Ian
Pearson: The hon. Member for Fareham shot his own
amendment down when he referred to proposed new section 214D(6). As he
knows, that section already provides for independent verification of
special resolution regime costs, as does section 214B in its current
form. It is difficult to see what a second level of audit or
verification would add, and that second level would also be likely to
be included in the SRR
costs. It
might be helpful if I explain our view. The financial services industry
as a whole benefits from the existence of a credible regime for bank
resolution and depositor compensation, and the confidence that that
provides to customers. It is right that when the authorities intervene
to resolve a bank or building society that is failing, the industry,
not the taxpayer, should pick up the tab. I think that is something
that all our constituents would
recognise. Nevertheless,
I recognise that many in the industry are concerned that that means
that the authorities will have too little incentive to control costs.
There is a feeling within the industry that there should be something
akin to a creditors committee operating that would exercise greater
cost control. I am not sure that the amendment would deal with such
concerns. The
auditor would be required to check that the financial services
compensation scheme was being asked to pay only for SRR costs and not
other expenses of the authority, and he or she would not be asked to
check whether those expenses were excessive or unnecessary. That can be
done already. To reassure the Committee and those who follow these
proceedings, I will set out what measures are in place to ensure that
the FSCS contribution to SRR costs is properly
controlled. First,
the FSCS contribution to SRR costs is capped to a level it would have
had to pay out if the failed bank had gone into insolvency, as the hon.
Member for Fareham rightly notes. That will still be the case after
clause 28 is enacted. The clause simply ensures that interest is
included in the costs. It is not possible for Government action under
the SRR to result in the FSCS having to pay more than it would have had
to pay if the Government had not
intervened. The
second point is that in carrying out a resolution, the authorities must
balance the five statutory resolution objectives, as we discussed at
great length during the passage of the Banking Act 2009. The objectives
already cover the key elements of a successful SRR
action—protecting financial stability, protecting depositors and
protecting property rights. There is no need for an explicit
least-cost-to-industry objective.
There are also
measures in place for an independent assessment of costs that the FSCS
may be expected to bear. As well as provision for the costs incurred in
an SRR to be independently verified, the legislation explicitly
requires the appointment of an independent valuer to calculate the
amounts the FSCS would recover from the bank under a hypothetical
insolvency. It
is vital that the authorities are accountable for action taken under
the SRR, and the Government appreciate that industry has an economic
interest in the outcome of the resolution, but so do the taxpayer and
the wider economy. That is why, in exercising the SRR powers, the
authorities are accountable through Parliament to the wider public for
how they have gone about achieving the special resolution
objectives. The
statutory limit on the FSCS contribution to the SRR costs ensures that
the industry will not have to pay more than it would have done if the
firm had failed and the Government had not stepped in. That is the
fundamental point to appreciate. I hope that my explanation clarifies
the situation with regard to FSCS contributions to SRR.
[Interruption.] I invite the hon. Member for Fareham to
withdraw his
amendment.
Mr.
Hoban: I am pleased that the hon. Member for Leeds, East
found the Minister’s answer acceptable on this occasion. In
Tuesday’s evidence session, he told a witness that their answer
had made him happier than the Minister’s. Clearly, the Minister
has been working on the quality of his answers to keep the Whip
happy.
Let me
explain my concern. The Minister said that the levy payers will have to
pay out no more than they would have done had the business become
insolvent and the normal operation of the FSCS been applied. That
almost gives a credit card limit. As we said in an earlier debate,
people will spend up to the limit rather than trying to control costs.
While the measure might cap the upside of the potential exposure, it
does not give levy payers the reassurance that costs have been
incurred wisely and carefully with a view to minimising their
costs. My
amendment is better than the Government’s proposal on this
occasion. Verification would be easy, because it would just require
someone to check that the costs had been incurred. Before I came to the
House I was an auditor. Verification simply means saying, “This
is what is in the records of the resolution authority. These are the
invoices that have been received and paid out again.” It a very
mechanical process that requires little judgment. I am looking for a
process that goes further than that and includes a check to ensure that
the costs
are “wholly,
exclusively and necessarily
incurred” in
pursuit of the resolution regime—to use language from
elsewhere—and in respect of the exercise of the stabilisation
powers. My wording is tighter and would give more comfort to levy
payers.
