Mr.
Todd: It might persuade you to bank
elsewhere. 9.15
am
Mr.
Hoban: The hon. Gentleman says that I should bank
elsewhere—a comment that goes back to his earlier intervention
about clarity of information. Until I had a conversation with the FSCS,
I did not know that I would be ineligible for the scheme, so we need to
think carefully about that point. I have a personal interest, but in
terms of the payment process, the FSCS needs to go through the list of
accounts and say, in my case, for example, “Ah, Mark Hoban.
He’s related to X and cannot get any money.” That process
of weeding out close family members of directors and managers will
delay the compensation process. Not only would it stop me receiving my
money at all, if I had up to £50,000 in Barclays bank, but it
would delay payment to other customers of that bank as well. It is
important to get the simplification of the eligibility criteria right.
The less restrictive the criteria, the easier it will be to make
payments to affected
depositors. On
another area of eligibility, a number of businesses fall within the
FSCS. We talk about the matter in the context of retail depositors, but
if a business meets two of the following criteria—fewer than 50
employees, a turnover of less than £6.5 million or a balance
sheet worth less than £3.6 million—it is a small business
and qualifies to receive compensation under the FSCS. In sorting out
the eligibility criteria and who needs to be paid, the FSCS will need
to write to each business account and work out whether they meet those
criteria. Businesses will have to submit their claim forms, establish
whether they meet the criteria and await confirmation from the FSCS
about whether they are within or without the scope of the
scheme. If
the FSCS was given time in advance to access such information, it could
do some preparatory work to find out which business bank accounts were
eligible and which were not, but that is a time-consuming process. The
FSA, in its consultation, needs to think about the eligibility criteria
and the trade-off between ensuring prompt payment and the possible
increase in the cost of the scheme to levy payers. There is no easy
answer. However, some easy things can be done, and I plead my own case
in that regard. The issue relating to relatives of senior directors and
managers should be dealt with, but the FSA and the stakeholders will
also need to think about more complex issues.
The second
important issue with regard to simplifying the payments and giving
customers confidence is the single customer view: knowing quickly how
much a customer is exposed to a particular bank and what deposits they
have. That aspect causes some concern in the banking community. I
understand that Abbey, just before its acquisition of Bradford &
Bingley, and Alliance & Leicester, had a single customer view, but
in the evidence given to the Treasury Committee that appeared to be
unique among banks. At present, most systems do not necessarily
facilitate banks looking across their entire customer base and
identifying all the accounts that belong to me or to somebody else. The
Governor of the Bank of England suggested in his evidence to the
Treasury Committee that it was an important thing to do, but that a
period of grace should be given to enable banks to get it in
order. Mr.
Peter Bone (Wellingborough) (Con): Is there not another
slight complication? My hon. Friend gave the example of Santander.
There are four banking licences in that group, so it is not a question
of just one brand in that case; to work out the situation there the
process would have to be divided between the banking
licences.
Mr.
Hoban: My hon. Friend makes an important point, on which I
shall focus when I mention objective 3, because it needs to be resolved
if we are to get the process right and give consumers confidence. The
point also relates to the earlier intervention by the hon. Member for
South Derbyshire, who talked about clarity, because it affects the
clarity of a customer’s understanding of their level of
protection under the scheme.
The third
change that the FSA has consulted on is the need to net off
people’s balances with a bank. A customer may have
£30,000 in their current account, but a mortgage of
£150,000 with the bank. Under current rules, the bank account
balance would be offset against the mortgage, so the customer would end
up owing less on their mortgage, but they might have no ready cash with
which to go about their daily transactions. That is a challenge for
people. There was consensus in the evidence session on Tuesday that
people should be paid out of their gross balances, and the only
qualification to that was the offset of their overdrafts against their
balance.
Mr.
Todd: I was going to say that the qualification, which
would certainly apply with the more complex banks, might be that it is
perfectly possible that somebody would hold an overdraft under one
brand, but a substantial deposit under another. I would have thought
that there was a strong argument for allowing a net off on a cash
deposit basis.
Mr.
Hoban: The hon. Gentleman makes an important point. There
is an issue about overdrafts offset against bank accounts, but it also
goes back to the brand versus bank problem. If a customer has an
overdraft with one brand and cash with another brand, how do they mesh
together? It is not a straightforward area and it requires careful
thought and consultation. I have some sympathy with the view that if
someone has an overdraft with one brand and a balance with another,
there should be a net off, but we need to think through carefully its
impact on the distinction between brands and banks. Whether the
payment is gross or net is an important issue and there was consensus on
Tuesday that, subject to the offsetting of overdrafts, gross balance
would be the easiest way. That would enable customers to repay their
long-term liability, such as a mortgage, in their usual way, rather
than having their current account balances offset against their
mortgage.
