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General Committee Debates
Banking Bill

Banking Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, Mr. Jim Hood, Mr. Eric Illsley
Barlow, Ms Celia (Hove) (Lab)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Eagle, Angela (Exchequer Secretary to the Treasury)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Keeble, Ms Sally (Northampton, North) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Pearson, Ian (Economic Secretary to the Treasury)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Smith, Geraldine (Morecambe and Lunesdale) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Viggers, Sir Peter (Gosport) (Con)
Wilson, Phil (Sedgefield) (Lab)
Alan Sandall, Mick Hillyard, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 13 November 2008


[Mr. Roger Gale in the Chair]

Banking Bill

Clause 157

Special resolution regime
1 pm
The Economic Secretary to the Treasury (Ian Pearson): I beg to move amendment No. 177, in clause 157, page 81, line 42, after ‘bank’ insert
‘, building society or credit union’.
The Chairman: With this it will be convenient to take Government amendments Nos. 178 and 17.
Ian Pearson: It is a pleasure to serve under your chairmanship, Mr. Gale. Without wishing to intrude into what would normally be the province of a clause stand part debate, I shall first say something about clause 157. I emphasise that the clause allows the Treasury to require the Financial Services Compensation Scheme to contribute to the costs of the special resolution regime. As we have discussed before, the Government believe, as a point of principle, that the financial services sector, through the FSCS, should contribute to the costs of the SRR.
The amendments are all technical. Government amendments Nos. 177 and 178 amend the clause to allow the FSCS to contribute to the costs of the resolution of building societies and, if the stabilisation powers were extended to credit unions, credit unions as well. That ensures that our approach to the FSCS contributing to the costs of resolving banks can be extended to building societies and, if needed, credit unions. We discussed that earlier today.
Government amendment No. 17 ensures that the FSCS contribution to the SRR will not be classified as FSCS management expenses. That brings the treatment of the FSCS funding of the SRR in line with the treatment of the FSCS funding of compensation payments to claimants under the scheme. I commend these sensible technical amendments to the Committee.
Mr. Mark Hoban (Fareham) (Con): It is a pleasure to serve under your chairmanship, Mr. Gale. I point out, for the benefit of Government members of the Committee, that it is only as a consequence of the presence of Opposition members in Committee this afternoon that the Committee can continue, as I think that the Government Benches are not quorate. I am sure the usual channels are cognisant of our good will in ensuring that the Bill proceeds.
Lord Commissioner of Her Majesty’s Treasury (Mr. Bob Blizzard): By maintaining their places, Opposition members enable Government members to be carrying out other duties in the corridor. Those members will return to Committee in due course.
Mr. Hoban: It is always better for armies to be visible than invisible, according to my friends with military experience.
I want to ask the Minister about Government amendment No. 17. I had intended to raise this point in a clause stand part debate. In the context of the rescue of Bradford & Bingley, my understanding is that the interest that is being charged on the £14 billion that the FSCS has borrowed is classified as management expenses and therefore will be borne not by the depositing sector within the FSCS, but by all participants in it—independent financial advisers, investment managers, insurers and so on. I listened to the Minister’s explanation of Government amendment No. 17. Will that have retrospective effect or will IFAs and others have to bear that cost, as it is currently classified as part of the management expenses?
Ian Pearson: My understanding is that the FSCS was used to fund the deposit book transfer of deposits to Abbey Santander, and this is similar to the provisions in the banking insolvency procedure in the Bill for a deposit transfer, which the Bill provides for the FSCS to fund through clause 110(1)(b). Provision by the Treasury under clause 110 for the FSCS to fund the use of a stabilisation tool would technically occur before the onset of insolvency, and therefore before the FSA can currently activate the FSCS. However, that does not mean that the firm in difficulties might be resolved at lower cost to FSCS levy payers.
As I explained when dealing with amendment No. 17, our intention is to bring the treatment of FSCS funding of the SRR into line with that for its funding of compensation payments to claimants under the scheme. We believe that we have achieved that.
The hon. Gentleman asked about interest. Yes, interest is regarded as a management expense. However, it is a specific expense that is borne only by deposit takers, so individual financial advisers do not pay. I hope I have clarified the point.
Mr. Hoban: I am grateful to the Minister for that clarification. Having had conversations with IFAs, I know that the position that he has outlined will be welcome to them, as there was ambiguity about the provisions for the FSCS and others. IFAs will be grateful to the Minister for clarifying the matter.
Mr. Colin Breed (South-East Cornwall) (LD): I accept the amendments. However, I am sure the Minister is aware that there is much disquiet among building societies about their contributions to the fund in the current circumstances. The formula is based upon their retail deposits, which in the past was not a bad measure. The more deposits they have, the more they should contribute to the fund. In today’s circumstances, we are bailing out people with relatively little in retail deposits. Much of the problem is caused by the fact that the building societies have relied on the wholesale market. It seems a tad unfair that those that have been operating with significant retail deposits and lending a proportion of that money, which is much more prudent in today’s circumstances, are now being required to pay a larger ratio into the FSCS fund.
I put that down as a marker because I believe the Minister ought to consider the formula for contributions before Report.
Ian Pearson: I understand the point raised by the hon. Gentleman, which was discussed briefly in earlier debates. I know that some building societies feel strongly about the matter, and I understand that they have been making representations to the Financial Services Authority, among others. I have no doubt that those representations will continue. The Government will continue to follow the situation closely.
Amendment agreed to.
Amendments made: No. 178, in clause 157, page 81, line 44, after ‘bank’ insert
‘, building society or credit union’.
