Banking Bill

Public Bill Committee, 23 October 2008.

Roger Gale (Conservative, North Thanet)

Good morning, ladies and gentleman. While I am in the Chair, hon. Members may remove their jackets for their comfort if they wish to do so. I cannot speak for Mr. Hood, but I am sure that he spoke for himself at the opening sitting.

Clause 155

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following: New clause 1—Objectives of the compensation scheme for depositors—

‘(1) This section sets out the objectives for the compensation scheme for depositors.

(2) Objective 1 is to maintain customers’ confidence in the UK banking system regardless of whether the bank is incorporated in the UK or another EEA country.

(3) Objective 2 is to be able to make payments to depositors within seven days and to have eligibility criteria, qualification processes and information requirements which facilitate that.

(4) Objective 3 is to ensure that there are compensation arrangements for each bank brand.

(5) Objective 4 is to require that the scheme pays customers their gross balance and that any amounts due from customers are collected in the usual way.’.

New clause 2—Compensation payable to depositors—

‘(1) Each depositor will be entitled to receive from the manager of the scheme referred to in section [Objectives of the compensation scheme for depositors] a sum which is the lower of—

(a) the deposit protection amount; and

(b) the gross balance held by the person.

(2) The “deposit protection amount” is £50,000.

(3) The Treasury may by order amend the figure in subsection (2).

(4) An order under this section may not be made unless a draft statutory instrument containing such an order has been laid before, and approved by a resolution of, each House of Parliament.’.

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship this morning, Mr Gale. The purpose of new clauses 1 and 2 is to facilitate a debate in Committee about the wider aspects of the Financial Services Compensation Scheme. The Financial Services and Markets Act 2000 established the compensation scheme and set out a framework for it. Much of its detailed regulation will be formulated in consultation with the industry by the Financial Services Authority. There are important public policy issues that the Committee should have the opportunity to discuss this morning because such matters have received considerable attention in the media during the past 13 months, from the point at which depositors queued around the block to take their money from Northern Rock through to the rescue of the Icelandic banks earlier this month.

It is important to start consideration of part 4 of the Bill by having a broader debate about the compensation scheme and what objectives we want it to deliver when the FSA produces its final rules. New clause 1 sets out four objectives, the first of which would

“maintain customers’ confidence in the UK banking system regardless of whether the bank is incorporated in the UK or another EEA country”,

including members of the European Union and countries such as Iceland. Objective 2 would

“make payments to depositors within seven days and to have eligibility criteria, qualification processes and information requirements which facilitate that.”

Objective 3 would ensure

“that there are compensation arrangements for each bank brand”,

and objective 4 would

“require that the scheme pays customers their gross balance and that any amounts due from customers are collected in the usual way.”

I shall talk about each objective in turn before explaining new clause 2.

One lesson that we can learn from recent events is the need for consumers to feel confident about their money. I mean not only the solvency and security of the bank that they are with, but what happens in the event of the bank’s failure, how they can access their money and how confident they are about how quickly they can get their hands on it. It means that the compensation scheme must be very clear and set out the precise terms for consumers. We want consumers to understand the limits of the scheme so that they can determine in their own minds how they allocate their funds between banks and what precautions are necessary so that they can take responsibility for their financial affairs. That is why objective 1 is to maintain consumers’ confidence in the banking system.

Mark Todd (Labour, South Derbyshire)

One measure that might improve consumer confidence is a clear definition to consumers of exactly what coverage the FSCS gave to the deposits that they made. Currently, many consumers are left in the dark about how they are protected or to what extent they are protected. Does the hon. Gentleman agree that there should be an obligation on the provider of a product to define how the Financial Services Compensation Scheme relates to that product when the deposit is made?

Mark Hoban (Conservative, Fareham)

The hon. Gentleman makes an important point. Consumers need to understand that. There is a shared responsibility on this matter. The FSA needs to ensure that its website gives information to customers. Banks also have an obligation to their customers to make the matter clear. I will come on to some of the challenges related to that when I talk about objective 3 on the bank versus brand debate. That is the most challenging area.

Interestingly, the US Federal Deposit Insurance Corporation has FDIC logos and information on its website for banks to purchase so that it is clear what people are insured for. Its website helps consumers to understand what is there. There is a shared responsibility and I think that there is an obligation on banks. However, for that information to be communicated clearly requires additional work on the scheme rules. I will come on to issues that individual customers might face under the current rules.

There was some lack of clarity this year from the Treasury on what would happen if a bank in the EEA collapsed. During the Treasury Committee evidence session on 22 July 2008 the then Economic Secretary, the hon. Member for Burnley (Kitty Ussher), was asked what would happen if an EEA bank faced problems. This is one of those curious areas where some protection comes from the home state of the bank and there is a top-up from the FSCS. She said:

“I do not want to be pressed too far on this so as not to unduly alarm anyone”.

When pressed further, she said:

“I simply do not know how it will work in practice”.

That was not a very helpful response from the then Minister. We now know how it works in practice. The collapse of Icesave and Kaupthing demonstrated what happens. At the time, those comments did not give much confidence to consumers.

That point demonstrates how important it is that there is clarity for people about the arrangements that apply to their bank and on how those will work in practice. That is particularly important given that our open economy enables banks from outside the UK to establish branches and be incorporated here.

The second objective of any compensation scheme is the speed of payout. We can ensure up to any limit through a deposit protection scheme, but if a customer cannot get access to their money for three or four months, the level of protection will not give them much confidence.

Stewart Hosie (Scottish National Party, Dundee East)

On the speed of the payment of compensation, the Federation of Small Businesses has made me aware of a number of small businesses, sole traders and others that have put into Icelandic schemes money that was locked away to pay the VAT or the tax bill at the end of the year. Although it is important to put something on the speed of payment in the Bill, would it not also be useful if the Minister made it clear in this debate that Her Majesty’s Revenue and Customs will not add penalties for non-payment of tax if someone can demonstrate that the money is locked up and they cannot access it? That makes the speed of payment important in the future.

Mark Hoban (Conservative, Fareham)

Indeed. The hon. Gentleman makes a valid point. In yesterday’s debate in Westminster Hall on banks and small businesses, a question was posed to the Exchequer Secretary on whether HMRC guidance on payments could be placed in the Library so that people can see what the rules are. This is an important point. Many small businesses have cash in banks and are not reliant on banking services, but need access to it to enable their businesses to thrive.

As I was saying, the speed of payouts is an important issue. The target that is being consulted on is to provide the depositor access to at least a proportion of their funds within seven days. That is an important target.

The original consultation on the FSCS said:

“The FSCS normally processes deposit claims in relation to relatively small deposit-taking firms within one month...more time would be needed in a complex failure involving a high volume of claims and depositors could be left without access to their funds for several months.”

Clearly, that is not in the interests of the depositors. It is, therefore, important to understand what steps need to be taken to speed up the payment of claims.

In our evidence session on Tuesday, the chief executive of the FSCS, Loretta Minghella, pointed out that in the case of Bradford & Bingley the FSCS had paid £14 million overnight, so that 2.5 million people who bank with Bradford & Bingley went to bed on 28 September and woke up on 29 September banking with Abbey. In that instance, there was a seamless process as accounts were transferred from one provider to another. That was in the context of a partial transfer—something that is set out in the Bill—but a very different situation could arise where a bank becomes insolvent and there may not be the same ease or speed of transfer from one bank to another, so we need to ensure that some processes are in place.

There are four conditions in the Bill that help to speed up payment, including early access to information about default firms before they fail. In the evidence session on Tuesday it was said that in the US the FDIC receives access to information about a bank three months before it is put into default.

We had a brief discussion on Tuesday about the involvement of the FSCS when a bank is in the amber stage and is subject to heightened supervision. I think that Dr. Huertas from the Financial Services Authority indicated that the FSCS would be involved at that stage. However, it would be helpful to have some more clarity, perhaps through the consultation or even today, about how involved the FSCS could be, because if it has access to more information it would clearly be in a better position to process claims. In the event that a bank defaults, it would be able to understand how the bank’s systems work and it would understand the volume of records. In the States, the FDIC has the time to go through dummy check runs and things like that, so that it is in a position, when a bank collapses, to ensure that there is prompt payment. Clearly, therefore, early access to information is important.

The FSCS would like assistance from a liquidator in the event of a failure to prioritise comparative deposits. It also wants to see a streamlined process, because at the moment if a deposit-taking institution fails depositors have to make a claim. Clearly, making a claim delays the process of passing money across to depositors, so if we can move to an automated process it would be very helpful in meeting the seven-day deadline. That is an important step that the Bill facilitates.

The fourth condition in the Bill is the immediate access to liquidity to pay people promptly. We will return to that when we discuss a later clause.

The FSCS has indicated that four other things need to happen, but they will be dealt with under the consultation process that the FSA will embark on. The first of them is simplifying the eligibility criteria, which is a challenge, because the simpler the eligibility criteria the greater the potential cost to levy payers, because we are talking about broadening the number of people who would be covered by the scheme. However, let me indicate two problems with the eligibility criteria at the moment.

I bank with Barclays, as do my parents. My sister works for Barclays. If it happened that my sister was a director or a senior manager at Barclays, my parents and I would be ineligible for deposits to be paid out under the FSCS. Not only does that put me in a difficult position but it would also mean that I would not have access to money.

Mark Todd (Labour, South Derbyshire)

It might persuade you to bank elsewhere.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman says that I should bank elsewhere—a comment that goes back to his earlier intervention about clarity of information. Until I had a conversation with the FSCS, I did not know that I would be ineligible for the scheme, so we need to think carefully about that point. I have a personal interest, but in terms of the payment process, the FSCS needs to go through the list of accounts and say, in my case, for example, “Ah, Mark Hoban. He’s related to X and cannot get any money.” That process of weeding out close family members of directors and managers will delay the compensation process. Not only would it stop me receiving my money at all, if I had up to £50,000 in Barclays bank, but it would delay payment to other customers of that bank as well. It is important to get the simplification of the eligibility criteria right. The less restrictive the criteria, the easier it will be to make payments to affected depositors.

On another area of eligibility, a number of businesses fall within the FSCS. We talk about the matter in the context of retail depositors, but if a business meets two of the following criteria—fewer than 50 employees, a turnover of less than £6.5 million or a balance sheet worth less than £3.6 million—it is a small business and qualifies to receive compensation under the FSCS. In sorting out the eligibility criteria and who needs to be paid, the FSCS will need to write to each business account and work out whether they meet those criteria. Businesses will have to submit their claim forms, establish whether they meet the criteria and await confirmation from the FSCS about whether they are within or without the scope of the scheme.

If the FSCS was given time in advance to access such information, it could do some preparatory work to find out which business bank accounts were eligible and which were not, but that is a time-consuming process. The FSA, in its consultation, needs to think about the eligibility criteria and the trade-off between ensuring prompt payment and the possible increase in the cost of the scheme to levy payers. There is no easy answer. However, some easy things can be done, and I plead my own case in that regard. The issue relating to relatives of senior directors and managers should be dealt with, but the FSA and the stakeholders will also need to think about more complex issues.

The second important issue with regard to simplifying the payments and giving customers confidence is the single customer view: knowing quickly how much a customer is exposed to a particular bank and what deposits they have. That aspect causes some concern in the banking community. I understand that Abbey, just before its acquisition of Bradford & Bingley, and Alliance & Leicester, had a single customer view, but in the evidence given to the Treasury Committee that appeared to be unique among banks. At present, most systems do not necessarily facilitate banks looking across their entire customer base and identifying all the accounts that belong to me or to somebody else. The Governor of the Bank of England suggested in his evidence to the Treasury Committee that it was an important thing to do, but that a period of grace should be given to enable banks to get it in order.

Peter Bone (Conservative, Wellingborough)

Is there not another slight complication? My hon. Friend gave the example of Santander. There are four banking licences in that group, so it is not a question of just one brand in that case; to work out the situation there the process would have to be divided between the banking licences.

Mark Hoban (Conservative, Fareham)

My hon. Friend makes an important point, on which I shall focus when I mention objective 3, because it needs to be resolved if we are to get the process right and give consumers confidence. The point also relates to the earlier intervention by the hon. Member for South Derbyshire, who talked about clarity, because it affects the clarity of a customer’s understanding of their level of protection under the scheme.

The third change that the FSA has consulted on is the need to net off people’s balances with a bank. A customer may have £30,000 in their current account, but a mortgage of £150,000 with the bank. Under current rules, the bank account balance would be offset against the mortgage, so the customer would end up owing less on their mortgage, but they might have no ready cash with which to go about their daily transactions. That is a challenge for people. There was consensus in the evidence session on Tuesday that people should be paid out of their gross balances, and the only qualification to that was the offset of their overdrafts against their balance.

Mark Todd (Labour, South Derbyshire)

I was going to say that the qualification, which would certainly apply with the more complex banks, might be that it is perfectly possible that somebody would hold an overdraft under one brand, but a substantial deposit under another. I would have thought that there was a strong argument for allowing a net off on a cash deposit basis.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman makes an important point. There is an issue about overdrafts offset against bank accounts, but it also goes back to the brand versus bank problem. If a customer has an overdraft with one brand and cash with another brand, how do they mesh together? It is not a straightforward area and it requires careful thought and consultation. I have some sympathy with the view that if someone has an overdraft with one brand and a balance with another, there should be a net off, but we need to think through carefully its impact on the distinction between brands and banks. Whether the payment is gross or net is an important issue and there was consensus on Tuesday that, subject to the offsetting of overdrafts, gross balance would be the easiest way. That would enable customers to repay their long-term liability, such as a mortgage, in their usual way, rather than having their current account balances offset against their mortgage.

The fourth issue is that there should be streamlined arrangements for people to open new accounts with other banks when they have received their compensation. The transfer of accounts between Bradford & Bingley and Abbey was a seamless process because it was a partial transfer. It would be different if a bank became insolvent. What would happen when a customer received their cheque, if it were done in the traditional, old-fashioned way? Would they need to go to their local bank branch and go through the whole customer procedure—the money laundering steps that have to be gone through when opening a new bank account? Would it not be more appropriate to grandfather a set of bank accounts from a failed bank into the new institution, to enable the payment of the cheque or the transfer of funds between accounts to work seamlessly? The more steps that are put in the way of enabling that payment to be made quickly and efficiently, the less confidence people will have in the FSCS and in the strength and stability of the banking sector. Those are all important issues that need to be worked through in the consultation.

The third objective is the issue of brands versus banks that we touched on in the evidence session on Tuesday. There is some confusion among customers about quite how they are covered. In the evidence to the Treasury Committee, the general counsel of the FSCS pointed out that the compensation limit is set per banking licence, of which a bank may have more than one. It is certainly not set per brand. The general counsel said that

“if a bank does trade with a number of divisions or brands under a single registration only one limit would apply to depositors even if they had accounts across the brands”.

Let me give the Committee some examples, as much for education and future guidance as to point out the problems. NatWest is a subsidiary of RBS, but has its own licence. Consequently anyone with an account with NatWest and RBS has two lots of £50,000. However, within RBS there are two other brands, Virgin Money and Direct Line, so anyone with £50,000 with RBS, Virgin Money and Direct Line—a total of £150,000—would be covered for only £50,000. Santander has within its group four brands: Asda, Cahoot, Abbey and Bradford & Bingley. Again, the £50,000 limit applies. Coutts, which was the Queen’s bank and is now the people’s bank as it is owned by RBS, has its own licence too.

If I went into a high street bank tomorrow, how would I know what level of cover I had between the different brands it operates? It becomes confusing for customers. It affects not just the banks, but building societies in a slightly curious way. There is a £50,000 limit per building society, but the Derbyshire and Cheshire building societies, which are now owned by Nationwide—

Mark Todd (Labour, South Derbyshire)

Not quite yet.

Mark Hoban (Conservative, Fareham)

When they are taken over they will have separate brands for a while, but they will have only a £50,000 limit. There is potential for confusion here. Teresa Perchard from Citizens Advice said:

“If there is a limit, and it applies to a business, not an individual brand with which a customer thinks they are trading, the brands that are trading with their customers need to tell them when they have exceeded the protected limit, I am not aware of financial institutions doing that as a matter of course...The consumers cannot know what they are not being told by the supplier”. ——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 57, Q166.]