Rob
Marris: The hon. Gentleman tempts me to return to an
earlier point—we have come full circle. Proposed new section
214D(6)(c)
says “may
contain provision about the appointment and payment of an
auditor.” Why
did he not draft a simpler amendment changing “may” to
“shall”?
Mr.
Hoban: The Treasury will, of course, draw up the
regulations, whereas the amendment would give the scheme manager the
power to request that the Treasury appoint an auditor. A bit more
control would pass to the FSCS and a bit less to the Treasury. I could
have finessed the drafting and tinkered around a bit more, but I wanted
to get a point across. This should be considered from the levy
payer’s point of
view. The
hon. Member for South-East Cornwall was absolutely
right—ultimately, the customer of the bank or building society
will pick up the cost. Anyone who has had a conversation with building
society senior executives over the past year will know the extent to
which they believe that the costs to the FSCS have impacted on the
rates that they can offer savers and charge mortgage payers, so there
has been a
flow-back. I
want to see what additional governance arrangements could be put in
place to reassure the people who are paying the levy that the expenses
incurred would be reasonable. The opportunity for the scheme manager to
put in an auditor to look at the subject more tightly might help to get
that reassurance across. I am still not content that the governance
arrangements properly balance the interests of the taxpayer, the
resolution authorities and the people who ultimately have to foot the
bill. We rehearsed these issues a little during the passage of the 2009
Act and it has been useful to explore them
again.
Ian
Pearson: At risk of prolonging the debate, I can
understand the hon. Gentleman’s point about a scheme manager,
but I do not accept that his amendment is superior to what the
Government propose. He said that he was asking for more than
verification, but I do not see how his amendment would achieve that. It
suggests only that the auditor
should “confirm
that the expenses have been incurred as a consequence of the exercise
of a stabilisation
power.” He
seems to be saying something that his amendment would not
deliver.
Mr.
Hoban: I disagree. We need to ensure that the costs
incurred are properly controlled and the Bill does not get us to that
point, frankly. The Minister’s assurance about a cap on the
amount that levy payers would have to pay if a bank went through the
usual processes with the FSCS is not adequate to reassure levy payers
and, ultimately, the customers of those institutions. We need to find a
way to tighten up that process; this may not be the right way, but
other aspects of the resolution regime need to be determined as well.
We may come back to those at some point and tighten them
up.
Rob
Marris: The hon. Gentleman’s seems to have implied
that “reasonably” is in the third line of his
amendment—“have been ‘reasonably’
incurred”. He seems to be addressing it, although it is not
there. That addresses the point made by the Minister, who rightly
criticises the amendment for not including the words “reasonably
incurred”, and therefore being about mere verification rather
than the audit the hon. Gentleman
seeks.
Mr.
Hoban: One thing that I have learnt serving on Committees
with the hon. Gentleman over the past four or five years is that he and
I should talk about amendments before I table them. He adds that extra
bit of finesse
that might avoid at least one set of interventions. He gives me food for
thought that might encourage me to return to the point on Report. On
that basis, and as I have the opportunity of the Christmas recess to
cogitate further, I beg to ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Clause 28
ordered to stand part of the
Bill.
Clause
29Power
to require FSCS manager to act in relation to other
schemes Question
proposed, That the clause stand part of the
Bill.
5.15
pm
Mr.
Hoban: This relatively straightforward clause tries to
formalise something that already exists. It concerns the powers to
require the Financial Services Compensation Scheme to act in relation
to other schemes. Under the provisions, the FSCS can make payments on
behalf of other compensation schemes, including arrangements that do
not relate to other authorised financial services firms under the
Financial Services and Markets Act
2000. The
impact assessment is quite instructive in explaining the motivation
behind the provisions. It
states: “In
2008 the FSCS went beyond its formal remit to ensure that eligible
claimants in failed banks were fully compensated for their deposits,
including those in the UK (Icesave) branch
of... Landsbanki...by paying the compensation due
from the Icelandic deposit-guarantee
scheme”. The
key word in that passage is “formal”, because what we
have seen, in effect, is the FSCS acting in relation to other schemes.
