Financial Services

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The Chairman: Order. We now have until six o’clock for questions to the Minister. I remind Members that questions should be brief. Subject to my discretion, it is open to a Member to ask a series of related questions, one after the other.
Mr. David Gauke (South-West Hertfordshire) (Con): Thank you, Mr. Bercow. I shall bear in mind your strictures on being brief, but I want to welcome you to the Chair and also thank the Financial Secretary for his opening remarks.
Mr. Timms: Yes, we did indeed have concerns in this area. We welcome the progress that has been made since then. [Interruption.] I was just hoping for a little help on this matter, which I have now received. We have narrowed significantly the scope of the proposed restriction, which has been particularly helpful, and we have been able to achieve flexibility concerning how the 5 per cent. can be calculated. We have also introduced a Commission review clause one year in, so that we can see an assessment to ensure that the impact is not excessive. The hon. Gentleman is right: we did not support the original proposal because we thought that it was not underpinned by an appropriate impact assessment, and that the case had not been made for how it would help to align incentives. We are very encouraged and heartened by the changes made since then.
In practice, a lot of originators in the UK do retain, in any case, elements of the transactions that they make, so the effect would be limited. However, we now think that we have reached a position that we can be comfortable with and can confidently support.
Mr. Gauke: I thank the Minister for that response, but I want to press him on the industry’s response to these proposals. What representations have the Government received from originators and investment banks as to the likely impact of these proposals? Also, do the Government feel that they are sufficiently defending the interests of investment banks based in the UK, if they consider that the appropriate thing to do?
Mr. Timms: Industry has been reassured, as we have, by the changes that have been made, and I think that there is a general view now—in the industry as well as on our part—that we can take these measures forward with some confidence. Like the Government, the industry originally had concerns, and there are indeed some issues still to be addressed. However, there is a broad consensus, which we support, that the directives should now go forward.
Mr. Colin Breed (South-East Cornwall) (LD): I wish to make two interrelated points about the capital requirements directive and the college of supervisors, which the Minister mentioned. The documents contain a strange statement about the use of credit rating agencies, which, as he will be aware, has proved problematic. However, the documents suggest that such colleges will use such agencies to assist them in their task. Given the current situation, that seems to me—and perhaps to others—slightly problematic. Given the basis on which the colleges will operate, higher compliance costs might be likely. Will the Minister confirm that the compliance costs will not disadvantage particular member states, especially the UK?
Mr. Michael Fallon (Sevenoaks) (Con): What will be the relationship between the principal college of banking supervisors and the European Central Bank?
Mr. Timms: We envisage that the colleges will be in a position to make supervision significantly more efficient. Clearly, this is an international crisis, and problems have hit around the world, so we want regulators to be able to address problems collectively at the European level and beyond, hence the important work being undertaken at the G20 summit. However, we do not envisage a close relationship between the colleges and the ECB, because the colleges will be for supervisors only, not the ECB.
Mr. Gauke: Returning to the quantitative retention requirement, what assessment has the Minister made of the proposal’s impact on the level of securitisation following implementation of the capital requirements directive and, in particular, the changes being discussed today? He will be aware of the importance of securitisation for industries such as car manufacturing. Are the Government concerned that there might be a substantial impact in that area to the detriment of manufacturers?
Mr. Timms: The hon. Gentleman is absolutely right about the importance of securitisation in financial markets. As I have said, we have made significant changes to the way that the 5 per cent. will be applied. In addition, the requirements will not be enforced until 2011, and there will be a Commission review clause one year in to ensure that the impact is not excessive. The Government consider that the proposal can proceed with confidence, and that, I think, is the general view in industry, as well.
Mr. Gauke: On the same subject, my understanding is that the quantitative retention requirement does not distinguish between securities of different risks. We are aware that risks can still apply to triple A securities, but they are treated in the same way as much higher-risk securities. Does the Minister see a case for a distinction between securities of different risks in the retention requirement?
Mr. Timms: I have not seen a case made for that distinction being drawn, although I would certainly be happy to consider it if the hon. Gentleman or others want to advance one. It could be reflected on in the review to which I have referred. I would welcome the opportunity to consider representations along those lines.
Mr. Gauke: I thank the Minister. I was not particularly advocating that—just pressing him on what consideration had been given to it.
On a related matter, the retention requirement will apply to banks, as I understand it. It will essentially prohibit banks from buying paper that has not been created with the 5 per cent. retention requirement by the originator. If that is a sensible idea, why not extend it to pension funds, insurance companies or any other organisation in which people invest their money?
Mr. Timms: Of course, the directive applies to banks, so only they are within its scope. There are other directives on other parts of the financial services industry, and the Commission expects there to be a read-across from this directive to UCITS, and to Solvency II for the insurance industry, after an impact assessment has been conducted.
Mr. Breed: On the deposit guarantee scheme, two important amendments are to the minimum protection cover and the payout period. As I understand it, the minimum will change to €100,000, which at the current exchange rate is about £85,000. It is currently up to about £50,000 under the Financial Services Compensation Scheme. Where will the £35,000 difference emanate from if there is a claim?
