented.
9.
The Directive will require that an extensive range of powers are made available
to resolution authorities in order to apply the resolution tools envisaged under
that Directive (including the bail-in tool5) effectively (see, for example, Articles
56 and 57 of the BRRD). Many of these powers are already available to the UK
authorities under the special resolution regime of the Banking Act. However,
further powers are specified in that Directive in relation to the bail-in tool in
order to ensure any appropriate actions can be taken to stabilise the financial
position of the institution under resolution. Relevant powers are to be made
available to the Bank of England as a result of the bail-in amendments and
include the power—
(1)
to reduce, including to zero, the principal amount of or outstanding
amount due in respect of eligible liabilities of an institution under
resolution (see Article 56(1)(f) of the BRRD);
2
Certain powers are also extended to the bridge bank stabilisation option under the Banking Act in
order to align with the powers that will be required to be conferred on resolution authorities as a result
of the European Commission’s proposals for the BRRD (see §8 of this memorandum).
3
Information about the BRRD, and the Commission’s original proposal for the Directive, can be found
on the European Commission’s website using the following link:
http://ec.europa.eu/internal_market/bank/crisis_management/.
4
A General Approach was agreed in Council on 27 June 2013 and the negotiations are now at the
trialogue stage with final agreement expected towards the end of this year. The general approach text
is available at: http://register.consilium.europa.eu/pdf/en/13/st11/st11148-re01.en13.pdf.
5
The other tools identified in the Directive are the sale of business tool (Article 32), the bridge
institution tool (Article 34) and the asset separation tool (Article 36).
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(2)
to covert liabilities within the scope of the bail-in tool into shares or other
instruments of ownership of the institution under resolution, a relevant
parent institution or a bridge institution (see Article 56(1)(g));
(3)
to cancel debt instruments issued by the bank under resolution (see Article
56(1)(h) of the BRRD);
(4)
to cancel or modify the terms of a contract to which the institution under
resolution is party (see Article 57(1)(f) of the BRRD).
Legislative context
10.
Special resolution powers to resolve failing banks were first introduced through
the Banking (Special Provisions) Act 2008 (“the Special Provisions Act”). The
Special Provisions Act was a temporary Act brought forward when the then
Government was consulting on legislation to provide permanent powers to
resolve failing banks. Its powers were used to take Northern Rock plc into
temporary public ownership and to resolve Bradford & Bingley plc and a
number of Icelandic banks.
11.
The resolution powers in the Special Provisions Act were replaced in 2009 by
the special resolution regime for failing banks of the Banking Act. The Banking
Act was subject to extensive consultation and detailed parliamentary scrutiny.
The special resolution regime is summarised further below. It provides three
stabilisation options which may be used to resolve failing banks. As enacted, it
applied to banks and, with modifications, to building societies.
12.
The Banking Act was amended by the Financial Services Act 2012 (“the 2012
Act”). The main purpose of the 2012 Act was to provide a new framework for
financial services regulation. This included replacing the then financial services
regulator, the Financial Services Authority, with two new regulators, the
Prudential Regulation Authority (the “PRA”) and the Financial Conduct
Authority (the “FCA”).
13.
The 2012 Act made four broad changes to the special resolution regime:
14.
(1)
Changes in consequence of the establishment of the PRA and FCA.
(2)
The extension of the special resolution regime to investment firms and
central counterparty clearing houses (with modifications).
(3)
The extension of certain stabilisation options to companies in the same
group as a failing bank.
(4)
Miscellaneous changes to the operation of the special resolution regime.
As noted above, it is anticipated that the BRRD will require Member States to
make available to their resolution authorities a range of tools, including a bail-in
option.
Amendments & terminology
15.
6
The bail-in amendments primarily consist of a new Schedule that would be
inserted in the Bill that would in turn amend the Banking Act. 6 In this
memorandum, references to—
And the Investment Bank Special Administration Regulations 2011 (S.I. 2011/245).
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(1)
“paragraphs” are to the paragraphs of the new Schedule;
(2)
“sections” are to sections of the Banking Act;
(3)
“new sections” are to the new sections that would be inserted in the
Banking Act,
unless the context otherwise requires.
Summary of the special resolution regime
16.
Parts 1 to 3 of the Banking Act set out the special resolution regime. This
confers powers on the Bank of England and the Treasury to resolve banks which
have encountered, or are likely to encounter, financial difficulties. The regime
is applied with modifications to building societies, investment firms and central
counterparty clearing houses, together with certain group companies.
17.
The objectives of the special resolution regime are as follows (section 4):
18.
19.
20.
(1)
Objective 1 is to protect and enhance the stability of the financial systems
of the United Kingdom.
(2)
Objective 2 is to protect and enhance public confidence in the stability of
the banking systems of the United Kingdom.
(3)
Objective 3 is to protect depositors.
(4)
Objective 4 is to protect public funds.
(5)
Objective 5 is to avoid interfering with property rights in contravention of
a Convention right (within the meaning of the Human Rights Act 1998).
(6)
Objective 6, which applies in any case in which client assets may be
affected, is to protect those assets.
(7)
Objective 7 is to minimise adverse effects on institutions (such as
investment exchanges and clearing houses) that support the operation of
financial markets.
