Financial Services Bill

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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 29

Power 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... 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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