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
domain—that is, the British Bankers Association—which 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 situations—by 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
it—not always, of course, but it tends to hypothecate straight
up to a banking
licence. So
it is very difficult to answer your question—how 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.
Q
117Dr.
Pugh: Before Third
Reading? 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 someone’s
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 bank’s 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 Bill—and, indeed, the debate—has
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 banks—not all—have
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
arrangements of the air travel organiser’s licence and ABTA. That
is effectively paying in during the good years for when something goes
wrong. It is rather like an insurance policy. We all want them paid out
quickly, but why should the money fall on the taxpayer to do it
immediately? Angela
Knight: I do not think that it does. All the interest
is paid for by the
banks.
Q
121Mr.
Bone: But it does have to be funded immediately, does it
not? Angela
Knight: But we pay for it. So it does not fall on the
taxpayer.
Mr.
Bone: I just want to stop you. I am not making my point
clear.
Mr.
Bone: Well, she is not answering the question.
The
Chairman: Please answer
it. 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 period—that is a general
comment about a number of issues in the Bill, not only in this area.
Such a provision existed in the FSMA—the 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
here—a 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 money—none of those billions and billions
of pounds made by the bank—was 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
to put it in the compensation scheme to protect depositors, or whether
to keep it in the building society balance sheet. At the margin, if the
money is taken out of the building society and put in the compensation
scheme, depositors in the building society are slightly less safe by
the amount that the building society has given to the compensation
scheme. From our point of view, that is moving it around in two
buckets, rather than adding to overall depositor
safety.
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, that’s 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.
Mr.
Todd: That is what I assumed, I must
admit.
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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