That takes us back to the point made by the hon. Member for South Derbyshire: there needs to be some clarity for consumers. We need to think carefully about how we communicate the information to them.

We may take the view that the easiest thing to do would be to provide the limit per brand, but there is an issue about the legal definition of a brand. I am not sure that I would know where to start. If we went down the route of compensating by brand, a bank might decide to roll two brands into each other. How would it tell its customers that, having gone from two £50,000 limits, they now had only one £50,000 limit?

There will be a marketing advantage to banks in having multiple brands. They could tell their customers that if they bank with brand A they will get £50,000 and they will get another £50,000 with brand B, but in the event of a default of a multi-brand bank there would be an increased cost to levy payers. To go back to the example of RBS: trading through three brands there is £150,000 cover, but simply trading through RBS there would be only £50,000 cover. The other levy payers would have to pick up quite a significant increase if we went down the per brand route.

In all this debate, the broader the scheme rules become, the easier it is for consumers to understand and to recover their funds, but the scheme potentially becomes more expensive for the levy payers. An economic analysis needs to be done as part of the consultation by the FSA to get the scheme right. I have touched on objective 4, which is the issue about net and gross in the context of objective 3, so I do not think that I want to go back through that debate. I want to move on to new clause 2.

Mark Todd (Labour, South Derbyshire)

The hon. Gentleman has not yet touched on the definition of what should be paid in relation to a product’s conditions. For example, if one invests in a bond with a commitment for 12 months and that period is interrupted by the collapse of the financial provider, will a penalty be levied for an early withdrawal and will there be an attempt to compensate the loss resulting from the early termination of the bond, as is the case with accounts that have 60-day withdrawal limits? How does the product definition interface with the compensation scheme?

Mark Hoban (Conservative, Fareham)

The hon. Gentleman raises a point that I had not investigated so closely, but it would clearly be unfair for a customer to have to pay a penalty if their money was meant to be locked up for a year. The second issue is whether they should be compensated for the loss of interest, and I am not sure that I know the answer to that. Again, it might seem fair to compensate the consumer for the fallback, but there will be a cost to levy payers. Perhaps the equitable position is: no penalty, no additional compensation.

The complexity of the different financial products on offer needs to be reflected in how a scheme is drawn up, which will then need to be communicated to those who buy the products. That is not a straightforward process, and it is unfortunate that the trigger for the debate has been a banking crisis. It would have been better to think about those issues and resolve the problems at an earlier stage, rather than waiting until we are in the thick of it.

The hon. Gentleman will recollect that in the Treasury Committee’s report, “The Run on the Rock”, which was published in January, both the Governor of the Bank of England and the chairman of the FSA, Sir Callum McCarthy, commented that they had highlighted in an exercise on that area the need to think through carefully what would happen when a bank collapsed, and that was long before the collapse of Northern Rock. We are paying the price for not acting on that earlier.

Stewart Hosie (Scottish National Party, Dundee East)

There is an ancillary point to the one made by the hon. Member for South Derbyshire. If compensation is paid quickly from a 60-day account or one that is locked away for a year, that might change an individual’s tax liability because it was locked away in a scheme designed at least in part to be tax-beneficial. I take it that the hon. Gentleman expects to add that complexity to the considerations as well.

Mark Hoban (Conservative, Fareham)

We are getting into very complex areas. I think that I am right in saying that the Government did vary the rules on cash ISAs so as to encourage those Northern Rock depositors who had withdrawn their money from cash ISAs to put it back in. They used the tax benefit to do so, so that might be a precedent. It is very interesting, but I think that we are getting into quite complex territory on that.

I shall move on to new clause 2. I think that we know the limit for the deposit protection scheme, but we are in a slightly curious situation. It is slightly odd that the FSA had a consultation on the limit earlier this month. It was going to consult on £50,000 as a limit, and within a couple of days of the publication of that consultation the limit suddenly became £50,000. However, we have moved into a period of some uncertainty about what the limit actually is. Yes, the limit set out by the FSA is £50,000, but that limit has been varied in the case of the Icelandic banks that had financial problems. Where an account has not been transferred, for example, to ING Direct, the depositors would be paid out in full through the Financial Services Compensation Scheme, and the same applies to some of the other Icelandic banks. We now have a situation where, although the de jure limit is £50,000, de facto it is unlimited. In his evidence on Tuesday, the Minister said that the Government

“will do whatever it takes”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 9, Q16.]

A few weeks ago, when the Irish authorities introduced unlimited guarantees, the Government were up in arms. I think that either the Chancellor or the Prime Minister complained to their Irish counterparts that that had changed the playing field.

Mark Todd (Labour, South Derbyshire)

The hon. Gentleman is very indulgent in giving way so often. One of the other difficulties is the ambiguity about the meaning of the guarantee. Is this guarantee to be applied to the FSCS, or is it provided by the state and the taxpayer? The source of the money is completely different, as are the implications in terms of moral hazard. One of the difficulties in these bold statements about guaranteeing payments on all accounts, is how that interfaces with the existing guarantee scheme. We have not seen absolute clarity here or in other states in the European economic area.

Mark Hoban (Conservative, Fareham)

No, and in a sense it is a moving feast. I understand that the FSCS will cover the first £50,000 and the Treasury will cover any balance above that. That seems to be the implication, but it would be helpful if the Minister could clarify it. What do we tell our constituents? What do banks tell their depositors? Is there a £50,000 limit, or next time, will the Government do “whatever it takes” to resolve the situation?

The new clause sets out a limit and provides a mechanism for changing it. Doubtless, the Minister will say that that creates a degree of inflexibility and that we cannot wait for affirmative procedure to go through—I know the Minister well enough from Committee last week to know the sorts of arguments that he might deploy. However, my argument is not about the parliamentary process but the clarity of what we tell our constituents. We have moved from a situation of great confusion in October last year, where 100 per cent. of the first £2,000 and 90 per cent. of the next £33,000 was protected, to a coverage of 100 per cent. for £35,000 and then for £50,000. Now we have moved to, “whatever it takes.” I am intrigued to see how that might be legislated for.

Customers need clarity. People are moving money from account to account and they want to get their financial affairs in order. Mixed messages from the Government do not help our constituents understand where to put their money. That concludes my remarks on new clauses 1 and 2.

I apologise to the Committee for spending what might have seemed a long time—nearly 40 minutes—on the two new clauses, but the FSCS is an important part of the arrangements that should be in place to protect depositors. Because of the way that the FSCS works, and how its regulations are developed, if I did not use this opportunity to raise such issues, there would be no opportunity for parliamentary input into the process. I tabled the two new clauses in the hope that they would stimulate debate and provide guidance to the FSA and the financial services sector about the views of parliamentarians on these matters, and the importance that we place on getting the arrangements right so that consumers will be protected in the event of a failure. Proper processes must be in place to ensure that, should such a failure occur, customers will get access to their money speedily.

Roger Gale (Conservative, North Thanet)

The hon. Gentleman will understand that if he wishes to press either new clause to a Division, they must be moved at the end of the consideration of the Bill in the appropriate place.

Colin Breed (Liberal Democrat, South East Cornwall)

It is a pleasure to work under your chairmanship, Mr. Gale. The hon. Member for Fareham gave a considerable list of potential difficulties and hurdles. It is interesting to note the genesis of the compensation scheme many years ago. It was set up under entirely different circumstances and was brought in not for banks per se, but principally for what were then called licensed deposit-takers. They did not have the same safeguards, traditions, capitalisation and so on as institutions working under banking licences.

It was deemed a good idea to ensure widespread opportunities and to increase the number of deposit-taking institutions; therefore, the institution of licensed deposit-taker was set up. The category ceased to be some years ago, but the compensation scheme remained, and there have been no significant changes to it.

I do not think that in those days there was any perception or any view whatever that the scheme would apply to what may be called mainstream banks. The idea of a major high street bank falling into a situation where it would come into the scheme was ludicrous—it did not even begin to be mentioned—but of course we now live in very different times.

The compensation scheme was set up when there was a much larger number of smaller banks and licensed institutions, when there were significantly less, if any, of the connected brand problems that have been highlighted this morning, when relationships generally consisted of a customer and a bank—people were not multi-banked and so on—and when there were few, if any, overseas banks operating in this country. We have to ask ourselves whether the scheme should now be radically changed or whether banks should try to squeeze themselves into an extraordinarily difficult straitjacket by completely changing their operations and relationships with their customers. Should we perhaps devise a completely new scheme, which could deal with today’s problems in a more modern way and take account of what global banking might become over the next 10 or 20 years?

We have heard about the potential problems, and I have thought of quite a few more which I do not really want to go through. To be honest, they will make any financial compensation scheme extremely difficult to implement. I am a member of the Treasury Committee, which has been looking at some of the issues. We thought about pre-funded schemes, and a couple of our members went to the US to look at its scheme, but the US has an entirely different kind of banking network anyway. I wonder whether at the end of the day we will be able to devise a new compensation scheme that will deliver all the things that we want it to deliver in today’s different world.

One thing that I and, I am sure, all of us accept is that there is a need for a speedy response to the current problems, but I am not sure that we will be able to provide a lasting solution for the future. There is no doubt that consumer confidence, individually and collectively, has been knocked. Restoration of confidence in one way or another is a key factor, but that is not just about our trying to devise some kind of legislation and compensation scheme. It demands that not just the banks but, indeed, the bankers start reflecting and operating in a way that will restore the confidence of the country and individuals, rather than our providing a legislative framework for oversight and regulation. Oversight and regulation are the end of what should never come to be, and the banks have a real responsibility to deliver and restore confidence in what they do.

Most customers do not think about the risk; indeed, why should they in some respects? Worse than that—as has been said and perhaps as will be highlighted in the future—even if they do, it is almost impossible to obtain the information to find out or judge that risk. We know that even clever accountants, with whom we are blessed in the Committee, find it extraordinarily difficult to look at any bank balance sheet and devise an opportunity to consider how strong or weak a particular institution is.

Rob Flello (Labour, Stoke-on-Trent South)

Is not one possibility for advertising the potential risk or otherwise to simply publish the most common credit reference agency reference rating for that particular bank alongside where a bank advertises its rate of interest?

Colin Breed (Liberal Democrat, South East Cornwall)

That might be a way, but those of us who have looked into credit ratings agencies might begin to question whether their advice was worth much more than a bag of beans anyway. I agree in slightly more simplistic terms that that might be one way to approach the matter, but regretfully, my opinion—and I suspect that of many members of the Treasury Committee—is that the credit ratings agencies are part of the problem and not perhaps part of the solution. However, I thank the hon. Gentleman for his contribution.

Considering the off-balance sheet items, various connections, different brands and relationships between institutions and everything else—let alone a bank’s relationship to the FSA and the compensation scheme—it is difficult for anybody sensibly to find out sufficient information, even if they were technically professionally qualified, to really judge whether there is a risk in depositing money in a particular institution. Customer information, advice and so on is vital, but UK-based only institutions, UK-based but foreign owned institutions, and branches of foreign banks all have different relationships, different capital requirements and a different way of selling their services. If they are in the UK, all of those institutions have to be regulated in some form or other. We have sophisticated, highly developed banking and deposit institutions and a largely unsophisticated system that we are unable to make sophisticated in terms of depositors and customers. Marrying those together will be a difficult task.

On timely payments—again, the Treasury Committee has spent some time on this, particularly with its US experience—people of course want to be able to get their money quickly. Sometimes that is necessary because people have to complete transactions to which they have properly contracted. Some people will no doubt require their money in cash, but whether there will be enough banknotes available is another matter. An electronic transfer, bank draft, or whatever, needs to be reasonably timely. Whether moving from the current situation to seven days is a practical solution is another matter, but the process has to be timely so that transactions can take place.

As the hon. Member for Fareham has said, that matter is complicated by the sheer number of different relationships. There are customers with credit accounts, customers with loan accounts, customers with long-term mortgages, customers with credit cards, customers who have guaranteed businesses in which they are a director, and customers who have guaranteed businesses in which they are not a director. There are a multiplicity of relationships between banks and their customers. The intervention in one relatively small area of that relationship will inevitably cause ripples through the rest. There are potentially enormous difficulties in getting this right. I did not even realise the potential issues in relation to people who happen to be related to senior managers—which I find totally and utterly ridiculous—but they complicate things even more.

In order for there to be timely payments, the aim must be simplicity, not complexity. The simplicity of obtaining them—we may have to impose some caps on how much can be paid within a certain period—has to be much more clearly thought through because it is confusing. Most of the relationships that are being exposed are confusing.

On gross and net payments, most banks have clear terms and conditions for loan facilities. Back in the old days, people received a two or three-line letter saying that they had an overdraft. Now they receive a 28-page facility letter. If the terms and conditions mean anything—they must mean something not just when the bank is operational, but if it fails—people must consider whether a longish-term relationship in their borrowing requirements may be jeopardised. It is all very well saying that banks must make timely payment of all deposits, but does that mean that they may request all the loans to be repaid at the same time? Serious questions are starting to arise.

Banks must be more explicit about set-off—setting off a credit account against a debit account—and whether an account can or cannot be set off. A clear condition or relationship should be able to deal with the problem of gross or net payments.

Peter Bone (Conservative, Wellingborough)

The hon. Gentleman is making an important point about complexity, and whether the scheme can be adjusted or we must start again.

Set-off will cause delay, and we are trying to create an unusual situation: we are giving special protection to a class of creditor. The asset, which may be an overdraft or a loan, could be left as it was because it will be collected in the ordinary way or sold on to another bank. I am not sure that there is much need for set-off.

Colin Breed (Liberal Democrat, South East Cornwall)

That is probably quite right, but most loan agreements at the moment, and the small print of clause 106(2), probably give banks the right to set off anyway. Most people do not realise that because they do not understand the potential for that, but banks must be more explicit and customers must be more aware of whether set-off applies.

In simple terms, if someone owes money on a car loan, for example, and has a lump of money in a deposit account, would it be sensible to tell the customer that they cannot have the money in the deposit account because they must pay off the loan account? In those rather simplistic terms, I think that would be inappropriate, so it would probably be inappropriate in more complex ones.

Stewart Hosie (Scottish National Party, Dundee East)

I am listening to the debate, and I am convinced that setting off is not a good idea. However, if it happens, can we have an assurance that if someone has an overdraft—perhaps a sole trader running a normal bank account—and it is set off against cash, the overdraft facility would not also be removed, because that might cause all sorts of difficulties with future trading?

Colin Breed (Liberal Democrat, South East Cornwall)

The hon. Gentleman is entirely correct. We are discussing the disruption of people’s businesses, organisations, charities, clubs and so on when a major institution fails.

That brings me to my last point, to which I do not have an answer. We are deciding when the hurdle or the bar should be raised or lowered to cushion the effect on a depositor or a relationship with a bank. To what extent does the state have an obligation to cushion a set of depositors with certain institutions in respect of tax or overdraft problems, and so on? That has not been clearly thought through. All sorts of statements have been made to try to restore confidence because of systemic risk and so on—largely, I suspect, because it was thought that making the statement would restore confidence, and the obligation to pay out under the statement would not happen. Let us hope that was the case, because some wild statements have been made, such as “We will do whatever is necessary” or “We will pay out whatever is required”, on the basis that that would restore confidence in the banking system and stabilise the situation so that no payout would be required. That is okay in an emergency, but it is not satisfactory to legislate for it formally.

New clause 2 relates specifically to that matter and is a very worthy attempt to say, “Look, let’s try and make an effort”. As someone who has read much about such matters and been involved in banking for more than 30 years, I am deeply sceptical, given the current situation, about whether the current financial compensation scheme can be amended sufficiently to address potential problems. Although the provision before us might be a short-term measure, it does not preclude the FSA from carrying out much more detailed work. We might have to return to the matter in the future.

Peter Viggers (Conservative, Gosport)

The compensation scheme in the Bill is an unsatisfactory way to deal with a profoundly disturbing situation and is, of course, misnamed: it is not a compensation scheme, because strictly speaking compensation is when a malefactor carries out an act and is forced to compensate and make good through money or some other means the injury that he has done to somebody else. Strictly speaking, therefore, the word “compensation” is wrong in the sense used in the Bill. It is used in the criminal injuries compensation scheme, under which the state compensates someone for an injury suffered, but used here the word is wrong. Again, strictly speaking, the word used should be “relief”, because the state is relieving problems suffered by an individual.

