(5A) The scheme manager may request the Treasury to appoint an auditor in accordance with the regulations set out in 214D(6) to confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power..
I am pleased that the Minister gave an example of a policy he supported without any evidence to back it up. That was going to be my intervention, but we have one on the record now. Veterans of the Banking Act 2009, such as the hon. Member for South Derbyshire, the Minister and the hon. Member for South-East Cornwall will remember the details of the financial services compensation scheme, but I should like to put my amendment in context for those who missed out on the great opportunity to serve on that Committee.
Professor Buiter, who gave evidence for the Treasury Select Committees report on Northern Rock and who did not get round to teaching me when I was at the LSE, argued that the financial services compensation scheme had nothing to do with financial stability and was purely social policy. As we know from the 2009 Act, the FSCS has become a fundamental part of the special resolution regime and it serves as a way to maintain financial stability when a bank or a building society is put into the special resolution regime. It has been used quite often now, with Bradford & Bingley and the Dunfermline building society, and it is an established part of that architecture. The 2009 Act put in place the legislative framework for the FSCS to act in this role.
We have today, a mere number of months since the Banking Act 2009 received Royal Assent, an opportunity to rewrite part of that Act as it applies to the FSCS and to introduce new section 214B into FSMA as well as some further safeguards. Proposed new section 214B confers a power on the Treasury to require the FSCS to contribute to the costs incurred in applying the stabilisation regime. The amount is limited to that which would have been payable in the counterfactual scenariothat is, if the bank in question had become insolvent and an independent valuer was appointed to calculate the likely amount of recovery.
Proposed new sections 214B and 214D bring some corrections and clarifications to the 2000 Act. Most significantly, in subsection 2 of the clause we have amended the provision so that it applies from 19 November 2009, which allows interest to be taken into account in calculating the FSCS contributions from that day onwards, when a special resolution regime power is used. The Bill gives the FSCS the ability to charge interest on the Dunfermline loan, a provision that was omitted from the previous Bill. When we passed the 2009 Act, the expectation was that the FSCS would bear the full cost, but because of the costs that the FSCS is likely to bear the Government decided to charge the interest rather than the resolution costs to the FSCS.
I will turn to my amendment in a moment, but I wish to ask the Minister a question about an issue that we touched on during the passage of the 2009 Act. I had hoped that the Minister would use this Bill to fill in a gap, and give the FSCS and all the levy payers a greater insight into what happens in the wind-up of the affairs of banks that are being bailed out. At the moment, the FSCS does not have a formal role in looking at the activities of institutions that are being wound up, and it does not know whether those activities will be wound up in a way that will minimise the costs to itself. It is difficult for it to understand just what the likelihood of recovery is, and the problem arises, therefore, of how much levy payers are likely to have to pay in the future. Greater transparency in that process would help, as would improving the governance arrangements. I wonder whether since our debate on the 2009 Act the Minister has given any further thought to the improvement of governance arrangements.
My amendment inserts a new subsection (5A) into proposed new subsection 214B, under which the scheme managerFSCSmay
request the Treasury to appoint an auditor in accordance with the regulations set out in section 214D(6) to confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power.
A question might be, Why do we need that, given that section 214D(6) provides for the independent verification of expenses incurred? This must be for the verification of other matters, and the regulations will be introduced about the appointment and payment of an auditor. The hon. Member for Wolverhampton, South-West will probably suggest that I should have tabled a further amendment to take out the powers under section 214D(6), but the point of my amendment is to focus more precisely on ensuring that the costs that the FSCSultimately its levy payerswill incur are strictly related to the exercise of stabilisation powers. The levy payers can therefore take some comfort in the fact that the costs being incurred are the right costs and they are not picking up a bill for anything else, and they can know that they are getting value for money for what they are paying out. The wording in my amendment makes the provision slightly tighter, and ensures that the levy payers get comfort in the absence of any other improved governance arrangements. That acts as a safeguard for those who ultimately have to pick up the bill.