The
fourth issue is that there should be streamlined arrangements for
people to open new accounts with other banks when they have received
their compensation. The transfer of accounts between Bradford &
Bingley and Abbey was a seamless process because it was a partial
transfer. It would be different if a bank became insolvent. What would
happen when a customer received their cheque, if it were done in the
traditional, old-fashioned way? Would they need to go to their local
bank branch and go through the whole customer procedure—the
money laundering steps that have to be gone through when opening a new
bank account? Would it not be more appropriate to grandfather a set of
bank accounts from a failed bank into the new institution, to enable
the payment of the cheque or the transfer of funds between accounts to
work seamlessly? The more steps that are put in the way of enabling
that payment to be made quickly and efficiently, the less confidence
people will have in the FSCS and in the strength and stability of the
banking sector. Those are all important issues that need to be worked
through in the consultation.
The third
objective is the issue of brands versus banks that we touched on in the
evidence session on Tuesday. There is some confusion among customers
about quite how they are covered. In the evidence to the Treasury
Committee, the general counsel of the FSCS pointed out that the
compensation limit is set per banking licence, of which a bank may have
more than one. It is certainly not set per brand. The general counsel
said
that “if
a bank does trade with a number of divisions or brands under a single
registration only one limit would apply to depositors even if they had
accounts across the
brands”. Let
me give the Committee some examples, as much for education and future
guidance as to point out the problems. NatWest is a subsidiary of RBS,
but has its own licence. Consequently anyone with an account with
NatWest and RBS has two lots of £50,000. However, within RBS
there are two other brands, Virgin Money and Direct Line, so anyone
with £50,000 with RBS, Virgin Money and Direct Line—a
total of £150,000—would be covered for only
£50,000. Santander has within its group four brands: Asda,
Cahoot, Abbey and Bradford & Bingley. Again, the £50,000
limit applies. Coutts, which was the Queen’s bank and is now the
people’s bank as it is owned by RBS, has its own licence
too.
If I went
into a high street bank tomorrow, how would I know what level of cover
I had between the different brands it operates? It becomes confusing
for customers. It affects not just the banks, but building societies in
a slightly curious way. There is a £50,000 limit per building
society, but the Derbyshire and Cheshire building societies, which are
now owned by
Nationwide—
Mr.
Hoban: When they are taken over they will have separate
brands for a while, but they will have only a £50,000 limit.
There is potential for confusion here. Teresa Perchard from Citizens
Advice said:
“If
there is a limit, and it applies to a business, not an individual brand
with which a customer thinks they are trading, the brands that are
trading with their customers need to tell them when they have exceeded
the protected limit, I am not aware of financial institutions doing
that as a matter of course...The consumers cannot know what they are
not being told by the supplier”.
——[Official Report, Banking
Public Bill Committee, 21 October 2008; c. 57,
Q166.] That
takes us back to the point made by the hon. Member for South
Derbyshire: there needs to be some clarity for consumers. We need to
think carefully about how we communicate the information to
them.
We may take
the view that the easiest thing to do would be to provide the limit per
brand, but there is an issue about the legal definition of a brand. I
am not sure that I would know where to start. If we went down the route
of compensating by brand, a bank might decide to roll two brands into
each other. How would it tell its customers that, having gone from two
£50,000 limits, they now had only one £50,000
limit? There
will be a marketing advantage to banks in having multiple brands. They
could tell their customers that if they bank with brand A they will get
£50,000 and they will get another £50,000 with brand B,
but in the event of a default of a multi-brand bank there would be an
increased cost to levy payers. To go back to the example of RBS:
trading through three brands there is £150,000 cover, but simply
trading through RBS there would be only £50,000 cover. The other
levy payers would have to pick up quite a significant increase if we
went down the per brand
route. In
all this debate, the broader the scheme rules become, the easier it is
for consumers to understand and to recover their funds, but the scheme
potentially becomes more expensive for the levy payers. An economic
analysis needs to be done as part of the consultation by the FSA to get
the scheme right. I have touched on objective 4, which is the issue
about net and gross in the context of objective 3, so I do not think
that I want to go back through that debate. I want to move on to new
clause
2. 9.30
am
Mr.
Todd: The hon. Gentleman has not yet touched on the
definition of what should be paid in relation to a product’s
conditions. For example, if one invests in a bond with a commitment for
12 months and that period is interrupted by the collapse of the
financial provider, will a penalty be levied for an early withdrawal
and will there be an attempt to compensate the loss resulting from the
early termination of the bond, as is the case with accounts that have
60-day withdrawal limits? How does the product definition interface
with the compensation
scheme?
Mr.
Hoban: The hon. Gentleman raises a point that I had not
investigated so closely, but it would clearly be unfair for a customer
to have to pay a penalty if their money was meant to be locked up for a
year. The second issue is whether they should be compensated for the
loss of interest, and I am not sure that I know the answer to that.
Again, it might seem fair to compensate the consumer for the fallback,
but there will be a cost to levy payers. Perhaps the equitable position
is: no penalty, no additional compensation.
