Banking Bill

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Ian Pearson: I do not accept that we are being inconsistent. If we introduce this, we need to be clear about the principles underpinning the FSA’s action, but it is up to the FSA to make its own rules. That is the process we have. A lot of the detail is rightly a matter for the FSA, but it is right and sensible that Parliament should agree the key principles. That is what we allow for in our approach. Amendments Nos. 34 and 35 would impose an unnecessary two-stage process, when we were going to work closely with the FSA on the issue.
Mr. Hoban: I am not persuaded by the Minister on that point, because I think that there is a difference of approach between this and the previous group of amendments. I do not intend to press the amendment to a vote, but we might return to the matter on Report if the Government do not offer more clarity. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
1.15 pm
Mr. Hoban: I beg to move amendment No. 2, in clause 156, page 81, line 6, after ‘expenses’, insert
‘relating to the powers exercisable under sections 10 to 12 and Parts 2 and 3 of the Banking Act 2008’.
The Chairman: With this it will be convenient to discuss the following amendments: No. 1, in clause 156, page 81, line 12, leave out from first ‘the’ to end of line 13 and insert
‘contributions payable by banks and building societies’.
No. 3, in clause 156, page 81, line 16, leave out ‘classes of person’ and insert ‘banks and building societies’.
No. 8, in clause 156, page 81, line 23, after ‘compensation’, insert ‘for depositors’.
No. 5, in clause 156, page 81, line 27, at end insert—
‘(2A) In making any provision by virtue of subsection (2)(c) the Treasury must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised person reflects, so far as practicable, the amounts of claims made, in respect of that class of person.’.
No. 6, in clause 156, page 81, line 27, at end insert—
‘(2A) The amount of payments into the funds by virtue of subsection (2)(d) may vary between persons in each class.’.
No. 4, in clause 159, page 83, line 37, leave out ‘classes of person’ and insert ‘banks and building societies’.
No. 7, in clause 159, page 83, line 38, at end insert—
‘(4A) In making any provision by virtue of subsection (4)(c) the Treasury must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised person reflects, so far as practicable, the amount of claims made, in respect of that class of person.’.
Mr. Hoban: It is clear from the proposed new section of the 2000 Act that the Government have set out contingency funding arrangements with a very broad scope. There is nothing in the proposed new section to indicate the limits on contingency funding. The amendments in this group try to tease out what the Government are trying to achieve through the proposed new section.
There are four strands running through my thoughts on these matters. Amendments Nos. 2 and 8 would restrict the scope of the Bill so that it only applied to deposit-taking institutions. Amendments Nos. 1, 3 and 4 suggest that only banks or building societies foot the Bill for the contingency funding scheme. Amendments Nos. 5 and 7 look at how the FSCS will raise its levy if there is a wider scheme. Amendment No. 6 raises the issue of risk weighting in relation to the contributions made to the contingency funding scheme.
Amendment No. 2 would require that the expenses discussed relate more narrowly
“to the powers exercisable under sections 10 to 12”,
which relate to the special resolution regime,
“and Parts 2 and 3 of the Banking Act 2008”,
which relate to bank insolvency and bank administration. The scope of the funding would be limited strictly to the exercise of the powers set out in the Bill. The amendment suggests that it would be inappropriate to use the contingency funding to set up a pre-pay fund for other parts of the financial services sector.
Although our discussions have been focused primarily on banks and building societies, the FSCS covers other aspects of the financial services sector such as insurance, insurance brokers, fund managers and independent financial advisers. It is a broad scheme, and we have been focusing on a subsection of customers within it. However, the breadth of the clause means that it would be possible for the Government to set up a pre-funding scheme that covered all of those sectors and not only banking.
There is a debate to be had on the extent to which the financial services sector as a whole should contribute to solving the problems faced by a subset of it. There is interdependence between the various subsets, so an element of contribution should be required from those subsets when losses are particularly high. That is the principle on which the FSCS is currently based. For example, if the cost of rectifying Bradford & Bingley were to exceed the amount set aside for banks to pay, that extra cost could be borne by independent financial advisers, insurance companies and investment managers. The principle of the scheme is currently based on such an idea, but we are talking about a pre-funding scheme that could possibly involve contributions from other parties. By limiting pre-funding to the powers under the Bill, it would remove the risk of setting up a scheme that covers a much wider range of issues within the financial services sector.
Amendment No. 8 approaches matters in a slightly different way by restricting compensation to depositors. It applies to proposed subsection 214A(2)(g) of the 2000 Act under clause 156 of the Bill, and would exclude a fund being set up to pay for the compensation of people who hold insurance policies, who have taken up investments for a fund manager and who have been given advice by an independent financial adviser. It is a different way to limit the scope or the extent of the pre-funded scheme.
Amendments Nos. 1, 3 and 4 take a different approach to who contributes to the pre-funding scheme. They would replace the Government’s broad wording of “classes of person” with “banks and building societies” to make it clear that only those entities will pay towards the pre-funding scheme. In effect, we say that the only people who should be responsible for making payments to depositors are the deposit-taking institutions and no other organisation.
Amendments Nos. 5, 6 and 7 reflect the wording under the 2000 Act and work on the basis that it is the Government’s intention to set up a pre-funded scheme for the whole of the FSCS and to cover investment managers, IFAs and so on, so the contribution to the pre-funded scheme should reflect the likely level of losses that will flow from the particular classes of authorised persons.
Mr. Mark Todd (South Derbyshire) (Lab): I am sympathetic to some of the hon. Gentleman’s arguments, as I would be to the suggestion of a risk-based principle of applying a contribution. Has he considered the methodology to be applied that would produce the sums involved?
