Office of Public Sector Information
137.Subsection (4) describes a third party compensation order, which establishes a scheme for paying compensation to third parties (persons who are not transferors), for example counterparties of a bank whose property rights are interfered with in a compensatable way (under Article 1 of the First Protocol to the European Convention on Human Rights) as a result of the transfer.
138.This section requires the Treasury to make a compensation scheme order, on the exercise by the Bank of England of the private sector purchaser stabilisation option (section 11) (a property or share transfer instrument to such a purchaser). Subsection (3) sets out that the order may include a third party compensation order.
139.This section requires, on the exercise by the Treasury of the temporary public ownership stabilisation option, the Treasury to make either make a resolution fund order (which may include a compensation scheme order) or a compensation scheme order. In either case, the order may include a third party compensation order.
140.This section requires, on the exercise by the Bank of England of the bridge bank stabilisation option (section 12), the Treasury to make a resolution fund order (further considered under section 58 below). Subsection (3) provides that the order may include a compensation scheme order and a third party compensation order.
141.Where there is an onward or reverse transfer from either a bridge bank or a bank in temporary public sector ownership, This section enables the Treasury to make a compensation scheme order or a third party compensation order.
142.Subsection (1) allows a compensation scheme order and a third party compensation order to include provision for the amount of compensation to be determined by an independent valuer. Subsection (2) requires the Treasury to appoint a person to appoint the independent valuer, and in practice the Government anticipates that an appointments panel will be convened for this purpose. Two different methods for appointing the valuer are provided in subsection (3); namely, for the Treasury to arrange to identify candidates or provide that another person will arrange to appoint a valuer.
143.Subsection (4) states that the independent valuer can be removed only on grounds of incapacity or serious misconduct. The removal must be made by a person specified by the Treasury in accordance with the order. Subsection (5) states that the order must include provision for resignation and replacement of the independent valuer.
144.Subsection (1) enables the independent valuer to do anything necessary or desirable in relation to the performance of his functions. Subsections (2) to (4) enable the Treasury by order to make provision to assist the independent valuer in the discharge of his functions, for example by providing him with certain powers.
145.Subsection (4) gives the independent valuer the power to appoint staff.
146.Subsection (6) requires the order to provide for the reconsideration of the decisions of the valuer, and for onward rights of appeal from the valuer to a court or tribunal.
147.Under Subsection (7) the independent valuer and his staff are not servants of the Crown, and subsection (8) provides that the records of the independent valuer are public records for the purposes of the Public Records Act 1958.
148.Subsection (1) allows the order to make provision for the remuneration and allowances of the independent valuer, his staff, appointing persons or monitors. Although such payments will be made by the Treasury, the order will require the Treasury to appoint a person to monitor the arrangements made for the remuneration and allowances (subsection (2)). Further functions may be conferred on the monitor, such as requiring his approval to certain actions.
149.Subsections (2)(c) and (d) give the Treasury a power to include provision in the order about records, accounts and staff resources. This section also provides that the independent valuer and his staff are not liable for damages for anything done in good faith when undertaking their respective roles in relation to independent valuation (save in respect of awards of damages under the Human Rights Act 1998, for unlawful actions under that Act).
150.Subsection (1) allows a compensation scheme order and a third party compensation order (by virtue of subsection (6)) to specify valuation principles to be applied during the determination of the amount of compensation. Subsection (2) provides that valuation principles may require an independent valuer to apply specific methods of valuation, assess values at specified dates or periods, take specified matters into account or not take specified matters into account.
151.Subsection (3) requires the valuer to disregard actual or potential financial assistance provided by the Bank of England or Treasury (other than ordinary market assistance offered by the Bank on its usual terms).
152.Subsection (4) sets out assumptions as to the position of the bank that can or may be required to be taken into account by the valuer. These include that the bank has had a permission under Part 4 of Financial Services and Markets Act 2000 varied or cancelled; that it is unable to continue as a going concern; that it is in administration; or that it is being wound up. Subsection (5) provides that there is nothing to prevent the application of valuation principles from resulting in no compensation being payable.
