Banking Bill

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Mr. Hoban: I beg to move amendment No. 37, in clause 159, page 83, line 30, after ‘loan,’, insert
‘which shall not be higher than the Bank of England base rate,’.
The Chairman: With this it will be convenient to discuss amendment No. 38, in clause 159, page 83, line 31, after ‘conditions’, insert
‘which shall ensure that repayment of the loan is made on a fair basis.’.
Mr. Hoban: The provisions refer to loans that might be made by the national loans fund. We have established our long-standing difference of principle about pre and post-funded schemes, but what is important is the access to money in the event of a default by a bank. Amendment No. 37 would limit the interest rate payable on money borrowed from the national loans fund to no higher than the Bank of England base rate. I instinctively assume that it would not be higher than the base rate, but we have seen examples in the last few months where a penalty rate has been levied on money borrowed as part of the special liquidity scheme. I would like clarity from the Minister about the rate that will be used to determine the interest payable on moneys borrowed from the national loans scheme, because clearly the cost will fall on the levy payers and they will need to understand what rate will be applied. That is happening at the moment to cover the amount that has been borrowed to deal with the transfer of balances from Bradford & Bingley to Santander and its UK subsidiary, Abbey.
Amendment No. 38 relates to what happens when moneys are borrowed from the national loans scheme and what the period of repayment is for those loans. The current situation for the money borrowed to cover the transfer of balances to Santander, and to Abbey, makes a three-year delay on repayment of principal, and the loans will be paid thereafter. The amendment would ensure that a penal or pro-cyclical loan repayment scheme was not put in place.
In the previous debate we talked about the impact of payments being made after the event. There is no guarantee that a pre-funded scheme will have sufficient capital to cover all the costs of a default. The main question is, in a situation where money has been borrowed, what will the period of repayment be, or how will it be determined? We do not want a situation where the level of repayments made to the national loans fund is potentially damaging to the wider financial services sector or the banking sector. I should be grateful for clarification from the Minister on the rate of interest paid and how the period of repayment will be determined.
Ian Pearson: The effect of the proposed amendments would be to limit the interest rate that could be charged on NLF loans to the FSCS to between an upper limit, set by the Bank of England base rate, and a lower limit set by the Government’s cost of funds—I assume that would be the consequence of amendment No. 38. It is surely fair that the interest covers the Government’s cost of funds. In any event, it is a statutory requirement of the National Loans Act 1968, which governs NLF lending, that the rate of interest on a loan must be set at a rate that would be sufficient to prevent a loss, taking into account the cost of the borrowing to finance the loan.
It is not clear what would have to happen if the Bank’s base rate fell below the Government’s cost of funds; that is not just a technical possibility. The rate of interest on any loan would also depend on the expected maturity date of the loan. Depending on market conditions and other factors that affect the rates on longer-term loans, the applicable rate of interest may have to be higher then the Bank’s base rate.
However, it is not sufficient that the interest charged on NLF loans merely covers the Government’s cost of funds. Loans to the FSCS are really loans to the levy payers, who are ultimately responsible for meeting the scheme’s costs. Government loans to commercial undertakings need to be made at proper commercial rates, which ensure that they can compete fairly, and that there can be no question of any subsidy or state aid, which could, of course, be challenged under European law.
I hope that I have clarified the situation. If the amendments are pressed, I invite the Committee to vote against them.
Mr. Hoban: The Minister replied to amendment No. 37, but not to amendment No. 38.
Ian Pearson: The question of the period of loan repayments would have to be agreed between the Financial Services Compensation Scheme and the Treasury. The Treasury would be able to consider all these factors and would consult the tripartite authorities.
The interest rate will be set on the same principles as for Government lending to bodies operating in competitive markets. That is appropriate, because the loans are effectively made to the scheme levy payers, who ultimately fund the scheme.
