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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