The
Chairman: We will come to amendment No. 5 at the
appropriate point.
Mr.
Hoban: I beg to move amendment No. 36, in
clause 156, page 81, line 20, at
end insert ‘and ensuring
that no such investment shall cause there to be a prevention,
restriction or distortion of competition in the relevant lending
market;’. The
amendment deals with the way in which money that has accumulated in a
pre-funded scheme should be invested. Concern has been expressed to me
about the potential distortionary impact that a fund might have
depending on how much has built up within it, and about its impact on
the wider savings investment market. Will the Minister clarify how he
thinks that the fund will be invested in the future? What comfort can
he give that it will not be invested in a way that leads to
distortion?
Ian
Pearson: The Government believe that the amendment is
unnecessary. If pre-funding is introduced, our intention is that the
contingency funds built up would be invested in the national loans
fund, as is provided for in clause 158. Funds invested in the NLF will
have been lent to the Government and will be used to minimise
Government borrowing. At the end of each day, the Exchequer must borrow
from, or place funds on deposit with, the money market depending on the
net position after balancing outflows in order to finance expenditure
again. Any funds from the Financial Services Compensation Scheme will
represent an inflow and arrangements will be put in place to minimise
the impact of the flows and ensure that there is no distortion of money
markets. The
purpose of proposed new section 214A(2)(f) is to enable the regulations
to specify some of the detailed requirements on NLF investors. Proposed
new section 223A(2) in clause 158 allows the Treasury to agree terms
and conditions with the FSCS from the borrower’s point of view.
The FSCS is an independent body so will have to contract with the
Treasury, like any other lenders to the Government. We need to be able
to regulate both sides of the transaction and equally, of course, to
keep both sides separate in our minds. There is no intention that new
section 214A(2)(f) would be used to require the FSCS to take a
different approach from that set out above to the investment of
contingency funds, but of course were that to be proposed in the
future, parliamentary approval would be required under the affirmative
resolution procedure. We could then build in safeguards to meet
concerns about distortion at that stage. I hope that that clarifies the
point for the hon. Gentleman.
Mr.
Hoban: I am grateful to the Minister for his response,
which clarifies the matter put to me. On the basis of that reassurance,
I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Amendment
proposed: 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.’.—[Mr.
Hoban.]
Question
put, That the amendment be made:—
The
Committee divided: Ayes 5, Noes
7.
Division
No.
1] Question
accordingly
negatived.
Question
proposed, That the clause stand part of the
Bill. 2
pm
Mr.
Hoban: Even if I did not object on principle to
pre-funding, I would still object to the clause because, in response to
the previous group of amendments, the Minister did not give us
sufficient reassurance about how it will be used in practice or about
its scope. It is broadly drafted and gives the Government the
flexibility to do pretty much what they want in a pre-funded scheme on
the back of an affirmative resolution. That does not give security or
confidence to the wider financial services
sector. Notwithstanding
that fact, I have an objection of principle to a pre-funded scheme.
There has been quite vigorous debate since last October about the
merits of a pre-funded compensation scheme. There are arguments why one
might be appropriate. One example is that it would not be pro-cyclical.
If there was a large default by a bank now, banks would have to
contribute through the levy, at a time when their capital was under
pressure. Clearly that would exacerbate the current position. The
argument is that under a pre-funded scheme a contingency fund would be
available to absorb those losses rather than increasing the levy at a
time when banks are in difficulty.
The Governor
of the Bank of England, who is supportive of a pre-funded scheme, said
that “if
you wait until there is a problem, that’s a pretty bad time to
ask banks to put up a large amount of
money”. That
is not an unreasonable comment. I accept that, which is why we support
clause 159 in principle. It would enable the scheme to borrow from the
national loans fund. However, on balance there are some stronger
arguments against a pre-funded scheme. We believe that any assets held
by the fund would be better deployed by the financial services sector
as a whole—not just by the banking sector but by insurers, IFAs,
investment managers and all the people who could be subject to a
contingency fund. It would be better if they retained their own capital
and determined how to deploy it rather than having possibly significant
sums locked up in a pre-funded
scheme. The
Government have not given a clear indication about the period over
which a scheme would be built up. Would it be over two, three, 10, 15
or 20 years? How much would institutions have to contribute over what
period of time? Clearly, the quicker the build-up of a fund, the greater
pressure financial institutions would come under as a consequence of
contributing to it. That is a
concern. In
the United States there is a pre-funded scheme. We had a discussion
earlier about the FDIC. There is a different banking model in the US,
compared with the UK. Like the hon. Member for Sedgefield, I was in the
States in the summer. I drove past the First National Bank of
Collinsville, which had just one branch—in Collinsville. It was
to be covered by the FDIC. I asked the Congressmen I was with whether
they did not think it a risk having an account with such a bank. They
replied that as long as they did not put in more than $1,000, they
would be okay because they would be covered. That shows the
fragmentation in the US banking market. There is a much greater
expectation of banks failing, because they are smaller, less well
capitalised and more prone to
default. There
is another reason why we do not believe that pre-funding is necessary.
