The role of this Act
To that end, the Act introduces a new mechanism to allow the Bank to use funds provided by the banking sector to cover certain costs associated with resolution. Mirroring the arrangements for a modified insolvency, these funds would be initially provided by the FSCS as needed in the event of a failure and subsequently funded by a levy on the banking sector. Credit unions will be exempt from paying the FSCS levy when it is used to recoup funds provided under this mechanism. As such, for the purposes of this document, the banking sector refers to those PRA-authorised banks, building societies and investment firms which take deposits in the UK and are thereby subject to the PRA Depositor Protection rules.
	To achieve this policy outcome, the Act contains a number of core provisions:
It expands the statutory functions of the FSCS, requiring it to provide funds to the Bank of England upon request which could be used to meet certain costs arising from the use of stabilisation tools to manage the failure of a bank, building society or PRA authorised investment firm;
It allows the FSCS to then use its existing levy-raising powers to recover its costs from the banking sector, while exempting credit unions from any levy raised in respect of recapitalisation payments under this mechanism;
It gives the Bank the express ability to require the issuance of shares in connection with a resolution, facilitating the Bank’s use of these funds to meet a bank’s recapitalisation costs; and
It makes a number of minor and consequential amendments to support the measures outlined above and ensure FSCS funds can be used effectively in resolution. These include:
Expressly scoping FSCS funds provided in resolution out of the definition of "extraordinary public financial support" in the Banking Act 2009. This reflects that the new mechanism is intended to reduce risk to the kind of public funds described within this definition. It will also enable the Bank to discharge its resolution functions effectively in relation to the use of those FSCS funds;
Allowing the Bank to take into account the funds provided by the FSCS when they are calculating the extent to which certain liabilities are bailed-in when exercising the bail-in write-down tool. This is to ensure that the Bank is not required to write-down certain liabilities where this may negatively impact and destabilise the continued operation of the failed firm.
Ensuring that FSCS funds provided in resolution are taken into account when the Treasury makes Compensation Scheme Orders or Resolution Fund Orders after a resolution event and determining whether compensation or proceeds of sale are due to transferors;1 and
Amending section 78A of the Banking Act 2009 (pre-conditions for financial assistance: duty of Bank to give information) by scoping use of FSCS funds provided in resolution out of the requirement on the Bank to inform the Treasury where conditions for financial assistance are met.
	It also introduces a specific requirement for the Bank to report to the Chancellor of the Exchequer in the event that the mechanism is used, as well as a requirement for the Bank to notify the relevant Parliamentary Committees.
	Taken together, the Act seeks to ensure that the Bank has a more flexible toolkit for managing the failures of smaller banks in a way that strengthens protections for public funds. It also does this in a way that intends to avoid additional upfront financial costs for the financial services sector, by relying on the existing FSCS funding system where industry is only levied to pay for the costs of failure after the event.