Ian
Pearson: Let me begin by restating why the Government
believe, as a point of principle, that the financial
services sector, through the FSCS, should contribute to the
costs of the SRR. I will then address a number of points
raised by the hon. Gentleman.
There are two
strong arguments why the financial services sector should be
contributing to the costs of the SRR through the FSCS. First, where
intervention is necessary to prevent costs to the wider economy of the
failure of a bank, we believe there is a compelling argument for banks
to contribute to that cost because banks—and the financial
services sector more widely—benefit directly from the
achievement of the SRR objectives, particularly the objective of
enhanced financial stability and confidence in the banking system. It
is therefore entirely appropriate that the sector should contribute to
measures that achieve these objectives. Secondly, but for the use of a
resolution tool, the financial services sector would have to fund
through the services of the FSCS the cost of compensation to depositors
arising from the failure of a deposit taker. Therefore it is also
entirely appropriate that the Treasury may provide that the banks
contribute to the costs arising from the exercise of the special
resolution regime tools that are designed to address a failing
bank. In
response to consultations on the provision, the banking industry has
consistently opposed our plans. In its view, the costs of resolution
should be met by an acquiring company or the insolvent bank’s
estate. However, industry should be called upon before taxpayers
contribute to any
shortfall.
Mr.
Hoban: Is it the Minister’s view, therefore, that
the acquirer or the estate of the failed bank should bear the costs
initially, and that anything in excess of that should be
borne by the wider financial services
sector?
Ian
Pearson: That probably depends on the circumstances and
the particular transaction. I have tried to outline the general
principles that underpin clause 157. The clause notes that the FSCS
will be called upon to contribute to the resolution costs when a
stabilisation power under part 1 of the Bill has been used, and when
the Treasury considers that, but for the exercise of that power, the
FSCS would have normally been triggered to pay out to depositors under
the provisions of the Financial Services and Markets Act
2000. I
shall draw the Committee’s attention to a number of safeguards
that the Bill puts in place around that power. First, as set out in
subsection (4)—which the hon. Gentleman spent some time
discussing—the Treasury will only contribute up to the
hypothetical cost of depositor compensation payments. Secondly, as also
set out in that subsection, if the FSCS pays out to depositors it
should not be called upon to contribute to the costs of any other
resolution tools for the same bank. Finally, as set out in subsection
(3), there will be independent verification of the nature and amount of
the expenses
incurred. The
hon. Gentleman queried the meaning of “unable to satisfy claims
against it”. I am advised that that is a standard term that
refers to when the FSCS will be triggered. It is in part 5, chapter 15
of FSMA. The subsections regarding the resolution received many probing
questions from the hon. Gentleman. I have already drawn particular
attention to subsection (4), which outlines some of the requirements of
the regulations, and subsection (3) sets out that the Treasury can make
regulations to specify the expenses that the FSCS should contribute to.
It is important to recognise that the regulations will be fully
consulted on. To return to the hon. Gentleman’s
example, we do not think that the operational costs of the bridge bank
would be
included. While
we will consult on the regulations, it might help to briefly indicate
some examples of what resolution costs could include. We have in mind
the market value of any guarantees provided by the authorities to the
bank, financial assistance provided to support a resolution, the
administrative costs of the SRR—for example, the cost
of an advisory service procured by the authorities to effect a
resolution—and certain compensation
costs. The
hon. Gentleman also asked whether the acquirer pays the resolution
costs. Yes, the acquirer will bear those costs. For example, under the
bank resolution fund the proceeds of any resolution will flow back to
compensation
costs. The
hon. Gentleman also raised the issue of consultation. He asked whether
the Treasury will consult with scheme members on the rules that will
guide the independent valuer, and I want to be clear that the answer is
definitely yes. We can consult on any principles, but we must recognise
that valuation involves complex calculation of a hypothetical
insolvency, so it might not be appropriate to involve FSCS members in
all of the independent valuer’s procedures and calculations. I
hope he appreciates that throughout the Bill we have always wanted to
commit to working with the industry in a consensual, open and
transparent manner, and that applies to the extent that it
is possible to do so in this case, just as it has with other aspects of
the Bill that we have discussed.
Mr.
Hoban: I am grateful to the Minister for those answers but
am concerned about who will bear the costs initially. He indicated that
the acquirer would bear
some of the costs through the bank resolution fund, but I am still not
clear that the creditors and shareholders would bear some of that cost
as well. I am with the Government on ensuring that the taxpayer does
not bear the cost, but there is a residual concern that in trying to do
so we give the impression that the first port of call is the FSCS,
rather than the acquirer or creditors. I might return to that point on
Report to get a little more detail clarifying the
ordering.
