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We recognise there are arguments on the other side. Building up a contingency fund would put pressure on bank capital and cash flow. No one will doubt the importance of that issue at the present time. I can also see the more practical arguments of those who feel pre-funding would be unnecessary if Government give the Financial Services Compensation Scheme access
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However, these are arguments about timing and size; they are not arguments about the principle. It is surely right to recognise that there will come a time when it is right to have the debate, and the Bill allows us to do that. The Bill provides for pre-funding to be introduced only after full parliamentary scrutiny under the affirmative resolution procedure. The necessary statutory instruments will have to be laid in draft and debated in both Houses before they are made. There will be consultation beforehand involving the Bank of England, the Financial Services Authority, the Financial Services Compensation Scheme and, of course, the industry itself before any regulations are laid. I hope the Committee will see that there is no reason why this clause should not stand part of the Bill.
I see the point the noble Baroness is making with Amendment 160, but I feel that it would be unnecessary to have a requirement to produce a rather narrowly focused report before the regulations are made. Regulations to bring in pre-funding would not appear suddenly and without warning. There would be full consultation, and I am sure that process would generate far more information and material than would be found in a report. Parliament will have to debate the regulations, and there will be plenty of briefing from a wide range of sources. I am not sure that an additional report from the Treasury would help noble Lords who are considering any draft regulations. Therefore, I hope that the noble Baroness will withdraw the amendment.
Lord Skelmersdale: Does the Minister realise that he has produced an extraordinary argument for not debating the contingency fund now? The Bill apparently allows the Government of the day to set up such a fund by statutory instrument. Parliament must now decide whether such an action might ever be appropriate. Therefore, I give full backing to what my noble friend said.
Lord Higgins: The proposal is open to the usual objection to a statutory instrument; namely, that when the measure is debated, it will not be amendable, whereas it would be if it were in primary legislation. However, I am puzzled by this. It seems that the Minister is arguing for the power to tax by statutory instrument. This has terrible echoes of the policyholder protection arrangements for pensions, whereby levies were made on final salary schemes that led to a further reduction in the number of such schemes. This sounds similar.
I understand that the Minister does not want to introduce the measure at the moment, because the people from whom he is raising levies would probably be in the same position as the bank that is supposed to be helped by the contingency fund. Is it proposed that
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Lord Myners: I take Members of the Committee back to my previous observation that the critical principle here is a contribution by the industry towards the cost of compensation, including by institutions that may in due course fail, so that the burden of their failure is not borne entirely by those who, through caution and prudent management, do not fail. There is a strong argument of equity there. The noble Lord, Lord Higgins, introduces an eloquent argument that seeks to align this with tax. I do not think that it is a tax, because contributions to the scheme will be there to meet obligations and claims on the scheme, and the existence of the scheme should be a source of comfort, reassurance and lower funding costs to the industry.
I turn to the observations made by the noble Lord, Lord Skelmersdale. I believe that the strength of this proposal is the facility to permit prefunding as and when circumstances are appropriate. As my noble friend Lord Davies of Oldham said earlier, it is not the Governments intention to suggest to Parliament that prefunding be introduced. However, I believe that the principle of creating a facility by which the industry contributes to the protection arrangement, from which the industry itself will benefit, is entirely proper and subject to parliamentary scrutiny and approval. The mechanism will exist at the right timethat clearly will be some time from nowto introduce an element of prefunding.
Finally, in response to the noble Lord, Lord Higgins, the judgment on the scale of contribution clearly should be taken only after careful consultation and full involvement from the industry. He rightly alerts the Committee to the risk that if the contribution level is fixed at too high a point, it may be a contributory factor to failure, although none of the simulations I have seen suggest that anyone is thinking it would be set at a level which could be so damaging. Although the parallel, conceptually, with the pensions protection scheme is correct, I do not think that the issue is quite the same. In those circumstances, I would ask the noble Baroness to withdraw her amendment.
