Draft Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015
The Committee consisted of the following Members:
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Crockart, Mike (Edinburgh West) (LD)
† Dakin, Nic (Scunthorpe) (Lab)
† Doyle-Price, Jackie (Thurrock) (Con)
† Fabricant, Michael (Lichfield) (Con)
Field, Mr Frank (Birkenhead) (Lab)
† Flello, Robert (Stoke-on-Trent South) (Lab)
† Harris, Rebecca (Castle Point) (Con)
Healey, John (Wentworth and Dearne) (Lab)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Kwarteng, Kwasi (Spelthorne) (Con)
† Leadsom, Andrea (Economic Secretary to the Treasury)
Simpson, David (Upper Bann) (DUP)
† Stunell, Sir Andrew (Hazel Grove) (LD)
Vaz, Valerie (Walsall South) (Lab)
† Weatherley, Mike (Hove) (Con)
† Wharton, James (Stockton South) (Con)
Kate Emms, Committee Clerk
† attended the Committee
Eighth Delegated Legislation Committee
Tuesday 3 March 2015
[Mr Joe Benton in the Chair]
Draft Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015
2.30 pm
The Economic Secretary to the Treasury (Andrea Leadsom): I beg to move,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015.
Today, we are debating the final piece of legislation required to bring about the biggest ever overhaul of Britain’s banking system. The regulations will ensure that a ring-fenced bank cannot be liable for the pension obligations of other parts of the wider banking group. They are the final piece of secondary legislation required to implement the ring-fencing of retail banking from investment banking, so they also are the final piece of legislation required to implement the recommendations of the Independent Commission on Banking and ensure that Britain has a safer and more stable banking sector.
The Government have tasked themselves with fixing the banks following the worst banking crisis in the entirety of British history. We have reformed the supervision of the banking industry by putting the Bank of England back at the centre of the supervisory regime, with new powers to identify and address systemic risks as they emerge. That will ensure that we have resilient banks that are less likely to bring down the economy in future. We have also reshaped the culture of the banking industry through the imposition of higher standards of conduct by introducing a criminal sanction for reckless misconduct that leads to bank failure and a more stringent approval regime for senior bankers.
The Government have increased competition in the banking industry by making it easier for new banks to enter the banking sector—for example, by driving changes to how the regulators authorise new banks. The Government’s drive to increase competition in the sector has also empowered consumers, with it now being far easier to compare the products and services offered by banks and to switch accounts when a better deal is available.
In 2010, the Government established the Independent Commission on Banking, led by Sir John Vickers, to consider the structural reform of the banking sector. The commission recommended that core high street retail banks should be ring-fenced from trading and investment banking and economically and operationally independent of their wider banking groups. Ring-fencing aims to ensure the constant provision of essential services to the public by insulating retail banking from shocks elsewhere in the financial system. It will make it easier for the Government to deal with failing banks and to protect taxpayers’ money from being used to cover the costs of banks’ riskier trading activities.
The Independent Commission on Banking recommended ring-fencing rather than forcing the banks to split entirely, which would have had a greater cost to the banks, and therefore to the economy, while achieving the same objective. Ring-fencing achieves economic independence for the ring-fenced banks while allowing them to benefit from a controlled relationship with the wider banking group. Following the recommendation of the Parliamentary Commission on Banking Standards, the Government have electrified the ring fence by giving the Prudential Regulation Authority the power to impose the complete separation of a banking group. The ring fence was initially legislated for in the Financial Services (Banking Reform) Act 2013. Since then, two pieces of secondary legislation have been approved by Parliament, setting out which banks will need to ring-fence and what activities are permitted inside or must be kept outside the ring fence. The regulations are the final piece of secondary legislation required to implement ring-fencing fully.
One recommendation of the Independent Commission on Banking was that ring-fenced banks should not have any liabilities to group-wide pension schemes. Collectively, the large banks are running their pensions schemes at massive deficits totalling billions of pounds. That means that were a non-ring-fenced investment bank to fail, the ring-fenced bank could suddenly be left with a huge pension liability in the many millions, or even billions, that it may be unable to pay. Shared pension liabilities could therefore pose a significant risk to the viability of the overall ring fence and threaten the ring-fenced bank’s ability to maintain the provision of vital services.
The regulations set out that a ring-fenced bank cannot be liable for the pensions deficit arising from any other parts of the wider banking group. To achieve that, the banks will need to restructure their pension schemes. The regulations will give powers to banks and the trustees of the banks’ pension schemes to ensure that the necessary changes are made. The regulations also set out the role of the regulators, the Prudential Regulation Authority and the Pensions Regulator, for monitoring and assessing the changes.
It will not necessarily be a simple process for a bank to divide its pension scheme, especially where the bank may have shared pension liabilities with organisations around the world or where there is disagreement between the bank and the pension scheme trustees. To ensure that the banks and trustees have enough time to work out the optimal solution for separating their pension schemes, we have granted banks until 2026 to make these changes.
There will be some transitional costs to the banks of implementing the measure. The cost is hard to estimate, but the Treasury expects it to be in the tens or low hundreds of millions of pounds, which is relatively small in comparison with the total cost to banks of the wider ring-fencing package. Ring-fencing is also expected to have a one-off transitional cost to UK banks of up to £3 billion and an ongoing cost of £2 billion to £4 billion per annum. However, that cost primarily comes from the reduction in the perceived Government guarantee enjoyed by banks seen as too big to fail.
