Autumn Budget 2025

Baroness Noakes Excerpts

Thursday 4th December 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, it is good to see so many on the Government Benches here to support their failing Chancellor and her miserable Budget. They are in a very small minority. In polling after the Budget, only 10% thought Labour were the best party to run the economy. That is lower than the score achieved after the Truss-Kwarteng mini-Budget.

The run-up to the Budget was chaotic. Whatever the Chancellor intended with the constant press briefing and that excruciating early morning Downing Street speech, the fact is that pretty well everyone was misled about what was going to be in the Budget. This chaos was then followed by a Budget designed to please fractious Labour Back-Benchers rather than sort the economy out. The gilt markets were unimpressed and maintained our position as the advanced economy with the second-highest borrowing costs. Since the Chancellor has been appointed, the gap above the average advanced economy borrowing cost has been growing.

The Budget confirmed that this is a tax-and-spend Government. The tax burden will be a record 38.3% of GDP by the end of the forecast period, while public expenditure will be more than 44%—way above pre-pandemic levels. The Minister claimed again today that growth is the number one priority, but the OBR has pointed out that there is nothing for growth in this Budget. The Minister bragged about growth in the first half of this year, but he knows that a large chunk of that is down to one-off factors. The outlook for growth is at best lacklustre.

Businesses are in despair. We have a tax system that is ranked 32nd out of 38 countries in the tax competitiveness index, 1960s-style employment laws are about to be imposed on business, and taxes and inflation are sucking demand out of the economy. It is no surprise that the OBR sees business investment falling away. Working people too are in despair. Their taxes are rising—by stealth, largely—to fund an increasing number living on state handouts. The rich and the young are leaving the country every day, which simply compounds the problem.

The Budget dodges some tricky issues that may well derail the Budget arithmetic. I have some questions for the Minister. Like the noble and gallant Lord, Lord Craig of Radley, I want to know when the 3.5% committed to defence will be achieved. It certainly is not showing up in the current Budget numbers. Like my noble friend Lady Barran, I ask the Minister to say how much will be spent on SEND after 2027-28, which budget will pay for it and what will happen to the accumulated local authority deficits that have been growing while they have been funding the rising SEND bill over recent years. In addition, how many billions of efficiency savings after 2028-29 are still to be identified? How will the £1.8 billion bill for digital ID cards be paid for? Whose budget will that come from? One thing is clear: we need a change of leadership in the Treasury if the UK is going to have any chance of economic success.

Economic and Taxation Policies: Jobs, Growth and Prosperity

Baroness Noakes Excerpts

Thursday 13th November 2025 Lords Chamber

[Baroness Noakes (Con)]

It is always a pleasure to follow the noble Baroness, Lady O’Grady of Upper Holloway, but she will not be surprised to find that I agreed with very little of what she said—indeed, I was horrified by some of it.

Four minutes is not long enough to cover the very many ways in which the Government are damaging our economy, so I will concentrate on just one area: how their tax policies impact business investment in the UK. This morning’s dismal GDP figures, which are the result of this Government’s policies, underscore the growth problem. If the UK is going to escape from that, we need businesses—both existing ones and new investors from abroad—to invest.

Tax really matters when it comes to investment decision-making. This year’s tax competitiveness index ranked the UK 32nd out of 38 countries, with a corporate element only marginally better, at number 28. These are terrible figures. The key drivers of this are the headline rate of corporation tax, the complexity of the tax system and low levels of tax allowances.

First, I turn to the headline rate. We used to have a rate of 19%, and then it was raised to 25%. The current Government have said that they will keep it at 25%, which is a mistake. When CFOs run the numbers on investment decisions, a key determinant of the outcome is corporation tax, because it is such a big drag on net investment returns. Low corporate tax rates both encourage investment and increase tax yields. Ireland, with its 12.5% corporate tax rate, is the living proof of this.

Secondly, on complexity, we notoriously have the longest tax code in the world, at over 22,000 pages. Size is not synonymous with complexity, but it is a pretty good proxy. Businesses want to be able to understand the tax rules that affect them and to be able to interact efficiently with the tax authorities. We fail on both counts.

Thirdly, although we have a competitive system of tax allowances for plant and machinery, we are not competitive for structures and buildings, which are important for some kinds of business investment. Research by the Tax Foundation suggests a significant GDP boost if tax expensing were widened.

In last year’s budget, the Chancellor made the terrible decision to raise employers’ national insurance on top of the minimum wage hike. This has already led to higher prices and lower employment, and it is now a big negative factor in investment decisions that create jobs. Similarly, business rates are now weighing heavily on business investment that needs a large physical footprint. On top of all this, as my noble friend Lord Elliott explained, the non-dom tax regime actively deters entrepreneurs from making the UK their investment base. Wealthy businesspeople are already relocating; soon they will not come at all.

The Government did not create all these problems, but they certainly made them a lot worse. A decent rate of growth is a pipe dream if the Government continue with policies that actively deter business investment.

National Debt: It’s Time for Tough Decisions (Economic Affairs Committee Report)

Baroness Noakes Excerpts

Friday 25th April 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I was a member of your Lordships’ Economic Affairs Committee under the excellent chairmanship of my noble friend Lord Bridges of Headley when this report kicked off, but the annual musical chairs of Select Committees saw my chair move to another committee before the report got seriously under way.

Since the global financial crisis, all Governments have normalised high levels of debt and focused on short timeframes. The report correctly calls out the lack of focus on medium to long-term debt sustainability, and we urgently need this to be a government priority. If we look back to the 1970s, when the debt-to-GDP ratio came back below 50% after about 60 years, there was no sophistry around whether R was greater or less than G, or whether tipping points could have been predicted; it was just accepted that keeping the debt ratio down to a sensible level was an important thing to do. There was not much science to Gordon Brown’s first iteration of his fiscal rules in 1997, which set the debt ratio at what he described as a “stable and prudent” level of 40% of GDP. It did not matter that the 40%—or indeed the EU’s 60%—could not be proven with intellectual rigour. These were rules of thumb which conveyed a sense of sound financial management.

These debt targets provided a sustainability underpin, as they allowed economies to absorb inevitable shocks. However, sustainability now seems to mean absorbing those shocks by being able to borrow more: as long as we keep borrowing, we will be okay. That is the approach to balance sheet management that brought Thames Water to its knees. Operating just the right side of a tipping point is a gamble, and it is one small shock away from financial disaster.

The prudent rules were thrown out of the window after 2008, and all iterations after that point, including that of the current Government, assume, in effect, that high levels of government debt are normal. These rules have allowed successive Governments to carry on spending as if the only issue were a few basis points on the trajectory of debt in a few years’ time. We currently have the crazy spectacle of debt levels hovering around 100% and the Chancellor making microadjustments to her fiscal strategy every time the OBR produces another forecast that eats into her tiny headroom. Changing the debt measure to one based on net financial liabilities is just another layer of smoke and mirrors. There is no plan to get debt levels seriously trending back towards pre-global financial crisis levels, and, equally, no plan to cope with debt hurtling towards 300% of GDP as demographics and other long-term pressures take their toll.

The Government are betting the farm on getting growth back into the economy, but it is going to take levels of growth way beyond those we have seen in recent years if debt is to trend down convincingly towards much lower levels. No one outside the Treasury bubble thinks that the growth mission has any traction whatever, and most government policies are pulling hard in the other direction. I agree with the Economic Affairs Committee that it is time for tough decisions, but the report should have been more explicit about what “tough” really means. The complacent government response to this report shows that the Government are completely blind to the problem.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Baroness Noakes Excerpts

Consideration of Commons amendments and / or reasons
Monday 24th March 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I support all the amendments in lieu in this group, particularly Amendment 21B by my noble friend Lady Neville-Rolfe, asking for an ex post review of the impact on various sectors of this jobs tax. It is official government policy, confirmed by the leader in the other place, that Parliament will be given the information it needs to scrutinise legislation properly, but, shamefully, the Treasury refused point blank to give the information that we requested in order to scrutinise this Bill properly. My noble friend’s amendment is modest and reasonable, and if the Government do not accept it then that will show a complete lack of respect for Parliament and the process of parliamentary scrutiny.

I want to underline a point made by my noble friend Lady Neville-Rolfe about hospices. At the earlier stages of the Bill, the Minister kept repeating that the Government were putting £100 million into hospices and £26 million into children’s hospices. It is clear that neither of these amounts represents additional money available to absorb the cost pressures produced by the national insurance changes. My noble friend explained that, and I hope the Government will not try to pretend that the funding situation for hospices is anything other than completely dire at the moment.

[Lord Ashcombe (Con)]

My Lords, I would like to personalise this a little, because the hospice movement is unbelievably important in this country, and I am grateful to other noble Lords for raising the point again. I suppose that my family has been very fortunate, in unfortunate circumstances, to have the benefit of two hospices, both at end of life. Both hospices face significant shortfalls in their annual running costs and live off the back of occasional big legacies. They already have to raise substantial amounts of money, and the national insurance increase puts yet more pressure on the system. We have had the increase in minimum wages, which means that they have suffered those costs in addition; doctors and nurses do not come cheap, as we know. This just drives costs up further—for the hospice closest to home, the figure is nearly £0.5 million.

So what does the national insurance increase mean? In this particular case, it means either the loss of three nurses, who conduct some nearly 4,000 visits a year in the community, preventing the need for hospital care, or losing one bed, which would be dedicated to the most complex needs for patients at the end of their life.

If hospices are forced to reduce their care to the community, what happens next? They play such a critical role in supporting the NHS, which is not subject to the increase, both in terms of community care and in easing pressure on acute beds in hospitals, as well as facilitating discharges from hospital. If the Government continue to impose financial strain on the hospice sector, more hospices will be forced to scale back services or even close. That is something we cannot live with in this country, and it would place yet greater strain on the NHS—a particularly difficult sector, as we know, and one that we are trying not to pressure any further. When salary increases for medical staff and the rises in national insurance are factored in, this particular hospice will have to raise yet another £200,000 on top of the £0.5 million that I mentioned earlier, and that hospice is but one of 200 fantastic operations in this country.

I make again the point that various noble Lords have made: the recent announcement of the £100 million funding from His Majesty’s Government for the hospice movement and the £26 million for the children’s hospices is for capital projects, which, while very welcome, does not help this particular situation—a situation that the Prime Minister singularly seemed to ignore at PMQs last week. I beg the Government to reconsider their position.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Baroness Noakes Excerpts

Committee stage
Thursday 6th February 2025 Grand Committee

Moved by

[Baroness Noakes]

54: Clause 3, page 1, line 20, at end insert—
“(2A) After section 1(2), insert— “(2A) If the person is a public authority, the amount of the employment allowance in subsection (1)(2)(a) is £20,000.(2B) A public authority means any person whose activities involve, wholly or mainly, the performance of functions (whether or not in the United Kingdom) which are of a public nature.””Member’s explanatory statement
This amendment would give a higher employment allowance to persons carrying out functions of a public nature.

