Banking Bill
Public Bill Committee, 21 October 2008.
Jimmy Hood (Labour, Lanark and Hamilton East)
Before we begin, I have a few preliminary announcements. Members may, if they wish, remove their jackets during Committee meetings. Will all Members please ensure that all mobile phones, pagers and other electronic devices are turned off or on to silent mode? If something goes off while on silent mode, I ask Members to switch it off or, if they are going to answer it, to leave the Committee Room.
There is a money resolution and a Ways and Means resolution in connection with the Bill, and copies are available in the room. I remind hon. Members to give adequate notice of amendments. As a general rule, my fellow Chairmen and I do not intend to call starred amendments, including any starred amendments that may be reached during an afternoon sitting of the Committee.
First, the Committee will consider the programme motion on the amendment paper, for which debate is limited to half an hour. We will then proceed to a motion to report written evidence, and then to a motion to permit the Committee to deliberate in private in advance of the oral evidence sessions. I hope that we can deal with that formally.
Assuming that the second motion is agreed to, the Committee will move into private session. Once the Committee has deliberated, the witnesses and members of the public will be invited back into the room and our oral evidence session will commence. If the Committee agrees to the programme motion, it will hear oral evidence this morning and this afternoon. From Thursday, we will revert to the familiar process of clause-by-clause scrutiny of the Bill.
Ian Pearson (Labour, Dudley South)
I beg to move,
That
(1) the Committee shall (in addition to its first meeting at 10.30 a.m. on Tuesday 21st October) meet
(a) at 4.30 p.m. on Tuesday 21st October;
(b) at 9.00 a.m. and 1.00 p.m. on Thursday 23rd October;
(c) at 10.30 a.m. and 4.30 p.m. on Tuesday 28th October;
(d) at 9.00 a.m. and 1.00 p.m. on Thursday 30th October;
(e) at 10.30 a.m. and 4.30 p.m. on Tuesday 4th November;
(f) at 9.00 a.m. and 1.00 p.m. on Thursday 6th November;
(g) at 10.30 a.m. and 4.30 p.m. on Tuesday 11th November;
(h) at 9.00 a.m. and 1.00 p.m. on Thursday 13th November;
(i) at 10.30 a.m. and 4.30 p.m. on Tuesday 18th November;
(2) the Committee shall hear oral evidence in accordance with the following
TABLE
Mark Hoban (Conservative, Fareham)
I welcome you to the Chair, Mr. Hood. We look forward to working under your chairmanship, and that of Mr. Gale and, for a brief spell, Mr. Illsley.
As the Minister said in his opening remarks, there was broad support for the Bill at Second Reading. There was also a commitment, on our part, to ensure that the Bill has a smooth passage through the House and the other place, to enable it to reach the statute book before the Banking (Special Provisions) Act 2008 expires in February 2009. We are grateful to the Minister for arranging the reordering of the consideration of the Bill, because we believe it is important that there is time to study the draft code of practice and the principal regulations underlying this Bill prior to the debate on part 1. It would be helpful if the Minister were to indicate when he expects the draft code and regulations to be published, because that would clearly impact on the speed of consideration in Committee.
Despite the broad support for the Bill, there are areas that we will want to probe in detail between now and 18 November. I am sure we can do that and ensure proper scrutiny of the Bill.
John Pugh (Liberal Democrat, Southport)
Some members of the Committee might be disappointed that the Liberal Democrats are not represented by the sage of Twickenham on this occasion. We will be led by my hon. Friend the Member for South-East Cornwall (Mr. Breed) who is unfortunately out of the country at the moment. He has appreciable experience of both retail and investment banking. We have no objection to or difficulty with the programme motion as this is an important and highly technical bit of legislation.
Many representations made by the banking industry and others recommend a holistic approach. People are concerned about what may be caught up in the code of practice or secondary legislation. I welcome the Ministers assurances that as much as possible will be put before the Committee during its deliberations and as much inkling as possible will be given about the future secondary legislation that follows in its wake.
Jimmy Hood (Labour, Lanark and Hamilton East)
Copies of any memorandums that the Committee receives will be available in the Committee Room.
Jimmy Hood (Labour, Lanark and Hamilton East)
We shall now hear oral evidence from the Treasury. I welcome the Minister and Mr. Levendoglu. Minister, would you like to make a brief introductory statement, or to proceed straight to the Committees questions?
Peter Bone (Conservative, Wellingborough)
Mr. Chairman.
Jimmy Hood (Labour, Lanark and Hamilton East)
Order. Carry on, Minister.
Jimmy Hood (Labour, Lanark and Hamilton East)
Before the first question, I remind Members that the questions should be limited to matters in the scope of the Bill. To assist me and the Committee, both questions and answers should be brief and succinctthen we shall get more questions and answers.
Mark Hoban (Conservative, Fareham)
How did the Minister seek to reassure stakeholders in the Bill? How have issues around creditor rights and so on been dealt with, given the pressure to ensure that the Bill is passed quickly but also that legitimate concerns are being answered? How has the Minister sought to reassure interest groups?
Mark Hoban (Conservative, Fareham)
When will we see the draft code of practice and the draft regulations?
Mark Hoban (Conservative, Fareham)
How will you ensure that those principles are made available before the Committee gets to the relevant stage of the Bill? It is important that there is proper parliamentary scrutiny in this place as well as in the other place, and the earlier we have sight of those principles the better informed the scrutiny process.
Mark Hoban (Conservative, Fareham)
If the Bill had been on the statute book earlier, how would the Governments response to the banking crisis of the past few months have been different?
Mark Hoban (Conservative, Fareham)
So you believe that the Bill provides a framework in which the actions that you took over recent months would fit.