Part 1 provides three “stabilisation options”, enabling—
(1)
the Bank of England to transfer the shares or some or all of the business of
a bank to a commercial purchaser (section 11);
(2)
the Bank of England to transfer some or all of the business of a bank to a
‘bridge bank’ (this is a company wholly owned by the Bank) (section 12);
(3)
the Treasury to transfer the securities of a bank into temporary public
ownership (section 13).
The stabilisation options are effected by the exercise of delegated powers called
the “stabilisation powers”—
(1)
share transfer powers (sections 14 to 32), which may be used to effect the
commercial purchaser and temporary public ownership stabilisation
options;
(2)
property transfer powers (sections 33 to 46), which may be used to effect
the commercial purchaser and bridge bank stabilisation options.
The share and property transfer powers effect transfers by operation of law.
They are exercised by—
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21.
(1)
the Bank of England through “transfer instruments”, which are subject to
formality and publicity requirements, including a requirement on the
Treasury to lay a copy before Parliament (sections 24 and 41);
(2)
the Treasury through “transfer orders”, which are orders made by
statutory instrument subject to the negative procedure.
The stabilisation options are extended to group companies:
(1)
The sale to commercial purchaser and bridge bank stabilisation options
can be exercised in relation to banking group companies in certain
circumstances (section 81B).
(2)
The temporary public ownership stabilisation option can be exercised in
relation to a parent undertaking in certain circumstances (section 82).
22.
Extensive further delegated powers are conferred to make resolutions effective.
For example, stabilisation powers may be exercised to dismiss directors (e.g.
section 20) and ‘switch off’ termination rights that may have been triggered by
the resolution (e.g. section 22). A separate power to modify or disapply
enactments or provisions of common law was necessary, conferred on the
Treasury in section 75.7
23.
This reflects the need to take emergency action (potentially in highly timepressured circumstances) to resolve the failing bank under statutory powers to
achieve the special resolution objectives, rather than under general insolvency
law regimes. The resolution powers themselves are of necessity broad and
flexible, to accommodate the complexity and urgency to which bank resolutions
may give rise. But the resolution powers sit within a legislative regime that
provides extensive safeguards, including restrictions on the way that certain
transfer powers can be exercised8 and a detailed framework requiring
compensation arrangements to be put in place.9
Previous memoranda
24.
A comprehensive explanation of the delegated powers of the special resolution
regime was provided to the Committee in—
(1)
the Banking Act Memorandum, as mentioned above (§3);
(2)
the memorandum of the Government to Committee on the Bill which
became the 2012 Act (the “2012 Act Memorandum”).10
7
Subject to the draft affirmative procedure, or 28 day procedure in cases of necessity. This was
considered in the Banking Act Memorandum in §§221—238.
8
Sections 47 and 48; the Banking Act 2009 (Restriction on Partial Property Transfers) Order 2009 (S.I.
2009/322).
9
Sections 49 to 62, together with relevant secondary legislation (see the Banking Act 2009 (Third
Party Compensation Arrangements for Partial Property Transfers) Regulations 2009 (S.I. 2009/319)).
10
H M Treasury’s memorandum, paragraphs 401 to 429:
http://www.parliament.uk/documents/DPRR/2012-13/Financial%20Services%20Bill/FinancialServices-Bill-Delegeated-Powers-Memo-24-05-12.pdf
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Arrangement of this memorandum
25.
26.
The remainder of this memorandum is arranged as follows:
(1)
Part 2—Overview of bail-in option: This explains the basic nature of the
bail-in option, and the overall justification for the delegated powers
conferred.
(2)
Part 3—Individual delegated powers: This explains the individual
delegated powers that would be conferred.
Reference is made to the previous memoranda as appropriate.
PART 2: BAIL-IN OPTION
27.
The bail-in option is a new stabilisation option that will apply to banks, building
societies and investment firms (for convenience, the reference is to “banks” in
this memorandum). It will be exercised by the Bank of England (as with the
commercial purchaser and bridge bank stabilisation options).
28.
Two sets of conditions must be satisfied before the bail-in option can be used:
(1)
(2)
29.
The general conditions (section 7): As for all stabilisation options, the
PRA must be satisfied that—
(a)
the bank is failing, or is likely to fail, to satisfy its regulatory
threshold conditions (Condition 1), and
(b)
it is not reasonably likely that action will be taken by or in respect of
the bank that will enable it to meet the threshold conditions
(Condition 2).
A specific condition (paragraph 3; new section 8A): The Bank of England
must—having consulted the PRA, the FCA and the Treasury—be satisfied
that the exercise of the power is necessary, having regard to the public
interest in—
(a)
the stability of the financial systems of the United Kingdom,
(b)
the maintenance of public confidence in the stability of those
systems,
(c)
the protection of depositors, or
(d)
the protection of any client assets that may be affected.11
The bail-in option is exercised through a new type of stabilisation power, the
resolution instrument powers. The resolution instrument powers may be used
to—
(1)
make “special bail-in provision”;
(2)
transfer shares and other securities (“shares”) of the failing bank.
See paragraph 2; new section 12A.
30.
The power to make special bail-in provision is contained in new section 48B
and is considered below. In outline this allows for the cancellation, reduction or
11
This is the same as the first of two alternative condition for triggering the commercial purchaser or
bridge bank stabilisation options: section 8(2).
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deferral of the liabilities of the bank under resolution. Special bail-in provision
may also be made in relation to the existing bridge bank stabilisation option
(paragraph 5; new section 44B).
31.
