Examination of Witnesses (Questions 1820
THURSDAY 10 JANUARY 2008
MP, MR JOHN
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,
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 wordsin
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 secretthe odds against that
are longbut 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
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
Mr Darling: I do not believe it
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
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
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
Q1837 Mr Todd: You do not have a
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
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
Mr Darling: Absolutely. I agree