153.A resolution fund order may provide for persons to share in the proceeds of the disposal of things transferred (for example, the full or partial sale of a bridge bank whether through business or share transfer). Subsection (1) further provides for the order to provide for how proceeds and shares are to be calculated.
154.Subsection (2) allows for any payments to be net of resolution costs, which include public financial assistance or administrative expenses.
155.Subsection (3) provides that a third party compensation order may include provisions for arranging to appoint an independent valuer and to apply the valuation principles. Subsection (4) provides that a resolution fund order can confer discretion on persons and subsection (5) provides that it may include provision for the determination of disputes about the application of its provisions.
156.Subsection (6) allows the Treasury to place a management duty on the Bank of England in managing the bridge bank and set out how the Bank is to meet this duty. Subsection (7) enables a similar duty to be imposed on the Treasury, in cases where the Treasury elects to make a resolution fund order following a transfer of a bank to temporary public ownership.
157.Subsection (8) provides that the duties are only to be complied with to the extent that this is compatible with the pursuit of the special resolution objectives and compliance with the code of practice.
158.Subsection (1) provides that a third party compensation order is about setting up a scheme for determining any compensation to be paid to persons other than a transferor, for example, any creditors of the failed bank who have suffered compensatable interference with a property right. Compensation for transferors is dealt with under compensation scheme orders.
159.Subsection (2) provides that a third party compensation order can be a part of a compensation scheme order or a resolution fund order or may be separate.
160.Subsection (3) provides that a third party compensation order may include provisions for arranging to appoint an independent valuer and to apply the valuation principles.
161.This section contains a power to make regulations about third party compensation orders made in the circumstances where a partial transfer of the property of a failed bank has taken place.
162.Subsection (2) sets out the principle that where a residual bank enters an insolvency procedure following such a transfer, pre-transfer creditors (defined in subsection (3)(b)) should not receive less favourable treatment they would have received than had the bank entered an insolvency procedure prior to the partial transfer. The Treasury are to have regard to the principle in making regulations under the section.
163.Subsection (4) provides that the regulations may require a third party compensation order to be made. The regulations may also require a third party compensation order to include certain provisions or the regulations may make provisions that are deemed to be a part of the third party compensation orders.
164.Subsection (5) enables the regulations to provide for whether compensation is to be paid, its amount and the factors upon which the determination of the amount is to be made. Any factors could be included, particular factors are, in part, the amount payable under a resolution fund order, contingent events and a determination by an independent valuer.
165.The regulations are to be made by the affirmative procedure, or in the first instance the 28 day procedure, as provided by section 259.
166.This section confers an express power on the Treasury to make provision as to who should pay compensation under a compensation scheme order, resolution fund order, third party compensation order or under regulations made under section 60. It enables provision to be made for the FSCS, the Treasury or another person (e.g. a purchaser) to pay compensation. Any provision requiring the FSCS to pay compensation is subject to the provisions of section 171 of the Act.
167.The procedure for a compensation scheme order, a resolution fund order and a third party compensation order is that they must be made by statutory instrument subject to the draft affirmative procedure.
168.This section provides for services to be provided to a transferee from the transferor and other companies within the group through means of a general obligation, following a transfer of property. Subsection (5) provides that the obligation is not limited to the provision of services and facilities directly to the transferee.
169.Subsection (2) provides that the residual bank and each group company (as defined in subsection (1)) must provide such services and facilities as required to enable the transferee to operate the transferred business effectively. This duty may be enforced as a contract (subsection (3)).
170.As provided by subsection (6), the Bank of England may, with the consent of the Treasury, by notice to the residual bank or group company require specific activities to be undertaken (or provide that activities are to be undertaken on specific terms).
171.Subsection (4) provides that the residual bank or group company has a right to reasonable consideration.
172.This section provides for the Bank of England, through a property transfer instrument, to create or vary rights and obligations between a transferee, a residual bank and group companies. It applies following the exercise of property transfer powers.