The powers to transfer shares are familiar, as the share transfer stabilisation
powers make such powers available to effect the sale to commercial purchaser
and temporary public ownership stabilisation options (above, §19(1)). The
share transfer powers in this context may be exercised to transfer shares as
follows:
(1)
To a bail-in administrator. The role of bail-in administrators is considered
below, but in outline this would allow, for example, the ownership of the
failing bank to be temporarily transferred to a bail-in administrator for the
purposes of the resolution.
(2)
To another person. This allows, for example, ownership of the failing
bank to be permanently transferred from the original shareholders to
others. This reflects the fact that the bank has failed and creditors may
have suffered losses (through the making of special bail-in provision).
The transferees could be or include creditors of the bank affected by the
making of special bail-in provision.
32.
The powers are exercised by the Bank of England by resolution instrument, a
form of subordinate legislation considered below. As noted above, the special
resolution regime already provides for the Bank to exercise existing stabilisation
powers by instrument. This reflects the necessity of resolution action being
tailored to the specific circumstances of the failing bank and for it to have effect
immediately by operation in law, to ensure confidence in the bank in resolution
(as considered in the Banking Act Memorandum, §§66—71).
33.
Further transfer powers are conferred (as with other stabilisation options). For
example, if shares had been transferred to a bail-in administrator, further
transfer powers could be exercised to transfer the shares to creditors (similar to
the direct transfer contemplated in §31(2)).
34.
The Bank of England is to exercise the bail-in option, as the Bank is the lead
resolution authority under the special resolution regime. The role of the Bank
of England was further considered in §§49ff of the Banking Act Memorandum.
35.
The bail-in option will provide a further stabilisation option, to allow failing
banks to be resolved in a way which best achieves the special resolution
objectives of section 4 of the Banking Act. A bail-in option will be required on
an EU-wide basis by the BRRD. The use of delegated legislation to this end is
consistent with the existing approach to resolution powers in the special
resolution regime and is the only practicable way to confer powers to address
failing banks that are appropriate to their purpose.
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PART 3: DELEGATED POWERS CONFERRED
36.
This part is divided into the following categories:
(1)
Category A: The bail-in option.
(2)
Category B: The power to make special bail-in provision.
(3)
Category C: Bail-in administrators, business reorganisation plans &
powers relating to bail-in administrators.
(4)
Category D: Ancillary powers.
(5)
Category E: The powers to mitigate the impact of the bail-in option.
(6)
Category F: Further transfers.
(7)
Category G: Group companies.
(8)
Category H: Miscellaneous powers.
Category A: The bail-in option
Paragraph 2 / new section 12A
Power:
To effect the bail-in stabilisation option through one or more
resolution instruments.
Body:
Bank of England.
Procedure:
None: Resolution instruments, as with other stabilisation
powers exercised by the Bank, are subject to no parliamentary
procedure but a copy of the instrument is laid before Parliament
by the Treasury.
37.
New section 12A provides for the bail-in stabilisation option.
38.
As noted in Part 2, this allows the Bank of England to exercise the power to
make special bail-in and the power to transfer securities, together with related
provision. The Bank may make proposals as regards the future ownership of
the failing bank. The requirement in subsection (8) underlines that any
ownership of securities by a bail-in administrator is to be temporary.
39.
The Banking Act Memorandum considered—
(1)
the exercise of stabilisation powers by Bank of England instrument (in
§§65—72);
(2)
the technical aspects of share transfer instruments, which are relevant to
the power to transfer securities under resolution instruments (in §§119—
121).
Category B: The power to make special bail-in provision
Paragraph 4 / new section 48B
Power:
By resolution instrument, to make special bail-in provision to
cancel, modify or change the form of liabilities of the bank.
Body:
Bank of England.
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Procedure:
None (but see new section 48E, which provides for a report to
be laid before Parliament).
40.
The bail-in option provides for the stabilisation of the failing bank through the
writing down of its liabilities. The power to make special bail-in provision
allows, subject to certain safeguards, the Bank of England to provide in a
resolution instrument for liabilities to be written down by operation of law.
41.
Subsection (1) permits—broadly speaking—a resolution instrument to cancel,
modify or change the form of liabilities (including by modifications to contracts
and instruments). It is necessary to go beyond simply a power to cancel
liabilities, as, for example, claims may be written down in part only (allowing
for the power to be used proportionately and in order to ensure that appropriate
actions can be taken to address the precise financial position of the bank under
resolution12). The power also needs to have considerable flexibility to address
the complex documentation used in relation to, for example, the financing of
banks and to prevent attempts to evade the bail-in powers in the drafting of
contracts.
42.
Subsection (2)(a) limits the power, by providing that it may be exercised only
for the purpose of, or in connection with, reducing, deferring or cancelling a
liability. Subsections (2)(b) and (6) (as supplemented by new sections 48C and
48D) provide safeguards, by excluding certain liabilities from the scope of
special bail-in powers. The excluded liabilities include for example protected
deposits (e.g. a retail depositor whose deposit is covered by the Financial
Services Compensation Scheme and secured creditors (so far as their liabilities
are secured)). A power is also conferred on the Treasury to put in place specific
safeguards arrangements (see new section 48P discussed under Category E) in
relation to certain financial arrangements, such as security rights.
43.
Although the power to make special bail-in provision is subject to no
parliamentary procedure (as it is made in a resolution instrument made by the
Bank of England), a copy of a resolution instrument will be laid before
Parliament by the Treasury (new section 48T).
44.