The important thing in the event of a default is ready access to cash.
We need ready access to cash for depositors, but the FSCS needs ready
access to cash too. It has to have access to that liquidity, which is
why the facility available under clause 159 is so important. It gives
the FSCS access to liquidity. If we had a pre-funded scheme we would
not know, when the balances were being built up, at what point there
might be a bank insolvency and whether there would be enough money in
the scheme. If there was not enough money in the scheme, we know that
the FSCS could draw on liquidity from the national loans fund. There is
no fundamental requirement that suggests to me that we must have a
pre-funded scheme, as long as there is access to loans from the
national loans fund.
One of the
messages that came across in our discussions on Tuesday was the
absolute necessity for ready access to cash, but that is different from
the desirability or otherwise of a pre-funded scheme. Indeed, Nigel
Jenkinson, the director of financial stability at the Bank of England,
said that pre-funding was “not necessary, but desirable”.
There is a very important distinction to be
drawn. Although
there may be consensus among some people that a pre-funded scheme is
desirable, there is certainly no such consensus in the banking sector.
I have the impression that the Building Societies Association is not
sold on the idea either—Adrian Coles, speaking in the evidence
session on Tuesday, was very explicit about that. Let us not forget
that the BSA scheme has not been a failure; it has always looked after
its own and it has always swallowed its own smoke, to use the
Minister’s phrase from earlier.
Adrian Coles
said: “There
is a choice of whether to put it in the compensation scheme to protect
depositors, or whether to keep it in the building society balance
sheet. At the margin, if the money is taken out of the building society
and put in the compensation scheme, depositors...are slightly less
safe by the amount that the building society has given to the
compensation scheme.”——[Official Report,
Banking Public Bill Committee, 21 October 2008; c. 44,
Q122.] That
demonstrates that we must think through the economic analysis of the
issue. Adrian Coles went on to say that
“if there were a
requirement for pre-funding, and if there were a requirement to keep
capital at the current level in building societies, the only place the
money could come from is higher mortgage rates or lower saving rates
for building society
customers.”——[Official Report, Banking
Public Bill Committee, 21 October 2008; c. 47,
Q131.] An
economic cost is attached to a pre-funded scheme. Adrian Coles talked
about it in the context of building
societies.
Ms
Sally Keeble (Northampton, North) (Lab): I am grateful to
the hon. Gentleman, because he is quoting from answers to the questions
I asked in the evidence session. Does he agree that one of the issues
that the building societies pressed closely was risk-related premiums,
because of their perceived lower risk of
failure?
Mr.
Hoban: Indeed. I thought the hon. Lady’s line of
questioning on Tuesday was very fruitful, and showed the experience
that she and her hon. Friend, the hon. Member for South Derbyshire,
have gained from the Treasury Committee. She put the finger on the very
point: yes, there is a cost to the building society from putting money
into a deposit protection scheme. However, it goes back to our previous
debate about risk weighting. If a sector has a lower risk, should it
contribute less to a pre-funded scheme? We talked about that in the
context of different institutions when we were discussing amendment No.
6. Equally, different business models have their own consequences. The
more cautious approach that building societies traditionally adopt
leads to a lower risk of default in the building society
sector.
The Minister
whispered, “Bradford & Bingley”. As I am sure he
knows, Bradford & Bingley was a demutualised building society that
was swallowed up by a former building society, Abbey, which is now
owned by Banco Santander. Bradford & Bingley and some of the other
demutualised building societies took a very different model from that
of the building societies currently in the building society
sector.
Ms
Keeble: May I put to the hon. Gentleman a point that it
was not possible for me to put to the institutions on Tuesday? There is
public concern, and the public interest would probably be in favour of
a pre-funded scheme, because of people’s concerns about the
general behaviour of financial institutions, precipitating some of the
crises.
Mr.
Hoban: I am not sure that I agree with the hon. Lady. This
is probably where we part company on this matter. I think people will
want to know that in the event of an institution becoming insolvent the
compensation scheme has ready access to cash. That is the necessity
that underpins the measure. We would not want to get into a situation
where consumers believed that because the fund has only built up
£1 billion, for example, that is all there is in the kitty. We
have not really addressed what size the kitty might be to provide
protection.
