Banking Bill

The hon. Gentleman makes an important point. In the wider debate on the pre-funded scheme, the Building Societies Association has highlighted instances in which building societies might be called on to contribute to resolutions. It says that the building societies have swallowed their own smoke, to use a phrase beloved by the Minister in Committee, and that a requirement to contribute to a pre-funded scheme would reduce the money available to them to lend to their members, which would perhaps reduce their attractiveness. We need to think about who would contribute to the scheme and what the impact of that would be. This is not just about building societies. Credit unions could be placed in a difficult position, as they do not often have huge reserves, but, as deposit-taking institutions, they could be covered by the provisions. Such contributions would take money out of the credit union sector, when that money would be better employed being lent to people than being put into a pre-funded scheme. The case has not been made for a pre-funded scheme, and there are strong arguments against introducing such a scheme. The first is that the important point is not whether the scheme is pre-funded but whether it has access to liquidity and resources to enable it to make payments to customers when a bank has defaulted. The second argument asks whether a pre-funded scheme would be the best use of assets. We have touched on that question in the context of building societies, but I want to make some broader points on that in a moment. Thirdly, while this debate has been primarily about pre-funding in the event of a bank failure, the powers in the clause could require other financial sectors to contribute to a pre-funded scheme to rescue a bank—or, indeed, any other financial institution. The Bill makes provision for the scheme to access the national loan fund. This is what has happened in the context of Bradford & Bingley, where money has been borrowed from the Government to lend to Banco Santander to cover the deposits. Consumers are given confidence not because there is a pre-funded scheme or a pot of money already sitting there, but because a bank has access to resources that enable the Financial Services Compensation Scheme to make payments to customers in the event of a default. With a post-funded scheme, a reasonable amount of time would need to be allowed to recover the money from the bank, so as not to put undue strain on the balance sheets of banks, building societies and other deposit takers at a time when the whole financial system is under distress. Given the increasingly concentrated nature of the UK banking system, the pot of money that it would be necessary to build up against any failure would be quite significant. The position is very different from that in the US, which has a much more fragmented banking system. It also has the Federal Deposit Insurance Corporation and needs to have a pre-funded scheme, because the likelihood of a bank failing is much greater, given the sheer number of institutions involved. A pre-funded scheme would be capital-intensive, and the second argument is that that money would be better used by a bank, building society or credit union, rather than being tied up in the Financial Services Compensation Scheme. Accumulating the fund could increase the pressure on bank capital and liquidity. There is also the possibility—at least we hope so—that once the scheme had been built up, it would never be used. We have gone through a period of extreme volatility and instability, and I am not sure of the value of having a significant sum sitting in the hands of the FSCS that might never be used. We do not expect another comparable period of financial instability, and there are better ways to use that money than having it tied up in that way. The report envisaged in new clause 6 would be a good way to set out the arguments about a pre-funded scheme. Before the Government laid regulations in this area, the House would have to be persuaded that this is the right approach. The third point is that the pre-funding debate encroaches on more than just the banking sector. The hon. Member for South Derbyshire (Mr. Todd) talked about building societies, and there are other categories of deposit-taking institutions, such as credit unions. There is also concern in other parts of the industry that they would have to pay the costs of mistakes in the banking sector. The Association of British Insurers has said:"““We are concerned...that the present approach requires all sectors of financial services to contribute to the costs. This involves cross subsidy which imposes an unfair burden on the insurance industry, particularly in cases where, as in Bradford & Bingley, insurers have already made substantial contribution through the provision of additional capital by their investment arms.””" Several insurers subscribed to the rights issue, and they would be doubly penalised if they lost that money and had to make an excess payment to the FSCS. The present arrangements mean insurers could end up paying twice. A powerful case has been made that a pre-funded scheme is not the appropriate approach. There is another argument to be made, and we will come to that in the debate on the special resolution regime in the next group, but I shall flag it now briefly. For customers, the best deal is continuity of service. They want to be able to go into their bank and withdraw cash, or have their cheques cashed, use their debit cards and have their standing orders and direct debits honoured. They do not want to have to wait for five days, seven days, a month or however long it takes for the FSCS to send them their cheque. Continuity of service is a much better way to resolve the problem than dependence on a compensation scheme. If continuity of service were the priority for protecting depositors, we would not need a pre-funded scheme. The argument for a pre-funded scheme has not yet been made strongly enough. The arguments against it are much stronger, which is why I have tabled new clause 5. Amendment No. 17 is a probing amendment, and flags up a debate that we had in Committee, although it was truncated. It concerns the challenge posed under the passporting arrangements for financial institutions in the European economic area. That enables an institution regulated in one state to establish a branch in another. It is part of the liberalisation of financial markets in the EU. The home state acts as a prudential regulator, looking at capital and deposit protection, while the host state—the country in which the branch is established—looks after the conduct of business rules. It was those rules that enabled the Icelandic bank Landsbanki to establish a branch trading as Icesave in London. Icesave was able to upstream some of the money attracted from UK depositors to Landsbanki in Iceland to reduce its dependence on funding from wholesale markets. Customers of Landsbanki would have realised that they were covered up to £50,000 under the deposit protection schemes in place when Landsbanki went into administration. The first layer of the protection was under the Icelandic guarantee scheme, while the second layer was a top-up from the FSCS. However, as events have demonstrated, the first layer of support depends on the capitalisation of the bank and, in this instance, on the sovereign guarantee of the home country. In the absence of support from the Icelandic Government, the UK Government could have been on the hook for that first layer of protection. That problem has been resolved by the IMF and UK loans to Iceland, but it illustrates the challenges that we face. As EU financial services markets are liberalised, customers are being put at risk because they depend on the home state for an element of consumer protection. I raised this matter in a debate on a European directive, when the Minister's predecessor, the present the Secretary of State for Children, Schools and Families, was Economic Secretary. It was not adequately resolved then, and the Treasury and the FSA need to think very carefully about how we alert UK consumers to the risk that they face when they do business with a branch of an institution incorporated in another EEA member state. That is a lesson that we need to learn from the debates about Landsbanki and related matters. I turn now to amendments Nos. 13 and 14 in this group. Clause 165, as drafted, sets out how the special resolution regime is to be paid for and provides for the FSCS to contribute to the cost of a resolution regime. Initially, that contribution will be made by the deposit-taking sector: when it exceeds the levy from that sector for a year, it will be picked up by other contributors to the scheme. The amendments would insert into the clause a recognition of what would happen ordinarily when a business is either acquired by a private sector company or goes into liquidation or administration. Traditionally, the cost of a private sector acquisition is borne by both the vendor and the purchaser. For a company that goes into liquidation or administration, the costs of resolving the problem that I have described are borne by the shareholders and creditors. It is important that that is clear. Rather than it being discussed by way of a comment in Committee, or put in the code of practice, it should be in the Bill, so that people know fully who is expected to pay for the resolution regime.