Mark Hoban (Conservative, Fareham)
Clause 4 sets out the five objectives. Can the Minister rank them in order of priority, please?
Mark Hoban (Conservative, Fareham)
Why is maximising the amount available for distribution to creditors not an objective of the Bill in this regime?
Peter Viggers (Conservative, Gosport)
The Bill introduces a concept of a bridge bank as a kind of intermediary. What is the advantage of having such a bridge bank over ordinary nationalisation?
Peter Viggers (Conservative, Gosport)
The nearest analogue to the present situation is Lloyds of London in the 1990s, where toxic assets were reinsured in a kind of spiral, so that nobody quite knew the value of the assets. What Lloyds did was to identify and isolate the toxic assets. Did you think of using such a model?
Peter Viggers (Conservative, Gosport)
The Bill seeks to reduce the impact on depositors of a bank entering insolvency. Does that mean that the interests of other creditors will be disadvantaged?
David Gauke (Conservative, South West Hertfordshire)
May I ask about the bank administration procedure under the Bill? Why is it necessary, and what is wrong with the existing arrangements?
David Gauke (Conservative, South West Hertfordshire)
Would the use of the administration procedure as you describe it mean that jobs would be lost in the residual bank? Would the administration procedure mean a running down of the residual bank?
David Gauke (Conservative, South West Hertfordshire)
So you would not describe administration as a fire sale of assets?
David Gauke (Conservative, South West Hertfordshire)
If you had had the powers at the time of Northern Rock, is it conceivable that you would have tried to address Northern Rock in the way that you have described and use the administration procedures?
David Gauke (Conservative, South West Hertfordshire)
The administration method that you describe sounds similar to what has been done with Bradford & Bingley. Will you say whether that is a fair characterisation so we can understand that, in practice, the Bradford & Bingley model is similar to the administration procedure set out in the Bill? Why did you adopt that approach then, but not with Northern Rock?
David Gauke (Conservative, South West Hertfordshire)
It is just that it is helpful for us to understand what it will look like in practice. You would not disagree with the Bradford & Bingley model, with a partial transfer to Abbey of the deposit holding?
John Pugh (Liberal Democrat, Southport)
It is almost impossible these days not to panic the City. How will you square the circle between having arrangements that are completely transparent, and not causing undue panic as a result of a firms involvement in the special resolution regime? Are you giving serious thought to how news of the special resolution regime will be communicated, both internally and externally?
John Pugh (Liberal Democrat, Southport)
But you do recognise the anxiety there, that leaks of one kind or another will create more problems than you originally started with?
John Pugh (Liberal Democrat, Southport)
You do recognise the problem that if a degree of transparency causes panic in the market, to some extent the special resolution regime will not work as perfectly as it might?
Sally Keeble (Labour, Northampton North)
I want to ask some questions about the regime for depositor protection. To what extent do you think that in setting up the enhanced scheme, the Government have abandoned the idea of moral hazard and consumer responsibility, by diversifying the risk across investments?
Sally Keeble (Labour, Northampton North)
When Mervyn King came to see us he said that a scheme like this, if the banks were to pre-fund it, would amount to tens of billions of pounds, which he called non-negligible. Since then, to maintain confidence in the banking system has cost more than thatit has been hundreds of billions. What modelling have you done about how much would actually be needed for the scheme? What kind of bank collapse would it be able to deal with? Could it deal with an HBOS? What size of bank? When will you publish the draft regulationsthere are some in clauses 155 onwards, but I mean more detailed ones?
Sally Keeble (Labour, Northampton North)
But what size collapse would you expect this to deal with? How much money would you expect to be in the kitty, and where would it come from?
Sally Keeble (Labour, Northampton North)
Whatimproved or got worse? That is a serious question. If the decision is to be taken in the future, at what point would that happen?
Sally Keeble (Labour, Northampton North)
So in the meantime, it is Government funded?
John Pugh (Liberal Democrat, Southport)
May we go back to depositor protection and the variations in it? When Northern Rock began to have difficulties, the compensation scheme changed and went up to 90 per cent. It went up to £35,000. Recently, protection increased to £50,000 and now offshore depositors in failed Icelandic banks are told that they are totally protected. Can you point to a genuine practical compensation limit, or is it a case-by-case decision being made by the Government?
John Pugh (Liberal Democrat, Southport)
So if another crisis of another nature were to loom up, theoretically, the limit could change again almost overnight?
John Pugh (Liberal Democrat, Southport)
It happens in practice.
Geraldine Smith (Labour, Morecambe and Lunesdale)
We certainly live in extraordinary times; may I begin by congratulating the Treasury team? I think that you have worked extremely well in amazing circumstances. I thought that the Government had a lot of things to deal with, but we effectively have a strike of capitalism, with the banks refusing to lend money to one another. I hope that the measures we are taking can get them back to work and get them lending the money to businesses again. The SRR that the Government are bringing in is presumably the nuclear option. You would not want to be using that too often. What can you do to prevent us getting to this situation?
Obviously there needs to be some global regulation. A lot of ordinary people feel that there has almost been criminal negligence here. What can we do to prevent these sorts of things happening in the future? We are seeing large amounts of taxpayers money being used to prop up the banking system. It must never be allowed to happen again. I appreciate that we need to act quickly, but we also need to get some responsibility back into the banking system.
Peter Bone (Conservative, Wellingborough)
Just so there is no doubt, I think that the Treasury team have been running around like a load of headless chickens. They have been lurching from one set of goalposts to another. So I take a slightly different view from the hon. Lady. May I refer the Minister to the Banking Bill regulatory impact assessment? Paragraph 1.192 says in big red lettering:
The Banking Bill will enable the FSA to collect information from firms that the FSCS requires (and share this with the FSCS) before default.