It is disturbing that the issue of fairness does not seem to enter the debate. In fact, new clause 1 makes it absolutely clear that the object

“is to maintain customers’ confidence in the UK banking system”,

but does not say that the object of the exercise is to be fair. And, of course, the system is not at all fair, because the burden of loss will fall extremely unfairly on certain individuals. Those with up to £50,000 in different banks will be fully compensated, but if their bank, or the institution in which they made the investment, is part of a grouping they will be compensated up to a total of £50,000 only, which is unfair. Furthermore, individuals with deposits in Icelandic banks will be fully compensated, but corporate bodies with similar deposits will not. That, too, is extremely unfair.

I could mention many cases that would tug at the heart strings, but I cannot think of a more extreme case—it is more extreme even than those of the local authorities that have lost out, meaning that council tax payers will suffer and pay—than that of Naomi House children’s hospice, in my own area, in south Hampshire. It invested some £5 million in an Icelandic institution and now those who contributed to the hospice, the children supported by it and their parents will suffer. Yesterday I received information from Naomi House about a proposed campaign for compensation and support in view of the loss suffered.

Two days ago I received a letter from a constituent. Both he and his wife served in the armed forces. In anticipation of retirement they sold their house before moving and put their life’s savings, including the value of the house, into Kaupthing Singer & Friedlander’s Isle of Man branch. They will not be compensated, because Isle of Man institutions do not carry compensation. They stand to lose everything that they have worked for. Will the Minister spell out the guiding principle, if there is one, behind the Government’s decision? Are they simply looking for signs of panic, and trying to staunch the flow of fear-fuelled withdrawals by bringing forward a spatchcock scheme to compensate individuals and stem the panic? New clause 1 states that the objective is to “maintain customers’ confidence”. Is there any principle behind the proposals that the Government are putting forward?

I have another, detailed point to put to the Minister. New clause 2 states:

“An order under this section may not be made unless a draft statutory instrument containing such an order has been laid before, and approved by a resolution of, each House of Parliament.”

If the Government were minded to go down that route, would they add the words “and until” to such a thought, so that an order could not be made retrospective? Will the Minister spell out, for the benefit of all those who have lost out and who will not be compensated under the scheme currently proposed, the point of principle on which the Government are acting?

Peter Bone (Conservative, Wellingborough)

I have one question for the Minister, but, first, will he confirm that investors in the Channel Islands and the Isle of Man who have money in an Icelandic bank have no compensation rights? I believe that to be the case, but it has not been widely published, and the issue causes significant concern to a great number of people.

We are talking about a scheme that will compensate people to a level of £50,000, but are we talking “Alice in Wonderland”? Will any Government, especially this one, ever allow anyone to lose any money that they have put into a British bank? Pick any bank: suppose that the scheme were in place and Barclays had failed—there is no reason to think that it would fail, but let us suppose that it had. Can the Government guarantee that they would stick to the scheme and protect all depositors, and that they would not override it? Is it not the case that in the real world, because of the political implications, the Government could not let a bank fail and not cover the depositors? We are spending a lot of time discussing the scheme, and I want to know that the Government will actually keep to it if it is put in place.

Ian Pearson (Labour, Dudley South)

Clause 155 introduces part 4 of the Bill, the purpose of which is to make several amendments to part 15 of the Financial Services and Markets Act 2000, which sets out the legal framework for the Financial Services Compensation Scheme. The changes are largely detailed and technical, but there is one potentially major innovation—the provisions allowing for the introduction of pre-funding, to which we shall return shortly.

Given recent events and the great public concern about depositor protection, it is right that we should have a wide-ranging debate, as we are having today. New clauses 1 and 2 give us the opportunity to do that, and I am sure that was the intention of the hon. Member for Fareham in tabling them. Their overall effect would be to add to the Bill objectives or requirements for the scheme. However, the matters that they deal with can already be dealt with under FSA rules. I remind the Committee that the FSCS is responsible for compensating consumers with claims that any kind of financial services firm is unable to meet—that applies not only to deposit takers. To provide new, statutorily defined objectives for depositor compensation alone could divert attention from other important areas that the FSCS covers.

As the hon. Member for Fareham has clearly outlined, new clause 1 would set four objectives, in relation to protecting deposits, that the FSCS would have to meet. They range from the very general objective 1 to what are in effect detailed requirements for the scheme in objectives 3 and 4, although I appreciate that the purpose might be to stimulate debate.

New clause 2 covers detailed requirements for the scheme in a particular area. It proposes putting the headline limit for depositor compensation in the Bill and that any change to the limit would have to be made using the affirmative resolution procedure. That proposal is not desirable. The FSA rule-making procedures are better suited to making such changes. As was demonstrated last September and more recently, FSA rule-making procedures need not be a barrier to making rapid changes to FSCS rules. The affirmative resolution clearly would be. I ask the Committee to reject the new clauses.

I will reply to some of the general points made in the debate. The hon. Member for Fareham quoted the previous Economic Secretary, now the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Burnley. She was correct in her description of the current legal situation. It is the case that the Government will work with the Commission and other European economic area states to improve protection for depositors in cross-border situations. We welcome the Commission’s proposal to amend the deposit guarantee schemes directive, which will now be considered by the Council. We have also recommended putting in place, as a regulatory measure, agreements between the EEA states to require home state deposit guarantee schemes to act as a single point of contact for depositors in those states. We believe that will bring simplicity to the system.

I want to be clear about the general issue of compensation when it comes to the Icelandic banks. The Government, not the FSCS, will pay for extra cover over the FSCS limit if there is a shortfall. However, payment will be through the FSCS for the sake of simplicity as the aim is to get money quickly to customers. The Government guarantee is quite separate from the FSCS and is not a permanent measure.

Mark Hoban (Conservative, Fareham)

The FSCS will pay up to £50,000, but my understanding is that it will recover from the Icelandic authorities the first £16,000. Will the Minister clarify what will happen if it is unable to do so? Will levy payers meet that cost or will it be the Treasury?

Ian Pearson (Labour, Dudley South)

I shall come to that point in a moment. First, I shall talk about the £50,000 limit that hon. Members have mentioned and the concept of moral hazard, which is clearly important. The situation with the Icelandic banks was exceptional. It was right for the Government to say that all retail deposits would be guaranteed. We did that to be quite clear. We wanted to ensure that there was confidence in the banking system. We do not see it as a permanent measure for the future. The Government will not for all time guarantee all retail deposits. In the circumstances, we think that was the right course of action.

I also want to clarify the position with respect to deposits in the Isle of Man. The hon. Member for Wellingborough is right in his belief that they are not covered by the FSCS. As he is aware, offshore jurisdictions aggressively market themselves as being outside the UK regulation and tax regime. They clearly are outside UK regulation and thus outside UK compensation.

Peter Bone (Conservative, Wellingborough)

If we were talking about normal times as they have been for the past 100 years and a bank had failed, the Minister would have been happy for the £50,000 limit to come in because it would not have affected the rest of the system. However, the circumstances are exceptional, which is why the Icelandic banks were protected. If that is the case for the Icelandic banks, why does it not apply to investors through the Channel Islands and the Isle of Man, who could be British citizens?

Ian Pearson (Labour, Dudley South)

The investors might be British citizens, but they chose to make investments outside the United Kingdom regulation and tax regime. That was a matter for them. I want to be clear that the Government have taken strong, decisive action with the Icelandic authorities. We have been in regular discussions with them. There have been conversations at Prime Minister and Chancellor level, and we will do everything that we can to support non-retail depositors as well as retail depositors in respect of creditors in administrations in Iceland. Obviously, the administrations taking place in the United Kingdom, where subsidiaries of Icelandic banks have been under the regulation of the Financial Services Authority, are in a different position, and we hope to see speedy progress with the administration process.

Colin Breed (Liberal Democrat, South East Cornwall)

We have not reached such matters yet, but while the Minister is on the Icelandic situation, will he say whether he expects Icelandic banks to be part of the pre-funded scheme in future circumstances? In other words, in future, will we be looking at Icelandic banks, if they wanted to receive deposits from the UK, being part of the pre-funded scheme by obtaining money from them in advance?

Ian Pearson (Labour, Dudley South)

When we reach the debate on pre-funding, I shall reiterate our commitments that we do not regard pre-funding as something that would happen immediately. We would discuss it with the Bank of England and the Financial Services Authority at the appropriate time. Foreign banks with subsidiaries in the United Kingdom that are regulated by the Financial Services Authority would be part of the Financial Services Compensation Scheme, but foreign banks with branches—the case with two of the Icelandic banks—are regulated by the Icelandic authorities and are not part of the FSCS.

Mark Todd (Labour, South Derbyshire)

Does that not reinforce my earlier point that customers do not examine carefully the regulatory environment in which they are committing themselves with their deposit? I do, but I am not typical. If a bank sets up a branch in the UK and is regulated outside our shores, there should be a clear obligation to UK depositors to inform them of the limits of their protection and under what governance that protection will operate.

Ian Pearson (Labour, Dudley South)

My hon. Friend makes a good point. A branch of a bank that is outside the UK should make clear the basis on which it is regulated, and the guarantees that are available. As for whether the Financial Services Compensation Scheme would meet a shortfall from the Icelandic scheme, that is not the case. A shortfall would not fall on the FSCS. It would be paid for by the Treasury, but we do not know whether there will be a shortfall because it is still part of the administration process.

I repeat that local authorities are in a different class to retail depositors when it comes to compensation. I discussed the situation with the Local Government Association, and we have been monitoring closely the potential impact on local councils. The Department for Communities and Local Government is actively supporting and working with local authorities that may have some short-term difficulties. But there are few of those. To repeat the commitment, the Government will continue to put pressure on the Icelandic authorities to make sure that local authorities and other wholesale creditors are treated fairly during the administrations that are taking place in Iceland.

Sally Keeble (Labour, Northampton North)

I understand that all these investments were given good ratings by the credit ratings agencies. I know that my hon. Friend’s colleagues were looking at increasing regulation on them. How is that going?

Ian Pearson (Labour, Dudley South)

I am not sure that I would use the same terminology to describe the ratings given to Icelandic banks. I do not believe there is any evidence of negligence by local authorities in the way they have used their public funds. The vast majority of them have been quite responsible in what they have had to do. However, my hon. Friend raises a point about the regulation of credit agencies and we shall want to consider that in future.

Colin Breed (Liberal Democrat, South East Cornwall)

The Minister is right to say that there is a world of difference between ordinary depositors and local authorities, bearing in mind the fact that they employ well-paid treasurers with significant qualifications, experience and everything else. It is just another reflection of the fact that everyone is passing the buck—thinking that as long as a bank has a triple A with a credit ratings agency, they do not have to do their job. Quite frankly, one does not have to employ a very senior treasurer to look at a list to see whether an institution has three As. I could probably do that myself in my spare time. We would not expect local authority treasurers to base the whole of their judgment upon something like that. I accept that they have acted responsibly in everything else, but we shall have to go back to that point.

This is rather “group think”, unfortunately—because everyone else is doing it, it must be perfectly okay. It is like lending to Mr. Maxwell a few years ago. Reference was made on a number of occasions by the LGA and some individual authorities to the fact that they were “following the Government’s advice”. I can find no advice or website where the Government said that it was perfectly okay to invest local authority money in that way. Will the Minister confirm whether there was any such advice?

Ian Pearson (Labour, Dudley South)

We are straying a long way away from new clauses 1 and 2 and clause 155. The Government certainly were not advising local authorities to put their money in Icelandic banks. The hon. Gentleman will have seen the guidance that is issued by the Department for Communities and Local Government.

Mark Hoban (Conservative, Fareham)

Will the Minister give way on that point?

Ian Pearson (Labour, Dudley South)

It is not part of the Bill.

Roger Gale (Conservative, North Thanet)

Order. If it was out of order, I would have pointed that out. It refers to compensation and it is in order.

Ian Pearson (Labour, Dudley South)

I stand corrected, so I give way.

Mark Hoban (Conservative, Fareham)

Just to be helpful to the Minister for a change, I have a copy of the guidance here. It is in a very helpful Library note, which refers to the DCLG website, and says:

“The guidance recommends that priority should be given to security and liquidity. However, that does not mean that authorities should ignore yield. It will be appropriate to seek the highest rate of return consistent with the proper levels of security and liquidity.”

Colin Breed (Liberal Democrat, South East Cornwall)

That is what we pay treasurers for.

Mark Hoban (Conservative, Fareham)

I thought it would help the Committee to understand what guidance has been given. The other point that may help the Minister is that the Isle of Man scheme protects depositors up to £50,000. I am not sure that the same level of protection applies to Channel Island authorities.

Ian Pearson (Labour, Dudley South)

I thank the hon. Gentleman for reading out the guidelines. There are separate jurisdictions for regulation purposes and they have separate compensation schemes. When people are making investments they need to be aware of that and it should be made clear to them, as part of the normal process.

Rob Flello (Labour, Stoke-on-Trent South)

Sadly, most of my constituents will not have more than £50,000 in savings, but there will undoubtedly be some who do. At some point, charities and organisations will have such amounts in their accounts, as will businesses. Given that most of my constituents will not have access to treasurers and will rely on credit agencies, when the trauma in the markets and financial world has ended and things have settled down, what sort of support and assistance can be offered to constituents who have more than £50,000? Although I support the Government in their proposals to do everything that they can now, I am concerned about the future.

Ian Pearson (Labour, Dudley South)

I reassure my hon. Friend that few of his constituents will be in that situation. According to our figures, 98 per cent. of accounts in banks and 97 per cent. in building societies have deposits of less than £50,000. If any individuals in his constituency have amounts that are significantly in excess of that, I am sure that they will be talking to individual financial advisers who will direct them on such matters.

Mr. Flellorose—

Ian Pearson (Labour, Dudley South)

I want to make progress as we are due to finish at 10.25 am and I am answering questions at 10.30 am.

The authorities remain committed to a seven-day target for providing depositors with access to at least part of their funds, with the remaining balance following within a few days. The importance of ensuring that fast payout has been raised in Committee. The Government accept that and we are doing all that we can to ensure that it happens. It is a challenging target, especially if the FSCS has to pay depositors individually or if accounts must be opened individually with new banks.

The hon. Member for Fareham, and others, raised a number of important issues in respect of close family members, distinguishing small businesses from larger ones, brands and netting off. The FSA has made it clear that it wants to tackle those points as part of the consultation process that is taking place at the moment. We do not believe that we need to put such matters in the Bill, as it is more appropriate for the FSA to deal with them through its rules. Any changes can be introduced as amendments to the FSA’s rules.

Mark Hoban (Conservative, Fareham)

We shall have time later on for the Minister to continue his speech. Does he not have a view on these issues? Yes, it is for the compensation scheme and the FSA to come up with the rules, but surely the Government have a view—they will end up picking up the pieces if the scheme rules are wrong.

Ian Pearson (Labour, Dudley South)

When a consultation takes place, it is right for us to listen to what the consultees say before we come to a conclusion. The FSA will come up with a view on these matters. Obviously, the Government will have their own view, but it is right and proper to listen to what people say. This is a matter for the FSA under the powers provided in FSMA—the Financial Services and Markets Act 2000.

The hon. Member for Fareham also raised the issue of gross payment. Obviously, that can facilitate faster payout and help ensure that depositors with large mortgages always have access to cash. However, it may require some amendments to the insolvency rules for the bank insolvency procedure, to ensure a fair result for customers, other bank creditors and the FSCS. We will be considering that.

The hon. Gentleman was also concerned about consumers being left in the dark about the Financial Services Compensation Scheme. I want to be clear that the FSA and the FSCS are conscious of the importance of consumer awareness. As part of that, the FSA is considering whether to back up industry initiatives with further rule changes in the future.

Roger Gale (Conservative, North Thanet)

I remind the Committee that with this we are taking New clause 1—Objectives of the compensation scheme for depositors—

‘(1) This section sets out the objectives for the compensation scheme for depositors.

(2) Objective 1 is to maintain customers’ confidence in the UK banking system regardless of whether the bank is incorporated in the UK or another EEA country.

