Only a few days to go: We’re raising £25,000 to keep TheyWorkForYou running and make sure people across the UK can hold their elected representatives to account.

Donate to our crowdfunder

Clause 157

Banking Bill – in a Public Bill Committee on 13th November 2008.

Alert me about debates like this

Special resolution regime

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to take Government amendments Nos. 178 and 17.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

It is a pleasure to serve under your chairmanship, Mr. Gale. Without wishing to intrude into what would normally be the province of a clause stand part debate, I shall first say something about clause 157. I emphasise that the clause allows the Treasury to require the Financial Services Compensation Scheme to contribute to the costs of the special resolution regime. As we have discussed before, the Government believe, as a point of principle, that the financial services sector, through the FSCS, should contribute to the costs of the SRR.

The amendments are all technical. Government amendments Nos. 177 and 178 amend the clause to allow the FSCS to contribute to the costs of the resolution of building societies and, if the stabilisation powers were extended to credit unions, credit unions as well. That ensures that our approach to the FSCS contributing to the costs of resolving banks can be extended to building societies and, if needed, credit unions. We discussed that earlier today.

Government amendment No. 17 ensures that the FSCS contribution to the SRR will not be classified as FSCS management expenses. That brings the treatment of the FSCS funding of the SRR in line with the treatment of the FSCS funding of compensation payments to claimants under the scheme. I commend these sensible technical amendments to the Committee.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

It is a pleasure to serve under your chairmanship, Mr. Gale. I point out, for the benefit of Government members of the Committee, that it is only as a consequence of the presence of Opposition members in Committee this afternoon that the Committee can continue, as I think that the Government Benches are not quorate. I am sure the usual channels are cognisant of our good will in ensuring that the Bill proceeds.

Photo of Bob Blizzard Bob Blizzard Government Whip

By maintaining their places, Opposition members enable Government members to be carrying out other duties in the corridor. Those members will return to Committee in due course.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

It is always better for armies to be visible than invisible, according to my friends with military experience.

I want to ask the Minister about Government amendment No. 17. I had intended to raise this point in a clause stand part debate. In the context of the rescue of Bradford & Bingley, my understanding is that the interest that is being charged on the £14 billion that the FSCS has borrowed is classified as management expenses and therefore will be borne not by the depositing sector within the FSCS, but by all participants in it—independent financial advisers, investment managers, insurers and so on. I listened to the Minister’s explanation of Government amendment No. 17. Will that have retrospective effect or will IFAs and others have to bear that cost, as it is currently classified as part of the management expenses?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

My understanding is that the FSCS was used to fund the deposit book transfer of deposits to Abbey Santander, and this is similar to the provisions in the banking insolvency procedure in the Bill for a deposit transfer, which the Bill provides for the FSCS to fund through clause 110(1)(b). Provision by the Treasury under clause 110 for the FSCS to fund the use of a stabilisation tool would technically occur before the onset of insolvency, and therefore before the FSA can currently activate the FSCS. However, that does not mean that the firm in difficulties might be resolved at lower cost to FSCS levy payers.

As I explained when dealing with amendment No. 17, our intention is to bring the treatment of FSCS funding of the SRR into line with that for its funding of compensation payments to claimants under the scheme. We believe that we have achieved that.

The hon. Gentleman asked about interest. Yes, interest is regarded as a management expense. However, it is a specific expense that is borne only by deposit takers, so individual financial advisers do not pay. I hope I have clarified the point.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Minister for that clarification. Having had conversations with IFAs, I know that the position that he has outlined will be welcome to them, as there was ambiguity about the provisions for the FSCS and others. IFAs will be grateful to the Minister for clarifying the matter.

Photo of Colin Breed Colin Breed Shadow Minister, Treasury

I accept the amendments. However, I am sure the Minister is aware that there is much disquiet among building societies about their contributions to the fund in the current circumstances. The formula is based upon their retail deposits, which in the past was not a bad measure. The more deposits they have, the more they should contribute to the fund. In today’s circumstances, we are bailing out people with relatively little in retail deposits. Much of the problem is caused by the fact that the building societies have relied on the wholesale market. It seems a tad unfair that those that have been operating with  significant retail deposits and lending a proportion of that money, which is much more prudent in today’s circumstances, are now being required to pay a larger ratio into the FSCS fund.

I put that down as a marker because I believe the Minister ought to consider the formula for contributions before Report.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

I understand the point raised by the hon. Gentleman, which was discussed briefly in earlier debates. I know that some building societies feel strongly about the matter, and I understand that they have been making representations to the Financial Services Authority, among others. I have no doubt that those representations will continue. The Government will continue to follow the situation closely.

Amendment agreed to.

Amendments made: No. 178, in clause 157, page 81, line 44, after ‘bank’ insert

‘, building society or credit union’.

No. 17, in clause 157, page 83, line 3, at end insert—

‘(2) At the end of section 223(3) of the Financial Services and Markets Act 2000 (management expenses) add “;

(c) under section 214B.”’.—[Ian Pearson.]

