Previous Section Index Home Page

10 Mar 2009 : Column 39WH—continued

As I try to understand why that mood gripped the Conservative party at the time, and is probably still very much a characteristic of its outlook, I suppose that it
10 Mar 2009 : Column 40WH
was a reaction to the cloying corporatism of the 1970s. The sense took hold that dynamic, entrepreneurial people were being held back and needed to be liberated, and that we needed a higher-risk, lower regulation economy. That was a world away from the benefits of prudent mutualisation that we are discussing this morning and, of course, the chickens have come home to roost.

I have not informed the right hon. Gentleman that I would mention him because he has only just come into my mind, but Members such as the right hon. Member for Wokingham (Mr. Redwood) were making such a case until a few months ago. This is not a history lesson. The Conservative party is still very much wedded to the approach that led to the failures of institutions in the financial services sector that are now becoming apparent even to them.

What is harder to understand is why in the second half of that quarter century the Labour party, which one traditionally thinks of as the party of the left, of trade unions and even of socialism in the United Kingdom, presided over disaster in the financial services sector. Again, I am trying to look at the situation as dispassionately as possible and trying to understand. I have heard several Labour Members make extremely reasonable, sensible speeches, but one would think from listening to them that Labour had not been in Government for the past 12 years, and that a Labour Government had not set up the regulatory system that allowed the failure to happen.

As I try to understand how the Labour party came to preside over the collapse in Britain’s banking system, I conclude that the motivation was probably a desire to rebrand as Labour after Tony Blair became leader of the party in 1994.

Anne Snelgrove: Will the hon. Gentleman give way?

Mr. Browne: In a moment. There was a desire to come up with a wholly new entity—new Labour—and it was important that it was branded as something separate from the Labour party that had gone before, which had lost the previous four general elections, as you, Mr. Amess, will remember more than anyone.

Mr. Prentice: On a point of order, Mr. Amess. That is straying way beyond the terms of the debate. We have been listening for the past 10 minutes to something that has no direct bearing on the subject before us.

Mr. David Amess (in the Chair): I have to advise Mr. Browne that a valid point has been made. I ask him to stick much more closely to the terms of the debate.

Mr. Jeremy Browne rose—

Anne Snelgrove: Will the hon. Gentleman give way?

Mr. Browne: I seek your advice, Mr. Amess. Am I able to give way on a subject that you have ruled to be inappropriate for discussion?

Mr. David Amess (in the Chair): The intervention must be specifically about the Financial Services Compensation Scheme and the levy on building societies.

10 Mar 2009 : Column 41WH

Anne Snelgrove: Mr. Amess, you took the words out of my mouth. The FSCS is, of course, a body that was set up by the Labour Government in 2001—traditional values in a modern setting—and part of the regulatory regime and one of many measures introduced by the Government. The first Standing Committee I ever sat on was about regulating credit cards. I am delighted with the regulation that we introduced. However, we face a global economic crisis that neither this nor any other Government predicted.

Mr. Browne: Interventions from Parliamentary Private Secretaries remind me of speak-your-weight machines. One puts in the necessary information, and it comes out the other end.

For many years, there have been warnings from my hon. Friend the Member for Twickenham (Dr. Cable) and many others, so I observe only that the Labour Government are the Government now and have been for 12 years. One burden of being in government—an opportunity that, sadly, I have yet to experience—is that one has to take responsibility when things go wrong as well as taking the credit when they go right. That is the misfortune that Labour must face, having presided over a collapse not only in the number of mutual building societies but, more importantly to some people, in the viability of many financial institutions.

My party opposed demutualisation—as did the hon. Member for Keighley and others. We need a mixed sector, comprising a banking segment and complementary mutual building societies. There should not be one dominant model; it is not desirable for all mutuals to turn themselves into banks, because mutuals offer different and complementary services. We also need to move to a different banking model altogether, separating the high street banks and their depositors—the people we meet in our constituencies who put their savings and money into banks and borrow small amounts from them under the protective umbrella of insurance schemes and, ultimately, if need be, the state—from the high-risk investment banks.

The hon. Member for Pendle (Mr. Prentice) touched on my next point. When I look at the very highly paid chief executives and senior managers of banks, I am always reminded of the expression about criminals: “If you do the crime, you have to be man enough to do the time.” If bankers are willing to take the big pay when times are good, they have to be big enough to take the losses when times are bad. It is no good people saying, “We want the state out of our lives—all those people trying to regulate and frustrate our entrepreneurial spirit,” as they make lots of money and award themselves huge bonuses, when as soon as things do not go so well for them, they suddenly want to be propped up and looked after.

Anne Snelgrove: Will the hon. Gentleman give way?

Mr. Browne: I am coming to my final point and want to leave time for the other speeches, but I shall give way once more.

Anne Snelgrove: Will the hon. Gentleman’s party give back the dodgy £2 million from its dodgy donor?

Mr. Browne: I am not entirely sure about that question, so I shall defer to you, Mr. Amess.

