The
Committee consisted of the following
Members:
Chair:
John
Robertson
†
Birtwistle,
Gordon (Burnley)
(LD)
Blears,
Hazel (Salford and Eccles)
(Lab)
†
Coffey,
Ann (Stockport)
(Lab)
†
Davies,
Glyn (Montgomeryshire)
(Con)
†
Dorries,
Nadine (Mid Bedfordshire)
(Con)
†
Dromey,
Jack (Birmingham, Erdington)
(Lab)
†
Elphicke,
Charlie (Dover)
(Con)
†
Evans,
Graham (Weaver Vale)
(Con)
†
Evans,
Jonathan (Cardiff North)
(Con)
†
Farrelly,
Paul (Newcastle-under-Lyme)
(Lab)
†
Goodwill,
Mr Robert (Scarborough and Whitby)
(Con)
†
Greening,
Justine (Economic Secretary to the
Treasury)
†
Harrington,
Richard (Watford)
(Con)
†
Mudie,
Mr George (Leeds East)
(Lab)
†
Munn,
Meg (Sheffield, Heeley)
(Lab/Co-op)
†
Thomas,
Mr Gareth (Harrow West)
(Lab/Co-op)
†
Williams,
Stephen (Bristol West)
(LD)
†
Wilson,
Sammy (East Antrim)
(DUP)
Mark Etherton, Committee
Clerk
† attended the
Committee
First
Delegated Legislation
Committee
Monday
26 July
2010
[John
Robertson
in the
Chair]
Draft
Financial Services and Markets Act 2000 (Contribution to Costs of
Special Resolution Regime) Regulations
2010
4.30
pm
The
Economic Secretary to the Treasury (Justine Greening):
I
beg to
move,
That
the Committee has considered the draft Financial Services and Markets
Act 2000 (Contribution to Costs of Special Resolution Regime)
Regulations
2010.
It
is a pleasure to serve under your chairmanship, Mr
Robertson. The Financial Services Compensation Scheme, which I shall
refer to as the FSCS, was established under the Financial Services and
Markets Act 2000 as a mechanism to compensate customers of authorised
financial services firms when those firms are in default.
Using the
FSCS to pay compensation was the only way to protect depositors in 2007
when the banking crisis erupted. The Banking Act 2009 made new
arrangements to allow failing banks and building societies to be
resolved in a number of ways. They included transferring all or part of
the business of the failing institution to another institution or into
temporary public ownership. Such transfers often include the transfer
of deposits held by persons who are eligible for FSCS compensation. The
effect is that those retail depositors are protected not by the payment
of compensation under the FSCS, but by having new accounts with a new
bank or building
society.
It
could be costly to transfer a business and, naturally enough, the
buying institution will expect to be paid for taking on liabilities,
such as deposits, in excess of any assets that are also transferred.
However, from the FSCS point of view, the transfer of a failing
institution’s retail deposits to a stronger bank or building
society has the advantage that compensation will not need to be paid to
the depositors concerned. It is therefore right for the FSCS to be
asked to contribute to the cost of resolving a failing bank or building
society using the Banking Act powers, as it would have been spared the
potentially large cost of paying compensation to depositors. It is also
right that there should be a limit on those contributions, and that
limit is the cost that the FSCS would have otherwise incurred in paying
compensation.
The
Banking Act 2009 therefore inserted a new section into the Financial
Services and Markets Act 2000, commonly known as FSMA, to give the
Treasury the power to require the FSCS to pay a contribution to
resolution costs, subject to the limit that I have just described. The
new section also gave the Treasury the power to make regulations to
deal with the inevitable points of detail. Those regulations were made
in March 2009, to allow the FSCS to contribute to the costs of the
resolution of the Dunfermline building society.
However, it
was quickly realised that the new FSMA powers were not quite right. It
was found that no allowance could be made for the time needed to
complete a bank resolution and the interest costs that would be
incurred in borrowing to finance the initial payments to the buyer of
the business while waiting for the proceeds from selling the assets of
the failed institution. Furthermore, the limit on FSCS contributions
could not be adjusted to take account of the interest costs that the
FSCS would have to pay on the borrowing needed to finance the
compensation pay-out. The new FSMA provisions did not allow for those
matters to be put right in revised regulations and, to correct the FSMA
rules, amending legislation was included in the Financial Services Act
2010.
The
regulations that we are considering today deal with detailed points
about including interest costs in the resolution expenses and in
calculating the limit on the FSCS contributions to those
expenses.
