 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Banking Bill |
Banking Bill |
The Committee consisted of the following Members:Alan
Sandall, Mick Hillyard, Committee
Clerks † attended the
Committee Public Bill CommitteeThursday 23 October 2008(Morning)[Mr. Roger Gale in the Chair]Banking Bill9
am
The
Chairman: Good morning, ladies and gentleman. While
I am in the Chair, hon. Members may remove their jackets for their
comfort if they wish to do so. I cannot speak for Mr. Hood,
but I am sure that he spoke for himself at the opening
sitting.
Clause 155Overview Question
proposed, That the clause stand part of the
Bill.
The
Chairman: With this it will be convenient to discuss the
following: New clause 1—Objectives of the compensation scheme
for
depositors— ‘(1)
This section sets out the objectives for the compensation scheme for
depositors. (2) Objective 1 is
to maintain customers’ confidence in the UK banking system
regardless of whether the bank is incorporated in the UK or another EEA
country. (3) Objective 2 is to
be able to make payments to depositors within seven days and to have
eligibility criteria, qualification processes and information
requirements which facilitate
that. (4) Objective 3 is to
ensure that there are compensation arrangements for each bank
brand. (5) Objective 4 is to
require that the scheme pays customers their gross balance and that any
amounts due from customers are collected in the usual
way.’. New
clause 2—Compensation payable to
depositors— ‘(1)
Each depositor will be entitled to receive from the manager of the
scheme referred to in section [Objectives of the compensation scheme
for depositors] a sum which is the lower
of— (a) the deposit
protection amount; and (b) the
gross balance held by the
person. (2) The “deposit
protection amount” is
£50,000. (3) The
Treasury may by order amend the figure in subsection
(2). (4) An order under this
section may not be made unless a draft statutory instrument containing
such an order has been laid before, and approved by a resolution of,
each House of
Parliament.’. Mr.
Mark Hoban (Fareham) (Con): It is a pleasure to serve
under your chairmanship this morning, Mr Gale. The purpose of new
clauses 1 and 2 is to facilitate a debate in Committee about the wider
aspects of the Financial Services Compensation Scheme. The Financial
Services and Markets Act 2000 established the compensation scheme and
set out a framework for it. Much of its detailed regulation will be
formulated in
consultation with the industry by the Financial Services Authority.
There are important public policy issues that the Committee should have
the opportunity to discuss this morning because such matters have
received considerable attention in the media during the past 13 months,
from the point at which depositors queued around the block to take
their money from Northern Rock through to the rescue of the Icelandic
banks earlier this
month. It
is important to start consideration of part 4 of the Bill by having a
broader debate about the compensation scheme and what objectives we
want it to deliver when the FSA produces its final rules. New clause 1
sets out four objectives, the first of which would
“maintain
customers’ confidence in the UK banking system regardless of
whether the bank is incorporated in the UK or another EEA
country”, including
members of the European Union and countries such as Iceland. Objective
2 would
“make payments
to depositors within seven days and to have eligibility criteria,
qualification processes and information requirements which facilitate
that.” Objective
3 would
ensure “that
there are compensation arrangements for each bank
brand”, and
objective 4
would “require
that the scheme pays customers their gross balance and that any amounts
due from customers are collected in the usual
way.” I
shall talk about each objective in turn before explaining new clause
2. One
lesson that we can learn from recent events is the need for consumers
to feel confident about their money. I mean not only the solvency and
security of the bank that they are with, but what happens in the event
of the bank’s failure, how they can access their money and how
confident they are about how quickly they can get their hands on it. It
means that the compensation scheme must be very clear and set out the
precise terms for consumers. We want consumers to understand the limits
of the scheme so that they can determine in their own minds how they
allocate their funds between banks and what precautions are necessary
so that they can take responsibility for their financial affairs. That
is why objective 1 is to maintain consumers’ confidence in the
banking
system. Mr.
Mark Todd (South Derbyshire) (Lab): One measure that might
improve consumer confidence is a clear definition to consumers of
exactly what coverage the FSCS gave to the deposits that they made.
Currently, many consumers are left in the dark about how they are
protected or to what extent they are protected. Does the hon. Gentleman
agree that there should be an obligation on the provider of a product
to define how the Financial Services Compensation Scheme relates to
that product when the deposit is
made?
Mr.
Hoban: The hon. Gentleman makes an important point.
Consumers need to understand that. There is a shared responsibility on
this matter. The FSA needs to ensure that its website gives information
to customers. Banks also have an obligation to their customers to make
the matter clear. I will come on to some of the challenges related to
that when I talk about objective 3 on the bank versus brand debate.
That is the most challenging area.
Interestingly,
the US Federal Deposit Insurance Corporation has FDIC logos and
information on its website for banks to purchase so that it is clear
what people are insured for. Its website helps consumers to understand
what is there. There is a shared responsibility and I think that there
is an obligation on banks. However, for that information to be
communicated clearly requires additional work on the scheme rules. I
will come on to issues that individual customers might face under the
current
rules. There
was some lack of clarity this year from the Treasury on what would
happen if a bank in the EEA collapsed. During the Treasury Committee
evidence session on 22 July 2008 the then Economic Secretary, the hon.