(3) Objective 2 is to be able to make payments to depositors within seven days and to have eligibility criteria, qualification processes and information requirements which facilitate that.

(4) Objective 3 is to ensure that there are compensation arrangements for each bank brand.

(5) Objective 4 is to require that the scheme pays customers their gross balance and that any amounts due from customers are collected in the usual way.’.

New clause 2—Compensation payable to depositors—

‘(1) Each depositor will be entitled to receive from the manager of the scheme referred to in section [Objectives of the compensation scheme for depositors] a sum which is the lower of—

(a) the deposit protection amount; and

(b) the gross balance held by the person.

(2) The “deposit protection amount” is £50,000.

(3) The Treasury may by order amend the figure in subsection (2).

(4) An order under this section may not be made unless a draft statutory instrument containing such an order has been laid before, and approved by a resolution of, each House of Parliament.’.

Ian Pearson (Labour, Dudley South)

In addition to the points that I covered this morning, I want to emphasise that the Financial Services and Markets Act 2000 already provides a flexible and wide-ranging framework for the compensation scheme. Most of the improvements to the United Kingdom’s arrangements for depositor protection—a goal to which the Government and other authorities are strongly committed—can be delivered within that framework, including the matters in objectives 3 and 4 of new clause 1, and the change in the limit in new clause 2.

Part 4 of the Bill therefore covers only the matters that cannot be dealt with under existing FSMA provisions, and the changes in this part should be considered alongside other changes being made to the legal framework of the Financial Services Compensation Scheme. The Financial Services Authority, as I said, is consulting on changes that may be made under FSMA powers, including, in the latest consultation paper on the review of limits, the compensation limits for other sorts of investment, payment of compensation by brand, dealing with temporary high balances, and changes to the way in which recoveries from a failed firm are calculated. The FSA is also considering the eligibility criteria for claimants under the scheme, information requirements for firms, and consumer awareness. So there is plenty going on at a detailed level to improve the arrangements for depositor protection in the UK. In our view, it would neither sensible nor desirable to cherry-pick some items and put them in the Bill as objectives or requirements.

Part 4 makes changes to the overall compensation framework that only primary legislation can do. If at a later time the hon. Member for Fareham wants to press new clauses 1 and 2—I do not think he will, because I think he was genuinely trying to promote a worthwhile debate—I would ask the Committee to reject them.

Mark Hoban (Conservative, Fareham)

Let me summarise where we are. Members of the Committee have expressed views about various aspects of the Financial Services Compensation Scheme, with the one exception of the Minister, who has spoken about the generality of the scheme, but has not expressed a view on the Government’s approach. Before the lunch break, he said that the FSA was consulting—which it is, and the various stakeholders will respond to that consultation—but I question where the Government’s intervention or input will come in the process. It is right and refreshing to hear a Minister say that we had better await the outcome of a consultation process—I had not realised that it always worked like that—but at what point will the Government say that the scheme is right, or that there is an issue? Taxpayers have ended up being the back-up in the scheme. We have talked about consultation on limits and, of course, the decision has been made about the limit, which is now £50,000, but the Government decided in connection with Northern Rock and the Icelandic bank accounts that there was no limit.

The Government will always be in a fall-back position if the scheme does not work effectively, to step in and intervene. It would be helpful to the Committee to understand how the Government will comment on the emerging consensus that will result from the FSA’s consultation to ensure that taxpayers’ future liabilities are limited.

I want to pick up a couple of comments made by other hon. Members. The hon. Member for South-East Cornwall, who speaks from practical experience of the banking sector, raised a broader issue that is not covered by the new clause—whether the current scheme is still fit for purpose. It was designed for normal activities, such as the collapse of the odd credit union or an insurance company such as Independent Insurance, and I am not sure whether anyone had thought through the consequences for the scheme of a major bank becoming insolvent, and how those costs should be borne. We can perhaps touch on that in later sittings.

There was a broader issue about how the compensation scheme should be revisited. We never got to the bottom of the comment that my hon. Friend the Member for Wellingborough made about the current limit—about whether there is a de facto unlimited amount, or whether there is a £50,000 limit. My impression is that the Minister feels that we should wait and see, depending on the circumstances. That may be prudent, but it does not give constituents clarity as to how they should manage their affairs.

We will not come to the formal moving of new clauses until later, as you have indicated, Mr. Gale. This was a probing debate and we have covered a fair amount of territory, so I will not move the two new clauses, at the appropriate time.

Roger Gale (Conservative, North Thanet)

I am not certain that I heard that correctly. Was that, “will” or “won’t”?

Mark Hoban (Conservative, Fareham)

I will not.

Clause 156

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 34, in clause 156, page 81, line 4, after ‘the’, insert ‘Authority to make rules enabling the’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss amendment

No. 35, in clause 156, page 81, leave out lines 7 to 9 and insert—

‘(2) Rules made by the Authority may make provision about the establishment and management of contingency funds provided that such rules are limited to the deposit protection element of the compensation scheme; in particular, the rules may make provision about—’.

Mark Hoban (Conservative, Fareham)

We now move on to one of the less consensual issues in the Bill—contingency funding. We will come on to other amendments, and hopefully a clause stand part debate, to discuss some of the principles behind the issue.

Roger Gale (Conservative, North Thanet)

Order. Those of you who have not experienced my chairmanship should know that I have an absolute golden rule. I am particularly aware that complex issues can arise from a clause and I am perfectly prepared to have a broad debate on tabled amendments at the start of the clause. What I am not prepared to do is allow such debate twice. Therefore, if hon. Members choose to discuss certain issues early on to make the tabled amendments make more sense, that is fine by me, but they should not then expect a stand part debate.

Mark Hoban (Conservative, Fareham)

As a veteran of your chairmanship, Mr. Gale, I know exactly where the limits are drawn on those matters, and I will seek to confine my remarks on the amendments precisely to how the regulations are made.

As the Minister alluded to earlier, the broad framework for the FSCS is set out in the 2000 Act. In that Act, the FSA has responsibility for drawing up the detailed regulations. Section 213 clearly states:

“The Authority must by rules establish a scheme for compensating persons in cases where relevant persons are unable, or are likely to be unable, to satisfy claims against them.”

The responsibility to draw up the detailed rules therefore rests with the authority. Clause 156 of the Bill states that the Treasury will make regulations, not that the authority will make rules. Amendment No. 34 and the first part of amendment No. 35—I will not address the second part now as it pertains more to the next group of amendments—are designed to reassert the role of the FSA in making those detailed rules. Once the principle of contingent funding has been introduced by the Bill, and once the provision for that funding has been triggered, it is down to the FSA to make the rules and not to the Treasury to set out detailed regulations about how that funding may work in practice. This is therefore a straightforward pair of amendments.

Ian Pearson (Labour, Dudley South)

The overall effect of the proposed amendments would be to divide responsibility for the introduction of pre-funding between the Treasury and the FSA. The Treasury, after obtaining parliamentary approval through the affirmative resolution procedure, would give the green light to the FSA to make rules to cover the matters set out in subsection (2) of proposed new section 214A.

It is not clear from the amendment whether the Treasury, with parliamentary approval, could set any high-level parameters in those areas. If the amendment were agreed by the Committee, we would need to do further work to clarify that point. However, I am not persuaded that a two-stage process for bringing in pre-funding is either necessary or desirable. The reality is that the Government would never seek to introduce pre-funding without consultation, including extensive consultation with the FSA, the Bank of England and the FSCS. Self-evidently, the Treasury would want to have a pretty good idea of what the FSA might plan to do in its rules before it sought parliamentary approval to give the FSA the green light. At the same time, it could not say to Parliament, “These are the rules that the FSA will make,” because FSA rules are a matter for the FSA.

It seems much better, therefore, that the Treasury should ask Parliament to approve all the key elements of any pre-funding package. In particular, we thought it right that Parliament should have the final say, through the affirmative resolution procedure, in a decision to allow levies to be imposed. Under the current pay-as-you-go system, the levies follow costs incurred by the FSCS or anticipate costs that the FSCS might incur in the near future. With pre-funding, levies may be imposed long before the FSCS incurs any costs, and costs will never be incurred if no default occurs.

Our approach is the right one, with the Treasury asking Parliament to approve all the key elements of any pre-funding package and with the affirmative resolution procedure, for which the hon. Member for Fareham has expressed a strong preference in previous debates. I ask the Committee to reject the amendments if they are pressed to a vote.

Mark Hoban (Conservative, Fareham)

I am slightly perplexed by the Minister’s response. In the previous stand part debate, the Minister was happy to leave all the detail to the FSA to sort out: “It’s not up to us, guv. We’ll let the FSA decide all these important issues.” Yet, in this scheme—the contingency funding clause—the Minister has taken an alternative view: “We’re going to do this, not the FSA.”

The Minister has not explained to the outside world why this approach is right for contingency funding, but the other approach is right for reform of the FSCS in the light of recent experience. I find that disappointing—there is a difference of approach. The Government clearly want to have the right to trigger contingency funding—for which the affirmative resolution procedure is right—but I do not understand why they have gone further than that, saying that they will set out the main principles of the legislation. It is not clear why there is a divergence of practice between the different parts of the scheme. It leaves external stakeholders confused about the Government’s approach. Does the Minister wish to clarify? I do not get the sense that he does, although I am happy to give way if he wants me to.

Ian Pearson (Labour, Dudley South)

I do not accept that we are being inconsistent. If we introduce this, we need to be clear about the principles underpinning the FSA’s action, but it is up to the FSA to make its own rules. That is the process we have. A lot of the detail is rightly a matter for the FSA, but it is right and sensible that Parliament should agree the key principles. That is what we allow for in our approach. Amendments Nos. 34 and 35 would impose an unnecessary two-stage process, when we were going to work closely with the FSA on the issue.

Mark Hoban (Conservative, Fareham)

I am not persuaded by the Minister on that point, because I think that there is a difference of approach between this and the previous group of amendments. I do not intend to press the amendment to a vote, but we might return to the matter on Report if the Government do not offer more clarity. I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 2, in clause 156, page 81, line 6, after ‘expenses’, insert

‘relating to the powers exercisable under sections 10 to 12 and Parts 2 and 3 of the Banking Act 2008’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following amendments: No. 1, in clause 156, page 81, line 12, leave out from first ‘the’ to end of line 13 and insert

‘contributions payable by banks and building societies’.

No. 3, in clause 156, page 81, line 16, leave out ‘classes of person’ and insert ‘banks and building societies’.

No. 8, in clause 156, page 81, line 23, after ‘compensation’, insert ‘for depositors’.

No. 5, in clause 156, page 81, line 27, at end insert—

‘(2A) In making any provision by virtue of subsection (2)(c) the Treasury must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised person reflects, so far as practicable, the amounts of claims made, in respect of that class of person.’.

No. 6, in clause 156, page 81, line 27, at end insert—

‘(2A) The amount of payments into the funds by virtue of subsection (2)(d) may vary between persons in each class.’.

No. 4, in clause 159, page 83, line 37, leave out ‘classes of person’ and insert ‘banks and building societies’.

No. 7, in clause 159, page 83, line 38, at end insert—

‘(4A) In making any provision by virtue of subsection (4)(c) the Treasury must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised person reflects, so far as practicable, the amount of claims made, in respect of that class of person.’.

Mark Hoban (Conservative, Fareham)

It is clear from the proposed new section of the 2000 Act that the Government have set out contingency funding arrangements with a very broad scope. There is nothing in the proposed new section to indicate the limits on contingency funding. The amendments in this group try to tease out what the Government are trying to achieve through the proposed new section.

There are four strands running through my thoughts on these matters. Amendments Nos. 2 and 8 would restrict the scope of the Bill so that it only applied to deposit-taking institutions. Amendments Nos. 1, 3 and 4 suggest that only banks or building societies foot the Bill for the contingency funding scheme. Amendments Nos. 5 and 7 look at how the FSCS will raise its levy if there is a wider scheme. Amendment No. 6 raises the issue of risk weighting in relation to the contributions made to the contingency funding scheme.

Amendment No. 2 would require that the expenses discussed relate more narrowly

“to the powers exercisable under sections 10 to 12”,

which relate to the special resolution regime,

“and Parts 2 and 3 of the Banking Act 2008”,

which relate to bank insolvency and bank administration. The scope of the funding would be limited strictly to the exercise of the powers set out in the Bill. The amendment suggests that it would be inappropriate to use the contingency funding to set up a pre-pay fund for other parts of the financial services sector.

Although our discussions have been focused primarily on banks and building societies, the FSCS covers other aspects of the financial services sector such as insurance, insurance brokers, fund managers and independent financial advisers. It is a broad scheme, and we have been focusing on a subsection of customers within it. However, the breadth of the clause means that it would be possible for the Government to set up a pre-funding scheme that covered all of those sectors and not only banking.

There is a debate to be had on the extent to which the financial services sector as a whole should contribute to solving the problems faced by a subset of it. There is interdependence between the various subsets, so an element of contribution should be required from those subsets when losses are particularly high. That is the principle on which the FSCS is currently based. For example, if the cost of rectifying Bradford & Bingley were to exceed the amount set aside for banks to pay, that extra cost could be borne by independent financial advisers, insurance companies and investment managers. The principle of the scheme is currently based on such an idea, but we are talking about a pre-funding scheme that could possibly involve contributions from other parties. By limiting pre-funding to the powers under the Bill, it would remove the risk of setting up a scheme that covers a much wider range of issues within the financial services sector.

Amendment No. 8 approaches matters in a slightly different way by restricting compensation to depositors. It applies to proposed subsection 214A(2)(g) of the 2000 Act under clause 156 of the Bill, and would exclude a fund being set up to pay for the compensation of people who hold insurance policies, who have taken up investments for a fund manager and who have been given advice by an independent financial adviser. It is a different way to limit the scope or the extent of the pre-funded scheme.

Amendments Nos. 1, 3 and 4 take a different approach to who contributes to the pre-funding scheme. They would replace the Government’s broad wording of “classes of person” with “banks and building societies” to make it clear that only those entities will pay towards the pre-funding scheme. In effect, we say that the only people who should be responsible for making payments to depositors are the deposit-taking institutions and no other organisation.

Amendments Nos. 5, 6 and 7 reflect the wording under the 2000 Act and work on the basis that it is the Government’s intention to set up a pre-funded scheme for the whole of the FSCS and to cover investment managers, IFAs and so on, so the contribution to the pre-funded scheme should reflect the likely level of losses that will flow from the particular classes of authorised persons.

Mark Todd (Labour, South Derbyshire)

I am sympathetic to some of the hon. Gentleman’s arguments, as I would be to the suggestion of a risk-based principle of applying a contribution. Has he considered the methodology to be applied that would produce the sums involved?

Mark Hoban (Conservative, Fareham)

When I comment on amendment No. 6, I shall come on to risk-based premiums. That is an important issue and it is a principle that underpins the US Federal Deposit Insurance Contribution scheme whereby there is a risk-based contribution. I shall return to that in a minute.

I want to establish what types of institution will be covered by a pre-funded scheme other than banks. If other institutions will be so covered, it is important that their contribution reflects the likely level of losses that they could face in the future. A worry about cross-subsidy has emerged from our debate. We heard from the Association of British Insurers about that this week. It is worried that the present approach requires all the sectors of financial services to contribute to the cost, and that would involve a cross-subsidy that imposes an unfair burden on the insurance industry.

The ABI highlighted the case of Bradford & Bingley when insurers, as investors, made a contribution the first time round to solving the problems. That did not work, and they now have to pay potentially through the cross-subsidy route. In the debate about who would fund a pre-funded scheme, there are clearly trade bodies that consider that the onus should fall on the sector that is directly affected rather than going through the pre-funded route.

I had a conversation with the Association of Independent Financial Advisers, which recognises that there are cases when transactions have been intermediated. Obviously, the association understands the matter from its perspective—it might have put an insurance policy with a company or advised on some investment arrangement. It is therefore appropriate for there to be some form of subsidisation within a narrow part of the financial services sector, but not to the breadth that the clause, as drafted, could lead to.

Another aspect is that banks and insurers—they are well capitalised businesses in terms of banks and they will be better capitalised when the money goes in—should be seen to have the resources to contribute to a pre-funded scheme. Intermediaries are not as well capitalised and might well find it expensive and difficult to do so. They potentially might not be able to afford to contribute to a pre-funded scheme, particularly one to subsidise the entire sector, rather than just a narrow part of it.

