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]
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
159Borrowing from National Loans Fund
| 
