Bank Resolution (Recapitalisation) Bill [HL]

Baroness Neville-Rolfe Excerpts

Consideration of Commons amendments and / or reasons
Monday 12th May 2025 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I have to say that I appreciate the explanation that we have just had from the Minister, but I and others remain disturbed by the Government’s decision not to accept the amendment, which was not just rational but well crafted, introduced by your Lordships in this House. The underlying Bill was initially presented to the House as providing a mechanism to save significant small banks from failing by recapitalising them from the Financial Services Compensation Scheme, rather than having to turn to the taxpayer. Regulated banks, as this House will know, are then required to replenish the FSCS when it is depleted for any reason, but, because the thrust of the language was around small banks—that was the intent, and that was the discussion that is in all the notes—this House very much agreed to it, with just a few probing points engaged with.

Thank goodness that we have a lot of very good brains in this House. The combination of my noble friends Lady Bowles and Lord Fox and the noble Baronesses, Lady Noakes and Lady Vere, realised that there was a significant loophole in the language. We did not realise in the beginning that any of this could be applied to the larger banks; that became clear only as those pursuing the legislation became more aware of the implications of its content. Now we have a Bill that permits the regulator to use the FSCS as its mechanism to rescue large banks. Let us be frank: it completely changes the whole profile of both risks and consequences. The amendment would have effectively closed that loophole.

The larger banks, as the Minister has said, already have their own dedicated process to recapitalise in case of failure, a process that was introduced after the 2008 crisis. The Bank of England requires each large bank to hold a tranche of MREL—in plain English, bail-in bonds—which can be converted to capital by the regulator in case of failure, with the consequence that the bank is thereby rescued. We need to understand why that is not considered by the Government to be an adequate system. The Minister has just said—if I understood him—that the regulators will always require that bail-in bonds are used first, and the FSCS is a resource of last resort. But that is not in the legislation. The legislation allows the regulator to turn first to the FSCS and ignore bail-in altogether. He will be very conscious that the Swiss regulator, with the failure of Credit Suisse, completely ignored the bail-in capability and chose other routes to manage the rescue of Credit Suisse.

Those who hold bail-in bonds—the investors who buy them—are extremely well remunerated for carrying the risk associated with a bail-in bond. I am trying to work out why they can now look at this legislation and begin to assume that they will have the benefits of receiving a risk premium for holding those bonds but never actually find that those bonds are forced into use in case of a failure. How can we rely on just a code to continue to determine that bail-in will be the first resort and not a later resort or no resort at all? Are the Government basically saying that there are now many circumstances they have identified in which bail-in is neither usable nor adequate? I refer to the Swiss example. What are the consequences for financial sustainability if we are saying that bail-in is a slightly busted system? Have there been blandishments from the various investors who have purchased bail-in bonds, trying to pressure the Government into creating an alternate route? What are the consequences for our small- and medium-sized banks if the FSCS is depleted by big bank failure?

The Minister says that the regulators will not ask for an unaffordable contribution from the various banks to replenish the FSCS, but it is our mechanism that ensures small depositors’ accounts. Who is going to do the replenishment if the number is too great to ask the banks to commit to it? I am quite troubled by this change in responsibility for where risk lies that is embedded in the Bill. If the Minister is so sure that the items in the code should be giving us reassurance, why have they not been introduced in this Bill as part of the legislation?

[Baroness Neville-Rolfe (Con)]

My Lords, this is an important Bill, which provides the Bank of England with extra flexibility to manage bank failures, particularly those of smaller banks, in a way that strengthens protections for taxpayers. It reflects proposals by the last Government in the light of experience with the demise of Silicon Valley Bank. As such, it had cross-party support and, starting in the Lords, was a good example of expert scrutiny across the House.

Special thanks go to my noble friend and predecessor Lady Vere, my noble friends Lady Noakes and Lady Penn, the noble Lords, Lord Vaux of Harrowden and Lord Eatwell, the noble Baronesses, Lady Kramer and Lady Bowles, officials on all sides—of course, not forgetting the Whips—and, above all, the Financial Secretary to the Treasury, the noble Lord, Lord Livermore. I thank him both for the government amendments, notably that which was made to Clause 3 on the involvement of the Treasury Committee and the House of Lords Financial Services Regulation Committee, and for the timely publication of the draft code of practice, which helped us to overcome some substantial difficulties, as he has already mentioned.

Banking and financial services are very important to the success of the British economy. In 2022, the UK financial system held assets of around £27 trillion and in 2023 the financial insurance services sector contributed £208 billion to the UK economy. Legal regimes which govern how our banking and financial sectors operate need to promote growth and competitiveness and be easy to navigate and use. They must also balance ambition with prudence—an understandable driver of the Bill.

Noble Lords will recall the amendment we successfully added that was championed by my noble friend Lady Vere. This sought to prohibit the use of the funds from the Financial Services Compensation Scheme to recapitalise large financial institutions, defined as those which had reached an end-state MREL. The object was to reflect in law the Government’s stated objective of using the resolution framework in the event of a smaller bank requiring intervention, thus preventing the associated risk of contagion. The truth is that the Banking Act 2009 provides a robust framework for dealing with the large banks that have achieved end-state MREL status. They and the Bank of England should not be taking comfort from the fact that they could fall back on an ex-post levy of the banking sector through the FSCS in times of trouble. Resources should be focused on the SME banking sector, as the noble Baroness, Lady Kramer, reiterated.

In view of this, I am joined by noble Lords across the House in expressing disappointment that Members in the other place voted to remove this amendment from the Bill. We are confident that it would have improved the Bill in meeting its objective and helped to embed the balance I spoke of. However, we must accept that Treasury Ministers, with their battalions of support in the other place, wish to maintain flexibility; for example, as the Minister explained, to deal with a large, unexpected redress claim leaving the taxpayer exposed, although this is very much a backstop arrangement, with a £1.5 billion cap, as the Minister confirmed. So I do not propose to test the opinion of the House again.

It was also disappointing to see the rejection of other prudent proposals put forward by colleagues in the other place in good faith. Regardless, I hope the Government will consider these proposals seriously as we try together to create a system which is balanced and simple and promotes growth—an objective that the Minister and I share.

We support the thrust of the Bill, which continues the work that we did in government to support our banking sector, protect consumers and safeguard the public finances. However, there are still outstanding questions which I hope the Government can address today or in writing. They are even more important now that the Vere amendment has been rejected.

The Financial Conduct Authority and the Prudential Regulation Authority have proposed an FSCS operating budget for 2025-26 of £109 million. This budget covers the FSCS’s administrative expenses and does not represent the total funds available for compensation payouts. Over the three financial years from 2021 to 2024, the FSCS paid just £10 million in compensation relating to deposit claims, due primarily to the defaults of 11 credit unions and one small bank. Will the Minister kindly outline the steps the Government are taking to minimise the operating costs of the FSCS?

The FSCS is a quango, which is overseen by a quango, in conjunction with another quango. The fact that it uses an industry funding model does not change this. The money in its operating budget is money that is not being utilised in the banking sector, which employs millions of people and contributes billions to our economy and to growth. Does the Minister agree that the FSCS should focus on efficiency and on keeping as much money as possible available to banks for their use and not tied up unnecessarily in its operating budget and that, like other regulators, it should have regard to the Government’s overall objective of growth?

I end by saying that this is a broadly sensible proposal designed to safeguard public finances, ensure the security of our financial sector and limit public risk. We will support the Government in their ambition to achieve the objectives of the Bill, but I hope the Minister will seriously consider the points that have been raised today and will take the opportunity to clear up some of the questions that have been asked.