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Session 2007 - 08
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General Committee Debates
Banking Bill

Banking Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, Mr. Jim Hood, Mr. Eric Illsley
Barlow, Ms Celia (Hove) (Lab)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Eagle, Angela (Exchequer Secretary to the Treasury)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Keeble, Ms Sally (Northampton, North) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Pearson, Ian (Economic Secretary to the Treasury)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Smith, Geraldine (Morecambe and Lunesdale) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Viggers, Sir Peter (Gosport) (Con)
Wilson, Phil (Sedgefield) (Lab)
Alan Sandall, Mick Hillyard, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 23 October 2008


[Mr. Roger Gale in the Chair]

Banking Bill

Clause 155

Question proposed [this day]: That the clause stand part of the Bill.
1 pm
The Chairman: I remind the Committee that with this we are taking New clause 1—Objectives of the compensation scheme for depositors—
‘(1) This section sets out the objectives for the compensation scheme for depositors.
(2) Objective 1 is to maintain customers’ confidence in the UK banking system regardless of whether the bank is incorporated in the UK or another EEA country.
(3) Objective 2 is to be able to make payments to depositors within seven days and to have eligibility criteria, qualification processes and information requirements which facilitate that.
(4) Objective 3 is to ensure that there are compensation arrangements for each bank brand.
(5) Objective 4 is to require that the scheme pays customers their gross balance and that any amounts due from customers are collected in the usual way.’.
New clause 2—Compensation payable to depositors—
‘(1) Each depositor will be entitled to receive from the manager of the scheme referred to in section [Objectives of the compensation scheme for depositors] a sum which is the lower of—
(a) the deposit protection amount; and
(b) the gross balance held by the person.
(2) The “deposit protection amount” is £50,000.
(3) The Treasury may by order amend the figure in subsection (2).
(4) 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.’.
The Economic Secretary to the Treasury (Ian Pearson): In addition to the points that I covered this morning, I want to emphasise that the Financial Services and Markets Act 2000 already provides a flexible and wide-ranging framework for the compensation scheme. Most of the improvements to the United Kingdom’s arrangements for depositor protection—a goal to which the Government and other authorities are strongly committed—can be delivered within that framework, including the matters in objectives 3 and 4 of new clause 1, and the change in the limit in new clause 2.
Part 4 makes changes to the overall compensation framework that only primary legislation can do. If at a later time the hon. Member for Fareham wants to press new clauses 1 and 2—I do not think he will, because I think he was genuinely trying to promote a worthwhile debate—I would ask the Committee to reject them.
Mr. Mark Hoban (Fareham) (Con): Let me summarise where we are. Members of the Committee have expressed views about various aspects of the Financial Services Compensation Scheme, with the one exception of the Minister, who has spoken about the generality of the scheme, but has not expressed a view on the Government’s approach. Before the lunch break, he said that the FSA was consulting—which it is, and the various stakeholders will respond to that consultation—but I question where the Government’s intervention or input will come in the process. It is right and refreshing to hear a Minister say that we had better await the outcome of a consultation process—I had not realised that it always worked like that—but at what point will the Government say that the scheme is right, or that there is an issue? Taxpayers have ended up being the back-up in the scheme. We have talked about consultation on limits and, of course, the decision has been made about the limit, which is now £50,000, but the Government decided in connection with Northern Rock and the Icelandic bank accounts that there was no limit.
The Government will always be in a fall-back position if the scheme does not work effectively, to step in and intervene. It would be helpful to the Committee to understand how the Government will comment on the emerging consensus that will result from the FSA’s consultation to ensure that taxpayers’ future liabilities are limited.
I want to pick up a couple of comments made by other hon. Members. The hon. Member for South-East Cornwall, who speaks from practical experience of the banking sector, raised a broader issue that is not covered by the new clause—whether the current scheme is still fit for purpose. It was designed for normal activities, such as the collapse of the odd credit union or an insurance company such as Independent Insurance, and I am not sure whether anyone had thought through the consequences for the scheme of a major bank becoming insolvent, and how those costs should be borne. We can perhaps touch on that in later sittings.
We will not come to the formal moving of new clauses until later, as you have indicated, Mr. Gale. This was a probing debate and we have covered a fair amount of territory, so I will not move the two new clauses, at the appropriate time.
The Chairman: I am not certain that I heard that correctly. Was that, “will” or “won’t”?
Mr. Hoban: I will not.
Question put and agreed to.
Clause 155 ordered to stand part of the Bill.

