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Session 2009 - 10
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Delegated Legislation Committee Debates



The Committee consisted of the following Members:

Chairman: Mr. Jim Hood
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Baldry, Tony (Banbury) (Con)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Bottomley, Peter (Worthing, West) (Con)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chaytor, Mr. David (Bury, North) (Lab)
Clapham, Mr. Michael (Barnsley, West and Penistone) (Lab)
Crausby, Mr. David (Bolton, North-East) (Lab)
Dorrell, Mr. Stephen (Charnwood) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hendrick, Mr. Mark (Preston) (Lab/Co-op)
Hepburn, Mr. Stephen (Jarrow) (Lab)
McCarthy-Fry, Sarah (Exchequer Secretary to the Treasury)
Newmark, Mr. Brooks (Braintree) (Con)
Stuart, Ms Gisela (Birmingham, Edgbaston) (Lab)
Sarah Davies, Committee Clerk
† attended the Committee

Fourth Delegated Legislation Committee

Tuesday 15 December 2009

[Mr. Jim Hood in the Chair]

Draft Banking Act 2009 (Exclusion of Insurers) Order 2009
4.30 pm
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): I beg to move,
That the Committee has considered the Draft Banking Act 2009 (Exclusion of Insurers) Order 2009.
How delightful it is, Mr. Hood, to serve under your chairmanship once again, on this pleasant Tuesday afternoon.
This order will exclude insurance companies from the scope of the special resolution regime established by the Banking Act 2009. As I am sure Committee members know, the special resolution regime provides the authorities with powers to resolve banks that are failing. The regime is also applied to building societies, and it may be applied, by order, to credit unions.
The usual way of defining a bank in legislation is to refer to a UK institution that has a regulatory permission granted by the Financial Services Authority to accept deposits, and then to refine that definition to exclude bodies that are not to be regarded as banks. Sections 2 and 91 of the 2009 Act adopt exactly that approach, but they also give the Treasury the power to add to the exclusions from the definition of “bank” by making orders. The reasons for excluding insurers are clear: the special resolution regime was not designed for insurance companies.
The 2009 Act is, of course, an
“Act to make provision about banking”,
not about insurance. That is also clear from the special resolution objectives. Those objectives refer explicitly to “banking services”, “banking systems” and “protection of depositors”, none of which are applicable to insurance companies.
The key provisions for the special resolution regime would not be suitable for use in the resolution of an insurance company and would require significant modifications if they were to be applied effectively to insurers. That reflects the difference in the structure of insurance and banking institutions and the different ways in which they carry on their businesses, as well as the significant difference between banking and insurance as financial services. Although the 2009 Act provides powers to deal with mutual banks—in other words, building societies—there is no similar power to deal with mutual insurers, which perform an important role in the insurance industry in the UK.
The statutory code of practice issued under section 5 of the 2009 Act refers only to banks and building societies, and the banking reform consultation documents essentially referred only to banks and other institutions that carry out deposit-taking business. However, it may be helpful to the Committee if I explain why insurance companies often have a deposit-taking permission, which is why they are potentially caught by the definition of “bank” and the scope of parts 1 to 3 of the 2009 Act.
Under the Financial Services and Markets Act 2000, institutions can apply for permission to carry on a number of regulated activities, such as accepting deposits and dealing in investments as principal or agent. Where an institution meets the conditions for authorisation, the FSA will issue a permission that lists all of the regulated activities that the institution may undertake and any restrictions that apply to those activities.
Historically, a view has been taken that, in some instances, the business of providing insurance might require a firm to accept deposits. Consequently, most institutions authorised by the FSA to carry on insurance business have the permission to accept deposits, but that permission is granted for the purposes of carrying on insurance business.
For clarity, I will give an example of where an insurance company may need a deposit-taking permission. A life insurer may need to hold the proceeds of a matured policy while waiting for instructions from the policyholder on what to do with those proceeds. Doing that will require the insurer to hold the deposit-taking permission, but the permission is to be used only in the course of carrying on its insurance business.
I must emphasise, however, that even if an insurer has a deposit-taking permission, it does not carry out banking business. Indeed, insurers are prevented from carrying out deposit taking by European law. That is recognised in the limitation that the FSA applies to these permissions, under which insurers are limited to accepting deposits in the course of carrying on insurance business.