From the
Minister’s comments about the limit on how much could be paid, I
think we may take it that if the hypothetical cost was £10
million and the FSCS only paid out net £5 million, the
contribution that members would make could still be a further £5
million; so the way in which that works is now clearer in my
mind. Question
put and agreed
to. Clause
157, as amended, ordered to stand part of the
Bill.
Clause
77Overview Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: This point might seem rather trivial to the
Minister, but I would like to know why in subsection (1) the
procedure is described as insolvency. The normal procedure is either
liquidation or administration, so insolvency seems to be a new term
invented for the purposes of the Bill to describe the process. Indeed,
it becomes clear in subsection (2)(b) that the order appoints a
“bank liquidator,” and that term is used thereafter
fairly regularly. Indeed, clauses 86 to 89 deal with the process of
bank liquidation.
I am not sure
why the Government have chosen to introduce the word
“insolvency.” Someone rather crudely suggested that,
given that these things are normally matters for the Department for
Business, Enterprise and Regulatory Reform, the Treasury was a little
more lax in its language, but knowing the Minister’s dual role,
I am sure that he would not have allowed that to happen. It would be
helpful to know why “insolvency” was used in this case
rather than the more traditional
liquidation. 1.30
pm Sir
Peter Viggers (Gosport) (Con): I should like to probe the
thinking behind the clause. My understanding is that in some
jurisdictions a failed bank is subject to the general corporate
insolvency laws, as is the case in this country. I understand that
there are special regimes in other countries, including Italy, Norway,
Canada and the United States. The Government’s principal reason
for bringing in a special regime, as stated in the explanatory notes,
is that depositors who are eligible claimants under the terms of the
FSCS are paid out promptly when a bank fails. As I understand it, the
Government intend that to be the main thrust of the proposed new
insolvency regime. Then there are some other objectives which were
listed in the Government’s consultative document earlier this
year. The first is that depositors might be deprived of access to their
accounts at very short notice if there is no special regime. The second
is that no objectives exist around the fast pay-off of
depositors. The third is the likely destruction of any residual
franchise value. The fourth is the risk of contagion to other
banks.
I can see why
the Government gave consideration to the creation of a special regime.
However, I draw to the Minister’s attention the fact that the
majority of correspondents to the January 2008 consultation felt that
wholesale changes to current insolvency provisions were not required to
ensure rapid payments to eligible FSCS claimants. Several parties
suggested that any new procedure should be closer to liquidation than
the creation of a new regime. But the Government have proceeded to
create this new regime.
To what
extent has the Minister consulted with other international bodies
responsible for bank supervision in order to try to ensure that the
globalisation of banks is reflected by a similarity of treatment? To
what extent has he had discussions with the responsible bodies in our
European colleague countries, with responsible bodies in the United
States and in other countries that are becoming increasingly important
in a globalised market? While these provisions for a new regime in the
United Kingdom are before us, I should like to know a bit about the
Government’s thinking in arriving at this conclusion and putting
these proposals before us. In particular, can the Minister tell us
about any discussions he has had to try to ensure that our regime does
not stand alone, but is carefully co-ordinated and preferably made
similar to those of other
countries?
Ian
Pearson: The clause introduces part 2, which sets out a
new insolvency procedure for banks, based on existing liquidation
provisions. I should like to respond directly to the question posed by
the hon. Member for Fareham about the use of the term
“insolvency” here. We use it because the draftsman
thought that it would be a more natural, modern term in this context
than liquidation.
Mr.
Hoban: Why, then, is the draftsman inconsistent later in
this part of the Bill? Clauses 86 to 92 are headed “Process of
bank liquidation”, which seems a very archaic use of
words.
Ian
Pearson: I suspect that the answer is that insolvency can
involve liquidation and administration too. We would need to refer to
existing law. In due course the draftsman may put words into my mouth
so that I can respond
further. I
want to respond the point made by the hon. Member for Gosport about the
importance of the existing insolvency law. There has been extensive
consultation between the Government and insolvency practitioners in
this area. We believe that we have the right sort of balance in terms
of ensuring a fast payout procedure, while having a system of law with
which insolvency practitioners are already familiar. The fact that
there has not been a flood of suggested amendments to the clauses from
those outside who follow these matters shows that there is strong
consensus in this
area. The
Government’s objective is to ensure effective protection for
depositors and to minimise the impact of a bank failure, while also
providing for the orderly winding up of the affairs of a failed bank in
the interests of its creditors generally. I shall set out the thinking
behind the clause. In doing so, I hope to provide an overview for future
debates on the bank insolvency procedure, which is established in part
2 of the Bill. The procedure will enable prompt FSCS payments to be
made to eligible depositors or their accounts to be transferred to
another institution. It will also provide for the winding up of the
affairs of a failed bank in the interests of creditors as a
whole. The point
about allowing depositors fast access to their funds in the event of a
bank failure is an important one. As my hon. Friends on the Treasury
Committee noted, it is not just the level of FSCS compensation payout
that is important—the speed of payout is also vital. The
Chairman of the Committee, referring to moves to raise the compensation
limit to £50,000,
stated: “It
is far more important that banks be able to identify who their insured
depositors are, and that the FSCS be able to process compensation
claims quickly.”
