 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Banking Bill |
Banking Bill |
The Committee consisted of the following Members:Alan
Sandall, Mick Hillyard, Committee
Clerks † attended the
Committee Public Bill CommitteeThursday 13 November 2008(Afternoon)[Mr. Roger Gale in the Chair]Banking BillClause 157Special
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’.
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)?
|
| |
| ©Parliamentary copyright 2008 | Prepared 14 November 2008 |