7 Financial services
| (a)
(31816)
12386/10
+ ADDs 1-2
COM(10) 368
(b)
(31836)
12346/10
+ ADDs 1-2
COM(10) 371
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Draft Directive on deposit guarantee schemes (recast)
Draft Directive amending Directive 97/9/EC on investor compensation schemes
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| Legal base | Article 53(1) TFEU; co-decision; QMV
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| Department | HM Treasury
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| Basis of consideration | Minister's letter of 9 November 2010
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| Previous Committee Report | HC 428-iii (2010-11), chapter 7 (13 October 2010)
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
7.1 The Deposit Guarantee Schemes Directive, Directive 94/19/EC,
as amended, governs the operation of statutory deposit guarantee
schemes in the European Economic Area, including the UK's Financial
Services Compensation Scheme. The Directive was amended, following
the financial crisis, in March 2009, by Directive 2009/14/EC.
The main change was to increase the coverage level to €100,000
(£83,490) by 31 December 2010 — under the earlier legislation
Member States operated widely differing levels of coverage. When
proposing the 2009 Directive the Commission said it would undertake
a fuller review of the Deposit Guarantee Schemes Directive.
7.2 The Investor Compensation Schemes Directive, Directive 97/9/EC,
ensures compensation for clients receiving investment services
from investment firms (including credit institutions) in specific
circumstances where the firm is unable to return money or financial
instruments that it holds on the client's behalf because it is
in default. Examples of where compensation may occur are in cases
of theft, embezzlement, fraudulent misrepresentation, unintentional
errors, negligence or breakdown in systems and controls. If the
firm is unable to pay compensation itself due to insolvency national
schemes pay compensation on eligible claims. The Directive does
not cover investment risk.
7.3 The draft Directive, document (a), is to recast,
that is revise and consolidate, the Deposit Guarantee Schemes
Directive, with the aim of improving protection for depositors
and further harmonising the rules governing schemes. The second
draft Directive, document (b), is to amend the Investor Compensation
Schemes Directive. It aims to:
- increase the protection provided
under the present Directive and strengthen confidence in the use
of investment services;
- address regulatory loopholes and problems experienced
in the operation of national schemes; and
- reflect changes in the regulatory framework,
both as the present Directive was modelled on the Deposit Guarantee
Schemes Directive, which has since been amended and for which
further changes are proposed, as in document (a), and as it complemented
the Investment Services Directive, which has now been replaced
by the Market in Financial Instruments Directive regulating provision
of investment services in the EU.
7.4 The Commission published at the same time as
these documents a White Paper on insurance guarantee schemes,
which we have reported on separately.[18]
7.5 We considered these documents in October 2010
— in relation to the draft Directive to recast the Deposit
Guarantee Schemes Directive, document (a), we heard that the Government
believed that compensation plays a vital role in ensuring ongoing
depositor confidence and that recent events had highlighted the
importance of this, that the UK's Financial Services Compensation
Scheme leads the way in the EU and already goes further in many
areas than required by the current Directive, such as aiming to
pay out within seven days, implementing single customer view and
having the capacity to pay out on behalf of another scheme and
that the Government therefore fully supported the principle of
improving EU-wide depositor protection by raising minimum standards
of deposit guarantee schemes across the EU, but that it would
not support further EU harmonisation if this were to lead to a
reduction in protection currently offered to UK depositors.
7.6 On the second draft Directive, document (b),
to amend the Investor Compensation Schemes Directive, we heard
a Government stance that was very similar to that in relation
to the other draft Directive, document (a). We learned also that
the Government supported the principle of updating the Investor
Compensation Schemes Directive in the light of changes in the
past thirteen years, although it planned to argue for continued
national discretion in the operation of compensation schemes,
that it would seek important improvements to the draft Directive
during Council negotiations to ensure that it would avoid imposing
unnecessary burdens on the EU investment industry, while at the
same time delivering improvements to investor protection and confidence.
7.7 We said we were concerned that some provisions
in the two draft Directives might not accord with the principle
of subsidiarity. We thought that:
- such provisions risk introducing
moral hazard — that is a scheme could undertake inappropriate,
careless or risky action because it was relying on a fail-safe
mechanism;
- to avoid introducing moral hazard it would be
better not to have recourse to other Member States' schemes, but
to have each Member State ensure that members of a scheme take
full responsibility themselves; and
- in other words the draft Directives, would not,
as they stand in relation to this aspect of the proposals, produce
a result that was, in the words of Article 5 TEU, "better
achieved at Union level" and therefore do not meet the principle
of subsidiarity.
