Ian
Pearson: Yes, our understanding is that the FSCS is the
first port of call for compensation. I am happy to confirm
that.
Mr.
Hoban: My hon. Friend asked whether the banks will pick up
the cost. Is not the reality that if the cost exceeds £1.84
billion, the excess cost will fall upon other levy payers to the
FSCS?
Ian
Pearson: We have discussed that point already. Obviously,
if the banks are regulated by the Icelandic authorities, the first part
of the compensation will have recourse to those authorities. They have
a guarantee of about £16,500. Secondly, the Financial Services
Compensation Scheme goes up to £50,000, and thirdly, if
required, recourse would be to the Treasury. I hope that that is
helpful.
Mr.
Bone: I apologise to the Minister; I did not make myself
clear. The question was not about top-up money above £50,000 or
the money that Iceland will provide but rather about the money in
between. Will that cost fall entirely on the banks and building
societies, or over the wider financial
community?
Ian
Pearson: It falls to the Financial Services Compensation
Scheme.
Mr.
Hoban: Will the Minister give
way?
Ian
Pearson: I am sure that we can come back to that matter at
a later stage—I would be happy to do so, but first I would like
to look at the hon. Gentleman’s amendments.
Amendments
Nos. 2 and 8 would restrict the uses that could be made of the
contingency funds. Amendment No. 2 is the more restrictive. It would
mean that contingency funds could only be used to meet the expenses
arising from the Banking Bill, and not for the payment of compensation
for other types of FSA-regulated activity covered under the
compensation scheme. Amendment No. 8 would allow the funds to be used
for the payment of compensation to depositors, but not in relation to
any other kind of regulated activity. Amendment No. 1 is a
consequential amendment following on from amendments Nos. 2 and 8. It
means that only banks and building societies could pay levies to build
up a contingency fund. That would be logical if pre-funding were
restricted to deposit taking.
We feel that
to restrict pre-funding to deposit taking in the Bill would be
unnecessary and undesirable. The Government have made it clear that
there is no intention to bring in pre-funding in the near future.
Clearly, the timing would not be right now, and it would not be
appropriate to speculate about when it might be right or on which funds
the measure might be established. It is sensible to have
flexibility—we do not know what challenges the future may bring.
The Bill allows for different funds to be established for different
purposes and for different persons to contribute to those
funds.
Stewart
Hosie (Dundee, East) (SNP): Notwithstanding that the time
for pre-funding is not now—there is general agreement about
that; we should not bash balance sheets when they are already
weak—I am looking for the opposition to this in principle. Why
is it wrong to restrict pre-funding to deposit takers when the time is
right?
Ian
Pearson: We have made it clear that if the Government
considered the timing to be right, we would have discussions with the
Bank of England and the FSA, and undoubtedly more widely. The powers
that we seek in the Bill could potentially go further than deposit
takers and banks and building societies. In the future, a scheme might
allow different funds to be established with different legal entities.
But pre-funding cannot be introduced without parliamentary approval and
the affirmative resolution procedure. The Bill confers flexibility that
can be exercised only if subject to full parliamentary scrutiny at that
time.
Amendments
Nos. 3 and 6 would ensure that when making regulations for pre-funding,
the Treasury could specify how a levy was to be apportioned between
different members of the same class of levy payer. That could make the
introduction of risk-based levies by the Treasury possible—an
issue that my hon. Friend the Member for South Derbyshire raised a few
moments ago.
The
Government consider that apportioning any levy between firms within the
same class should be a matter for the FSA. The FSCS will have to raise
levies under different powers as a result of the Bill, and those powers
must be co-ordinated at a detailed level. The FSA is best placed to do
that.
The FSA
already has the power to decide the rules that govern the apportionment
of levies between levy payers of the same class under the existing FSMA
provisions, so it could already bring in risk-based levies if it was
considered appropriate to do so.
Amendment No.