Member for Burnley (Kitty Ussher), was asked what would happen if an
EEA bank faced problems. This is one of those curious areas where some
protection comes from the home state of the bank and there is a top-up
from the FSCS. She
said: “I
do not want to be pressed too far on this so as not to unduly alarm
anyone”. When
pressed further, she
said: “I
simply do not know how it will work in
practice”. That
was not a very helpful response from the then Minister. We now know how
it works in practice. The collapse of Icesave and Kaupthing
demonstrated what happens. At the time, those comments did not give
much confidence to
consumers. That
point demonstrates how important it is that there is clarity for people
about the arrangements that apply to their bank and on how those will
work in practice. That is particularly important given that our open
economy enables banks from outside the UK to establish branches and be
incorporated
here. The
second objective of any compensation scheme is the speed of payout. We
can ensure up to any limit through a deposit protection scheme, but if
a customer cannot get access to their money for three or four months,
the level of protection will not give them much
confidence. Stewart
Hosie (Dundee, East) (SNP): On the speed of the payment of
compensation, the Federation of Small Businesses has made me aware of a
number of small businesses, sole traders and others that have put into
Icelandic schemes money that was locked away to pay the VAT or the tax
bill at the end of the year. Although it is important to put something
on the speed of payment in the Bill, would it not also be useful if the
Minister made it clear in this debate that Her Majesty’s Revenue
and Customs will not add penalties for non-payment of tax if someone
can demonstrate that the money is locked up and they cannot access it?
That makes the speed of payment important in the
future.
Mr.
Hoban: Indeed. The hon. Gentleman makes a valid point. In
yesterday’s debate in Westminster Hall on banks and small
businesses, a question was posed to the Exchequer Secretary on whether
HMRC guidance on payments could be placed in the Library so that people
can see what the rules are. This is an important point. Many small
businesses have cash in banks and are not reliant on banking services,
but need access to it to enable their businesses to thrive.
As I was
saying, the speed of payouts is an important issue. The target that is
being consulted on is to provide the depositor access to at least a
proportion of their funds within seven days. That is an important
target.
The original
consultation on the FSCS
said: “The
FSCS normally processes deposit claims in relation to relatively small
deposit-taking firms within one month...more time would be needed in a
complex failure involving a high volume of claims and depositors could
be left without access to their funds for several
months.” Clearly,
that is not in the interests of the depositors. It is, therefore,
important to understand what steps need to be taken to speed up the
payment of claims.
In our
evidence session on Tuesday, the chief executive of the FSCS, Loretta
Minghella, pointed out that in the case of Bradford & Bingley the
FSCS had paid £14 million overnight, so that 2.5
million people who bank with Bradford & Bingley went to bed on 28
September and woke up on 29 September banking with Abbey. In that
instance, there was a seamless process as accounts were transferred
from one provider to another. That was in the context of a partial
transfer—something that is set out in the Bill—but a very
different situation could arise where a bank becomes insolvent and
there may not be the same ease or speed of transfer from one bank to
another, so we need to ensure that some processes are in
place.
There are
four conditions in the Bill that help to speed up payment, including
early access to information about default firms before they fail. In
the evidence session on Tuesday it was said that in the US the FDIC
receives access to information about a bank three months before it is
put into default.
We had a
brief discussion on Tuesday about the involvement of the FSCS when a
bank is in the amber stage and is subject to heightened supervision. I
think that Dr. Huertas from the Financial Services Authority indicated
that the FSCS would be involved at that stage. However, it would be
helpful to have some more clarity, perhaps through the consultation or
even today, about how involved the FSCS could be, because if it has
access to more information it would clearly be in a better position to
process claims. In the event that a bank defaults, it would be able to
understand how the bank’s systems work and it would understand
the volume of records. In the States, the FDIC has the time to go
through dummy cheque runs and things like that, so that it is in a
position, when a bank collapses, to ensure that there is prompt
payment. Clearly, therefore, early access to information is
important. The
FSCS would like assistance from a liquidator in the event of a failure
to prioritise comparative deposits. It also wants to see a streamlined
process, because at the moment if a deposit-taking institution fails
depositors have to make a claim. Clearly, making a claim delays the
process of passing money across to depositors, so if we can move to an
automated process it would be very helpful in meeting the seven-day
deadline. That is an important step that the Bill
facilitates. The
fourth condition in the Bill is the immediate access to liquidity to
pay people promptly. We will return to that when we discuss a later
clause.
The FSCS has
indicated that four other things need to happen, but they will be dealt
with under the consultation process that the FSA will embark on. The
first of them
is simplifying the eligibility criteria, which is a challenge, because
the simpler the eligibility criteria the greater the potential cost to
levy payers, because we are talking about broadening the number of
people who would be covered by the scheme. However, let me indicate two
problems with the eligibility criteria at the
moment. I
bank with Barclays, as do my parents. My sister works for Barclays. If
it happened that my sister was a director or a senior manager at
Barclays, my parents and I would be ineligible for deposits to be paid
out under the FSCS. Not only does that put me in a difficult position
but it would also mean that I would not have access to
money.
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| ©Parliamentary copyright 2008 | Prepared 24 October 2008 |