[Baroness Noakes (Con)]

My Lords, I will also speak to Amendments 55 and 56. I thank my noble friend Lady Neville-Rolfe for adding her name to these amendments.

They deal with two aspects of the employment allowance: public authorities and the employment of people with personal or household care. We heard earlier in Committee that, under the National Insurance Contributions Act 2014, the employment allowance is not available to public authorities and that the term “public authority” includes bodies in the private sector whose activities are at least 50% the performance of functions of a public nature. GPs and NHS dentists have been cited as among those caught by this definition. Amendment 55 would remove this exception for public authorities so that they would be able to claim the employment allowance and Amendment 54 would create a £20,000 level of employment allowance for public authorities.

The effect of this Bill is that all public authorities will pay the higher rate of national insurance calculated on the lower secondary threshold, but none of them will get an employment allowance. Amendment 55 would give them an employment allowance of £10,500, while Amendment 54 would increase that to £20,000. We know that the Chancellor intends to spend around £5 billion each year on reimbursing public authorities, which are classified to the public sector. Since my amendment would reduce the national insurance costs borne by those public sector authorities, it would simply reduce the amount of money that the Chancellor would have to reimburse in her money-go-round and offer a practical benefit for public authorities in the private sector. This would not be a full exemption, which the noble Lord, Lord Scriven, has argued for in relation to GPs and dentists, but it would soften the blow of the national insurance increases. If there ever was a justification for excluding GPs and dentists from the employment allowance, that went out of the window when the Chancellor introduced her jobs tax.

--- Later in debate ---

[Lord Livermore (Lab)]

In conclusion, the Government have provided £4.7 billion of funding to support public sector employers with increased employer national insurance. Expanding eligibility for, or increasing the value of, the allowance would come with additional costs and would reduce the revenue generated by this Bill; this would then require either higher borrowing, lower spending or alternative revenue-raising measures. In the light of these points, I respectfully ask noble Lords to withdraw or not press their amendments.

[Baroness Noakes (Con)]

I am not going to thank the Minister for that reply because he has given us no more information and no justification for why employers who employ people for domestic or household care should not get the employment allowance. He has given no explanation as to why private sector public authorities do not get an employment allowance, other than it was put in the 2014 Act. Both these categories are significantly affected by the other contents of this Bill, so I had hoped that the Minister would respond with some rationale for why the Government think it is right that these categories of employer should not qualify for the employment allowance.

This is rather typical of the way in which the Minister has conducted the whole of this Committee. Since this is the last time we will speak in it, I would like to record that it has been more than disappointing. We normally expect Ministers to give us, or offer to provide, information. We do not normally expect Ministers simply to repeat, parrot-like, three or four set lines that are shuffled for whatever the particular amendment is, but that is what we have received. We are in Committee, so I will of course beg leave to withdraw my amendment, but I would like to record that this is no way to run a Committee.

Amendment 54 withdrawn.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Baroness Noakes Excerpts

Committee stage
Tuesday 21st January 2025 Grand Committee

[Lord Eatwell (Lab)]

I agree, but adding more exemptions is adding to the pile. What we desperately need is a reform of our tax system that removes exemptions and forces Governments to make policy by deciding which goods and services they are going to subsidise.

[Baroness Noakes (Con)]

My Lords, I agree with the noble Lord, Lord Eatwell, on simplification of the tax system; indeed, I have made many speeches on that subject in the past. I also agree that as a matter of principle it is not good to layer exemptions on to any taxes, but we have to see here that the Government have chosen to use a very blunt instrument to raise taxes, so we are faced with a problem. Do we just accept this blunt instrument bludgeoning whole sectors of our community or do we try to make it a bit better? I think that, on grounds of public policy, it is reasonable to make exceptions in order to ameliorate the effect of a dangerously wide imposition of these additional taxes on employment.

[Lord Blackwell (Con)]

My Lords, as the noble Baroness said, the easiest way to avoid exemptions would be not to raise this tax at all; then we would not have to deal with the sectors that will be hit hard by it. I very much support the amendment in the name of the noble Lord, Lord Scriven, and I hope that it will come to a vote on Report, so that we can all support it. As other noble Lords have said, I particularly want to extend that to other charities, which I think are covered by Amendment 5 in this group.

--- Later in debate ---

[Baroness Noakes (Con)]

Is the Minister going to address the amendment?

[Lord Livermore (Lab)]

Yes, I am. I said that I wanted to set out some context at the outset. I know that the noble Baroness may not like that context, but it is why we are here today, after all.

That meant taking some very difficult decisions on welfare, spending and tax, including those in the Bill. I recognise that this involves asking some businesses to contribute more and that the impacts of the Bill will be felt beyond businesses. These are difficult decisions—not ones we wanted to take—and I understand and respect the very legitimate concerns that have been raised, both during today’s debate and outside this House. Crucially, however, and I may find myself making this point repeatedly during these debates, noble Lords who oppose the measures in the Bill must be clear. Do they propose instead more borrowing, lower spending or alternative tax-raising measures? That is the key question at the heart of these debates.

--- Later in debate ---

[Baroness Noakes (Con)]

My Lords, the whole Committee has, I know, great respect for the immense knowledge and expertise in economics of both the noble Lord, Lord Eatwell, and his colleague, the noble Lord, Lord Layard. Laying out a theoretical argument about what happens to employment and demand in the economy is entirely valid, but it ignores what actually happens at the level of the individual enterprise, employer or employee.

In her amendment, the noble Baroness, Lady Smith, talks about the impact on a specific group of employees. There is nothing in what the noble Lord had to say about the overall macroeconomic impact, which will affect the attractiveness of continuing to employ veterans if the cost of employing them is going to go up. In debating the previous group, we talked about whether community pharmacies could stay in business, given the additional costs that would arise for those businesses. We have to remember that this is not a highly theoretical exercise: the imposition of these massive national insurance changes is going to have a huge impact at the micro level. That is what we are trying to explore in many of the amendments we will look at in Committee, today and next week. They are not answered by theoretical answers at a macro level.

[Lord Altrincham (Con)]

My Lords, I rise to speak to this group of amendments surrounding the exemption of veterans’ salaries from this NI jobs tax; the lead amendment was moved by the noble Baroness, Lady Smith of Newnham. This is a helpful group of amendments to remind us—just as my noble friend Lady Noakes has reminded us—that the social costs of this taxation initiative will fall on individuals. Although we talk about economics in an aggregate manner and debate it in the aggregate, there are social costs, and they are very real.

In the aggregate, the Treasury may do quite well from this rise because of wage inflation. Wage inflation is a tremendous friend to the Treasury and will more than make up for the gap that the noble Lord mentioned at the start, which is that we need to find other sources of revenue. Wage inflation is going to support the Government quite nicely through this, but that cuts both ways: obviously, it has an aggregate and fiscal benefit, but it hits hard because the cost of employment goes up a lot. There is a double effect and we are probably seeing that right now.

Putting aside the theory about whether we lose jobs in one place and offset them somewhere else, we know that we were down 50,000 jobs in December; the OBR number is an aggregate loss of 50,000 through this initiative. That is a tremendous estimate, of course—who is to say that it has any better insight than anybody else?—but it is already down by 50,000 in December. It is probably a combination of wage inflation and expected tax rises, but that is 50,000 people who are out of a job. As we look through these amendments, we might pause and reflect. Who are these vulnerable employees? Who is actually going to bear the social cost of this change?

These amendments perfectly encapsulate the problem, which is that these changes will fall on people who are, and have already been identified as, vulnerable in one form or another. Observations about tax complexity may have been well made by the noble Lord, Lord Eatwell and, by the way, it is not just tax avoidance that is a burden to the economy. Tax compliance is a burden to the economy, as all forms of taxation in this country have become very complex and are a tremendous drag on the economy as things stand. However, that is how we manage our affairs.

While we look at this issue, we might pause and think about where the costs fall on individuals—in this case, on veterans. The previous Conservative Government ensured that veterans were a priority. They guaranteed that the funding was sufficient to support veterans in securing highly paid and skilled employment in key sectors across our economy, utilising the skills that they developed in the military.

In April 2024, veteran employment was at an all-time high of 89% owing to various initiatives, including the 12-month national insurance relief for employers hiring a veteran into their first role out of military service. This tax incentive was highly beneficial for veterans and business. Following its introduction in 2022, this relief was extended in 2023 and again in the following year, 2024. Following the Government’s decision to impact business through this tax decision, will the Minister at least confirm that they intend to continue this business relief to ensure that our veterans are able to find employment after their service and that businesses are able to benefit from their unique skills and experience?

Our military deserve the utmost respect for the service they provide to our country and, as such, the veterans deserve that same level of respect. This tax will be harmful to these people, and if the Government are unwilling to exempt them, at the very least they must explain how they have arrived at the conclusion that it will not be exceptionally detrimental to the employment rate of veterans.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, in answer to the point made by the noble Baroness, Lady Neville-Rolfe, as I have said, the Government and the OBR have already set out the impacts of the policy change. The information provided is in line with the approach for other tax changes and the Government do not intend to publish additional assessments.

[Baroness Noakes (Con)]

My Lords, before the noble Baroness, Lady Kramer, speaks again to her amendment, the Minister said that what the Government have provided is in line with what they did for other tax changes. I remind him that this is not a tax. The reason we are scrutinising this Bill is that it is not a tax; it is national insurance. I do not think that the Minister can run a line saying that, just because this Bill comes from the Treasury, the Treasury is allowed to produce whatever minimalist, large-font document, with no information in, that it wants. There is an obligation on government to produce impact assessments for major policy changes—and, my goodness me, this is a major policy change and I do not think we will be giving up this particular pursuit in Committee.

[Lord Livermore (Lab)]

HMRC has provided a tax information note, as it does for all similar policy changes. The Government have no intention of publishing additional assessments.

--- Later in debate ---

[The Deputy Chairman of Committees (Viscount Stansgate) (Lab)]

We now move on to the next group. I call Amendment 6 in the name of the noble Baroness, Lady Neville-Rolfe.

[Baroness Noakes (Con)]

My Lords, before we start on that amendment, it is 7.28 pm and the Committee is due to finish at 7.45 pm. It always used to be the custom that if we would cover only a very short part of a group, we would normally draw stumps at that stage. That is the way it has always been done in the past. Obviously, we do not absolutely have to finish every group, but we do not normally start a quite significant group with a large number of amendments when there are so few minutes left, so I would like clarification on what will happen in this Committee.

