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26 Nov 2008 : Column 797

Simon Hughes: Please will you advise the House on how we can have an opportunity, either today or at the first possible occasion when we come back, to vote on the substantive issues in the pre-Budget report? Some of us do not agree with them all and some of us want to be able to vote accordingly.

Mr. Iain Duncan Smith (Chingford and Woodford Green) (Con): Further to that point of order, Madam Deputy Speaker. I hope, if possible, that when you answer that point of order you might correct something that the hon. Gentleman said. He said that that he and his colleagues voted to get more time on the motion, but in fact what they voted on was closing the debate ahead of time.

Madam Deputy Speaker: My best advice to the hon. Member for North Southwark and Bermondsey (Simon Hughes), who is an experienced Member of this House, is to go to the Table Office and have a word with the staff there.

European documents

Motion made, and Question put forthwith, pursuant to Standing Order No . 119(11) (European Committees),

Financial services

Question agreed to.

Banking Bill (Programme) (No. 2)


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Orders of the Day

Banking Bill

As amended in the Public Bill Committee, considered.

4.44 pm

The Economic Secretary to the Treasury (Ian Pearson) rose

Madam Deputy Speaker (Sylvia Heal): Order. Will Members who do not wish to stay for the debate please leave the Chamber as quickly and quietly as possible?

New Clause 11

Special resolution regime: compensation: Sources of compensation

‘(1) This section applies to—

(a) compensation scheme orders,

(b) resolution fund orders,

(c) third party compensation orders, and

(d) regulations under section 60.

(2) An order or regulations may provide for compensation or other payments to be made by—

(a) the Treasury,

(b) the Financial Services Compensation Scheme, subject to section 214B of the Financial Services and Markets Act 2000 (contribution to costs of special resolution regime - inserted by section 165 below), or

(c) any other specified person.’.— [Ian Pearson.]

Brought up, and read the First time.

Ian Pearson: I beg to move, That the clause be read a Second time.

Madam Deputy Speaker: With this it will be convenient to discuss the following: new clause 6— Contingency funding: power to make regulations—

‘After section 214A of the Financial Services and Markets Act 2000 (Contingency funding - inserted by section 164 above) insert—

“214AA Contingency funding: power to make regulations

The Treasury may make regulations under section 214A only after it has laid before Parliament a report on the impact of a pre-funded scheme on the classes of person from whom contributions can be levied and whether contingency funding is the best way to achieve the special resolution regime objective set out in section 4 of the Banking Act 2008.”’.

Government amendments Nos. 23 to 26.

Amendment No. 5, in page 86, line 7, leave out clause 164.

Amendment No. 17, in clause 164, page 86, line 24, at end insert—

‘(da) arrangements for institutions that have permission under part 4 of the Financial Services and Markets Act 2000 to carry out the regulated activity of accepting deposits (within the meaning of section 22 of the Act, taken with Schedule 2 and by order under section 22) but are not incorporated in, or formed under the law of, any part of the United Kingdom;’.

Amendment No. 13, in clause 165, in page 87, line 12, after ‘(2)’, insert ‘Subject to subsection (2A),’.

Government amendments Nos. 41 and 42.

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Amendment No. 14, line 18 , at end insert—

‘(2A) Prior to requiring the scheme manager to contribute towards the exercise of the stabilisation powers, the Treasury may require—

(a) a private sector purchaser to make a contribution where the option under sections 11 or 12 has been exercised, or

(b) the bank liquidator to make payment where a bank insolvency order has been made, or

(c) the bank administrator to make a payment where a bank administration order has been made.’.

Government amendments Nos. 43 to 48.

Ian Pearson: This first group of new clauses and amendments covers a wide range of subjects. I propose, with your permission, Madam Deputy Speaker, to speak to the Government new clauses and amendments, and then to seek to catch your eye at a later point in the debate to respond to the amendments tabled by the hon. Member for Fareham (Mr. Hoban).

Let me start with Government new clause 11 and Government amendment No. 26, which is consequential on it. As was discussed in Committee, the Bill provides a number of ways for compensation to be calculated and paid to compensatable persons. As hon. Members will know, it allows the Treasury to make regulations to provide for no creditor being worse off following a partial transfer. The purpose of new clause 11 is to make explicit provision in the Bill for the Treasury, the Financial Services Compensation Scheme or other specified persons to pay or contribute to compensation payments under clauses 49 to 61.

