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.
I turn first
to the capital requirements directive and the proposals requiring
investor institutions in the EU to invest in credit risk transfer
products only if the originator has committed to holding a net economic
interest of at least 5 per cent. In the information provided to this
Committee, the Government stated that they initially had concerns about
the scope of the quantitative retention requirements, but then stated
that negotiations are progressing well. Could the Minister outline the
concerns that the Government had and provide a little more detail on
how negotiations are
progressing? 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.
Timms: I am confident that the UK will not be
disadvantaged. The colleges represent a significant step forward in
including branches and subsidiaries in the
supervisory, consultative and decision-making processes necessary for
effective supervision. The hon. Gentleman is right, however, that
credit rating agencies have an important role to play in a variety of
areas, and that the operation of some has contributed significantly to
the problems in recent months. For that reason, the UK supports an EU
registration scheme for credit rating agencies, subject to the
resolution of some practical considerations. Work on that is under way.
We wish any proposed regulation to be proportionate in the civil space.
That would help to resolve some of the difficulties to which the hon.
Gentleman referred, and help agencies to be used with greater
confidence. 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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