Financial Services

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Mr. Breed: We broadly support the Government’s view on the directives. In some respects, we have all recently heard the slamming of stable doors after the horses have bolted. Nevertheless, it is right that we at least try to co-ordinate some sort of activity across the European Union to address these difficult issues. I wonder whether it is possible to regulate and supervise the immense banks that cover a sort of supermarket range of financial services and products. I also wonder whether we will end up having to try to de-aggregate them and regulate and supervise them differently with different capital adequacy rules and other requirements.
6.23 pm
Mr. Fallon: I am sorry, Mr. Bercow, if you thought I was unhappy earlier; it was an inadvertent frown, which I am good at. I also remind the Committee that my interests are recorded in the register. I, too, welcome the draft legislation before us. First, I shall turn to the capital requirements directive. It is worth reminding ourselves that the current capital requirements directive has only just come into effect. These measures will amend it all over again. In happier times, it might have been better to have allowed the new directive to bed down a little before returning to the fray.
The tests that the amended directive we are considering must meet are, first, whether—as my hon. Friend the Member for South-West Hertfordshire has said—it addresses the issue of counter-cyclicality, which is obviously increasingly important. Secondly, we must consider whether the directive continues to discourage off-balance-sheet activity, which, of course, was one of the great faults of the original Basel framework. Thirdly, we must consider whether the directive is proportionate. Of course, this legislation carries a cost for the firms that have to implement it and, indeed, for the customers of the products they are trying to sell. Those are the tests the legislation must meet before the Government sign up to it on Monday.
As far as the central elements of the legislation are concerned, I welcome the new focus on liquidity management, which has clearly been one of the great weaknesses exposed over the past year or so. I have three particular reservations. As time passes, I understand that the Minister may not be able to address them at great length. The first concerns the college of supervisors. I was genuinely stunned when the Minister said that there would be no relationship with the European Central Bank. We have learned to our cost of the lacunae in the relationship between the supervisory authority, the FSA, and the Bank of England—the provider of liquidity—when it comes to banks. There must be some relationship there. The European Central Bank concurs with that view. That was certainly the impression that it gave to the Treasury Committee when we visited it last January. There must be some connection between the body supervising the bank and the body that is ultimately responsible for providing liquidity. I hope that the Minister will reflect on his earlier answer in that respect.
My third reservation concerns the ratings agencies’ legislation. It is unfortunate that it was not incorporated in this motion. We need to get on and deal with the ratings agencies, which have been hopelessly conflicting in their current operations. In some countries, there are completely independent ratings agencies that are not paid by the institution that they are rating, but independently by the people who depend on their research. The Commission has a proposal—a separate draft directive, or some other regulation on ratings agencies—that should be considered at the same time.
Those are my reservations on the capital requirements directive, and let me now turn briefly to the deposit guarantee scheme directive. Some matters have already been aired. I have to say to the Minister that they are being dealt with at a leisurely pace. We had the run on Northern Rock, and we have had difficulties with banks right across the continent. There are Danish housewives queuing to get their deposits out of a British branch in Copenhagen, and so on. We have had issues of nomenclature, in which an Icelandic bank is registered on the Isle of Man, or whatever.
We need to get on with this—I am concerned at the slippage in the timetable. Originally, we were supposed to have an agreement across Europe on the minimum compensation payment by the end of next year. Now, it appears that nothing will be done until December 2011; that is too leisurely. I am not as worried as the hon. Member for South-East Cornwall is about the three-day requirement. I see no difficulty in getting cheques back to depositors relatively quickly. That is what happens in the United States and it happens now in Japan—such things can be dealt with in the three days. The bank’s deposits are frozen and cheques are paid out within two or three days. The industry is wrong to continue to pressurise Governments to extend the period. I think that 20 days might well prove to be too long.
I have three specific points about the compensation procedure, the first of which is on the coverage. I assume from what the Minister said that we are still talking only about retail depositors, and that it is not intended to widen the coverage of the scheme any further than the existing retail depositors. However, sadly, we have learned that several charities involved in depositing in Iceland were not covered fully by the scheme, and now face formidable difficulties—as, indeed, do a number of public authorities—in getting their deposits returned. I will just leave on the table the thought as to whether the definition of retail deposit is sufficient.
Secondly, on mergers, in a banking crisis banks are folded into other banks. That is what we want to happen; we want them to be rescued, with building societies being merged, and so on. What happens if people have €100,000 in one building society and €100,000 in another building society or bank, and, suddenly, the two institutions are merged and they lose half the coverage they previously had? That issue needs to be addressed. It has certainly had to be addressed here in respect of some recent mergers.