[The Deputy Chairman of Committees (Viscount Stansgate) (Lab)]

In answer to the noble Baroness, I am in the hands of the usual channels.

--- Later in debate ---

[Baroness in Waiting/Government Whip (Baroness Blake of Leeds) (Lab)]

I understand that Amendment 17 has been withdrawn in the Chamber.

[Baroness Noakes (Con)]

I am grateful to the noble Baroness for those comments. In the spirit of good will in the Committee, this would be an appropriate time for us to draw stumps.

[The Deputy Chairman of Committees (Viscount Stansgate) (Lab)]

In the spirit of good will, the Committee is adjourned.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Baroness Noakes Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, this Bill delivers one of the most destructive policies invented by this Labour Government. I will not deal with the fact that it breaks a manifesto promise, though it does, or talk about its impact on much of the social fabric of our land, from charities to childcare, though the damage that it will do is immense. Instead, I will focus on its impact on businesses and the onward impact on their customers and employees.

First, let us get a couple of things out of the way. The Minister gave us his usual diatribe about the so-called black hole which the Government allege that they inherited. He must be getting embarrassed about going on about this all the time. He knows that the Office for Budget Responsibility has not backed the Government’s story on the black hole. He knows that a fair chunk of the £22 billion can be ascribed to the massive pay increases given to some public sector workers in return for zero productivity. He must also know that an even bigger black hole is already emerging as the economy goes into reverse as a result of the Budget and as some spending promises excluded from it have to be funded. No more nonsense, please, about black holes.

While we are at it, I hope we will have no more nonsense about the Truss mini-Budget. It did not crash the economy. GDP certainly did not crash—in fact, its trajectory hardly budged. However, since Labour came to power, growth has ground to a halt. There was a dislocation in bond markets and interest rates peaked but, as the Bank of England’s analysis has shown, the Bank itself was to blame for at least two-thirds of that, due mainly to its negligent oversight of LDI pension strategies. As my noble friends Lady Neville-Rolfe and Lord Forsyth have pointed out, interest rates are now higher than they were after the Truss Budget, whether you look at the short-term gilt rate, the long-term gilt rate or the premium over the bund rate. All this feeds into today’s mortgage rates, and the Government need to own the fact that it is their Budget that is having an impact on today’s mortgage costs. It is very clear which Budget has been worse for people with mortgages.

The Chancellor has dressed up her dreadful policy choice on national insurance by saying:

“We are asking businesses to contribute more”,—[Official Report, Commons, 30/10/24; col. 818.]


as if businesses themselves will be paying more tax to fund the public expenditure largesse in the Budget. This has been exposed as at best naive and at worst downright misleading by a host of commentators, starting with the Office for Budget Responsibility and going on through many others. Not a single analysis shows that businesses will be “contributing more”, except in the narrow technical sense that they will be writing cheques to HMRC for the increased national insurance bills. All the analysis points to the impact ending up on jobs, prices and wages.

The OBR reckoned that, even in the first year—2025-26 —60% would be passed on to employees and consumers and that this would rise to 76% by the second year. The National Institute of Economic and Social Research has pointed to higher unemployment and weaker wage growth. This is not theory. The Bank of England’s decision-maker panel in December found that, while most businesses expect lower profit margins, over 50% expect to raise prices and reduce numbers and 40% expect to lower wages.

The policy is highly regressive, which ought to worry the Benches opposite. The Institute for Fiscal Studies has highlighted the disproportionate impact on employing people at the bottom end of the wage scale. The NI changes mean that the cost of employing somebody on the minimum wage will rise by 3.2%, compared with 2.5% for those on median wages and 1.8% for those earning twice the median wage. The Centre for Policy Studies has taken this further by calculating the tax burden on labour, known as the tax wedge: overall, the tax wedge for someone on minimum wage will rise to 21.3%, which is even higher than the figure we inherited in 2010 from Gordon Brown.

When businesses come to manage these increased costs, the option of lower wage rates does not exist for those on minimum wage, and so we can expect employers to reduce their numbers instead. Higher up the wage scale, employers will be looking to reduce wages as well as numbers. National data are already showing weak job vacancies, and recruitment companies, which are often the canary in the mine, are issuing profit warnings, as employers are already turning away from recruitment.

What does all of this add up to? The pain of job losses for employees will knock on to higher unemployment benefits; lower profits and wages will result in lower taxes for the Exchequer; and all of us will face rising prices which will feed into inflation, thereby keeping interest rates higher than they would otherwise have been. It is hard to think of a more disastrous economic policy, especially in the context of a Budget which could not have been more anti-growth if it had tried.

Business confidence has been in retreat since before the Budget. Businesses are now facing an unholy trinity of national insurance rises, significant increases in the minimum wage—especially for younger employees—and the Government’s employment law reforms. This is not an environment in which businesses will want to invest. Indeed, many sectors will face retrenchment. This morning, the British Chambers of Commerce said that many of its members expect to cut back on investment. The British Retail Consortium has warned of shop closures. Hospitality businesses will be on insolvency watch. This is no way to grow the economy. The Government’s growth mission is starting to look like mission impossible.

The Government must be wondering whether the gain is worth the pain. The OBR calculated the static yield from national insurance increases as £26 billion by the end of the Budget forecast period, but it then forecast that the net yield would fall to only £16 billion, due to the direct and indirect behavioural impacts. In addition, the Government have said that they will fund the public sector for the additional costs which will fall on to public sector employers, amounting to around £5 billion. It is inevitable that the public sector will have to pay more for public services provided by private sector suppliers when they pass on the extra costs in prices. So we have all this pain for businesses, employees and consumers, plus the opportunity cost of lost economic growth, for a net figure which is probably south of £10 billion. That is just two-thirds of 1% of the Government’s total expenditure at the end of the Budget period. Is it worth it?

Bank Resolution (Recapitalisation) Bill [HL]

Baroness Noakes Excerpts

Report stage
Monday 4th November 2024 Lords Chamber

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, in moving government Amendment 1, I shall speak also to government Amendment 4. The Government have tabled these amendments after considering the concerns raised in Grand Committee by the noble Baronesses, Lady Noakes, Lady Bowles, and Lady Vere, and the noble Lord, Lord Vaux. I am extremely grateful to all of them for all of the points they have raised.

Reflecting in particular on the points made by the noble Baroness, Lady Noakes, the Government have decided to clarify in the Bill whose expenses can be covered by a recapitalisation payment from the Financial Services Compensation Scheme. I am grateful to the noble Baroness for her engagement on this matter since Grand Committee.

The Bill as introduced permitted a recapitalisation payment to cover the expenses that the Bank of England or another person has incurred, or might incur, in connection with the recapitalisation of the firm in resolution. These amendments replace that broad formulation with “relevant person”, then specify that “relevant person” means the Treasury, a bridge bank or an asset management vehicle. They further specify that “bridge bank” and “asset management vehicle” have the meanings given by Sections 12 and 12ZA of the Banking Act 2009 respectively.

In Grand Committee, the noble Baroness, Lady Noakes, indicated that she had no objection to the Treasury, the Bank of England and its entities having certain expenses covered by the new mechanism, but that this should be specified in the Bill. These amendments tabled by the Government seek to do just that; I hope that she and other noble Lords will be able to support them.

In Grand Committee, the noble Baroness, Lady Noakes, also asked questions about the specific expenses that would be in scope under the terms of the Bill. On this point, I should be clear that the Government maintain the position set out in Grand Committee: it is important that the Bill is not overly prescriptive, allowing the Bank to respond flexibly when costs arise. I refer to the explanations given in Grand Committee, in the Government’s response to the consultation and in the draft updates to the code of practice of the types of expenses that will be expected to be covered. The Government maintain that it is prudent to ensure that there is broad provision to cover these potential additional costs. Ultimately, it should be borne in mind that the alternative may be for such costs to be met by the taxpayer.

By way of reassurance, I reiterate that, in determining whether to include certain ancillary expenses in its request for funding, the Bank of England is subject to the usual obligations under public law to act in a way that is reasonable and proportionate. In addition, the legislation does not allow the Bank of England or any other person to claim expenses that arise exclusively for preparing for a Bank insolvency. The draft updates to the code of practice also set out that the Government would expect any final report on the use of the mechanism to explain why certain expenses were considered reasonable and necessary.

I hope that the Government’s approach as set out in these amendments addresses the points raised by noble Lords in Grand Committee, and that noble Lords will feel able to accept them. I beg to move.

[Baroness Noakes (Con)]

My Lords, I spoke in Committee. I draw attention to my interests as included on the register; in particular, I hold shares in a number of banks that could be affected by the contents of this Bill.

I thank the Minister for the comprehensive letters that he wrote to Members who took part in Committee—and, indeed, for the subsequent meeting that he organised. I also thank the Treasury for publishing the draft extra chapter for the code of practice, which has been very helpful to those of us trying to work through the Bill.

I certainly support the two amendments to which the Minister has just spoken, which go some way to limiting the wide power in new Section 214E(2), but I have some further questions for the Minister, building on the comments he has just made. These amendments constrain to whom payments can be made under that new subsection but they do not do anything to constrain the types of expenses that can be incurred. In Committee, I tried to explore what happens if litigation or regulatory actions arise in relation to issues that had occurred prior to the resolution action being taken but which do not emerge until a little later. We did not get very far, so I will spend just a couple of minutes on them here.

I am talking about material litigation or regulatory action. There could be shareholder litigation, which happened after RBS was bailed out by the Treasury. There could also be other kinds of issues that result in both regulatory action and civil litigation, as happened in relation to Libor, for example. Today’s hot issue is vehicle financing commissions, following the Court of Appeal’s decision recently, and no one knows how much it will cost.

Before this Bill, the working assumption was that smaller banks would be placed into the insolvency procedure and that, in that event, the kind of liabilities I am talking about would likely be extinguished as part of the insolvency because there would simply be insufficient money there to pay for them. However, once the recapitalisation power is used, it opens up the possibility that the Bank of England could use the power to raise capital in order to pay for litigation or regulatory costs that had arisen and were crystallising after the recapitalisation event.

The issue of litigation was raised by my noble friend Lord Moylan at Second Reading, and the Minister wrote to him on 21 August. The letter confirmed that litigation costs could well be covered through the use of the recapitalisation power. The Minister expressed this in terms of it being

“a judgement to be taken at the time, noting that the alternative could be to use public funds instead”.

