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Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1820 - 1839)



  Q1820  Mr Mudie: Yes. You have dismissed this as being something of little interest, of little use, of little importance. He said it was fundamental. It was one of the four fundamental reasons he gave the Committee for not intervening.

  Mr Darling: Yes, he raised four issues. One was the depositor protection, which I think we all accept. The present situation needs to be changed so that we can protect people. That is actually a pretty big one. He raised the weekend takeovers problems, although I think in terms of both EU legislation and also the takeover power you cannot do a weekend takeover. I think in this day and age it would be difficult anyway to get shareholders' consent to do that. He also raised the Market Abuse Directive and he raised that in the context of his desire. In a perfect world, if we all had our way, it would be highly advantageous to be able to do these things in a covert sort of way, because that is the whole point of it. However, what I said to you in reply to John Thurso's point, the Market Abuse Directive was not in the front of our minds when we sat down and discussed what we would do and how we would do it, but I think the Governor raised a number of issues.

  Q1821  Mr Mudie: He raised four fundamental reasons and MAD was one of them.

  Mr Darling: That is right, but I do not think he maintained, but for that particular one, we would have been able to do something covertly.

  Q1822  Mr Mudie: It was fundamental.

  Mr Darling: I do not think—

  Q1823  Mr Mudie: Yes, he said, "These four things are fundamental."

  Mr Darling: I think he was looking at them together, was he not? Certainly in relation to the ability--- One of the big issues that you will need to address, we need to address, is (a) is it desirable to do these things covertly and, if it is, (b) what else do we need to do to ensure that we can?

  Q1824  Mr Mudie: I understand that, but we go to Europe this week and Europe say the legislation allows you to do it. You are covered.

  Mr Darling: It was two provisos, I think.

  Q1825  Mr Mudie: There were no provisos on Monday. In fact the senior official who saw us said they deliberately left "wriggle room"—and those are his words—in the Directive for just such a happening.

  Mr Darling: There are though, but my understanding is that there is flexibility provided you can be sure that what you have done remains confidential and the second point is that you do not end up misleading people. The first one is actually pretty problematical. In this case he was hardly confidential when he appeared on the BBC.

  Q1826  Mr Mudie: We are talking mid-August rather than when it came out in September, but the Abuse Directive is you will not keep anything secret—the odds against that are long—but it is when it emerges that you have acted this way have you abused the market and the legislation allows you to take covert action and, when it comes out, you are covered in the legislation. That is the basis. You are bringing forward legislation as a result of lessons learned and the Governor of the Bank of England says there are four fundamental things that must happen. In the legislation, the consultative paper you are going to bring forward, are these four matters going to be covered?

  Mr Darling: Yes.

  Q1827  Mr Mudie: Including MAD?

  Mr Darling: Yes.

  Q1828  Mr Mudie: The last question on MAD. The suggestion has been raised that, if Europe say it did not stop you, it was a British decision, when we put that Directive in we gold-plated it.

  Mr Darling: I do not think we did.

  Q1829  Mr Mudie: Can I ask you to be specific when you say you do not think we did. Can your officials confirm: the Directive that came, was it gold-plated here? Yes or no.

  Mr Darling: I do not believe it is.

  Mr Maxwell: My understanding of that part of that Directive is that it is not gold-plated. I will check that absolutely and we will cover it in our consultation paper. It is also worth saying that the European regime is very heavily based on what UK practice is, because we were seen as having a leading regime in Europe.

  Mr Darling: The other thing, Mr Mudie, is that the decision was made in Britain but it was made by the Tripartite Committee, it was not made in Brussels or Europe at all, which is why I repeated this morning and last October that it was not the Market Abuse Directive that was in the front of our minds when we discussed this.

  Q1830  Mr Todd: We have had contradictory views on the purpose of the Financial Services Compensation Scheme. What do you think its purpose should be? What institutions should it seek to cover?

  Mr Darling: What institutions?

  Q1831  Mr Todd: Yes.

  Mr Darling: It should be primarily institutions that take deposits, which are banks and building societies.

  Q1832  Mr Todd: The evidence we have had is that its purpose is really more narrowly defined as being a way of bailing out small credit unions and not larger financial institutions such as Northern Rock or even some smaller than that. Is that your understanding?

  Mr Darling: No, it is certainly not the case now, because even before the changes were made there has been protection for people who have got deposits in quite large institutions. Were you to take away the protection for people who have got their money in banks and building societies, I think that would be quite damaging, but the structure of the funding and the extent of the compensation scheme is one of the things that will be covered in the goodwill that will be made.

  Q1833  Mr Todd: Let me read you a bit of what the BBA have said: "We need to be clear about what compensation can and cannot do. The Financial Services Compensation Scheme cannot create a zero failure regime and will not be able to cope with the failure of a systemically significant bank." The impression given from that evidence is that this would be a fund set aside to deal with smaller institutions but in larger institutions the state would always be obliged to bail out the institution and guarantee the deposits. Is that your feel of what would be an appropriate outcome?

  Mr Darling: I know the BBA represents many that pay into the scheme and, therefore, might be tempted to try and make it more restrictive rather than less so, but if we are going to encourage people to save and give people confidence to save, then I think they deserve a reasonable degree of protection. There are always going to be arguments about how much, whether it is 100%, and other issues too, but I am not attracted to a scheme that basically was restricted to credit unions, for example.

  Q1834  Mr Todd: So, in principle, you want a scheme which envelopes all deposit-taking institutions?

  Mr Darling: I think we need to build on where we are at the moment, I think that is the right way to do this, but as the BBA also said, there does need to be proper consultation about the funding, the extent, the nature of compensation.

  Q1835  Mr Todd: Let me turn to the funding. At the moment the funding is after the event.

  Mr Darling: Yes.

  Q1836  Mr Todd: So a catastrophe happens, you then collect the money together to compensate the depositors who may receive it some time later. Bearing in mind that the circumstances of a collapse are likely to be ones in which institutions have less money available than they otherwise would do, this will not be the most favourable circumstances to collect the contributions made. Would it not be better to reverse the model and make this an insurance scheme into which banks and other institutions paid at points in the market place when they are better able to cope?

  Mr Darling: Of course that would mean that you would be taking money out of the system at the moment, it would not be free to be lent, and therefore there would be a cost to both savers and borrowers because the banks would have less money available and they would charge more to lend it; so I think there is a trade off. You either take the money out, if you like, up front and, therefore, savers pay by getting less interest rates or those who borrow pay more, or you operate the present system, but that is something which will be part of this consultation that we will look at. You will no doubt have views yourselves.

  Q1837  Mr Todd: You do not have a view yourself.

  Mr Darling: I think that the present system has worked. I would be quite wary about taking more money out of the system, particularly at the present time, because I think you might exacerbate quite a difficult situation, but these are things that we need to look at and I have got an open mind on it but I can see the difficulties.

  Q1838  Mr Todd: The guarantee points where deposits are fully guaranteed, you floated raising that level somewhat from its existing level, but the BBA, perhaps understandably in the context of what you have said, have suggested that the current level is adequate for 96% of deposits. Where do you draw the line?

  Mr Darling: Again, that is something that we have listened to what people are saying, we are consulting on that and we will reach a view, but I am not in a position today to express the Government's concluded view on that.

  Q1839  Mr Todd: One thing that I would have thought is consensual is that the consumer needs to be utterly clear as to where that guarantee lies and what actions are available to them to manage their affairs to keep within it, because it was obvious in this crisis that very few depositors actually knew what scheme existed, where the cut-off points lay and what they could do.

  Mr Darling: Absolutely. I agree with you.

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