Mr
Gareth Thomas (Harrow West) (Lab/Co-op):
I ask my question
in a spirit of genuine inquiry. I accept that the hon. Lady might not
be able to answer my query now, but I hope that she will be able to in
her winding-up speech. Regulation 12 relates to the appointment of an
independent person to verify the amounts that are required to be paid.
Does she think that there is a public interest in the publication of
the basis on which the independent verifier makes the
calculations?
Justine
Greening:
The hon. Gentleman raises an interesting issue,
which I shall come to in my closing remarks. I shall also address any
other points that hon. Members
make.
The
regulations require the Treasury to keep detailed accounts of the
resolution costs incurred, of recoveries made and of the costs and
recoveries that the FSCS would have incurred and made if the failed
institution had become insolvent and compensation had been paid to
depositors. Interest is then added to the outstanding account balances,
and the interim contributions that the FSCS pays are deducted. At the
end of the resolution process, closing balances are to be calculated,
and a final FSCS contribution calculated and paid. If the FSCS has
already paid too much, it will receive a
refund.
The
regulations also provide for the FSCS to estimate the amount and timing
of the compensation that it would have paid in the hypothetical
scenario, and for an independent valuer to estimate the amount and
timing of the recoveries that the FSCS would have made from the
winding-up of the failed institution. The Treasury will need that
information to complete the
accounts.
The
regulations include detailed provision regarding making interim
payments, referring disputes to the upper tribunal, appointing
independent valuers and independently verifying the accounts. There are
also transitional provisions to ensure that action taken under the
regulations made in 2009 is properly allowed for. Those regulations are
then revoked. The powers inserted by the Financial Services Act 2010
provide that interest can be applied to accounts kept in respect of the
Dunfermline building society under the new regulations as of 19
November 2009. I commend the regulations to the
Committee.
4.37
pm
Mr
Thomas:
I, too, welcome the opportunity to serve under
your chairmanship, Mr Robertson, and to debate the regulations. As the
Economic Secretary has described, the regulations represent refinements
to arrangements introduced under the previous Government’s
banking legislation and deal in particular with the important issues of
the costs of the special resolution regime and the role of the
Financial Services Compensation Scheme in conforming to those
costs.
It
is worth recognising, however, that the regulations potentially
represent the end of a journey in dealing with a failing financial
institution. In understanding the importance of the regulations, one
has also to recognise the significant changes being made to that
journey and to the end point. Today, the Financial Secretary to the
Treasury is announcing a Green Paper that sets out some of the detail
of changes that were presented in the Chancellor’s Mansion House
speech and which could have significant implications for whether the
regulations have to be used. Much as I am sure that the whole House
hopes that the regulations do not have to be used any time soon, under
every previous Government one or two financial institutions have faced
challenges, and I suspect that we will have to call on the regulations
at some
point.
One
key change that the Government are introducing, which could have an
impact on whether the regulations have to be used, is to the Bank of
England’s role. Is the Economic Secretary, or are her
colleagues, any closer to deciding whether part 2 of the Bingham report
into the collapse of the Bank of Credit and Commerce International will
be published? That might help us to understand whether the Bank of
England has learned the lessons of what was a disaster for so many
constituents of Members across the House, and therefore whether it is
better placed to carry out the role that the Chancellor hopes for
it.
Has
the Economic Secretary anything by way of comment on the stress tests
that European banks have had to undergo? There is a growing critique,
among some people, of the robustness of those tests. They are important
indicators of whether financial institutions might, in time, fail;
obviously, that is a key issue for whether regulations such as the ones
before us will have to be used.
I
have two specific points to make about the regulations. The first
relates to my intervention on the Minister’s speech. One
respondent to the consultation on the regulations in March expressed
the view that the basis of the independent verification process should
be published. I recognise that the Government argue in paragraph 8.5 of
the explanatory memorandum that it would not be appropriate to use the
regulations to require estimated resolution costs to be communicated to
levy payers; in any case, the FSCS has access to the information
necessary to make that assessment. I also recognise that the major
interest in how levies are calculated will be from industry, which will
have regular communications with the FSCS anyway.
However,
as I have indicated, some might argue that there is also public
interest in understanding how the costs of a special resolution levied
on the FSCS will be calculated. Publishing the basis for independent
verification would satisfy that. Without any prejudice to the position
of this side of the Committee, I ask genuinely what the
Minister’s view on that particular question is.