From the perspective of the financial sector, which will be picking up the costs using the power—then doubtless passing them on to their customers—the alternative is using not public funds but the insolvency procedure. If we let the insolvency procedure take its course, at least nine times out of 10, those costs will not be met at all. So, that is the heart of the problem from the financial sector’s point of view.

I have not tabled an amendment on Report because it is very difficult to table one that would cover all eventualities. The redraft of the code of practice does not appear to deal with this issue either, whether in relation to expenses per se—in the terms of the new subsection we are discussing—or in relation to which liabilities the Bank should allow to go into the bridge bank. Today, I am seeking that the Government recognise that this is an issue and that it should be dealt with somehow as part of the code of practice.

I accept, as I have throughout, that there may be public interest reasons for avoiding the bank insolvency procedure, and for settling historical liabilities through the recapitalisation power, but the public interest test is a rather slippery concept and gives no real comfort to those who are expected to pick up the tab. I hope that the Minister will accept that this new power must not become a blank cheque to avoid bank insolvency and to pick up all kinds of costs that would otherwise fall by the wayside. I look forward to hearing what reassurances he can give.

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[Lord Vaux of Harrowden (CB)]

My Lords, I add my support to Amendment 2 tabled by the noble Baroness, Lady Vere. From the outset of this process, the Bill was intended to cover only small banks. That was made clear in almost the first paragraph of the original consultation. It was then extended and now covers all banks, regardless of size. I thank the Minister for making sure that the draft code of practice was published by the Treasury before Report; it has been incredibly helpful in this process, and we are all very grateful for that. The draft code of practice is clear that the resolution mechanism is designed primarily to support the resolution of small banks and that the Bank of England will not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and the corresponding MREL requirements of a large bank.

So why does the Bill cover large banks? The argument from the Government seems to be along the lines of, “Well, it might be useful to have this flexibility”. That does not seem a very strong argument. As we have heard, larger banks are required to hold additional capital resources, known as MREL, effectively to ensure that they are able to bail themselves out—a process known as bail-in. If the Government are not confident that the MREL regime is sufficient for those larger banks, they should be looking to strengthen that regime rather than extending a measure that is designed specifically for smaller banks whose failure would not create systemic risk, to act as a further insurance policy for the big banks.

I am afraid that unless the Minister can come up with a stronger argument than he has so far, I will be minded to support the noble Baroness, Lady Vere, should she decide to test the opinion of the House.

[Baroness Noakes (Con)]

My Lords, I add my support to my noble friend’s amendment.

If the power were used on a bank that had already achieved the MREL set for it, that use of the mechanism would raise questions about whether MREL and the minimum capital requirements had been set correctly—and whether there had been a regulatory failure. In either event, the Bank is conflicted, whether through the setting of MREL in its capacity as a resolution authority or through setting capital levels through its PRA arm. I am clear that the Bank should not have the power to cover up regulatory failure, which this unconstrained provision allows. There is no way for the Treasury to stop the Bank using the power other than by using the power of direction that exists but has never been used in the existence of the Bank since nationalisation. Unconstrained powers are unhealthy. That is why I support my noble friend’s amendment.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I concur with what other noble Lords have said about this amendment: that is why I have added my name. It cannot be left as a possibility for any size of bank; if it needs to apply to a larger bank, perhaps the MREL level should have been set higher. We have this rather unusual situation in the UK where we set MREL at a much lower level; it is set at about a quarter of the level of other countries. If there is a nervousness about needing to use it for a bank that is a little bit larger, perhaps some other fundamentals about where MREL is being set are wrong.

The premise of this Bill is based on it being an alternative to insolvency, where that would have been the normal end result. Maybe the compensation scheme would have had to pay out on deposit guarantees and so there is the happy thought that the money could be perhaps put to different use this way round. But the assumption should still be insolvency and we need a public interest test before we go looking at the Financial Services Compensation Scheme. It is already an extraordinary event—so how extraordinary are extraordinary events? I do not think one can layer extra extraordinariness on top of it: there has to be a line somewhere.

We do not know how many dips into the Financial Services Compensation Scheme there are going to be. In insolvency, there is one dip for the deposits that are guaranteed. It does not say that there cannot be multiple dips. There is already the notion that there is this enormous pot of money. Maybe it looks like a bank tax—and everybody hates banks and it is a pot to raid—but it is a very good way to cause more issues within the wider banking sector. Frankly, it is unfair if there are not some bounds somewhere. So I think this is the right one and, if the Minister is not going to incorporate the amendment, which I think would be a jolly good idea, we on these Benches will be supporting the noble Baroness, Lady Vere.

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[Lord Vaux of Harrowden (CB)]

My Lords, this group covers reporting and accountability to Parliament on the use of the resolution mechanism, which was probably the greatest area of discussion in Committee. The Bill gives significant rights to the Bank of England to impose costs on the banking industry. It can only be right, therefore, that the Bank should have to explain the reasons for its decisions and the outcome to both the Treasury and Parliament.

A number of concerns have been expressed throughout the process, and again today, about how the Bank might use the mechanism. At Second Reading, the noble Lord, Lord Macpherson of Earl’s Court, said:

“I can foresee circumstances where the Bank will choose to recapitalise a small bank rather than put it into a bank insolvency process, less because it is in the national interest and more as a way of minimising the reputational damage of regulatory failure”.—[Official Report, 30/7/24; col. 914.]


The noble Baroness, Lady Noakes, said something similar earlier today. The noble Lord and others have pointed out that there is nothing in the Bill that would incentivise the Bank to control the expenses of the process; again, we discussed this to an extent earlier. Those expenses will be picked up by the FSCS, by the wider financial services industry and, ultimately, by the customers of that industry.

As we have just seen, the Government have tabled amendments to clarify that last point, which we have already discussed—but the point remains. Fears, which I share, have been raised that this resolution mechanism could become the default, rather than insolvency. I believe—others share this view, I think—that, in principle, a failing institution should be allowed to fail unless it is in the public interest for it to be bailed out. The draft code attempts to deal with this but the concern remains.

For all these reasons, it is essential that the Bank should have to explain its decisions and that Parliament should have the ability to scrutinise those decisions. For that reason, I have tabled Amendment 5, which would require the Bank to make a report to the Chancellor that must then be laid before Parliament every time a recapitalisation payment is made. The amendment sets out some minimum requirements for what the report should cover, including why the Bank chose to make a recapitalisation payment rather than allowing the institution to go into insolvency; the costs that will be incurred; and how those costs compare to the costs the FSCS would incur in an insolvency situation. It would also require a final report explaining what actually happened—and, if different, why—at the end of the resolution process.

Since I tabled Amendment 5, I am pleased to say that the Government have issued the draft code of practice—for which we are all grateful, as I said—and tabled Amendment 8. I am extremely grateful to the Minister for his constructive approach on this. Given that the two together deal with most of the areas covered by my Amendment 5, I will not push that.

However—there is always a “but” in these things—there is one important omission in the Minister’s Amendment 8. Although it requires the Bank to report within three months of any recapitalisation payment, it does not require a final report on what actually happened at the end of the resolution process. Although the resolution will happen quickly in many cases—the example of Silicon Valley Bank, where it happened over the weekend, is a good one—that may not always be the case. Under these rules, a bank can be put into a bridge bank for up to two years, which can be extended further. We can have multiple recapitalisation periods during that period, so the process can last a number of years. If the Bank reports within three months of each payment, we may never see a report on what actually happened at the end—for example, if the failing institution is put into insolvency two years later.

It is essential that the Chancellor and Parliament have an opportunity to review how the resolution worked out and, most importantly, to ensure that any relevant lessons are learned. So I have tabled Amendment 9, as an amendment to the Minister’s amendment, to cover that point. I think that this may have been the Minister’s intention all along, but I cannot agree with him that his amendment, as drafted, actually achieves this. On the report it requires, his amendment says:

“The Bank must report to the Chancellor of the Exchequer about … the exercise of the power to require a recapitalisation payment to be made, and … the stabilisation power and the stabilisation option to which the payment relates”.


Nowhere does it talk about what happened at the end, which could be a number of years later.

I am alive to the concern that we should not have too many potentially repetitive reports, so my amendment would have effect only if the reports published by the Bank, in accordance with the Minister’s amendment, do not cover the final resolution results. I hope that this is not controversial and that the Minister will be able to accept Amendment 9 to his amendment. However, as I say, it is essential that the final outcome of any resolution is made transparent and open to scrutiny.

If the Minister is unwilling to accept my proposal, or accepts the principle but does not like some of the detail—he has mentioned to me that he is not terribly keen on the three-month timeframe—perhaps he could commit to coming back at Third Reading with his own version of the amendment that satisfies the guaranteed requirement to report on the final outcome. He can tweak it as he likes on timing and things—I cannot get too excited about that—but, if he is not prepared either to accept it or to do that, I will be minded, I am afraid, to test the opinion of the House on Amendment 9 when the time comes.

The other amendments in this group relate to notifying the relevant committees of both this House and the other place of the use of the recapitalisation power. The amendments tabled by the Minister, as well as the amendments to his amendments tabled by the noble Baroness, Lady Noakes, arose from amendments that the noble Baroness put down in Committee. I am pleased that the Government have accepted those amendments. However, all the amendments do is say that the committees must be notified. Those committees need something to look at; it makes it all the more important that we have the reports we are talking about, both on the use of the recapitalisation power and on what finally happens, at the end of the day. I beg to move.

[Baroness Noakes (Con)]

My Lords, I have Amendments 11 to 13 in this group; they are amendments to the Government’s Amendment 10, to which the noble Lord, Lord Vaux, has referred. Before I address those amendments, I shall refer briefly to the reporting amendments in this group. I certainly praise the Government for bringing forward their Amendment 8, as well as for beefing up the code of practice on reporting. However, I agree with the noble Lord, Lord Vaux, that the issue of the final report made by the Bank of England is outstanding; I therefore support his Amendment 9.

On Amendments 10 to 13, I start by thanking the Minister for listening to the case, made in Committee, that parliamentary committees should be notified of the use of the bank recapitalisation power. I had tabled an amendment that named the Treasury Select Committee in the other place and the Financial Services Regulation Committee in your Lordships’ House; this was supported in Committee by fellow Members of the latter committee, as noble Lords might imagine. I retabled my amendment for Report—the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux, added their names—but the Government then tabled Amendment 10, which was similar in principle to my amendment but drafted using the language of the Financial Services and Markets Act 2023. That Act did not refer to the Financial Services Regulation Committee for the simple reason that it did not exist at the time—indeed, it was that Act that led to creation of that committee. So, following the helpful meeting that we had with the Minister, I was told that the Government were happy to refer directly to the Financial Services Regulation Committee. They suggested that this be achieved by my tabling amendments to the Government’s amendments. So I hope that, when the Minister gets up to speak to his amendment, he will confirm that he accepts my Amendments 11 to 13.