Mr. Hoban: When I comment on amendment No. 6, I shall come on to risk-based premiums. That is an important issue and it is a principle that underpins the US Federal Deposit Insurance Contribution scheme whereby there is a risk-based contribution. I shall return to that in a minute.
I want to establish what types of institution will be covered by a pre-funded scheme other than banks. If other institutions will be so covered, it is important that their contribution reflects the likely level of losses that they could face in the future. A worry about cross-subsidy has emerged from our debate. We heard from the Association of British Insurers about that this week. It is worried that the present approach requires all the sectors of financial services to contribute to the cost, and that would involve a cross-subsidy that imposes an unfair burden on the insurance industry.
The ABI highlighted the case of Bradford & Bingley when insurers, as investors, made a contribution the first time round to solving the problems. That did not work, and they now have to pay potentially through the cross-subsidy route. In the debate about who would fund a pre-funded scheme, there are clearly trade bodies that consider that the onus should fall on the sector that is directly affected rather than going through the pre-funded route.
I had a conversation with the Association of Independent Financial Advisers, which recognises that there are cases when transactions have been intermediated. Obviously, the association understands the matter from its perspective—it might have put an insurance policy with a company or advised on some investment arrangement. It is therefore appropriate for there to be some form of subsidisation within a narrow part of the financial services sector, but not to the breadth that the clause, as drafted, could lead to.
Another aspect is that banks and insurers—they are well capitalised businesses in terms of banks and they will be better capitalised when the money goes in—should be seen to have the resources to contribute to a pre-funded scheme. Intermediaries are not as well capitalised and might well find it expensive and difficult to do so. They potentially might not be able to afford to contribute to a pre-funded scheme, particularly one to subsidise the entire sector, rather than just a narrow part of it.
There are some important issues in relation to who we are expecting to contribute to a pre-funded scheme. In making a contribution will they be expected to support—or cross-subsidise—other parts of the financial services sector? At the moment, the clause permits that. It would be helpful if the Minister could outline the Government’s thinking about where the parameters of the scheme are in terms of both coverage and contributions.
The hon. Member for South Derbyshire raised the issue of risk. Amendment No. 6 is a peg on which I want to hang that discussion because it makes provision for contributions to vary from person to person in a particular class. The US system—the FDIC—works on a risk-based approach. Any Member who wishes to look at the FDIC website can see that the calculation of the premium that someone should pay into the fund is based on various tests, such as the amount of non-performing loans. The proportion of non-performing loans is a factor that drives the calculation of the levy, and whether a business is well capitalised also drives the levy. The better capitalised the business is, the lower the risk of its business and the lower its contribution to the FDIC. There is clear weighting when to comes to risk. The clause does not set out whether the Government expect there to be a risk-weighted contribution. Of course, if there is a risk-weighted contribution, it is like an insurance policy in a way. We are saying that bank A has a particular set of risks and consequently should pay an amount related to its risk.
Mr. Todd: Essentially, that also reinforces the moral hazard principle, which is that if people contribute collectively to a particular resource, one does not want to effectively incentivise higher-risk behaviour by letting the individuals concerned know that they will not necessarily have to bear the full consequences of their action. Giving a clear trigger that says, “If you choose a model that has those particular features, you will bear a greater burden towards the compensation scheme,” reinforces the message about their behaviour.
I hope I have not transgressed your rule so far, Mr. Gale. I have some reservations that I will come to much later, in the stand part debate. There are some other issues in relation to the principle of whether we should have a pre or post-funded scheme. With a pre-funded scheme there is clearly an issue with how risk is reflected in the contributions that people make.
1.30 pm
It would be helpful for a Government who are minded to introduce a pre-funded scheme to set out what role they believe risk should play in determining the contributions to be made by members of the scheme.
To conclude my remarks on this group of proposals, four issues concern me. First, what is the scope of the scheme and what will it pay out for? Secondly, who will pay into the scheme? I have said clearly that we want the amendments to suggest that it should just be banks and building societies. Thirdly, if the scheme is broader, contributions will be made by other parts of the financial services sector and I suggest that those contributions should be in line with the likely level of future payouts. Fourthly, if a scheme such as this is set up, what role will risk play in determining the contributions?
People are interested in how the scheme will work in practice, but there is no consensus about the merits of the scheme. People want to know more detail about the Government’s thinking on this matter. The Minister’s comments will be very important in giving stakeholders an insight into the Government’s thoughts on this difficult area.
Ian Pearson: The amendments would make a number of significant changes to clauses 156 and 159. Before turning to them in detail, I will set out the Government’s understanding of the intention of the clauses. The function of the FSCS is to pay compensation to eligible claimants if financial services firms are in default and are unable to meet the claims. Funds are needed to pay compensation. The FSCS normally obtains the funds by making levies on the financial services industry. If very large firms such as banks or building societies default, the FSCS will need much more money in a short time than it could realistically raise from the industry or borrow in the ordinary way from commercial sources.
Two solutions have been put forward for that problem: building up funds in advance or borrowing money from the Government that can be paid back using future levy payments. Clause 156 allows for the first of those and will set up contingency funds in advance of need through a process commonly called pre-funding. Just to set the record straight, the Government are clear that now is not the right time to introduce pre-funding. Clause 159 allows for the second solution with borrowing from the national loans fund. That is a technical change that allows the public sector to lend to the FSCS in the most efficient way. As the Committee knows, the public sector has already made loans to the FSCS to enable it to play its part in the transfer of deposits from Bradford & Bingley, Heritable and Kaupthing Singer & Friedlander.
Mr. Peter Bone (Wellingborough) (Con): The Minister says that there will be a cost for those organisations. Is it true that those costs will ultimately be charged to the banking system using the current system?
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