4 would limit to banks and building societies the classes of person who
may be required to contribute to levies to repay borrowing from the
national loans fund. In our view the amendment is unnecessary, as it
would be possible to set out in the regulations which classes of person
will be required to contribute to the repayment of borrowing. Perhaps
more importantly, any type of financial services firm could default and
if the costs of the default were large enough, it might be appropriate
for the FSCS to borrow from the national loans fund, to obtain the
liquidity it would need to pay compensation. If the firm concerned was
not a deposit taker, it would not be appropriate for levies to be
imposed only on a deposit-taker class of firm for the purpose of
repaying the loans.
Amendments
Nos. 5 and 7 would impose an unnecessary restriction on the making of
regulations regarding the levies to build up contingency funds, or to
finance the repayment of borrowing from the national loans fund.
Clearly, any type of firm could default, and in principle, therefore,
any class of levy payer should have to contribute to the costs of
repaying of borrowing. As I have just explained, it will be possible to
have different contingency funds for different purposes, and for
different classes of persons to be required to contribute to different
funds.
The hon.
Member for Fareham raised the issue of the general retail fund and the
possible introduction of pre-funding, and the mechanisms through which
levy payers in one class may be required to contribute to the
compensation costs of other classes. Those are separate issues, but I
agree that if pre-funding were introduced, consideration would have to
be given to the interaction of pools covering different types of
business. I want to emphasise that this will be part of any
consultation about the introduction of pre-funding. The two
arrangements—pre-funding and the general retail pool—are
not incompatible. Pre-funding is a way of providing the resources
needed to meet the costs that fall on one class of levy payers, such as
banks and building societies. A contingency fund could be used to meet
compensation costs that a class of levy payer has to bear, whether
those costs originated in that sector or elsewhere. Equally, the
existence of a fund could reduce the extent to which levy demands spill
over on to other sectors.
If
regulations for pre-funding or NLF borrowing were made, we would ensure
that the appropriate class of levy payer had to be the primary
contributor towards the levy concerned. I entirely agree with the
general principle that each sector should consume its own smoke, but
this is yet another point where flexibility is important, and in the
Government’s view it would be better not to tie our hands too
much for possible future circumstances that we cannot anticipate at
this stage.
I hope that
that will give the Committee the assurance it needs on this issue. It
is worth remembering that any regulations the Treasury makes will be
subject to parliamentary scrutiny, through either the affirmative or
the negative procedure. I am confident that any unsatisfactory
allocation of levies would be speedily
challenged.
Mr.
Bone: I understand why the Government want flexibility,
but the affirmative and negative procedures only allow the regulations
to be accepted or rejected; they do not allow them to be amended in any
way.
Ian
Pearson: We made clear our intention that when it comes to
pre-funding, we would want to consult widely before drawing up
secondary legislation, not just by consulting the FSA and the Bank of
England, but by undertaking a more formal consultation exercise. The
issues and concerns would be raised during that process. As I said, I
think that the general principle that each sector should consume its
own smoke but that we must allow flexibility because we do not know
what the future might bring, is the right one. I hope that I have
convinced the Committee of that case.
Sir
Peter Viggers (Gosport) (Con): I was listening to the
Minister’s speech to hear whether he would explain, if there are
to be differential rates of levy, how people will perceive an
institution that is subject to them. Will
those rates be ascertainable through a central register, or will the
individual institutions be obliged to bring them to the attention of
their customers, to allow them to take account of the risk that the
differential rate implies? I have not heard that point made and I
should be grateful to be reassured and have an an
explanation. 1.45
pm
Ian
Pearson: As I argued earlier, the FSA already has the
powers, if it considers it appropriate, to introduce differential
rates. It is a matter for the FSA, which in its normal way would want
to consult parties if it were to take any future action, and I do not
think it appropriate for us to accept the
amendment.
Mr.
Hoban: Frankly, I was not at all impressed by the
Minister’s response to this debate. I quite like the Minister
and last week we had a good debate about another Bill, and he provided
some good responses to points made during that scrutiny
process.