Baroness Noakes: The Minister said the cardinal principle was that there should be contribution by the industry. Of course, that has underpinned the Financial Services Compensation Scheme from the outset. He went on to say that it has to be equitable by those which fail. The proportion that those that fail will contribute will be very much at the margins of the burden on the whole industry. So the Minister constructs a little principle of fairness for the institutions that fail to be set against the inequity of those banks which continue having to fund 1 per cent or 2 per cent of the
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The Minister says that Parliament can debate an affirmative order. He perhaps is not very familiar with the procedures of both Houses. In the other House, a statutory instrument would be programmed into a Committee, which would not be taken on the Floor of the House. There would be a time limitperhaps an hour and a halfto debate it and it would not be amendable. In your Lordships' House, we would not be time-limited, but it would still not be amendable. We would have only the option of completely rejecting the statutory instrument. A statutory instrument is not an appropriate vehicle for proper parliamentary scrutiny. Since neither the full justification, nor the timing, nor the quantum, nor the impact of the exercise of this power is before Parliament at the moment, we have a seriously deficient proposal in this Bill.
Amendment 160 accepts the principle of the Government proceeding in that way. It is a perfectly reasonable approach of requiring the Treasury to make a report to Parliament. Perhaps the report should have covered more thingsthe Minister said that it was a narrow reportbut at least it would allow parliamentary debate to take place outside the confines of the rules of either House in dealing with statutory instruments. I do not think that the Government are taking this issue seriously and I beg leave to test the opinion of the Committee.
Baroness Noakes: I shall speak also to related Amendment 162. These amendments add another subsection to proposed new Section 214B of the Financial Services and Markets Act, introduced by Clause 168. The clause allows the Treasury to make regulations for the Financial Services Compensation Scheme, and therefore the financial services industry, to contribute payments arising in connection with the exercise of the stabilisation powers under the special resolution regime. I am far from convinced that the Financial Services Compensation Scheme should be burdened with such payments, because it goes beyond the original intention for the Financial Services Compensation Scheme. It is justified by the Government on the basis that if the authorities did not act, a failing bank may well end up facing costs on the Financial Services Compensation Scheme. If regulations are ever used, I predict that they will be a complete nightmare to operate.
My amendments, which are probing, are designed to test the limits of the contribution. They allow the Treasury to seek contributions from a private sector purchaser, or a liquidator or administratorthat is, the people who will have their hands on the assets of the failed bank. While my amendment is permissive, the intention is that the Treasury should have to justify not taking contributions from those sources before charging the Financial Services Compensation Scheme.
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Lord Myners: These amendments concern Clause 168, which provides for the FSCS funding of the SRR. I know that this matter has been the subject of much interest and debate, in the other place as well as here. Before I turn to the amendments, let me set out why the FSCS should be required to contribute to the SRR.
Intervention under the SRR will, in the vast majority of cases, be undertaken only if necessary to prevent disruptions to financial stability. This is provided for by the specific conditions of Clauses 8 and 9, without which the authorities may not act, and by the SRR objectives which govern the way in which authorities act. While undoubtedly of crucial importance to the general public interest, financial stability also directly benefits the banking sector and the financial services industry more widely. A stable financial system is an essential condition for the financial services industry to operate efficiently and competitively.
Thus, where the authorities have intervened in a firm for the purposes of preserving stability, there is a strong argument that banks and the financial services industry more widely should contribute to the cost of the intervention. The financial services industry will benefit directly from the authorities taking action in furtherance of the SRR objectives, in particular, the objective of enhanced financial stability and confidence in the banking system. Therefore, it is entirely appropriate that the sector should contribute to measures that achieve these objectives.
The second consideration is that the trigger for entry into the SRR, which we have discussed in debating Clause 7, is that the firm has either already failed its threshold conditions or is reasonably likely to do so. I have agreed to look at these provisions again to consider whether additional clarity is needed on the wording around the degree of likelihood involved, but I have made it clear that the test should be one in which the prospect of a voluntary or regulatory turnaround of the firm is remote. In other words, the SRR can be triggered only in cases in which, in the judgment of the regulator, the only alternative would have been a default that would have led to a payout under the FSCS. Therefore, but for the use of a resolution tool, the FSCS levy payers would have had to fund the cost of compensation to depositors arising as a result of the failure of a deposit-taker through the FSCS. It is entirely appropriate that the Treasury may provide that the FSCS levy payers should contribute to the costs arising from an exercise of the special resolution regime tools. I believeor, at the very least, I hopethat the noble Baroness may have some sympathy with this proposal.