Further, new section 48E requires the Bank to prepare a report concerning the
provision made in relation to liabilities. The report must, in particular, explain
any departure from the principles related to how liabilities would be treated in
insolvency (new section 48E(4)), namely the order of priority on liquidation and
loss bearing on an equal footing for creditors having equal priority. The
Treasury has a power to specify further requirements as to the content of reports
(subsection (5)) and the principles to which the Bank is to have regard in
exercising the power (new section 48G, discussed in Category E below). The
Chancellor of the Exchequer must lay a copy of the report before Parliament.
On reporting, see also new section 80A (§113).
Paragraph 5 / new section 44B
Power:
In conjunction with the bridge bank stabilisation option, etc., to
make special bail-in provision in a property transfer instrument.
12
As noted at §8 above, the BRRD will require Member States to confer on their resolution authorities
a wide range of powers, including the power to cancel debt instruments (Article 56(1)(i)) and to modify
the terms of a contract (Article 57(1)(f)) to ensure the bail-in tool can be applied effectively.
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Body:
Bank of England.
Procedure:
None (but see new section 44C, which provides for a report to
be laid before Parliament).
45.
New section 44B(1) permits special bail-in provision in conjunction with the
existing bridge bank stabilisation option. For technical reasons, separate
provision to new section 48B is needed because the bridge bank stabilisation
option is effected through property transfer instrument (rather than resolution
instrument). This is consistent with the approach which is to be required under
the BRRD which envisages that resolution authorities may make bail-in
provision in connection with a transfer to a bridge institution.
46.
It also allows a property transfer instrument under new section 41A(2) (Transfer
of property subsequent to resolution instrument) to make special bail-in
provision (see below, §104).
47.
The Banking Act Memorandum considered the bridge bank stabilisation option
in the context of the need for a range of options to resolve banks in §§92ff.
Paragraph 4 / new section 48F
Power:
By order, to make amendments to excluded liabilities provided
for in new section 48B(6) (as supplemented by new sections
48C and 48D).
Body:
Treasury.
Procedure:
Draft affirmative.
48.
The special bail-in powers that the Bank of England may exercise under new
section 48B may not be exercised so as to affect the excluded liabilities
enumerated in subsection (6) of that section.
49.
This provision allows the Treasury to—
(1)
add to the list of excluded liabilities;
(2)
amend or omit the excluded liabilities already enumerated in subsection
(6) (other than protected deposits, secured liabilities and certain liabilities
in relation to client assets);
(3)
amend the definition provisions relating to excluded liabilities in new
sections 48C and 48D.
50.
The protections for excluded liabilities strike a balance between the need to
have broad and flexible resolution powers to ensure the effectiveness of the
bail-in power and the need to confer safeguards for certain types of interests (as
with the other stabilisation options). The list of excluded liabilities provides an
important element of what will be a calibrated package of safeguards
surrounding the bail-in powers (see also Category E below).
51.
Providing for the list of excluded liabilities in primary legislation puts in place
an important safeguard immediately. However, special bail-in powers are
applied to very complex commercial circumstances and creditors may seek to
evade the application of the powers. The power partially to amend the list and
the definitions provides necessary flexibility, should experience show that the
excluded liabilities should be more or less extensive than initially thought. It
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also enables more detailed provision to be made in place of the existing
descriptions of the excluded liabilities, for example following changes in the
nature of arrangements giving rise to such liabilities (e.g., some relate to
arrangements which operate in complex and changing regulatory environments,
such as clearing or pension schemes). It is also necessary as the BRRD will
specify a list of excluded liabilities for the purposes of the bail-in tool (see
Article 38) and a number of terms used for the purposes of the list of excluded
liabilities may change from time to time, particularly those that are defined by
reference to EU legislation and therefore it is appropriate that the Treasury have
the power to take the actions referred to above to take account, among other
things, of changes to European law.
52.
Such amendments, being made by draft affirmative order, will be made on an
‘on notice’ basis to the market and interested parties. The Treasury is required
to consult (subsection (5)) before exercising the power.
53.
For these reasons, the Treasury consider that the power partially to amend the
list of excluded liabilities and the definitions in sections 48B(6), 48C and 48D is
appropriate. As the Treasury consider the flexibility mentioned above to be
necessary, the alternative would have been to provide for the excluded liabilities
in secondary legislation alone. Indeed, an analogous issue arose in the course of
developing the special resolution regime generally. Safeguards were provided
for certain interests in relation to partial property transfers (e.g. as here, for
secured creditors). There it was necessary to provide for the protected interests
through secondary legislation, rather than as here to take a power partially to
amend safeguards set out in the primary legislation (see Banking Act
Memorandum, §§303—335).
Category C: Bail-in administrators, business reorganisation plans & powers
relating to bail-in administrators
Paragraph 2 / new section 12B
Power:
By resolution instrument, to make provision in relation to bailin administrator’s appointment and functions.
Body:
Bank of England.
Procedure:
None.
54.
Subsection (1) makes provision in relation to the appointment of bail-in
administrators in share transfer instruments.
55.
Subsection (2) (as supplemented by subsection (4)) permits a resolution
instrument to provide for the terms on which securities transferred to the bail-in
administrator are to be held.
56.
Subsection (6) (as supplemented by subsection (7)) permits the share transfer
instrument to specify objectives to which the bail-in administrator is to have
regard.
