Banking Bill

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Mr. Todd: Briefly, the case has not been made for introducing a pre-funded scheme now. It has been made for having provision for a pre-funded scheme in the future, which is why I endorse the clause. The Treasury Committee unanimously took that view when it considered the issue. However, the debate has highlighted weaknesses in the drafting of the clause. I would have welcomed a clearer explanation from the Minister of exactly how the powers will be exercised by the Government, and I hope that the debate will have given the Minister and his team the opportunity to reflect further on the approach that is being taken.
In another forum, I had the opportunity to listen carefully to the points made by the building society sector, which makes provision of its own and is assisted by the enabling legislative framework under the FSA. As an account holder with the Derbyshire, which is about to be dragooned—quite correctly, for the foolish acts of some of its executives—into the Nationwide, I know that the FSA is effectively able to force the bride and groom together with its existing powers. It is doing the same with the Cheshire and there are rumours that it will do the same with another society as well. I can well understand the attitude of the building society sector. It would say that it was being asked to cough up for something that has not happened in the past and, based on the existing legal framework, is most unlikely to happen in the future, unless the Nationwide—now by far the largest building society—finds itself in difficulty and it cannot do the rescue operations that it has been asked to do in such cases.
The Government do not appear to be uncertain about the principle. I think that they agree about the potential need for such a fund, but my continuing concern is that they have not worked out terribly well how it would work. As for the issue of scale, I asked jokingly, “How long is a piece of string?” It is a long piece of string, but there is no attempt to quantify accurately the purpose of the fund, if pre-funded, and what its scale should be in proportion to its purpose. It would be helpful in our discussions to have a clearer definition of the fund and of its linkage to its real purposes. We all know that, if a major institution went down, it would be a useful part of a solution but no more than that.
My line of questioning in our earlier discussions highlighted the fact that a risk-based analysis is required to justify payments in; in fact, such analysis is required to justify payments at all. In other words, there is a material risk in certain areas of activity, when pre-payment may be justified, but there might be others when no such provision need or should be made. The hon. Member for Fareham’s point about the impact on some businesses from pre-funding was well made. There is not necessarily an argument that money set aside for that purpose would be better used there than in the balance sheets of the operations concerned.
However, there are some exceptions to the rule, when a pre-funding mechanism might well be a further indicator of the need for greater care in the management of a particular area of financial services and for reinforcing the message of compliance with safer, more prudent business models than have been followed until now. I noted the guffaw at my vote in the previous Division. My purpose in Committee is not to defeat the Government, but to help them to improve the Bill as far as possible and I hope that my remarks have helped me to go further in that.
Mr. Colin Breed (South-East Cornwall) (LD): Without repeating what I said this morning, the provision is another example of the fact that trying to reconstruct an old way to address current problems is almost impossible. When the compensation scheme was set up, it was more or less envisaged that a small operation somewhere in the sticks through the stupidity of its policy might create a difficulty for some depositors and the large banks, with a view to trying to maintain basic confidence in the banking system, would each dip into their pockets for a relatively small amount to bail out the depositors, after which everyone would be happy and off we would go. It was not envisaged that that would need to be pre-funded because the amount likely to be required would be relatively insignificant to the larger banking institutions that would be required or called on to fund it.
To turn that easy and simple scheme—not pre-funded, but secure—into a scheme designed to bail out the depositors of an enormous bank, which, through acquisition and merger, has got into the situation that we are now in seems totally impossible. Yes, pre-funding might be a great idea but, if we are to be true to it, the moneys that might be required are phenomenal. If the Government have to stand behind the shortfall—if a big bank goes down, there will be a shortfall—we might as well recognise the situation from the front end.
The Treasury Committee’s report on this issue is very good. It says that there is not much consensus on the whole thing. Obviously, the banks are not keen to put huge amounts of money into a pre-funded scheme, particularly those that think they will never have to rely on it. They wonder why they should support their competitors. It was never considered, under the old scheme, that the small institutions that might fail were competition for the big might of Barclays, the National Provincial or National Westminster banks, as they were then. They were relatively small licensed deposit-taking institutions and smaller building societies, and everything could be covered without too much of a problem. To try to turn that into something that will address the current problems is somewhat foolish.