173.Subsection (2) describes the particular provision which the Bank of England can make in a property transfer instrument in this connection.
174.Subsection (3) provides that the Bank of England shall aim, so far as is reasonably practicable, to preserve or include provision for reasonable consideration and terms.
175.Subsection (4) provides that the powers under subsection (2) may be exercised only in so far as the Bank of England thinks it necessary to ensure the provision of such services and facilities as are required to operate the transferred business effectively. The power may be exercised only with the consent of the Treasury.
176.This section provides for the Bank of England or the Treasury to extend the general continuity obligation of section 63 or special continuity obligations of section 64 in the circumstances of an onward transfer of property, rights or liabilities (so, for example, continuity obligations could be owed to the onward transferee).
177.Subsection (1) defines the terms “onward transfer” and “onward transferee”. Subsection (4) provides that onward obligations may be imposed on an original transferee, a residual bank, a bank transferred by share transfer or anything which is or was a group undertaking of the foregoing. Subsection (5) provides that onward obligations may be in addition to, or replace, initial obligations.
178.The power under this section is exercisable by giving a notice both to each person on whom a continuity obligation is to be imposed, and the person who is expected to benefit from it. The Bank of England may exercise the power only with the consent of the Treasury.
179.This section makes provision for services to be provided in respect of a bank transferred by share transfer from former group companies through means of a general obligation. Subsection (5) provides that the obligation is not limited to the provision of services and facilities directly to the transferee.
180.Subsection (2) provides that each former group company (as defined in subsection (1)) must provide such services and facilities as required to enable the transferred bank to operate effectively. This duty may be enforced as a contract (subsection (3)).
181.As provided by subsection (6), the Treasury or Bank of England (with the consent of the Treasury), may by notice to the former group company (as described in subsection (7)), state that specific activities on specific terms should be undertaken.
182.Subsection (4) provides that the former group company has a right to reasonable consideration.
183.This section provides for the relevant authority, through share transfer instrument or order, to create or vary rights and obligations between a transferred bank and former group companies. It applies following the exercise of share transfer powers.
184.Subsection (2) provides for how the Treasury or the Bank of England (with the consent of the Treasury) may create, modify or cancel contracts between the transferee, and the group company (as defined in section 63).
185.Subsection (3) provides that the continuity authority shall aim, so far as is reasonably practicable, to preserve or include provision for reasonable consideration and terms.
186.Subsection (4) provides that the powers under subsection (2) may be exercised only in so far as the Bank of England or Treasury thinks it necessary to ensure the provision of such services and facilities as are required to enable the transferred bank to operate effectively.
187.This section provides for the Bank of England or the Treasury to extend the general continuity obligation of section 66 or special continuity obligations of section 67 in the circumstances of an onward transfer of securities (so, for example, continuity obligations could be owed to the transferred bank following the onward transfer).
188.Subsection (1) defines the term “onward transfer”. Subsection (4) provides onward obligations may be imposed on the bank, anything which is or was a group undertaking of the bank, anything which is or was a group undertaking of a residual bank, or any combination. Subsection (5) provides that onward obligations may be in addition to, or replace, initial obligations.
189.The power under this section is exercisable by giving a notice both to each person on whom a continuity obligation is to be imposed, and the person who is expected to benefit from it. The Bank of England may exercise the power only with the consent of the Treasury.
190.This section provides the Treasury with a power, by order, to specify matters which are to be or not to be considered in determining what amounts to reasonable consideration for the purposes of general continuity obligations. Secondary legislation may also specify matters which are to be or not to be considered in determining what provisions would be expected in arrangements concluded between parties dealing at arm’s length (with regard to special continuity obligations).
191.The power is subject to the negative resolution procedure.
192.This section provides that the continuity authority may by notice terminate a general continuity obligation.
193.This section allows for a share transfer instrument or order or a property transfer instrument to make provision in relation to pensions. The power may be exercised to make provision about the consequences of a transfer of securities or property etc. for pension schemes. For example, the need to make such provision could arise when the pension schemes of employees who are subject to the transfer form part of the pension scheme of a wider corporate group.
