Q 116Dr. Pugh: On the face of it, it sounds a very difficult area to regulate in any way, given the complexity of financial products.
Adrian Coles: Yes.
Angela Knight: Perhaps I can answer for the banks on the two points. First, regarding the depositor protection scheme and the limits, there have been some noticeable changes in the last year. Originally, we put out some information into the public domainthat is, the British Bankers Associationwhich is approximately two years old. That information gave the percentage of individuals who are covered by the £35,000 limit, which was 96 per cent., and at £50,000 it was 98 per cent. In terms of value, of course, it was significantly less.
However, one of the effects of the credit crunch over the past year is that people have moved their money around, to get below the limits. So, in the Bradford & Bingley case you will have noticed that 80 per cent. by value was covered by the £35,000 limit. We must recognise that people have responded to a very strong message, which is, Spread it around underneath the limit, whereas I suspect that the movement is now slowing down. Actions have been taken.
I think that there is a case for special situationsby that, I mean when an individual has sold a house, or there is a lump of money from a will or whatever. We are looking into how we deal with coverage insurance for special situations.
Let us move on to your next point, which is what banks know about the particular positions of their customers. You are right that most systems have been built by brand. Therefore, there are various different types of brands that sit under a bank and usually the systems are built like that. By brand I mean, for example, the NatWest. So it has been done like that. Perceptionally, that is how individuals look at itnot always, of course, but it tends to hypothecate straight up to a banking licence.
So it is very difficult to answer your questionhow can you bring everything together and how long will it take? It is difficult to answer it, not least because there are some other things to consider; there are regulatory requirements and taxation on some issues. There are all those sorts of considerations.
With other issues, we have some consultants examining this area. The consultants report ought to be available relatively shortly. I am afraid that I cannot give an exact date; consultants are as consultants are. However, it should certainly be available before you have finished your deliberations.
Angela Knight: Yes, absolutely. The report delves down into a number of areas, including what is known as single customer view, speed and what can and cannot be done. We felt that that was an important part of this debate and that it would be helpful for us all if we went in with others and commissioned that work.
Adrian Coles: There is one particular aspect that will affect the speed with which you have a single customer view, and that is the extent to which there have been recent mergers between two building societies or two banks. If there has been a recent merger, it will be much more difficult to get a single customer view, because the acquiring organisation will not know the circumstances of the customers of the acquired organisation as well as it knows its own customers.
Angela Knight: May I just come back in, because there was one part of your question that I did not answer? That is what nets off. The view that we have put forward is that what nets off is an overdraft but that is all, and we think that that is probably the right way. I think that we need to work through the legalities of offsets, but again that is something that sits to the side. Netting off the overdraft is the only one that we are really proposing.
Q 118Mr. Peter Bone (Wellingborough) (Con): Following on from that, we heard in previous evidence that there should be a customer-level test beforehand by the compensation scheme, so that, when a bank goes under, the scheme can, at the press of a button and in a common format, produce the amount of money that needs to be given back to an individual. This issue is very time-sensitive. If someones money is in a bank and that bank has gone bust, they need to access that money.
Listening to your previous argument, it seems that the banks are not very sure how much money each customer has. You have a problem. Do you think that there should be a common format and that customer-level information should be given in advance?
Angela Knight: You are absolutely right about customer information. About 130 million personal accounts are out there. People are using cash machines. They have cheques and direct debits in the system. At any one time, quite a lot of movements are hung up in the system. You are right that we cannot know the precise position at one moment in time. The debate has looked at the matter the wrong way round. We should not be considering a system whereby, if a bank goes bust, the information is passed to the compensation scheme, which cranks up the cheque-printing equipment and sends out 14 million cheques by post. That is probably not how to do it. Even if it can be done quickly, does that really sound right?
We think that, if a bank has failed, the banks systems should be operated by a third party for the purposes of paying out through cash machines and bank branches in the same way as an individual would be treated now. That does not mean that they all have to queue up outside a bank branch; no, because the general payment system has been used. In effect, that was the case with the Bradford & Bingley. If we consider from where the Billand, indeed, the debatehas come, it would imply that, in a Bradford & Bingley case, the information is passed to the compensation scheme, which then fires up the printing press and sends out all the cheques to people as quickly as possible. Was it not much more appropriate from the customer side that they had a seamless, continuous service?
We should like the Committee to consider an amendment to the Bill that would provide continuity of service, because that is infinitely more likely both to give confidence and give people the experience that they deserve.
Q 119Mr. Bone: That is a very interesting proposal. May I move away from that to the funding of the compensation scheme? In the US and other countries, it is pre-funded, but we really have a pay-as-you-go model. My constituents would be amazed that the banks are opposed to a pre-funded scheme. Some of your member banksnot allhave brought the economy to the verge of disaster. We are going from boom to bust because of irresponsible bankers and, by the way, the bankers do not want to fund the compensation scheme in advance. Is that not a very strange attitude for the banks to take?