Mr. Timms: I am not sure that I fully understand the question. Is the hon. Gentleman asking about the difference between our current £50,000 guarantee and the figure of €100,000, when a claim reaches that level? There would be an obligation on us to increase our guarantee to €100,000, in line with the requirement in the directive, by the end of 2011. The Commission will produce an impact assessment by September 2009. There would be a requirement on us to change the level of the guarantee in the UK.
Mr. Breed: I thank the Minister; I thought that that would be the case. As Report stage of the Banking Bill, which relates to the guarantee scheme, is only tomorrow, is the Minister suggesting that the Government will table amendments to cover that eventuality, or are they going to wait and do that at some later stage?
Mr. Timms: The Financial Services Authority announced an increase in the compensation limit under the FSCS to £50,000, effective on 7 October. Arrangements will need to be put in place to conform with the directive if it is agreed at ECOFIN next week. Precisely how and when that is done is under review as part of the current consultation, but it does not need to be done in the Bill at this stage.
Mr. Breed: I appreciate that that relates to 2011 but, clearly, at some stage, we are going to be signing up to a guarantee scheme that will compensate £85,000 at today’s market rate, which is significantly higher than the current £30,000.
I might have missed an explanation of this in all our to-ing and fro-ing for Divisions, but page 568 indicates that the payout period will be reduced to three days. That seems to be an extraordinarily short period for what might be a complicated procedure. I welcome the fact that people will get their money back quickly, but the document seems to say that the period should be reduced
“to 3 days in order not to impede rapid payout”.
Is that realistic?
Mr. Timms: The proposal is that compensation should be paid within 20 working days. In the UK, we are aiming for seven days from early 2011, but the figure specified in the directive is 20 working days, compared with three months previously.
Mr. Breed: In that case, will the Minister explain paragraph 5 at the top of page 568 of the directive, which seems to indicate what I said. It says:
“in cases where payout is triggered by a determination of the competent authorities, the decision period of 21 days currently provided for should be reduced to 3 days in order not to impede...payout.”
Is there a difference between payout and consideration? I just want to get clear in my mind when somebody can expect to get their money.
Mr. Timms: The element that the hon. Gentleman has picked out is one part of a process. The process overall can be up to 20 days.
Mr. Gauke: While we are on the subject of the deposit guarantee schemes, will the Minister give the Committee his assessment of how practical it is for the European Union to co-ordinate member states on offering guarantees? We saw in recent months countries such as the Republic of Ireland offering full guarantees, and there was consequently a certain amount of disgruntlement elsewhere in the EU. Does he believe that this matter will essentially be under the exclusive control of the EU? How much power will member states have?
Mr. Timms: Let me go back to the previous question, because, the reason why the document mentions three days is not the one that I gave. Three days was the proposal at one stage, but when it goes to committee next week, there will be a compromise figure of 20 days on the table, so the hon. Member for South-East Cornwall was absolutely right.
Do I think that the EU intervention can be effective? Yes, I do. The proposal is that €100,000 should be a maximum as well as a minimum, which means that the temporary unlimited guarantees that we have seen recently will not be permissible.
Mr. Gauke: Does the Minister agree, though, that in circumstances of financial crisis, as we have seen in recent months, many member states may well, when seeing runs on their banks, be tempted by a full, 100 per cent. guarantee? What sanctions will be available to the EU in those circumstances?
Mr. Timms: There is no appetite among EU member state Governments as a whole to offer an unlimited state guarantee or to expand further the eligibility criteria. The directive successfully balances the needs of taxpayers with those of savers and institutions on which the cost of support would fall. I do not believe that a nation would seek to be in breach of the directive, and directives currently are effective throughout the EU.
Mr. Breed: The directive seems to commit member states to ensuring that deposit guarantee schemes have adequate funds available to meet their needs. We have learned that €100,000, which is a substantial amount, is the minimum and maximum. How will member states ensure that they have adequate funds, and will we go down the route of pre-funding?
Mr. Timms: That will be a matter for each individual state. It has been an issue of late because of the position in Iceland, and I am pleased that Iceland has now recognised that it is obligated to pay out in accordance with the Europe-wide guarantee. There was some question about that for a while, but it has now been accepted. It will be a matter for each state to determine precisely how it will ensure that it can fulfil the directive’s requirements.
Mr. Breed: I accept that, but will the Minister explain how the Government propose to ensure that there will be adequate funds for what may be a substantial claim, should it ever come about?
Mr. Timms: If the hon. Gentleman is asking me about the arrangements in the UK, the FSCS is well developed and effective, and has delivered in the difficult circumstances that we have been through recently. I am confident that those arrangements will continue to be effective.
Mr. Gauke: May I touch on an issue raised by the hon. Member for South-East Cornwall? There will be a minimum and maximum requirement for deposit protection of €100,000. How will that work in countries outside the eurozone where there may be some confusion for investors? Bank account holders’ perceptions are important, and there may be confusion with a fluctuating currency. It may be simpler to say £50,000. How does the Minister intend to address that?
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Prepared 26 November 2008