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Baroness Noakes: I can be brief on this amendment, which adds a new subsection to new Section 223B of the Financial Services and Markets Act 2000, introduced by Clause 170. This clause allows the Financial Services Compensation Scheme to borrow from the National Loans Fund. We talked earlier about money going into the NLF; this is about money coming out of the fund to fund payments made by the FSCS. The Minister will be aware that the provision has been warmly welcomed by the British Bankers’ Association, which believes that this is a much more appropriate mechanism for funding the FSCS than the pre-funding that has been allowed for.
To cut though the technicalities, my amendment tries to say that interest charged on the loan should cover the NLF’s cost of money but should not allow the NLF to make a profit on it. In another place, the Minister said that the Treasury would want to charge a commercial rate because lending to the FSCS was, in effect, lending to the banks—but he did not specify what a commercial rate was. That rather begs the question what a commercial rate is. The Minister might like to answer that.
The FSCS will get its money from the banks by way of levies. There is no risk that the Treasury will not get the money ultimately through levies, except in extreme, Armageddon-like scenarios for the financial services industry. There is no risk to the Treasury, so no case for a risk premium for the Treasury. What the various banks could borrow will, of course, vary but, if LIBOR returns to its path at something very close to base rate, it will be difficult to justify the Treasury getting any more than that. My amendment seeks to stop the Treasury from profiteering from its financial relationship with the FSCS.
Lord Myners: I thank the noble Baroness for the brevity with which she spoke. As I look at my daytime job in the Treasury, I have no sense that it is seeking to profiteer at the expense of the banks—quite the opposite, at times.
We have already extensively discussed the issues of funding the activities of the compensation scheme. Clause 167 allows for pre-funding, and Clause 170 allows for the Government to lend in the most administratively efficient way from the National Loans Fund.
The National Loans Fund charges interest on the loans it provides. Section 5 of the National Loans Fund Act requires the rate of interest to be set at a level which would cover the Government’s cost of funds if, in order to service the loan, they were to borrow money on comparable terms to the loan they were making. I should stress that each loan or class of loans has to be priced individually in this way. The Treasury cannot take a portfolio approach and subsidise certain loans from the National Loans Fund by charging a higher interest rate on others.
Section 5(6) makes it clear that the Treasury may charge a higher interest rate on loans than the minimum that the section requires. The amendment would disapply that provision in relation to loans to the FSCS. The intention behind the amendment is that the FSCS should be able to borrow money from the Government
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The interest rate will, therefore, have at least to match the European Commission reference rate to avoid any suggestion that the loans amounted to state aid to the FSCS levy payers. There is also an underlying principle: the rate of interest on any loan should reflect the real risk of the transaction, which is important to ensure that the risks and exposures of the Exchequer—in other words, the taxpayer—are properly managed. I hope that the noble Baroness will, therefore, agree to withdraw this amendment.
Baroness Noakes: If the NLF loaned the money today, what sort of rate would it charge? We have talked about translating these words into what they mean on the ground.
Lord Myners: I would be more than happy to confirm this in writing if it would help, but I believe that the NLF would charge the risk-free rate, plus a premium to reflect the risk of lending, but taking into account that the existing levying power is such that the risk of default is low.
Baroness Noakes: How many basis points, then, are in that risk premium?
Lord Myners: It would be unwise for me to speculate on the precise number, but it would certainly be toward the lower end of basis points that would be applied to the extension of credit to companies in the financial services sector.
Baroness Noakes: I thank the Minister for that helpful response. He has given a lot of information in his reply, which I shall consider carefully when I have read it in Hansard, but for today I beg leave to withdraw.
Debate on whether Clause 171 should stand part of the Bill.
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Lord Newby: My reason for initiating this short debate is to look at some aspects of how the Financial Services Compensation Scheme operates for consumers, as opposed to how the banks contribute into it. We discussed one of these matters last week, on an earlier amendment that the noble Baroness proposed, when we talked about the £50,000 compensation amount.
I wish to raise two further issues today. First, there is how the scheme covers temporary high balances. The FSA aims to make proposals to deal with such balances, and those are due in the relatively near future. As many noble Lords will be aware, the issue is that many people face situations in their lifetime when they hold temporary high balances in their bank accounts—when they sell a house, for example, or receive a redundancy payout or benefit from an inheritance.
At the moment, it is impossible for customers who have such temporary high balances to cover themselves against the possibility of the bank failing. They can, potentially, spread the balance between different bank accounts once the money has cleared, but they will have to pay the lump sum into one account initially—and while it remains there, nothing over £50,000 will be covered. The FSA undertook research into that area, and found that consumers were unprepared to pay insurance to secure high bank balances, as they felt that they should not have to insure something that was supposed to be safe in the first place. We believe that the best solution would be some form of temporary 100 per cent guarantee. Of those possible solutions, one of the best options would be an automatically triggered guarantee for balances above the £50,000 limit for a specifically set time. That could be backed by an insurance policy paid for by the bank earning the interest on the large sum temporarily deposited with it. We welcome the Government’s views on that proposal.
