New legislation that aims to stop the taxpayer having to foot the bill when a bank fails has passed its first hurdle.

Under the proposed law, other island banks could be levied to meet costs if a failed bank’s assets do not cover them.

The Bank (Recovery and Resolution) Bill was granted a second reading in the House of Keys on Tuesday, which means MHKs have approved its principle.

Treasury department member Bill Shimmins (Middle) - a former managing director of Isle of Man Bank - is in charge of guiding the bill through its scrutiny in the House of Keys.

He said: ’The primary aim of the bill is to introduce a legal framework that will provide a range of options to deal with a failing bank.

’Learning from the financial crisis of 2008, the bill provides new mechanisms for a failing bank to be either resolved or wound-up in an orderly fashion, without losses falling upon the taxpayer.’

standards

This was in line with the relevant international standards, he said, including those already introduced in the UK and European Union.

In the Isle of Man, the Financial Services Authority would be the ’resolution authority’ and the bill will set out how that role will be kept separate from the FSA’s function as a regulatory supervisor.

Mr Shimmins added: ’The bill addresses both the recovery and resolution of banks and also the resourcing and funding of the resolution authority.

’In respect of any potential recovery and resolution action, banks to which the bill applies may be required to maintain appropriate recovery plans.

’In addition, the resolution authority is also obliged to draw up suitable resolution plans for each bank incorporated in the island in respect of potential action.’

Those plans would be ’required to exclude consideration of any public financial support, so that the burden of any bank failure falls primarily on the shareholders and creditors of the bank and not on Isle of Man taxpayers’.

Guiding principles will be in place for the resolution authority.

’Such principles include that shareholders and creditors must bear the first losses, that deposits within the scope of the Depositors’ Compensation Scheme coverage must be protected and that the overall costs of a resolution action must be minimised,’ said Mr Shimmins.

The bill would set up a ’bank resolution fund’ to gather money to be used in a resolution action.

’Funds required in the event of a resolution action may initially be provided by the Treasury but any monies would be fully recovered from the failing bank’s remaining assets,’ said Mr Shimmins. ’Or, if there is any shortfall, other banks in the island may be levied to recoup this over a 10-year period.’

Banks may also be levied to fund the ongoing administration costs of the resolution authority.’

Mr Shimmins said liquidation of a failing bank would always remains an option and the bill contained a modified winding-up procedure.

He said ’extensive engagement’ had taken place with banks.

Urging support from his colleagues, Mr Shimmins added: ’Both the Treasury and the Financial Services Authority believe that consumers will be better protected from the impact of a potential bank failure through the introduction of this dill.

’The bill also ensures that banking regulation in the Island meets the standards which have been established internationally in the wake of the financial crisis.’

Members granted the bill a second reading but could face some challenge when it undergoes detailed scrutiny at the clauses stage later this month.

Lawrie Hooper (LibVannin, Ramsey) flagged up concerns at the appeals mechanism in place in the bill and the regulation-making powers it included.