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

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I have some questions about the operation of the clause. I take the Minister back to his brief opening remarks on the last group of amendments. Let us look at the matter in a different way. Traditionally, when there is an administration or insolvency—a process to sort out the problems of a failing company, be it a bank or otherwise—the cost of the process is borne by the company itself, not by its peers. Why should sound and stable banks pay the costs of a bridge bank, temporary public ownership or the transfer to a private sector purchaser? Surely the investors in the company, principally the shareholders, should pay either through a lower distribution on wind-up or through lower proceeds on sale. Why is it appropriate for banks that have not failed to pay the costs of a bank that has? I distinguish between the FSCS in its normal activities and some of the costs incurred in the process under discussion.

I shall move on to more detailed questions about the individual parts of proposed new section 214B. Proposed new subsection (1)(b) states that the section applies where

“the Treasury think that the bank was, or but for the exercise of the stabilisation power would have become, unable to satisfy claims against it.”

To what extent would the bank have to be unable to satisfy those claims for the Treasury to exercise that power? We have just debated amendment No. 17 about the treatment of expenses, which relates to proposed new subsection (2). The assumption in proposed new subsection (3) appears to be that the costs will be borne by the banks—the Minister provided clarification on amendment No. 17 on that basis—but the new subsection does not make it clear that that cost will always be borne by deposit takers. Is the expectation that other members of the FSCS could bear those costs or would those costs, in the first instance, always rest with the deposit-taking sector?

On proposed new subsection (3)(a), how will the Treasury determine the costs that will borne by the scheme? What principles will it use to determine which costs will be borne by the scheme and which will be borne elsewhere? We spoke about Bradford & Bingley on the previous group of amendments. The FSCS has taken out a loan of £14 billion to fund the transfer of balances. Scheme members will bear the interest on that, which is about £900 million per year, and they could, potentially, also bear any defaults on the Bradford & Bingley mortgage book. One assumes that if a similar partial transfer had to be used in the future, the FSCS would bear the same type of costs.

I am not sure how much wider the definition of costs could go. Will the scheme cover the operational costs of a bridge bank, or will the bridge bank be expected to pay for those? If an indemnity on the value of the mortgage book is given to a purchaser, will the Government expect the scheme to bear those costs? Are there other operational costs that the Government expect the scheme to bear? What are the parameters of the costs that the scheme could bear? It would be helpful to provide some predictability.

Proposed new subsection (3)(b) states that the Treasury shall make regulations

“providing for independent verification of the nature and amount of expenses incurred”.

It also refers to the potential appointment of an auditor. I alluded to that is an earlier debate on the objectives, when I raised the issue of money being used in an efficient and economical way. Who will control and monitor the amount that is being spent? It is all very well auditing something, but that is a retrospective check. Will there be a prospective check? If the FSCS and its members are to bear the costs, is there a role for them, alongside the tripartite authorities, in agreeing the types of cost that could be incurred? Potentially, they will be writing a blank cheque to the tripartite authorities and they would like a level of control over the types of cost that they will be expected to pick up. The proposed new subsection is not clear on whether that control would be in place.

I had some difficulty understanding proposed new subsection (4), maybe because I am not a lawyer. Perhaps the drafting is clearer to those better versed in the law than I. I think it is trying to set a cap on the amount the scheme would pay, so that it would not exceed the amount payable if the stabilisation power had not been exercised. I assume that means that, rather than a failing bank’s being dealt with through one of the stabilisation options in part 1, it would become insolvent and be dealt with through administration or insolvency or the bespoke tools that we are going to deal with in part 2 and part 3. That is the comparison that will be made.

The Minister will recognise the complex and subjective nature of the judgment that the valuer would need to reach. The outcome of those judgments would have a significant impact on the cost incurred by the scheme member. Will the Treasury consult with scheme members before issuing regulations to ensure that there is some consensus on the rules that will guide the independent valuer? I am not saying that that will determine the outcome but clearly there would be an opportunity to reduce the conflict between scheme members and the  tripartite authorities—perhaps avoiding the need to appeal to a court or tribunal—if there were some consensus about the process that a valuer would use in approaching a valuation.

Again in proposed new subsection (4), I think the expense is limited to the amount the scheme would have paid out. Is this calculated on a gross basis, that is, does it not take into account the recoveries from the bank or the amounts actually paid out? If the amount that would have been paid out was £10 million but for the stabilisation options, but only £5 million had to be paid and, of that, a bank had assets that would cover £3 million of costs, it would end up with the FSCS bearing a cost of only £2 million—that is, the amount paid, net of recoveries. What is the limit that the scheme will pay? Is it the £10 million; is it £8 million, as the explanatory note suggests; or is it the level of recoveries of £3 million? I am not sure how, in proposed new subsection (4), paragraphs (a) and (b) interact with each other to determine the amount the scheme will have to bear. I would be grateful for clarification.