Mr. Hoban: I am grateful for the Minister’s clarification on amendment No. 38 and the basis on which the Treasury and the FSCS would negotiate the payment of the schemes. On amendment No. 37, the Minister has clarified the basis on which the interest rate will be calculated. I am content with his explanation on that and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Ian Pearson: I beg to move amendment No. 18, in clause 159, page 83, line 36, at end insert:
‘(and the regulations may have effect despite any provision of this Act);’.
Clause 159 inserts a new section into the 2000 Act, which allows the Treasury to authorise the making of loans from the national loans fund to the FSCS. It also provides for the making of regulations to provide for limits on borrowing and for the collection of levies to ensure that the loans are repaid.
The amendment is intended to make it clear that the explicit wording of section 223 of the 2000 Act, in particular, cannot restrict what those regulations can do. It is essentially a technical amendment and the need for it was not appreciated until a comparatively late stage. I regret the inconvenience to the Committee. However, it was appreciated at a very early stage of the banking reform work that the FSCS cannot pay large amounts of compensation, or make a substantial contribution to the cost of a special resolution regime, if it has no money. The FSCS could, of course, raise levies from the industry and, if pre-funding had been introduced, it could use whatever funds had been built up in that way. However, there is no guarantee that those sources would be sufficient, or that it would be possible—or desirable—to raise levies of the scale required from the industry at a time of financial stress.
As we all understand, the FSCS has to be able to borrow. It can borrow from commercial banks, but that too cannot be a reliable source of funds at a time of financial stress.
The Government stand behind the FSCS so that it can be relied upon to play its role in meeting the claims that arise. There can be no question of allowing the scheme to run out of funds. That is why we have made it clear that we would ensure that the FSCS has access to immediate liquidity through borrowing from the public sector. That has already been done by ensuring that finance was available to the scheme to enable it to contribute to the costs of transferring accounts from Bradford & Bingley to Abbey and from Heritable and Kaupthing Singer and Friedlander to ING. Those loans have been made by the Bank of England and will be refinanced by the Treasury in due course.
Clause 159 permits public sector loans to the FSCS to be provided in the most efficient way. The necessary funds can be raised by the Treasury as part of its ordinary financing operations and made available to the scheme without the use of votes and estimates procedure. That is important because we cannot rely on financial crises to consult the estimates timetable before they occur. This is essentially a technical amendment and I hope that its purpose is clear.
Stewart Hosie: I am slightly intrigued by this technical amendment. As the Minister said, clause 159 is designed for a particular purpose. However, by inserting these words into the Financial Services and Markets Act 2000 it allows the Treasury to make regulations about amounts that are borrowed, permitting the scheme manager to impose levies, setting the classes of people who can be levied and setting the amounts and timing of those levies and so on. The clause in subsection (5) goes on to say:
“The compensation scheme may include provision about borrowing under this section provided that it is not inconsistent with regulations under this section.”
We have a problem in that we have not seen the regulations we are talking about. If the Minister has his way, we then have to add:
“the regulations may have effect despite any provision of this Act”.
He said that this was to get past a particular obstacle, to get round a particular hurdle. I understand and respect that, but that is not what the words on this bit of paper say. The amendment is extraordinarily wide. These regulations will have effect despite any provision. Would the Minister not consider it better to put in place an amendment that bypasses the obstacle, which he quite rightly identified at the beginning of his speech, rather than have something in the Bill, through this amendment, that is so wide that the regulations may have effect despite any provision and not simply the one he specified?
Ian Pearson: The purpose of the amendment is simply to put beyond doubt that regulations made under the new section 223B power can allow the FSCS to raise levies to pay interest on borrowing from the national loans fund, notwithstanding any limit imposed under section 223.
Amendment agreed to.
Clause 159, as amended, ordered to stand part of the Bill.