Paragraph 4 / new section 48H
Power:
By resolution instrument, to require the bail-in administrator (or
bank directors) to prepare a business reorganisation plan.
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Body:
Bank of England.
Procedure:
None.
57.
The Bank of England may, in a resolution instrument, require the bail-in
administrator (or one or more directors of the bank) to draw up and submit to
the Bank a business reorganisation plan (subsection (1)).
58.
Subsection (2) defines a business reorganisation plan to be a plan that includes
an assessment of the factors that caused Condition 1 of the general conditions
for triggering the special resolution regime to be satisfied, a description of the
measures to be adopted to restoring the viability of the bank and a timetable.
59.
Further provision is made about the process, allowing the Bank of England to
require amendments to be made to business reorganisation plans and requiring
the Bank to consult the PRA and the FCA (subsections (3) to (5)). Business
reorganisation plans may recommend that the Bank of England exercises
powers under Part 1 of the Banking Act in relation to the bank.
Paragraph 4 / new section 48I
Power:
By resolution instrument, to confer certain powers and impose
certain requirements on bail-in administrator.
Body:
Bank of England.
Procedure:
None.
60.
The Bank of England may, in a resolution instrument, confer powers on a bailin administrator. For example, the bail-in administrator may be authorised to
manage the bank’s business and exercise other powers of the bank (subsection
(1)(a) to (c)).
61.
The resolution instrument may also require reports to be made by the bail-in
administrator to the Bank (subsection (2)).
62.
Conditions may be imposed on the exercise of powers conferred by subsection
(1) (subsection (1)(d)). More generally, a resolution instrument may impose
consultation or consent requirements in relation to specified functions
(subsection (4)).
63.
This provision allows a balance to be struck between ensuring that the bail-in
administrator has adequate powers to enable him to discharge his functions but
is properly accountable for their exercise.
Paragraph 4 / new section 48J
64.
Power:
In resolution instrument, requirement to make provision for
resignation and replacement of bail-in administrator.
Body:
Bank of England.
Procedure:
None.
Subsection (3)(a) requires the Bank of England to make provision in a
resolution instrument for the resignation and replacement of the bail-in
administrator.
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65.
Subsection (3)(b) limits the grounds on which the bail-in administrator may be
removed from office.
Paragraph 4 / new section 48K
66.
Power:
By resolution instrument, to provide for payment of
remuneration and allowances to bail-in administrator.
Body:
Bank of England.
Procedure:
None.
The Bank of England may, in a resolution instrument, provide for the payment
of remuneration and allowances to a bail-in administrator (either from amounts
to be paid by the Bank of England or by the bank in resolution).
Category D: Ancillary powers
Context
67.
As noted above, it was necessary to confer a number of ancillary powers to
make the existing stabilisation powers effective (§22). As a resolution
instrument is a new type of stabilisation power, it has been necessary to make
analogous ancillary provision here. In some cases, modifications have been
made to the powers to reflect the differences between the share and property
transfer powers and the resolution instrument powers.13
68.
All the following powers are exercised by the Bank of England by resolution
instrument.
Paragraph 4 / new section 48L
Power:
By resolution instrument, to make provision in respect of
securities cancellation, conversion and delisting of securities.
69.
Subsection (1) allows for the cancellation or conversion of certain securities
(Class 1 of section 14, shares and stock). The bail-in option does not
necessarily involve a transfer of securities (at least initially). This power
ensures, for example, that losses can be imposed on ordinary shareholders
before losses are imposed on creditors (under new section 48B). For safeguards
for shareholders, see Category E below (for example, new section 60A and the
mandatory provision that can be made relating to pre-resolution shareholders
and creditors of a bank).
70.
The subsection (1)(b) conversion power is analogous to section 19(1).
Subsection (3) confers a power to delist securities analogous to section 19(2).
Both are considered in Banking Act Memorandum, §134—138.
71.
Subsection (3)(a) (as supplemented by subsection (5)) confers powers in
relation to rights attaching to securities. In the existing stabilisation options
13
The share and property transfer powers are both predicated on an underlying transfer by operation of
law. By contrast, the bail-in option involves the making of special bail-in provision and / or the
transfer of securities. The former does not involve a transfer, but rather the reduction, etc. of liabilities
by operation of law.
13
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control of the banking business is obtained either through share transfer or
property transfer. Again, as bail-in may not involve a transfer at the time
special bail-in provision is made, alternative arrangements may be necessary to
ensure effective control is exercised.
Paragraph 4 / new section 48M
Power:
72.
By resolution instrument, to make provision concerning default
event provisions in contracts or other agreements.
This new section makes analogous provision to sections 22 and 38, addressed in
the Banking Act Memorandum, §§145—153.
Paragraph 4 / new section 48N
Power:
73.
By resolution instrument, to make provision concerning the
removal and appointment of directors of bank.
This section makes analogous provision to sections 20 and 36A. Section 20 was
considered in the Banking Act Memorandum, §§139—141.
Paragraph 4 / new section 48O
Power:
By or under resolution instrument, to give directions to
directors of bank.
74.
A resolution instrument may set out directions, or allow the Bank of England to
give directions in writing, to directors of the bank (subsection (1)). Protection is
conferred on a director who acts in accordance with such directions (subsection
(3)). Directions are enforceable by application to court (subsection (4)).
75.
This is a new power. In the existing stabilisation options control of the banking
business is obtained either through share transfer or property transfer. As bailin may not involve a transfer at the time special bail-in provision is made,
alternative arrangements may be necessary to ensure effective control is
exercised.