The second issue is broader. It relates to depositors in banks based elsewhere in the European economic area, but with branches in the UK. Measures proposed by the FSA do not go far enough to tackle the serious problems that apply to compensation arrangements for EEA banks operating within the UK. Currently EEA banks operate here by obtaining authorisation status with the FSA, also known as passporting. Consumers will be covered by the bank’s home state compensation scheme in the event of a bank failing. If that compensation is lower than UK compensation, EEA firms can volunteer to top up their compensation limits by joining the FSCS. Thus, if the Icelandic scheme had honoured its commitments, Icesave customers should have received their first €20,000 compensation, with the rest of the balance up to £50,000 provided by the FSCS.
Different compensation limits and arrangements between countries cause confusion for consumers. It is not sufficient simply to require passporting firms to make what the FSA has described as,
Changes are needed to ensure a single point of contact for consumers to access the full amount of their compensation in their home country. The added risk,
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We suggest that the Government should lobby for a change in EU regulations, making topping up compulsory for passporting EEA banks and requiring member states to act as lenders of last resort for their compensation scheme. Only then can UK citizens feel confident in placing deposits with foreign banks.
This might have seemed a rather far-fetched concern had we not had the situation with Iceland. That caused real problems and the Government had to step in and bail the banks out. We believe that now is the time for the Government to take up this issue at EEA level. We commend that proposal to Ministers.
Lord Davies of Oldham: I am grateful to the noble Lord for the points he makes on Clause 171. The clause would facilitate the speedy payment of compensation to depositors or facilitate the speedy transfer of their accounts to another bank under the bank insolvency procedure in Part 2 of the Bill. I am sure the noble Lord shares with the Government the objective of speedy restitution, particularly to certain categories of depositors. Obviously, large volumes will take longer, but the whole point of the clause is to respond as speedily as possible to the needs of depositors. I agree with him in that broad concern.
Another of the noble Lord’s concerns is about temporary high balances. I agree with him that that is an important point. Experience over the past few months has ensured that the vast majority of those with resources know the nature of existing guarantees, and that to benefit from the guarantees on £50,000 they must put any greater amounts with different institutions. I appreciate the point the noble Lord makes, that because of the nature of a transaction—particularly the selling of a house—people can have a temporary high balance. I emphasise that we are consulting on this, which is rightly a matter for the Financial Services Authority. I cannot comment on the position at present, except to say that the FSA is all too well aware of exactly the point that the noble Lord has made. It has been made in many different quarters and made in another place with some force as well. He is knocking at an open door if he is seeking to bring this debate to the attention of the authorities. At this stage I do not have an immediate resolution of the point but I accept the representation.
On the European economic area branches, the Government are bound by the European directive, so the noble Lord is right that if we want to see things change we have to stiffen up the directive, which is subject to review at present. I bring to the attention of the House the obvious point that present problems with the banks are much wider than the United Kingdom. We often mention the United States at this point, but we should not underestimate the problems in Europe as well. The Government are concerned about cross-border payment. We have lobbied for a single point of contact. We accept entirely the noble Lord’s anxiety that talking about passport arrangements is not enough as far as the new position is concerned. He has recommended that topping up should be made compulsory. I cannot
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Lord Newby: I am grateful to the noble Lord for those partial reassurances.
Debate on whether Clause 173 should stand part of the Bill.
Baroness Noakes: I have given notice that I wish to oppose Clause 173 standing part of the Bill in order to pursue a matter that I raised on our first day in Committee but to which the Minister did not respond.
Under Clause 173, the FSA can make banks give it all kinds of information which it can then make available to the Financial Services Compensation Scheme. There is considerable concern among the banks about the use which might be made of this provision. This is not a concern about providing information per se; it is a concern that the FSA will use this power to impose data requirements on the banks to provide information that the banks do not need for their business purposes, and the effect of that will be to impose costs on the banks on a disproportionate basis. The issue that is currently causing the greatest concern is the proposal for faster payout, which will impose significant additional costs. An independent study by Ernst & Young, which was commissioned by the FSA, the Financial Services Compensation Scheme and the British Bankers’ Association, has recently reported on the costs of the faster payout proposals. Those will require banks to marshal their customer data into a single customer view, as well as a number of other systems changes. The Ernst & Young study found that the costs over the first five years just to set up and maintain this system, whether or not it was used, would be in the range of £0.9 billion to £1 billion. This contrasts with the regulatory impact assessment for the cost of the whole of this Bill—not just Clause 173—amounting to no more than £5 million.
Will the Minister say whether Clause 173 is in this Bill to support faster payout arrangements or for any other purpose? If there is another purpose, I would be grateful if the Minister would set that out. If Clause 173 is there simply to support faster payout arrangements, will the Minister acknowledge that faster payout will be very much less of an issue if continuity of banking services, for which we sought an amendment to Clause 4, is placed in the Bill as an objective of the special resolution regime? This is the way forward that the banks themselves support. They do not support the current proposals set out by the FSA, so Clause 173 is a potential problem. I look forward to the Minister’s comments.