There are some important issues in relation to who we are expecting to contribute to a pre-funded scheme. In making a contribution will they be expected to support—or cross-subsidise—other parts of the financial services sector? At the moment, the clause permits that. It would be helpful if the Minister could outline the Government’s thinking about where the parameters of the scheme are in terms of both coverage and contributions.

The hon. Member for South Derbyshire raised the issue of risk. Amendment No. 6 is a peg on which I want to hang that discussion because it makes provision for contributions to vary from person to person in a particular class. The US system—the FDIC—works on a risk-based approach. Any Member who wishes to look at the FDIC website can see that the calculation of the premium that someone should pay into the fund is based on various tests, such as the amount of non-performing loans. The proportion of non-performing loans is a factor that drives the calculation of the levy, and whether a business is well capitalised also drives the levy. The better capitalised the business is, the lower the risk of its business and the lower its contribution to the FDIC. There is clear weighting when to comes to risk. The clause does not set out whether the Government expect there to be a risk-weighted contribution. Of course, if there is a risk-weighted contribution, it is like an insurance policy in a way. We are saying that bank A has a particular set of risks and consequently should pay an amount related to its risk.

Mark Todd (Labour, South Derbyshire)

Essentially, that also reinforces the moral hazard principle, which is that if people contribute collectively to a particular resource, one does not want to effectively incentivise higher-risk behaviour by letting the individuals concerned know that they will not necessarily have to bear the full consequences of their action. Giving a clear trigger that says, “If you choose a model that has those particular features, you will bear a greater burden towards the compensation scheme,” reinforces the message about their behaviour.

Mark Hoban (Conservative, Fareham)

Absolutely. The measure sends a clear message and imposes an additional cost on them for following those businesses practices. It says to them, “If you follow a high-risk business strategy, you will have to pay more into the fund.” That will, essentially, potentially disincentivise businesses from following that strategy. If a business is not profitable, it will choose not to follow that route because the contributions it would have to make would exceed the profitability of the business. The measure forces businesses to think carefully about the business model they follow and its consequences for their levy. Banks that follow a prudent, cautious and conservative policy in their business development would not want their shareholders and investors to, in effect, bear the cost of the more reckless and imprudent policies that other banks might follow.

I hope I have not transgressed your rule so far, Mr. Gale. I have some reservations that I will come to much later, in the stand part debate. There are some other issues in relation to the principle of whether we should have a pre or post-funded scheme. With a pre-funded scheme there is clearly an issue with how risk is reflected in the contributions that people make.

It would be helpful for a Government who are minded to introduce a pre-funded scheme to set out what role they believe risk should play in determining the contributions to be made by members of the scheme.

To conclude my remarks on this group of proposals, four issues concern me. First, what is the scope of the scheme and what will it pay out for? Secondly, who will pay into the scheme? I have said clearly that we want the amendments to suggest that it should just be banks and building societies. Thirdly, if the scheme is broader, contributions will be made by other parts of the financial services sector and I suggest that those contributions should be in line with the likely level of future payouts. Fourthly, if a scheme such as this is set up, what role will risk play in determining the contributions?

People are interested in how the scheme will work in practice, but there is no consensus about the merits of the scheme. People want to know more detail about the Government’s thinking on this matter. The Minister’s comments will be very important in giving stakeholders an insight into the Government’s thoughts on this difficult area.

Ian Pearson (Labour, Dudley South)

The amendments would make a number of significant changes to clauses 156 and 159. Before turning to them in detail, I will set out the Government’s understanding of the intention of the clauses. The function of the FSCS is to pay compensation to eligible claimants if financial services firms are in default and are unable to meet the claims. Funds are needed to pay compensation. The FSCS normally obtains the funds by making levies on the financial services industry. If very large firms such as banks or building societies default, the FSCS will need much more money in a short time than it could realistically raise from the industry or borrow in the ordinary way from commercial sources.

Two solutions have been put forward for that problem: building up funds in advance or borrowing money from the Government that can be paid back using future levy payments. Clause 156 allows for the first of those and will set up contingency funds in advance of need through a process commonly called pre-funding. Just to set the record straight, the Government are clear that now is not the right time to introduce pre-funding. Clause 159 allows for the second solution with borrowing from the national loans fund. That is a technical change that allows the public sector to lend to the FSCS in the most efficient way. As the Committee knows, the public sector has already made loans to the FSCS to enable it to play its part in the transfer of deposits from Bradford & Bingley, Heritable and Kaupthing Singer & Friedlander.

Peter Bone (Conservative, Wellingborough)

The Minister says that there will be a cost for those organisations. Is it true that those costs will ultimately be charged to the banking system using the current system?

Ian Pearson (Labour, Dudley South)

Yes, our understanding is that the FSCS is the first port of call for compensation. I am happy to confirm that.

Mark Hoban (Conservative, Fareham)

My hon. Friend asked whether the banks will pick up the cost. Is not the reality that if the cost exceeds £1.84 billion, the excess cost will fall upon other levy payers to the FSCS?

Ian Pearson (Labour, Dudley South)

We have discussed that point already. Obviously, if the banks are regulated by the Icelandic authorities, the first part of the compensation will have recourse to those authorities. They have a guarantee of about £16,500. Secondly, the Financial Services Compensation Scheme goes up to £50,000, and thirdly, if required, recourse would be to the Treasury. I hope that that is helpful.

Peter Bone (Conservative, Wellingborough)

I apologise to the Minister; I did not make myself clear. The question was not about top-up money above £50,000 or the money that Iceland will provide but rather about the money in between. Will that cost fall entirely on the banks and building societies, or over the wider financial community?

Ian Pearson (Labour, Dudley South)

It falls to the Financial Services Compensation Scheme.

Mark Hoban (Conservative, Fareham)

Will the Minister give way?

Ian Pearson (Labour, Dudley South)

I am sure that we can come back to that matter at a later stage—I would be happy to do so, but first I would like to look at the hon. Gentleman’s amendments.

Amendments Nos. 2 and 8 would restrict the uses that could be made of the contingency funds. Amendment No. 2 is the more restrictive. It would mean that contingency funds could only be used to meet the expenses arising from the Banking Bill, and not for the payment of compensation for other types of FSA-regulated activity covered under the compensation scheme. Amendment No. 8 would allow the funds to be used for the payment of compensation to depositors, but not in relation to any other kind of regulated activity. Amendment No. 1 is a consequential amendment following on from amendments Nos. 2 and 8. It means that only banks and building societies could pay levies to build up a contingency fund. That would be logical if pre-funding were restricted to deposit taking.

We feel that to restrict pre-funding to deposit taking in the Bill would be unnecessary and undesirable. The Government have made it clear that there is no intention to bring in pre-funding in the near future. Clearly, the timing would not be right now, and it would not be appropriate to speculate about when it might be right or on which funds the measure might be established. It is sensible to have flexibility—we do not know what challenges the future may bring. The Bill allows for different funds to be established for different purposes and for different persons to contribute to those funds.

Stewart Hosie (Scottish National Party, Dundee East)

Notwithstanding that the time for pre-funding is not now—there is general agreement about that; we should not bash balance sheets when they are already weak—I am looking for the opposition to this in principle. Why is it wrong to restrict pre-funding to deposit takers when the time is right?

Ian Pearson (Labour, Dudley South)

We have made it clear that if the Government considered the timing to be right, we would have discussions with the Bank of England and the FSA, and undoubtedly more widely. The powers that we seek in the Bill could potentially go further than deposit takers and banks and building societies. In the future, a scheme might allow different funds to be established with different legal entities. But pre-funding cannot be introduced without parliamentary approval and the affirmative resolution procedure. The Bill confers flexibility that can be exercised only if subject to full parliamentary scrutiny at that time.

Amendments Nos. 3 and 6 would ensure that when making regulations for pre-funding, the Treasury could specify how a levy was to be apportioned between different members of the same class of levy payer. That could make the introduction of risk-based levies by the Treasury possible—an issue that my hon. Friend the Member for South Derbyshire raised a few moments ago.

The Government consider that apportioning any levy between firms within the same class should be a matter for the FSA. The FSCS will have to raise levies under different powers as a result of the Bill, and those powers must be co-ordinated at a detailed level. The FSA is best placed to do that.

The FSA already has the power to decide the rules that govern the apportionment of levies between levy payers of the same class under the existing FSMA provisions, so it could already bring in risk-based levies if it was considered appropriate to do so.

Amendment No. 4 would limit to banks and building societies the classes of person who may be required to contribute to levies to repay borrowing from the national loans fund. In our view the amendment is unnecessary, as it would be possible to set out in the regulations which classes of person will be required to contribute to the repayment of borrowing. Perhaps more importantly, any type of financial services firm could default and if the costs of the default were large enough, it might be appropriate for the FSCS to borrow from the national loans fund, to obtain the liquidity it would need to pay compensation. If the firm concerned was not a deposit taker, it would not be appropriate for levies to be imposed only on a deposit-taker class of firm for the purpose of repaying the loans.

Amendments Nos. 5 and 7 would impose an unnecessary restriction on the making of regulations regarding the levies to build up contingency funds, or to finance the repayment of borrowing from the national loans fund. Clearly, any type of firm could default, and in principle, therefore, any class of levy payer should have to contribute to the costs of repaying of borrowing. As I have just explained, it will be possible to have different contingency funds for different purposes, and for different classes of persons to be required to contribute to different funds.

The hon. Member for Fareham raised the issue of the general retail fund and the possible introduction of pre-funding, and the mechanisms through which levy payers in one class may be required to contribute to the compensation costs of other classes. Those are separate issues, but I agree that if pre-funding were introduced, consideration would have to be given to the interaction of pools covering different types of business. I want to emphasise that this will be part of any consultation about the introduction of pre-funding. The two arrangements—pre-funding and the general retail pool—are not incompatible. Pre-funding is a way of providing the resources needed to meet the costs that fall on one class of levy payers, such as banks and building societies. A contingency fund could be used to meet compensation costs that a class of levy payer has to bear, whether those costs originated in that sector or elsewhere. Equally, the existence of a fund could reduce the extent to which levy demands spill over on to other sectors.

If regulations for pre-funding or NLF borrowing were made, we would ensure that the appropriate class of levy payer had to be the primary contributor towards the levy concerned. I entirely agree with the general principle that each sector should consume its own smoke, but this is yet another point where flexibility is important, and in the Government’s view it would be better not to tie our hands too much for possible future circumstances that we cannot anticipate at this stage.

I hope that that will give the Committee the assurance it needs on this issue. It is worth remembering that any regulations the Treasury makes will be subject to parliamentary scrutiny, through either the affirmative or the negative procedure. I am confident that any unsatisfactory allocation of levies would be speedily challenged.

Peter Bone (Conservative, Wellingborough)

I understand why the Government want flexibility, but the affirmative and negative procedures only allow the regulations to be accepted or rejected; they do not allow them to be amended in any way.

Ian Pearson (Labour, Dudley South)

We made clear our intention that when it comes to pre-funding, we would want to consult widely before drawing up secondary legislation, not just by consulting the FSA and the Bank of England, but by undertaking a more formal consultation exercise. The issues and concerns would be raised during that process. As I said, I think that the general principle that each sector should consume its own smoke but that we must allow flexibility because we do not know what the future might bring, is the right one. I hope that I have convinced the Committee of that case.

Peter Viggers (Conservative, Gosport)

I was listening to the Minister’s speech to hear whether he would explain, if there are to be differential rates of levy, how people will perceive an institution that is subject to them. Will those rates be ascertainable through a central register, or will the individual institutions be obliged to bring them to the attention of their customers, to allow them to take account of the risk that the differential rate implies? I have not heard that point made and I should be grateful to be reassured and have an an explanation.

Ian Pearson (Labour, Dudley South)

As I argued earlier, the FSA already has the powers, if it considers it appropriate, to introduce differential rates. It is a matter for the FSA, which in its normal way would want to consult parties if it were to take any future action, and I do not think it appropriate for us to accept the amendment.

Mark Hoban (Conservative, Fareham)

Frankly, I was not at all impressed by the Minister’s response to this debate. I quite like the Minister and last week we had a good debate about another Bill, and he provided some good responses to points made during that scrutiny process.

The Government have included in the Bill a wide-ranging power to set up a contingency fund. The debate up to today has focused on whether that should apply to the banking sector. I was hoping that we would hear from the Minister a clear statement that that was the extent of the fund. That is why I tabled these probing amendments. It now becomes clear that the Government are taking powers that will enable the FSCS to introduce pre-funding to cover not just bank depositors but any aspect of regulated financial services activity, and that any regulated financial services company can contribute to the fund in whatever way it believes to be right at the time. Amendments Nos. 5 and 7 reflect the wording in the Financial Services and Markets Act 2000. The current scheme works according to that wording—it is nothing new. It seems odd to have an approach to levies that relates to an existing pay-as-you-go scheme when there may be a different form of levy for contingency funding, and when the Government will want flexibility with regard to contributions relating to the likely risk of future claims in that sector.

Cross-subsidy is a big issue in this debate. That is why I pressed the Minister when he began his remarks about the current problems that face us. The reality is that if the claims on the FSCS in respect of the banking sector exceed £1.4 billion, that cost will be borne by other financial service companies.

Ian Pearson (Labour, Dudley South)

£1.8 billion.

Mark Hoban (Conservative, Fareham)

£1.8 billion. I have spoken to various people in the financial services sector—banks and non-banks—who are concerned that that might happen. The FSCS is paying interest on the amount of money linked to the transfer of Bradford & Bingley accounts to Banco Santander. It is picking up the gap between the £16,000 and £50,000 limit in relation to the Icelandic banks. There is genuine concern in the sector that IFAs, insurance brokers, insurers and fund managers will have to pick up the excess if those costs exceed £1.8 billion. I wonder why the Minister did not accept that point when I intervened. It worries me that the Government are not on top of the cross-subsidy issue, which is at the heart of a series of amendments in this group.

Mark Todd (Labour, South Derbyshire)

There are two forms of cross-subsidy that we could be concerned about. One is between wholly different activities within the financial services sector, and I understand the hon. Gentleman’s argument on that. The second is between different business models within the same class of activity, which is another potential difficulty. I was not entirely clear from the definition in the Bill whether there is the opportunity to distinguish within classes of activity. The Bill allows a distinction between classes of activity, which presumably would refer to banks, building societies, IFAs and insurance companies, but not on the basis that a particular activity carries inherently higher risk and therefore should be distinguished in a different way.

Mark Hoban (Conservative, Fareham)

In a sense, that is partly addressed by whether a risk premium is attached. Again, the Minister will say that that is a matter for the FSA and that there will be a consultation, which I did not think was a robust answer because the issue is important.

I will come on to the stand part debate on clause 156, which concerns the impact that pre-funding could have on building societies compared to banks—a point that Adrian Coles made to us on Tuesday. A pre-funded scheme gives rise to many issues which have not been properly addressed.

Ian Pearson (Labour, Dudley South)

I have made it clear to the hon. Gentleman that the pre-funding issue and the powers that we seek potentially go beyond banks and building societies. His amendments seek, principally, to limit the provisions to that, which is why we are inviting the Committee to reject them. However, I confirm that we accept the general principle that institutions should consume their own smoke.

On cross-subsidy, it is in the general interests of financial stability, which all financial services firms benefit from, that they should contribute and provide to a scheme. It is therefore right that the generality of financial services schemes should contribute where costs to deposit takers are likely to be above £1.8 billion per annum.

Mark Hoban (Conservative, Fareham)

I do not think that there has been a satisfactory explanation as to why the Government oppose our amendments. These powers give the Government wide discretion to set up a type of scheme that they feel is appropriate at the time, in a flexible way, but the Bill does not give safeguards to the financial services about how the powers would be used in practice. On that basis, I want to press amendment No. 5 to a vote because it tackles the point that the level of contribution to a pre-funded scheme should reflect the likely level of contribution that will be made.

That does not preclude an element of cross-subsidy, but reflects the basic principle on which contributions to the scheme are made, as set out by the 2000 Act. It reflects that wording clearly, and if the Government are to introduce a pre-funded scheme, people should be aware of the type of funding mechanism that will be used, rather than leaving it to be flexible.