Like many industries, the UK insurance sector has been affected by the financial crisis. However, both the insurance industry and the UK’s prudential regulation regime for the insurance sector have so far stood up well to testing economic conditions, and the insurance industry continues to make a vital contribution to the UK economy.
As I have made clear, the special resolution regime powers are not designed to deal with insurance companies and therefore the Government believe that it is appropriate that insurers should be expressly excluded from the scope of the definition of “bank” in sections 2 and 91 of the 2009 Act.
4.35 pm
Mr. Greg Hands (Hammersmith and Fulham) (Con): It is a pleasure, Mr. Hood, to serve under your chairmanship this afternoon. I am a little disappointed that no Liberal Democrat Members are present for this important debate. I am not sure about what their view of the order would be, and we shall probably never know.
As the Minister said, the order addressed an apparent oversight in the definition of a bank in the Banking Act 2009. As it stands, it is possible for insurers to be caught under that definition, despite being prevented from acting as banks under European law. Although it would be difficult in practice for the Government to apply the 2009 Act’s special resolution regime to an insurer, in the Opposition’s view the order is designed to remove any doubt.
As the Minister indicated, it is conventional when defining a bank in law to lump together every institution permitted by the FSA to take deposits, and then to add clauses to exclude those institutions that are not banks. That convention was pursued in sections 2 and 91 of the 2009 Act; unfortunately, however, it was not pursued to completeness. The only use of the special resolution regime so far has been in relation to a building society in the Prime Minister’s back yard—the Dunfermline building society, which cropped up in Treasury questions earlier today.
It seems that institutions not within the intent of the legislation have escaped the Government’s notice. When drafting a definition based on deposits, surely it is a fairly basic procedure to check who actually takes them. Why did the Government not examine the list? The FSA certainly has a list, and had the Treasury or its draftsmen been in doubt, it could easily have advised the Government on which institutions it allowed to take deposits. What representations did the FSA make about the definition at the time and later?
Irrespective of the FSA’s role, the Government can hardly claim that they were not aware of a potential problem. If it was impossible for unintended types of institution to be classed as banks under the 2009 Act, there would be no point in allowing for additional exclusions—such as those in the order—to be made. It would be enlightening if the Minister were to tell us under what circumstances the Government envisage making such orders. I would also welcome a categorical assurance that we will not be debating more such orders in the near future. For the purposes of the 2009 Act, is the Minister satisfied that once insurers are excluded the only banks left will be genuine banks?
I do not want to over-dramatise the Government’s mistake. Obviously, the Opposition welcome the relatively swift action that they have taken to deal with the blunder. Nevertheless, a few interesting questions remain. First, could the 2009 Act have been used against an insurer? Could the Government have imposed a special resolution regime, given the Act’s direct references to banking services, banking systems and the like? In other words, could the problem that the order is meant to resolve have come about?
Secondly, given the Government’s and Parliament’s clear lack of intent, would a special resolution regime—an SRR—have been open to challenge in the courts as a result of the poorly drafted Act? Thirdly, would it have been feasible to operate an SRR given that the structure and nature of insurers differ so significantly from those of banks? Fourthly, are there circumstances in which it would be appropriate for the Government to take over an insurer? The implication of what the Minister said earlier is that it would be inappropriate, but I would be grateful if she said whether it might be appropriate for the Government to do so—albeit not through the mechanisms of the 2009 Act, which have now been excluded.
Fifthly, I note that the Select Committee on the Merits of Statutory Instruments, which sits in the other place to examine such things, has debated the order. The Government say in their response to that Committee’s report that they have
“no policy intention to extend the current provisions in the Banking Act to insurers”.
Will the Minister confirm that no plans for separate, parallel provisions for insurers will be introduced separately? Perhaps I am misreading the Treasury’s response to the Lords Committee, but it would be helpful to know.
I have a couple of questions about the information provided by the Treasury to the Lords Committee. The Committee asked a reasonable question:
“Why are you making this amendment now, i.e. why didn’t you exclude insurers on the face of the Banking Act 2009?”
It is a perfectly reasonable question: why is the order in front of us today? Questions do not get more basic than that. Why now? I notice that the Treasury provided nine paragraphs in response, not one of which answered the question, so I ask the Minister why the matter has come to light now. Have industry representations, or representations from the FSA, been made? Did a Treasury official note the drafting error that led to the order? From the answers given to the Committee in the other place, one would never know.
