My Lords, I am also pleased to introduce the Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014, the Banking Act 2009 (Restriction of Partial Property Transfers) (Recognised Central Counterparties)
Order 2014 and the Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) (Amendment) Regulations 2014. I will refer to the statutory instruments respectively as the banking group companies order, investment firms order, partial property transfer order and third party compensation regulations.
The financial crisis of 2007 to 2009 highlighted the need for the government to resolve failing systemic financial institutions in an orderly manner to protect UK financial stability and the economy. Moreover, resolution should be achieved without recourse to public funds. Since the financial crisis, a wide programme of financial sector reform has been under way at domestic, European and G20 levels. The reform has focused not only on banks but on investment firms and central counterparties, which also have the potential to cause major widespread disruption to the financial system.
Since 2009 a special resolution regime has been in place to deal with the failure of deposit-taking institutions such as banks and building societies. The regime gives the UK authorities a permanent framework, providing tools for dealing with failing banks and building societies. It gives the Bank of England a key role in implementing a resolution using the statutory resolution tools. The Financial Services Act 2012 widens the special resolution regime to include banking group companies, investment firms and central counterparties.
The powers provided for within the regime will enable the Bank of England, as resolution authority, to use the following tools to deal with the failure of investment firms and banking group companies: to transfer some or all of the securities or business of a firm or its parent undertaking to a commercial purchaser; and to transfer some or all of a firm or its parent undertaking to a bridge bank—that is, a company owned and controlled by the Bank of England.
The powers provided for within the regime will enable the Bank of England, as resolution authority, to use the following tools to deal with the failure of central counterparties: to transfer some or all of a firm or its parent undertaking to a bridge central counterparty—that is, a company owned and controlled by the Bank of England—or commercial purchaser, and to transfer ownership of a CCP to any person.
The Financial Services Act 2012 also extends the bank administration procedure to investment firms and banking group companies. The bank administration procedure is applicable when, during the resolution of a bank, a partial transfer of property takes place and the “residual bank”—ie, the part left behind—is insolvent. This procedure ensures that the residual bank continues to provide services and facilities required to enable the transferred business to be operated effectively. The same procedure will be available for the residual part of an investment firm or banking group company. The instruments that I present today are required to underpin and bring into force the widened scope of the special resolution regime and bank administration procedure.
The EU’s bank recovery and resolution directive requires there to be resolution tools in place for investment firms and banking group companies, and the instruments presented today are consistent with this directive. There
is widespread support for putting in place a resolution regime for investment firms, central counterparties and banking group companies. We first consulted at the end of 2012 on broad policy options, and subsequently took powers through primary legislation. Then, following extensive work on regime design with firms, the Government published detailed proposals on the secondary legislation in September last year.
The statutory instruments I am introducing today take into account the feedback we received from a wide range of stakeholders during the consultation period. These instruments put into place the necessary safeguards and definitions required before the special resolution regime can be extended to investment firms, central counterparties and banking group companies.
The first of these orders—the banking group companies order—specifies conditions which must be met by an undertaking to be considered a “banking group company” for the purposes of the special resolution regime. The aim of using resolution tools in respect of banking group companies is to ensure that resolution over a failing bank in the same group as the company is effective, and in particular to ensure that any intra-group service provision to the failing bank—for example, the provision of IT services—remains in place while in resolution. Subject to exceptions, the banking group companies which may be resolved under the special resolution powers are the subsidiary and parent companies of a bank, investment firm or central counterparty in resolution, and other subsidiaries of its parent companies.
The investment firms order excludes small investment firms from the scope of special resolution regime and bank administration procedure. Specifically, this instrument narrows the scope to investment firms of a type that is required under the capital requirements directive to hold initial capital of €730,000. Over 2,000 investment firms operate in the UK, of which 250 have capital above that threshold. The activities those firms are permitted to undertake, such as trading on their own account and underwriting financial instruments, taken together with the value of assets held on their balance sheet, means that a failure by such a firm could threaten financial stability in a way which the failure of a smaller firm would not. This order reflects that reality.
The partial property order places restrictions on the making of partial property transfers made in respect of central counterparties. This order provides legislative safeguards for the benefit of direct and indirect users of clearing services provided by CCPs. Those safeguards will provide them with greater certainty as to how a partial property transfer might affect their contractual rights, and ensure that there are appropriate restrictions and limitations on the making of a partial property transfer.
Finally, the third party compensation regulations put in place third party compensation arrangements in the event that some but not all of an investment firm has been transferred during resolution. This statutory instrument ensures that creditors are no worse off as a result of resolution action taken by authorities with respect to a failing investment firm which results in the transfer of part of the failing entity than they would have been if the entire entity had entered resolution.
I hope that I have assured the Committee that these statutory instruments represent a necessary step forward in putting an effective resolution regime in place for investment banks, central counterparties and banking group companies.