Mr.
Bone: I have one question for the Minister, but, first,
will he confirm that investors in the Channel Islands and the Isle of
Man who have money in an Icelandic bank have no compensation rights? I
believe that to be the case, but it has not been widely published, and
the issue causes significant concern to a great number of
people.
We are
talking about a scheme that will compensate people to a level of
£50,000, but are we talking “Alice in Wonderland”?
Will any Government, especially this one, ever allow anyone to lose any
money that they have put into a British bank? Pick any bank: suppose
that the scheme were in place and Barclays had failed—there is
no reason to think that it would fail, but let us suppose that it had.
Can the Government guarantee that they would stick to the scheme and
protect all depositors,
and that they would not override it? Is it not the case that in the real
world, because of the political implications, the Government could not
let a bank fail and not cover the depositors? We are spending a lot of
time discussing the scheme, and I want to know that the Government will
actually keep to it if it is put in
place. The
Economic Secretary to the Treasury (Ian Pearson): Clause
155 introduces part 4 of the Bill, the purpose of which is to make
several amendments to part 15 of the Financial Services and Markets Act
2000, which sets out the legal framework for the Financial Services
Compensation Scheme. The changes are largely detailed and technical,
but there is one potentially major innovation—the provisions
allowing for the introduction of pre-funding, to which we shall return
shortly.
Given recent
events and the great public concern about depositor protection, it is
right that we should have a wide-ranging debate, as we are having
today. New clauses 1 and 2 give us the opportunity to do that, and I am
sure that was the intention of the hon. Member for Fareham in tabling
them. Their overall effect would be to add to the Bill objectives or
requirements for the scheme. However, the matters that they deal with
can already be dealt with under FSA rules. I remind the Committee that
the FSCS is responsible for compensating consumers with claims that any
kind of financial services firm is unable to meet—that applies
not only to deposit takers. To provide new, statutorily defined
objectives for depositor compensation alone could divert attention from
other important areas that the FSCS covers.
As the hon.
Member for Fareham has clearly outlined, new clause 1 would set four
objectives, in relation to protecting deposits, that the FSCS would
have to meet. They range from the very general objective 1 to what are
in effect detailed requirements for the scheme in objectives 3 and 4,
although I appreciate that the purpose might be to stimulate
debate. New
clause 2 covers detailed requirements for the scheme in a particular
area. It proposes putting the headline limit for depositor compensation
in the Bill and that any change to the limit would have to be made
using the affirmative resolution procedure. That proposal is not
desirable. The FSA rule-making procedures are better suited to making
such changes. As was demonstrated last September and more recently, FSA
rule-making procedures need not be a barrier to making rapid changes to
FSCS rules. The affirmative resolution clearly would be. I ask the
Committee to reject the new
clauses. I
will reply to some of the general points made in the debate. The hon.
Member for Fareham quoted the previous Economic Secretary, now the
Under-Secretary of State for Work and Pensions, my hon. Friend the
Member for Burnley. She was correct in her description of the current
legal situation. It is the case that the Government will work with the
Commission and other European economic area states to improve
protection for depositors in cross-border situations. We welcome the
Commission’s proposal to amend the deposit guarantee schemes
directive, which will now be considered by the Council. We have also
recommended putting in place, as a regulatory measure, agreements
between the EEA states to require home state deposit guarantee schemes
to act as a single point of contact for depositors in those
states. We believe that will bring simplicity to the system.
I want to be
clear about the general issue of compensation when it comes to the
Icelandic banks. The Government, not the FSCS, will pay for extra cover
over the FSCS limit if there is a shortfall. However, payment will be
through the FSCS for the sake of simplicity as the aim is to get money
quickly to customers. The Government guarantee is quite separate from
the FSCS and is not a permanent
measure.
Mr.
Hoban: The FSCS will pay up to £50,000, but my
understanding is that it will recover from the Icelandic authorities
the first £16,000. Will the Minister clarify what will happen if
it is unable to do so? Will levy payers meet that cost or will it be
the
Treasury?
Ian
Pearson: I shall come to that point in a moment. First, I
shall talk about the £50,000 limit that hon. Members have
mentioned and the concept of moral hazard, which is clearly important.
The situation with the Icelandic banks was exceptional. It was right
for the Government to say that all retail deposits would be guaranteed.
