The
Committee consisted of the following
Members:
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 banksin other words, building
societiesthere 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 UKs
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
Acts special resolution regime to an insurer, in the
Oppositions 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 Ministers back
yardthe 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
Governments 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 FSAs 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
exclusionssuch as those in the orderto 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 Governments 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 Acts 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 Governments and Parliaments clear lack of
intent, would a special resolution regimean SRRhave
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 soalbeit 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 Committees
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 Treasurys 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 didnt 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 existsat least, I certainly
hope notand 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. Friends last remark, can the Minister confirm
that the powers under the special resolution regime are permissive and
allow the troikathe Bank of England, the Treasury and the
Financial Services Authorityto 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 itwhether
separately constituted or notwas 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 Governments 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 groups
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 metif the bank is failing or likely to
fail to meet its threshold conditionsit 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.