Regarding proposed new subsection (7), my understanding based on the explanatory notes is that these expenses could be funded from a pre-funded Financial Services Compensation Scheme. Will the Minister confirm that that is the intention of proposed new subsection (7)?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury 1:15 pm, 13th November 2008

Let me begin by restating why the Government believe, as a point of principle, that the financial services sector, through the FSCS, should contribute to the costs of the SRR. I will then address a number of points raised by the hon. Gentleman.

There are two strong arguments why the financial services sector should be contributing to the costs of the SRR through the FSCS. First, where intervention is necessary to prevent costs to the wider economy of the failure of a bank, we believe there is a compelling argument for banks to contribute to that cost because banks—and the financial services sector more widely—benefit directly from the achievement of the SRR objectives, particularly the objective of enhanced financial stability and confidence in the banking system. It is therefore entirely appropriate that the sector should contribute to measures that achieve these objectives. Secondly, but for the use of a resolution tool, the financial services sector would have to fund through the services of the FSCS the cost of compensation to depositors arising from the failure of a deposit taker. Therefore it is also entirely appropriate that the Treasury may provide that the banks contribute to the costs arising from the exercise of the special resolution regime tools that are designed to address a failing bank.

In response to consultations on the provision, the banking industry has consistently opposed our plans. In its view, the costs of resolution should be met by an acquiring company or the insolvent bank’s estate. However, industry should be called upon before taxpayers contribute to any shortfall.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Is it the Minister’s view, therefore, that the acquirer or the estate of the failed bank should bear the costs initially, and that anything in excess of that should be borne by the wider financial services sector?

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

That probably depends on the circumstances and the particular transaction. I have tried to outline the general principles that underpin clause 157. The clause notes that the FSCS will be called upon to contribute to the resolution costs when a stabilisation power under part 1 of the Bill has been used, and when the Treasury considers that, but for the exercise of that power, the FSCS would have normally been triggered to pay out to depositors under the provisions of the Financial Services and Markets Act 2000.

I shall draw the Committee’s attention to a number of safeguards that the Bill puts in place around that power. First, as set out in subsection (4)—which the hon. Gentleman spent some time discussing—the Treasury will only contribute up to the hypothetical cost of depositor compensation payments. Secondly, as also set out in that subsection, if the FSCS pays out to depositors it should not be called upon to contribute to the costs of any other resolution tools for the same bank. Finally, as set out in subsection (3), there will be independent verification of the nature and amount of the expenses incurred.

The hon. Gentleman queried the meaning of “unable to satisfy claims against it”. I am advised that that is a standard term that refers to when the FSCS will be triggered. It is in part 5, chapter 15 of FSMA. The subsections regarding the resolution received many probing questions from the hon. Gentleman. I have already drawn particular attention to subsection (4), which outlines some of the requirements of the regulations, and subsection (3) sets out that the Treasury can make regulations to specify the expenses that the FSCS should contribute to. It is important to recognise that the regulations will be fully consulted on. To return to the hon. Gentleman’s example, we do not think that the operational costs of the bridge bank would be included.

While we will consult on the regulations, it might help to briefly indicate some examples of what resolution costs could include. We have in mind the market value of any guarantees provided by the authorities to the bank, financial assistance provided to support a resolution, the administrative costs of the SRR—for example, the cost of an advisory service procured by the authorities to effect a resolution—and certain compensation costs.

The hon. Gentleman also asked whether the acquirer pays the resolution costs. Yes, the acquirer will bear those costs. For example, under the bank resolution fund the proceeds of any resolution will flow back to compensation costs.

The hon. Gentleman also raised the issue of consultation. He asked whether the Treasury will consult with scheme members on the rules that will guide the independent valuer, and I want to be clear that the answer is definitely yes. We can consult on any principles, but we must recognise that valuation involves complex calculation of a hypothetical insolvency, so it might not be appropriate to involve FSCS members in all of the independent valuer’s procedures and calculations. I hope he appreciates that throughout the Bill we have always wanted to commit to working with the industry in a consensual, open and transparent manner, and that applies to the extent that it is possible to do so in this case, just as it has with other aspects of the Bill that we have discussed.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Minister for those answers but am concerned about who will bear the costs initially. He indicated that the acquirer would bear  some of the costs through the bank resolution fund, but I am still not clear that the creditors and shareholders would bear some of that cost as well. I am with the Government on ensuring that the taxpayer does not bear the cost, but there is a residual concern that in trying to do so we give the impression that the first port of call is the FSCS, rather than the acquirer or creditors. I might return to that point on Report to get a little more detail clarifying the ordering.

From the Minister’s comments about the limit on how much could be paid, I think we may take it that if the hypothetical cost was £10 million and the FSCS only paid out net £5 million, the contribution that members would make could still be a further £5 million; so the way in which that works is now clearer in my mind.

Question put and agreed to.

Clause 157, as amended, ordered to stand part of the Bill.