The Building Societies (Bail-in) Order 2014

EXPLANATORY NOTE

(This note is not part of the Order)

This Order modifies Part 1 of the Banking Act 2009 (c.1) (special resolution regime) in consequence of the application to building societies of the bail-in stabilisation option introduced by the Financial Services (Banking Reform) Act 2013 (c.33) (see in particular sections 12A and 48B to 48W of the Banking Act 2009). Part 1 of the Banking Act 2009 was amended by the Bank Recovery and Resolution Order 2014 (S.I. 2014/3329) which transposes in part Directive 2014/59/EU of the European Parliament and of the Council of 15th May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (OJ No. L 173 (12.6.2014), p.190). This Order also implements in part that Directive. A transposition note setting out how that Directive is transposed into UK law is available from Her Majesty’s Treasury, 1 Horse Guards Road, London SW1A 2HQ or on www.gov.uk.

Article 2 inserts new sections 84A to 84D into the Banking Act 2009.

Section 84A gives the Bank of England power, for the purpose of exercising the bail-in option, in a resolution instrument to convert the building society into a public limited company or to transfer the business of the society to such a company. Although the Order does not make provision to this effect, the successor company would need to be authorised as a bank under Part 4A of the Financial Services and Markets Act 2000 (c.8). Section 84A(7) to (11) gives examples of the provision such a resolution instrument may include. It may, for example—

• cancel shares and membership rights in the society,

• convert shares in the society into deposits in the successor company,

• confer rights and impose liabilities in place of cancelled shares and membership rights,

• provide for the successor company to be wholly owned by a parent undertaking which is itself wholly owned by the Bank of England or its nominee or the resolution administrator appointed under section 62B of the Banking Act 2009.

Section 84B contains further provision about the conversion of a building society into a company, and section 84C contains further provision about the transfer of the business of a society to a company which must be owned by the Bank of England, its nominee, the resolution administrator or a parent undertaking referred to in section 84A(8).

Section 84D(1) enables the bail-in option to be exercised in relation to the successor company of a building society demutualised under section 84A (or the parent undertaking, if it has a parent undertaking). Section 84D(2) modifies the application of Part 1 of the Banking Act 2009 for cases where a resolution instrument contains provision under section 84A to demutualise a building society. Generally the bail-in powers are to be exercised in relation to the successor company (or its parent undertaking, as appropriate). However some further modifications are included, for example to secure that for the purposes of compensation, the principle of no less favourable treatment in section 60B of the Banking Act 2009 is that the shareholding members of the society and creditors of the society do not receive less favourable treatment than would have been the case had the society entered insolvency. Section 84D also disapplies the transfer of business regime and provision about cancellation of registration in the Building Societies Act 1986 (c.53).

Where on demutualisation the successor company acquires assets subject to a charge, article 3 enables that charge (whenever created) to be registered under Part 25 of the Companies Act 2006 (c.46).

Article 4 makes a consequential amendment to section 90D of the Building Societies Act 1986 (notice to regulators of insolvency process), article 5 makes consequential amendments to Building Societies (Insolvency and Special Administration) Order 2009 (S.I. 2009/805) and article 6 makes consequential amendments to the Banking Act 2009 (Mandatory Compensation Arrangements Following Bail-in) Regulations 2014 (S.I. 2014/3330).

Article 7 requires the Treasury to review the operation and effect of this Order and publish a report within five years after it comes into force and within every five years after that. Following a review it will fall to the Treasury to consider whether the Order should remain as it is, or be revoked or amended. A further instrument would be needed to revoke or amend the Order.

A full impact assessment of the effect that this Order will have on the costs of business and the voluntary sector is available from Her Majesty’s Treasury, 1 Horse Guards Road, London SW1A 2HQ or on www.gov.uk and is published alongside the Order on www.legislation.gov.uk.