Government amendment No. 26 is consequential on new clause 11. It removes the provisions in subsection (6)(c) and (d) from clause 60, as new clause 11 now supersedes them. In Committee, the hon. Member for South-West Hertfordshire (Mr. Gauke) tabled a probing amendment that questioned whether subsection (6)(c) and (d) appropriately placed in clause 60. New clause 11 sets out more clearly our intention to ensure that if needed the appropriate persons can pay or contribute towards compensation. These are sensible amendments that reflect the consensual debate that we had in Committee, and I hope that the House will support them.

Government amendments Nos. 23 to 25 amend clause 60, which, as hon. Members will know, puts in place a safeguard to protect creditors following a partial transfer, as it aims to ensure that they are no worse off than they would have been had the bank gone into a whole bank insolvency procedure. This is part of the package of safeguards on which the Government are consulting. The basic principle that will be implemented in the regulations to be made under the clause is that there should be a comparison of the treatment that creditors of a residual bank created by a partial property transfer receive in fact with the treatment that they would have received in the hypothetical circumstances of the whole bank entering an insolvency procedure. Should that process show that creditors have received less in fact than they would have done in the hypothetical circumstances, the difference is to be made up. As drafted, the hypothetical circumstances used in clause 60 for the purposes of comparison are those of the winding up of the bank. This is a reference to a particular form
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of insolvency procedure involving the appointment of a liquidator and the realisation of the bank’s assets and their distribution to creditors.

The purpose of amendments Nos. 24 and 25 is to make a technical change to provide greater flexibility. The references to winding up will be replaced by references to a full range of different insolvency procedures, because a bank might end up in some form of insolvency procedure other than the bank insolvency procedure—for example, administration under the Insolvency Act 1986. The amendments aim to preserve the flexibility of the Treasury to select the most appropriate hypothetical circumstances for comparison in secondary legislation.

Amendment No. 23 is a technical correction to subsection (2) of clause 60, which relates to the insolvency procedure that the residual bank, rather than the hypothetical whole bank, is likely to enter. As a partial transfer is likely to render the residual bank insolvent, and as the residual bank may need to provide services and facilities to the transferee, this procedure is likely to be the bank administration procedure. Again, the amendment provides flexibility to select the most appropriate procedure. I hope that the House will agree to it.

I turn to Government amendments Nos. 41 to 48 to clause 165. The effect of these amendments is to require the Financial Services Compensation Scheme to be able to contribute up front to the costs of a resolution. Let me briefly set out how such an approach would work. The amendments to clause 165 will allow a “payments on account” approach to be adopted. That would allow the Treasury to impose a requirement early on, possibly immediately after use of the stabilisation powers, for the FSCS to contribute an amount to the resolution. That would be based on an estimate of the eventual payment under clause 165. The FSCS would be obliged to make the payment. Thereafter, there would be an evaluation exercise and an assessment of the final costs of resolution, with a balancing payment being payable either from the Treasury to the FSCS, or from the FSCS to the Treasury. Following the experience of recent resolutions, including the Bradford & Bingley case, it is important to have the flexibility to require the industry to contribute to the costs associated with resolutions before the end of the process. That flexibility could allow the FSCS to start paying, from day one, towards interest costs on any loans from the national loans fund in relation to a resolution. Paying up front could be preferable to leaving the cumulative interest costs to the end of the process.

I have mentioned the importance of having safeguards to protect the use of FSCS funds, and I should like to reassure hon. Members that current safeguards surrounding the use of such funds will still exist. The safeguarding principle that resolution costs should be capped at the level at which depositor compensation would have been payable had the bank entered insolvency proceedings will be retained, as will the safeguard that ensures independent auditing of the amount that the FSCS will have to contribute. The amendments provide useful flexibility to allow the FSCS to contribute up front, rather than only at the end of the process, while preserving important safeguards to protect the interests of levy payers. I hope that the House will support these amendments. As I have said, Madam Deputy Speaker, I should like to catch your eye later to reply to the hon. Member for Fareham’s comments on his amendments.

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Mr. Mark Hoban (Fareham) (Con): Let me deal first with the Government’s new clause and amendments. I am sure that my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) will be heartened to hear that the Government took note of his comments, in Committee, about the appropriate place for the institutions that have been mentioned. We have no problem with that.

We would expect resolution regime costs to be paid up front, especially in the light of recent transactions in which the FSCS has taken part. The Minister will know that we are not as convinced as he is about the safeguards, and we will discuss the contribution that the FSCS has to make in such situations when we come to later amendments. On the concept of being able to meet up-front payments, we are content.