Noble Lords who have joined the House in the past eight years might be mystified by the reference to the Chairman of Committees in my Amendment 13. Although the House has not used the title since 2016, the post to which we now refer as the Senior Deputy Lord Speaker technically remains the Chairman of Committees. One learns something every day in Parliament.

Let me conclude by saying that I hope the principle of requiring notification to the Treasury Select Committee in the other place and your Lordships’ Financial Services Regulation Committee is now regarded as a precedent for any future creation of significant or unusual powers granted to the Bank of England or any of the other regulators in future. The strength of parliamentary accountability for those bodies, with their massive powers, must always be maintained—and, indeed, enhanced.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will speak principally to Amendment 7 in this group, which has also been signed by the noble Baronesses, Lady Vere and Lady Noakes. Amendment 6 was my first attempt, when I was worried that defined first and secondary objectives were not already specified in connection with resolution. In fact, there are a whole load of objectives that have to be balanced in Section 4 of the Banking Act 2009. However, I then hit upon the formulation of claim 7, to make it agree with how it had been rendered in FiSMA 2000. I am suggesting that this is a secondary objective to all the existing ones, and the formulation is the one with which we are already familiar.

We on these Benches are not always certain of the merits of the competitiveness and growth objective, which is what I am inserting into the Bill here, in respect of the resolution authority. Our concern is that in other places, it might return to too much of the animal spirit that led to the financial crisis, but here, it has a different and particular role. The Bank has to balance all the Section 4 objectives to get the best results, and, in its resolution capacity, it is not really in a situation to be prey to animal spirits.

When it comes to the Financial Services Compensation Scheme as a source of funds, as we have already said, there are no bounds, or at least no written ones. How many dips into it can be made if the first one is not enough? How big can those dips be, compared to what might have been needed to compensate depositors if the Bank had gone bust instead? What happens if there are multiple resolution events in a narrow period of time? For how many years can the extra levy be put on to the banking sector in order to pay back the scheme? As the noble Baroness, Lady Noakes, has said before, how can we be certain that, years later, it is not called upon again in connection with some kind of legal action?

All these things are left open for the Bank of England resolution authority to decide and to do its best on. It will, of course, receive advice from the PRA, which has to consider what is an affordable levy for the industry, but it is receiving advice from a body which has in one sense just failed, and to which it is always close. It is advice that it does not actually have to take, either.

The only lever—other than the one suggested in the amendment of the noble Baroness, Lady Noakes, a requirement to minimise cost—is to impose the objective of competitiveness, which in this instance means affordability, and for that to be imposed on the resolution authority itself. It is secondary to everything else, so it cannot kick the other objectives into touch in any way; it is just making sure that there is a small reality check about what this does to other banks, especially in the circumstance that this is not the only bank or that this is not the only dip into the fund.

So, this is an instance where the secondary competitiveness and growth objective is relevant, and I hope the Minister can see his way to accepting it. If not, I shall probably seek to test the opinion of the House. I beg to move.

[Baroness Noakes (Con)]

My Lords, I have Amendment 16 in this group and added my name to Amendment 7, to which the noble Baroness, Lady Bowles of Berkhamsted, just spoke. As she indicated, the two amendments are related in that the imposition of unnecessary costs, which is the target of my Amendment 16, will do nothing to help the financial sector grow, be competitive or, indeed, support the real economy.

I fully supported the growth and competitiveness objectives introduced for the PRA and the FCA in the Financial Services and Markets Act 2023, and I am very glad that the Chancellor of the Exchequer has given her support to those. But I hope that the Government will want to go further and make all regulators, and indeed all other public sector bodies, pay attention to growth and competitiveness. Extending this to other organisations is important, particularly in the financial services universe, as they were not included within the competitiveness and growth objective in the 2023 Act.

One of those omitted at that time—perhaps we should have spotted it during the passage of the Financial Services and Markets Act—was the Bank of England in its capacity as a resolution authority. The noble Baroness, Lady Bowles, has had to confine her amendment to the use of the bank recapitalisation power because of the Long Title of the Bill. But the competitiveness and growth objective ought to apply to the Bank as the resolution authority in toto, not simply when it exercises the new bank recapitalisation power but also when, for example, it is setting MREL levels.

My Amendment 16 adds a special resolution objective to the seven already listed in Section 4 of the Banking Act 2009, and it requires the Bank to consider the minimisation of costs borne by the financial sector when the recapitalisation power is used. It is not an absolute requirement, as it would be just one of eight objectives, and it is for the Bank to determine, under the 2009 Act, how to balance those various objectives.

When it is using the power, the Bank is playing with other people’s money. Ultimately, it is the money of those of us who are customers of the banks, because at the end of the day the money that flows through the banks will end up being borne by customers, and it is only right that the Bank should have regard to the minimisation of costs that are ultimately borne by the banks’ customers.

In Committee I tabled an amendment that focused on the costs being borne through the FSCS not exceeding the counterfactual of the bank insolvency procedure to which the Bank should be paying regard in any event. My amendment today is a less complex test and is simply designed to act as a reminder to the Bank that it should treat other people’s money as carefully as it treats its own. If it does that, it should also help to keep the sector competitive and to help it grow. I hope that the Minister will agree that this amendment is right in principle and that it responds to a number of concerns expressed by several respondents during the consultation on the power over the last year or so.

[Lord Vaux of Harrowden (CB)]

My Lords, I support both the amendments in the names of the two noble Baronesses who have just spoken. I probably have a slight preference for Amendment 16 on the expenses—it is more direct—but we need something in the Bill that reminds the Bank of England that it is spending other people’s money, and that it needs to do that carefully and with care. These amendments are aimed primarily at that end, so I support them both.

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Moved by

[Baroness Noakes]

11: In inserted subsection (2) leave out paragraph (b) and insert—
“(b) the Financial Services Regulation Committee of the House of Lords”

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I am not going to press my amendment but I hope the Minister recognises that there is a genuine issue here, will keep it under review and will consider amending the code of practice in that respect. I beg to move.

[Baroness Noakes (Con)]

My Lords, I added my name to the amendment but I am glad that the noble Lord, Lord Vaux, will not be pressing it because, as he explained, there are difficulties with it.

I pay tribute to the noble Lord for chasing this issue down because it is a very real issue that could arise in certain defined circumstances, as he explained. I am not convinced that the solution of simply transferring assets into the bridge bank actually works. The complexities of a bank mean that you have liabilities—that is how you fund yourself from market sources—and in practice it may well be difficult. I hope the Government will take this away and find a way of minimising the likelihood that that ever happens, whether in the code of practice or otherwise, in discussion with the Bank of England.

[Baroness Kramer (LD)]

My Lords, the point that the noble Lord, Lord Vaux, has been making is significant and crucial in shaping the way in which the Bank of England approaches the resolution of banks when they fail.

Unlike the noble Baroness, Lady Noakes, I think there is a potential path of looking at the sale of the assets rather than the sale of the equity. That is the normal practice that one would follow in order not to transfer liabilities over to the new recovering entity. I fully understand all the complexities, and I hope the Minister will take this up with the Bank of England in his discussions. It requires a lot more work but it could get us out of some very nasty traps in future, and it will be more likely to do so if there has been thought beforehand rather than it being a reaction in a situation of emergency.

Bank Resolution (Recapitalisation) Bill [HL]

Baroness Noakes Excerpts

Committee stage
Tuesday 10th September 2024 Grand Committee

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, I hope I can address the concerns of the noble Baronesses, Lady Bowles and Lady Vere, and provide them with reassurances about the protections in place for depositors as a result of the mechanism under this Bill. I can assure the noble Baroness, Lady Bowles, that in the event that the mechanism under the Bill is used, it would not reduce a covered depositor’s entitlement to a payout in the event of a subsequent bank insolvency. In this situation, eligible depositors would continue to be paid out up to the coverage limit set by the Prudential Regulation Authority, which is currently £85,000. That protection is enshrined in the rules set by the Prudential Regulation Authority. If the mechanism under the Bill is used and a bank subsequently enters insolvency, the Financial Services Compensation Scheme will continue to have access to the same resources as it does now. This means that it would first seek to use any existing funds or its commercial borrowing facility to meet its costs. If that is not sufficient, the Financial Services Compensation Scheme is able to turn to the Treasury and request a loan under the National Loans Fund. Any borrowing under the National Loans Fund would then be repaid by future levies. That is an important backstop that means that the Financial Services Compensation Scheme can continue to access the funding it needs.

The noble Baroness, Lady Bowles, asked a specific question about affordability being taken into account when deciding to recapitalise using the payout in insolvency. The answer to that is yes. The bank would consult the PRA when deciding to use its powers to consider affordability in levies. I hope this provides the reassurance that the noble Baroness is seeking that covered depositors will not face a reduction in what they are entitled to in insolvency if the new mechanism is used. On that basis, I hope she will be able to withdraw her amendment.

[Baroness Noakes (Con)]

Can I just clarify what happens when the FSCS has gone to the Treasury, because there does not appear to be a limit on the amount of money that it could draw down to meet its obligations to protected depositors? As the noble Lord, Lord Eatwell, pointed out on our first Committee day, there might be several financial institutions—my noble friend also raised this—in play at one time. It cannot be the case that an infinite amount of money can be funnelled through the FSCS and ultimately funded by loans from the National Loan Fund with the expectation that that will always then be met by subsequent years’ levies on the institution. Is there is there no break in the system which says, “No, this is too much for the FSCS to deal with”, especially as it is now potentially being loaded with a different kind of expense to process through its mechanisms?

[Lord Livermore (Lab)]

As the noble Baroness said, we touched on this briefly in the first day of Committee. If it is okay with her, I will write to set out the precise way in which the mechanism would work in that instance.

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Moved by

[Baroness Noakes]

15: Clause 1, page 2, line 3, at end insert—
“214F Engagement with Parliamentary Committees(1) If the Bank of England exercises the power under section 214E it must, as soon as reasonably practicable, notify in writing the chair of each relevant Parliamentary Committee that the power has been exercised.(2) Relevant Parliamentary Committees are—(a) the Treasury Committee in the House of Commons, and(b) the Financial Services Regulation Committee in the House of Lords.(3) References to the committees referred to in subsection (2)—(a) if the name of the Committee is changed, are references to that Committee by its new name, and(b) if the functions of that Committee (or substantially corresponding functions) become functions of a different Committee of the House of Commons or the House of Lords, are to be treated as references to the Committee by which the functions are exercisable.(4) Any question arising under subsection (3) is to be determined by the Speaker of the House of Commons in relation to committees of the House of Commons and by the Senior Deputy Speaker of the House of Lords in relation to committees of the House of Lords.”Member's explanatory statement
This amendment provides that the Bank of England must notify the Treasury Committee of the House of Commons and the Financial Services Regulation Committee in the House of Lords if the recapitalisation power is used.

