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Amendment 158 would insert a new clause before Clause 167. The new clause would set out in statute what compensation should be paid to depositors under the deposit protection scheme. There are two elements to the proposed new clause. First, it sets out that the compensation limit is to be increased to £50,000 and that the amount may be amended by the Treasury by
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The Minister may say that the FSA can do it, so why should we put it in the Bill? I have a simple answer to that. The decision to increase the limit is as much political as technical, as the events of the past 18 months have shown. A political decision should be made by the Government and put to Parliament for approval. It was wrong that Parliament was completely on the sidelines in that debate and that the Government were not in the driving seat, if I may mix my metaphors. Although the FSA can currently do it, that is the wrong location for the power, as recent history has shown.
The second and important element of my amendment relates to deposits being calculated on a bank brand basis. At present, the Financial Services Compensation Scheme relates only to legal entities, so if a depositor holds a deposit in more than one bank in a group, his compensation limit is restricted to the one limit of £50,000. A depositor who investigates the legal ownership of banks can work out that he needs to spread his money around to avoid legal groupings, but many investors are not that sophisticated. Recent events, such as Lloyds TSB and HBOS, Bradford & Bingley and Abbey/Santander have restricted the number of legal groups, although not the number of brands.
Consumer groups, led by Citizens Advice and Which?, are firm in their view that the scheme should operate on a brand basis. I hope that the Minister can agree. I should say that my amendment would probably need further refinement to be clear what is meant by a “bank brand”, so for the purposes of today's debate my amendment is probing, but I hope that the Minister will respond positively so that we can at least deal with this aspect when we come back on Report. I beg to move.
Lord Newby: I am grateful to the noble Baroness for tabling the amendment because it covers in part issues that we proposed to raise in debate on Clause 171 stand part. There was a question about where to put our focus in dealing with the compensation scheme. We should perhaps have grouped our amendment with this one.
I agree with several aspects of the amendment. First, I absolutely agree with the noble Baroness that this should be a matter not for the FSA but for Parliament. The FSA was dilatory beyond measure in increasing the limit to £50,000. It seemed that the Treasury either could not or would not exercise much influence on it to do that. We also agree with the principle that the £50,000 should apply to a brand. Given that there is such a concentration of ownership now and so many brands, I wonder how many people realise exactly which brand is owned by which bank.
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The FSA’s view on compensating by brand is slightly odd in that it seems to accept the principle of doing this, but claims that amendments to the deposit guarantee schemes directive mean that a fully harmonised approach to the level of coverage is likely to be imposed across the EU, which would rule out such a change. It goes on to say that it will return to the topic should there by any changes to the EU legislative framework. We are rather surprised by this, because the directive simply requires the European Commission to report on harmonisation by the end of this year. No proposals have been made, and the consultation on the matter has yet to be published. The FSA needs at this point simply to get on with it, stand up for UK consumers, make the necessary changes now, and then lobby for them to be allowed under any new rules that may emerge from the EU in the future.
Two other issues arise from the compensation scheme, which I wanted to refer to in the Clause 171 stand part debate. I suggest that, given the lateness of the hour, I will do so at that point.
9.45 pm
Lord Myners: Part 4 makes a number of changes to Part XV of the Financial Services and Markets Act 2000, which provides the legal framework for the Financial Services Compensation Scheme. That framework also allows the Financial Services Authority to deal, in its rules, with most features of the compensation scheme.
As described by the noble Baroness, the amendment would put the headline compensation limit into the Financial Services and Markets Act 2000 on a per brand basis and would allow that limit to be changed by the Treasury in an order made under the affirmative procedure. It would also allow the Treasury to define by order what constituted a bank brand. The FSA’s rules can already deal with these matters. Indeed, the FSA has recently published a consultation paper, which discusses, among other matters, paying compensation on a per authorised entity or a per trading-name basis.
The effect of the amendment would not be desirable. The FSA rule-making procedures are better suited for making such changes. As was demonstrated in September 2007 and October 2008, FSA rule-making procedures need not be a barrier to making rapid changes to the Financial Services Compensation Scheme rules, which the affirmative procedure clearly would be. It is also worth recalling that the Financial Services Compensation Scheme is also responsible for compensating insurance policyholders and customers of investment firms when these businesses are in default and unable to pay claims. It would be rather inappropriate simply to put matters relating to deposit-taking in the primary legislation.
