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
160Procedure
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
163Payments
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
165Delegation
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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