Why?
Peter Bone (Conservative, Wellingborough)
That is open to debate.
Peter Bone (Conservative, Wellingborough)
Mr. Chairman, I think the Minister said customer-level in that answer. I am trying to understand why that customer information is wanted in advance of a collapse. The nearest comparison I can think of is a collapse of a travel firm where ABTA will, immediately after the collapse, get the information about the customers who are travelling and then refund. Why do you want customer-level information to go to a Government agency before the collapse?
Peter Bone (Conservative, Wellingborough)
Finally, Mr. Chairman, we have already touched on it but there is the matter of funding this compensation scheme. I link it again to the travel industry, where the funding is put up by the travel companies and paid into a fund so that it is there for when a company collapses. It is very strange that we are treating bankers with kid gloves and not making them contribute. Last year, one of those banks made £9 billion. Are we talking one thing for bankers and another thing for other companies?
Mark Todd (Labour, South Derbyshire)
The Bill says that an objective of the Bank should be to
protect and enhance the stability of the financial systems of the United Kingdom.
It is not clear what tools, other than a financial stability committee, it will have to carry out that function. Can you tell us more?
Mark Todd (Labour, South Derbyshire)
I shall come to that.
Mark Todd (Labour, South Derbyshire)
I am probing whether the Bank has the resources to do what is set down in its new objective, which is not to manage the stability, but to contribute to protecting and enhancing our ability to protect stability.
Mark Todd (Labour, South Derbyshire)
How is the Bank supposed to do that?
Mark Todd (Labour, South Derbyshire)
Indeed, that is set down in the Bill. The strategy is co-devised with the Treasury.
There were comparisons on Second Reading to the Monetary Policy Committee, which is an Executive committeeit decides interest rates. The Bill gives a committee the power to make recommendations, to give advice in various areas and to monitor the activities of the Bank at various points. It is not an Executive committeeis that right?
Mark Todd (Labour, South Derbyshire)
Is there no difficulty having the effective chief executive of the Bank chairing a committee to which the Bill gives the power to monitor his activity? The Governor certainly has Executive functions. Is there no conception of possible conflicts in that? I would have thought that they were obvious.
Mark Todd (Labour, South Derbyshire)
Even with the excellent Governor that we have. Having a robust conversation about how the powers were exercised is not the role of the committee. Its task is to monitor within the Bill. How can it have that debate with the person or persons who carry out that function actually chairing its deliberations?
Mark Todd (Labour, South Derbyshire)
It is not entirely clear within the Bill whether it does always report through the court. You may wish to reflect on the precise wording of clause 216. There are elements when the court is referred to and there is an obligation to report through it, but there are others when it seems to communicate to whoever it feels so inclined to do.
Mark Todd (Labour, South Derbyshire)
Just to help the Committee, will the Minister look at proposed subsection 2B(2)(a) of clause 216? It refers to a recommendation through the court of directors, but the rest of the clause appears to consign its thoughts into a vacuum of wherever it thinks those functions should be best directed. Where did the idea of the financial stability committee come from? The Select Committee probed that, and no one put up their hand, said that it was their idea and that they thought it was great.
Mark Todd (Labour, South Derbyshire)
A ghostly apparition in the room appeared above someones head.
Mark Hoban (Conservative, Fareham)
Can the Minister define what he means by financial stability? It is not defined in the Bill.
Mark Hoban (Conservative, Fareham)
But does that not make it rather difficult for the Bank to fulfil the obligation if only a high-level concept is undefined?
Mark Hoban (Conservative, Fareham)
But surely it should be made clear in the Bill, which we shall scrutinise, to the wider public what the Banks remit in respect of financial stability is, rather than relying on the Bank to know the meaning of financial stability, and for it perhaps to emerge from some discussion. Should it not be in the Bill?
Mark Hoban (Conservative, Fareham)
I am sure that I will.
Mark Hoban (Conservative, Fareham)
One of the criticisms levied at the tripartite arrangements was the lack of clarity about who took the lead and who took responsibility for certain issues. Does not leaving a broad description of financial stability out of the Bill give rise to the same sort of challenge in the future?
Mark Hoban (Conservative, Fareham)
The Governor himself, in his evidence to the Treasury Committee, gave a definition of financial stability. Why have you not incorporated that in the Bill?
Peter Bone (Conservative, Wellingborough)
In relation to financial stability, the Minister referred in his helpful opening statement to the recapitalisation of the banks, which would fit within the framework that we are discussing. There was an injection of £37 billion in shares; have the terms and conditions of those share offerings been determined and when is it likely that the share issues will take place?
Peter Bone (Conservative, Wellingborough)
That is very helpful, but you did not answer the question. Are those terms and conditions finalised, and when will the money be injected into the banks?
Peter Bone (Conservative, Wellingborough)
But the Prime Minister said the opposite yesterday. I thought that it was as the Minister said because I have looked at those documents. However, under questioning yesterday, the Prime Minister said that the terms and conditions had not been finalised, so I am trying to find out whether they have been.
Peter Bone (Conservative, Wellingborough)
So they have not been finalised, and the Library documents are not the finalised version.
Peter Viggers (Conservative, Gosport)
I have a general, simplistic question. Decades ago, regulation of banks took place behind closed doorsthe Governors eyebrow and pressure brought to bearand banks got regulated. Did you, as a Minister, seeing this massive tome, wonder whether it would be possible to make regulation much simpler, and just authorise the Bank of England to do what is necessary to regulate and control, and to ensure the security of the banking system? Were questions asked about whether all this detail was necessary? It is absolutely certain that we will be back in a years time with a banking (amendment) Bill and, I suspect, the following year and the year after.