10 Mar 2009 : Column 42WH

Mr. David Amess (in the Chair): I ask the hon. Gentleman to resist responding to it, because I cannot quite see its relevance to the debate.

Mr. Browne: I cannot either. It may be displacement theory—a cry for help from the party that presided over disaster.

In conclusion, my party strongly supports the point that early-day motion 426 makes. It is extremely regrettable that we are in this deep financial crisis, which has affected our whole economy and continues to do so. There are big lessons that we can learn about how our financial institutions are regulated and the merits of a mutual sector that works much more prudently and modestly on behalf of its members than banks have on behalf of their account holders. I hope that the Minister will look kindly upon the case that the hon. Member for Keighley and others make, because the hon. Lady makes an eminently reasonable point about the balance between risk and reward. At the moment, the building societies are being very unfairly treated.

12.3 pm

Mr. Mark Hoban (Fareham) (Con): I congratulate the hon. Member for Keighley (Mrs. Cryer) on securing this interesting and thoughtful debate. It raises a host of issues, some of which are relevant, and others, including many remarks that the hon. Member for Taunton (Mr. Browne) made in his 14-minute speech, which seem wholly irrelevant, given the title of the debate.

I shall probe the issues that have been raised and, in doing so, comment directly or indirectly on the speeches made by the hon. Members for Staffordshire, Moorlands (Charlotte Atkins), for Dunfermline and West Fife (Willie Rennie), for Pendle (Mr. Prentice) and for South Swindon (Anne Snelgrove). I intervened on the hon. Member for South Swindon regarding credit unions, because, importantly, the Financial Services Compensation Scheme shares the risk of failure between sectors, and if one part of the deposit-taking pool wanted to go it alone, there would be an issue about how it affected other parts of the pool.

Anne Snelgrove: Having had time to reflect on the hon. Gentleman’s point, my response is that credit unions are so small and deal with so few people that they will not call on the FSCS as much as he makes out. I take his point, but any measure must be part of an overhaul of the whole system.

Mr. Hoban: The hon. Lady makes an important point. We must think about what risk we are trying to assess, because although the absolute amount that credit unions may call upon from the FSCS may be small, credit unions collapse more frequently than banks or building societies, so the assessment of risk is much more complex than the debate has so far addressed. The hon. Lady and the hon. Member for Pendle pointed out that building societies have swallowed their own smoke in this financial crisis and, indeed, problems with building societies have led to mergers.

The hon. Lady mentioned Nationwide acquiring the Derbyshire and Cheshire building societies. It is worth pointing out that they were the two societies that sold their offshore deposit-taking activities—Derbyshire in the Isle of Man to Kaupthing Singer & Friedlander,
10 Mar 2009 : Column 43WH
and Cheshire in Guernsey to Landsbanki—and created a raft of problems for savers inside and outside the United Kingdom. Building societies must remember that rescuing smaller institutions involves a cost to them and to their members. No merger is cost-free, even if only the cost of the transaction is involved. Indeed, building society members pick up costs from two sources: first, the levy from the FSCS and, secondly, the cost of the merger with their stronger counterparts.

Everyone on both sides of the House—or around the hemicycle, whichever way one refers to Westminster Hall—agrees about the importance of the financial mutual sector and wants it to survive and to continue to strengthen, because its ethos gives a distinctive character to its organisations and how they deal with their members and customers. There have been legislative changes to strengthen the sector. The hon. Member for Staffordshire, Moorlands referred to Britannia building society, which is merging with Co-operative Financial Services and taking advantage of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, which my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) promoted during its passage through the House. That legislation is being used to help to strengthen the mutual sector.

The hon. Member for Keighley made a cogent argument about the building society levy’s disproportionate effect on building societies, and I noticed yesterday, when Newcastle building society published its results, that the levy amounted to about £6 million. Unfortunately, the other major factor affecting that institution’s results was its exposure to Icelandic banks, so it has been caught twice by the financial crisis.

The FSCS is an important tool that protects consumers in the event of a default and an important part of the architecture of this country’s financial regulation. Although the scheme came into effect in 2001, there were predecessors, including a stand-alone building society scheme that has now merged with the overall scheme for deposit takers. The FSCS exists to instil confidence in consumers, and it is important that the institutions that benefit from being able to offer their customers such protection recognise the costs that must be paid when there is a default.

One point that has come out a couple of times during the debate is that no one, either when the FSCS scheme was set up in 2001 or when its funding was reviewed in late 2004 or early 2005, envisaged the current financial crisis. I do not think that we would have had this debate had it not been for the fact that the FSCS has been used as a conduit for funding the transfer balances from Bradford & Bingley to Banco Santander and some of the balances from the Icelandic banks to ING and to make payments out to some people who have banked with the Icelandic banks and London Scottish. There is a cost attached to that. No one in this debate has argued that the industry should not bear that cost, because if it did not do so the taxpayer would.

