New UK bank levy for resolution becomes law

After almost a year working its way through Parliament, the Bank Resolution (Recapitalisation) Act 2025 received Royal Assent on 15 May 2025, largely in the form in which it was originally introduced as a bill, but with a few enhancements. The Act will enable the Bank of England (BoE) to recapitalise a failing bank by requiring a payment from the Financial Services Compensation Scheme (FSCS)  and in turn enable the FSCS to impose levies on the industry. The power applies where the resolution is effected by way of a sale to a third party or transfer to a bridge bank. It is aimed at small banks but it also gives the BoE the flexibility to use the mechanism for larger banks where necessary.

As we reported in an earlier blog post, following the collapse of Silicon Valley Bank and its UK subsidiary, HM Treasury consulted in January 2024 on a proposed new mechanism that would allow the BoE to request funds from the FSCS to support resolution of failing building societies or small banks. The Bank Resolution (Recapitalisation) Bill was introduced in the House of Lords on 18 July 2024. The Bill and HM Treasury’s consultation response confirmed that the Government broadly intended to maintain the position set out in the consultation. The main modification was the exclusion of credit unions from the requirement to pay the levy. Since credit unions cannot benefit from the resolution regime, it didn’t seem fair to require them to contribute to the mechanism. For more information, see our blog post on the Bill.

The final Act 

One of the most controversial elements of the Bill as it made its way through Parliament was whether the mechanism should be available for larger banks as well as small banks. In the House of Lords, an amendment was added to limit the Bill’s scope to smaller bank failures. Lawmakers were concerned that the mechanism might otherwise be used for larger banks that are already covered by the minimum requirement for own funds and eligible liabilities (MREL). However, the Government opposed this change, and the House of Commons reversed it to give the BoE the flexibility to use the mechanism in situations such as where a large bank is subject to a significant redress claim that can’t be covered by its MREL.

Other amendments that were introduced by the House of Lords did survive the Commons process. Most significantly, the BoE will be required to report to the Chancellor of the Exchequer about the exercise of this power and the stabilisation measures. The BoE must also notify the chairs of the Treasury Committee of the House of Commons and the Financial Services Regulation Committee of the House of Lords when exercising this power. An amendment that was tabled to introduce a secondary objective requiring the BoE to observe “competitiveness and growth” when using the new mechanism was rejected by the House of Lords at report stage.

In addition, the scope of “other expenses” in recapitalisation payments—as defined in section 1 of the Act—is now limited to expenses incurred or potentially incurred by the BoE or a “relevant person”. For these purposes, “relevant person” means HM Treasury, a bridge bank, or an asset management vehicle in connection with recapitalisation or the use of stabilisation powers. 

Next steps

The Act will come into force on a date chosen by the Treasury and specified in a separate statutory instrument.

When introducing the Bill, the Government said it intended to update the Special Resolution Regime Code of Practice in consultation with the Banking Liaison Panel. In October 2024, HM Treasury published a draft chapter outlining how the new recapitalisation mechanism will be applied. This includes its target firms, how the BoE will assess FSCS funding needs and compare the relative costs of using the mechanism with insolvency, and BoE accountability. The draft also clarifies certain policy aspects, following the Government’s engagement with industry and Parliament. The Government intends to issue a finalised version of the Code in full when the Act comes into force. 

The Prudential Regulation Authority (PRA) has also consulted on proposals for new and amended rules to enable the FSCS to fulfil its new functions under the Act. These proposals are set out in a consultation paper (CP4/25) on depositor protection published on 31 March 2025. The deadline for feedback on those proposals was 30 April 2025. Now that the Act has received Royal Assent, the PRA will publish the policy statement in due course. (The consultation paper also included proposals to increase the  protection limit available from £85,000 to £110,000 to a firm’s depositors from the FSCS if the firm fails with effect from 1 December 2025. The deadline for responses to those proposals is 30 June 2025).