Banking Bill

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Mr. Breed: I entirely agree with that. What I am saying is that the original scheme had no recourse to the taxpayer. It was never even considered that it would be necessary. I want the scheme, as far as possible, to have no recourse to the taxpayer, whether that is achieved through massive pre-funding or some sort of amazingly risk-based premium insurance. The scheme is largely to do with the banks and the institutions looking after themselves. If it is almost inevitable that it will come to the taxpayer, I am not happy.
Ms Keeble: I completely agree that the call on the public purse should be as small as possible, given that, in a sense, there is a failure of the private sector. The Government backstop for a pre-funded scheme would be to provide liquidity. It would not necessarily be to pick up the costs, because there would be the assets from the failed bank and issues about loans and repayment. It is important that there are visible, up-front contributions and that thought is given to how the banking industry will deal with possible failure. That is partly what the argument—the pre-funding—is about.
We have heard different scales for the contributions that might be needed, and an indication—from the Governor, I think—that if a fund is to be built up in any reasonable way, the contributions have to start early. We are not talking about the Government backstop being a blank cheque written by the taxpayer to bail out the banking industry, as was clear in the evidence on Tuesday. We are talking about provision of liquidity that is likely to be temporary, pending the arrangements made around a bank failure. The hon. Member for South-East Cornwall may say that was not needed previously, but we did not think that HBOS would get into difficulties; all kinds of things have happened that we did not think possible. We have to recognise that the scheme has to deal with a different order of events, and a different banking world from the one we were used to and which we might like to inhabit. Unfortunately that world has gone. Those changed circumstances require something more substantial and it is right that it should be done by regulation.
In essence, the provision is a reserve power that can be called on to introduce the scheme, and then some of the details will be worked out. There are two reasons for that. First, it was clear in the evidence given on Tuesday that some complex risk-based premium issues need to be looked at and, given that the Governor thought that a hybrid scheme was possible, that issue too needs to be looked at. We also need to consider the scale of the different institutions and how the payments are structured. I absolutely would not want a scheme that let the guilty parties off the hook. I completely take on board the point made by the hon. Member for Wellingborough about not wanting to bring in general sweeping regulation. However, we are acting now because we need confidence in the banking system, so we cannot say, “Okay, we’ll do all the rest and then some way down the line we’ll think about this particular thing.”
2.45 pm
Mr. Hoban: Is not the reality that although the Government will have the powers to introduce a scheme, there is a clear expectation that it will not be introduced now? The hon. Lady wants certainty now, but the reality is that these are enabling powers, not actual powers.
Ms Keeble: I completely take the point, but the inclusion of the powers in the Bill now, puts my constituents in a position to say, “This is what the Government can do; this is what can happen.” They can see that provisions are in place and that we will not get into a further crisis some way down the line and have to come back with primary legislation, which takes so long, and start to look at setting up such a scheme.
It is a difficult situation because we are trying to deal with changed circumstances, scales of losses that we had perhaps not previously expected, and the real complexity of how the structures of the scheme might work. On the contribution that the banks might make, even the Governor of the Bank of England had to be pressed and pressed when talking about, as I recall it, non-negligible billions. We need to say now that we are prepared to give the Government the powers to introduce a pre-funded scheme so that we can make sure that, in consultation with the industry, we can give the public of this country the best possible assurance that if they put their money into a bank, their interests will be protected. We need to give that to people now and the clause is key to doing so. That is why I strongly support it.
Ian Pearson: So there we have it. The view of the official Opposition is that they are, in principle, against asking banks up front to pay some money in case of the possibility of future banking failures. In fact, the hon. Member for Fareham went further, and said that even after failure, they should be spreading the burden over a number of years. I have to ask him and the official Opposition, “Have you been listening to what ordinary people are saying?” I do not think that they can have been listening.
It is absolutely right that we take the powers in the clause and accept the principle of pre-funding. We made it clear that now is not the time to introduce a pre-funding scheme. In some of the debate that we have had earlier, we have been trying to design the scheme, but now is not the time to do that; now is the time to say that as a matter of principle, we think it is right that pre-funding should be introduced at some time in the future. We should talk about the practical details and having a risk-based approach to making contributions, as mentioned by my hon. Friends the Members for South Derbyshire and for Northampton, North, who made an excellent contribution to the debate. However, we can do so when we debate how pre-funding might be introduced in the future. We do not need to make provision in the Bill for risk-based levies because the Financial Services Authority already has the power, but I agree that it is something to be considered, if a pre-funding scheme should be introduced.
On building societies, I want to briefly say that large parts of the Government’s proposals in the Bill for the special resolution regime will ensure that the Government can resolve banks and building societies through private sector solutions. That will avoid the recourse to compensation in the first place, which clearly must be our last resort.
I was not clear about the official position of the Liberal Democrats on this matter—whether they are favour of pre-funding.
Mr. Breed: We are happy to support pre-funding and what the Government are doing. Our view is that it will be in place and fit for purpose in months rather than decades. This is a plaster, to try to cover what is a potentially very large problem. Unless real intellectual thought is given to exactly how we can properly constitute a compensation scheme for the circumstances that banks are now in, the provision will be wholly inadequate.
Ian Pearson: I am glad that the Liberal Democrats are at least in favour of the principle of pre-funding. They seem in a great rush to introduce it. Given the turmoil in financial markets, now is certainly not the time.
