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The noble Lord, Lord Monson, expressed surprise that Amendment No. 32 is grouped with Amendment No. 4. That is nothing to do with us. The amendment seeks to clarify that the interest rate that will apply will be the contractual rate. This is unnecessary, as it is clear in relation to Clause 8 that the interest will be calculated in accordance with the contract between the individual and the bank. In particular, subsection (2) sets out that the interest rate that the customer will be repaid is the one that would have applied had the transfer not taken place. It is not therefore possible for any other interest rate to be applied, as subsection (2) prevents this. Individual financial institutions will be responsible for calculating how much a customer is owed, including accrued interest, according to their records, andwill make the payment on the reclaim funds behalf accordingly. Customers will be repaid their balance, adjusted for interest according to the terms of the original contract.
If the bank were to make a mistake and transferred too little or too much to the reclaim fund, the institution would still be obliged to repay to the customer the full amount that they would have been owed under the terms of their contract. The banks and the reclaim fund are expected to adjust for overpayment or underpayment. If there is a dispute about the fairness of any charges deducted post-transfer, customers can now complain to the Financial Ombudsman Service, if necessary.
Baroness Noakes: How is this supposed to work? If a bank transfers £100 from a dormant account to the reclaim fund and at some later stage someone establishes their entitlement to that account, and if the bank then says, Oh, it is £120and tells the reclaim fund that it is £120does the reclaim fund pay out £120? Whether the extra is for accrued interest from the time the £100 went over to the fund or some other amount, how will this work in practice? The reclaim fund will not have access to the information and therefore will not know whether that is the right amount. I apologise for asking this basic question but it was not until the Minister started describing it that I thought, I am not sure I know how this works.
Lord Bach: In part, the voluntary nature of this enterprise means that I cannot give the noble Baroness a direct answer as to how it will work. The relationship between the banks and building societies and the fund will be critical in how people are paid. Working out the interest will, of course, be a matter for the bank, and if the customer is not satisfied, he will be entitled to take the matter further. As I understand it, because the bank is likely to act as the agent for the fund, the bank will pay the customer and will reconcile matters with the reclaim fund through the agency arrangements. So it will be an agency arrangement between the bank and the reclaim fund, and that is how the right amount will be paid.
Baroness Noakes: So, in my example, the reclaim fund would have to pay the additional £20 even though it had received only £100 in the first instance, and that calculation is entirely in the hands of the banks. I think that is what the Minister is saying.
Lord Newby: This raises the question of how the reclaim fund invests the money. It could be required to pay out significantly more than it receivesfor example, the five shillings and 11 pence of my noble friend Lord Shutt could be worth £20 or £30. Presumably the reclaim fund will have to invest its money to best effect for it to be capable of paying back to the banks any amounts that are required to be paid.
Lord Shutt of Greetland: There is another issue herethe rate of interest. The Committee will be aware that banks and building societies keep changing the style of their accounts. I have not heard of a brass accountthey usually talk about gold, silver and platinum and so onbut if you do not watch it they say, This issue is now closed and has a reduced rate because we have now got the double gold account. If people ultimately turned up to claim their money, the dormancy position would perhaps be a code of conduct or a banking code issue.
Lord Bach: It is certainly an issue. I repeat the basic principle that the customers will be repaid the amount they would have been repaid had their accounts not been transferred to the scheme; so they will get the interest. If a particular type of account has been withdrawn, which I think is what the noble Lord, Lord Shutt, is referring to, the bank or building society will obviously need to determine what happened to equivalent non-dormant accounts which were not transferred into the scheme. If these had automatically moved on to some other terms, the interest on the transferred dormant account should be calculated in accordance with the new terms too.
The noble Lord looks sceptical about what I have said. I repeat that customers will have the right to go to the Financial Ombudsman Service, just as they have now, if they wish to dispute the fairness of the repayments. Ultimatelywe hope that it does not come to thiscustomers will have recourse to the courts. That is why I said to the noble Baroness that it is impossible to say exactly how the scheme will work in every single case, but I hope that the principle is clear from what I have said.
The noble Lord, Lord Newby, raised an important point. It is expected that the fund will manage money prudently. FSA regulation, too, will need to be taken into account, but the noble Lord is right that the claim fund may have to pay out more than it sometimes anticipates.
