Draft Financial Services and Markets Act 2000 (Contribution to Costs of Special Resolution Regime) Regulations 2010

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.