When the FSA announced an increase in the deposit compensation limit last October, it also launched a consultation exercise on the compensation limits in other areas, so there is real merit in allowing the FSA to follow a consistent and co-ordinated approach across a broad range of financial products. That is particularly important, given the essential mutualisation that lies behind the funding of this scheme.
Part 4 therefore covers only the matters that cannot be dealt with under the existing provisions in the Financial Services and Markets Act. The changes in
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Last October, as well as raising the headline limit for deposit compensation to £50,000, the FSA announced consultation on dealing with temporary high balances, on changes to the way in which recoveries from a failed firm are calculated, and on the compensation limits for other types of investment. Part 4 should be, and is, limited to making those changes to the overall framework in which the Financial Services Compensation Scheme operates that only primary legislation can do.
Members of the Committee should rest assured that there is plenty more going on at the right levels to improve the arrangements for depositor protection in the UK. It would be neither sensible nor desirable to cherry-pick certain items and highlight them in the way proposed. I therefore ask the noble Baroness to withdraw the amendment, and, if it is pushed to a vote, I ask your Lordships to reject it.
Baroness Noakes: The Minister will not be aware that he is entering my favourite time of night for seeking the opinion of the Committee, but I want to put his mind at rest that I shall not be doing so tonight. He has resisted our perfectly reasonable amendments, which were based on the premise that these are political issues which should be in the hands of Parliament and not within the hands of the FSA. I do not think he has really answered that point. In fact, he said that the affirmative procedure would be a barrier. I do not think that the Government of the day have ever found the affirmative procedure to be a significant barrier.
The other points he raised were about other matters and not about the deposit protection scheme. But it is the deposit protection scheme about which there is so much interest. I do not have any fundamental problems with leaving the FSA to deal with those aspects of the compensation scheme that are not about deposit protection. But, in the public mind, as we have known over the past year and a half, deposit protection is extremely important and hugely confusing to people, as we first found out around the original definition of partial loss sharing and the lower limit.
I do not think that the Minister has answered our points on this issue and I think that we will want to return to it in some form on Report. This probably goes to the heart of one of the most important areas of how the Financial Services Compensation Scheme will work for people, which is an issue for Parliament to determine. I beg leave to withdraw the amendment.
Amendment 158A had been withdrawn from the Marshalled List.
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Clause 167 : Contingency funding
158B: Clause 167, page 88, line 28, leave out from first “the” to end of line 29 and insert “contributions payable by banks and building societies”
Baroness Noakes: In moving Amendment 158B, I shall speak also to Amendments 158C, 158D and 162B. The first three of these amendments amend Clause 167 and the last amends Clause 170. These arrangements ensure that the contingency funding arrangements for the Financial Services Compensation Scheme are confined to banks and building societies. As the Minister has just said in response to the previous amendment, the compensation scheme covers many other kinds of financial service provider. Those which are not banks and buildings societies are extremely concerned to ensure that they do not get called on to pay compensation in respect of failed banks and building societies. They are extremely concerned about having to pick up part of the tab from the current slew of compensation being processed through the Financial Services Compensation Scheme. They are doubly concerned at the possibility that they might have to pay in advance of any compensation payments in order to the allow the FSCS to build up a contingency fund.
This is a position of basic equity as between different financial products and service providers. The costs of the Financial Services Compensation Scheme are inevitably borne, ultimately, by customers, but they might initially be paid for by service providers. What is the justification for requiring the customers of, say, insurance or investment management products to bear the costs of bank failure? It goes without saying that the ABI and the IMA have concerns with this, as do other groups of financial service provider which are within the net of the Financial Services Compensation Scheme. I beg to move.