On the subject of banks and insurers, will the Minister say a little about the banking subsidiaries of insurers? I am thinking of AIG Financial Products, an outfit that no longer exists—at least, I certainly hope not—and insurance companies’ habit of having banking subsidiaries. How will they be affected by the 2009 Act and the order?
Finally, I return to the answers provided by the Treasury to the Committee in the other place. The Committee asked:
“Have any insurers benefited from the provisions of the Act so far, or are likely to in the near future?”
In other words, in the six months since the Banking Act 2009 came into force, have any insurance companies benefited? I am sure that the Minister will say no, because nobody knew that insurance companies were within the provisions of the Act, but is she certain?
Is it not possible for an insurance company to have marketed itself on the basis that it might be subject to a Government bail-out? That would be quite a good way to market an insurance company: “We have the Government standing behind us. If we get into difficulty, we could easily, according to the Banking Act 2009, be bailed out by the Government.” I could see that being a potential positive marketing angle for an insurance company or set of insurance companies. Can the Minister give us a categorical reassurance that no insurance company has profited as a result of the poorly drafted legislation in the 2009 Act?
4.42 pm
Peter Bottomley (Worthing, West) (Con): I am impressed by the analysis made by my hon. Friend the Member for Hammersmith and Fulham, and I congratulate him on his speech.
I am not sure whether the Minister has a copy of the Banking Act 2009 with her, but to help those who read our debates, will she confirm that there are only two parts to the Act? The order, which I find unexceptionable, deals with the definition of “bank” in section 2(1), which relates to part 1 of the Act, and section 91(1), which relates to part 2. We need to ensure that there is nothing else that might include insurance companies, credit unions or other institutions.
If any of my questions is better dealt with in a letter afterwards to those hon. Members who have attended, I am happy with that. Paragraph 4.4 of the explanatory memorandum, which I find useful, says that a bank is defined for the purposes of the Act as a UK institution. Will the Minister confirm that no foreign bank can operate in this country without having a UK institution to do the trading? If that is not the case, we have found a bit of a loophole.
To follow up my hon. Friend’s last remark, can the Minister confirm that the powers under the special resolution regime are permissive and allow the troika—the Bank of England, the Treasury and the Financial Services Authority—to deal with failing banks, rather than requiring it to do so, and that it could allow a bank to fail if it chose? I am not suggesting that it should or would, but it ought to be clear that there is no assurance like the one to which my hon. Friend referred.
Let us suppose that, for unimaginable reasons, a bank wished to be put outside the regime. Will the Minister confirm that it cannot do that just by having an insurance subsidiary? Therefore, would it be possible to exclude the whole institution, because one part of it—whether separately constituted or not—was dealt with? It would also be helpful if the Minister confirmed that this is not a circular argument. The memorandum helpfully explains that a bank is
“a UK institution which has permission under Part 4 of the Financial Services and Markets Act 2000”.
I will not read out the rest of the paragraph, but let us assume that it does not refer back to something else and that we have an unclosed group rather than a closed group of definitions.
Finally, if it was anticipated that classes such as insurance companies might be covered by a statutory instrument of this nature, was that mentioned when the Banking Bill was going through Parliament? Was the intention that companies could come along later and ask for an exclusion, or, as my hon. Friend suggested, do the Government need to explain whether or not they realised that insurance companies could be sorted out if they were to fail under the tripartite regime?
4.46 pm
Sarah McCarthy-Fry: I thank the hon. Members for Worthing, West and for Hammersmith and Fulham for their contributions to the debate, and I will attempt to answer all the points that were made. It was always the Government’s intention for insurers to be excluded from the scope of the Banking Act 2009. However, there were discussions within the tripartite group about whether it was best to exclude them by virtue of the order-making power in the Act, or whether to look at removing their deposit-taking commission, which would have effectively removed them from the Act without doing it by this route. There were consultations and representations. The banking liaison panel and others have now agreed that this order-making power is the best route through which to take such action. We do not think that it would be appropriate to use the Banking Act special resolution regime powers in relation to an insurance company. Although it would be theoretically possible to apply the regime powers, we do not believe that it would be effective in practice. That was the tripartite group’s conclusion.