Peter Bone (Conservative, Wellingborough)
That is very helpful. Does that mean that the money will be injected fairly soon if there are only minor details left?
Geraldine Smith (Labour, Morecambe and Lunesdale)
You may not be able to answer this, but do you have any idea how long it will take for the banks to get back to normal and start lending money properly to business and things? Do you think that the recession we could be heading into is caused by the financial situation with the banks?
Geraldine Smith (Labour, Morecambe and Lunesdale)
If the banks have been recapitalised, surely there should be no excuse not to lend money now?
Jimmy Hood (Labour, Lanark and Hamilton East)
Time is catching up with us. I call for the last question.
Sally Keeble (Labour, Northampton North)
This is a general question. Clearly, the public are going to have high expectations of the Bill as being able to prevent the kind of catastrophe that we have seen in recent months. What do you say to people who say, Well, actually what happened was down to some dysfunctions in some banks that were not properly regulated or managed by the people who were supposed to be doing so. So, how is the Bill going to make a difference and which particular measures are going to make a difference? What do you say to the public?
Sally Keeble (Labour, Northampton North)
Hang on. You say that it is not meant to outlaw sub-prime lending in the US, and obviously it cannot do that, but it is supposed to make the banks here spot when some of that sub-prime lending is bundled up, packed over here and cannot be dealt with. That is where we came in.
Jimmy Hood (Labour, Lanark and Hamilton East)
Order. Thank you, Minister and Mr. Levendoglu. I now call the next group of witnesses. We will hear evidence from representatives of the Bank of England, the Financial Services Authority and the Financial Services Compensation Scheme.
Lady and Gentleman, welcome to this mornings meeting. Beginning with the lady, would you introduce yourselves, please?
Jimmy Hood (Labour, Lanark and Hamilton East)
Welcome. Our first question is from Mr. Mark Hoban.
Mark Hoban (Conservative, Fareham)
These questions are addressed to the representatives from the Bank of England. The Governor said that it was more important to get the special resolution regime legislation right, rather than rush it through to a fixed timetable. To what extent are you convinced that the Bill gets it right?
Mark Hoban (Conservative, Fareham)
The Governor argued that the Bank should have the ability to pull the trigger on a failing bank. What benefits do you see from that approach?
Mark Hoban (Conservative, Fareham)
But the Bill talks about the FSA consulting with the Bank before it pulls the trigger. Do you think you need a much more formal process for making recommendations to the FSA about whether a bank should be placed under the regime?
Mark Hoban (Conservative, Fareham)
Under the terms of the Bill, you may lack the legal power to pull the trigger, but do you not have a de facto power to pull the trigger? If a bank came to you, looking for help to enter into liquidity or some other form of financial assistance, the fact that you can refuse would, by necessity, place the bank in the special resolution regime.
Mark Hoban (Conservative, Fareham)
But presumably if you said that you could not provide liquidity assistance to a particular bank, that would effectively pull the trigger?
Mark Hoban (Conservative, Fareham)
No, I am sure that is the case.
Mark Hoban (Conservative, Fareham)
No, quite. Mr. Jenkinson, you are the director for financial stability. What does financial stability mean?
Mark Hoban (Conservative, Fareham)
Yes, but do you think that it would be helpful to define financial stability in the Bill? Clearly, the Bank will be held to account on its ability to deliver financial stability. At the moment that is a high-level concept, which is undefined in the Bill. How can we hold the Bank to account if there is no definition, even along the lines that you have outlined?
Mark Hoban (Conservative, Fareham)
You talked about the financial stability report, and your organisation was one of those that pointed out some of the issues that were building up in the economy. What tools do you have to implement your responsibility for financial stability?
Mark Hoban (Conservative, Fareham)
It seems to me that you lack the ability to intervene to maintain our stability. If you go back to the issue that was identified about growing levels of debt in the economy, what tools are at your disposal to affect that?
Peter Bone (Conservative, Wellingborough)
Tucked away on page 105, clause 222, extraordinary bank immunity has been given to the Bank of England; it cannot be sued for any acts or omissions it commits. Why has that been tucked in there?
Peter Bone (Conservative, Wellingborough)
Does that answer imply that this would be retrospective to anything that the Bank has done in the past?
Peter Bone (Conservative, Wellingborough)
I would like the FSA to answer this question: do you think that the public would be surprised, having had the biggest financial crisis for 100 years, with runs on banks and banks nearly going bust and being nationalised, if the regulatory bodies immune themselves from being sued? Would not the public think that rather strange?
Peter Bone (Conservative, Wellingborough)
But do you not think that the public would think that was rather strange? The regulators have obviously failed, because we have got to this situation, but nobody can actually sue the regulator.
Peter Viggers (Conservative, Gosport)
The tripartite arrangements left the Bank of England with general responsibility for financial stability, but put the supervision of individual banks upon the FSA. Now the Bank is to be charged with a range of new responsibilities relating to bridge banks, private sector purchaser tools, partial transfer tools and so on. How will it ensure that it has the resources and the expertise that it will need for that duty?
Peter Viggers (Conservative, Gosport)
I have put it to the Governor and others that a good regime would have the FSA responsible for regulation, but that when it comes to supervision and action, the Bank should be the supervisor. What steps can you take, short of what has been described as the nuclear option of the special resolution regime? What range of measures do you have available, short of that?
Peter Viggers (Conservative, Gosport)
How will the Bank stay close enough to individual banks and financial institutions to have an awareness of the general situation without duplicating the work of the FSA or treading on its toes?
