Banking Bill

[back to previous text]

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. Todd: Not quite yet.
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 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.
Previous Contents Continue
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2008
Prepared 24 October 2008