I beg to ask leave to withdraw the amendment.

Roger Gale (Conservative, North Thanet)

We will come to amendment No. 5 at the appropriate point.

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 36, in clause 156, page 81, line 20, at end insert

‘and ensuring that no such investment shall cause there to be a prevention, restriction or distortion of competition in the relevant lending market;’.

The amendment deals with the way in which money that has accumulated in a pre-funded scheme should be invested. Concern has been expressed to me about the potential distortionary impact that a fund might have depending on how much has built up within it, and about its impact on the wider savings investment market. Will the Minister clarify how he thinks that the fund will be invested in the future? What comfort can he give that it will not be invested in a way that leads to distortion?

Ian Pearson (Labour, Dudley South)

The Government believe that the amendment is unnecessary. If pre-funding is introduced, our intention is that the contingency funds built up would be invested in the national loans fund, as is provided for in clause 158. Funds invested in the NLF will have been lent to the Government and will be used to minimise Government borrowing. At the end of each day, the Exchequer must borrow from, or place funds on deposit with, the money market depending on the net position after balancing outflows in order to finance expenditure again. Any funds from the Financial Services Compensation Scheme will represent an inflow and arrangements will be put in place to minimise the impact of the flows and ensure that there is no distortion of money markets.

The purpose of proposed new section 214A(2)(f) is to enable the regulations to specify some of the detailed requirements on NLF investors. Proposed new section 223A(2) in clause 158 allows the Treasury to agree terms and conditions with the FSCS from the borrower’s point of view. The FSCS is an independent body so will have to contract with the Treasury, like any other lenders to the Government. We need to be able to regulate both sides of the transaction and equally, of course, to keep both sides separate in our minds. There is no intention that new section 214A(2)(f) would be used to require the FSCS to take a different approach from that set out above to the investment of contingency funds, but of course were that to be proposed in the future, parliamentary approval would be required under the affirmative resolution procedure. We could then build in safeguards to meet concerns about distortion at that stage. I hope that that clarifies the point for the hon. Gentleman.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for his response, which clarifies the matter put to me. On the basis of that reassurance, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

Even if I did not object on principle to pre-funding, I would still object to the clause because, in response to the previous group of amendments, the Minister did not give us sufficient reassurance about how it will be used in practice or about its scope. It is broadly drafted and gives the Government the flexibility to do pretty much what they want in a pre-funded scheme on the back of an affirmative resolution. That does not give security or confidence to the wider financial services sector.

Notwithstanding that fact, I have an objection of principle to a pre-funded scheme. There has been quite vigorous debate since last October about the merits of a pre-funded compensation scheme. There are arguments why one might be appropriate. One example is that it would not be pro-cyclical. If there was a large default by a bank now, banks would have to contribute through the levy, at a time when their capital was under pressure. Clearly that would exacerbate the current position. The argument is that under a pre-funded scheme a contingency fund would be available to absorb those losses rather than increasing the levy at a time when banks are in difficulty.

The Governor of the Bank of England, who is supportive of a pre-funded scheme, said that

“if you wait until there is a problem, that’s a pretty bad time to ask banks to put up a large amount of money”.

That is not an unreasonable comment. I accept that, which is why we support clause 159 in principle. It would enable the scheme to borrow from the national loans fund. However, on balance there are some stronger arguments against a pre-funded scheme. We believe that any assets held by the fund would be better deployed by the financial services sector as a whole—not just by the banking sector but by insurers, IFAs, investment managers and all the people who could be subject to a contingency fund. It would be better if they retained their own capital and determined how to deploy it rather than having possibly significant sums locked up in a pre-funded scheme.

The Government have not given a clear indication about the period over which a scheme would be built up. Would it be over two, three, 10, 15 or 20 years? How much would institutions have to contribute over what period of time? Clearly, the quicker the build-up of a fund, the greater pressure financial institutions would come under as a consequence of contributing to it. That is a concern.

In the United States there is a pre-funded scheme. We had a discussion earlier about the FDIC. There is a different banking model in the US, compared with the UK. Like the hon. Member for Sedgefield, I was in the States in the summer. I drove past the First National Bank of Collinsville, which had just one branch—in Collinsville. It was to be covered by the FDIC. I asked the Congressmen I was with whether they did not think it a risk having an account with such a bank. They replied that as long as they did not put in more than $1,000, they would be okay because they would be covered. That shows the fragmentation in the US banking market. There is a much greater expectation of banks failing, because they are smaller, less well capitalised and more prone to default.

There is another reason why we do not believe that pre-funding is necessary. The important thing in the event of a default is ready access to cash. We need ready access to cash for depositors, but the FSCS needs ready access to cash too. It has to have access to that liquidity, which is why the facility available under clause 159 is so important. It gives the FSCS access to liquidity. If we had a pre-funded scheme we would not know, when the balances were being built up, at what point there might be a bank insolvency and whether there would be enough money in the scheme. If there was not enough money in the scheme, we know that the FSCS could draw on liquidity from the national loans fund. There is no fundamental requirement that suggests to me that we must have a pre-funded scheme, as long as there is access to loans from the national loans fund.

One of the messages that came across in our discussions on Tuesday was the absolute necessity for ready access to cash, but that is different from the desirability or otherwise of a pre-funded scheme. Indeed, Nigel Jenkinson, the director of financial stability at the Bank of England, said that pre-funding was “not necessary, but desirable”. There is a very important distinction to be drawn.

Although there may be consensus among some people that a pre-funded scheme is desirable, there is certainly no such consensus in the banking sector. I have the impression that the Building Societies Association is not sold on the idea either—Adrian Coles, speaking in the evidence session on Tuesday, was very explicit about that. Let us not forget that the BSA scheme has not been a failure; it has always looked after its own and it has always swallowed its own smoke, to use the Minister’s phrase from earlier.

Adrian Coles said:

“There is a choice of whether to put it in the compensation scheme to protect depositors, or whether to keep it in the building society balance sheet. At the margin, if the money is taken out of the building society and put in the compensation scheme, depositors...are slightly less safe by the amount that the building society has given to the compensation scheme.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 44, Q122.]

That demonstrates that we must think through the economic analysis of the issue. Adrian Coles went on to say that

“if there were a requirement for pre-funding, and if there were a requirement to keep capital at the current level in building societies, the only place the money could come from is higher mortgage rates or lower saving rates for building society customers.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 47, Q131.]

An economic cost is attached to a pre-funded scheme. Adrian Coles talked about it in the context of building societies.

Sally Keeble (Labour, Northampton North)

I am grateful to the hon. Gentleman, because he is quoting from answers to the questions I asked in the evidence session. Does he agree that one of the issues that the building societies pressed closely was risk-related premiums, because of their perceived lower risk of failure?

Mark Hoban (Conservative, Fareham)

Indeed. I thought the hon. Lady’s line of questioning on Tuesday was very fruitful, and showed the experience that she and her hon. Friend, the hon. Member for South Derbyshire, have gained from the Treasury Committee. She put the finger on the very point: yes, there is a cost to the building society from putting money into a deposit protection scheme. However, it goes back to our previous debate about risk weighting. If a sector has a lower risk, should it contribute less to a pre-funded scheme? We talked about that in the context of different institutions when we were discussing amendment No. 6. Equally, different business models have their own consequences. The more cautious approach that building societies traditionally adopt leads to a lower risk of default in the building society sector.

The Minister whispered, “Bradford & Bingley”. As I am sure he knows, Bradford & Bingley was a demutualised building society that was swallowed up by a former building society, Abbey, which is now owned by Banco Santander. Bradford & Bingley and some of the other demutualised building societies took a very different model from that of the building societies currently in the building society sector.

Sally Keeble (Labour, Northampton North)

May I put to the hon. Gentleman a point that it was not possible for me to put to the institutions on Tuesday? There is public concern, and the public interest would probably be in favour of a pre-funded scheme, because of people’s concerns about the general behaviour of financial institutions, precipitating some of the crises.

Mark Hoban (Conservative, Fareham)

I am not sure that I agree with the hon. Lady. This is probably where we part company on this matter. I think people will want to know that in the event of an institution becoming insolvent the compensation scheme has ready access to cash. That is the necessity that underpins the measure. We would not want to get into a situation where consumers believed that because the fund has only built up £1 billion, for example, that is all there is in the kitty. We have not really addressed what size the kitty might be to provide protection.

Mark Todd (Labour, South Derbyshire)

How long is a piece of string? [Interruption.]

Mark Hoban (Conservative, Fareham)

I am happy to give way if an hon. Member wishes to intervene.

The issue we are teasing out through this process is how big is the fund and how much do we need to put away? The conversation during the evidence-taking session on Tuesday suggested that it could be between £10 billion and £15 billion. The level of bank deposits earlier this year, when I was looking closely at the matter, took us as far as the 10th-largest institution. That was before the wave of consolidation over the past few months. We are talking about building up a significant fund just for banks, let alone the other sectors of the financial services industry that might have to contribute to a pre-funded scheme.

Peter Bone (Conservative, Wellingborough)

I take a slightly different view from my hon. Friend. As he said, we are talking about not wanting to reduce the capital in respect of building societies. In the case of the banks, that would mean paying out less dividend each year. That would actually be a charge on a person’s account and would build up over the years. An institution that failed would, for a number of years, have been contributing to that fund. Under the present scheme, a bank that fails does not contribute, because it has gone bust by that stage.

Mark Hoban (Conservative, Fareham)

My hon. Friend makes a valid point. It is one of the arguments that people could deploy in favour of a contingency fund. Of course, that depends on people’s expectations and whether banks fail in future. Until recently, we had not had a run on a bank since Overend and Gurney in 18-something or other. We hope that this is an unusual time and that it will be some time before we have a crisis on a comparable scale. The Governor of the Bank of England said in his speech in Leeds earlier this week that this was the closest that we have been since the first world war to a banking collapse. We could end up with a fund of between £10 billion and £15 billion sitting on deposit somewhere for another 80 years before it was required.

My hon. Friend mentioned a pre-funded scheme enabling an insolvent bank to contribute up front to the costs of its recovery, but that would be at a cost to shareholders or potential borrowers as the costs of capital rose, because of the way in which the scheme was to be funded.

There are important arguments against a pre-funded scheme: it is expensive, it is, we hope, unnecessary and it does not address the main point, which is that we must have cash available to meet the relevant needs if a bank becomes insolvent. Dr. Huertas, in his evidence on Tuesday, made the point that

“the deposit guarantee promise needs to be backed by the full faith and credit of the Government”

and that having a contingency fund would not be the full answer to the problem. He continued:

“If it ever got to the point that the deposit guarantee promise was limited to the size of the fund, the exhaustion of the fund and the removal of any type of deposit guarantee for the remaining depositors would be a severe threat to financial stability.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 33, Q96.]

Even if the Government take the route of introducing the fund, it is not an answer in itself and is not sufficient to create financial stability. It is, in effect, a means of paying up front for the potential costs of insolvency.

Loretta Minghella of the FSCS said that it is crucial that there is always a backstop and that people are confident that the Government will always be there for the scheme.

I have talked a lot about the banking sector and how it might be affected by a pre-funded scheme. My contention is that as long as there is access to the national loans fund, that will create the liquidity that the scheme needs to repay depositors. Then, we can look at recovering the amounts from the levy payers over a reasonable period, so that we do not exacerbate the pro-cyclical tendencies that we might see if we asked the levy payers to pay immediately after the collapse of a bank. If we spread the repayments from levy payers, the burden would not be unfair, and they would pay only when a collapse has taken place.

I would like to deal now with what happens to others if there is a pre-funded scheme. In the insurance sector, given the nature of the impact of a collapse or an insolvency, the FSCS often pays out over a long period. Therefore, one argument from the insurance sector is that it pays out on long-term liabilities currently under the FSCS, so why should it pre-fund that scheme? If an insurance company that pays annuities becomes insolvent, the FSCS will pay out, over a long period, the compensation that annuity holders are entitled to, without having to go down the pre-funded route. The insurance sector is used to the idea of paying liabilities out over a long period. If insurers can do that, why can banks not do it?

The case has not been made for a pre-funded scheme. We could continue on a pay-as-you-go scheme, as long as there is a commitment to provide liquidity to the FSCS when necessary. Under the Bill, the powers are not sufficiently circumscribed to give people confidence in the shape and nature of a pre-funded scheme in the future.

Mark Todd (Labour, South Derbyshire)

Briefly, the case has not been made for introducing a pre-funded scheme now. It has been made for having provision for a pre-funded scheme in the future, which is why I endorse the clause. The Treasury Committee unanimously took that view when it considered the issue. However, the debate has highlighted weaknesses in the drafting of the clause. I would have welcomed a clearer explanation from the Minister of exactly how the powers will be exercised by the Government, and I hope that the debate will have given the Minister and his team the opportunity to reflect further on the approach that is being taken.

In another forum, I had the opportunity to listen carefully to the points made by the building society sector, which makes provision of its own and is assisted by the enabling legislative framework under the FSA. As an account holder with the Derbyshire, which is about to be dragooned—quite correctly, for the foolish acts of some of its executives—into the Nationwide, I know that the FSA is effectively able to force the bride and groom together with its existing powers. It is doing the same with the Cheshire and there are rumours that it will do the same with another society as well. I can well understand the attitude of the building society sector. It would say that it was being asked to cough up for something that has not happened in the past and, based on the existing legal framework, is most unlikely to happen in the future, unless the Nationwide—now by far the largest building society—finds itself in difficulty and it cannot do the rescue operations that it has been asked to do in such cases.

The Government do not appear to be uncertain about the principle. I think that they agree about the potential need for such a fund, but my continuing concern is that they have not worked out terribly well how it would work. As for the issue of scale, I asked jokingly, “How long is a piece of string?” It is a long piece of string, but there is no attempt to quantify accurately the purpose of the fund, if pre-funded, and what its scale should be in proportion to its purpose. It would be helpful in our discussions to have a clearer definition of the fund and of its linkage to its real purposes. We all know that, if a major institution went down, it would be a useful part of a solution but no more than that.

My line of questioning in our earlier discussions highlighted the fact that a risk-based analysis is required to justify payments in; in fact, such analysis is required to justify payments at all. In other words, there is a material risk in certain areas of activity, when pre-payment may be justified, but there might be others when no such provision need or should be made. The hon. Member for Fareham’s point about the impact on some businesses from pre-funding was well made. There is not necessarily an argument that money set aside for that purpose would be better used there than in the balance sheets of the operations concerned.

However, there are some exceptions to the rule, when a pre-funding mechanism might well be a further indicator of the need for greater care in the management of a particular area of financial services and for reinforcing the message of compliance with safer, more prudent business models than have been followed until now. I noted the guffaw at my vote in the previous Division. My purpose in Committee is not to defeat the Government, but to help them to improve the Bill as far as possible and I hope that my remarks have helped me to go further in that.

Colin Breed (Liberal Democrat, South East Cornwall)

Without repeating what I said this morning, the provision is another example of the fact that trying to reconstruct an old way to address current problems is almost impossible. When the compensation scheme was set up, it was more or less envisaged that a small operation somewhere in the sticks through the stupidity of its policy might create a difficulty for some depositors and the large banks, with a view to trying to maintain basic confidence in the banking system, would each dip into their pockets for a relatively small amount to bail out the depositors, after which everyone would be happy and off we would go. It was not envisaged that that would need to be pre-funded because the amount likely to be required would be relatively insignificant to the larger banking institutions that would be required or called on to fund it.

To turn that easy and simple scheme—not pre-funded, but secure—into a scheme designed to bail out the depositors of an enormous bank, which, through acquisition and merger, has got into the situation that we are now in seems totally impossible. Yes, pre-funding might be a great idea but, if we are to be true to it, the moneys that might be required are phenomenal. If the Government have to stand behind the shortfall—if a big bank goes down, there will be a shortfall—we might as well recognise the situation from the front end.

The Treasury Committee’s report on this issue is very good. It says that there is not much consensus on the whole thing. Obviously, the banks are not keen to put huge amounts of money into a pre-funded scheme, particularly those that think they will never have to rely on it. They wonder why they should support their competitors. It was never considered, under the old scheme, that the small institutions that might fail were competition for the big might of Barclays, the National Provincial or National Westminster banks, as they were then. They were relatively small licensed deposit-taking institutions and smaller building societies, and everything could be covered without too much of a problem. To try to turn that into something that will address the current problems is somewhat foolish.