We noted that the deadline for submission of a Reasoned
Opinion on the draft Directive to recast the Deposit Guarantee
Schemes Directive had expired and so our Chairman would write
to the presidents of the three EU institutions concerned to draw
their attention to our view.[19]
However the deadline for a Reasoned Opinion on the draft Directive
to amend the Investor Compensation Schemes Directive had not expired
and we invited the House to agree a resolution on a Reasoned Opinion.[20]
7.8 As for the other issues related to the draft
Directives we said that, whilst we noted the Government's support
in principle for the proposals we wished to consider the documents
further in the light of information from the Government about
progress in negotiating the problems it had identified to us,
about the outcome of its consultations it was undertaking and
about any impact assessments it developed. Meanwhile the documents
remained under scrutiny.[21]
The Minister's letter
7.9 The Financial Secretary to the Treasury (Mr Mark
Hoban), noting that the issues of subsidiarity in relation to
the draft Directive to amend the Investor Compensation Schemes
Directive have already been fully debated, first comments on our
decision to write to the Presidents of the EU institutions on
issues of moral hazard and subsidiarity in relation to the draft
Directive to recast the Deposit Guarantee Schemes Directive. He
tells us that:
- as he said in the European
Committee debate of 21 October 2010, the Government does not think
that either of the Commission's proposals would create additional
moral hazard risk given that some schemes, including the UK's
Financial Services Compensation Scheme, have access to additional
sources of liquidity;
- in any case, any risk of moral hazard is minimised
by the boundaries imposed by the Commission on mutual borrowing;
- the Government is strongly of the view that the
principle of subsidiarity is one of the key checks and balances
on the Commission's competence to propose draft EU legislation
and it is committed to ensuring the principle is respected and
adhered to; but
- as with the draft Directive to amend the Investor
Compensation Schemes Directive, the Government does not dispute
the Commission's general position that the draft Directive to
recast the Deposit Guarantee Schemes Directive is consistent with
the principle of subsidiarity.
The Minister continues, on the Commission's proposals
for mutual borrowing, that the Government believes that:
- the strongest arguments against
are those that are grounded in policy rather than the legal interpretation
of subsidiarity;
- the inclusion of mutual borrowing in both draft
Directives presents an unpredictable and unacceptable fiscal risk
to the UK Exchequer; and
- for these reasons, the Government opposes this
aspect of the proposals.
7.10 On the progress of negotiations the Minister
says that there have been two Council working group meetings on
each draft Directive and that:
- as well as strong opposition
to mutual borrowing, many Member States joined the UK in voicing
their opposition to the high levels of pre-funding required in
both proposals;
- on deposit guarantee schemes, Member States are
particularly supportive of the confirmation of the increase in
the protection limit to €100,000 and general proposals for
improved consumer protections;
- however, many Member States have voiced their
opposition to the reduction to seven days of the deadline for
schemes to payout to depositors in the event of a bank failure;
- on investor compensation schemes, the Commission
has thus far unsuccessfully attempted to address the queries and
issues raised by the UK and other Member States on the proposal
to extend the scope to third parties and undertakings for collective
investments in transferable securities depositaries;
- there is further widespread concern for the feasibility
of introducing partial compensation for investor claims;
- there is more work to be done to understand Member
States' positions on the compensation level, as most of the discussions
have centred on funding and scope;
- the Government will continue to argue against
maximum harmonisation of the compensation level at €50,000
and any provisions that would cause a decrease in the cover afforded
to UK investors;
- no compromise texts have as yet been put forward,
despite the widespread opposition to the funding provisions in
both proposals, but the Belgian Presidency has promised more meetings
before the end of the year and has given an initial date of 23
November for a meeting on the deposit guarantee schemes proposal;
- no further meetings have yet been scheduled for
the investor compensation schemes proposal;
- the Government has also submitted written comments
to the Presidency on the deposit guarantee schemes proposal; and
- the European Parliament is due to commence shortly
with its examination of the proposals.
7.11 Turning to the Government's consultations the
Minister says that:
- the Government has found support
for the principle of compensation schemes, but also concern about
the increased costs the proposals would bring;
- the industry is particularly
concerned that excessive pre-funding would extract capital from
firms which they could otherwise use to strengthen their businesses
and this could increase the risk of failure;
- there is also concern that the investor compensation
scheme proposals may reduce cover for investors;
- working with the industry, the Financial Services
Authority, the Financial Services Compensation Scheme and the
Bank of England, the Government has been analysing the impacts
to ensure the its response to the proposals is based on careful
analysis of the potential costs to the financial services industry
and that the right outcome is achieved; and
- the Government will continue to consult with
the industry and consumer organisations as negotiations progress
in order to develop impact assessments for these proposals.
Conclusion
7.12 We are grateful to the Minister for this
account of where matters stand on these two documents. However
we note that there has been little progress yet on the full range
of issues the Government originally drew to our attention. So
before considering the documents again we will await a further
report from the Minister about developments, including progress
on its impact assessments. Meanwhile the documents remain under
scrutiny.
18 (31843) 12360/10 + ADDs 1-8: see HC 428-iii (2010-11),
chapter 7 (13 October 2010). Back
19
The Chairman wrote on 13 October 2010: see http://www.parliament.uk/business/committees/committees-a-z/commons-select/european-scrutiny-committee/news/subsidiarity-correspondence-with-the-eu-institutions/. Back
20
A Reasoned Opinion was adopted and forwarded to the Commission
on 25 October 2010: see Gen Co Deb, European Committee
B, 21 October 2010, cols. 3-18 and HC Deb, 25 October 2010,
col. 26. Back
21
See headnote. Back
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