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withdrawn. 1.15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.
Mr.
Hoban: Absolutely. The measure sends a clear message and
imposes an additional cost on them for following those businesses
practices. It says to them, “If you follow a high-risk business
strategy, you will have to pay more into the fund.” That will,
essentially, potentially disincentivise businesses from following that
strategy. If
a business is not profitable, it will choose not to follow that route
because the contributions it would have to make would exceed the
profitability of the business. The measure forces businesses to think
carefully about the business model they follow and its consequences for
their levy. Banks that follow a prudent, cautious and conservative
policy in their business development would not want their shareholders
and investors to, in effect, bear the cost of the more reckless and
imprudent policies that other banks might follow.
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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