I support the amendment and the hon. Member for Fareham has said all the right things as to why it should be accepted. I want to add that, while the costs of the special resolution fall on the levy payers, it is actually members of the public who will ultimately have to pay for it. The costs will go back to the building societies, and you and I, Mr. Gale, and other members of the public, will be forced to pay the levies in one way or another. It is therefore important that the costs are contained and looked at. We also need to ensure that they are reasonable and that the reasons for them are addressed.
It was mentioned during todays Treasury questions that the Dunfermline building society has lost £26 million in costs, auditors fees, consultants and so on. That seems an extremely large sum of money for a medium-sized building society; £26 million is a lot of money. If that is to be covered by the levy payers, they will have to recoup the moneythey will do that in various waysbut it is ultimately the taxpayer, the depositor, the borrower and the customers of all those involved in the levy who will one day have to pay it. The issue is of genuine public interest.
When I first read the clause, I was reminded of the words of Andrew Whittaker of the FSA during the evidence sitting. He warned us that costs will be sensitive and that at this stage we need to provide as much evidence as possible to ensure that we are reactive to that sensitivity. I am struck by how little there is in the clause about the auditors role compared with that of the valuer.
The two activities are actually quite similar, which raises an ancillary question. The cap on the limited expenses is set against a hypothetical scenario of insolvency. I have never been an insolvency practitioner, but I have worked alongside them and my impression is that, whatever the ground rules, what makes one practitioner better than another in what they can get out of an insolvency is their skill, their context and the way they use those principles.
The clause, however, offers a hypothetical scenario that is supposed somehow to set an average. It would be useful to know what principleswhich, it is alluded, will be implemented in regulationswill apply to ensure that we can see in detail and have a good understanding of what is going on behind the hypothetical scenario.
The hon. Member for Fareham shot his own amendment down when he referred to proposed new section 214D(6). As he knows, that section already provides for independent verification of special resolution regime costs, as does section 214B in its current form. It is difficult to see what a second level of audit or verification would add, and that second level would also be likely to be included in the SRR costs.
It might be helpful if I explain our view. The financial services industry as a whole benefits from the existence of a credible regime for bank resolution and depositor compensation, and the confidence that that provides to customers. It is right that when the authorities intervene to resolve a bank or building society that is failing, the industry, not the taxpayer, should pick up the tab. I think that is something that all our constituents would recognise.
Nevertheless, I recognise that many in the industry are concerned that that means that the authorities will have too little incentive to control costs. There is a feeling within the industry that there should be something akin to a creditors committee operating that would exercise greater cost control. I am not sure that the amendment would deal with such concerns.
The auditor would be required to check that the financial services compensation scheme was being asked to pay only for SRR costs and not other expenses of the authority, and he or she would not be asked to check whether those expenses were excessive or unnecessary. That can be done already. To reassure the Committee and those who follow these proceedings, I will set out what measures are in place to ensure that the FSCS contribution to SRR costs is properly controlled.
First, the FSCS contribution to SRR costs is capped to a level it would have had to pay out if the failed bank had gone into insolvency, as the hon. Member for Fareham rightly notes. That will still be the case after clause 28 is enacted. The clause simply ensures that interest is included in the costs. It is not possible for Government action under the SRR to result in the FSCS having to pay more than it would have had to pay if the Government had not intervened.
The second point is that in carrying out a resolution, the authorities must balance the five statutory resolution objectives, as we discussed at great length during the passage of the Banking Act 2009. The objectives already cover the key elements of a successful SRR actionprotecting financial stability, protecting depositors and protecting property rights. There is no need for an explicit least-cost-to-industry objective.
There are also measures in place for an independent assessment of costs that the FSCS may be expected to bear. As well as provision for the costs incurred in an SRR to be independently verified, the legislation explicitly requires the appointment of an independent valuer to calculate the amounts the FSCS would recover from the bank under a hypothetical insolvency.
It is vital that the authorities are accountable for action taken under the SRR, and the Government appreciate that industry has an economic interest in the outcome of the resolution, but so do the taxpayer and the wider economy. That is why, in exercising the SRR powers, the authorities are accountable through Parliament to the wider public for how they have gone about achieving the special resolution objectives.