Angela Knight: I can put it another way: if you want a system that is pre-funded, it means that you are taking finance out of the banking arrangements at a time when it is not necessarily needed and that will flow through inevitably into costs. Is it not more appropriate to have arrangements that ensure that, if that finance is available, it is made available, instead of having a sum of money sitting in mid-air? I agree that there is a debate to be had. Even the Bill says that it will take a power and think about it. If I were a customer, what I want is my money quickly. If the arrangement behind that ensures that I get my money quickly, that is the important thing.
Q 120Mr. Bone: With due respect, you are missing the point. We all agree that the money has to come quickly. Let us consider the travel industry, and the
Angela Knight: I do not think that it does. All the interest is paid for by the banks.
Angela Knight: But we pay for it. So it does not fall on the taxpayer.
Angela Knight: There are points on both sides. Two years ago, perhaps slightly less, there was a consultation by the FSA at which some of those points were raised. Consultants were asked to look at some of the issues, such as the size of the pots and how they were funded. The conclusion from that consultation was that availability was the important issue. It asked whether arrangements in the UK were such that first, cash was available, should it be required, and secondly, that the cost did not fall on the taxpayer. Those two conditions have been met.
You might say that you want X billion pounds out of the banking industry today. If you do, that is X billion pounds not available for provision for the people of this country. There is a balance. You will know our view because we stated it in our earlier representations. However, in our recent commentary, you will see that equally, we have accepted that a power can be enacted, should there be the will to do so.
It might be a good idea to have a fixed review periodthat is a general comment about a number of issues in the Bill, not only in this area. Such a provision existed in the FSMAthe Financial Services and Markets Act 2000, where it was written into the legislation that a review was to take place in a couple of years. There are many issues herea lot of maybe this and maybe thats and how do interacts take place? Perhaps you would like to take that thought away.
Q 122Mr. Bone: Just to nail the point. Last year, one of the banks that has failed made something like £9 billion profit. None of that moneynone of those billions and billions of pounds made by the bankwas put away in a protection scheme. Do the banks think that is right?
Angela Knight: Well, they always knew that they stood liable for it. They stood liable in good years, bad years, profitable years, non-profitable years. They always knew that they were liable regardless.
Adrian Coles: I would add from the building society point of view that the profits that building societies make are added to their capital. That capital stands there to protect depositors. There is a choice of whether
Q 123Mr. Mark Todd (South Derbyshire) (Lab): The investment banks have not featured too strongly in this debate. To what extent are they covered by the Bill?
Jonathan Taylor: They are covered by the Bill in that netting, which we were talking about earlier on, is extremely important to the activities of investment banks. Investment banking is an activity rather than an entity, particularly since a large part is carried out within universal banks.
Q 124Mr. Todd: Indeed. There are specialist investment banks that presumably are not covered by the proposed legislation. They are not licensed as deposit takers.
Jonathan Taylor: That is right. If they are not deposit takers, they are not affected by those parts of the Bill. However, the netting provisions would certainly have a bearing on them.
Q 125Mr. Todd: Is there any issue of inequity between a specialist investment bank and an investment bank operation within a deposit-taking bank, in terms of the marketplace for their products? Will a burden be placed on those that have combined functions, as opposed to those that lie outside the legislation?
Jonathan Taylor: I do not think so, no.
Q 126Mr. Todd: Okay, good. You alluded to the netting issue. Do investment banks have other concerns about the application of the Bill?
Jonathan Taylor: No, as an organisation representing investment banking activities, our principal concern about the Bill is the netting arrangement.
Angela Knight: I think there is something that is not yet proven, which is how level the playing field might be, given that stand-alone investment banks will not be subject to the content of the Bill.
Mr. Todd: That was what I was trying to explore, but your colleague was saying, No, thats all right by us.
Angela Knight: Of course it is, and it is a perfectly fair comment for him to make. It is also perfectly fair for me to say that we are not actually quite that sure. Some of the difficulties will end up being not so much with the content of the Bill, but how it is applied by the regulators. Certainly, it is the regulation side where most attention needs to be paid.
Q 127Sir Peter Viggers: How do the provisions of the Banking Bill in the United Kingdom compare with the manner in which these issues are being handled in the United States and in the European Community?
Angela Knight: I will have a go, but I cannot remotely pretend to be word perfect on this.
Sir Peter Viggers: I can narrow the question if you wish: are there points of comparison that cause you concern?
Angela Knight: There seems to us to be one main difference, which is that within the Bill it is envisaged that the special resolution regime could be triggered prior to a bank being in default, whereas in other jurisdictions the default process takes place first. The reason the Bill does that is to promote financial stability. It states that we will not get to the point at which there is a default; instead, if we think that will happen the tripartite regulatory system has the right to go in early and take action. In the other jurisdictions of which I have knowledge, that happens after the bank has breached the appropriate default triggers, whatever they may be. That is a difference. It does not make us wrong to do it and them right, or vice versa, but it is one of the reasons why the whole netting thing has come so high up the agenda.
It is noticeable that by putting this legislation through we are in effect codifying practices that not only did we understand could take place prior to Northern Rock, but which the authorities have used since then. We are putting them into place and codifying them. It seems to us that the Bill is doing so far more extensively than the existing procedures in other countries, although I suspect that after the actions that other countries have had to take, which are similar to our own, they too will have to look at and revise their legislation.
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