We estimate that the actual annual cost to the UK economy will be much lower, at less than £2 billion. In comparison, it is estimated that the annual economic benefit of increased financial stability as a result of
ring-fencing will be roughly £9 billion per annum. The regulations are therefore a necessary part of ensuring a robust ring fence to protect our core banking services. Ring-fencing is just one of a number of steps that the Government have taken to transform the banking industry in the UK in the past five years, making it more resilient, more stable and more accountable.As this is a financial systemic risk measure, the regulations are out of scope of the one-in, two-out requirements. They will ensure that a ring-fenced bank will not be responsible for the pension liabilities of other parts of the banking group and, in doing so, will ensure a robust ring fence. This is the final piece of legislation needed to implement the recommendations of the Independent Commission on Banking and to ensure a safer and more stable banking sector for the UK. I commend the regulations to the Committee.
2.38 pm
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): It is a pleasure to be here this afternoon to deal with this statutory instrument. I thank the Minister for setting out the scope of the regulations and attempting to anticipate some of my questions—as always, I hope to have one or two that she has not thought of, although I am sure she has the answers to those as well but did not include them in her speech so as to allow me to ask them.
We support today’s measure, because it will safeguard the integrity of the ring fence. As the Minister said, the ring fence between retail and investment banking was set out by the Independent Commission on Banking. At that stage, we proposed powers to fully split retail and investment banks unless the letter and spirit of the commission’s recommendations were fully introduced and there was a cultural change in the banking sector. As she said, the Parliamentary Commission on Banking Standards concluded in 2012 that the ring fence “should be electrified” through the power to fully separate retail from investment banking if the ring fence began to be eroded.
It would be fair to say that, initially, the Government did not particularly support that approach. We pressed the case, however, and the Government agreed to bring forward legislative powers for the full separation of individual institutions. However, the Government still did not accept our view that we should have a back-stop power allowing full separation, which is something that we would legislate for in government.
As the Minister said, the regulations will ensure that the ring-fenced banks are economically independent from the rest of their corporate group. The divisions are not themselves ring-fenced and do not become liable for funding a deficit in any group-wide pension scheme, helping to ensure that the ring fence operates effectively and that ring-fenced banks are fully insulated from any financial shocks affecting other members of their corporate group. The requirement for ring-fenced banks to restructure their pension liabilities is set out in the regulations, which are, as she outlined, just one element in the larger ring-fencing package.
The explanatory notes and impact assessment allude to the regulations having an impact on the banks’ costs, as there will be an administrative cost to implementing the required changes to the pension schemes, which I
understand the Government have estimated to be no larger than £50 million across all the affected banks. Of course, banks may be liable for further transitional costs—for example, a section 75 payment may be due if they choose to depart from their pension scheme.It is important to recognise the benefits of the ring fence to the stability of the wider economy and the safeguarding of taxpayers’ money—that is why we support the measures—but I have a few questions. Does the Minister plan to make further adjustments to the ring fence to ensure it operates as effectively as possible? The impact assessment reads:
“There is a risk that members of relevant pension schemes are detrimentally affected by these changes. For example there is a possibility that, depending on how banks restructure their pension schemes, members could lose out on traditional tax protections.”
I am sure she can reassure us on that. Obviously, we should be concerned about the position of bank employees who are pension scheme members. The impact assessment also states that banks will probably look to pass on to customers some of the implementation costs of these regulations. Will she give us any assurance on that? Has she discussed the matter with the banks? Do they intend to pass on the costs or absorb them?
Finally, the impact assessment talks about the wider impacts, particularly on small and micro-businesses. It reads:
“There are two ways that Small and Micro Businesses may be indirectly affected”—
although not directly affected. It continues:
“This policy may distort business borrowing.”
It would be helpful if the Minister could reassure us on that point, because the last thing we need is further pressure on small and micro-businesses in terms of access to funding. If she can answer those questions and reassure us, we will be happy to support the regulations.
2.43 pm
Andrea Leadsom: I thank the hon. Lady for her response and questions. At the moment, further adjustments are not anticipated, but, as she would expect, ring-fencing will be reviewed, by 2021 at the latest, at which point—so not in the near future—any successes and learning points will be reviewed and adjustments made.
The hon. Lady asked whether there will be tax protection issues for pension fund scheme members. At the moment, it is impossible to say whether there will be some detrimental impact, but once we have greater clarity, we will of course address any issues that arise. We have committed to revisiting the matter if there are any such problems, but she will appreciate that it is difficult to guess the implications up-front, before we get stuck into seeing how the banks implement the pensions ring fence.
The hon. Lady asked about banks passing on the costs—I assume she meant the general costs—of ring-fencing to customers. Again, there is nothing in the regulations to prevent them from doing so, just as there is potential for any additional cost to banking to be passed on to customers—as well as to the bottom line of the bank, thereby reducing profitability and so on. The answer is that, of course, it will be a balance. She will appreciate that since we have implemented the measures and changes introduced in this Parliament, costs to businesses and customers have risen as a result
of sensible measures that have been put in place in some areas. The cost of providing banking services has risen, but so far we have not seen a big impact on either customers or small businesses. In fact, there is evidence to suggest that margins on loans to small businesses have been decreasing—certainly recently—which suggests that to date the banks are absorbing the costs. We hope that that will continue.The hon. Lady is absolutely right to say that we do not want to see costs increase for families and businesses as a result of ring-fencing, just as the economy is doing
so well. I share that concern, but as yet there is no evidence of it. Likewise, we are all concerned to see access to finance for small and medium-sized enterprises, particularly micro-businesses, but again there is no evidence to suggest that our ring-fencing proposals have affected that.I am grateful for the hon. Lady’s questions. I hope that I have answered them, and I commend the regulations to the House.