[Baroness Noakes (Con)]

My Lords, Amendment 15 would add a new section to FSMA. This would create a requirement for the Bank of England to notify the Treasury Select Committee in the other place and the Financial Services Regulation Committee of your Lordships’ House of the use of the recapitalisation power.

On our last Committee day, I tried to add a requirement for Treasury consent when the recapitalisation payment power was used in order to improve parliamentary accountability around the use of the power. That would, in effect, have tied Ministers into the decision, thus allowing Parliament—in particular, the other place—to hold Ministers to account. As I have said many times, the accountability of the Bank of England is weak. Unsurprisingly, because Ministers have never been known to be in love with ministerial responsibility or accountability, the Minister turned this down.

However, in response to my amendment, the Minister said, as if it was a self-evident truth, that:

“It is important to maintain the position that the Bank of England can take decisions on the appropriate resolution action independently”.—[Official Report, 5/9/24; col. GC 33.]


I am not sure that that is correct. The independence of the Bank of England certainly exists in relation to monetary policy, but it does not extend to the totality of its functions.

I invite the Minister to look at Section 4 of the Bank of England Act 1946, which was when the Bank of England was nationalised. Section 4 allows the Treasury to issue directions to the Bank of England—it has in fact never issued a direction, but the power exists. There are carve-outs from that power of direction to cover monetary policy, the activities and functions of the PRA, and something to do with central counterparties. It does not carve out the Bank as a resolution authority, so a power exists for the Treasury to direct the Bank on resolution functions. We should not therefore get hung up on the so-called independence of the Bank in considering amendments to this Bill, though we may well return to the topic on Report.

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[Lord Livermore (Lab)]

My Lords, the amendment tabled by the noble Baroness, Lady Noakes, focuses on the important theme of how the Bank of England is accountable to Parliament. As I have said in response to other amendments, the Government agree that it is right that the Bank of England is held to account for the actions it takes in resolution. That includes being accountable, as appropriate, to Parliament, so I do look warmly, in the words of my noble friend Lord Eatwell, at the intent of this amendment. I also stress that it is right that the Bank of England can act quickly and decisively when exercising its powers. That is particularly important in a crisis situation.

That said, the Government expect that the Bank of England would engage with Parliament after taking resolution action, including when the mechanism under the Bill is used. Specifically, under the existing provisions of the Banking Act, when the Bank of England exercises its resolution powers it must provide a copy of the relevant legal instrument to the Treasury. The Treasury must then lay that instrument in Parliament and the Bank of England must also publish it. This will continue to apply under the new mechanism and ensure that Parliament is notified when resolution action is undertaken. I shall give one specific example. In the case of SVB, the Bank sent to the Treasury the copy of the legal instrument the same morning as it exercised its power. The Treasury then laid the relevant document in Parliament on the very same day.

I also reiterate points I have made elsewhere about the Government’s commitment to require the Bank of England to produce reports in the event that the mechanism is used. The Government strongly expect such reports to be made public and laid in Parliament unless there are clear public interest grounds for not doing so, such as issues of commercial confidentiality. I hope this provides some comfort to the noble Baroness and, on that basis, I respectfully ask her to withdraw her amendment.

[Baroness Noakes (Con)]

Just to clarify something with the Minister, I understand that the resolution instruments are notified to the Treasury and laid before Parliament but they, of course, do not refer to the use of the mechanism in the Bill. That is what I was focusing on, rather than the resolution action itself. They may be separated, so it is not quite satisfactory to say that the law already provides for the resolution instruments to be relaid, unless that bit of the legislation, from the 2009 Act, were amended to cover the use of the Bank’s payment capitalisation power. I was trying to fill in a gap that I thought existed.

[Lord Livermore (Lab)]

I do not know whether this goes far enough for the noble Baroness but we absolutely intend, and would be clear, that we expect the same exact procedure to apply for this new mechanism.

--- Later in debate ---

[Baroness Noakes (Con)]

I am very glad that the Minister has said that.

First, I thank my fellow members of the Financial Services Regulation Committee for their support on this amendment—I was never in any doubt that I would get it—and I thank my noble friend, the shadow Minister, for her support.

I think this will come down to whether the Treasury’s expectations should be backed up somewhere in the legislation or whether we can allow it to exist on the basis that Treasury expectations will always somehow work out in practice. I favour the former: we need to be clear in the legislation about the trail of information that needs to go and when it needs to go.

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[Lord Vaux of Harrowden (CB)]

My Lords, this amendment is simply intended to try to obtain some clarification on how a recapitalisation payment that has been made by the FSCS to the Bank of England will be treated if the failing bank eventually gets into insolvency. This could occur if the bank is transferred to a bridge bank, the buyer is not found and the bank’s financial situation does not improve. There is a two-year deadline for the bridge bank although that can be extended in certain circumstances but, eventually, the process can end up with the bank being wound up.

If that happens, the recapitalisation payments should be treated as a debt of the bank and should rank ahead of all other liabilities, debts or other claims other than the fees of the official receiver when it comes to distributing any value that might be left in an insolvency situation. This is related to other discussions that we have already had and partially to Amendment 23, tabled by the noble Baroness, Lady Bowles, which we will debate later.

The principle should be that the shareholders, lenders and other creditors should not be put in a better position as a result of the recapitalisation. To put it another way, the industry-funded compensation scheme should not, in effect, be bailing out the losses of shareholders and creditors other than the depositors who will be compensated under the scheme should their deposits be lost in the insolvency. However, that is not clear in the proposed Bill, although it is entirely possible that I have missed something in the interplay between the various Acts that apply here. I would therefore be most grateful if the Minister could explain exactly how the amount provided by the FSCS would be treated in such a situation. It might most easily and clearly be dealt with by including it in the worked example that the Minister agreed to consider providing during our discussions on Amendment 1 on Thursday.

I should say that I suspect that my amendment as it is currently drafted probably does not work, and that it may require some changes to be made to insolvency legislation to work properly if there is an issue. Rather than worrying about the specifics of the amendment, I hope that the noble Lord will concentrate on the principle and explain how the recapitalisation payment would be treated in an insolvency process, as it stands, in particular in making sure that it does not advantage shareholders and lenders, and ideally point me to the relevant clauses of the relevant legislation. If I am right that the situation is unclear, we can sort the details out on Report. I beg to move.

[Baroness Noakes (Con)]

I support the amendment that the noble Lord, Lord Vaux, has put forward, and in particular the request for worked examples, preferably with numbers in, because the noble Lord, Lord Vaux, and I are accountants and we like looking at numbers rather than words. Having read the proceedings of the first Committee day in Hansard, I realised that I did not know how some of these things work in practice, so I think that it is important to have those worked examples.

[Baroness Bowles of Berkhamsted (LD)]

I support this amendment as well, or something like it, and I would be very pleased if the Minister was prepared to try to work out something that might go in the Bill, because we need to have some clarity around these issues. We come back, as has been suggested, to our shareholders being advantaged at the end of the day. I find who is getting what in insolvency remarkably difficult to follow anyway; I certainly defer to the noble Lord, Lord Vaux, who is an accountant and a lot better at it than I am. I suggest that, if the noble Lords present cannot get their heads around it or are wondering, it needs laying out somewhere for clarity, ideally in legislation.

--- Later in debate ---

Moved by

[Baroness Noakes]

20: Clause 4, page 3, line 15, at end insert—
“(2A) In section 4 (special resolution objectives), at the end of subsection (9) insert— “(9A) Objective 8, which applies in any case in which the Bank of England uses the power in section 214E of the Financial Services and Markets Act (recapitalisation payments), is to ensure that the costs which are born through the Financial Services Compensation Scheme do not exceed those which would have been born if the bank insolvency procedure had been used.””Member’s explanatory statement
This amendment adds to the special resolution objectives so that the Bank of England has to consider the net costs recouped via the FSCS if it uses the recapitalisation power with the counterfactual of the use of the bank insolvency procedure.

[Baroness Noakes (Con)]

My Lords, this amendment would insert a new special resolution objective into Section 4 of the Banking Act 2009. That objective is to ensure that the costs of using the recapitalisation payment power, thus loading costs on to the banking sector and in due course on to its customers, are not more than if the bank insolvency procedure had been used.

The special resolution objectives in Section 4 are not absolute requirements. The Bank has to have regard to them when using the resolution and related powers under the 2009 Act. There are seven existing objectives, and I am simply adding one more “have regard” for use only when the bank recapitalisation payment power is used. Section 4(10) states:

“The order in which the objectives are listed in this section is not significant; they are to be balanced as appropriate in each case”.


Thus, I am not trying to impose a requirement which trumps everything else in the special resolution regime. I regard this amendment as quite modest.

Two strands of analysis underlie my tabling of this amendment. The first is that the code of practice is clear that the bank insolvency procedure is the default option, unless there are public interest considerations that outweigh the important market discipline of failure. I am not sure we have seen in practice the use of the default option, but it ought to remain the core option for smaller banks in particular, which the Government insist are the main target of this new power.

The second concern was expressed during the consultation on this Bill—that there ought to be something akin to the “no creditor worse off” provisions of the Banking Act 2009. These provisions ensure that creditors are not disadvantaged by the use of one of the resolution tools compared with the option of insolvency. I am trying to ensure that the banking sector, which is footing the bill via the recapitalisation payment, should not be worse off than if the failed bank had been put through the insolvency process, resulting in the banking sector picking up the costs of reimbursing protected depositors.

I completely accept that there are difficulties in making this an absolute rule, because the Bank of England may well prioritise other matters, such as the continuity of banking services for critical functions. That is why I have drafted this amendment as an additional objective rather than an absolute rule. However, its inclusion in the 2009 Act would ensure that the Bank was especially mindful of the costs that would fall on the banking sector when using the bank recapitalisation power. I beg to move.

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[Lord Livermore (Lab)]

My Lords, the amendment tabled by the noble Baroness, Lady Noakes, seeks to introduce a new objective into the special resolution regime. The new objective would state that the costs in using the new mechanism should not exceed those that would be incurred in the counterfactual of placing the firm into insolvency. This amendment therefore touches on an important point raised both in consultation and during Second Reading, which is whether there should be a formal test or objective that seeks to prevent the use of the new mechanism, or make its use significantly more challenging, where the cost is higher than insolvency.

