The Banking Act 2009 came into force on 21 February. It creates special regimes for dealing with banks in financial difficulty. It has been rushed through Parliament to coincide with the lapse of the emergency legislation introduced to deal with the Northern Rock collapse.

Summary

The Banking Act applies to UK banks that have permission to take deposits and, in some respects, their UKincorporated holding companies. It does not apply to UK branches of EEA banks.  

The Act introduces a wide range of new measures to promote financial stability, including:  

  • a permanent special resolution regime (SRR) giving the Bank of England, the Treasury and FSA powers to deal with collapsing banks. The authorities are now able to transfer a bank or a part of it through a share or asset sale to (i) a private sector buyer; (ii) a bridge bank; or (iii) the Government. They may also transfer a bank’s UK holding company into temporary public ownership;  
  • a so-called bank insolvency and bank administration procedure. The administration procedure was introduced to deal with partial transfers of failing banks. It deals with any property, information or rights in the residual bank that are necessary for running the new bank. If the residual bank is insolvent or likely to become insolvent, an administrator may be appointed to support the new bank and to conduct a “normal” administration on the residual bank. The insolvency procedure allows the Bank of England and FSA to apply for a compulsory winding up order to promote the interests of depositors eligible for compensation from the Financial Services Compensation Scheme (FSCS). The liquidator will then have to carry out a “normal” winding up and to ensure each eligible depositor has his account transferred to another institution or receives payment from the FSCS as soon as possible;  
  • Treasury powers to create an “investment bank” insolvency procedure – the power covers broker dealers who hold client money and custodians and is expected to address some of the concerns of Lehman Brothers International (Europe) creditors;  
  • changes to the FSCS. FSA will now be able to introduce contingency funding for the scheme, use the FSCS to fund the SRR and use the National Loans Fund to make loans to the FSCS. It has also been given the power to amend the FSCS;  
  • new powers for the Bank of England in overseeing interbank payment systems;  
  • changes to the laws on Scottish and Northern Irish bank notes;  
  • changes to the Bank of England Act 1998, including a new statutory financial stability objective and a new Financial Stability Committee; and  
  • powers to make rules on financial collateral directive to address concerns that aspects of the Financial Collateral (No 2) Regulations were ultra vires.  

Comments

The Banking Act contains wide powers.

The Treasury and the Bank of England may only exercise their stabilisation powers if FSA is satisfied the bank in question fails (or is likely to fail) to meet the threshold conditions in FSMA and is likely not to act to meet those conditions. The threshold conditions are set at a high level and it would not be hard to show that a bank failed to meet the conditions. A Code of Practice (currently in draft) expands on the tripartite authorities’ objectives in using the SRR powers, the type of SRR power they should use and the differing roles of each authority in the SRR. But it is unlikely that the Code will provide much certainty on the use of the SRR powers.  

The Treasury has also been given the power to amend subordinate legislation to the Banking Act) if it thinks it necessary or desirable to exercise its SRR powers. Orders created under Section 75 can even have retrospective effect. There are checks on this power – an order must be laid before and approved by Parliament, but the Treasury may make an order without Parliament’s approval if approval is not given within 28 days of the order being made.

Many provisions to temper the wide ambit of the Act are in secondary legislation. Section 48 of the Act enables the Treasury to create safeguards for netting, set-off and collateral arrangements. But the current draft of the Safeguards Order does not go far enough to protect common market practices that reduce the amount of capital banks have to hold. This goes against the Government’s objective of encouraging bank lending. any legislation or common law provision (apart from subordinate legislation to the Banking Act) if it thinks it necessary or desirable to exercise its SRR powers. Orders created under Section 75 can even have retrospective effect. There are checks on this power – an order must be laid before and approved by Parliament, but the Treasury may make an order without Parliament’s approval if approval is not given within 28 days of the order being made.  

Many provisions to temper the wide ambit of the Act are in secondary legislation. Section 48 of the Act enables the Treasury to create safeguards for netting, set-off and collateral arrangements. But the current draft of the Safeguards Order does not go far enough to protect common market practices that reduce the amount of capital banks have to hold. This goes against the Government’s objective of encouraging bank lending.