We did that to be quite clear. We wanted to ensure that there was
confidence in the banking system. We do not see it as a permanent
measure for the future. The Government will not for all time guarantee
all retail deposits. In the circumstances, we think that was the right
course of
action. I
also want to clarify the position with respect to deposits in the Isle
of Man. The hon. Member for Wellingborough is right in his belief that
they are not covered by the FSCS. As he is aware, offshore
jurisdictions aggressively market themselves as being outside the UK
regulation and tax regime. They clearly are outside UK regulation and
thus outside UK
compensation.
Mr.
Bone: If we were talking about normal times as they have
been for the past 100 years and a bank had failed, the Minister would
have been happy for the £50,000 limit to come in because it
would not have affected the rest of the system. However, the
circumstances are exceptional, which is why the Icelandic banks were
protected. If that is the case for the Icelandic banks, why does it not
apply to investors through the Channel Islands and the Isle of Man, who
could be British
citizens?
Ian
Pearson: The investors might be British citizens, but they
chose to make investments outside the United Kingdom regulation and tax
regime. That was a matter for them. I want to be clear that the
Government have taken strong, decisive action with the Icelandic
authorities. We have been in regular discussions with them. There have
been conversations at Prime Minister and Chancellor level, and we will
do everything that we can to support non-retail depositors as well as
retail depositors in respect of creditors in administrations in
Iceland. Obviously, the administrations taking place in the United
Kingdom, where subsidiaries of Icelandic banks have been under the
regulation of the Financial Services Authority, are in a different
position, and we hope to see speedy progress with the administration
process.
Mr.
Breed: We have not reached such matters yet, but while the
Minister is on the Icelandic situation, will he say whether he expects
Icelandic banks to be part of the
pre-funded scheme in future circumstances? In other words, in future,
will we be looking at Icelandic banks, if they wanted to receive
deposits from the UK, being part of the pre-funded scheme by obtaining
money from them in
advance?
Ian
Pearson: When we reach the debate on pre-funding, I shall
reiterate our commitments that we do not regard pre-funding as
something that would happen immediately. We would discuss it with the
Bank of England and the Financial Services Authority at the appropriate
time. Foreign banks with subsidiaries in the United Kingdom that are
regulated by the Financial Services Authority would be part of the
Financial Services Compensation Scheme, but foreign banks with
branches—the case with two of the Icelandic banks—are
regulated by the Icelandic authorities and are not part of the
FSCS.
Mr.
Todd: Does that not reinforce my earlier point that
customers do not examine carefully the regulatory environment in which
they are committing themselves with their deposit? I do, but I am not
typical. If a bank sets up a branch in the UK and is regulated outside
our shores, there should be a clear obligation to UK depositors to
inform them of the limits of their protection and under what governance
that protection will operate.
Ian
Pearson: My hon. Friend makes a good point. A branch of a
bank that is outside the UK should make clear the basis on which it is
regulated, and the guarantees that are available. As for whether the
Financial Services Compensation Scheme would meet a shortfall from the
Icelandic scheme, that is not the case. A shortfall would not fall on
the FSCS. It would be paid for by the Treasury, but we do not know
whether there will be a shortfall because it is still part of the
administration
process. I
repeat that local authorities are in a different class to retail
depositors when it comes to compensation. I discussed the situation
with the Local Government Association, and we have been monitoring
closely the potential impact on local councils. The Department for
Communities and Local Government is actively supporting and working
with local authorities that may have some short-term difficulties. But
there are few of those. To repeat the commitment, the Government will
continue to put pressure on the Icelandic authorities to make sure that
local authorities and other wholesale creditors are treated fairly
during the administrations that are taking place in
Iceland. Ms
Sally Keeble (Northampton, North) (Lab): I understand that
all these investments were given good ratings by the credit ratings
agencies. I know that my hon. Friend’s colleagues were looking
at increasing regulation on them. How is that
going? 10.15
am
Ian
Pearson: I am not sure that I would use the same
terminology to describe the ratings given to Icelandic banks. I do not
believe there is any evidence of negligence by local authorities in the
way they have used their public funds. The vast majority of them have
been quite responsible in what they have had to do. However, my hon.
