On Tuesday 7 October the Government introduced the much anticipated Banking Bill.
The Banking Bill follows earlier consultation in which the Government sought to strengthen the existing framework for financial stability and depositor protection. The Bill is made up of the following:
Part 1 - Special resolution regime
Part 1 establishes a permanent special resolution regime (SRR) that provides the Tripartite Authorities (the FSA, HM Treasury and the Bank of England) with the tools to deal with failing banks. In this part the objectives of the SRR are set out together with how it is triggered. The SRR's three stabilisation options (transfer to a private sector purchaser, transfer to a bridge bank and transfer to temporary public sector ownership) are also set out.
Part 1 also covers:
- arrangements for assessing compensation payable to transferors for the shares or other property transferred and for other parties affected by the transfer; and
- how the SRR is applied to building societies and credit unions.
Part 2 - Bank insolvency
Part 2 covers the new bank insolvency procedure (BIP) which is based on existing insolvency provisions.
The purpose of the BIP to facilitate an orderly winding up of a failed bank and to ensure fast payments under the Financial Services Compensation Scheme (FSCS) to eligible claimants or the transfer of accounts to another financial institution.
The BIP is extended to building societies and credit unions.
Part 3 - Bank administration
Part 3 deals with the new bank administration procedure. This procedure is to be used where there has been a partial transfer from a failing bank.
Part 4 - Financial Services Compensation Scheme
Part 4 covers amendments to the Financial Services and Markets Act 2000 to allow for changes to be made to the FSCS.
There are also three substantive changes and these relate to :
- permitting the FSCS to impose levies to build up contingency funds in advance of possible defaults by firms which would give rise to the payment of compensation under the scheme;
- the use of the FSCS to contribute to the costs of the use of the SRR; and
- the use of the National Loans Fund to make loans to the FSCS.
Part 5 - Inter-bank payment systems
In this Part the Bank of England's role in the oversight of payment systems is formalised.
At the moment the Bank of England undertakes the oversight of payment systems on a non-statutory basis and focuses on promoting the robustness and resilience of key UK payment systems. The FSA has a statutory responsibility for the regulation of Recognised Clearing Houses, which contain embedded payment systems.
Under Part 5 the Bank of England retains its power of informal oversight of payment systems where it considers appropriate and where it does not have an obligation for formal oversight.
Part 6 - Banknotes: Scotland and Northern Ireland
Under existing legislation a small number of commercial banks have the right to issue their own banknotes in Scotland and Northern Ireland. Notes issued by these commercial banks are not guaranteed by the Bank of England. These notes are liabilities of the issuing banks.
In Part 6 there are provisions that prohibit the issue of banknotes in Scotland and Northern Ireland other than by the Bank of England and those commercial banks that are authorised to issue banknotes immediately before this Part comes into force. Part 6 also allows HM Treasury to make banknote regulations and such regulations may include provisions protecting note holders in the event that a commercial bank gets into financial difficulties.
Part 7 - Miscellaneous
Part 7 contains various miscellaneous provisions. These include the establishment of a Financial Stability Committee as a subcommittee of a smaller court of directors of the Bank of England. Also, as part of measures to permit short-term non-disclosure of the provision of emergency liquidity, the requirement for the Bank of England to publish a weekly return is removed.
Part 8 - General
Part 8 contains general provisions including an index of defined terms.
The Banking Bill can be found at http://www.publications.parliament.uk/pa/cm200708/cmbills/147/2008147.pdf
Explanatory notes to the Banking Bill can be found at http://www.publications.parliament.uk/pa/cm200708/cmbills/147/en/2008147en.pdf
James Bateson, Head of Financial Institutions, Norton Rose LLP commented:
"This draft bill is a welcome development and will give the UK authorities enhanced powers to intervene in the banking sector. However, what is really needed is a coordinated international response to manage what is now a global credit crisis. After all, many of the businesses concerned are global businesses with shareholders, customers and employees in many jurisdictions. Notwithstanding the immense legal, regulatory and political difficulties in doing so, it is to be hoped that closer harmonisation of regulations and greater cooperation between regulators around the world will be one of the positive consequences of the current credit crisis."