It would appear to have done so successfully last year, but I suspect
that it is probably one of those areas—there are several cases
in the Bill—where people have acted to do the right thing but
have not necessarily had the legal basis to do it, so it would be
helpful to put such things on a more formal
footing. I
do not think that there is anything particularly objectionable in the
clause, but a couple of points emerge. The Association of British
Insurers has pointed out that the EU is looking at compensation schemes
on a cross-border basis at present, and whether it should plan to
include one compensation scheme acting as the agent of another as part
of its reform of the deposit guarantee schemes
directive. As
we clearly have interim arrangements that work, is it appropriate for
us to push ahead with the measures in the Bill when we may have to
revisit them as a consequence of an EU directive? Given that there are
moves around the EU to harmonise rules in this area, why should we
react now? Why not wait until the directive is
formalised? The
British Bankers Association in its representation suggested that the
Bill as drafted will permit the FSA to make rules that allow the FSCS
to levy UK deposit takers for irrecoverable management expenses
incurred in respect of overseas schemes. I am all for UK deposit takers
picking up the tab for resolving problems around UK institutions, but
are we sure that we understand the true extent of the additional
liability that deposit takers will take on if they are to recover the
FSCS management expenses as a consequence of administering overseas
schemes? In the discussions Ministers have had with their counterparts
in Europe about the move to a
harmonised directive, have they discussed any provision for a scheme
acting as an agent on behalf of another scheme recovering such costs
from the home state’s deposit protection scheme and its levy
payers, rather than having to recover them from UK levy
payers? Ian
Pearson: The power to require the FSCS manager to act in
respect of other schemes has been widely welcomed by respondents to the
“Reforming financial markets” consultation. They agreed
that the measure will be of real and practical assistance to
depositors. Respondents to the consultation were keen to stress that
the authorities must ensure that there is no additional cost to FSCS
levy payers. That is the point that the hon. Gentleman raised. I
confirm that that has always been the Government’s intention,
and that the Bill includes suitable safeguards to ensure that in
carrying out the new function, the FSCS will take on minimal financial
risk. When it is acting on behalf of another scheme or authority, that
scheme or authority will be expected to meet all the compensational
costs and additional management expenses incurred by the FSCS in making
the payout. The FSCS will be able to decline to act if it is not
satisfied that funding is being, or will be, provided to meet the
expenditure and expenses it will incur. A number of other grounds on
which it may decline to act are set out in detail under the
clause. On
the wider point made by the hon. Member for Fareham about the European
Commission’s consultation on co-ordinating deposit guarantee
schemes, it has always been the Government’s view that effective
cross-border arrangements for deposit compensation are crucial to
ensure the protection of depositors and confidence in the banking
system. It is well known that the FSCS has already had to act as a
paying agent for a foreign scheme, so the provision is a basic measure
to ensure that it has the legal basis for that co-operation so that
United Kingdom depositors can be paid out quickly and effectively,
which is in customers’ best interests.
Our approach
is fully compatible with the existing provisions of the deposit
guarantee scheme directive. If the directive is revised in the light of
the Commission’s report, we consider that the measures are
likely to be compatible with any such revisions. Of course, there is
always the unlikely event of some incompatibility and, in those
circumstances, the Government will take the usual approach and use the
powers under section 2(2) of the European Communities Act 1972 to make
any necessary amendments. However, we believe that what we are doing is
consistent with what seems to be an emerging approach that will be
operated on a pan-European
basis.
Mr.
Love: I apologise for asking a probing question, but the
Treasury Committee received a great many representations from people
with deposits in offshore centres, particularly around the United
Kingdom. Are there implications for people in those circumstances? Will
they continue to have to look to the offshore centre for
compensation?
Ian
Pearson: Yes, that is the case. The situation is very much
the same as has been outlined previously. It depends on the identity of
the host regulator, which we have made clear on several
occasions.
The measure
has been welcomed as a result of the consultation exercise that we
conducted. We are introducing it under the Bill, and I hope that the
clause is
accepted. Question
put and agreed
to. Clause
29 ordered to stand part of the
Bill.
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