No. 17, in clause 157, page 83, line 3, at end insert—
‘(2) At the end of section 223(3) of the Financial Services and Markets Act 2000 (management expenses) add “;
(c) under section 214B.”’.—[Ian Pearson.]
Question proposed, That the clause, as amended, stand part of the Bill.
Mr. Hoban: I have some questions about the operation of the clause. I take the Minister back to his brief opening remarks on the last group of amendments. Let us look at the matter in a different way. Traditionally, when there is an administration or insolvency—a process to sort out the problems of a failing company, be it a bank or otherwise—the cost of the process is borne by the company itself, not by its peers. Why should sound and stable banks pay the costs of a bridge bank, temporary public ownership or the transfer to a private sector purchaser? Surely the investors in the company, principally the shareholders, should pay either through a lower distribution on wind-up or through lower proceeds on sale. Why is it appropriate for banks that have not failed to pay the costs of a bank that has? I distinguish between the FSCS in its normal activities and some of the costs incurred in the process under discussion.
I shall move on to more detailed questions about the individual parts of proposed new section 214B. Proposed new subsection (1)(b) states that the section applies where
“the Treasury think that the bank was, or but for the exercise of the stabilisation power would have become, unable to satisfy claims against it.”
To what extent would the bank have to be unable to satisfy those claims for the Treasury to exercise that power? We have just debated amendment No. 17 about the treatment of expenses, which relates to proposed new subsection (2). The assumption in proposed new subsection (3) appears to be that the costs will be borne by the banks—the Minister provided clarification on amendment No. 17 on that basis—but the new subsection does not make it clear that that cost will always be borne by deposit takers. Is the expectation that other members of the FSCS could bear those costs or would those costs, in the first instance, always rest with the deposit-taking sector?
On proposed new subsection (3)(a), how will the Treasury determine the costs that will borne by the scheme? What principles will it use to determine which costs will be borne by the scheme and which will be borne elsewhere? We spoke about Bradford & Bingley on the previous group of amendments. The FSCS has taken out a loan of £14 billion to fund the transfer of balances. Scheme members will bear the interest on that, which is about £900 million per year, and they could, potentially, also bear any defaults on the Bradford & Bingley mortgage book. One assumes that if a similar partial transfer had to be used in the future, the FSCS would bear the same type of costs.
I am not sure how much wider the definition of costs could go. Will the scheme cover the operational costs of a bridge bank, or will the bridge bank be expected to pay for those? If an indemnity on the value of the mortgage book is given to a purchaser, will the Government expect the scheme to bear those costs? Are there other operational costs that the Government expect the scheme to bear? What are the parameters of the costs that the scheme could bear? It would be helpful to provide some predictability.
Proposed new subsection (3)(b) states that the Treasury shall make regulations
“providing for independent verification of the nature and amount of expenses incurred”.
It also refers to the potential appointment of an auditor. I alluded to that is an earlier debate on the objectives, when I raised the issue of money being used in an efficient and economical way. Who will control and monitor the amount that is being spent? It is all very well auditing something, but that is a retrospective check. Will there be a prospective check? If the FSCS and its members are to bear the costs, is there a role for them, alongside the tripartite authorities, in agreeing the types of cost that could be incurred? Potentially, they will be writing a blank cheque to the tripartite authorities and they would like a level of control over the types of cost that they will be expected to pick up. The proposed new subsection is not clear on whether that control would be in place.
1.15 pm
I had some difficulty understanding proposed new subsection (4), maybe because I am not a lawyer. Perhaps the drafting is clearer to those better versed in the law than I. I think it is trying to set a cap on the amount the scheme would pay, so that it would not exceed the amount payable if the stabilisation power had not been exercised. I assume that means that, rather than a failing bank’s being dealt with through one of the stabilisation options in part 1, it would become insolvent and be dealt with through administration or insolvency or the bespoke tools that we are going to deal with in part 2 and part 3. That is the comparison that will be made.
The Minister will recognise the complex and subjective nature of the judgment that the valuer would need to reach. The outcome of those judgments would have a significant impact on the cost incurred by the scheme member. Will the Treasury consult with scheme members before issuing regulations to ensure that there is some consensus on the rules that will guide the independent valuer? I am not saying that that will determine the outcome but clearly there would be an opportunity to reduce the conflict between scheme members and the tripartite authorities—perhaps avoiding the need to appeal to a court or tribunal—if there were some consensus about the process that a valuer would use in approaching a valuation.
Again in proposed new subsection (4), I think the expense is limited to the amount the scheme would have paid out. Is this calculated on a gross basis, that is, does it not take into account the recoveries from the bank or the amounts actually paid out? If the amount that would have been paid out was £10 million but for the stabilisation options, but only £5 million had to be paid and, of that, a bank had assets that would cover £3 million of costs, it would end up with the FSCS bearing a cost of only £2 million—that is, the amount paid, net of recoveries. What is the limit that the scheme will pay? Is it the £10 million; is it £8 million, as the explanatory note suggests; or is it the level of recoveries of £3 million? I am not sure how, in proposed new subsection (4), paragraphs (a) and (b) interact with each other to determine the amount the scheme will have to bear. I would be grateful for clarification.
Regarding proposed new subsection (7), my understanding based on the explanatory notes is that these expenses could be funded from a pre-funded Financial Services Compensation Scheme. Will the Minister confirm that that is the intention of proposed new subsection (7)?
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Prepared 14 November 2008