Sally Keeble (Labour, Northampton North)
I want to ask the FSA, in particular, about the trigger mechanism. There is an argument that there is a risk of regulatory forbearance because, in a sense, triggering the regime would be a sign of regulatory failure. Do you accept that? If so, how would you guard against it?
Sally Keeble (Labour, Northampton North)
There could be. Sorry, I was being hypothetical.
Sally Keeble (Labour, Northampton North)
But do you think it is a realistic possibility?
Sally Keeble (Labour, Northampton North)
Is the trigger mechanism sufficient? Clause 7 on page 4 sets out two conditions and then there is the consultation process. One condition is whether or not the bank satisfies the threshold and the second condition is a judgment call as to whether the bank might be able to recover. Applying those two conditions, would you have picked up Northern Rock, for example?
Sally Keeble (Labour, Northampton North)
Can you say how that trigger would have worked? I thought that one of the problems with Northern Rock was that it ticked all the boxes and the problems were not immediately evident.
Sally Keeble (Labour, Northampton North)
Would they be sufficient steps in practice?
Sally Keeble (Labour, Northampton North)
Would you be able to get through them in a timely fashion, without triggering a bank run? That is the other problem.
Sally Keeble (Labour, Northampton North)
May I come back on this again? Condition 1 is, in so far as these things can be, objective. Condition 2 is a judgment call, is it not?
Sally Keeble (Labour, Northampton North)
What things would you look for and how would you frame that judgment call?
Sally Keeble (Labour, Northampton North)
You will have some criteria you will look at. In terms of the public, suppose something goes wrong again and it comes back to a Select Committee, which can say, What were the objective criteria? and What factors did you take into account in condition 2? People would see that. The staff would be trained in that, as well.
David Gauke (Conservative, South West Hertfordshire)
May I follow up the issue that Sally raised about potential bank runs and panic? Clearly a balance needs to be struck between transparency regarding the special resolution regime and not inducing panic among the public. Could I ask the FSA in particularI will be grateful for the thoughts of the Bank of England, toowhat your communication strategy will be regarding measures taken under the special resolution regime? How are you going to avoid panic?
David Gauke (Conservative, South West Hertfordshire)
The most striking thing about the last 13 months or so, about the various developments in this crisis, has been that practically every interesting bit of information has been revealed by Robert Peston on the BBC News. To what extent has that been a major difficulty for the FSA and the Bank of Englandthat control of the story appears to be in the hands of Robert Peston rather than the authorities? Is there anything in this regime that will prevent that happening again?
David Gauke (Conservative, South West Hertfordshire)
Do you identify it as a problemwhether with existing powers or under these new powersthat every story seems to be breaking not through official channels but through leaks to a particular journalist? Is that an issue for financial stability?
David Gauke (Conservative, South West Hertfordshire)
But has it exacerbated the difficulty that there seems to be a constant stream of leaks?
Mark Todd (Labour, South Derbyshire)
You were sitting at the back when the earlier questions were asked, so I can run through them briefly. It is clear from the Bill that the financial stability committee is not an executive committee. It has a hybrid scrutiny and advisory role. Is that your understanding?
Mark Todd (Labour, South Derbyshire)
Absolutely.
Mark Todd (Labour, South Derbyshire)
Good. I have that. The Bill, as I explored earlier, is not absolutely clear about the relationship between the financial stability committee and the court. It is in certain respects, but not in other aspects. Would you welcome a clarification of the clear subsidiarity of the financial stability committee or do you feel that allowing it to float free to some extent is desirableas appears to be the intent of the Bill, as drafted?
Mark Todd (Labour, South Derbyshire)
The Bill is silent as to whom it gives the advice.
Mark Todd (Labour, South Derbyshire)
One can.
You heard the exploration as to the role of the Governor. He is designated as the chair of the financial stability committee, yet part of the committees function is to scrutinise the Banks executive role for which he is responsible. That is an unusual combination of roles, is it not?
Mark Todd (Labour, South Derbyshire)
It may help if I quote the Bill. It says
to monitor the Banks use of the stabilisation powers.
I interpret that as a scrutiny function normally carried out by non-executives, but the committee would be chaired by the main executive responsible for the delivery of those functions.
Mark Todd (Labour, South Derbyshire)
Would it be fair to say that the court will have a significantly different function than it does now? The Bill cuts the number of members of the court.
Mark Todd (Labour, South Derbyshire)
There is an implicit suggestion that a somewhat different character of membership might be required to carry out this role, which it has now been given rather more explicitly than in the past.
Mark Todd (Labour, South Derbyshire)
Which is?
Mark Todd (Labour, South Derbyshire)
There is a reference in the Bill to co-opting other non-voting members. I hope that is a means of recruiting those who are not necessarily UK citizens, but have valuable experience of financial stability issues. Of course, the Bank already has someone from the Scandinavian banking system who, even before this happened, advised it on stability issues, presumably based on the experience of nearly 20 years ago. Is that the kind of model that is envisaged regarding the use of that power?
Peter Bone (Conservative, Wellingborough)
I should like to kick off with some questions on depositor protection. The Governor of the Bank of England banged on about moral hazard many times on television. I think I understood what he meantwe do not want irresponsible lending and we have to bear the consequences of the risks we take. On the other hand, although we have talked about a £50,000 limit to depositor protection, we all know that it is effectively 100 per cent. We have seen that with Northern Rock and the Icelandic Banks. Politically, the Government do not dare allow depositors to lose money in banks.
Was the Governor saying moral hazard for soundbite purposes, or was he serious? If he was serious, what is he saying to the Government regarding their actions in giving, in effect, 100 per cent. protection?
