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Session 2007 - 08
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Banking Bill

Banking Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, Mr. Jim Hood, Mr. Eric Illsley
Barlow, Ms Celia (Hove) (Lab)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Eagle, Angela (Exchequer Secretary to the Treasury)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Keeble, Ms Sally (Northampton, North) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Pearson, Ian (Economic Secretary to the Treasury)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Smith, Geraldine (Morecambe and Lunesdale) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Viggers, Sir Peter (Gosport) (Con)
Wilson, Phil (Sedgefield) (Lab)
Alan Sandall, Mick Hillyard, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 23 October 2008


[Mr. Roger Gale in the Chair]

Banking Bill

9 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 155

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.
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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Prepared 24 October 2008