Banking Bill

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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.
Mr. Flello rose—
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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