Clause 160

Procedure for claims
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: Will the Minister expand on proposed new section 214(1C) of this clause? It enables
“the scheme manager to settle a class of claim by payment of sums fixed without reference to, or by modification of, the normal rules for calculation of maximum entitlement for individual claims.”
When I read that, I wondered whether it meant that the FSCS could make an interim payment to a certain class of depositor. It could say that, rather than go through the full rigmarole of calculating exactly the deposit balance, people who usually have more than £10,000 in their accounts could have £5,000 as an interim payment. That would be a pragmatic way in which to deal with the problems of eligibility, simplifying criteria and that sort of stuff, or does it mean something completely different? If it is intended to make an interim payment, how would the FSCS recover any surplus or excess of payment made above the level of entitlement of someone in the scheme? It is not clear what the scheme would do in practice. The explanatory note is not much clearer either, particularly given that it is shorter than the clause to which it refers.
3.15 pm
Ian Pearson: Let me try to shed light on the matter. Clause 160 inserts three new subsections into section 214 of the Financial Services and Markets Act 2000. The purpose of those provisions is to facilitate speedy payment of compensation to depositors or to facilitate the speedy transfer of their accounts to another bank under the bank insolvency procedure in part 2 of the Bill. Proposed new section 214(1A) allows the FSA to make rules to deem claims under the scheme to have been made. It will enable the scheme to begin processing the claims from the moment of default, rather than waiting for actual claims to be made. The claims process, especially when dealing with large volumes, will obviously take time so the sooner that it can begin, the better.
The hon. Member for Fareham talked about proposed new section 214(1C). It allows the scheme to deal with certain types of claim, without having to make calculations of individual claimants’ entitlements. The Government believe that that could help to speed up a bulk transfer of deposits under the bank insolvency procedure or the special resolution regime, which is why we sought to insert it into the clause.
Mr. Hoban: From the Minister’s explanation, the clause would enable a bulk transfer, as happened with the transfer from Bradford & Bingley to Abbey. It does not give the FSCS the power to make an interim payment to depositors. It is really just to facilitate a bulk transfer.
Ian Pearson: I can confirm that the clause is not about interim payments.
Question put and agreed to.
Clause 160 ordered to stand part of the Bill.
Clauses 161 and 162 ordered to stand part of the Bill.

Clause 163

Payments in error
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: I have a question about what will become section 223C(2) of the 2000 Act. It states:
“This section does not apply to payments made in bad faith.”
If penalties are attached to making a claim in bad faith, what sanctions will there be if someone makes a bogus claim and under what legislation will such action be covered?
Ian Pearson: I do not have an answer for the hon. Gentleman at the moment. It might be helpful if I write to him.
Question put and agreed to.
Clause 163 ordered to stand part of the Bill.
Clause 164 ordered to stand part of the Bill.

Clause 165

Delegation of functions
Mr. Breed: I beg to move amendment No. 10, in clause 165, page 86, line 27, at end insert—
‘(4) Any scheme agent who reneges on their contract of employment will be subject to a penalty.
(5) The Chancellor of the Exchequer may make such regulations as are necessary for the establishment of a penalty.
(6) The power to make regulations under subsection (5) is exercisable by statutory instrument.
(7) A statutory instrument containing regulations under subsection (5) may not be made unless a draft of it has been laid before and approved by resolution of the House of Commons.’.
I shall not detain the Committee too long. I just want to tease out from the Minister the purpose behind giving the FSA powers to appoint a scheme agent. I understand that the FSA is the scheme manager. I suppose that, as much as anything else, my concern revolves around responsibility. We always like to put layers between us and decision making. I want the FSA to be responsible. If it has to employ someone new to be the person who organises matters, let it do so. I am not particularly in favour of saying that it delegate functions. Even the explanatory note states:
“Before entering into arrangement the FSCS must be satisfied that the person is competent to carry out the function”.
I should jolly well hope so, and that the person is given sufficient direction. Our excellent staff have drafted a rather convoluted amendment, but is there an absolute necessity for such a provision. Let us leave the FSA to get on with it and to be responsible for managing matters and not delegate that responsibility to other people. While such people may well be able to do the job properly, we all know of wonderful examples of when the Government have delegated powers to contractors and agents, and things have gone belly up. I do not know why it is absolutely necessary for the FSA not to be wholly responsible for such matters. If it wants to employ some proper people to do the job, that is fine, but why must delegated power be given to some sort of scheme agent?
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