Banking Bill

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The Chairman: The hon. Gentleman will understand that if he wishes to press either new clause to a Division, they must be moved at the end of the consideration of the Bill in the appropriate place.
Mr. Colin Breed (South-East Cornwall) (LD): It is a pleasure to work under your chairmanship, Mr. Gale. The hon. Member for Fareham gave a considerable list of potential difficulties and hurdles. It is interesting to note the genesis of the compensation scheme many years ago. It was set up under entirely different circumstances and was brought in not for banks per se, but principally for what were then called licensed deposit-takers. They did not have the same safeguards, traditions, capitalisation and so on as institutions working under banking licences.
It was deemed a good idea to ensure widespread opportunities and to increase the number of deposit-taking institutions; therefore, the institution of licensed deposit-taker was set up. The category ceased to be some years ago, but the compensation scheme remained, and there have been no significant changes to it.
I do not think that in those days there was any perception or any view whatever that the scheme would apply to what may be called mainstream banks. The idea of a major high street bank falling into a situation where it would come into the scheme was ludicrous—it did not even begin to be mentioned—but of course we now live in very different times.
The compensation scheme was set up when there was a much larger number of smaller banks and licensed institutions, when there were significantly less, if any, of the connected brand problems that have been highlighted this morning, when relationships generally consisted of a customer and a bank—people were not multi-banked and so on—and when there were few, if any, overseas banks operating in this country. We have to ask ourselves whether the scheme should now be radically changed or whether banks should try to squeeze themselves into an extraordinarily difficult straitjacket by completely changing their operations and relationships with their customers. Should we perhaps devise a completely new scheme, which could deal with today’s problems in a more modern way and take account of what global banking might become over the next 10 or 20 years?
We have heard about the potential problems, and I have thought of quite a few more which I do not really want to go through. To be honest, they will make any financial compensation scheme extremely difficult to implement. I am a member of the Treasury Committee, which has been looking at some of the issues. We thought about pre-funded schemes, and a couple of our members went to the US to look at its scheme, but the US has an entirely different kind of banking network anyway. I wonder whether at the end of the day we will be able to devise a new compensation scheme that will deliver all the things that we want it to deliver in today’s different world.
One thing that I and, I am sure, all of us accept is that there is a need for a speedy response to the current problems, but I am not sure that we will be able to provide a lasting solution for the future. There is no doubt that consumer confidence, individually and collectively, has been knocked. Restoration of confidence in one way or another is a key factor, but that is not just about our trying to devise some kind of legislation and compensation scheme. It demands that not just the banks but, indeed, the bankers start reflecting and operating in a way that will restore the confidence of the country and individuals, rather than our providing a legislative framework for oversight and regulation. Oversight and regulation are the end of what should never come to be, and the banks have a real responsibility to deliver and restore confidence in what they do.
Most customers do not think about the risk; indeed, why should they in some respects? Worse than that—as has been said and perhaps as will be highlighted in the future—even if they do, it is almost impossible to obtain the information to find out or judge that risk. We know that even clever accountants, with whom we are blessed in the Committee, find it extraordinarily difficult to look at any bank balance sheet and devise an opportunity to consider how strong or weak a particular institution is.
9.45 am
Mr. Robert Flello (Stoke-on-Trent, South) (Lab): Is not one possibility for advertising the potential risk or otherwise to simply publish the most common credit reference agency reference rating for that particular bank alongside where a bank advertises its rate of interest?
Mr. Breed: That might be a way, but those of us who have looked into credit ratings agencies might begin to question whether their advice was worth much more than a bag of beans anyway. I agree in slightly more simplistic terms that that might be one way to approach the matter, but regretfully, my opinion—and I suspect that of many members of the Treasury Committee—is that the credit ratings agencies are part of the problem and not perhaps part of the solution. However, I thank the hon. Gentleman for his contribution.