Peter Bone (Conservative, Wellingborough)
I am not quite clear. Let me give an example. Were the Government right to protect all retail depositors with the Icelandic banks? At that time, the scheme said that deposits of up to £35,000 were protected. That is where it should have come in. People who had money above that amount should have lost it. That is the moral hazard aspectpeople who went to an Icelandic bank that gave a higher rate of return were taking a moral risk. That is not what happened; the Government rushed in and said that we must protect everyone. There might be somebody who is very rich and had £5 million in an Icelandic bank. Such a person is protected the same as somebody with only £35,000. Does that not drive a coach and horses through the idea of moral hazard?
Mark Hoban (Conservative, Fareham)
Nobody 13 or 14 months ago would have expected a bank to fail. No one anticipated that the Financial Services Compensation Scheme would have to step in to repay depositors. Will Ms Minghella set out what lessons the FSCS has learned over the last year and what changes it needs to make to adjust to the new financial climate?
Mark Hoban (Conservative, Fareham)
You talked about how you were able to transfer money overnight to Abbey, straight from Bradford & Bingley. How long do you think it is right for customers to wait until they can access their accounts, if the situation is not that a banks assets are being transferred to another bank, but that a bank is going insolvent? Is it one week, two weeks, or longer?
Mark Hoban (Conservative, Fareham)
What are the principal barriers to a seven-day payout?
Mark Hoban (Conservative, Fareham)
Just going back to Ms Minghellas comment about the FDIC in the States going in three months before the button is pressed to make the payments, how would that work in the context of the regime we are talking about? If a bank was to go into the amber zone of heightened supervision, would you expect the FSCS to become involved in that situation, to prepare the ground in case a bank goes into the special resolution regime?
Mark Hoban (Conservative, Fareham)
But at what point would you request that information?
Peter Bone (Conservative, Wellingborough)
I understand why you require the banks to hold the information in a certain format. I have no understanding of why you need that information in advanceof particular customers. When the button is pushed, the deposits of each customer will have varied from the earlier information. Why on earth do you need that information in advance? In the travel industry, the information is not required in advanceit is required in a format, so that it can be immediately had and acted on. Why do customers details have to be with you in advance of a failure?
Sally Keeble (Labour, Northampton North)
I wanted to ask about the pre-funding, which is not popular with banks. The Governor talked about the need to build up such a fund, but if there was a decision to go with that, it would take some years to provide the level of funding needed. What are your views on that and on how the Bill provides for a reserve power to be used at some future date?
Sally Keeble (Labour, Northampton North)
But what kind of lead time would they need?
Sally Keeble (Labour, Northampton North)
How much would that be?
Sally Keeble (Labour, Northampton North)
Would that be enough?
Sally Keeble (Labour, Northampton North)
Time is short, and I had some indications from Dr. Huertas and Ms Minghella that they might have views about the adequacy of that size of fund.
Sally Keeble (Labour, Northampton North)
You are saying that we have to bear in mind that, whatever happens on the pre-funding or the size of the pot, the Government have to provide the backstop.
Sally Keeble (Labour, Northampton North)
Ms Minghella?
Sally Keeble (Labour, Northampton North)
Some of our constituents might think that the idea of having a pre-funding scheme is to move some of the risk of failure away from the Government and on to the banks. But are you saying that, whether that happens or not, the Government still have to underwrite it?
Sally Keeble (Labour, Northampton North)
But then it is a loan.
John Pugh (Liberal Democrat, Southport)
To be precise about this, what you are saying is that a pre-funding arrangement is not sufficient. To be very specific, would you say that it is necessary, or desirable?
John Pugh (Liberal Democrat, Southport)
In your view, is it desirable?
John Pugh (Liberal Democrat, Southport)
I will take that as a no.
John Pugh (Liberal Democrat, Southport)
That is two not necessaries, one desirable.
John Pugh (Liberal Democrat, Southport)
Right. That is necessary, desirable and useful.
David Gauke (Conservative, South West Hertfordshire)
May I ask the Bank of England about clause 66, which relates to international obligations and says:
The Bank of England may not exercise a stabilisation power in respect of a bank if the Treasury notify the Bank that the exercise would be likely to contravene an international obligation of the United Kingdom.?
Will this mean that, essentially, the Bank of England will not need to take a view on international obligations and that it will proceed as if there are no issues with international obligations unless the Treasury says otherwise?
David Gauke (Conservative, South West Hertfordshire)
You will be aware that there is a view that the Bank of England took perhaps too prescriptive a view as to the market abuse directive and what it could do, as far as covert support and so on was concerned. Do you not see this as an attempt to clip the wings of the Bank of England in any way, or as the Treasury saying, We will take things on there; dont you worry about that, Bank of England?
David Gauke (Conservative, South West Hertfordshire)
But the Bank of England will do its own analysis and act accordingly.
Jimmy Hood (Labour, Lanark and Hamilton East)
If Members have no further questions for the panel, that brings to an end the business for this morning.
Further consideration adjourned.[Mr. Blizzard.]
Written evidence to be reported to the House
Jimmy Hood (Labour, Lanark and Hamilton East)
Good afternoon. Welcome to the Committee. I am sure, Angela, that your two colleagues will not mind me paying you a particular welcome. It does not seem as though you have been away, but it is a fair time. Welcome. We will open our session with a question from Mark Hoban.
Mark Hoban (Conservative, Fareham)
This question is for both Mrs. Knight and Mr. Taylor. Quite a lot of concerns have been expressed about the proposed changes to creditors rights, particularly in the context of the partial transfer of banks. Have your concerns been satisfactorily addressed in the Bill?
Mark Hoban (Conservative, Fareham)
This morning, the Minister said that the draft code of practice would be produced next Thursday, and that the principles for the secondary legislation would be ready in time for the debate on clauses 42 and 43. What principles would you like to see in that secondary legislation to address the concerns of your members?
