Clause 5
Dormant Bank and Building Society Accounts Bill [Lords]
11:15 am

Functions etc of a reclaim fund

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Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I beg to move amendment No. 26, in clause 5, page 4, line 32, at end insert—

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

The amendment continues in the spirit of the previous amendment tabled by the hon. Member for Taunton, and I am not sure whether it holds any greater chance of success. I want to introduce into clause 5 a power to ensure that, where the Government issue a direction to the reclaim fund, that direction is subject to parliamentary scrutiny. As the Government frequently point out—doubtless they will do so again today, perhaps when we have a stand part debate on the clause—the reclaim fund is a private company and the Government will not have a great deal to do with it. As with any other private company, it will be regulated by the Financial Services Authority. Yet, when we look at the detail of the clause, subsection (4) will give the Treasury the right to “give a direction” to the reclaim fund, requiring it

“to give effect to any specified object that it has, or...to comply with any specified obligation or prohibition imposed on it by a provision that its articles of association are required to make under Schedule 1.”

We touched on the issue briefly on Second Reading last week. I asked the Minister if it would be possible for the Treasury to give a direction to the reclaim fund to transfer more money to the Big Lottery Fund. After a while, we got the answer—I paraphrase significantly—yes. It will be possible, in exceptional circumstances, to use the power of direction to encourage or require the fund to transfer more money.

If the Government intend to have such power of direction, it should be subject to proper parliamentary scrutiny. In such circumstances, the Government would be saying, “We do not agree with the prudent decision that the board of the reclaim fund has made to hold back this amount of money. We believe that, in the interests of maximising the amount of money in the Big Lottery Fund, the right decision is to transfer across another £20 million, £30 million or £40 million.” The Government’s exercising such powers without parliamentary scrutiny is not appropriate. What if the reclaim fund is left short? We had the assurance in the other place that the financial services compensation scheme would meet the needs of customers, but it would not be satisfactory for the private sector to pick up a shortfall through the FSCS.

There is a need for proper parliamentary scrutiny of the directions that the Government can give to the reclaim fund. Without that, the directors of the reclaim fund will be in a difficult position. We are giving the Treasury powers without proper parliamentary scrutiny. The Minister ought to accept the amendment, in the spirit of trying to improve the scrutiny of the operation of the reclaim fund. We are told that the fund is a private body; but at the end of the day, it will be subject to those Treasury directions.

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

I understand the intention of the amendment, which is to probe the Treasury’s use of its power to direct the reclaim fund to comply with the legislation and to ensure greater parliamentary scrutiny. We touched on the issue on Second Reading. I hope that the comments that I can put on the record today will help to give the hon. Member for Fareham and others watching the proceedings some reassurance.

Clause 5 contains a direction-making power, as the hon. Gentleman said. We see it as an ultimate safeguard, which allows the Treasury to take action to ensure that a reclaim fund complies with the requirements to which  it will be subject as a result of the Bill. I want to emphasise that the direction will do no more than require the reclaim fund to give effect to, or comply with, the requirements to which it is already subject under the Bill, which will have been approved by Parliament.

Let me be as clear as I can about how I see the power being used. The Financial Services Authority will authorise the reclaim fund and put in place ongoing prudential regulation, to ensure that the reclaim fund has sufficient money to repay customers. That is in keeping with the FSA’s roles of financial regulation and consumer protection. It is not expected to go beyond its statutory objectives and make rules that govern other areas of the reclaim fund’s operations. The Government do not envisage using the direction-making power in the Bill to interfere in any way in the day-to-day running of the reclaim fund and the management of its money. It will be the FSA’s sole responsibility to regulate the reclaim fund for prudential purposes.

The power is an ultimate sanction, which the public would reasonably expect us to have to ensure that the reclaim fund functions in accordance with its articles of association, particularly in those areas that the FSA will not regulate for prudential purposes. That is an important point. Such areas include, in principle, the requirements in schedule 1—for example, the publication of information by the reclaim fund, the use of money to cover reasonable money costs or the requirements elsewhere to transfer surplus money to the Big Lottery Fund.

Again, I emphasise that we do not expect to use this power. These issues are primarily a matter for the company’s directors and members, but the power gives us the ability to act in exceptional circumstances. That is all. It is not a question of using a direction if we just had an honest disagreement about the distribution policy of the reclaim fund. It would be used if there were in our view a fundamental breach of the company’s responsibilities that have been set out in legislation. Only in those circumstances would we want to act without delay in the interests of account holders.

11:30 am
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Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I find it difficult to comprehend what exceptional circumstances the Minister refers to, since he does not appear to mean an honest disagreement between the reclaim fund and the Government about the amount being transferred. Will he give a better example of the areas where the Government feel that they might have to give directions to the reclaim fund?

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

We do not have particular areas specifically in mind because we do not anticipate any problems. This is a voluntary scheme. A private company is going to be set up in accordance with the legislation, and we have confidence that it will appoint people who will run the reclaim fund in an effective way. This is very much a back-up power in the case of unexpected circumstances.