The
complexity of the different financial products on offer needs to be
reflected in how a scheme is drawn up, which will then need to be
communicated to those who
buy the products. That is not a straightforward process, and it is
unfortunate that the trigger for the debate has been a banking crisis.
It would have been better to think about those issues and resolve the
problems at an earlier stage, rather than waiting until we are in the
thick of it. The hon.
Gentleman will recollect that in the Treasury Committee’s
report, “The Run on the Rock”, which was published in
January, both the Governor of the Bank of England and the chairman of
the FSA, Sir Callum McCarthy, commented that they had highlighted in an
exercise on that area the need to think through carefully what would
happen when a bank collapsed, and that was long before the collapse of
Northern Rock. We are paying the price for not acting on that
earlier.
Stewart
Hosie: There is an ancillary point to the one made by the
hon. Member for South Derbyshire. If compensation is paid quickly from
a 60-day account or one that is locked away for a year, that might
change an individual’s tax liability because it was locked away
in a scheme designed at least in part to be tax-beneficial. I take it
that the hon. Gentleman expects to add that complexity to the
considerations as
well.
Mr.
Hoban: We are getting into very complex areas. I think
that I am right in saying that the Government did vary the rules on
cash ISAs so as to encourage those Northern Rock depositors who had
withdrawn their money from cash ISAs to put it back in. They used the
tax benefit to do so, so that might be a precedent. It is very
interesting, but I think that we are getting into quite complex
territory on
that. I
shall move on to new clause 2. I think that we know the limit for the
deposit protection scheme, but we are in a slightly curious situation.
It is slightly odd that the FSA had a consultation on the limit earlier
this month. It was going to consult on £50,000 as a limit, and
within a couple of days of the publication of that consultation the
limit suddenly became £50,000. However, we have moved into a
period of some uncertainty about what the limit actually is. Yes, the
limit set out by the FSA is £50,000, but that limit has been
varied in the case of the Icelandic banks that had financial problems.
Where an account has not been transferred, for example, to ING Direct,
the depositors would be paid out in full through the Financial Services
Compensation Scheme, and the same applies to some of the other
Icelandic banks. We now have a situation where, although the de jure
limit is £50,000, de facto it is unlimited. In his evidence on
Tuesday, the Minister said that the Government
“will do
whatever it takes”——[Official Report,
Banking Public Bill Committee, 21 October 2008; c. 9,
Q16.] A few
weeks ago, when the Irish authorities introduced unlimited guarantees,
the Government were up in arms. I think that either the Chancellor or
the Prime Minister complained to their Irish counterparts that that had
changed the playing field.
Mr.
Todd: The hon. Gentleman is very indulgent in giving way
so often. One of the other difficulties is the ambiguity about the
meaning of the guarantee. Is this guarantee to be applied to the FSCS,
or is it provided by the state and the taxpayer? The source of the
money is
completely different, as are the implications in terms of moral hazard.
One of the difficulties in these bold statements about guaranteeing
payments on all accounts, is how that interfaces with the existing
guarantee scheme. We have not seen absolute clarity here or in other
states in the European economic
area.
Mr.
Hoban: No, and in a sense it is a moving feast. I
understand that the FSCS will cover the first £50,000 and the
Treasury will cover any balance above that. That seems to be the
implication, but it would be helpful if the Minister could clarify it.
What do we tell our constituents? What do banks tell their depositors?
Is there a £50,000 limit, or next time, will the Government do
“whatever it takes” to resolve the situation?
The new
clause sets out a limit and provides a mechanism for changing it.
Doubtless, the Minister will say that that creates a degree of
inflexibility and that we cannot wait for affirmative procedure to go
through—I know the Minister well enough from Committee last week
to know the sorts of arguments that he might deploy. However, my
argument is not about the parliamentary process but the clarity of what
we tell our constituents. We have moved from a situation of great
confusion in October last year, where 100 per cent. of the first
£2,000 and 90 per cent. of the next £33,000 was
protected, to a coverage of 100 per cent. for £35,000 and then
for £50,000. Now we have moved to, “whatever it
takes.” I am intrigued to see how that might be legislated
for.
Customers
need clarity. People are moving money from account to account and they
want to get their financial affairs in order. Mixed messages from the
Government do not help our constituents understand where to put their
money. That concludes my remarks on new clauses 1 and 2.
I apologise
to the Committee for spending what might have seemed a long
time—nearly 40 minutes—on the two new clauses, but the
FSCS is an important part of the arrangements that should be in place
to protect depositors. Because of the way that the FSCS works, and how
its regulations are developed, if I did not use this opportunity to
raise such issues, there would be no opportunity for parliamentary
input into the process. I tabled the two new clauses in the hope that
they would stimulate debate and provide guidance to the FSA and the
financial services sector about the views of parliamentarians on these
matters, and the importance that we place on getting the arrangements
right so that consumers will be protected in the event of a failure.
Proper processes must be in place to ensure that, should such a failure
occur, customers will get access to their money
speedily.
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