Thirdly and finally, I am not sure whether transparency is dealt with in the current Banking Bill or whether those colleagues serving on the Banking Bill Committee have addressed this point, but I hope that at the end of this exercise we will make it clear to customers what their entitlement is. On walking into the branch of a bank in the United States—you have probably done so many times, Mr. Bercow—you will see on the counter or in the window your entitlement and exactly what the compensation is if that bank should fail. I should like our banks to make that much clearer, so that people do not have to read the Sunday supplements or make expensive phone calls to the Financial Services Compensation Scheme, and so that they have a clear indication in every branch as to exactly what their entitlement is. Then, we can start to rebuild confidence in the system.
I fully understand if the Minister cannot answer all my questions, but if he cannot, perhaps he will address them in another form.
6.31 pm
Mr. Timms: I am grateful to hon. Members for their observations. Let me respond to a number of them.
The hon. Member for South-West Hertfordshire was concerned about a potential conflict between co-operation at the European level and wider international co-operation. Clearly, one could conceive of circumstances in which that might prove to be a difficulty, but I do not think that it needs to be difficult. There is now good experience of European-level co-operation contributing to wider international co-operation, rather than being in conflict with it. Indeed, in the hon. Gentleman’s remarks on pro-cyclicality, he recognised that some things need to be addressed at European level and he is right.
We want an alignment of global regulatory standards. I agree with the hon. Gentleman that that should not be done through a single regulator, at European level or global level. There would be real problems in any such institution, because it would be too far removed from the localised issues that it was seeking to regulate for it to be effective. Co-operation is the way to square the circle. That is why we support the convergence of European Union supervision, provided that the focus is on the outcomes, rather than the practices, of that supervision. I do not think that there needs to be a conflict between greater co-operation at the European level and internationally.
The hon. Gentleman asked why we were dealing with hybrid capital here, rather than waiting for the Basel procedure. The answer is that the proposal we are discussing gives substance to the Basel guidance, which is not clear at the moment because we have 27 different regimes. This is an opportunity to clarify those arrangements.
In the UK, the Treasury, the Bank of England, and the FSA are working together to assess the options in the course of the coming year, and a working group has been set up to review the issues within Europe. The Financial Stability Forum has a particularly important role to play and has featured quite prominently in recent discussions at the G20, which recognised in particular the need to broaden the membership of that forum, so that it can do its work more effectively. I am grateful for the hon. Gentleman’s support of the UCITS directive. I take his point about the loss of a memorable number in the deposit guarantee scheme, but I think that arrangements can be made, notwithstanding that fairly minor loss.
In response to the hon. Member for Sevenoaks, it is unfair to say that nothing has happened on this matter. Actually, we have reached this point quite quickly since work began, earlier this year. There will be an increase from the current €20,000 level to €50,000 in July next year and the further increase will be in 2011. The issue has been taken forward with some urgency and I entirely agree that that was necessary.
Let me say a little more about the 5 per cent., how it has varied, and how it will be applied. The original Commission proposal required that no risk transfer should take place without the seller of the risk transfer product retaining a 5 per cent. stake. It also proposed detailed prescriptive requirements on transparency of sellers, on due diligence for investors, and on monitoring of the underlying quality of assets, with severe capital penalties for non-compliance. That would have had a significant impact on the UK because London is responsible for over half of the securitisation issuance in Europe.
We managed to amend the compromise proposal in four key areas, some of which I have mentioned already. The scope of the proposal has been narrowed from all credit risk transfer products to pure securitisation activity. Additional flexibility has been agreed on the retention of four ways in which an institution’s 5 per cent. stake can be calculated. Proportionality in the qualitative requirements has been addressed—they will now only apply where appropriate. The severe capital penalty will apply only in cases of negligence. As I mentioned earlier, the impact of the requirement will be reviewed after one year of operation, to take account of international developments and further evidence. On the quantitative requirement, our view is that it was unnecessary, but that with the modifications I have outlined, the position now proposed represents an acceptable compromise.
Going back to the deposit guarantee scheme, the hon. Gentleman rightly made the point that there is no requirement, for example, for schemes to cover charities, although of course the directive does not limit member states from widening coverage if they so choose.
We have had an interesting and useful discussion, particularly on the capital requirements directive, but there has been general support for the other directives, too. I am grateful to the Committee for its help in enabling me to present the UK position with confidence at the meeting of ECOFIN next week.
Question put and agreed to.
That the Committee takes note of European Union Document No. 12149/08 and Addenda 1 and 2, draft Directive on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS); No. 13713/08 and Addenda 1 and 2, Draft Directive amending Directives 2006/48/EC and 2006/49/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management; and No. 14317/08, Draft Directive amending Directive 94/19/EC on deposit guarantee schemes as regards coverage level and the payout delay; and endorses the Government’s approach on all three draft Directives.—[Mr. Timms.]
Committee rose at twenty minutes to Seven o’clock.
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Prepared 26 November 2008