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Charles Walker (Broxbourne, Conservative)

I imagine that the reclaim fund will be carrying a balance. What will be the rules for investing that balance? Will it have to keep it in cash or will it be allowed to make investments? If it is allowed to make investments, will it invest, for example, in Government bonds and public bonds, or in Icelandic banks?

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

I seriously doubt that it will invest in Icelandic banks. This is not a matter for primary legislation. It will be up to the private company to decide how it manages its money for the length of time for which it has it, the extent and size of a contingency fund for moneys that will be reunited with customers, and the extent of the funding requirements that it will pass on to the BLF.

In response to the hon. Member for Fareham, I stress that we see this very much as a back-up power to be applied if there were a clear breach of a company’s articles of association. This would include failure to publish information, as we want the reclaim fund to operate transparently. Serious concerns about the behaviour of the company might warrant the Government wanting to take action, and we think there should be a power there. I hope that I have reassured the hon. Gentleman that we do not intend to use this power routinely—it should be considered wholly exceptional.

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Mark Field (Cities of London and Westminster, Conservative)

Does the Minister accept and recognise the heart of the concern that has been raised by my hon. Friend the Member for Fareham in tabling the amendment? Whereas in national lottery legislation there is a clear delineation between the raising of the money and its distribution, with the latter being in the hands of the BLF, in this instance, even with the exceptional use of these powers, there will be a muddying of the water in that the power of distribution will no longer be exclusively in the hands of the Big Lottery Fund, as we shall see when we discuss later clauses dealing with precisely how the powers will operate. That is the nub of my concern. There should at least be some opportunity for Parliament to have its say through the statutory instrument provision.

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

I understand the hon. Gentleman’s point. However, the reclaim fund will be set up as a private company and incorporated under UK company law. It will have articles of association and be regulated by the FSA. We will have a power under the Bill that can be used in exceptional circumstances if we believe that the company is in breach of its articles of association. That situation would not be normal. The normal situation will be that the company collects money that is given to it by banks and building societies from dormant accounts. It will have a business plan whereby it makes decisions about how much of that money can be distributed to the BLF, which will then issue it to good causes, and how much needs to be kept back as a proper contingency against future claims on the reclaim fund from existing customers with dormant accounts. Only in exceptional circumstances might the Government need to exercise a power to require the reclaim fund to do certain things. I do not think that it would happen, but if the reclaim fund suddenly decided that it did not want to publish information and there were serious concerns about the propriety of how the company was being run, the taxpayer would want the Government to intervene. That is the reason for the back-up. We do not intend to use it other than in wholly exceptional circumstances. It is normal to have reserve powers of that sort under legislation.

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Charles Walker (Broxbourne, Conservative)

Will the Minister clarify whether a private company will pay corporation tax on any surpluses that it builds up in its accounts?

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

I do not have information on tax status to hand, but I will make sure that the hon. Gentleman receives it during our sitting.

I hope that I have explained the exceptional nature of the power that is being taken and why we do not support the amendment. As we have seen from the events of the past few days, it is sometimes necessary to intervene in a time of unexpected crisis. Having the power to do so is a good thing, and I would like to think that in this week, of all weeks, Opposition Members appreciate that too.

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Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

Perhaps the directors of the reclaim fund would be grateful that the Government lost their 42-day provision in the House of Lords last night, as otherwise they could be detained without trial in exceptional circumstances.

In reassuring the Committee about the exceptional nature of the powers to intervene and when they might be exercised, the Minister almost makes the argument for why parliamentary scrutiny of such matters would not be a bad thing. It will not be a daily occurrence. We will not have to sit here week in, week out, approving directions. The powers will be exceptional, and as such need parliamentary scrutiny.

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Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat)

I would find it immensely reassuring if the hon. Gentleman could assure me that, in the unlikely event of a Conservative victory at the next general election, such a provision would be a priority on which to legislate at the beginning of the new Parliament.

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Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

One thing that I learned when I was a member of the Finance Bill Committee is that I could give way to too often to the hon. Gentleman. I shall not go down that route, because he will change his policy before we know it.

The Minister said that the scheme is voluntary, that the company is private and that it will be regulated by the FSA. Would we expect the Treasury to have these powers in the first place? I think that most people would say not. If the Treasury does have powers to give direction it is important that, given their exceptional nature, they are not to be used willy-nilly but only in a moment of crisis.

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

In times of crisis we sometimes have to act extremely quickly. I stress that we expect to use the powers only in exceptional circumstances, but I will give the hon. Gentleman a hypothetical situation. If the company directors of the reclaim fund suddenly wanted to make an investment decision to put £200 million into an Icelandic bank and the Government got wind of that, it would be a good idea to stop them. We could not lay an order in the House and then debate it before taking action, which is what we would have to do under the affirmative procedure. In such exceptional circumstances we might need to act very quickly, which is why the negative procedure is the appropriate to way to operate.