I also note that the noble Lord, Lord Vaux, raised similar points on the first day of Committee, which he alluded to today, making the case that the Bank of England should be required to present an assessment of costs in reports to the Treasury and to Parliament.

The Government carefully considered the case for inclusion of various forms of such a safeguard, sometimes referred to as a least-cost test, in response to feedback received during the consultation. In considering this matter, it is important to strike the right balance between ensuring that the Bank of England can respond quickly and flexibly to a firm failure and ensuring that costs to industry are properly considered. Having considered this, the Government concluded that the existing public interest test and special resolution regime objectives remained the appropriate framework for deciding whether the mechanism in this Bill could be used.

Adding a specific objective for the Bank of England to ensure that the costs to industry from using the new mechanism do not exceed insolvency could prevent it taking the most appropriate action to advance its broader resolution objectives. Those objectives include protecting financial stability, certain depositors and public funds. It is right that these aims are prioritised at a time of significant risk, which is part of the reason why the Government have not proposed changes to the broader resolution framework.

There is also the potential for such a change to impose important practical challenges. Resolution would likely take place in an uncertain and fast-paced context. Estimating the costs of different approaches during this period will be highly challenging and could change over time. There is therefore a risk that such an objective could create legal uncertainty around any resolution action, which in turn may undermine the usability and effectiveness of the new mechanism in situations where it is justified. This could have significant and undesirable consequences, including crystallising a set of indirect costs for the financial services sector and the wider economy. Further, it should be borne in mind that the alternative if the new mechanism is not available may be to use public funds.

However, I appreciate the intent behind the noble Baroness’s amendment and hope that I can provide some reassurance by reiterating previous points on the subject of the scrutiny and transparency of the Bank of England’s actions. As I have noted, the Bank of England is required under the Banking Act 2009 to report to the Treasury when exercising some of its stabilisation powers and, as was set out in response to the consultation, it is the Government’s clear intention to use these existing reporting mechanisms to ensure that the Bank of England is subject to appropriate scrutiny when using the mechanism provided by the Bill. However, I take the point that the noble Baroness made in response to my earlier point.

The Government have committed to updating the code of practice to provide further details on how these reporting requirements will apply when the mechanism is used. I reaffirm that the Government intend to include confirmation in the code that, after the new mechanism has been used, the Bank of England would be required to disclose the estimated costs to industry of the options considered, including the comparison with insolvency. The Government consider that using the code of practice in this way, rather than putting these requirements in the Bill, is the best approach to hold the Bank of England to account for its actions.

The Bank of England is legally required to have regard to the code and the Government are required to consult the Banking Liaison Panel, made up of regulatory and industry stakeholders, when updating it. Using the code will therefore ensure that a full and thorough consultation is taken on the approach. Given the complex and potentially fast-moving nature of bank failures, this will also ensure that any approach is sufficiently nuanced to account for the range of possible outcomes under insolvency or through the use of other resolution tools.

As I have previously said, the Government will share drafts of the updates to the code of practice as soon as practicable and provide sufficient opportunity for industry stakeholders to be consulted on them. The noble Baroness also made the case that insolvency should be a preferred strategy for small banks and I stress that this is the case. I hope that I have provided some helpful explanation to her of the Government’s position on this matter and respectfully ask that she withdraws her amendment.

[Baroness Noakes (Con)]

My Lords, I thank noble Lords for supporting the principle behind my amendment, even if they did not fully align with the mechanism that I have chosen. We have had a useful debate on the issues involved. The Minister’s response was clearly helpful and I want to consider it carefully.

The Minister talked about things being very fast-paced, which I completely accept. Nevertheless, the Bank has to make a decision on the best information that it has. I am trying to build only on what it should be doing anyway, even though that is difficult to do when things are moving very fast.

Let me reflect on what the Minister said. It may come back to the issues which I am going to discuss in the next amendment, which are about the code of practice and needing to see what is likely to be said in that. I will shut up at this point and save my powder until the next group. I beg leave to withdraw the amendment.

Amendment 20 withdrawn.

Moved by

[Baroness Noakes]

21: Clause 4, page 3, line 15, at end insert—
“(2A) In section 5 (code of practice), at the end of subsection (1) insert “and—(iv) the bank recapitalisation power under section 214E of the Financial Services and Markets Act 2000.””Member’s explanatory statement
This amendment requires the Treasury to include the use of the recapitalisation power created in this Bill in the Code of Practice issued in respect of the special resolution regime.

[Baroness Noakes (Con)]

Amendment 21 would amend the Banking Act 2009 so that the code of practice, which has to be issued for various aspects of the special resolution regime, must cover the use of the bank recapitalisation payment power being created by the Bill.

My reading of Section 5 of the 2009 Act is that it would not require the Treasury to cover the use of the recapitalisation payment power in the code of practice. Although I am aware that the Treasury says that it intends to update the code of practice—the Minister repeated that again, a few minutes ago—it should be put beyond doubt in the Bill that it is one aspect of the resolution regime, as a result of the Bill, that should be covered in the code of practice. It should not be optional now or at any point in the future.

We debated the code of practice a little in our first Committee day, and we do not yet have any idea of when the revision to the code will appear. Can the Minister assure the Committee that it will be reissued before the Bill comes into force? The Treasury has control of that because it has control of the regulations bringing the Bill into force, and it clearly is important that there is a revised code of practice covering the use of the recapitalisation of payments available at the same time.

The Minister would not give any specific timing for the updated code or the consultation on it when he responded last week. He repeated that a few minutes ago. Last week, I specifically asked him whether the draft updates, which he had said to my noble friend Lady Penn would be provided, would be available ahead of Report. On checking Hansard, I found that he had sidestepped that question. I hope that he will answer it today because, if he cannot commit to sharing draft updates before Report, it puts the House in a difficult position when it comes to that stage of the Bill.

Turning from timing to topics, can the Minister outline which topics are likely to be addressed in any updates?

In our first Committee day, when we debated the first group of amendments which sought in various ways to constrain the scope of the bank recapitalisation payment power to small banks or those on the glide path into the MREL regime, the Minister said:

“I appreciate noble Lords’ concerns about this issue and am happy to commit to exploring how to provide further reassurance on the Government’s intent via the code of practice”.—[Official Report, 5/9/24; col. GC 11.]


I found that rather alarming, as it implied that it was not the Government’s current intention to include something about the key target of the bank recapitalisation payment power being small banks. However, that is exactly how the power in the Bill has been marketed—a power to deal with the insolvency of small banks or the failure of small banks. I would have expected the code to set out where the Government expect the new power to be used, especially as the power has been drawn so very broadly.

Our second group of amendments on the first Committee day concerned the extremely wide definition of costs which can be covered under the bank recapitalisation power. The Minister said that it was important that the Bill was “not overly prescriptive”; that might have been an opportunity for him to say that the issues would be covered in a code of practice, but he did not do so. Does that mean that the code of practice will be silent on the important issues surrounding this very wide ability to charge practically any cost under the recapitalisation heading? That may be important to those of us who think that the current formulation of the Bill goes too far.

When we discussed double dipping into the FSCS last week, I asked the Minister whether the code of practice would cover the use of the power more than once for the same institution. This would also cover the need to reconsider the resolution strategy of not using the banking insolvency procedure before using the power a second or subsequent time. When I asked the Minister if that would be covered in the code of practice, he said:

“We can certainly take that away and look”.—[Official Report, 5/9/24; col. GC 25.]


at it. In other words that, too, was not in the plans for updating the code of practice. The only definitive reference to the content of the updated code of practice that the Minister made last week—he made it again in the previous group today—was in relation to the reporting requirements, where he said that the bank

“would be required to disclose the estimated costs”.—[Official Report, 5/9/24; col. GC 47.]

involved in using the power.

--- Later in debate ---

[Lord Livermore (Lab)]

My Lords, I should state at the outset that the Government have no objections to the principle under discussion. Indeed, the Government have already stated publicly in our response to the consultation on these proposals that we intend to update the code of practice to reflect the measures in the Bill. I have already committed to share a draft of the proposed updates at the earliest opportunity, and I am happy to reaffirm that commitment today. I am aware that this is not the answer that the Committee is looking for, but I am afraid that I cannot commit to providing that before Report. However, I expect it to be available before the Bill comes into force.

As set out in the Government’s consultation response, the updates to the code will do three things: first, they will ensure that the code appropriately reflects the existence of the new mechanism; secondly, they will set out that the Bank is expected to set out estimates of the costs of the options considered and, as noted elsewhere, this is expected to include the case of insolvency; and thirdly, they will set out the expectation that any use of the mechanism is subject to the ex post scrutiny arrangements that I have described elsewhere.

The noble Baroness, Lady Noakes, perfectly fairly asked for a series of clarifications of what the code will include. She asked about two points specifically. The first was whether the code will confirm the mechanisms intended for small banks and the expenses covered? Yes, it is the intention that it will. She also asked whether the code will cover multiple uses of the mechanism. Yes, the code will cover that. I will answer other specific questions in writing.

In preparing these updates, the Government are mindful to ensure that they are done efficiently and carefully to ensure that they achieve the intended effect within the wider resolution framework, for instance, ensuring that the right set of costs is considered on the appropriate basis.

The Government will ensure sufficient opportunity for industry stakeholders to be consulted on these proposed updates to the code of practice. In particular, the final wording of any proposed updates would be subject to review by a cross-section of representatives from the authorities and the industry on the statutory Banking Liaison Panel, which advises the Treasury on the resolution regime. As noted, the Government will aim to progress these updates and make the proposed changes available for consultation with industry as soon as practicable.

Finally, I note that the Banking Act 2009 already imposes an implicit requirement on HM Treasury to update the code of practice, even without this amendment. Addressing the operation of the new mechanism would therefore already fall within the scope of this requirement.

I know that this explanation may not be sufficient, but I respectfully ask the noble Baroness to withdraw her amendment.

[Baroness Noakes (Con)]

The Minister just referred to an “implicit requirement” in the Act. Does he believe that Section 5 can be interpreted only as requiring the code of practice to include matters relating to the bank recapitalisation power? That would be extraordinary because nobody knew about the bank recapitalisation power when the 2009 Act was drafted, so under the principles of ordinary interpretation, it would not be included.

[Lord Livermore (Lab)]

I will write to the noble Baroness on that.

[Baroness Noakes (Con)]

I thank noble Lords for taking part in this short debate. There were three parts. First, Section 5 of the 2009 Act needs to mention the bank recapitalisation power, which is what the amendment does. The Minister is going to write on that.