Mr.
Todd: How long is a piece of string?
[Interruption.]
Mr.
Hoban: I am happy to give way if an hon. Member wishes to
intervene.
The issue we
are teasing out through this process is how big is the fund and how
much do we need to put away? The conversation during the
evidence-taking session on Tuesday suggested that it could be between
£10 billion and £15 billion. The level of bank
deposits earlier this year, when I was looking closely at the matter,
took us as far as the 10th-largest institution. That was before the
wave of consolidation over the past few months. We are talking about
building up a significant fund just for banks, let alone the other
sectors of the financial services industry that might have to
contribute to a pre-funded
scheme.
Mr.
Bone: I take a slightly different view from my hon.
Friend. As he said, we are talking about not wanting to reduce the
capital in respect of building societies. In the case of the banks,
that would mean paying out less dividend each year. That would actually
be a charge on a person’s account and would build up over the
years. An institution that failed would, for a number of years, have
been contributing to that fund. Under the present scheme, a bank that
fails does not contribute, because it has gone bust by that
stage.
Mr.
Hoban: My hon. Friend makes a valid point. It is one of
the arguments that people could deploy in favour of a contingency fund.
Of course, that depends on people’s expectations and whether
banks fail in future. Until recently, we had not had a run on a bank
since Overend and Gurney in 18-something or other. We hope that this is
an unusual time and that it will be some time before we have a crisis
on a comparable scale. The Governor of the Bank of England said in his
speech in Leeds earlier this week that this was the closest that we
have been since the first world war to a banking collapse. We could end
up with a fund of between £10 billion and £15 billion
sitting on deposit somewhere for another 80 years before it was
required. My
hon. Friend mentioned a pre-funded scheme enabling an insolvent bank to
contribute up front to the costs of its recovery, but that would be at
a cost to shareholders or potential borrowers as the costs of capital
rose, because of the way in which the scheme was to be
funded. There
are important arguments against a pre-funded scheme: it is expensive,
it is, we hope, unnecessary and it does not address the main point,
which is that we must have cash available to meet the relevant needs if
a bank becomes insolvent. Dr. Huertas, in his evidence on Tuesday, made
the point
that “the
deposit guarantee promise needs to be backed by the full faith and
credit of the
Government” and
that having a contingency fund would not be the full answer to the
problem. He
continued: “If
it ever got to the point that the deposit guarantee promise was limited
to the size of the fund, the exhaustion of the fund and the removal of
any type of deposit guarantee for the remaining depositors would be a
severe threat to financial stability.”
——[Official Report, Banking Public Bill
Committee, 21 October 2008; c. 33,
Q96.] Even if
the Government take the route of introducing the fund, it is not an
answer in itself and is not sufficient to create financial stability.
It is, in effect, a means of paying up front for the potential costs of
insolvency.
Loretta
Minghella of the FSCS said that it is crucial that there is always a
backstop and that people are confident that the Government will always
be there for the
scheme. 2.15
pm
I have talked
a lot about the banking sector and how it might be affected by a
pre-funded scheme. My contention is that as long as there is access to
the national loans fund, that will create the liquidity that the scheme
needs to repay depositors. Then, we can look at recovering the amounts
from the levy payers over a reasonable period, so that we do not
exacerbate the pro-cyclical tendencies that we might see if we asked
the levy payers to pay immediately after the collapse of a bank. If we
spread the repayments from levy payers, the burden would not be unfair,
and they would pay only when a collapse has taken place.
I would like
to deal now with what happens to others if there is a pre-funded
scheme. In the insurance sector, given the nature of the impact of a
collapse or an insolvency, the FSCS often pays out over a long period.
Therefore, one argument from the insurance sector is that it pays out
on long-term liabilities currently under the FSCS, so why should it
pre-fund that scheme? If an insurance company that pays annuities
becomes insolvent, the FSCS will pay out, over a long period, the
compensation that annuity holders are entitled to, without having to go
down the pre-funded route. The insurance sector is used to the idea of
paying liabilities out over a long period. If insurers can do that, why
can banks not do
it? The
case has not been made for a pre-funded scheme. We could continue on a
pay-as-you-go scheme, as long as there is a commitment to provide
liquidity to the FSCS when necessary. Under the Bill, the powers are
not sufficiently circumscribed to give people confidence in the shape
and nature of a pre-funded scheme in the
future.
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