I recognise some of the arguments that have been expressed about pre-funding. We appreciate the concern that levies would be a charge on banks’ profits and reduce banks’ ability to pay dividends. We recognise that the banking industry thinks that it might be able to earn more by investing the money itself, rather than by placing the money on deposit with the national loans fund, although recent events might have dented that argument a little.
Mr. Hoban: Will the Minister accept that, given the way in which he is framing the debate, the levy is payable, potentially, by all financial services sector companies—not just by banks? That is what his clause says. It is not restricted to banks, building societies or credit unions—it includes all financial services. He needs to accept that when talking in the debate.
Ian Pearson: I certainly accept that we are taking the powers to enable us to do that in the future—and it is absolutely right to do so. I return to the principle: we fundamentally believe that banks should be paying up front, in case there is potential bank failure in the future. That is what our citizens would expect, and I think it is the right thing to do.
Mr. Hoban: The powers enable not just banks to contribute to the cost of bank failure, but insurance brokers, independent financial advisers, fund managers and other categories of financial services business. Does the Minister accept that? He seems keen to focus the argument on banks, but other financial services companies, in accordance with the clause, will be able to contribute to the cost of bank failure too.
Ian Pearson: We have made it very clear that sectors should consume their own smoke when it comes to such matters. We discussed that in the debate earlier. I am not surprised that I did not persuade the hon. Gentleman to withdraw amendment No. 5, because he is simply completely against the principle of banks paying anything up front. The general principle that the costs of failure should be borne by the sector where that failure occurs is an important one, and we shall be pursuing it.
Mr. Robert Flello (Stoke-on-Trent, South) (Lab): Does my hon. Friend accept that in the modern financial world, all the different institutions are so interrelated that it is difficult to isolate one particular sector, such as the banks from the insurance companies? But I believe he is right that a sector should consume its own smoke.
Ian Pearson: My hon. Friend is absolutely right in pointing out that the parts of the financial services sector are extremely interrelated. All the different firms and companies in that sector share a great interest in the financial stability of the sector as a whole.
When it comes to pre-funding, it is important to recognise that pre-funding can allow the costs of bank failure to be spread over a period. It can reduce the pro-cyclicality of the post-funded system, in which banks have to contribute after a failure, when the financial stress is clearly greater. It is also important to recognise a point raised by the hon. Member for Wellingborough—that one of the great features of an up-front scheme is that any institution that failed would have previously contributed.
I stress that there is a debate still to be had here, if a decision is taken to introduce pre-funding in the future. We will want to have a lot of discussion about how a scheme would work: discussions between the Bank of England, the FSA, the banks and building societies and their associations and the Government. There will be a consultation before any step is taken on pre-funding. The Committee and others will also note that pre-funding can be introduced only with parliamentary approval under an affirmative resolution procedure. The clause simply gives us the powers to introduce pre-funding at a later stage. It is a sensible piece of contingency planning and I commend it to the Committee.
Mr. Hoban: We have had a useful debate. There are strong views on either side. The Minister needs to be very careful. He framed the debate in the context of banks consuming their own smoke and paying the cost of failure. I would agree that banks need to pay the cost of their failure; no one disputes that. The point at issue is how and when they do so. But the clause is not just about banks. It is not just about a pre-funding scheme for banks, and banks themselves paying for it; it affects the whole of the financial services sector as covered by the Financial Services Compensation Scheme.
The Post Office, for example, sells financial services products. Will it be covered by the scheme? Will we be asking the Post Office to pay up front into this scheme? The Minister has not talked about the Post Office, but I wonder whether it will end up having to contribute. We are asked to approve today a clause that might be used, which might cover banks and which might ask others beyond banks to contribute. It might be risk-weighted. It might be restricted to non-negligible billions, to use the Governor’s phrase. It might ask for just a token contribution. It might be built up over three years or 20 years. It is all very vague and insubstantial.
The Minister has not set out clearly how the scheme would work, if it were ever to be introduced. That is one of the failings. Setting aside the argument about principle—we disagree with the principle of pre-funding—even as it stands the clause lacks definition. It lacks a clear sense of where the limits are. The words that the Minister used do not necessarily reflect the full breadth of the potential scheme as set out in the clause. The risk is that the Government are embarking on a scheme and have no idea where they will end up. In supporting this, the Committee would have no idea where the scheme might end up in future years. I do not think that legislation should be made in this way.
If it is the Government’s view that pre-funding is needed, they should set out a far clearer idea of the nature of the scheme than they have laid before the Committee this afternoon. Whether members of the Committee have a fundamental disagreement of principle about whether pre-funding is right—I believe it is not right and Members on the other side of the room believe that it is right—we have not been given the detail that we need to determine whether it is a power that the Government should have. That is why I oppose the clause.
Question put, That the clause stand part of the Bill:—
The Committee divided: Ayes 8, Noes 2.
Division No. 2]
Blizzard, Mr. Bob
Breed, Mr. Colin
Flello, Mr. Robert
Keeble, Ms Sally
Pearson, Ian
Robertson, John
Todd, Mr. Mark
Wilson, Phil
Bone, Mr. Peter
Hoban, Mr. Mark
Question accordingly agreed to.
Clause 156 ordered to stand part of the Bill.
3 pm
The Chairman: In the interests of clarity, clause 157 will come later because it is taken earlier, if you see what I mean. The procedure from now on is that where there is a clause without amendments, I will call the clause. If any hon. Member indicates that they wish to debate the clause I will call the Minister to move it and we will debate it. If nobody expresses any interest in the clause I will not call the Minister and waste his or the Committee’s time, and I will put it formally. I hope that that is understood.
Clause 158 ordered to stand part of the Bill.

Clause 159

Borrowing from National Loans Fund
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