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Lord Davies of Oldham: I am grateful to the noble Baroness for initiating this debate if it gives me a chance to recover from the past sins of omission that she suggested were committed from the Treasury Bench earlier in the Bill.
The intention of the clause is to allow the FSCS to obtain, in a timely fashion, the information it needs to ensure that compensation can be paid out swiftly. The noble Baroness asked whether the clause was directed towards swift payment, which is of course an important part of the thinking behind it. We need to be able to pay out swiftly and accurately to eligible claimants in the event of the failure of any institution. I am sure that the whole Committee shares in that objective.
The first subsection allows the FSA to make rules allowing it to obtain information that will assist the FSCS in carrying out its work, particularly preparing for a possible need to pay compensation even when no default is imminent. It allows the FSA to use its existing powers to require individual firms to provide information that would be of use to the FSCS. There is nothing exceptionable about that. It is an even clearer illustration of the concern over payouts for depositors.
The provisions will also enable the FSCS to undertake contingency planning and risk assessments in relation to the ability of firms to pay out in future, should it be necessary. This is an obvious, sensible contingency exercise for the Financial Services Compensation Scheme, and will also mean that requests for information from the FSA in relation to any such payout will not automatically be taken as a signal that the firm in question is in difficulty. That is important. We do not want the powers to be exercised and the search for information to take place only when crisis potentially looms. Otherwise, every search for information will cause anxiety about the difficulties of the institutions concerned. We are trying to regularise this for the needs of any Financial Services Compensation Scheme payout.
The remaining subsections allow the FSCS to obtain information directly from authorised persons or certain other persons from the time that the authorised person could be declared in default for the purposes of the scheme. They allow the FSCS to obtain information from a bank which is subject to the special resolution regime—by which time, of course, we will have got into difficult circumstances. This is to enable the calculation of the maximum amount that the FSCS would be required to contribute to the costs of the special resolution regime.
That, as all sides of the Committee will appreciate, is one of the legislative changes needed to make depositor payout more effective. The provisions in the clause are a fundamental part of the authorities’ work to speed up the payment of compensation to depositors by ensuring that the FSCS has the necessary information to make preparations for payout. I am sure that the Committee agrees with those objectives. We want to ensure that information can be collected by the compensation scheme before the bank becomes insolvent. The current position is that the FSCS can get information
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I agree with the noble Baroness on continuity and service through the special resolution regime. Clearly that is preferable, but it is necessary to have a fast payout as a backstop should the other resolution options prove unworkable. We have debated these at some length in Committee and they have problems attendant upon them. It would do nothing for consumer confidence if a fast payout proved unavailable when the institution was in difficulty.
The FSA is consulting on the single customer view; the noble Baroness is concerned about the costs that may be borne by the individual institution. The clause is directed towards faster payout but the FSA can require the single customer view under existing powers. Therefore, we are not adding to those in this clause.
The objectives of the clause are clear. I understand the noble Baroness’s anxieties about the element of costs involved. The authorities will direct their search for information towards the objective of a faster resolution of a situation when things have gone wrong. That is an important priority for the Government and is why the clause needs to remain part of the Bill.
Baroness Noakes: I thank the Minister for that explanation, in particular for explaining that existing powers can be used to impose a single customer view. I outlined the costs as being the best part of £1 billion and asked whether they were needed. Do the Government accept that the FSA should not go down that route if continuity of service were made an objective of the special resolution regime?
Lord Davies of Oldham: As I indicated, the FSA has not finished its consultation on this issue. This is a salient point that needs to be settled. I can give some reassurance that the points made by the noble Baroness today are important and need to be given serious consideration. Having acknowledged that the FSA will need to consult on how it operates under this clause, I have not the slightest doubt that this clause is essential. I hope the noble Baroness will feel able to accept that point.
Clause 181 : Recognition order
Baroness Noakes: Amendment 163 would delete subsection (3) of Clause 181. This is a probing amendment. We have now reached Part 5 of the Bill, which deals with interbank payment systems. I hope we will not be detained too long, although I have tabled a few amendments to this part of the Bill.
Subsection (3) says that the Treasury must not designate an interbank payment system which is operated solely by the Bank of England. We have no problem
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Secondly, what will happen if the Bank partly operates the system, as I believe is the case with CHAPS? This system will presumably be specified under Clause 181. Does it mean that the Bank will regulate itself in relation to the part that the Bank operates?
Lastly, my honourable friends in another place got quite excited about a suggestion in the Explanatory Notes, which I could not find in our version, that the Bank of England might step in and start running clearing systems. If that happens—and it is clearly a possibility—that system will presumably already have been specified. Would that lead to the Bank regulating itself in that case? These are points for clarification and I beg to move.
Lord Myners: Part 5 involves the Government legislating to formalise the Bank of England’s role in the oversight of payment systems. It is a very important section of the Bill in terms of strengthening financial stability and confidence in a financial system.
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