Making fast payout to
depositors is indeed crucial. For depositors of UK banks to have
confidence in the system, they need to be sure that the payment will be
made quickly, and that they will be able to access their deposits
quickly. Measures to enable depositors to access their funds quickly
are important for their own sake, but also to build confidence in the
banking system as a whole, and for the maintenance of financial
stability. In
response to comments by the hon. Member for Gosport, I shall talk
briefly about how the new bank insolvency procedure has been developed.
An established feature of the UK insolvency system is the existence of
special insolvency regimes for industries where failure poses unique
challenges—for example, water, energy and rail. Those special
regimes are based on provisions of the Insolvency Act 1986. Like those
special insolvency regimes, the bank insolvency procedure is a unique
process. However, it is based largely on existing provisions in UK
insolvency law and practice, particularly relating to the compulsory
liquidation of companies. It is worth emphasising the point that,
during our consultation process, stakeholders constantly referred to
the strength of the existing insolvency regime in the UK, noting its
advantages over other insolvency regimes
internationally. The
Financial Markets Law Committee put it very well in its response to the
April consultation
paper: “The
existing corporate insolvency laws in England and Wales...provide for
one of the most versatile and effective insolvency regimes in the
world. They are often used as a model for jurisdictions improving or
developing their
laws.” That
is a fairly comprehensive endorsement; other stakeholders made similar
points about the insolvency provisions. They were anxious, therefore,
that the Government should not make substantial changes. Bearing that
in mind, we are confident that our approach is the right one.
The bank
insolvency procedure builds on the strength and effectiveness of the
UK’s existing insolvency regime, closely following existing
insolvency law and practice. It will be familiar to companies and their
professional advisers. We have not changed the statutory priority order
of creditors. Consistent with existing special insolvency regimes, it
is a court-based procedure, which means that it can be commenced only
by a court order, and the whole process will be subject to the overall
supervision of the court. That will ensure transparency,
legitimacy and compliance with the Human Rights Act and provide a forum
for dispute resolution. Many other provisions remain substantially the
same as existing insolvency law, as we shall note when we come to the
relevant
clauses. As
with the existing special insolvency regimes, the bank insolvency
procedure has some specific features to reflect the unique challenges
of winding up a bank, and the Government’s specific objectives
of protecting depositors and maintaining financial stability. As I have
mentioned, the key difference from normal insolvency is that as well as
providing for the winding up of a bank’s affairs, the process
will enable prompt FSCS payments to eligible depositors, or else allow
for a bulk transfer of their accounts to another institution. To that
end, the liquidator of the bank will have specific statutory
objectives: to work with the FSCS to enable prompt payouts to eligible
depositors or to facilitate the bulk transfer of accounts to another
institution; and to wind up the affairs of the failed bank in the
interests of creditors as a whole. The authorities and the FSCS will
have a key role in the early stages of the proceedings to oversee and
work with the bank liquidator to ensure that those objectives can be
met. I
have used the word “liquidator”. Let me explain. The word
“liquidation” has to be used later in the Bill, because
it is the technical, legal term. In the overview clause, we can be
looser, more familiar and clearer with the readers, but we have to be
precise when it comes to the details of the
Bill. Clause
77 outlines the bank insolvency procedure in broad terms. A bank enters
the process by court order, appointing a bank liquidator. The bank
liquidator aims to arrange for the bank’s eligible depositors to
have their accounts transferred or to receive compensation from the
FSCS. To achieve that, the bank liquidator will work with the initial
liquidation committee, made up of the authorities and the FSCS. When
that is done, the bank liquidator winds up the bank. To carry out those
functions, the bank liquidator has the powers and duties of a
liquidator in normal insolvency as applied and modified by clauses that
we shall discuss
subsequently. I
hope that by giving a lengthy introduction to clause 77, I
have set out clearly the Government’s thinking and the
principles that were applied in framing the subsequent clauses. They
have been consulted on to a very large extent and have the broad
support of insolvency
practitioners.
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