The Minister
held this particular brief for some time in opposition, so I am sure
that she is aware of the continuing concern of building societies about
the distribution of the levy under the FSCS and the level of cover that
they can provide as a result. Will she comment on whether the
Government have yet taken a view on those
concerns?
I
recognise that the regulations have already been aired in the other
place and that two substantial efforts to consult stakeholders have
been made. I do not intend to ask my side of the Committee to divide on
the matter. The explanatory memorandum has been helpful in setting out
not only the key points that emerge from the consultation response, but
the Government’s reaction to the points made to them. I also
welcome the level of detail that the Minister was able to provide in
her opening remarks. I hope, however, that she will be able to answer
the four questions that I have
asked.
4.43
pm
Jonathan
Evans (Cardiff North) (Con):
I am grateful for the
opportunity to contribute to the debate. Before I start, it might be
appropriate for me to declare an interest. I am the chairman of Phoenix
Life Holdings Ltd, a holding company of closed life insurance
companies. I make it absolutely clear that I understand that the
regulations before us are limited to banks and building societies, and
have no direct impact on the companies that I chair. However, some
points that I raise about the Financial Services Compensation Scheme
may well go into the generality of its operation, so for the sake of
completeness it is necessary for me to declare that
interest.
I
refer the Minister to the consultation outcome contained in the
explanatory memorandum, which has been so helpfully provided to us.
Paragraphs 8.1.1 to 8.1.6 relate to a range of points, raised primarily
by building societies, about how the new regime may operate. From my
perspective, a range of points in the responses have some validity,
particularly paragraph 8.1.6, which states that an approximation in
relation to
costs
“should
be communicated to levy payers as soon as possible for accounting
purposes.”
I
have noticed that the response to that, in paragraph 8.5 of
the explanatory memorandum, appears to suggest that because the FSCS
communicates regularly with levy payers anyway, the provision is
enough.
I am not sure
whether any of us should comfortably take that view. Let us look at the
impact of the new levy that the insurance broking industry is required
to pay under the Financial Services Compensation Scheme—again, I
make it clear that I have no interest at all in insurance broking. I am
aware, from speaking to the industry, that in the current year there
has been a nine or tenfold increase in the levy that it is required to
pay—and in circumstances where the solvency of some businesses
may be jeopardised. That is a matter of concern. Will the Government
ensure that if costs of that nature impact on the solvency of
companies, the impact of the Financial Services Compensation Scheme
levy should be communicated to companies as early as
possible?
I
draw attention to the position that arose under the remit of the hon.
Member for Harrow West when his party was in government. I refer to
Bradford and Bingley and the arrangements for Santander to take it
over;
there was a major injection of capital into Bradford and Bingley. Many
building societies would say that the effect of that injection of
capital on the solvency of that company significantly aided it in
competing against the very companies that were required to make the
payment under the Financial Services Compensation Scheme.
In other
words, companies that had kept themselves solvent, done the right thing
and not found themselves in any financial difficulty were required to
make, through the scheme, a significant capital injection into another
company, placing that company in a better competitive position than
their own. That is another reason why companies, particularly building
societies, should be entitled to have the earliest
information.
Finally,
there is one other point that concerns me; again, it touches on the
point made by the hon. Member for Harrow West. Today he referred to the
publication of the Green Paper on the new regulatory architecture in
financial services. I confess that I have not yet had the opportunity
to plough my way through that document. However, we are all aware that
in any event the Financial Services Compensation Scheme was due for
review by the Financial Services Authority this year. It was
anticipated that a consultation document looking at how the scheme
operated would be published in or around November and December this
year.
Will the
publication of a Green Paper impact on that? Will the FSA, in whatever
guise, still proceed with the consultation on the structure of the
FSCS? The building societies would find that information
helpful.
4.48
pm
Paul
Farrelly (Newcastle-under-Lyme) (Lab):
It is good to see
you here today, Mr Robertson, albeit from my position on the Opposition
side of the room. I appreciate for the first time how difficult it was
for Opposition Back Benchers in the last Parliament to take the fight
to the Government when, first, they were outnumbered and, secondly,
they had the sun in their
eyes.
I
congratulate the hon. Member for Cardiff North on his speech. He may
find in future that, during longer Bills, Government Whips do not value
long contributions from Back Benchers because they want to get the
legislation through as quickly as possible. However, what the hon.
Gentleman said was
valuable.