194.Subsection (5) provides that this power may be exercised only by the Bank of England, with the consent of the Treasury.
195.The purpose of this section is to enable provision to be made as to the enforcement obligations arising under share transfer instruments and orders and property transfer instruments.
196.Provision may not create a criminal offence or impose a penalty, but may impose jurisdiction on a court or tribunal, this may include a creating an enforceable private law right or statutory duty.
197.This section makes provision for share transfer orders or instruments or property transfer orders made by the Treasury to include a method for disputes to be determined. Such a method may include conferring jurisdiction on a particular court or tribunal or discretion on a specified person.
198.This section enables the Treasury to make regulations including provision in relation to tax in connection with the exercise of powers in this Part of the Act.
199.Subsection (2) sets out the taxes in relation to which provision may be made.
200.Subsections (3), (4), (5) and (6) set out the effects which the regulations may have. The regulations may have retrospective effect but only up to three months before the date the stabilisation power is first exercised in relation to the bank concerned.
201.Subsection (7) allows the Treasury to change the taxes listed in subsection (2) by order. Subsection (8) makes provision about the procedures for making regulations and orders.
202.This section enables the Treasury to modify legislation (both primary and secondary, excluding, however, the provisions of the Act, and secondary legislation to be made under it (other than orders and instruments made in exercise of a stabilisation power)) and the provisions of common law for the purpose of enabling the powers in Part 1 to be used effectively, having regard to the objectives of the special resolution regime. Subsection (3) provides that such an order may make provision which has retrospective effect, although the Treasury is to have regard to the fact that it is in the public interest to avoid retrospective legislation).
203.The power is to be exercised by order and is subject to the affirmative procedure. In cases of necessity (in practice, where the power needed to be exercised urgently), the section makes provision for the Treasury to make the order immediately, following which there are 28 days for both Houses of Parliament to approve the order, failing which, the order would lapse. Subsection (8) states that a lapse of an order does not prevent another order being made in new terms.
204.This section makes provision about the role of the Treasury in meeting international obligations when the stabilisation powers are being exercised.
205.Subsection (1) provides that the Treasury, by notice in writing, may require the Bank of England not to exercise a stabilisation power where that exercise would be likely to contravene an international obligation of the UK. Subsection (2) sets out the procedure for such notices. Subsection (3) provides that, if the Treasury gives notice that an action would be likely to contravene an international obligation, then the Bank of England must consider alternative actions, which both pursue the SRR objectives and avoid the objections on which Treasury’s notice or refusal was based. Subsection (4) allows the Treasury, by notice, to disapply the requirement to consider alternative actions (as set out in subsection (3)). Such notice may be revoked.
206.This section makes provision about the role of the Treasury with regard to meeting international obligations when controlling a bridge bank.
207.Subsection (2) states that the Bank of England must comply with any notice provided by the Treasury, for the purpose of ensuring compliance by the UK with its international obligations, to take or not to take specified action in respect of a bridge bank.
208.Subsection (3) sets out the procedure for such notices.
209.Subsection (4) provides that a notice may include requirements on timing.
210.This section makes provision about the role of the Treasury with regard to public funds when the stabilisation powers are being exercised. It provides that the Bank of England may not exercise a stabilisation power without the Treasury’s consent if the exercise would be likely to have implications for public funds.
211.Subsection (2) defines public funds and implications for public funds.
212.Subsection (3) provides the Treasury with the power, by order, to specify considerations that should or should not be taken into account in determining whether action has implications for public funds.
213.Subsection (4) requires the Bank to consider another exercise of the stabilisation powers if the Treasury has refused consent. In doing so the Bank must pursue the special resolution regime objectives and avoid the objections that the Treasury first made.
214.Subsection (5) allows the Treasury, by notice, to disapply the requirement to consider alternative actions (as set out in subsection (4)). Such notice may be revoked.