Mark Hoban (Conservative, Fareham)
May I go further? On the cost of capital, you have both referred to the impact that it could have through the capital requirements directive. I am intrigued to understand how you think that will work its way through, and what the impact might be. I have spoken to one international bank, which said that if the right safeguards were not in place, it would lead to a situation in which you were counting assets and liabilities on a gross basis, not a net basis. His argument was that that would make London a pretty unattractive place to do business. Do you share that view?
Peter Viggers (Conservative, Gosport)
Clause 157 imposes an obligation on the Financial Services Compensation Scheme to contribute to the costs of resolution under the special resolution regime. Would you like to comment on that?
Peter Viggers (Conservative, Gosport)
As drafted, how much ability would you and your respective bodies have to influence the quantum of the costing?
John Pugh (Liberal Democrat, Southport)
Deposit protection varies slightly; in the past few months the goalposts have been moving all the time. In your view, what is the appropriate level of compensation for deposit protection?
John Pugh (Liberal Democrat, Southport)
You have answered on behalf of the building societies. The point has been made that deposit protection at the moment covers only your net depositnot the gross deposit. In other words, the gross figure is different precisely because you have a huge loan with a building society as well, so you do not get the level of deposit protection that you might think that you will get. Are you happy with that principle?
John Pugh (Liberal Democrat, Southport)
Would you welcome uniformity?
John Pugh (Liberal Democrat, Southport)
To what extent can banks and building societies quickly identify the extent of deposit insurances by individuals given the different brands, multiple accounts and so on? How long would they need to complete an assessment?
John Pugh (Liberal Democrat, Southport)
On the face of it, it sounds a very difficult area to regulate in any way, given the complexity of financial products.
John Pugh (Liberal Democrat, Southport)
Before Third Reading?
Peter Bone (Conservative, Wellingborough)
Following on from that, we heard in previous evidence that there should be a customer-level test beforehand by the compensation scheme, so that, when a bank goes under, the scheme can, at the press of a button and in a common format, produce the amount of money that needs to be given back to an individual. This issue is very time-sensitive. If someones money is in a bank and that bank has gone bust, they need to access that money.
Listening to your previous argument, it seems that the banks are not very sure how much money each customer has. You have a problem. Do you think that there should be a common format and that customer-level information should be given in advance?
Peter Bone (Conservative, Wellingborough)
That is a very interesting proposal. May I move away from that to the funding of the compensation scheme? In the US and other countries, it is pre-funded, but we really have a pay-as-you-go model. My constituents would be amazed that the banks are opposed to a pre-funded scheme. Some of your member banksnot allhave brought the economy to the verge of disaster. We are going from boom to bust because of irresponsible bankers and, by the way, the bankers do not want to fund the compensation scheme in advance. Is that not a very strange attitude for the banks to take?
Peter Bone (Conservative, Wellingborough)
With due respect, you are missing the point. We all agree that the money has to come quickly. Let us consider the travel industry, and the arrangements of the air travel organisers licence and ABTA. That is effectively paying in during the good years for when something goes wrong. It is rather like an insurance policy. We all want them paid out quickly, but why should the money fall on the taxpayer to do it immediately?
Peter Bone (Conservative, Wellingborough)
But it does have to be funded immediately, does it not?
Peter Bone (Conservative, Wellingborough)
I just want to stop you. I am not making my point clear.
Jimmy Hood (Labour, Lanark and Hamilton East)
Order.
Peter Bone (Conservative, Wellingborough)
Well, she is not answering the question.
Jimmy Hood (Labour, Lanark and Hamilton East)
Please answer it.
Peter Bone (Conservative, Wellingborough)
Just to nail the point. Last year, one of the banks that has failed made something like £9 billion profit. None of that moneynone of those billions and billions of pounds made by the bankwas put away in a protection scheme. Do the banks think that is right?
Mark Todd (Labour, South Derbyshire)
The investment banks have not featured too strongly in this debate. To what extent are they covered by the Bill?
Mark Todd (Labour, South Derbyshire)
Indeed. There are specialist investment banks that presumably are not covered by the proposed legislation. They are not licensed as deposit takers.
Mark Todd (Labour, South Derbyshire)
Is there any issue of inequity between a specialist investment bank and an investment bank operation within a deposit-taking bank, in terms of the marketplace for their products? Will a burden be placed on those that have combined functions, as opposed to those that lie outside the legislation?
Mark Todd (Labour, South Derbyshire)
Okay, good. You alluded to the netting issue. Do investment banks have other concerns about the application of the Bill?
Mark Todd (Labour, South Derbyshire)
That was what I was trying to explore, but your colleague was saying, No, thats all right by us.
Mark Todd (Labour, South Derbyshire)
That is what I assumed, I must admit.
Peter Viggers (Conservative, Gosport)
How do the provisions of the Banking Bill in the United Kingdom compare with the manner in which these issues are being handled in the United States and in the European Community?
Peter Viggers (Conservative, Gosport)
I can narrow the question if you wish: are there points of comparison that cause you concern?
Peter Viggers (Conservative, Gosport)
To what extent have your members reached a situation where they are confident that they now know the true value of their assets? To what extent are their balance sheets still contaminated by toxic assets? By way of illustration, I think that the nearest analogue to the present situation is Lloyds of London. Lloyds made a point of identifying and isolating the toxic assets in the so-called spiral and then moving on. Are your members at that stage? Are they doing that?
Sally Keeble (Labour, Northampton North)
This is a question for Adrian. Given that building societies have not had the same track record of failure, are you concerned that this package of reforms might be applied to you although you are not part of the problem?
Sally Keeble (Labour, Northampton North)
Are there any aspects of the legislation that are of concern to your members?
