Banking Bill

We have not specifically done so, but if the right hon. Gentleman is asking for my opinion, I do not think that there should be a limit at the moment. I go back to my point that the banking system is the blood circulating around the economy, which is what makes it so important in securing financial stability. Once that stability is established, we can look at other issues later. The Treasury Committee also considered depositor protection and we concluded in our January report that such protection afforded by the Financial Services Compensation Scheme was a mess: it was complicated, confusing and did little to instil confidence among savers. We took a fairly relaxed view about the level of the compensation limit and we saw little reason to increase it from £35,000 to £50,000. We believed that more than 80 per cent. of deposits were saved, although not deposits by value. The goalposts have moved considerably since then with other countries unilaterally increasing their protection—in some cases, to 100 per cent. of deposits, as we saw with the Republic of Ireland. It is therefore sensible for the FSA to move into line with our peers in order to prevent the danger of drainage of deposits from UK banks. Even more important to our Committee was the speed of payout. The Financial Services Compensation Scheme website refers to recipients of compensation having to wait potentially months for access to their funds. That is simply not good enough, so we urge the Government to stand firm on the tough, seven-day deadline for processing compensation. In fact, the real test of the FSCS will be whether it can deal with the fallout from the Icelandic banks in a speedy manner. An important precursor to speedy payout is that the relevant data are to hand. On our visit to Japan, we saw that banks were required to have frequently updated depositor information available in a common format for the use of the deposit protection institution. I know that the banks here are reluctant to do the same; they say that it will be preposterously costly, but at least one bank is able to provide such information in the UK—the Abbey bank. In its submission to the Treasury Committee, it told us that it was already doing it. If Abbey can do it, why cannot other banks do the same? That is absolutely necessary if the public are to have the confidence in the banking system that they need. The Government need to ensure that similar arrangements are in place across all banks in the UK. Other concerns that we raised about the FSCS were the complexities of protection by bank, rather than brand, and the coverage of deposits held in foreign-owned banks. The recent confusion over Icesave deposit protection underlines the point. For deposit protection to be of use, it must be simple and well understood. Our Committee continues to see merit in a pre-funded compensation scheme whereby banks contribute more in boom times than in bust times. When the hon. Member for Sevenoaks (Mr. Fallon) and I visited Washington last December, we were told by the American Institute of Banking that that was a necessity. It is important, therefore, to make preparations now for the introduction of a pre-funding scheme in readiness for the next financial crisis, although we hope that it will not happen. However, I accept that now would not be the most opportune time for the banks to start contributing to such a scheme: pre-funding would be a medium to long-term innovation, to commence only once banks were better capitalised. Much of the Committee's report last month focused on the governance of the Bank of England. It is disappointing to note that there is little sign, as the Bill stands, that account is being taken of our recommendations—although, in fairness to the Government, I must add that they have been faced with a tight timetable. I hope that the Minister who replies today will be able to indicate that they will give careful consideration to our proposals. Let me highlight two important concerns about the Bill. First, its proposals relating to the financial stability committee are unsatisfactory. The committee is to have a non-executive majority and a largely advisory and monitoring role, but is to be chaired by the Governor. In our report, we argued that the FSC should be established as an executive body, completely distinct from the court and with a status comparable to that of the Monetary Policy Committee. Secondly, we are not convinced that the general financial stability objective currently proposed for the Bank of England is properly calibrated to its actual functions. As we said in our recent report,"““There is no consensus about what financial stability means, how it should be measured and how the balance should be struck between the pursuit of a financial stability objective and other public policy objectives. There is no indication that a new statutory objective for the Bank of England would be accompanied by matching objectives for the Financial Services Authority and the Treasury. Above all, the Bank of England, while being endowed with certain financial stability functions and powers, is not being granted a coherent set of instruments in order to influence financial stability.””" We proposed two functional objectives rather than one general objective. That is one respect among many in which I hope that a good and well-timed Bill will become even better as it passes through the House. At the beginning of his speech, the Chancellor said that he would work constructively with others. As he knows, ours is a cross-party Committee. We worked for 12 months on proposals on which we have agreed, and I think that they are worthy of further consideration. We need a strengthening of the Bank of England, and an enhancement of the status of the financial stability committee to make it commensurate with that of the Monetary Policy Committee. We need to ensure that the tripartite authority does not become a sleepy backwater in normal circumstances; it must be constantly alert, and financial stability must be one of its key aims. We must also develop robust protection for depositors, because if that is not achieved, public confidence in the banking system will be undermined. I bring those constructive comments—developed over 12 months on a cross-party basis—to the Chancellor's attention for further consideration in Committee, and I wish the Bill well.