Clause 10 - Passporting: exercise of EEA rights and Treaty rights
Financial Services Bill
Cathy Jamieson (Kilmarnock and Loudoun, Labour)
I thank my hon. Friend for that question. It is perhaps a point that the Minister will come to. According to the FSA website, there are new proposals that every authorised bank, building society and credit union in the UK would have to display prominent stickers and posters in branches stating the deposit compensation scheme to which it belongs, the country in which the scheme operates and the compensation limit that customers may receive. A similar statement will also have to appear on the websites of those banks, building societies and credit unions. The question— I am sure this is what my hon. Friend is getting at—is whether that will be enough.
If the regulators do not start to track awareness and do not have a baseline—again, I would be interested to hear from the Minister what that baseline will be—it will be difficult to know whether the campaign is working. By their very nature, we find out that such things are not working when they are not working, if that does not sound like a silly thing to say. It is when problems arise that people come along and say, “Well, actually, I didn’t know about it. I didn’t see that. I didn’t know where to look. Nobody told me.” So I realise the difficulties.
In reality, however, the PRA’s main power will be to make public its limited role in regulating such firms and to work with the FCA to ensure that consumers understand that deposits in passported banks are not covered by the FSCS. The PRA has said that, where it does not have much information
“it will make that understood publicly so that there is no misunderstanding about what it can do and so that it is clear to depositors that they are not protected by the home state regime”.
Again, it is difficult to know whether people will understand that.
There is some public awareness. There was an article in The Daily Telegraph in December 2011 that stated:
“A number of overseas banks now offer market-leading savings accounts to UK consumers. Surprisingly…it’s not the ones from far flung destinations, like India, Pakistan and Nigeria you need to worry about, it’s the ones from European.
If a bank is outside European Economic Area have to be fully registered with the FSA to offer savings here, which includes full protection under the FSCS. However, some European banks can operate a ‘passport’ scheme, which means they are regulated, but in the unlikely event of them collapsing, customers would have to claim from the compensation scheme running in the bank’s home country. All European protection schemes now offer the same level of compensation (euros 100,000) but customers may be less confident about speedy redress if they are dealing with an overseas quango, application forms in a foreign language and of course, a country that may itself have serious debt problems. When the Icelandic banking system collapsed it’s own citizens were not surprisingly first in the queue for payouts.”
I hope the Minister will be able to address those points.
Amendment 160 addresses depositor guarantees on savings brands. We believe it is important that the FSCS is applied on a per brand basis, rather than on a per institution basis. Consumer organisations, including Which?, support that move. The FSCS’s payout limit should apply to each company within the groups that own them. There are commercial benefits to marketing brand by brand. By branding in a certain way, people will expect the guarantee to follow the brand rather than the institution.
Currently, the way in which the protection applies depends on how a bank is licensed, which is a bureaucratic distinction. With some affiliated banks such as Halifax and the Bank of Scotland, both of which are owned by Lloyds Banking Group, the limit is divided between the companies; and with others, such as the Royal Bank of Scotland and NatWest, the limit applies to each company separately.
A scheme that provides assurances per brand would be simpler for consumers to understand and lead to better appreciation of the protections afforded to the scheme. Simplifying the scheme so that the protection applies to brands rather than institutions would also help raise awareness of the scheme.
The issue is being debated in the European Parliament, which has approved per brand protection. I understand that that is now going to the European Council. Negotiations between the European Parliament, the European Commission and the European Council on the deposit guarantee scheme directive have stalled. We believe that that also needs to be kick-started.
This really only affects the UK so it has not necessarily been picked up or pushed by other nations. It is up to us now to decide whether to push the issue further in Europe. To be clear, unless the UK positively pushes for this change, there will not be any. Can the Minister clarify whether the Treasury is adopting a neutral approach to this or is it actively pursuing it? If the Government are pursuing the agenda, what efforts are being made? Our amendment would create what we have described as a domestic back-stop. It would give the regulator the opportunity to bring forward its own recommendations on the FSCS rather than waiting for Europe to act.
I am sure, Mr Howarth, that you will put me right if I stray from the correct procedure here. Very briefly, new clause 2 proposes that the Treasury
“bring forward regulations to ensure FSCS insured deposits are moved above other unsecured creditors and above floating charge holders in the creditor hierarchy in the event of insolvency on any imposition of losses in resolution.”
We support reform to the bankruptcy procedures so that depositors become a higher ranked creditor than senior unsecured credit—depositor preference—and so that the bond holders become exposed to the true credit risk of the bank that they are lending to.
Retail depositors are not well placed to evaluate the credit risk of the bank in which they place their deposits and therefore they are not able to provide the proper incentives to encourage bank management to control risk. We think it is also important to note that the costs of the FSCS levies are ultimately paid for by bank depositors as a whole or by taxpayers. This links to the recommendations in the Vickers report. The issue of depositor preferences was addressed in the ICB report when it stated:
“the Commission recommends that insured deposits should be moved above the other unsecured creditors and above floating charge holders in the creditor hierarchy.”
This preference applies in insolvency, but any imposition of losses and resolutions should respect the creditor hierarchy so that insured deposits also rank ahead of other unsecured liabilities and those secured by a floating charge in resolution. In their response to the ICB report the Government said:
“on balance the Government supports depositor preference, but believes that further analysis and consultation is needed on the scope of its application”.
I think that was said back in November last year.
Again, can the Minister set out a time scale for how long this analysis and consultation will take? I would not want to be left with the impression that somehow this was being kicked into the long grass, so if we could get some clarity on that it would be helpful. Again, just to be helpful, there are international examples. Depositor preference is already in place in a number of jurisdictions around the world, including Australia, Argentina, China, Hong Kong, Switzerland and the US. We would want to ensure that the Government are not dragging their feet here in the UK. If they support this in principle, the amendment would allow us to act on the Vickers proposals sooner rather than later and ensure that it was done without delay.