The sensible conclusions that the Select Committee reached in its report related to the idea that, if the Government are to go ahead with the scheme, they should set a timetable. That is not a bad idea, but we have not seen one yet. People might suggest that we should not go to banks that are in a difficult situation and ask them to put large amounts of money into a pre-funded scheme, but we could get on that road. After all, we often say to people who are in large debt that they should start to save a little bit somewhere. It certainly would not be a bad idea, if we are to have some sort of pre-funded scheme, to have an idea of how the pre-funding would work and a timetable on the milestones that we are trying to reach by a certain time.
The scheme will always be subject to the vagaries of the market. The FSA might sometimes say, for example, that the levies will have to go one year because there has been some problem in the international markets. UK deposits, as a percentage of the total liabilities of the bank, will be quite small. A major problem in one part of the bank, which is nothing to do with basic banking, could trigger its failure. We have seen that happen. Only last week, a French bank had a problem after a couple of its employees risked something on the market and lost about £800-odd million.
The future risk will not be from big financial issues such as that. It will be from fraudulent or unauthorised operations, in a computer-based trading situation, that might trigger the demise of a large bank. We saw that with Leeson and Barings—that was relatively small—and we could see something like that again. In such a case, almost any amount that is placed in a pre-funded scheme is fairly unlikely to be much more than a percentage of the total payout.
If the Government are to provide that security, why should not we cut out the major banks and say to the general public, “If you want 100 per cent. certainty on your money, stick it into National Savings. Stick it into the Government in the first place, because we could use the money quite well. If you want to go to a bank—you might consider a large bank to be 99.9 per cent. certain—you might get a slightly better rate and you can go there.” Frankly, it is up to the banks to sort out for themselves how to cover their compensation scheme.
Ms Keeble: Will the hon. Gentleman give way?
Mr. Breed: In a moment. I understand the consumer aspect, but the banks have to shoulder the responsibility of maintaining confidence in banks. If the banks come a cropper, the banking industry has to pay for it. The banks should not seek recourse to the taxpayer.
Ms Keeble: The hon. Gentleman seems to be saying that no effort should be made to get the banks to consider pre-funding, and that the Government should simply provide the backstop. Actually, it was about the Government providing liquidity, not paying the bills. Does he accept that there is an extreme moral hazard in that position, because there would be no incentive on the banks to try, because they would know that the Government would simply cough up to the public?
2.30 pm
Mr. Breed: I am sorry if I have confused the hon. Lady, but the case is the reverse. I see no sense whatever in giving the large commercial banks confidence that the taxpayer will come to their aid, so the depositor can actually make a clear decision. We ought not only to re-emphasise support for the demutualised sector in a more modern context, which is a better model for much domestic lending, but give people more opportunity to put their hard-earned savings, particularly up to £50,000, into a clear and reasonable national savings operation that would give them 100 per cent. security. If they want to go out to the market, they take whatever they perceive to be the potential risks of doing so. Otherwise, we will always have to be the lender of last resort, which could be very expensive in the future.
Mr. Bone: I must be misunderstanding this. Is Liberal Democrat policy now that people who put their money into banks have no deposit protection?
Mr. Breed: No, at present, we support the scheme as it is put down. I am just saying that I do not believe that the scheme will be fit for purpose in the future. We have to decide how and when the taxpayer can genuinely underpin the sort of potential liabilities that the large banks will present us with.
When we had a multiplicity of much smaller banks and a vibrant building society sector, it was much easier to put together a compensation scheme that would be funded mainly by the banks and might require a small amount from the Government at some stage. That is not the case today. We have large institutions that are subject to some extreme policies, as we saw with Northern Rock, and are allowed to go far beyond the usual, prudent way. They are subject to all sorts of problems in computer-based trading operations in a market that moves extremely quickly and in which banks can both make and lose an awful lot of money.
Unless we have massive capital requirements, which would be internationally uncompetitive, or require a massive amount put into some pre-funded schemes, there will inevitably be recourse to the taxpayer to provide that sort of assurance. I am quite happy to go along with what we are trying to do because today’s circumstances require it, but I hope that the FSA and the Treasury will look again at how we can genuinely ensure that people get some sort of protection.