215.This section makes provision about the role of the Treasury with regard to public funds when controlling a bridge bank
216.Subsection (2) states that the Bank of England may not take any action in respect of the bridge bank without the Treasury’s consent if the action would be likely to have implications for public funds.
217.Subsection (3) applies section 78(2) and (3) for the purpose of this section.
218.This section sets out requirements for the Bank of England to report to the Treasury on the activities of a bridge bank.
219.Subsections (2) and (3) requires the first report to be made as soon as is reasonably practicable after the end of one year and each subsequent year.
220.Subsection (4) requires the Chancellor of the Exchequer to lay a copy of the reports mentioned in subsections (2) and (3) before Parliament.
221.Subsection (5) requires the Bank of England to comply with any request of the Treasury for a report dealing with specified matters in relation to the bridge bank. The request may include the content or timing (subsection (6)).
222.This section requires the Treasury to lay before Parliament an annual report about banks in temporary public ownership.
223.Section 82 provides that the Treasury may take a parent undertaking of a bank (“a holding company”) into temporary public ownership if three conditions are met. These conditions are that the FSA are satisfied that the general conditions set out in section 7 are met in relation to the bank; that the Treasury are satisfied that it is necessary to take action in respect of the holding company to resolve or reduce a serious threat to the stability of the financial systems of the United Kingdom or to protect the public interest where financial assistance has been provided in certain circumstances; and that the holding company is an undertaking incorporated in or formed under the law of the United Kingdom.
224.In determining whether the second condition is met, the Treasury must consult the FSA and the Bank of England.
225.Section 83 specifies how various provisions of Part 1 of the Act (including the powers to make supplementary, onward and reverse transfers) apply where the Treasury take a bank’s holding company into temporary public ownership.
226.This section applies the SRR sections (with modifications) to building societies. The table sets out these provisions where modifications are made, namely that for a private sector purchaser of a building society a share transfer instrument cannot be made, that there is a separate provision for the temporary public sector ownership tool and that a property instrument for building societies may cancel shares in the building society may confer rights and impose liabilities in place of the cancelled shares and deemed shares, and also confer rights and impose liabilities through actual or deemed shares in a building society.
227.It also provides that a property transfer instrument may have effect without causing parts of the Building Societies Act 1986 to apply (see section 34). A compensation scheme order or a third party compensation order may be made to compensate a building society and its creditors. However, a resolution fund order may not be made for temporary public sector ownership of building societies.
228.This section provides the powers to take a building society into temporary public ownership.
229.Subsection (1) sets out the procedure and provides that the Treasury may make an order to arrange for deferred shares of a building society to be publicly owned, to cancel private membership rights in the building society, to allow the building society to continue business while in public ownership and for the eventual winding up or dissolution of the building society.
230.Subsection (2) allows the Treasury by order to arrange for the transfer of existing deferred shares or provide for the issue of new deferred shares.
231.Subsection (3) sets out the specific powers for the arranging for the transfer of existing deferred shares, and subsection (4) does the same for the purpose of providing for the issue of new deferred shares by the Treasury on behalf of the building society for a specified recipient.
232.Subsection (5) provides powers to cancel private membership rights in the building society, to allow the rights and liabilities attached to those cancelled shares to be conferred in place of cancelled shares and to prevent any further issue or acquisition of shares in the building society otherwise than under the Treasury’s order.
233.Subsection (6) allows the Treasury to make any provision that it thinks desirable to allow the building society to continue in business while it is in public ownership.
234.Subsection (7) allows the order to disapply or modify the memorandum or rules of a building society in respect of the transfer into public ownership and to make any consequential changes to building society legislation.
235.Subsection (8) applies most provisions relating to the making of share transfer orders to orders made under this section.
236.This section allows the Treasury to make provision by order for the distribution of surplus assets of a building society that is subject to a property transfer and then later wound up or dissolved. The order may, for example, also alter priorities on a building society’s dissolution or winding up.
237.Subsection (4)(c) makes an order under this section subject to the affirmative procedure.