However, it is my understanding from the apparent intended purpose of the amendment that the noble Baroness is concerned that other persons, in particular a private sector purchaser or the insolvent estate, should contribute to the costs of a resolution before the FSCS is called on. I entirely agree that, in some circumstances, a private sector purchaser should be called on to contribute towards resolution costs. For example, if the private sector purchaser were acquiring some of the failing banks assets or, at a later stage in a resolution, a bridge banks assets, we would expect it to pay a purchase price reflecting the value of those assets. Where the authorities intervention had led to an increase in the value of those assets, the purchase price would in most cases reflect it. The purchaser would thus have effectively contributed to the cost of the resolution through the increased price paid.
However, there are also certain circumstances where it would not be appropriate for the private sector purchaser to be required to contribute to resolution costs. For example, there may be administrative costs or additional compensation costs that a private sector purchaser would not be willing to pay, and a requirement that they do so may reduce the likelihood of a successful private sector solution. Therefore, I do not believe that the private sector purchaser should in all cases pay resolution costs before the FSCS or the authorities.
I turn to the proposal that the insolvent estate of the residual company left behind after the exercise of the stabilisation power should also fund resolution costs before the FSCS. I have a significant concern about this provision. Taking money out of the estate to fund resolution actions would lead to a smaller pot of money from which creditors and other counterparties left in the residual company would benefit. This is an outcome that we wish to avoid, as demonstrated by the no creditor worse off safeguard and objective 5 of the SRR, which emphasises the importance of minimising interference with property rights.
In the case of one of the more likely resolution actionsa deposit book transfer, as was carried out in the case of Bradford & Bingleyfunding the resolution out of the insolvent estate would result in a de facto depositor preference regime. The Government, with the support of banks and investors in banks, have sought to avoid this outcome. Of course there will be a cap on the levy payers contribution through the FSCS, fixed at the cost levy payers would have paid had the bank failed and the FSCS had had to pay out depositors. This cap will ensure that any recoveries which the FSCS would have been able to recover from the insolvent estate had it paid out in a normal way will be taken into account because the FSCS will not be required to pay more than it would have paid under a normal payout.
The approach taken in the Bill, whereby the FSCS may bear some of the costs of the SRR, is also consistent with the approach to the costs that the FSCS incurs when paying out depositors should a bank fail. The administrative expenses of the FSCS are not funded by the insolvency estate; these costs are borne by the levy payers.
I hope that I have provided sound arguments to support the view that, while in some circumstances the private sector purchaser may be called upon to contribute, this should not in all circumstances be the first port of call and why there are also risks in requiring the insolvent estate to be called upon before the FSCS.
In the case of requiring a private sector purchaser to contribute to the resolution costs, as I have set out, the Government are more inclined to consider funding from a private sector purchaser before FSCS funds, but I do not believe that such signalling is required in the Bill. Such arrangements will naturally form part of any commercial agreement between the parties involved and I therefore do not believe that this part of the amendment is necessary.
Finally, I recognise and agree with the intention to protect the use of the FSCSs funds which is why we have included a number of safeguards over the use of such money, including a cap and independent verification of any resolution costs. I do not believe, however, that the amendments, which the noble Baroness, Lady Noakes, described as probing, are the right way to protect the use of such funds. Therefore, I beg her to withdraw the amendment.
Baroness Noakes: I thank the Minister for setting out the Governments views. I remain concerned that the FSCS, especially once it is pre-funded, will look like a convenient pot of money to be used to pick up costs. I am not convinced that an insolvent estate should not in effect pay some of the costs alleged to that insolvency and thereby reduce the amounts available to creditors, as that is a necessary cost.
The Minister said there was a strong argument that the banking system or ongoing banks should pay. The trouble with that argument is that it actually means that consumers will pay. The banks do not pay in any real sense. The banks shareholders do not even paythis is just another cost which is passed on to consumers. The issue, therefore, is whether we localise the cost on to the failure or spread it over consumers. That is the only real issue between us. I would like to localise the costs where the failure occurred, even if that meant less for the creditors or the residual amounts that come out from a sale. I shall consider what the Minister has said between now and Report, and beg leave to withdraw the amendment.
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