We moved on to issues with the content and timing of the code. I say to the noble Lord, Lord Eatwell, that we all understand that the Bank needs powers to act as quickly as possible. Nobody is trying seriously to harm that. Taking what the noble Lord said to its logical conclusion, the statute would say just that the Bank of England can do whatever necessary when it comes to situations of bank failure—full stop. We would not have the many pages of the 2009 Act and all the complicated, mind-blowing arrangements that exist, holding companies and everything like that. We would not need that because we could just say that it could do everything. It is overstating the case to say that trying to write codes of practice would hold the Bank up in doing its duty when things go wrong.

What the Minister said on content is a helpful move forward from where we were. We may want to explore that a bit further on Report. However, timing is a concern, as we will not have further clarity by the time we reach Report. The only useful thing he has said is that they expect to reissue the code of practice prior to this Bill coming into force. I suggest that it would be pretty negligent not to update it before bringing the Bill into force.

--- Later in debate ---

[Baroness Bowles of Berkhamsted (LD)]

I am afraid that I will have to spend a little time on this, although we will still close well before time. We are in a slightly new world. The noble Lord, Lord Eatwell, referred to how—although he did not say it like this—once upon a time, when there were problems, you left it to the Bank of England to do the right thing. By and large it did, within the state of knowledge of that time.

However, banking and the way that we deal with resolutions have moved on a long way since then. We are moving further with this small but significant Bill, using the funds of other banks to give to a bank that has failed. Beyond the public interest of depositor guarantees, which in their day were a new thing, we are using private money for what would in the past have been done with public money. That is a different place. Just as with insolvency, you put in the right safeguards about priority orders and so on, we need to put in priority orders for how that money is properly used.

Turning to my amendment, I will have to delve into realms where words have taken on different meanings over time. “Recapitalisation” now seems to incorporate bits of resolution; it does not just mean “putting capital in”. I used that sense of it in my amendment but I will carry the Committee through it as best I can.

The purpose of this amendment is to probe further whether the language used in the Bill, which ends up meaning “reducing the shortfall”, is too broad and therefore allows the FSCS funds to be used not only as new capital for the ongoing bank but to reduce the write-down of other capital instruments and correspondingly increase the amount that would otherwise have been taken from the Financial Services Compensation Scheme above the level that would have been needed if those other capital instruments were fully written down, as is the present presumption under the Banking Act 2009 and everything that feeds into it.

When I wrote the amendment, I was thinking of the ordinary meaning of recapitalisation—replacing capital—and not covering write-down manoeuvrings. So, please think about it as if I had said that and at the end it said: “and without reducing write-down of loss-absorbing capital instruments or shareholdings”, or some such wording. That was the intention of the amendment; if I go around the loop again, I will have a better shot at it.

Overall, I now come to the thought that my previous Amendment 22, which just deleted this, was probably a better option and a good thing for a variety of reasons. We need to avoid capture by the dubious “shortfall” wording from the Banking Act 2009 and the EU BRRD. The things that feed into shortfall are now synonymous with the things that are called MREL but they are looking at it from different ends. If we are going to tie back to the BRRD, I remind noble Lords that the shortfall is the sum of write-down of eligible liabilities to zero—that is what it says under Article 47.3(b)—plus the recapitalisation amount under Article 47.3(c). In essence, I am saying that the FSCS should be used only for amounts under Article 47.3(c)—that is the recapitalisation, which is what I am trying to capture—and that it cannot be used ahead of the writing down to zero of what is in Article 47.3(b). However, the trouble is that we are dealing in this world now where different things have been put in a pot, this time called the shortfall, linked by “and”, and we have no idea which bit we are allowing to be changed.

If we look at the broader picture of trying to cover banks with MREL, that is where it starts to get messy. It was quite simple if we just did it for the smaller banks, and we did not have to worry about things that were supposed to be written down to zero not being written down to zero again. It seems that that is exactly what the Explanatory Notes are telling us—I will quote from my copy to keep myself on track. They say that Clause 4(3)

“amends section 12AA”,

which goes back to the things I have just talked about,

“to allow the Bank to take into account the funds provided by the FSCS when they are calculating the contribution of shareholders”—

that is what it says at paragraph 26—

“and creditors required when exercising the bail-in write-down tool. This is to ensure that the Bank is not required to write-down more capital than necessary”.

However, as I read the law when it came from BRRD in the Banking Act 2009, you have to write down to zero unless you have so much that you get there before you have written it down to zero, and then you should not be going fishing in any other ponds anyway. So, there is some inconsistency or there is a hidden agenda.

There are some things in the insolvency stack that are worthy of rescue, as was the Silicon Valley Bank reasoning—such as uninsured deposits—but not things in that loss-absorption stack, especially not shareholders, because they are right at the top. Otherwise, what is the point of all the expense and effort that we go to to provide MREL, which is further on down, if we are then not going to use it? I really cannot understand what is meant to be going on by adding in this reference to the shortfall. I tried to amend it to say that it should not do bad things, in effect, but I think that we are a lot better off without it.

I then went back and looked at the response the Minister gave me when I raised this on the first day in Committee. He said:

“The noble Baroness, Lady Bowles, asked whether the Bank of England should reduce MREL requirements in the knowledge that it could instead use FSCS funds. The Bank of England sets MREL requirements independently of government but within a framework set out in legislation … The Bank of England will consider, in the light of this Bill and wider developments, whether any changes to its approach to MREL would be appropriate”.—[Official Report, 5/9/24; col. GC 11.]


The Minister was answering a question that I did not ask, but it is an interesting response, which the larger banks should get quite excited about. Is a quid pro quo for chipping in through the FSCS that you end up having less MREL? What an interesting suggestion. I can read what was said that way. According to that interpretation, reading through what is in the Bill, it is perfectly open that you could then not write down to zero things that appear under article 47.3(b) of the BRRD.

I can skip a lot of the other things that I was going to say but, to summarise, if the Explanatory Notes are correct, the intention is to use the FSCS to reduce the amount of write-down for shareholders or other loss-absorbing capital instruments. That is almost going backwards to the days that the noble Lord, Lord Eatwell, was perhaps recollecting of the Bank basically choosing who it should favour in the capital and liability stack. That seems to be the power we are giving it. If we are returning to something like that, it should be done in the context of a proper review of the Banking Act 2009, not in a kiss-me-quick Bill like this one, which was sold to us as being rather more about saving uninsured deposits, not saving sophisticated investors who have enjoyed good returns from bail-inable bonds or who are at the top of the stack and are the shareholders in the failing bank.

The FSCS cannot just be a pot for general usage; it has to be targeted. I tried to amend it with this amendment, but I am now coming to the conclusion that linking back to shortfall has no place in this Bill because it introduces too many ambiguities. I beg to move.

[Baroness Noakes (Con)]

My Lords, I will be brief. The noble Baroness raises some important issues in her amendment. I think the Minister confirmed earlier that shareholders would disappear because the Bank of England would take over their share capital, so they could not benefit from the use of the recapitalisation, but if there is any suggestion that the recapitalisation amount will excuse the bail in of some of the bail-inable liabilities, that would be pretty unacceptable. I hope that the worked examples that I hope the Treasury will enjoy working on while we are on Recess can illuminate how all this is going to work.

[Lord Vaux of Harrowden (CB)]

My Lords, I find my head spinning a little about some of this. It comes back to the confusion about how the various flows here work, so that worked example is becoming more and more crucial. I come back to the principle that I raised before: recapitalisation by the industry should not bail out those who should be at risk in the case of a failure. MREL capital et cetera must surely be used up first before we take recourse to the industry. It is similar to, but slightly different from, the point we made in Amendment 17 that, again, people who are creditors of the failing bank should not be bailed out by the recapitalisation in the event that it all goes wrong. It seems rather confused, so I look forward to the worked example, and I wish the Minister good luck with getting something that covers all the aspects.

Budget Responsibility Bill

Baroness Noakes Excerpts

2nd reading & Committee negatived & 3rd reading
Monday 9th September 2024 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I have a number of regrets about the Bill. My first regret is that it is a money Bill. It is customary that this House does not challenge the decision of the Speaker in the other place, and I will not do so. It is not, however, a Bill that has any direct fiscal impact, but it makes changes to a body that has become an integral part of the country’s economic management. I believe the Bill would have benefited from a normal Committee, where we could have scrutinised it in detail. For example, noble Lords might recall that when income tax was first introduced in 1799, it was labelled a temporary tax, which raises interesting questions about this Bill’s exclusion of temporary measures from the OBR’s new powers.

Secondly, I regret that the Government have not taken the opportunity to ensure that the OBR’s forecasting is fit for purpose. My noble friend Lord Altrincham raised several of the issues here. On its own internal assessment, the OBR is not particularly good at forecasting. It claims, with no sense of irony, that its performance is in line with that of the Bank of England. The noble Lord, Lord Eatwell, from whom we have just heard, pointed out in his speech on the gracious Speech in July that the OBR was set up to reinforce austerity and is ill-suited to underpin the Government’s growth ambitions. In the same debate, I argued a similar point: the OBR does not use dynamic modelling, so growth measures will struggle for a full evaluation in the OBR’s calculations. These areas would have been a better target for the Government’s reforming zeal.

Thirdly, I regret that the Bill does not ensure that the OBR operates to high standards of governance. I cannot think of another public sector body which has an executive chairman and does not have a majority of non-executive directors. Like most independent quangos, its external accountability arrangements are weak. It is quite simply dangerous to allow a public body, which can exert great influence on the Government’s fiscal policies, to exist with weak internal governance alongside weak external accountability.

Lastly, I regret that the Government have used this Bill to peddle untruths for political purposes. At Second Reading in the other place, the Chief Secretary said:

“The country cannot afford a repeat of the calamitous mini-Budget of September 2022, when Liz Truss and Kwasi Kwarteng’s reckless plans unleashed economic turmoil that has loaded hundreds of pounds on to people’s mortgages and rents”.—[Official Report, Commons, 30/7/24; col. 1211.]


The Minister repeated the substance of that in his opening remarks. The fact is that interest rates were already on the way up in the fight against inflation, and they remain high for the same reason. They did spike immediately after the mini-Budget, but the Bank of England’s own internal analysis shows that two-thirds of the 103 basis points spike in the 16 days after the mini-Budget was due to the Bank’s own mismanagement of the risks inherent in LDI strategies. Furthermore, the Bank had already unsettled financial markets by failing to raise interest rates in line with the US and with market expectations. It does not reflect well on either of the Chancellors who succeeded Kwasi Kwarteng that they have turned a blind eye to these truths.

It was political opportunism that led to the creation of the OBR, and it is the same motivation driving this Bill. This is a poor foundation for legislation.