The sensible conclusions that the Select Committee reached in its report related to the idea that, if the Government are to go ahead with the scheme, they should set a timetable. That is not a bad idea, but we have not seen one yet. People might suggest that we should not go to banks that are in a difficult situation and ask them to put large amounts of money into a pre-funded scheme, but we could get on that road. After all, we often say to people who are in large debt that they should start to save a little bit somewhere. It certainly would not be a bad idea, if we are to have some sort of pre-funded scheme, to have an idea of how the pre-funding would work and a timetable on the milestones that we are trying to reach by a certain time.

The scheme will always be subject to the vagaries of the market. The FSA might sometimes say, for example, that the levies will have to go one year because there has been some problem in the international markets. UK deposits, as a percentage of the total liabilities of the bank, will be quite small. A major problem in one part of the bank, which is nothing to do with basic banking, could trigger its failure. We have seen that happen. Only last week, a French bank had a problem after a couple of its employees risked something on the market and lost about £800-odd million.

The future risk will not be from big financial issues such as that. It will be from fraudulent or unauthorised operations, in a computer-based trading situation, that might trigger the demise of a large bank. We saw that with Leeson and Barings—that was relatively small—and we could see something like that again. In such a case, almost any amount that is placed in a pre-funded scheme is fairly unlikely to be much more than a percentage of the total payout.

If the Government are to provide that security, why should not we cut out the major banks and say to the general public, “If you want 100 per cent. certainty on your money, stick it into National Savings. Stick it into the Government in the first place, because we could use the money quite well. If you want to go to a bank—you might consider a large bank to be 99.9 per cent. certain—you might get a slightly better rate and you can go there.” Frankly, it is up to the banks to sort out for themselves how to cover their compensation scheme.

Sally Keeble (Labour, Northampton North)

Will the hon. Gentleman give way?

Colin Breed (Liberal Democrat, South East Cornwall)

In a moment. I understand the consumer aspect, but the banks have to shoulder the responsibility of maintaining confidence in banks. If the banks come a cropper, the banking industry has to pay for it. The banks should not seek recourse to the taxpayer.

Sally Keeble (Labour, Northampton North)

The hon. Gentleman seems to be saying that no effort should be made to get the banks to consider pre-funding, and that the Government should simply provide the backstop. Actually, it was about the Government providing liquidity, not paying the bills. Does he accept that there is an extreme moral hazard in that position, because there would be no incentive on the banks to try, because they would know that the Government would simply cough up to the public?

Colin Breed (Liberal Democrat, South East Cornwall)

I am sorry if I have confused the hon. Lady, but the case is the reverse. I see no sense whatever in giving the large commercial banks confidence that the taxpayer will come to their aid, so the depositor can actually make a clear decision. We ought not only to re-emphasise support for the demutualised sector in a more modern context, which is a better model for much domestic lending, but give people more opportunity to put their hard-earned savings, particularly up to £50,000, into a clear and reasonable national savings operation that would give them 100 per cent. security. If they want to go out to the market, they take whatever they perceive to be the potential risks of doing so. Otherwise, we will always have to be the lender of last resort, which could be very expensive in the future.

Peter Bone (Conservative, Wellingborough)

I must be misunderstanding this. Is Liberal Democrat policy now that people who put their money into banks have no deposit protection?

Colin Breed (Liberal Democrat, South East Cornwall)

No, at present, we support the scheme as it is put down. I am just saying that I do not believe that the scheme will be fit for purpose in the future. We have to decide how and when the taxpayer can genuinely underpin the sort of potential liabilities that the large banks will present us with.

When we had a multiplicity of much smaller banks and a vibrant building society sector, it was much easier to put together a compensation scheme that would be funded mainly by the banks and might require a small amount from the Government at some stage. That is not the case today. We have large institutions that are subject to some extreme policies, as we saw with Northern Rock, and are allowed to go far beyond the usual, prudent way. They are subject to all sorts of problems in computer-based trading operations in a market that moves extremely quickly and in which banks can both make and lose an awful lot of money.

Unless we have massive capital requirements, which would be internationally uncompetitive, or require a massive amount put into some pre-funded schemes, there will inevitably be recourse to the taxpayer to provide that sort of assurance. I am quite happy to go along with what we are trying to do because today’s circumstances require it, but I hope that the FSA and the Treasury will look again at how we can genuinely ensure that people get some sort of protection.

As soon as the Government indicated that they would stand 100 per cent. behind the banks, people put their money into something they thought was 100 per cent. safe. Why are we so shy about that? I see no reason why we cannot promote a much more vigorous national savings opportunity so that people can get a reasonable rate of interest with that absolute assurance. They can go outside that if they want to and look at some of the large banks that in general terms have no great difficulty in supplying such rates, but if we are to go through some compensation scheme that will stand behind large amounts, the situation is not satisfactory.

Peter Bone (Conservative, Wellingborough)

It is a great pleasure to follow the hon. Gentleman because his thinking is out of the box and he has real concerns about the whole scheme, which is useful for the debate.

I have a problem supporting the clause. My hon. Friend the Member for Fareham made the good point that people are concerned about whether they will get their money. It is rather like the ABTA scheme: customers do not worry about how it works because if their travel agent goes bust they know they will get the money. That is the bit that people really want to know.

I have particular concerns about the clause because it contains the wonderful phrase:

“The Treasury may make regulations”.

When I see that in a Bill I think, “Aha! The Government are not telling us what they want to do and are hiding it for later on.” That is clearly the case here. A free-funded scheme that we do not know will work might disadvantage the banks in the international scene. If we create a fund that is not adequate and which, in financial terms, puts our banks at a disadvantage against their competitors, there is probably no point in doing it. People outside the Palace of Westminster will be concerned about one issue: they see the banks arrive at this crisis having got away with murder, and because the Government are not putting money away for a rainy day or for when a bank fails, people may perceive that the banks will be off again taking big dividends and giving excessive salaries to executives.

Mark Hoban (Conservative, Fareham)

But does my hon. Friend recognise that there are other ways of tackling the issue? It can be tackled through improved regulation such as the macro-prudential regulation that our party has talked about. If a bank goes bust, the people who lose their money are predominantly the investors. They will be encouraging banks to adopt a more cautious and prudent approach, so that they do not lose their investments. Other checks acknowledge that there is a cost to following reckless policies. Moving to a pre-funded scheme is not the only way to stop banks behaving irrationally.

Peter Bone (Conservative, Wellingborough)

I am grateful to my hon. Friend for that intervention. That point would have been the conclusion of my remarks—there must be other ways for us to get the point across to the public that things are being controlled. I looked at the share-placing agreement for the capital that taxpayers are investing in banks. It contains a clause that deals lightly with the emoluments of directors. That could be strengthened. There are other ways of proceeding, so given the way that clause 156 is drafted, especially those wonderful words,

“The Treasury may make regulations”,

I am afraid that I cannot support it.

Sally Keeble (Labour, Northampton North)

I have a few brief comments. The clause and the proposed new section go to the heart of the issues in the Bill, especially those about building public confidence in our banking system. I strongly support the Bill as it stands. It may be thinking out of the box, but some of the proposals suggested by the hon. Member for South-East Cornwall do not deal with the current pressures facing the banking system. It is not realistic to say that if people want to be confident of their savings, they should put them into national savings. Retail banking is one of our most successful industries, and it is important that the public have confidence and feel able to invest their savings in it, and in national savings, should they want to. We must ensure that the public and institutional investors have confidence and in this instance, the Government have a responsibility to the broad mass of people who want somewhere safe to put their savings.

Colin Breed (Liberal Democrat, South East Cornwall)

What about Iceland?

Sally Keeble (Labour, Northampton North)

Part of what we are looking at now, and some of the wider regulations that the Government are looking at, deal with precisely such issues. If the public are to have confidence, they must know that arrangements are in place for when things go wrong. Those arrangements must cover more substantial difficulties than we have seen previously. That is what the provisions are about.

Perhaps the hon. Gentleman should look at the evidence given by the Governor of the Bank of England about the different models for financing such schemes—they were either insurance-based or pre-funded. At the time, the Governor supported a mixed model, but he certainly accepted an element of pre-funding.

We have moved on since the Governor gave evidence to the Select Committee, and it seems that there is a public issue about the way that financial institutions have operated. Both general logic and the public require that people who might have a role in causing major losses to the general public as well as to the economy, should make some provision for, or be seen to contribute to, clearing up the mess. That is partly what contingency funding is about.

Colin Breed (Liberal Democrat, South East Cornwall)

I entirely agree with that. What I am saying is that the original scheme had no recourse to the taxpayer. It was never even considered that it would be necessary. I want the scheme, as far as possible, to have no recourse to the taxpayer, whether that is achieved through massive pre-funding or some sort of amazingly risk-based premium insurance. The scheme is largely to do with the banks and the institutions looking after themselves. If it is almost inevitable that it will come to the taxpayer, I am not happy.

Sally Keeble (Labour, Northampton North)

I completely agree that the call on the public purse should be as small as possible, given that, in a sense, there is a failure of the private sector. The Government backstop for a pre-funded scheme would be to provide liquidity. It would not necessarily be to pick up the costs, because there would be the assets from the failed bank and issues about loans and repayment. It is important that there are visible, up-front contributions and that thought is given to how the banking industry will deal with possible failure. That is partly what the argument—the pre-funding—is about.

We have heard different scales for the contributions that might be needed, and an indication—from the Governor, I think—that if a fund is to be built up in any reasonable way, the contributions have to start early. We are not talking about the Government backstop being a blank cheque written by the taxpayer to bail out the banking industry, as was clear in the evidence on Tuesday. We are talking about provision of liquidity that is likely to be temporary, pending the arrangements made around a bank failure. The hon. Member for South-East Cornwall may say that was not needed previously, but we did not think that HBOS would get into difficulties; all kinds of things have happened that we did not think possible. We have to recognise that the scheme has to deal with a different order of events, and a different banking world from the one we were used to and which we might like to inhabit. Unfortunately that world has gone. Those changed circumstances require something more substantial and it is right that it should be done by regulation.

In essence, the provision is a reserve power that can be called on to introduce the scheme, and then some of the details will be worked out. There are two reasons for that. First, it was clear in the evidence given on Tuesday that some complex risk-based premium issues need to be looked at and, given that the Governor thought that a hybrid scheme was possible, that issue too needs to be looked at. We also need to consider the scale of the different institutions and how the payments are structured. I absolutely would not want a scheme that let the guilty parties off the hook. I completely take on board the point made by the hon. Member for Wellingborough about not wanting to bring in general sweeping regulation. However, we are acting now because we need confidence in the banking system, so we cannot say, “Okay, we’ll do all the rest and then some way down the line we’ll think about this particular thing.”

Mark Hoban (Conservative, Fareham)

Is not the reality that although the Government will have the powers to introduce a scheme, there is a clear expectation that it will not be introduced now? The hon. Lady wants certainty now, but the reality is that these are enabling powers, not actual powers.

Sally Keeble (Labour, Northampton North)

I completely take the point, but the inclusion of the powers in the Bill now, puts my constituents in a position to say, “This is what the Government can do; this is what can happen.” They can see that provisions are in place and that we will not get into a further crisis some way down the line and have to come back with primary legislation, which takes so long, and start to look at setting up such a scheme.

It is a difficult situation because we are trying to deal with changed circumstances, scales of losses that we had perhaps not previously expected, and the real complexity of how the structures of the scheme might work. On the contribution that the banks might make, even the Governor of the Bank of England had to be pressed and pressed when talking about, as I recall it, non-negligible billions. We need to say now that we are prepared to give the Government the powers to introduce a pre-funded scheme so that we can make sure that, in consultation with the industry, we can give the public of this country the best possible assurance that if they put their money into a bank, their interests will be protected. We need to give that to people now and the clause is key to doing so. That is why I strongly support it.

Ian Pearson (Labour, Dudley South)

So there we have it. The view of the official Opposition is that they are, in principle, against asking banks up front to pay some money in case of the possibility of future banking failures. In fact, the hon. Member for Fareham went further, and said that even after failure, they should be spreading the burden over a number of years. I have to ask him and the official Opposition, “Have you been listening to what ordinary people are saying?” I do not think that they can have been listening.

It is absolutely right that we take the powers in the clause and accept the principle of pre-funding. We made it clear that now is not the time to introduce a pre-funding scheme. In some of the debate that we have had earlier, we have been trying to design the scheme, but now is not the time to do that; now is the time to say that as a matter of principle, we think it is right that pre-funding should be introduced at some time in the future. We should talk about the practical details and having a risk-based approach to making contributions, as mentioned by my hon. Friends the Members for South Derbyshire and for Northampton, North, who made an excellent contribution to the debate. However, we can do so when we debate how pre-funding might be introduced in the future. We do not need to make provision in the Bill for risk-based levies because the Financial Services Authority already has the power, but I agree that it is something to be considered, if a pre-funding scheme should be introduced.

On building societies, I want to briefly say that large parts of the Government’s proposals in the Bill for the special resolution regime will ensure that the Government can resolve banks and building societies through private sector solutions. That will avoid the recourse to compensation in the first place, which clearly must be our last resort.

I was not clear about the official position of the Liberal Democrats on this matter—whether they are favour of pre-funding.

Colin Breed (Liberal Democrat, South East Cornwall)

We are happy to support pre-funding and what the Government are doing. Our view is that it will be in place and fit for purpose in months rather than decades. This is a plaster, to try to cover what is a potentially very large problem. Unless real intellectual thought is given to exactly how we can properly constitute a compensation scheme for the circumstances that banks are now in, the provision will be wholly inadequate.

Ian Pearson (Labour, Dudley South)

I am glad that the Liberal Democrats are at least in favour of the principle of pre-funding. They seem in a great rush to introduce it. Given the turmoil in financial markets, now is certainly not the time.

I recognise some of the arguments that have been expressed about pre-funding. We appreciate the concern that levies would be a charge on banks’ profits and reduce banks’ ability to pay dividends. We recognise that the banking industry thinks that it might be able to earn more by investing the money itself, rather than by placing the money on deposit with the national loans fund, although recent events might have dented that argument a little.

Mark Hoban (Conservative, Fareham)

Will the Minister accept that, given the way in which he is framing the debate, the levy is payable, potentially, by all financial services sector companies—not just by banks? That is what his clause says. It is not restricted to banks, building societies or credit unions—it includes all financial services. He needs to accept that when talking in the debate.

Ian Pearson (Labour, Dudley South)

I certainly accept that we are taking the powers to enable us to do that in the future—and it is absolutely right to do so. I return to the principle: we fundamentally believe that banks should be paying up front, in case there is potential bank failure in the future. That is what our citizens would expect, and I think it is the right thing to do.

Mark Hoban (Conservative, Fareham)

The powers enable not just banks to contribute to the cost of bank failure, but insurance brokers, independent financial advisers, fund managers and other categories of financial services business. Does the Minister accept that? He seems keen to focus the argument on banks, but other financial services companies, in accordance with the clause, will be able to contribute to the cost of bank failure too.

Ian Pearson (Labour, Dudley South)

We have made it very clear that sectors should consume their own smoke when it comes to such matters. We discussed that in the debate earlier. I am not surprised that I did not persuade the hon. Gentleman to withdraw amendment No. 5, because he is simply completely against the principle of banks paying anything up front. The general principle that the costs of failure should be borne by the sector where that failure occurs is an important one, and we shall be pursuing it.

Rob Flello (Labour, Stoke-on-Trent South)

Does my hon. Friend accept that in the modern financial world, all the different institutions are so interrelated that it is difficult to isolate one particular sector, such as the banks from the insurance companies? But I believe he is right that a sector should consume its own smoke.

Ian Pearson (Labour, Dudley South)

My hon. Friend is absolutely right in pointing out that the parts of the financial services sector are extremely interrelated. All the different firms and companies in that sector share a great interest in the financial stability of the sector as a whole.

