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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