Reducing the impact of a failing bank

22.   Chapter 4 proposes the introduction of a 'special resolution regime' (SRR) giving the Authorities extra tools to achieve a more orderly resolution of a failing bank (or building society).  The Association is not convinced of the need for such fundamental change as would be represented by SRR.

23.   The BSA believes that, rather than introduce an entirely new process, it would be more appropriate, first of all, to wait and see whether the FSA has addressed its regulatory failings and to examine ways of ensuring faster payment to customers in the event of a firm's collapse.  During that time, it would be possible to examine more fully whether existing insolvency legislation or corporate rescue regimes could be amended to achieve the relevant objectives; for instance -

• in very exceptional circumstances, and subject to clear rules, a firm might be 'deemed' insolvent, even though it is not insolvent within the current definition
• powers of shareholders to block insolvency could be removed in relation to these special cases
• the insolvency practitioner could be placed under an obligation to release moneys as soon as possible to the FSCS.

24.   But no changes should be rushed.  These matters – especially the proposed SRR - are part of a wider, and complicated, legal framework and could give rise to unforeseen consequences regarding such matters as –

• existing property rights
• business contracts
• systems
• building society membership rights
• transfer of consumer data – fraud prevention in relation to data security would need to be addressed
• the assumption that cheques issued by the FSCS would clear immediately – further consideration would need to be given to matters such as indemnity if normal clearing times were to be waived
• oversight of the use of discretionary powers under SRRs – credible governance would be of the utmost importance
• unplanned cost burdens inherent in new, complicated arrangements etc.

Any proposed SRR arrangements should be subject to cost-benefit analysis, and the extent to which firms would be required to have contingency plans in place to facilitate the effectiveness of the SRR needs to be clearly defined.  It is important that any changes do not have a disproportionate effect on smaller institutions; for example, if smaller firms had to bear the costs of changes without benefiting from them.

25.   If, nevertheless, SRRs were to be put in place, the Association believes that the building society-specific proposals should be included in the arrangements. These concern rescue tools and winding up of a building society.  These changes would, broadly speaking, put building societies on a par with banks in the highly unlikely situation of a rescue being needed.  However, once again, unforeseen consequences could arise – this is one reason why it is particularly important not to make rushed legislative changes.  As noted above, pre-legislative scrutiny would help avert unintended consequences – see paragraph 11 above.  (Again, we note, in this context, that Building Societies (Financial Assistance) Order 2008 has been laid before Parliament and awaits approval.)