Peter Bottomley: That sounds rational. Will the Minister say what would happen were a building society to fail? Could it be rescued in some other way? Whether it is rescued or not, will those who have their money as deposits with an insurance company be protected in some way up to any kind of limit?
Sarah McCarthy-Fry: As the hon. Gentleman may be aware, the Financial Services Compensation Scheme and the levy-taking powers apply to insurance companies. They are not in the deposit-taking class within the FSA levies, but this is about the confidence that is given within the system. I will return to the hon. Gentleman on that specific point.
No existing draft legislation akin to the special resolution regime is currently planned that could be brought forward and would apply to insurers. We do not believe that there is the same risk within insurance companies.
Peter Bottomley: The Minister may be as young as she looks or as young as I feel. However, during my lifetime, there have certainly been insurance companies that have flatly failed.
Sarah McCarthy-Fry: I assume that the hon. Gentleman is referring to AIG. We think that AIG was in a different situation, owing to its structure. In this country, we believe that that issue does not apply, because of how insurance companies operate and our regulatory regime.
Mr. Hands: Will the Minister clarify the question that I asked her earlier about banking subsidiaries of insurance companies? For example, AIG Financial Products certainly operated in the UK, although I cannot recall whether it was a UK-based banking institution. It was clearly the source of a great amount of difficulty, and it would be helpful to clarify precisely how the 2009 Act and the order might affect an insurance company set up in that way, with a banking subsidiary.
Sarah McCarthy-Fry: If a company is a bank under the 2009 Act, it can be subject to the special resolution regime. If the conditions of part 1 of the Act are met—if the bank is failing or likely to fail to meet its threshold conditions—it is covered by the special resolution regime, even if it has an insurance subsidiary.
A question was asked in the other place about holding companies, and perhaps I should clarify the position in that regard. We have the power to take the holding company of a bank into temporary public ownership, but a holding company can be brought into temporary public ownership only if the FSA is satisfied that the general conditions are met in respect of a bank in the group, and the Treasury can take a holding company only if it is necessary to do so, and “necessary” is quite a high test on that basis, so although there may be an insurance company within the holding company, it would not apply to that insurance company specifically; it would apply to the holding company and to the bank.
I think that the hon. Member for Hammersmith and Fulham asked whether insurance companies could have inadvertently marketed themselves. The 2009 Act does not allow for a bail-out, so it is highly unlikely that an insurance company could market itself on that basis. As I said, the banking liaison panel agreed with the exclusion.
I have dealt with subsidiaries. The hon. Member for Worthing, West asked about the definition of insurers in parts 1 to 3 of the Act. A bank is defined in section 2 for the purposes of part 1 and in section 91 for part 2. The definition of a bank in section 2 also applies for the purposes of part 3 of the Act, which can be used only once the powers in part 1 have been exercised. I think that the answer is that it is all covered.
Mr. Hands: I am not sure whether the Minister is drawing to a conclusion, but I still do not think that she has answered the main question, which was also asked by the Lords. Why are the Government making this amendment now? What has happened to bring this to light? I am still unclear on that. Who found the hole in the original Act, to bring the order before us today? Was it insurance companies themselves? Was it the FSA? Was it Treasury officials?
Sarah McCarthy-Fry: I am not sure that there was a hole in the original Act. The point is that it was never the intention that insurance companies should be included, and it has been decided through a process of consultation with the tripartite group that this is the most appropriate way of ensuring that insurance companies are not included. As I said, another option that was considered involved taking away the deposit-taking powers.
Peter Bottomley: The Minister has explained that there was no hole; it was a net, and the insurance companies were caught. Is she saying that the only issue that had to be resolved after the Bill became an Act was whether to disallow insurance companies from holding deposits even if they were the result of a matured policy or for a similar reason? Is she saying that that was the reason for dealing with the matter in this way?
Sarah McCarthy-Fry: I was not in the Treasury at the time, but it is my understanding, from the notes that I have, that that was the position.
The Financial Services Compensation Scheme can provide funds to meet protected claims, including the return of premiums, if a firm is unable to do so. The scheme can also try to arrange or assist a transfer of some of the business to other insurers if that is cost-effective and practical. I think that I have covered all the points, so I shall now just thank the hon. Gentlemen for their contributions.
Question put and agreed to.
4.54 pm
Committee rose.
 
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