The taxpayer is making a significant contribution to the funding of the bank rescues, but it is right that the cost of bailing out individual institutions is borne by the industry. The question then becomes how that burden can be shared. Clearly, the existing funding mechanism that has been reviewed and supported relatively recently
10 Mar 2009 : Column 44WH
comes under particular strain at a time such as the present. Building societies are not the only ones who are concerned: independent financial advisers are also worried about some of the costs that they are having to bear in respect of the collapse of Pacific Continental Securities, for example, which is a boiler room that has gone bust owing a huge amount to its customers, leaving IFAs to pick up some of the tab. It is not just building societies that are facing this situation. Even if we accept the inequity of how the cost of financing has been borne by building societies and others, the question is, how can we design a more equitable scheme? Obviously, the responsibility for that rests with the FSA, which designed the scheme rules, and it will need to think about that.

A number of suggestions have been floated in this debate, including one to cap the contribution under percentage of profits. That is fine when all businesses are profitable, but I am not sure how such a scheme would work in practice at the moment, given the losses that have been incurred by the large banking institutions, such as HBOS, Lloyds and RBS. Of course, the scheme needs to cover all its costs, but a cap on contributions may mean that an element of the cost of the scheme will not be met from that levy. So what would happen then? Who would pay the excess over the amount that would be generated if the levy was restricted to 5 per cent. of profits? It is not clear to me how such a scheme would work in practice and who would pick up any shortfall.

There has been some discussion about risk. The hon. Member for Dunfermline and West Fife talked about that in the context of a no claims bonus-type scheme, as used for motor insurance, but that presupposes a level of pre-funding. There has been a lot of debate about whether there should be a pre-funded compensation scheme. The Minister and I discussed that topic at some length during the Commons’ consideration of the Banking Bill. Pre-funding had its attractions, but some difficulties attach to a pre-funded scheme. When the Banking Bill Committee took evidence from various interested parties at the start of its proceedings, Adrian Coles, the chief executive of the Building Societies Association, was quizzed on a pre-funded scheme and he said that such a scheme, assuming that building societies had to hold the same capital, could lead either to savers being paid a lower rate of interest or to borrowers paying a higher rate of interest. So even a pre-funded scheme is not cost-free from a building society’s perspective in relation to how it supports its members. There are some complexities that would need to be worked through in respect of a pre-funded scheme.

Anne Snelgrove: I understand the hon. Gentleman’s point about the complexities, which need to be considered carefully. We are just asking the FSCS to look again at various approaches. The building societies are not asking to be let off scot-free: they are asking for a more level playing field, because at 3 per cent. of profits for the banks and 15 per cent. on average for the building societies, the levy is iniquitous.

Mr. Hoban: I agree. There is a lot of sympathy out there for building societies, but the solution is not necessarily straightforward. That is why I reflected on the comments made by Adrian Coles of the BSA. A risk-based pre-funded scheme would have an impact
10 Mar 2009 : Column 45WH
upon a building society’s ability to serve its customers: it might have to either pay a lower rate to savers or charge borrowers a higher rate. Any review of the scheme needs to be carefully thought through, because there is no easy solution. The solutions proposed so far have their failings and will create a set of winners and losers. It is not necessarily about one sector winning and another losing. Some people in the building societies sector may lose out as a consequence, depending on how risk is assessed and quantified.

I am also concerned about the idea, which has been suggested, of moving away from the larger pools for deposit protection to smaller pools, with building societies perhaps picking up the first tranche of a series of losses. Would the building societies be in a position to bear the first loss? How big would that pool be? At what point would the risk be shared with banks and other deposit takers and then, at the next level up, with other financial services institutions? There has been a big debate already about how big the various pools should be and whether they should be tightly defined in relation to particular types of institution or whether they should be broader and what the transfer risk between them is. There is no easy solution to this problem; I wish there were, but I do not believe that there is. I do not think that there is a quick solution, either, as any solution will involve significant change and needs to be properly thought through.

I welcome the FSA’s consideration of the matter. It has already embarked on a review of the Financial Services Compensation Scheme to consider how it can introduce seven-day pay-outs or a single customer view and some other important issues. I hope that it looks at this matter carefully, because if there is to be change it is important that we get the right answer—one that is equitable and does not have any unforeseen consequences. We have seen in this crisis that a scheme that was supported by a range of institutions not that long ago is coming under pressure because of a specific set of circumstances. New circumstances may arise in future. Perhaps because of the consolidation of the building society sector, building societies will not be able to swallow their own smoke as they have done in the past. What would be the consequences of that if we moved to smaller pools or a pre-funded scheme, or one based on risk?

This is a complex topic. There is a great deal of sympathy with the views of building societies, but I do not think there is a clear solution—a clear way to tackle the problems—at the moment.

12.18 pm

The Economic Secretary to the Treasury (Ian Pearson): I congratulate my hon. Friend the Member for Keighley (Mrs. Cryer) on securing this Adjournment debate. Through the early-day motion and extensive lobbying, she has shown a great interest in the impact of FSCS levies on building societies, and we have previously discussed the matter. I hope to use this opportunity to go into greater detail on the current position.

Next Section Index Home Page