Sally Keeble (Labour, Northampton North)
Are you concerned about the pre-funding arrangements, if they come in? Given the benign track record that building societies have had, do you feel that they would be unduly onerous?
Sally Keeble (Labour, Northampton North)
But that is a general comment. The point about pre-funding is that, to some extent, the cost has to be related to risk. The risk for the banks could be quite substantial, but you could make a case that the risk for the building societies is slighter, given your track record.
Sally Keeble (Labour, Northampton North)
On the trigger mechanism, would any variations be required for triggering the SRR for building societies in comparison to banks, given the very different sort of models?
Peter Bone (Conservative, Wellingborough)
To return to a point that was made earlier, I found the answers that were given to Sir Peters question about the balance sheets of the banks extremely interesting. In the balance sheets of the banks last year, you had some assets that have turned out to be worth much less than had been thought, so the banks have now written those downas I understand you are sayingand have really got to a valuation. What was the change in the valuation rules? Was it a huge write-down?
Peter Bone (Conservative, Wellingborough)
Do we have any idea of the level of write-down?
Peter Bone (Conservative, Wellingborough)
Very significant?
Peter Viggers (Conservative, Gosport)
In an early comment by the BBA, you are quoted as saying that your main reservation related to partial transfers of banks, nil-rates and creditors. You made that comment in July. You said that you saw an imperative need for the Government to give further time for consideration of the partial transfer arrangements and that they should be stripped out of primary legislation. Would you like to confirm that that is still your view and elaborate on it?
Mark Hoban (Conservative, Fareham)
This is a question to you, Mr. Taylor. You said earlier that the provisions of the Bill affect stand-alone investment banks only to the extent to which they are counterparties in transactions where there is netting. Are there any tools in the Bill that you think appropriate to be used if a stand-alone investment bank suffered a financial problem, or are you happy with the existing regime for insolvency and administration?
Mark Hoban (Conservative, Fareham)
So, in effect, you anticipate that the tools available in the Bill could be used in relation to an investment bank.
Mark Hoban (Conservative, Fareham)
Although it is not the intention as the Bill is currently drafted.
Jimmy Hood (Labour, Lanark and Hamilton East)
If Members have no further questions, may I thank the panel for coming to the Committee today and call the next set of witnesses?
Jimmy Hood (Labour, Lanark and Hamilton East)
We will next hear evidence from representatives from the Association of British Insurers, the Investment Management Association, Citizens Advice and Which? Welcome to our meeting this afternoon. Could you please introduce yourselves? I will start with Teresa.
Peter Viggers (Conservative, Gosport)
Mr. Haddrill, the Association of British Insurers said in its submission to the Treasury Committee in July that the case for the special resolution regime was not fully proven. What is your view today?
Peter Viggers (Conservative, Gosport)
Have you ideas on what steps could be taken, short of a special resolution regime?
Peter Viggers (Conservative, Gosport)
Are there areas in the Bill that you think require further work? Are you content with the shape of the Bill as it is emerging?
John Pugh (Liberal Democrat, Southport)
Can I ask a supplementary question? I read your lucid, clear submission carefully. It contains a suggestion that the first port of call might be a shareholders meeting to see if they can divvy up a bit more cash or replace the management, or whatever. Given the speed with which events have been moving in financial markets recently, do you now acknowledge that that is a fairly unrealistic, not a real world, scenario?
John Pugh (Liberal Democrat, Southport)
So it is a real-world scenario when you have a company that is failing but it has a few big institutional investors who can get together and sort it out quickly, but not otherwise.
David Gauke (Conservative, South West Hertfordshire)
Mr. Haddrill, you have been in a minority in advocating that the special resolution regime should be administered by the FSA, rather than the Bank of England. Can you expand on why you think that should be so?
David Gauke (Conservative, South West Hertfordshire)
How do you respond to the view that since 1997, the Bank of England has been more distant from the banking sector as a whole, and that has been an adverse development?
Mark Hoban (Conservative, Fareham)
May I ask both the IMA and the ABI what are the consequences, from your members perspective, of the abridgement of property rights that the Bill sets out, and the way in which it can disturb the normal ranking of creditors in the event of the SRR being triggered?
Mark Hoban (Conservative, Fareham)
Would you outline for us what the changes were to Bradford & Bingleys bond terms, so that we can understand the sort of changes that could happen?
Mark Hoban (Conservative, Fareham)
Did your members who objected to that object in principle or to the fact that they had lost that right?
Mark Hoban (Conservative, Fareham)
Almost at nothing?
Mark Hoban (Conservative, Fareham)
What does that tell us about peoples views about those bonds being repaid?
Mark Hoban (Conservative, Fareham)
Yet bondholders would expect those bonds to be paid in full.
Mark Hoban (Conservative, Fareham)
Do you think that the Bill reflects that tension appropriately?
Mark Hoban (Conservative, Fareham)
Mr. Haddrill, you have described the authorities consultation process as paying
only perfunctory and box-ticking reference to the need to avoid interfering with property rights in contravention of the Human Rights Act 1998.
Is the Bill any better?
Peter Viggers (Conservative, Gosport)
A comment was made about the financial stability committee. I heard some implied criticisms, or at least a lack of total enthusiasm. What more would you wish to see of the committee that would enable you to feel much more enthusiastic and confident about it?
Peter Viggers (Conservative, Gosport)
And it is, as it were, influential, rather than a decision maker?
Peter Viggers (Conservative, Gosport)
Did you read the recommendations of the Treasury Committee, which were similar but different? Do you have any view on that?
Peter Viggers (Conservative, Gosport)
Mr. Sears, do you have any thoughts on the FSC?