Banking Bill

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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.
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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