Paragraph 4 / new section 48Q
Power:
76.
By resolution instrument, to make provision for the continuity
of actions, etc.
New section 48Q makes provision similar to sections 18 and 36, making
changes to reflect the position that the bail-in option does not necessarily
involve an immediate transfer (and therefore there may not be transferors or
transferees). Section 18 was considered in the Banking Act Memorandum,
§§129—133.
Paragraph 4 / new section 48R
Power:
By resolution instrument, to make provision concerning the
execution and registration of documents.
14
DPRR/13-14/39
77.
New section 48R makes provision similar to section 21, making changes to
reflect the position that the bail-in option does not necessarily involve an
immediate transfer.
Section 11 was considered in the Banking Act
Memorandum, §§142—144.
Paragraph 4 / new section 48S
Power:
78.
By resolution instrument, to make incidental consequential or
transitional provision.
New section 48S(2) makes analogous provision to sections 23 and 40, addressed
in the Banking Act Memorandum, §134.
Technical amendments
79.
The Schedule also makes technical amendments to various existing powers.
These are necessary because of the introduction of a new type of stabilisation
power (exercised by resolution instruments) in addition to the existing types of
stabilisation power (exercised by share transfer instruments or orders or
property transfer instruments). The amendments are as follows:
(1)
Paragraphs 14 to 16 make such amendments to existing powers that apply
to share transfers under share transfer instruments (under sections 17, 18
and 21). This extends the effect of those sections to share transfers made
under resolution instruments (a different instrument to a share transfer
instrument).
(2)
Paragraph 22 makes such amendments to the existing power in section 71
in respect of pensions. The power was considered in the Banking Act
Memorandum, §§207—213.
(3)
Paragraphs 23 and 24 make such amendments to the existing powers in
sections 72 and 73 in relation to enforcement and disputes, respectively.
(4)
Paragraph 25 makes such amendments to the existing power in section 74
in relation to tax, considered in the Banking Act Memorandum, §§214—
219.
Category E: The powers to mitigate the impact of the bail-in option
Paragraph 4 / new section 48P
80.
Power:
By order, to impose safeguards in relation to security interests,
title transfer collateral arrangements, set-off arrangements and
netting arrangements.
Body:
Treasury.
Procedure:
Draft affirmative.
As noted above, a significant safeguards were put in place in relation to the
special resolution regime in secondary legislation (§§23, 53). Particular
concerns were expressed about the ability to make partial property transfers and
the impact this may have on particular forms of arrangements (such as security
interests). As a result, the Banking Act conferred very wide-ranging safeguards
15
DPRR/13-14/39
powers on the Treasury, allowing for restrictions to be put in place on the
exercise of the powers to make partial property transfers by reference to
particular forms of protected interest (sections 47 and 48). This was exercised
to make the Banking Act 2009 (Restriction on Partial Property Transfers) Order
2009.14
81.
New section 48P confers an analogous power to section 48 to put in place
restrictions on the exercise of the powers to make special bail-in provision.
(The clause that became section 48 was discussed in the Banking Act
Memorandum, §§308—313.) The Treasury will be consulting on these
safeguards.
Paragraph 4 / new section 48G
Power:
By order, to specify matters or principles to which the Bank of
England is to have regard in making special bail-in provision
relating to the treatment of creditors; to amend the description
of the insolvency treatment principles in the reporting
obligations of new sections 44C(4) and 48E(4).
Body:
Treasury.
Procedure:
Draft affirmative.
82.
The Treasury may, for the purpose of ensuring that the treatment of liabilities
under special bail-in is aligned to an appropriate degree with the treatment of
liabilities on insolvency, by order specify matters or principles to which the
Bank of England must have regard.
83.
These could be the insolvency treatment principles (of new sections 44C(4) or
48E(4), discussed in §43) or alternative principles.
84.
Subsection (4) allows the insolvency treatment principles to be amended. If
new principles are specified under an order made under new section 48G(1),
this allows, e.g., for the insolvency treatment principles to be aligned with those
principles.
Compensation provisions—context
85.
The Banking Act (and secondary legislation made under it) put in place a
comprehensive regime for compensation arrangements. This reflects the
desirability and importance of providing an appropriate level of safeguards.
The exercise of any of the stabilisation powers will also constitute an
interference with property rights guaranteed by Article 1 of the First Protocol to
the European Convention on Human Rights. The compensation arrangements
form part of the safeguards which ensure that the powers are exercised lawfully.
86.
Section 49 is amended (by paragraph 6(1)), to create a new method of
protecting the financial interests of persons in connection with resolution
instruments. It provides for a new mechanism, the bail-in compensation order:
“a scheme for determining ... whether any transferors or others should be paid
compensation” (new subsection (2A)).
14
S.I. 2009/322.
16
DPRR/13-14/39
87.
88.
Two existing mechanisms are also relevant to the bail-in option:
(1)
Compensation schemes: These are schemes for determining whether
transferors should be paid compensation and for the paying of that
compensation.
(2)
Third party compensation: These are arrangements to pay compensation
to persons other than transferors, such as creditors of the failing bank.
The existing compensation framework is considered in detail in the Banking Act
Memorandum, §§266—335.
Paragraph 6 / new section 52A
Power:
Requirement to make bail-in compensation order.
Body:
Treasury.
Procedure:
Draft affirmative (section 62, as it would be amended by
paragraph 6(8)).