Clause 156

Contingency funding
Mr. Hoban: I beg to move amendment No. 34, in clause 156, page 81, line 4, after ‘the’, insert ‘Authority to make rules enabling the’.
The Chairman: With this it will be convenient to discuss amendment
No. 35, in clause 156, page 81, leave out lines 7 to 9 and insert—
‘(2) Rules made by the Authority may make provision about the establishment and management of contingency funds provided that such rules are limited to the deposit protection element of the compensation scheme; in particular, the rules may make provision about—’.
Mr. Hoban: We now move on to one of the less consensual issues in the Bill—contingency funding. We will come on to other amendments, and hopefully a clause stand part debate, to discuss some of the principles behind the issue.
The Chairman: Order. Those of you who have not experienced my chairmanship should know that I have an absolute golden rule. I am particularly aware that complex issues can arise from a clause and I am perfectly prepared to have a broad debate on tabled amendments at the start of the clause. What I am not prepared to do is allow such debate twice. Therefore, if hon. Members choose to discuss certain issues early on to make the tabled amendments make more sense, that is fine by me, but they should not then expect a stand part debate.
Mr. Hoban: As a veteran of your chairmanship, Mr. Gale, I know exactly where the limits are drawn on those matters, and I will seek to confine my remarks on the amendments precisely to how the regulations are made.
As the Minister alluded to earlier, the broad framework for the FSCS is set out in the 2000 Act. In that Act, the FSA has responsibility for drawing up the detailed regulations. Section 213 clearly states:
“The Authority must by rules establish a scheme for compensating persons in cases where relevant persons are unable, or are likely to be unable, to satisfy claims against them.”
The responsibility to draw up the detailed rules therefore rests with the authority. Clause 156 of the Bill states that the Treasury will make regulations, not that the authority will make rules. Amendment No. 34 and the first part of amendment No. 35—I will not address the second part now as it pertains more to the next group of amendments—are designed to reassert the role of the FSA in making those detailed rules. Once the principle of contingent funding has been introduced by the Bill, and once the provision for that funding has been triggered, it is down to the FSA to make the rules and not to the Treasury to set out detailed regulations about how that funding may work in practice. This is therefore a straightforward pair of amendments.
Ian Pearson: The overall effect of the proposed amendments would be to divide responsibility for the introduction of pre-funding between the Treasury and the FSA. The Treasury, after obtaining parliamentary approval through the affirmative resolution procedure, would give the green light to the FSA to make rules to cover the matters set out in subsection (2) of proposed new section 214A.
It is not clear from the amendment whether the Treasury, with parliamentary approval, could set any high-level parameters in those areas. If the amendment were agreed by the Committee, we would need to do further work to clarify that point. However, I am not persuaded that a two-stage process for bringing in pre-funding is either necessary or desirable. The reality is that the Government would never seek to introduce pre-funding without consultation, including extensive consultation with the FSA, the Bank of England and the FSCS. Self-evidently, the Treasury would want to have a pretty good idea of what the FSA might plan to do in its rules before it sought parliamentary approval to give the FSA the green light. At the same time, it could not say to Parliament, “These are the rules that the FSA will make,” because FSA rules are a matter for the FSA.
It seems much better, therefore, that the Treasury should ask Parliament to approve all the key elements of any pre-funding package. In particular, we thought it right that Parliament should have the final say, through the affirmative resolution procedure, in a decision to allow levies to be imposed. Under the current pay-as-you-go system, the levies follow costs incurred by the FSCS or anticipate costs that the FSCS might incur in the near future. With pre-funding, levies may be imposed long before the FSCS incurs any costs, and costs will never be incurred if no default occurs.
Our approach is the right one, with the Treasury asking Parliament to approve all the key elements of any pre-funding package and with the affirmative resolution procedure, for which the hon. Member for Fareham has expressed a strong preference in previous debates. I ask the Committee to reject the amendments if they are pressed to a vote.
Mr. Hoban: I am slightly perplexed by the Minister’s response. In the previous stand part debate, the Minister was happy to leave all the detail to the FSA to sort out: “It’s not up to us, guv. We’ll let the FSA decide all these important issues.” Yet, in this scheme—the contingency funding clause—the Minister has taken an alternative view: “We’re going to do this, not the FSA.”
The Minister has not explained to the outside world why this approach is right for contingency funding, but the other approach is right for reform of the FSCS in the light of recent experience. I find that disappointing—there is a difference of approach. The Government clearly want to have the right to trigger contingency funding—for which the affirmative resolution procedure is right—but I do not understand why they have gone further than that, saying that they will set out the main principles of the legislation. It is not clear why there is a divergence of practice between the different parts of the scheme. It leaves external stakeholders confused about the Government’s approach. Does the Minister wish to clarify? I do not get the sense that he does, although I am happy to give way if he wants me to.
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Prepared 24 October 2008