Lord Davies of Oldham: As the Committee will be aware, the principal function of the FSCS is to pay compensation to eligible complainants if financial services firms are in default and unable to meet claims. The Banking Bill will also allow the scheme to contribute to the costs of the special resolution regime, which we will debate later. But to do these things, funds are needed, and it is clear that under the current pay-as-you-go model of the FSCS, if a very large firm went into default—say a bank or building society—the scheme could not realistically levy sufficient moneys from the industry or raise funds by borrowing in the ordinary way from commercial sources. Two solutions have been put forward for the problem: borrowing money from the Government to be paid back through future levy payments, or building up funds in advance.
The FSCS is already able to borrow from the Government, and as I shall describe later, the Bill makes provision to make government borrowing administratively more efficient. However, Clause 167 allows for the second of the solutions, the setting up of
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Amendments 158B and 158C would ensure that levies to build up contingency funds could be collected only from banks and building societies, and in combination with Amendment 159D, which as the noble Baroness has explained is intended to prevent cross-subsidisation within the FSCS, the overall effect would be that contingency funds built up through pre-funding could be used only to meet the expenses arising from the failure of banks and building societies. A further effect of Amendment 159D might be that there would have to be separate contingency funds for banks and for building societies. This looks inflexible to us and is therefore unnecessary and undesirable. The Bill already allows for different funds to be established for different purposes, and for different persons to contribute to the different funds. We place great emphasis on this flexibility and we have no intention of bringing forward pre-funding in the near future. The time is clearly not right, nor would it be appropriate to speculate on when it would be right. We do not know what changes the future may bring and therefore we need flexibility.
In the future, the nature and structure of the financial services industry may be completely different, and we have all become accustomed to rapid change in this sector. We should not tie down our options in primary legislation which may become outdated in two, five or 10 years’ time. Future problems, should they arise, may be confined to banks and building societies, but equally they may not. As I have said, Clause 167 already allows for the creation of more than one fund. It is therefore possible to bring in contingency funds for one type of financial services firm built up with levies raised from that type of firm and not for other types. There could be separate funds for banks and building societies, but I do not see why we should set out to prejudge the issue now.
The Bill confers a flexible power to bring in pre-funding at the right time and in the right way. This flexibility would be exercised subject to full parliamentary scrutiny. The necessary statutory instruments will have to be laid in draft and debated in both Houses before they are made. There would be consultation beforehand involving the Bank of England, the Financial Services Authority, the Financial Services Compensation Scheme and the industries concerned before any such regulations were drafted.
I turn now to Amendment 162B. Clause 170 allows the public sector to make loans to the FSCS in what is administratively the most efficient way, by making loans from the National Loans Fund. The amendment would have the effect of restricting those firms which could be called on to contribute towards the cost of repaying loans from the National Loans Fund to
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I hope, therefore, that the noble Baroness will accept that the Government have drafted the clause on the basis of the necessary flexibility and that she will not press the amendment.
Baroness Noakes: I thank the Minister for his response to the amendments. I will not get into whether or not the affirmative procedure is the best way of scrutinising a contingency funding arrangement if one is ever introduced. Let me just say for the time being that we do not think that it is.
This is a banking Bill that is being introduced in response to what has happened in banking. It is not an opportunity for the Government to completely rewrite the Financial Services Compensation Scheme, which is what they are doing. In so doing, under the guise of flexibility, they are exposing all kinds of financial services providers to the risk that the way in which pre-funding is introduced will operate adversely to them. That is what they are concerned about and they do not see why any of these changes should affect them. A case has not been made for pre-funding for insurance or even for banking, as has been strongly put forward by a number of individual and collective players in the banking industry. We know that the
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But we can debate that later. For these purposes, if it is going to be introduced, it should be introduced for banks and building societies because that is where the problem that has led to this Bill has come from and not anything else. The Minister said at one stage that the problem with one of my amendments is that the banks and building societies might be treated separately. Perhaps they should be treated separately as the risk profile of banks and building societies is inevitably quite different given the different funding powers that they have, for example.
We will not get much further on the amendment tonight. I shall leave it by saying that I am wholly unconvinced by what the Minister has said in connection with this clause. We have a long way to go in our debates in Committee on the Financial Services Compensation Scheme and contingency funding, in particular, and I shall save further comments for later groups of amendments. I beg leave to withdraw the amendment.
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