The new clause and amendments that I have tabled tackle three issues, the first of which is the pre-funding of the compensation scheme. We touched on this matter in Committee, and I want to revisit it today. The second issue—how to protect people who bank with branches of overseas banks—has caused a great deal of concern to constituents. The third issue is who should bear the costs of the special resolution regime. That has already been mentioned in relation to Government amendments Nos. 41 to 48.

Clause 164 gives the Treasury the power to make regulations for a pre-funded compensation scheme that could cover any part of the financial services sector, not just the banking sector. The argument in favour of pre-funding is that the FSCS needs to be pre-funded to ensure that there are sufficient resources to make a payout to the customers of a failed bank or other financial institution. Currently, the FSCS works on a post-funding basis. There is a levy on financial services businesses through industry groups. One such group, deposit takers, includes banks, building societies and credit unions. Once the levy payable by that group is exhausted, other financial services institutions outside that group will be required to make payments to the FSCS. The scheme is important, in that it has an impact not only on the sector concerned but on others as well.

When we debated these matters in Committee, the Minister would not be drawn on whether he thought it necessary to have a pre-funded scheme. He thought it appropriate for the powers to be available and for there to be further consultation and discussion on whether that was the right way to proceed. Not knowing whether this will be the next step forward will put the financial services sector in a difficult position, because it will not know what preparations it needs to make. However, the case for pre-funding was not made properly in Committee.

An argument for pre-funding can be made, and new clause 6, which requires a report to be laid before Parliament before the regulations are made, is a vehicle for making that case. Amendment No. 5, which I have tabled, would remove clause 164 from the Bill entirely. I would like to make it clear that I want to press that amendment to a vote at an appropriate point in our deliberations.

Mr. Mark Todd (South Derbyshire) (Lab): I am sure that the hon. Gentleman would agree that our debate in Committee focused on two issues: the principle of whether pre-funding was desirable and the mechanisms by which pre-funding might be achieved, bearing in mind the
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very different risk profiles of the various institutions that might be called on to contribute. For example, building societies have historically cleaned up their own difficulties in that sector, but they might be called on to contribute to institutions that have followed much higher risk profiles in business.

Mr. Hoban: The hon. Gentleman makes an important point. In the wider debate on the pre-funded scheme, the Building Societies Association has highlighted instances in which building societies might be called on to contribute to resolutions. It says that the building societies have swallowed their own smoke, to use a phrase beloved by the Minister in Committee, and that a requirement to contribute to a pre-funded scheme would reduce the money available to them to lend to their members, which would perhaps reduce their attractiveness. We need to think about who would contribute to the scheme and what the impact of that would be.

This is not just about building societies. Credit unions could be placed in a difficult position, as they do not often have huge reserves, but, as deposit-taking institutions, they could be covered by the provisions. Such contributions would take money out of the credit union sector, when that money would be better employed being lent to people than being put into a pre-funded scheme.

The case has not been made for a pre-funded scheme, and there are strong arguments against introducing such a scheme. The first is that the important point is not whether the scheme is pre-funded but whether it has access to liquidity and resources to enable it to make payments to customers when a bank has defaulted. The second argument asks whether a pre-funded scheme would be the best use of assets. We have touched on that question in the context of building societies, but I want to make some broader points on that in a moment. Thirdly, while this debate has been primarily about pre-funding in the event of a bank failure, the powers in the clause could require other financial sectors to contribute to a pre-funded scheme to rescue a bank—or, indeed, any other financial institution.

The Bill makes provision for the scheme to access the national loans fund. This is what has happened in the context of Bradford & Bingley, where money has been borrowed from the Government to lend to Banco Santander to cover the deposits. Consumers are given confidence not because there is a pre-funded scheme or a pot of money already sitting there, but because a bank has access to resources that enable the Financial Services Compensation Scheme to make payments to customers in the event of a default. With a post-funded scheme, a reasonable amount of time would need to be allowed to recover the money from the bank, so as not to put undue strain on the balance sheets of banks, building societies and other deposit takers at a time when the whole financial system is under distress.

5 pm

Given the increasingly concentrated nature of the UK banking system, the pot of money that it would be necessary to build up against any failure would be quite significant. The position is very different from that in the US, which has a much more fragmented banking system. It also has the Federal Deposit Insurance Corporation and needs to have a pre-funded scheme, because the likelihood of a bank failing is much greater, given the sheer number of institutions involved.

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