Lord Monson: The noble Lord, Lord Higgins, will obviously decide what he wants to do about Amendment No. 4, but perhaps I may touch briefly on what the noble Lord, Lord Bach, said about my Amendment No. 32. If one reads Clause 8(2) very carefully, it is just about possible to make out what the Government intend. However, legislation should surely be intelligible to the reasonably literate man in the street. The noble Lord, Lord Davies, might consider having the clause redrafted so that it makes a little more sense. It would not do any harm to insert the word contractually after interest in Clause 8, simply as belt-and-braces extra clarification.
Will the noble Lord confirm that interest at the standard rate, which is currently 20 per cent, will be deducted from all the accumulated payments and paid over to the Treasury annually? I imagine that that is the case. What happens about higher-rate tax, which will be due in a few cases, I have no idea.
Lord Monson: I think that the noble Lord is wrong. Interest is normally deducted at 20 per cent on ordinary deposits. On special, fixed-term deposits of very large sumslet us say, £50,000it can be paid gross.
Lord Higgins: I am grateful to those who have contributed to this debate. It was what I would call an onion-peeling debate, in that more and more layers came off and questions that we had not thought of previously, even if we had sat down for 10 hours to look at the Bill, suddenly emerged.
I think I am right in saying that the situation is as follows. There is a dormant account on which interest will be paid, but one of two things can happen to it. It may simply be paid out to the owner, in which case I presume that interest either has been or will be added. I am a little more doubtful about fees. If the account has been dormant for 30 years, there will be little of it left if the fees that have accumulated in that period, in which nothing has happened, wipe out the whole account, which might have been quite large 30 years previously. We had that problem in Switzerland as well. Perhaps we should reconsider the fees aspect. In all events, that is the case where the money goes to the rightful owner.
Alternativelyand this is a more difficult issuethe account with interest up to that point goes to the fund. The problem is what happens then. Does interest continue to be added to it and, if so, at what rate? It would be jolly difficult for the fund to track back what interest was being paid by the bank and then apply that rate of interest. Does a charity, for example, eventually get what that interest would have been?
Finally, there is the question of taxon which the noble Lord says he will write and I do not ask him to comment further today. A dormant account may hold a large amountsay, £0.5 millionwhich has been there for 30 years and the interest will have piled up. Will the Revenue get its hands on that?
Lord Higgins: My noble friend, who knows more about tax than I do, says, Yes, probably. That is probably true, so we need to consider all these issues. The difficulty in this case is that the Minister is replying for the Government but, in a sense, is a proxy
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The noble Lord said: This amendment is the last that I shall be moving for some time. Throughout, the Bill uses the term customer of the bank. I am troubled because the customer may well be long dead and gone and no longer exist as far as this world is concerned, but the account is the property of one of his heirs. Therefore, I believe that it would improve the drafting if we used the word owner instead. I shall leave it there but I hope I have made the point. I beg to move.
Lord Bach: I appreciate that, wherever the word customer appears, the noble Lord would change it to owner. In responding to the noble Lord, I have to resort to strict legal terms as to why customer rather than owner is used. Strictly speaking, the customer does not own the money in the account. The balance on an account is a debt that the bank owes to the customer. In other words, the customer owns a right to enforce the debt, as opposed to owning the asset. That is a strict legal definition and one does not know how much that would affect the position but, as I understand it, that is the main reason why the term customer, as opposed to owner, has been employed in the drafting of the Bill.
Of course, heirs can still claim money back if they prove their claim; in those circumstances, they become the customer. However, because of the strict legal position, we think that on balance it is better to leave the term customer in the Bill rather than change it to owner.
Baroness Noakes: Can I just clarify that? The Minister said that he cannot use the word owner because it has a specific legal meaning, but this is simply a shorthand word being used in the Billit does not carry any other implication. The Bill could have said a person the monkey holds the account, and we could have carried on using the word monkey throughout the Bill. It would have been offensive and we would not have done that, but there is no magic in the word customer and my noble friends point is that customer does not reflect the relationship. It is not a good shorthand word to use throughout the Bill.