When it comes to pre-funding, it is important to recognise that pre-funding can allow the costs of bank failure to be spread over a period. It can reduce the pro-cyclicality of the post-funded system, in which banks have to contribute after a failure, when the financial stress is clearly greater. It is also important to recognise a point raised by the hon. Member for Wellingborough—that one of the great features of an up-front scheme is that any institution that failed would have previously contributed.

I stress that there is a debate still to be had here, if a decision is taken to introduce pre-funding in the future. We will want to have a lot of discussion about how a scheme would work: discussions between the Bank of England, the FSA, the banks and building societies and their associations and the Government. There will be a consultation before any step is taken on pre-funding. The Committee and others will also note that pre-funding can be introduced only with parliamentary approval under an affirmative resolution procedure. The clause simply gives us the powers to introduce pre-funding at a later stage. It is a sensible piece of contingency planning and I commend it to the Committee.

Mark Hoban (Conservative, Fareham)

We have had a useful debate. There are strong views on either side. The Minister needs to be very careful. He framed the debate in the context of banks consuming their own smoke and paying the cost of failure. I would agree that banks need to pay the cost of their failure; no one disputes that. The point at issue is how and when they do so. But the clause is not just about banks. It is not just about a pre-funding scheme for banks, and banks themselves paying for it; it affects the whole of the financial services sector as covered by the Financial Services Compensation Scheme.

The Post Office, for example, sells financial services products. Will it be covered by the scheme? Will we be asking the Post Office to pay up front into this scheme? The Minister has not talked about the Post Office, but I wonder whether it will end up having to contribute. We are asked to approve today a clause that might be used, which might cover banks and which might ask others beyond banks to contribute. It might be risk-weighted. It might be restricted to non-negligible billions, to use the Governor’s phrase. It might ask for just a token contribution. It might be built up over three years or 20 years. It is all very vague and insubstantial.

The Minister has not set out clearly how the scheme would work, if it were ever to be introduced. That is one of the failings. Setting aside the argument about principle—we disagree with the principle of pre-funding—even as it stands the clause lacks definition. It lacks a clear sense of where the limits are. The words that the Minister used do not necessarily reflect the full breadth of the potential scheme as set out in the clause. The risk is that the Government are embarking on a scheme and have no idea where they will end up. In supporting this, the Committee would have no idea where the scheme might end up in future years. I do not think that legislation should be made in this way.

If it is the Government’s view that pre-funding is needed, they should set out a far clearer idea of the nature of the scheme than they have laid before the Committee this afternoon. Whether members of the Committee have a fundamental disagreement of principle about whether pre-funding is right—I believe it is not right and Members on the other side of the room believe that it is right—we have not been given the detail that we need to determine whether it is a power that the Government should have. That is why I oppose the clause.

Roger Gale (Conservative, North Thanet)

In the interests of clarity, clause 157 will come later because it is taken earlier, if you see what I mean. The procedure from now on is that where there is a clause without amendments, I will call the clause. If any hon. Member indicates that they wish to debate the clause I will call the Minister to move it and we will debate it. If nobody expresses any interest in the clause I will not call the Minister and waste his or the Committee’s time, and I will put it formally. I hope that that is understood.

Clause 159

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 37, in clause 159, page 83, line 30, after ‘loan,’, insert

‘which shall not be higher than the Bank of England base rate,’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss amendment No. 38, in clause 159, page 83, line 31, after ‘conditions’, insert

‘which shall ensure that repayment of the loan is made on a fair basis.’.

Mark Hoban (Conservative, Fareham)

The provisions refer to loans that might be made by the national loans fund. We have established our long-standing difference of principle about pre and post-funded schemes, but what is important is the access to money in the event of a default by a bank. Amendment No. 37 would limit the interest rate payable on money borrowed from the national loans fund to no higher than the Bank of England base rate. I instinctively assume that it would not be higher than the base rate, but we have seen examples in the last few months where a penalty rate has been levied on money borrowed as part of the special liquidity scheme. I would like clarity from the Minister about the rate that will be used to determine the interest payable on moneys borrowed from the national loans scheme, because clearly the cost will fall on the levy payers and they will need to understand what rate will be applied. That is happening at the moment to cover the amount that has been borrowed to deal with the transfer of balances from Bradford & Bingley to Santander and its UK subsidiary, Abbey.

Amendment No. 38 relates to what happens when moneys are borrowed from the national loans scheme and what the period of repayment is for those loans. The current situation for the money borrowed to cover the transfer of balances to Santander, and to Abbey, makes a three-year delay on repayment of principal, and the loans will be paid thereafter. The amendment would ensure that a penal or pro-cyclical loan repayment scheme was not put in place.

In the previous debate we talked about the impact of payments being made after the event. There is no guarantee that a pre-funded scheme will have sufficient capital to cover all the costs of a default. The main question is, in a situation where money has been borrowed, what will the period of repayment be, or how will it be determined? We do not want a situation where the level of repayments made to the national loans fund is potentially damaging to the wider financial services sector or the banking sector. I should be grateful for clarification from the Minister on the rate of interest paid and how the period of repayment will be determined.

Ian Pearson (Labour, Dudley South)

The effect of the proposed amendments would be to limit the interest rate that could be charged on NLF loans to the FSCS to between an upper limit, set by the Bank of England base rate, and a lower limit set by the Government’s cost of funds—I assume that would be the consequence of amendment No. 38. It is surely fair that the interest covers the Government’s cost of funds. In any event, it is a statutory requirement of the National Loans Act 1968, which governs NLF lending, that the rate of interest on a loan must be set at a rate that would be sufficient to prevent a loss, taking into account the cost of the borrowing to finance the loan.

It is not clear what would have to happen if the Bank’s base rate fell below the Government’s cost of funds; that is not just a technical possibility. The rate of interest on any loan would also depend on the expected maturity date of the loan. Depending on market conditions and other factors that affect the rates on longer-term loans, the applicable rate of interest may have to be higher then the Bank’s base rate.

However, it is not sufficient that the interest charged on NLF loans merely covers the Government’s cost of funds. Loans to the FSCS are really loans to the levy payers, who are ultimately responsible for meeting the scheme’s costs. Government loans to commercial undertakings need to be made at proper commercial rates, which ensure that they can compete fairly, and that there can be no question of any subsidy or state aid, which could, of course, be challenged under European law.

I hope that I have clarified the situation. If the amendments are pressed, I invite the Committee to vote against them.

Mark Hoban (Conservative, Fareham)

The Minister replied to amendment No. 37, but not to amendment No. 38.

Ian Pearson (Labour, Dudley South)

The question of the period of loan repayments would have to be agreed between the Financial Services Compensation Scheme and the Treasury. The Treasury would be able to consider all these factors and would consult the tripartite authorities.

The interest rate will be set on the same principles as for Government lending to bodies operating in competitive markets. That is appropriate, because the loans are effectively made to the scheme levy payers, who ultimately fund the scheme.

Mark Hoban (Conservative, Fareham)

I am grateful for the Minister’s clarification on amendment No. 38 and the basis on which the Treasury and the FSCS would negotiate the payment of the schemes. On amendment No. 37, the Minister has clarified the basis on which the interest rate will be calculated. I am content with his explanation on that and I beg to ask leave to withdraw the amendment.

Ian Pearson (Labour, Dudley South)

I beg to move amendment No. 18, in clause 159, page 83, line 36, at end insert:

‘(and the regulations may have effect despite any provision of this Act);’.

Clause 159 inserts a new section into the 2000 Act, which allows the Treasury to authorise the making of loans from the national loans fund to the FSCS. It also provides for the making of regulations to provide for limits on borrowing and for the collection of levies to ensure that the loans are repaid.

The amendment is intended to make it clear that the explicit wording of section 223 of the 2000 Act, in particular, cannot restrict what those regulations can do. It is essentially a technical amendment and the need for it was not appreciated until a comparatively late stage. I regret the inconvenience to the Committee. However, it was appreciated at a very early stage of the banking reform work that the FSCS cannot pay large amounts of compensation, or make a substantial contribution to the cost of a special resolution regime, if it has no money. The FSCS could, of course, raise levies from the industry and, if pre-funding had been introduced, it could use whatever funds had been built up in that way. However, there is no guarantee that those sources would be sufficient, or that it would be possible—or desirable—to raise levies of the scale required from the industry at a time of financial stress.

As we all understand, the FSCS has to be able to borrow. It can borrow from commercial banks, but that too cannot be a reliable source of funds at a time of financial stress.

The Government stand behind the FSCS so that it can be relied upon to play its role in meeting the claims that arise. There can be no question of allowing the scheme to run out of funds. That is why we have made it clear that we would ensure that the FSCS has access to immediate liquidity through borrowing from the public sector. That has already been done by ensuring that finance was available to the scheme to enable it to contribute to the costs of transferring accounts from Bradford & Bingley to Abbey and from Heritable and Kaupthing Singer and Friedlander to ING. Those loans have been made by the Bank of England and will be refinanced by the Treasury in due course.

Clause 159 permits public sector loans to the FSCS to be provided in the most efficient way. The necessary funds can be raised by the Treasury as part of its ordinary financing operations and made available to the scheme without the use of votes and estimates procedure. That is important because we cannot rely on financial crises to consult the estimates timetable before they occur. This is essentially a technical amendment and I hope that its purpose is clear.

Stewart Hosie (Scottish National Party, Dundee East)

I am slightly intrigued by this technical amendment. As the Minister said, clause 159 is designed for a particular purpose. However, by inserting these words into the Financial Services and Markets Act 2000 it allows the Treasury to make regulations about amounts that are borrowed, permitting the scheme manager to impose levies, setting the classes of people who can be levied and setting the amounts and timing of those levies and so on. The clause in subsection (5) goes on to say:

“The compensation scheme may include provision about borrowing under this section provided that it is not inconsistent with regulations under this section.”

We have a problem in that we have not seen the regulations we are talking about. If the Minister has his way, we then have to add:

“the regulations may have effect despite any provision of this Act”.

He said that this was to get past a particular obstacle, to get round a particular hurdle. I understand and respect that, but that is not what the words on this bit of paper say. The amendment is extraordinarily wide. These regulations will have effect despite any provision. Would the Minister not consider it better to put in place an amendment that bypasses the obstacle, which he quite rightly identified at the beginning of his speech, rather than have something in the Bill, through this amendment, that is so wide that the regulations may have effect despite any provision and not simply the one he specified?

Ian Pearson (Labour, Dudley South)

The purpose of the amendment is simply to put beyond doubt that regulations made under the new section 223B power can allow the FSCS to raise levies to pay interest on borrowing from the national loans fund, notwithstanding any limit imposed under section 223.

Clause 160

Mark Hoban (Conservative, Fareham)

Will the Minister expand on proposed new section 214(1C) of this clause? It enables

“the scheme manager to settle a class of claim by payment of sums fixed without reference to, or by modification of, the normal rules for calculation of maximum entitlement for individual claims.”

When I read that, I wondered whether it meant that the FSCS could make an interim payment to a certain class of depositor. It could say that, rather than go through the full rigmarole of calculating exactly the deposit balance, people who usually have more than £10,000 in their accounts could have £5,000 as an interim payment. That would be a pragmatic way in which to deal with the problems of eligibility, simplifying criteria and that sort of stuff, or does it mean something completely different? If it is intended to make an interim payment, how would the FSCS recover any surplus or excess of payment made above the level of entitlement of someone in the scheme? It is not clear what the scheme would do in practice. The explanatory note is not much clearer either, particularly given that it is shorter than the clause to which it refers.

Ian Pearson (Labour, Dudley South)

Let me try to shed light on the matter. Clause 160 inserts three new subsections into section 214 of the Financial Services and Markets Act 2000. The purpose of those provisions is to facilitate speedy payment of compensation to depositors or to facilitate the speedy transfer of their accounts to another bank under the bank insolvency procedure in part 2 of the Bill. Proposed new section 214(1A) allows the FSA to make rules to deem claims under the scheme to have been made. It will enable the scheme to begin processing the claims from the moment of default, rather than waiting for actual claims to be made. The claims process, especially when dealing with large volumes, will obviously take time so the sooner that it can begin, the better.

The hon. Member for Fareham talked about proposed new section 214(1C). It allows the scheme to deal with certain types of claim, without having to make calculations of individual claimants’ entitlements. The Government believe that that could help to speed up a bulk transfer of deposits under the bank insolvency procedure or the special resolution regime, which is why we sought to insert it into the clause.

Mark Hoban (Conservative, Fareham)

From the Minister’s explanation, the clause would enable a bulk transfer, as happened with the transfer from Bradford & Bingley to Abbey. It does not give the FSCS the power to make an interim payment to depositors. It is really just to facilitate a bulk transfer.

Ian Pearson (Labour, Dudley South)

I can confirm that the clause is not about interim payments.

Clause 163

Mark Hoban (Conservative, Fareham)

I have a question about what will become section 223C(2) of the 2000 Act. It states:

“This section does not apply to payments made in bad faith.”

If penalties are attached to making a claim in bad faith, what sanctions will there be if someone makes a bogus claim and under what legislation will such action be covered?

Ian Pearson (Labour, Dudley South)

I do not have an answer for the hon. Gentleman at the moment. It might be helpful if I write to him.

Clause 165

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment No. 10, in clause 165, page 86, line 27, at end insert—

‘(4) Any scheme agent who reneges on their contract of employment will be subject to a penalty.

(5) The Chancellor of the Exchequer may make such regulations as are necessary for the establishment of a penalty.

(6) The power to make regulations under subsection (5) is exercisable by statutory instrument.

(7) A statutory instrument containing regulations under subsection (5) may not be made unless a draft of it has been laid before and approved by resolution of the House of Commons.’.

I shall not detain the Committee too long. I just want to tease out from the Minister the purpose behind giving the FSA powers to appoint a scheme agent. I understand that the FSA is the scheme manager. I suppose that, as much as anything else, my concern revolves around responsibility. We always like to put layers between us and decision making. I want the FSA to be responsible. If it has to employ someone new to be the person who organises matters, let it do so. I am not particularly in favour of saying that it delegate functions. Even the explanatory note states:

“Before entering into arrangement the FSCS must be satisfied that the person is competent to carry out the function”.

I should jolly well hope so, and that the person is given sufficient direction. Our excellent staff have drafted a rather convoluted amendment, but is there an absolute necessity for such a provision. Let us leave the FSA to get on with it and to be responsible for managing matters and not delegate that responsibility to other people. While such people may well be able to do the job properly, we all know of wonderful examples of when the Government have delegated powers to contractors and agents, and things have gone belly up. I do not know why it is absolutely necessary for the FSA not to be wholly responsible for such matters. If it wants to employ some proper people to do the job, that is fine, but why must delegated power be given to some sort of scheme agent?

Ian Pearson (Labour, Dudley South)

I appreciate the probing nature of the amendment, but it is the Government’s view that it is unnecessary and almost certainly unworkable. I fear that it might have arisen from a misunderstanding of what the proposed new section 221A of the 2000 Act will do and how it will work. I shall explain the Government’s thinking behind it and, if the hon. Gentleman has further questions, I shall be happy to hear them.

The purpose of proposed new section 221A is to allow the compensation scheme to delegate its decisions to a contractor, referred to as the “scheme agent”. The person might be the liquidator appointed under the bank insolvency procedure, another firm of accountants or a suitable firm, but the key point is that the decisions necessary for enabling speedy payouts from the FSCS have to be made quickly, in large numbers and in an automated way. That could not happen if all decisions had to be referred to the FSCS itself, even if all that took place was that the decisions were then ratified by the FSCS computers.

The decision-making process will therefore have to be delegated. Of course, the FSCS will keep the ultimate responsibility for the decisions. The scheme agent will be an agent of the FSCS and carry out functions on its behalf, not an independent decision maker. Rather than appoint a person to perform its functions, proposed new section 221A would simply provide that arrangements may be made with another person to perform any of the FSCS functions. Those arrangements are likely to take the form of a normal contract for services rather than a contract of employment and, if the contractor fails to perform, the FSCS will be able to take action for breach of contract in the normal way through the courts.

I appreciate the probing nature of amendment No. 10, but the mechanism that it proposes is unnecessary and could cut across the normal ways of dealing with breaches of contract in an unhelpful way. I hope that my explanation of proposed new section 221A has been helpful to the hon. Gentleman.

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to ask leave to withdraw the amendment.