238.This section states that expressions used in this group of sections (84 to 88) have the same meaning as in the Building Societies Act 1986. It further states that an order under section 119(1) of the Building Societies Act may make special provision for the meaning of deferred shares with regard to this group of sections.
239.The Treasury may, by order, make any consequential provisions to primary and secondary legislation (but not Acts of the Scottish Parliament or secondary legislation made under those acts) required as a result of the application of the special resolution regime to building societies. Any order made under This section is subject to the affirmative procedure.
240.This section allows the Treasury, by secondary legislation, to apply the SRR sections to credit unions. An order for this purpose may disapply, modify or apply any enactment, which relates to credit unions in respect of this Part. The order is made by affirmative resolution procedure.
241.This section outlines the main features of the bank insolvency procedure which is based largely on the existing liquidation provisions of the Insolvency Act 1986, with modifications where required. The Government’s principle reason for seeking to introduce a new insolvency procedure for banks (as an alternative to existing insolvency processes) is to ensure that, where a bank fails, depositors who are eligible claimants under the terms of the Financial Services Compensation Scheme are paid out promptly(2).
242.The equitable treatment of creditors as a whole is a key feature of the UK’s insolvency regime, and the bank insolvency procedure has therefore been designed to enable rapid compensation payments to depositors without creating a regime in which those depositors receive preference over other creditors.
243.This section limits the application of the bank insolvency procedure to UK institutions with permission to accept deposits under the provisions of the Financial Services and Markets Act 2000. The procedure may be extended by secondary legislation to building societies and credit unions (sections 130 and 131). The Treasury may, by order, add to the exclusions from this definition of bank.
244.The bank insolvency procedure can only commence by an order of the court and the process is subject to the general supervision of the court. Due to the size and complexity of the UK’s banks, the higher courts will supervise the process.
245.This section defines some terms used in this part of the Act, including the meaning of the Financial Services Authority (FSA), the Financial Services Compensation Scheme (FSCS) and “eligible depositors” (which means those persons eligible under the FSCS. The persons so eligible for compensation are set out in the FSA Handbook, which is available online.3).
246.Subsection (4) defines “inability to pay debts” and applies existing definitions from sections 367(4) and (5) of the Financial Services and Markets Act 2000 (as applied by subsection 4(a)) and section 123 of the Insolvency Act 1986 (as applied by subsection (4)(b)).
247.Subsections (5) and (6) provide that the expressions used generally throughout this part of the Act and also in insolvency and company legislation have the same meaning, except that subsection (8) provides that “fair” is used in this part instead of the somewhat antiquated term “just and equitable” (used in the Insolvency Act 1986).
248.Where the court makes a bank insolvency order a qualified insolvency practitioner, who has formally agreed to accept the position, will be appointed as the bank liquidator. This post is restricted to insolvency practitioners because the Government considers that their resource capabilities and practical experience of dealing with assets in complex insolvencies will be vital to ensure that the objectives of the bank insolvency procedure can be achieved and returns to creditors maximised.
249.The Bank of England, the FSA (with the Bank of England’s consent) or the Secretary of State may make an application to the court for a bank insolvency order and that application must nominate a qualified insolvency practitioner to be appointed as the bank liquidator.
250.To ensure compatibility with Human Rights legislation, such an application must be served on the directors of the company prior to a court hearing for a bank insolvency order and those service requirements will be specified in secondary legislation (Rules) to support the bank insolvency procedure.
251.Subsection (1) sets out the three grounds on which an application for a bank insolvency order may be based. The first of these is on the grounds of insolvency – that is, a bank is unable or is likely to become unable to pay its debts. An application may also be made where winding up the affairs of the bank would be in the public interest or fair (for the meaning of “fair” see the note to section 93(8)).
The Financial Services Compensation Scheme was established under Part XV of the Financial Services and Markets Act 2000. Back [2]
The FSA handbook is available from http://fsahandbook.info/. The Compensation section of the handbook sets out the rules governing eligibility under, and levies for, the FSCS (reference code: COMP). Back [3]
Banking Act 2009