This
measure is technical. My hon. Friend the Member for Harrow West sought
valiantly to broaden it out into the issue of the Bank of
Credit and Commerce International; I will resist the temptation to say
that, in 1995 when the lights finally went out, I was the last reporter
on the steps of Barings, along with the man from the Financial
T
imes. We will have an opportunity to address those
issues when the supervisory architecture is
changed.
I
have one question for the Minister on the delegated legislation. When
the Bank of England and the Financial Services Authority are reordered
and the FSA is abolished, is it the Government’s intention to
repeal, in whole or in part, the Financial Services and Markets Act
2000? Where would that leave this delegated
legislation?
4.50
pm
Justine
Greening:
There have been some interesting contributions
to the debate and I will try to address the questions that have been
raised. In responding to the hon. Member for Harrow West, I will resist
the urge to debate the regulatory scheme that was previously in place
for banks and the measures that had to be taken subsequent to its
failure. I will, however, say that we want to make sure that there is
confidence in the system.
With regard
to the distribution of the levy on building societies and the
contributions to FSCS costs arising from bank failures, it is
reasonable to ask other sectors—which include building
societies, credit unions, insurance companies and investment
firms—to contribute. Although FSCS costs are borne by the
financial services industry, the whole industry benefits from the
confidence that the existence of the FSCS provides to its customers. Of
course, the levies made on industry are subject to the limits set by
FSA rules. Changes to the allocation of levies between classes of
levy-paying firms will always be difficult; inevitably, if one part of
the industry pays less, other parts will have to pay more.
The hon.
Gentleman also talked about the public interest. The public’s
main interest is to have confidence in the banking system. At the same
time, we want to ensure that the process minimises the costs involved
in delivering that confidence. Today’s regulations are about
strengthening the rules and ensuring that swift action can be taken if
financial institutions get into trouble. We do not want to increase the
costs caused by that process.
Mr
Thomas:
Why would there be great additional costs in
publishing the basis of the independent verification process? If there
is another reason why they should not be published, I will be happy to
hear it, but I cannot see how publishing the basis of the independent
verification would add huge additional costs to the
process.
Justine
Greening:
I think that it would add costs and complexity
to the process. The need for speed is of the utmost when taking action;
it is important that the independent evaluation process is carried out
speedily.
I
turn to the points made by my hon. Friend the Member for Cardiff
North—
Mr
Thomas:
With all due respect to the Minister, I should say
that, as I understand it, there is a process under way in Government to
publish large numbers of contracts. Indeed, the Department for
Communities and Local Government is encouraging local authorities to
publish the spending of sums as low as £500. Why should there be
a lack of transparency in this case, but not in other areas of
expenditure?
Justine
Greening:
I do not think that there is any desire for a
lack of transparency. There are clearly commercial issues of interest
here as well. I urge the hon. Gentleman to reflect on the fact that the
draft regulations that we are considering were set out by his
Government; I would be interested to know whether he had previously
raised his concerns about these issues. We reached the same conclusion
as the previous Government—that we had got the balance right in
setting out the appropriate process and level of scrutiny and
independence.
Finally,
I turn to my hon. Friend the Member for Cardiff North, who made an
insightful contribution to the debate. There is no unnecessary delay in
communicating costs in relation to the FSCS. He is right to point out
that the Green Paper on the FSA was issued today. We believe that
consultation on funding is ultimately a matter for the FSA, but
today’s consultation document seeks views on alternative
operating models for the FSCS.
One
possibility is for the two new regulators to make rules on
compensations and levies for the firms that they regulate. That could
imply different compensation schemes for different classes of firm,
which could end the cross-subsidy between different classes of levy
players, although not within a class such as deposit takers.
Alternatively, one of the regulators—the proposed Consumer
Protection and Markets Authority—could make the rules for all
parts of the FSCS, reflecting its clear role in protecting customers.
Clearly, in either case
there would need to be close co-operation between the regulators and the
FSCS on operational matters. That issue has been flagged up today and I
am sure that my hon. Friend will want to have an input into that
process.
Finally,
the hon. Member for Newcastle-under-Lyme raised a question about the
principle behind the FSCS resolution costs not being consulted on.
That issue is not affected by the proposals in the Green Paper. We feel
that the regulations that we have set out today will sort out the
initial problems that we faced when we came into office. The previous
Government had put down draft regulations to tackle those problems, and
I hope that the regulations will address the specific problem that we
faced in a way that we can all agree is measured but
effective.
Question
put and agreed
to.
4.57
pm
Committee
rose.