89.
The Treasury are required to make a bail-in compensation order when the Bank
of England makes a resolution instrument, a property transfer instrument
providing for the transfer of property subsequent to the making of a resolution
instrument or a supplemental resolution instrument.
90.
The requirement is broadly similar to the provision the Treasury must make
following the exercise by the Bank of England of the sale to a commercial
purchaser stabilisation option (section 50). A bail-in compensation order
contemplates the payment of compensation to any transferors or others, as—
(1)
special bail-in provision always has the capacity to affect persons other
than transferors, and
(2)
the bail-in option need not involve a transfer, at least initially.
Paragraph 6 / section 53 (as amended)
Power:
Provision to make compensation scheme order / third party
compensation order where further transfer powers exercised.
Body:
Treasury.
Procedure:
Draft affirmative.
91.
Section 53 permits the Treasury to make a compensation scheme order and / or
a third party compensation order when certain transfer powers are exercised.
92.
The amendments made by paragraph 6(3) extend this power to circumstances
where the Bank of England exercises transfer powers conferred by the bail-in
amendments following the making of a resolution instrument under new section
12A (see Category F).
Paragraph 6 / new section 60A (as supplemented by new section 60B)
Power:
To make regulations on mandatory provision to be made in
relation to compensation arrangements following special bailin.
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DPRR/13-14/39
Body:
Treasury.
Procedure:
Draft affirmative.
93.
New section 60A enables the Treasury to make regulations about various
compensation orders in circumstances relating to resolution instruments or
special bail-in provision. Such regulations may set out mandatory provision.
94.
New section 60B provides that the Treasury, in making regulations under new
section 60A, shall have regard to the desirability of ensuring that pre-resolution
shareholders and creditors of a bank do not receive less favourable treatment as
a result of an exercise of the relevant powers than they would have received had
the bank entered insolvency.
95.
The provision is broadly analogous to section 60, which allows provision to be
mandated in the case of partial property transfers.
Consequential amendments
96.
Amendments are made to sections 54, 56, 57 and 61 in consequence of the
introduction of the new type of compensation arrangement, the bail-in
compensation order (paragraph 6(4) to (6), (8)).
Category F: Further transfers
Context
97.
The special resolution regime provides generally for a number of different types
of transfer orders and instruments. They are:
(1)
Initial transfers: These relate to the initial exercise of the existing
stabilisation options (all of which involve a transfer).
(2)
Onward transfers: These are transfers that follow an initial transfer of
securities or property from certain types of initial transferee.
(3)
Supplemental transfers: These provide for the transfer of further things
from a transferor to a transferee (or other supplemental provision).
(4)
Reverse transfer: These provide for the transfer of things back from a
transferee to a transferor.
98.
The Bill makes analogous provision in relation to the bail-in option, as
summarised below.
99.
The relevant delegated powers of the Banking Act (as amended) were
considered in—
(1)
the Banking Act Memorandum, §§102—117, 155—174, 193—205;
(2)
the 2012 Act Memorandum, §§403—415.
100. All the following powers are exercised by resolution instrument by the Bank of
England.
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DPRR/13-14/39
Paragraph 4 / new section 48U
Power:
To make supplemental resolution instruments, following an
initial resolution instrument.
101. The Bank of England may make one or more supplemental resolution
instruments, following the making of a resolution instrument. The provision is
analogous to, for example, section 26. Supplemental resolution instruments
may make any provision that may be made in a resolution instrument under
section 12A and provide necessary flexibility for the Bank to make further
provision following the making of the original instrument.
Paragraph 4 / new section 48V
Power:
To make onward transfer resolution instruments, following an
initial resolution instrument providing for the transfer of
securities.
102. The Bank of England may make one or more onward transfer resolution
instruments, following an initial transfer of securities (e.g. to a bail-in
administrator) under the bail-in option. The provision is broadly analogous to
the power of the Treasury to make onward share transfer orders in relation to
the temporary public ownership stabilisation option (in section 28).
Paragraph 4 / new section 48W
Power:
To make reverse transfer resolution instruments, following an
initial transfer or onward transfer of securities.
103. Following an initial transfer or an onward transfer of securities, the Bank of
England may make one or more reverse transfer resolution instruments. The
provision is broadly analogous to the power of the Treasury to make reverse
share transfer orders in relation to the temporary public ownership stabilisation
option (in section 29).
Paragraph 5 / new section 41A
Power:
To make property transfer instruments, following the making of
a resolution instrument.
104. The Bank of England may, where it has made a resolution instrument, make one
or more property transfer instruments in respect of the property, rights and
liabilities of the bank. The provision is broadly analogous to the power of the
Treasury to make property transfer orders following the exercise of the
temporary public ownership stabilisation option (in section 45).
105. Consequential amendments are made to the power in section 42 (supplemental
property transfer instruments) by paragraph 5(2).
Paragraph 5 / new section 44A
Power:
To make bail-in reverse property transfer instruments,
following the making of a property transfer instrument under
new section 41A.
19
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106. The Bank of England may, where it has made a property transfer instrument
under new section 41A(2), make one or more bail-in reverse property transfer
instruments. The provision is broadly analogous to the power of the Bank of
England to make reverse property transfer instruments following the exercise of
the bridge bank stabilisation option (under section 44)15 and the power of the
Treasury to make a reverse property transfer order under section 46 (following
the making of a property transfer order under section 45).