Considering the off-balance sheet items, various connections, different brands and relationships between institutions and everything else—let alone a bank’s relationship to the FSA and the compensation scheme—it is difficult for anybody sensibly to find out sufficient information, even if they were technically professionally qualified, to really judge whether there is a risk in depositing money in a particular institution. Customer information, advice and so on is vital, but UK-based only institutions, UK-based but foreign owned institutions, and branches of foreign banks all have different relationships, different capital requirements and a different way of selling their services. If they are in the UK, all of those institutions have to be regulated in some form or other. We have sophisticated, highly developed banking and deposit institutions and a largely unsophisticated system that we are unable to make sophisticated in terms of depositors and customers. Marrying those together will be a difficult task.
On timely payments—again, the Treasury Committee has spent some time on this, particularly with its US experience—people of course want to be able to get their money quickly. Sometimes that is necessary because people have to complete transactions to which they have properly contracted. Some people will no doubt require their money in cash, but whether there will be enough banknotes available is another matter. An electronic transfer, bank draft, or whatever, needs to be reasonably timely. Whether moving from the current situation to seven days is a practical solution is another matter, but the process has to be timely so that transactions can take place.
As the hon. Member for Fareham has said, that matter is complicated by the sheer number of different relationships. There are customers with credit accounts, customers with loan accounts, customers with long-term mortgages, customers with credit cards, customers who have guaranteed businesses in which they are a director, and customers who have guaranteed businesses in which they are not a director. There are a multiplicity of relationships between banks and their customers. The intervention in one relatively small area of that relationship will inevitably cause ripples through the rest. There are potentially enormous difficulties in getting this right. I did not even realise the potential issues in relation to people who happen to be related to senior managers—which I find totally and utterly ridiculous—but they complicate things even more.
In order for there to be timely payments, the aim must be simplicity, not complexity. The simplicity of obtaining them—we may have to impose some caps on how much can be paid within a certain period—has to be much more clearly thought through because it is confusing. Most of the relationships that are being exposed are confusing.
On gross and net payments, most banks have clear terms and conditions for loan facilities. Back in the old days, people received a two or three-line letter saying that they had an overdraft. Now they receive a 28-page facility letter. If the terms and conditions mean anything—they must mean something not just when the bank is operational, but if it fails—people must consider whether a longish-term relationship in their borrowing requirements may be jeopardised. It is all very well saying that banks must make timely payment of all deposits, but does that mean that they may request all the loans to be repaid at the same time? Serious questions are starting to arise.
Banks must be more explicit about set-off—setting off a credit account against a debit account—and whether an account can or cannot be set off. A clear condition or relationship should be able to deal with the problem of gross or net payments.
Mr. Bone: The hon. Gentleman is making an important point about complexity, and whether the scheme can be adjusted or we must start again.
Set-off will cause delay, and we are trying to create an unusual situation: we are giving special protection to a class of creditor. The asset, which may be an overdraft or a loan, could be left as it was because it will be collected in the ordinary way or sold on to another bank. I am not sure that there is much need for set-off.
Mr. Breed: That is probably quite right, but most loan agreements at the moment, and the small print of clause 106(2), probably give banks the right to set off anyway. Most people do not realise that because they do not understand the potential for that, but banks must be more explicit and customers must be more aware of whether set-off applies.
In simple terms, if someone owes money on a car loan, for example, and has a lump of money in a deposit account, would it be sensible to tell the customer that they cannot have the money in the deposit account because they must pay off the loan account? In those rather simplistic terms, I think that would be inappropriate, so it would probably be inappropriate in more complex ones.
Stewart Hosie: I am listening to the debate, and I am convinced that setting off is not a good idea. However, if it happens, can we have an assurance that if someone has an overdraft—perhaps a sole trader running a normal bank account—and it is set off against cash, the overdraft facility would not also be removed, because that might cause all sorts of difficulties with future trading?
Mr. Breed: The hon. Gentleman is entirely correct. We are discussing the disruption of people’s businesses, organisations, charities, clubs and so on when a major institution fails.