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Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I am not sure whether the Minister’s example is a good one. When the Government took Northern Rock into what was then called temporary public ownership, we had not debated the affirmative resolution before the decision was made and nationalisation  had gone ahead. If the Treasury is going to use the powers in exceptional circumstances and they will be reserved for such cases, there should be proper parliamentary scrutiny of the exercise of those powers. This will give the Government power to intervene in a voluntary scheme run by a private company, and that cuts across the nature of the scheme by undermining its voluntary nature. The Minister has not given a satisfactory explanation of why we should not go down the affirmative resolution route.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 8.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

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Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I want to spend a couple of minutes trying to understand more about the reclaim fund, because it is one of the key elements of the Bill. It will be required to hold sufficient reserves to meet the repayment of account balances that banks have deemed to be dormant. This is an opportunity for the Minister to say a little more about how the reclaim fund will work in practice. The point was made in the previous debate that this will be a private company, but will the Minister indicate who will actually establish it? Will it be established at the direction of the Treasury, or will it be established by the banks and building societies as part of their involvement in the scheme?

The reclaim fund has an important role in regulating the flow of money to the Big Lottery Fund from dormant accounts and in ensuring that sufficient reserves are in place. Will there be a consumer representative on the board of the reclaim fund to ensure that consumer interests are safeguarded and that any distribution policy will strike the right balance between feeding the distribution fund and meeting the repayment claims from customers? How would it set about establishing the right reserves for repayments? [Interruption.]

11:45 am
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Joe Benton (Bootle, Labour)

Order. I am sorry but the background noise is getting a little high. I do not know whether the acoustics of the room do not help, but it is getting difficult to hear. I ask people to keep the noise down.

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Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

Thank you, Mr. Benton.

Will the reserving be dictated by the prudential regulation of the reclaim fund by the FSA, or will the directors be required to come up with their own reserving strategy, which might lead to balances being held in the company  in excess of those required by the FSA? I was going to ask what sort of information the reclaim fund would have, but we have discussed that under amendment No. 1.

One theme that ran through the debate on Second Reading was that of ensuring that the costs associated with the scheme were kept to a minimum. What discussions has the Minister or his officials had with banks and building societies about the projected costs of administering the reclaim fund? The higher the cost, the less money will be available to distribute to the Big Lottery Fund and the three spending priorities. Will those costs be borne by the banks and building societies, or will they be paid for out of the dormant accounts balances transferred to the fund?

One of the reasons why the Bill took longer than expected in the Lords was that the opacity around the operation of the reclaim fund detained their lordships for some time. I hope that there are clearer answers now than there were earlier this year.

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

The clause defines a reclaim fund as the body that will receive dormant account money from banks and building societies, by setting out criteria that must be written into its constitution. It will ensure that the reclaim fund uses dormant accounts money only for specific purposes: to repay customers, to ensure that it has sufficient reserves to meet anticipated claims and to make any surplus available for distribution to the Big Lottery Fund.

As I have explained, the industry will establish the reclaim fund and it will be a private company. Last year, the BBA and the BSA published a detailed timetable to establish a reclaim fund between now and 2009. That has been updated this month in their most recent press notices. They are proceeding to identify a candidate and to work with them and the FSA to have a reclaim fund up and running next year.

The reclaim fund will invest and manage dormant accounts money prudently to meet reclaim applications. Only money not needed to meet the reclaim risk or reasonable running costs will be released for distribution. The clause should be read alongside schedule 1, which places certain requirements on the reclaim fund. The BBA has stated publicly that costs will be clear and transparent. Schedule 1 makes it clear that expenses cannot be unreasonable.

The hon. Member for Fareham asked how the reclaim fund will establish how much money it needs to keep back. The reclaim fund will determine that in accordance with the FSA rules. The FSA will consult separately on its rules, following Royal Assent.

I shall give more information on the point about costs. The reclaim fund will be able to meet reasonable running costs and have the option to outsource key tasks—for instance, the investment of funds transferred to it. That is necessary if it is to be run efficiently.

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

I want to be clear on this point and then I will give way.

The legislation makes it clear that the fund may not defray unreasonable expenses, including making unreasonable payments to third parties. We will debate some of that with schedule 1. The fund may not make  distributions to its members, which would be out of keeping with the essential purpose of the scheme, which is to make money available for reinvestment in the community. The industry has made clear that it will defray its costs on a publicly disclosed basis.

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Charles Walker (Broxbourne, Conservative)

I do not expect the Minister to answer this today, but perhaps he could write to me. He refers to the reclaim fund investing money. It would be helpful to the Committee if we got a note of what asset classes the reclaim fund will be allowed to invest in. I raised that a few moments ago, but it would be helpful in reassuring the Committee that the money will be invested in safe and secure financial instruments.

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Ian Pearson (Parliamentary Under-Secretary, Department for Business, Enterprise & Regulatory Reform, Economic Secretary, HM Treasury; Dudley South, Labour)

The investment policy of the reclaim fund is not a subject for the Bill. Investment activity would obviously be regulated through the FSA. The private company would determine its investment policy in accordance with the Bill and the prudential regulation regime that we have for companies of this nature.

Question put and agreed to.

Clause 5 ordered to stand part of the Bill.