As soon as the Government indicated that they would stand 100 per cent. behind the banks, people put their money into something they thought was 100 per cent. safe. Why are we so shy about that? I see no reason why we cannot promote a much more vigorous national savings opportunity so that people can get a reasonable rate of interest with that absolute assurance. They can go outside that if they want to and look at some of the large banks that in general terms have no great difficulty in supplying such rates, but if we are to go through some compensation scheme that will stand behind large amounts, the situation is not satisfactory.
Mr. Bone: It is a great pleasure to follow the hon. Gentleman because his thinking is out of the box and he has real concerns about the whole scheme, which is useful for the debate.
I have a problem supporting the clause. My hon. Friend the Member for Fareham made the good point that people are concerned about whether they will get their money. It is rather like the ABTA scheme: customers do not worry about how it works because if their travel agent goes bust they know they will get the money. That is the bit that people really want to know.
I have particular concerns about the clause because it contains the wonderful phrase:
“The Treasury may make regulations”.
When I see that in a Bill I think, “Aha! The Government are not telling us what they want to do and are hiding it for later on.” That is clearly the case here. A free-funded scheme that we do not know will work might disadvantage the banks in the international scene. If we create a fund that is not adequate and which, in financial terms, puts our banks at a disadvantage against their competitors, there is probably no point in doing it. People outside the Palace of Westminster will be concerned about one issue: they see the banks arrive at this crisis having got away with murder, and because the Government are not putting money away for a rainy day or for when a bank fails, people may perceive that the banks will be off again taking big dividends and giving excessive salaries to executives.
Mr. Hoban: But does my hon. Friend recognise that there are other ways of tackling the issue? It can be tackled through improved regulation such as the macro-prudential regulation that our party has talked about. If a bank goes bust, the people who lose their money are predominantly the investors. They will be encouraging banks to adopt a more cautious and prudent approach, so that they do not lose their investments. Other checks acknowledge that there is a cost to following reckless policies. Moving to a pre-funded scheme is not the only way to stop banks behaving irrationally.
Mr. Bone: I am grateful to my hon. Friend for that intervention. That point would have been the conclusion of my remarks—there must be other ways for us to get the point across to the public that things are being controlled. I looked at the share-placing agreement for the capital that taxpayers are investing in banks. It contains a clause that deals lightly with the emoluments of directors. That could be strengthened. There are other ways of proceeding, so given the way that clause 156 is drafted, especially those wonderful words,
“The Treasury may make regulations”,
I am afraid that I cannot support it.
Ms Keeble: I have a few brief comments. The clause and the proposed new section go to the heart of the issues in the Bill, especially those about building public confidence in our banking system. I strongly support the Bill as it stands. It may be thinking out of the box, but some of the proposals suggested by the hon. Member for South-East Cornwall do not deal with the current pressures facing the banking system. It is not realistic to say that if people want to be confident of their savings, they should put them into national savings. Retail banking is one of our most successful industries, and it is important that the public have confidence and feel able to invest their savings in it, and in national savings, should they want to. We must ensure that the public and institutional investors have confidence and in this instance, the Government have a responsibility to the broad mass of people who want somewhere safe to put their savings.
Mr. Breed: What about Iceland?
Ms Keeble: Part of what we are looking at now, and some of the wider regulations that the Government are looking at, deal with precisely such issues. If the public are to have confidence, they must know that arrangements are in place for when things go wrong. Those arrangements must cover more substantial difficulties than we have seen previously. That is what the provisions are about.
Perhaps the hon. Gentleman should look at the evidence given by the Governor of the Bank of England about the different models for financing such schemes—they were either insurance-based or pre-funded. At the time, the Governor supported a mixed model, but he certainly accepted an element of pre-funding.
We have moved on since the Governor gave evidence to the Select Committee, and it seems that there is a public issue about the way that financial institutions have operated. Both general logic and the public require that people who might have a role in causing major losses to the general public as well as to the economy, should make some provision for, or be seen to contribute to, clearing up the mess. That is partly what contingency funding is about.
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