Lord Higgins: I am not particularly keen on the word monkey as an alternative. I believe it has financial implications in some jargon and would totally confuse the issue. Be that as it may. I understand the Ministers point but, if that is so, the right expression would be creditor or the creditors heirs and not
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Lord Bach: I understand what the noble Lord is saying but perhaps we can agree that, if I am right about the legal point, it would clearly be wrong to put the word owner in the Bill. The noble Lord may not like the word customer but everyone will know that customer refers to the dormant account holder. We prefer that word to the word creditor, which is the noble Lords second alternative.
The noble Lord said: I shall speak also to Amendments Nos. 8 and 11. As regards that last exchange, another word comes to mindmember. Banks refer to customers but building societies refer to their members. Another group of amendments, starting with Amendment No. 10, also refers to this issue.
I am persuaded that it would be right to treat all building societies the same. The Bill treats 51 building societies in one way, and eight in another. At Second Reading, I referred to the position of a provincial but progressive building society with some national touches: the Skipton Building Society. Its resources would be deployed nationally in the main scheme and there would not be a local element. I was therefore concerned about the cliff edge, an issue to which I shall return.
There is a case for considering building societies as a whole. Eight building societies will be pushed into the main scheme but the bulk of them have local roots. Many of them have their own charitable activities and foundations. The Nationwidethe biggest of them allhas given out £22 million over the past few years. Serious amounts of money are involved and the members have a say; they go to the annual meetings of building societies and take a view on what should happen
There is a real case for mutuality meaning something and for the members having a real say. The Nationwide has its roots as a co-operative building society, with all that that means in terms of mutuality. Amendment No. 8 is about taking building societies out of the national scheme and entering them into the local scheme, or enabling them to operate nationally, with their own foundations which have been tried and tested. That is my first point.
Secondly, we should look at the national scheme and consider what is currently the cliff edge. At the moment, even a locally based society, such as the Skipton, would be in the national scheme. Perhaps we can deal with building societies, then consider the smaller banks and, indeed, banks as a whole. Some banks, such as the Halifax, started in the mutual movement. I restate the interests I declared at Second Reading so that they are on the record. The Halifax, which is now part of HBOS, has responsibilities in Halifax, Leeds, Birmingham and Scotland and it would be wrong if, because the bank is so big, those local communities did not benefit in the way that the smaller communities will benefit under the Bill. Similarly, other banks, such as Lloyds TSB, have their own serious and substantial foundations. I suggest that there should be a scheme whereby 10 per cent of the money can be either localised or put into the foundations or charities run by the respective banks.
The proposalthis is important for the Governmentaccepts that the Bill is basically about using the resources to enhance youth services and not about trying to include every favourite charity in the world. It accepts that that is the basis of the Bill but seeks to remove the cliff edge whereby only smaller communities can benefit locally. It seeks to include an opportunity for all communities to benefit, either locally or under the guidance of their own charitable foundations. I beg to move.
Baroness Noakes: I shall not comment in detail on the amendments in the name of the noble Lord, Lord Shutt, because my amendments in the next two groups make the same points. I was a little mystified by the noble Lords introduction to Amendment No. 8. It seemed to me that it was another compulsion amendment, like Amendment No. 2, moved by the noble Lord, Lord Newby, and that this was not just a question of what options we gave larger building societies and banks in terms of falling within the alternative scheme in Clause 2. That is why I shall reserve my comments for the two groups of amendments that follow this one.
Lord Davies of Oldham: I am grateful to the noble Lord for the way in which he moved the amendment. Two different perspectives are clearly at play here: the
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However, we are talking about five or six building societies under the definition to which we are working. When we consulted on where the line should be drawn, assets of £7 billion received broad support, reflecting a consensus on the scheme and providing a specific option for the smaller institution. I understand that the noble Lord is saying, Well, thats fine for the smaller institutions. You have safeguarded their role, identified exactly the position for them and it is light touch. But Id like the big boys, with resources vastly in excess of £7 billion, to enjoy the same role in localities. That threatens the concept of the scheme.
We are seeking a light-touch approach and not heavy regulation. The moment we brought within the framework some concept of a local dimension to very large institutions, we would need much greater specification from both the institutions and the schemes reclaim fund. Within that framework, we would have to have the machinery to look at the way in which resources would be utilised. The schemes light-touch approach is designed for small financial institutions. It is appropriate that it applies to banks and building societies within that framework. The light touch will not work for the large institutions if they are able to concentrate significant resources in the local way the noble Lord has identified.
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