That brings me to my last point, to which I do not have an answer. We are deciding when the hurdle or the bar should be raised or lowered to cushion the effect on a depositor or a relationship with a bank. To what extent does the state have an obligation to cushion a set of depositors with certain institutions in respect of tax or overdraft problems, and so on? That has not been clearly thought through. All sorts of statements have been made to try to restore confidence because of systemic risk and so on—largely, I suspect, because it was thought that making the statement would restore confidence, and the obligation to pay out under the statement would not happen. Let us hope that was the case, because some wild statements have been made, such as “We will do whatever is necessary” or “We will pay out whatever is required”, on the basis that that would restore confidence in the banking system and stabilise the situation so that no payout would be required. That is okay in an emergency, but it is not satisfactory to legislate for it formally.
New clause 2 relates specifically to that matter and is a very worthy attempt to say, “Look, let’s try and make an effort”. As someone who has read much about such matters and been involved in banking for more than 30 years, I am deeply sceptical, given the current situation, about whether the current financial compensation scheme can be amended sufficiently to address potential problems. Although the provision before us might be a short-term measure, it does not preclude the FSA from carrying out much more detailed work. We might have to return to the matter in the future.
Sir Peter Viggers (Gosport) (Con): The compensation scheme in the Bill is an unsatisfactory way to deal with a profoundly disturbing situation and is, of course, misnamed: it is not a compensation scheme, because strictly speaking compensation is when a malefactor carries out an act and is forced to compensate and make good through money or some other means the injury that he has done to somebody else. Strictly speaking, therefore, the word “compensation” is wrong in the sense used in the Bill. It is used in the criminal injuries compensation scheme, under which the state compensates someone for an injury suffered, but used here the word is wrong. Again, strictly speaking, the word used should be “relief”, because the state is relieving problems suffered by an individual.
It is disturbing that the issue of fairness does not seem to enter the debate. In fact, new clause 1 makes it absolutely clear that the object
“is to maintain customers’ confidence in the UK banking system”,
but does not say that the object of the exercise is to be fair. And, of course, the system is not at all fair, because the burden of loss will fall extremely unfairly on certain individuals. Those with up to £50,000 in different banks will be fully compensated, but if their bank, or the institution in which they made the investment, is part of a grouping they will be compensated up to a total of £50,000 only, which is unfair. Furthermore, individuals with deposits in Icelandic banks will be fully compensated, but corporate bodies with similar deposits will not. That, too, is extremely unfair.
I could mention many cases that would tug at the heart strings, but I cannot think of a more extreme case—it is more extreme even than those of the local authorities that have lost out, meaning that council tax payers will suffer and pay—than that of Naomi House children’s hospice, in my own area, in south Hampshire. It invested some £5 million in an Icelandic institution and now those who contributed to the hospice, the children supported by it and their parents will suffer. Yesterday I received information from Naomi House about a proposed campaign for compensation and support in view of the loss suffered.
Two days ago I received a letter from a constituent. Both he and his wife served in the armed forces. In anticipation of retirement they sold their house before moving and put their life’s savings, including the value of the house, into Kaupthing Singer & Friedlander’s Isle of Man branch. They will not be compensated, because Isle of Man institutions do not carry compensation. They stand to lose everything that they have worked for. Will the Minister spell out the guiding principle, if there is one, behind the Government’s decision? Are they simply looking for signs of panic, and trying to staunch the flow of fear-fuelled withdrawals by bringing forward a spatchcock scheme to compensate individuals and stem the panic? New clause 1 states that the objective is to “maintain customers’ confidence”. Is there any principle behind the proposals that the Government are putting forward?
10 am
I have another, detailed point to put to the Minister. New clause 2 states:
“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.”
If the Government were minded to go down that route, would they add the words “and until” to such a thought, so that an order could not be made retrospective? Will the Minister spell out, for the benefit of all those who have lost out and who will not be compensated under the scheme currently proposed, the point of principle on which the Government are acting?
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Prepared 24 October 2008