Friend raises a point about the regulation of credit agencies and we
shall want to consider that in future.
Mr.
Breed: The Minister is right to say that there is a world
of difference between ordinary depositors and local authorities,
bearing in mind the fact that they employ well-paid treasurers with
significant qualifications, experience and everything else. It is just
another reflection of the fact that everyone is passing the
buck—thinking that as long as a bank has a triple A with a
credit ratings agency, they do not have to do their job. Quite frankly,
one does not have to employ a very senior treasurer to look at a list
to see whether an institution has three As. I could probably do that
myself in my spare time. We would not expect local authority treasurers
to base the whole of their judgment upon something like that. I accept
that they have acted responsibly in everything else, but we shall have
to go back to that point.
This is
rather “group think”, unfortunately—because
everyone else is doing it, it must be perfectly okay. It is like
lending to Mr. Maxwell a few years ago. Reference was made
on a number of occasions by the LGA and some individual authorities to
the fact that they were “following the Government’s
advice”. I can find no advice or website where the Government
said that it was perfectly okay to invest local authority money in that
way. Will the Minister confirm whether there was any such
advice?
Ian
Pearson: We are straying a long way away from new clauses
1 and 2 and clause 155. The Government certainly were not advising
local authorities to put their money in Icelandic banks. The hon.
Gentleman will have seen the guidance that is issued by the Department
for Communities and Local Government.
Mr.
Hoban: Will the Minister give way on that
point?
Ian
Pearson: It is not part of the
Bill.
The
Chairman: Order. If it was out of order, I would have
pointed that out. It refers to compensation and it is in
order.
Ian
Pearson: I stand corrected, so I give
way.
Mr.
Hoban: Just to be helpful to the Minister for a change, I
have a copy of the guidance here. It is in a very helpful Library note,
which refers to the DCLG website, and
says: “The
guidance recommends that priority should be given to security and
liquidity. However, that does not mean that authorities should ignore
yield. It will be appropriate to seek the highest rate of return
consistent with the proper levels of security and
liquidity.”
Mr.
Breed: That is what we pay treasurers
for.
Mr.
Hoban: I thought it would help the Committee to understand
what guidance has been given. The other point that may help the
Minister is that the Isle of Man scheme protects depositors up to
£50,000. I am not sure that the same level of protection applies
to Channel Island
authorities.
Ian
Pearson: I thank the hon. Gentleman for reading out the
guidelines. There are separate jurisdictions for regulation purposes
and they have separate compensation
schemes. When people are making investments they need to be aware of
that and it should be made clear to them, as part of the normal
process.
Mr.
Flello: Sadly, most of my constituents will not have more
than £50,000 in savings, but there will undoubtedly be some who
do. At some point, charities and organisations will have such amounts
in their accounts, as will businesses. Given that most of my
constituents will not have access to treasurers and will rely on credit
agencies, when the trauma in the markets and financial world has ended
and things have settled down, what sort of support and assistance can
be offered to constituents who have more than £50,000? Although
I support the Government in their proposals to do everything that they
can now, I am concerned about the future.
Ian
Pearson: I reassure my hon. Friend that few of his
constituents will be in that situation. According to our figures, 98
per cent. of accounts in banks and 97 per cent. in building societies
have deposits of less than £50,000. If any individuals in his
constituency have amounts that are significantly in excess of that, I
am sure that they will be talking to individual financial advisers who
will direct them on such matters.
Ian
Pearson: I want to make progress as we are due to finish
at 10.25 am and I am answering questions at 10.30 am.
The
authorities remain committed to a seven-day target for providing
depositors with access to at least part of their funds, with the
remaining balance following within a few days. The importance of
ensuring that fast payout has been raised in Committee. The Government
accept that and we are doing all that we can to ensure that it happens.
It is a challenging target, especially if the FSCS has to pay
depositors individually or if accounts must be opened individually with
new banks.
The hon.
Member for Fareham, and others, raised a number of important issues in
respect of close family members, distinguishing small businesses from
larger ones, brands and netting off. The FSA has made it clear that it
wants to tackle those points as part of the consultation process that
is taking place at the moment. We do not believe that we need to put
such matters in the Bill, as it is more appropriate for the FSA to deal
with them through its rules. Any changes can be introduced as
amendments to the FSA’s rules.
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