The
Government have included in the Bill a wide-ranging power to set up a
contingency fund. The debate up to today has focused on whether that
should apply to the banking sector. I was hoping that we would hear
from the Minister a clear statement that that was the extent of the
fund. That is why I tabled these probing amendments. It now becomes
clear that the Government are taking powers that will enable the FSCS
to introduce pre-funding to cover not just bank depositors but any
aspect of regulated financial services activity, and that any regulated
financial services company can contribute to the fund in whatever way
it believes to be right at the time. Amendments Nos. 5 and 7 reflect
the wording in the Financial Services and Markets Act 2000. The current
scheme works according to that wording—it is nothing new. It
seems odd to have an approach to levies that relates to an existing
pay-as-you-go scheme when there may be a different form of levy for
contingency funding, and when the Government will want flexibility with
regard to contributions relating to the likely risk of future claims in
that sector.
Cross-subsidy
is a big issue in this debate. That is why I pressed the Minister when
he began his remarks about the current problems that face us. The
reality is that if the claims on the FSCS in respect of the banking
sector exceed £1.4 billion, that cost will be borne by other
financial service companies.
Ian
Pearson: £1.8
billion.
Mr.
Hoban: £1.8 billion. I have spoken to various
people in the financial services sector—banks and
non-banks—who are concerned that that might happen. The FSCS is
paying interest on the amount of money linked to the transfer of
Bradford & Bingley accounts to Banco Santander. It is picking up
the gap between the £16,000 and £50,000 limit in relation
to the Icelandic banks. There is genuine concern in the sector that
IFAs, insurance brokers, insurers and fund managers will have to pick
up the excess if those costs exceed £1.8 billion. I wonder why
the Minister did not accept that point when I intervened. It worries me
that the Government are not on top of the cross-subsidy issue, which is
at the heart of a series of amendments in this
group.
Mr.
Todd: There are two forms of cross-subsidy that we could
be concerned about. One is between wholly different activities within
the financial services sector, and I understand the hon.
Gentleman’s argument on that. The second is between different
business models within the same class of activity, which is another
potential difficulty. I was not entirely clear from the definition in
the Bill whether there is the opportunity to distinguish within classes
of activity. The Bill allows a distinction between classes of activity,
which presumably would refer to banks, building societies, IFAs and
insurance companies, but not on the basis that a particular activity
carries inherently higher risk and therefore should be distinguished in
a different way.
Mr.
Hoban: In a sense, that is partly addressed by whether a
risk premium is attached. Again, the Minister will say that that is a
matter for the FSA and that there will be a consultation, which I did
not think was a robust answer because the issue is important.
I will come
on to the stand part debate on clause 156, which concerns the impact
that pre-funding could have on building societies compared to
banks—a point that Adrian Coles made to us on Tuesday. A
pre-funded scheme gives rise to many issues which have not been
properly
addressed.
Ian
Pearson: I have made it clear to the hon. Gentleman that
the pre-funding issue and the powers that we seek potentially go beyond
banks and building societies. His amendments seek, principally, to
limit the provisions to that, which is why we are inviting the
Committee to reject them. However, I confirm that we accept the general
principle that institutions should consume their own smoke.
On
cross-subsidy, it is in the general interests of financial stability,
which all financial services firms benefit from, that they should
contribute and provide to a scheme. It is therefore right that the
generality of financial services schemes should contribute where costs
to deposit takers are likely to be above £1.8 billion per
annum.
Mr.
Hoban: I do not think that there has been a satisfactory
explanation as to why the Government oppose our amendments. These
powers give the Government wide discretion to set up a type of scheme
that they feel is appropriate at the time, in a flexible way, but the
Bill does not give safeguards to the financial services about how the
powers would be used in practice. On that basis, I want to press
amendment No. 5 to a vote because it tackles the point that the level
of contribution to a pre-funded scheme should reflect the likely level
of contribution that will be made.
That does not
preclude an element of cross-subsidy, but reflects the basic principle
on which contributions to the scheme are made, as set out by the 2000
Act. It reflects that wording clearly, and if the Government are to
introduce a pre-funded scheme, people should be aware of the type of
funding mechanism that will be used, rather than leaving it to be
flexible.
I beg to ask
leave to withdraw the amendment.
Amendment,
by leave, withdrawn.
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