Category G: Group companies
Paragraph 7 / new section 81BA
Power:
By resolution instrument, to apply the bail-in option to banking
group companies.
Body:
Bank of England.
Procedure:
None.
107. The existing sale to commercial purchaser and bridge bank stabilisation options
can be applied, in certain circumstances, to undertakings in the same group as a
bank (“banking group company”) (sections 81B to 81D16). The general
conditions of section 7 need to be satisfied in respect of the bank. The Bank of
England needs to be satisfied that the exercise of the power is necessary in
respect of the banking group company.
108. New section 81BA, as supplemented by new section 81CA, makes analogous
provision for the bail-in option. In addition to the normal triggers for the bail-in
option—as with the existing banking group company powers—the Bank of
England must satisfied that the exercise of the power is necessary in respect of
the banking group company (subsection (3). The power must be exercised
having regard to the need to minimise the effect of the exercise of the power on
other undertakings in the same group.
109. As with existing stabilisation powers, this reflects the complexity and
heterogeneity of banking group structures and their financing arrangements.
For example, this power is necessary to allow the bail-in option to be used
effectively where a bank is wholly owned by a parent undertaking and cannot be
severed from its wider group (e.g., because of its dependence of operating
platforms used by other group companies).
Paragraphs 18 to 21 / amendments to sections 63 and 66 to 68
Power:
To impose continuity obligations in the context of the bail-in
option.
Body:
Bank of England
circumstances).
Procedure:
None.
(with
Treasury consent
in
certain
Renamed “bridge bank reverse property transfer instruments” by the amendments made by paragraph
17.
16
As inserted by the 2012 Act.
15
20
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110. Sections 63 to 70 make provision for continuity obligations within corporate
groups containing a bank in resolution, for example, to ensure that vital services
continue to be supplied to a bank in resolution. These amendments ensure that
these powers are extended to the bail-in option. These powers were considered
in §§239—264 of the Banking Act Memorandum.
Category H: Miscellaneous powers
New Clause “Bail-in stabilisation option”, subsections (2) to (4)
Power:
By order, to make provision in consequence of the application
of Part 1 of the Banking Act to building societies (as amended
by the bail-in amendments).
Body:
Treasury.
Procedure:
Negative.
111. The special resolution regime applies to building societies, with certain
modifications specific to building societies (section 84). The bail-in power
extends to building societies. This power permits amendments in consequence
of this to be made, including to amend or modify enactments passed before the
passing of the Bill (or on or before the last day of the Session in which this Bill
is passed) (e.g. the Building Societies Act 1986). This approach is necessary to
reflect the membership structure of building societies. In particular, building
societies, unlike banks, do not have a separate body of shareholders. Instead,
building societies are broadly speaking owned and controlled by certain of their
customers, who are their members.
Paragraph 11 / new section 256A
Power:
To issue certain directions to a bail-in administrator or director.
Body:
Treasury.
Procedure:
None.
112. The Treasury may, in writing, direct a bail-in administrator or director of the
institution on grounds related to State aid in order to ensure that Treasury can
take the steps required to secure compliance with our international obligations.
This power is similar to the power conferred by section 145A of the Banking
Act in relation to bank administrators. The Treasury must consult the person
concerned before giving the direction.
Paragraph 26 / new section 80A
Power:
To require Bank of England to report to the Chancellor of the
Exchequer following the making of a resolution instrument.
Body:
Treasury.
Procedure:
None, but Chancellor of the Exchequer to lay copy of report
before Parliament.
113. The Treasury may require the Bank of England to report to the Treasury
following the making of a resolution instrument about the exercise of the power,
21
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the activities of the bank and any other matters in relation to the bank that the
Treasury may specify. The Chancellor of the Exchequer must lay a copy of the
report before Parliament.
114. See also the specific reporting requirement imposed in relation to the making of
special bail-in provision, in section 48E, above, §44.17 Both contribute to
ensuring an appropriate degree of transparency surrounding the use of the bailin powers.
Paragraph 30 / new section 152A
Power:
In regulations, to make modifications to the application of the
bank administration procedure.
Body:
Treasury.
Procedure:
Draft affirmative.
115. The bank administration procedure is designed to support the operation of
certain property transfers. It allows the Bank of England, as resolution
authority, to apply to court for the appointment of an insolvency office-holder—
a bank administrator—in relation to a bank from which business is transferred.
The bank administrator has a special objective of ensuring that the transferee is
provided with services and facilities necessary for the transferee operate
effectively (e.g. the continued provision of essential IT systems which it is not
practicable to transfer).
116. New section 152A provides for the provisions on bank administration to apply
in relation to any property transfers following the making of a resolution
instrument. Subsection (3) provides that the Treasury may make modifications
in regulations. The power is analogous to the power to make modifications to
bank administration following a property transfer from temporary public
ownership (section 152(3)). The Banking Act Memorandum considered bank
administration generally in §§442—477, and the clause that became section 152
specifically in §§462—464.
Technical amendment—Investment Bank Special Administration Regulations 2011
117. Paragraph 34 makes a consequential amendment to the Investment Bank Special
Administration Regulations 2011,18 providing for Bank of England consent to
be required to insolvency proceedings in relation to cases where a resolution
instrument has been made in relation to an investment bank (within a three
month period from the making of the resolution instrument under new section
12A).
H M Treasury
1 October 2013
17
18
And section 44C.
S.I. 2011/245.
22