The statutory limit on the FSCS contribution to the SRR costs ensures that the industry will not have to pay more than it would have done if the firm had failed and the Government had not stepped in. That is the fundamental point to appreciate. I hope that my explanation clarifies the situation with regard to FSCS contributions to SRR. [Interruption.] I invite the hon. Member for Fareham to withdraw his amendment.
I am pleased that the hon. Member for Leeds, East found the Ministers answer acceptable on this occasion. In Tuesdays evidence session, he told a witness that their answer had made him happier than the Ministers. Clearly, the Minister has been working on the quality of his answers to keep the Whip happy.
Let me explain my concern. The Minister said that the levy payers will have to pay out no more than they would have done had the business become insolvent and the normal operation of the FSCS been applied. That almost gives a credit card limit. As we said in an earlier debate, people will spend up to the limit rather than trying to control costs. While the measure might cap the upside of the potential exposure, it does not give levy payers the reassurance that costs have been incurred wisely and carefully with a view to minimising their costs.
My amendment is better than the Governments proposal on this occasion. Verification would be easy, because it would just require someone to check that the costs had been incurred. Before I came to the House I was an auditor. Verification simply means saying, This is what is in the records of the resolution authority. These are the invoices that have been received and paid out again. It a very mechanical process that requires little judgment. I am looking for a process that goes further than that and includes a check to ensure that the costs are
wholly, exclusively and necessarily incurred in pursuit of the resolution regimeto use language from elsewhereand in respect of the exercise of the stabilisation powers. My wording is tighter and would give more comfort to levy payers.
The hon. Gentleman tempts me to return to an earlier pointwe have come full circle. Proposed new section 214D(6)(c) says
may contain provision about the appointment and payment of an auditor.
Why did he not draft a simpler amendment changing may to shall?
The Treasury will, of course, draw up the regulations, whereas the amendment would give the scheme manager the power to request that the Treasury appoint an auditor. A bit more control would pass to the FSCS and a bit less to the Treasury. I could have finessed the drafting and tinkered around a bit more, but I wanted to get a point across. This should be considered from the levy payers point of view.
The hon. Member for South-East Cornwall was absolutely rightultimately, the customer of the bank or building society will pick up the cost. Anyone who has had a conversation with building society senior executives over the past year will know the extent to which they believe that the costs to the FSCS have impacted on the rates that they can offer savers and charge mortgage payers, so there has been a flow-back.
I want to see what additional governance arrangements could be put in place to reassure the people who are paying the levy that the expenses incurred would be reasonable. The opportunity for the scheme manager to put in an auditor to look at the subject more tightly might help to get that reassurance across. I am still not content that the governance arrangements properly balance the interests of the taxpayer, the resolution authorities and the people who ultimately have to foot the bill. We rehearsed these issues a little during the passage of the 2009 Act and it has been useful to explore them again.
At risk of prolonging the debate, I can understand the hon. Gentlemans point about a scheme manager, but I do not accept that his amendment is superior to what the Government propose. He said that he was asking for more than verification, but I do not see how his amendment would achieve that. It suggests only that the auditor should
confirm that the expenses have been incurred as a consequence of the exercise of a stabilisation power.
He seems to be saying something that his amendment would not deliver.
I disagree. We need to ensure that the costs incurred are properly controlled and the Bill does not get us to that point, frankly. The Ministers assurance about a cap on the amount that levy payers would have to pay if a bank went through the usual processes with the FSCS is not adequate to reassure levy payers and, ultimately, the customers of those institutions. We need to find a way to tighten up that process; this may not be the right way, but other aspects of the resolution regime need to be determined as well. We may come back to those at some point and tighten them up.
The hon. Gentlemans seems to have implied that reasonably is in the third line of his amendmenthave been reasonably incurred. He seems to be addressing it, although it is not there. That addresses the point made by the Minister, who rightly criticises the amendment for not including the words reasonably incurred, and therefore being about mere verification rather than the audit the hon. Gentleman seeks.
One thing that I have learnt serving on Committees with the hon. Gentleman over the past four or five years is that he and I should talk about amendments before I table them. He adds that extra bit of finesse that might avoid at least one set of interventions. He gives me food for thought that might encourage me to return to the point on Report. On that basis, and as I have the opportunity of the Christmas recess to cogitate further, I beg to ask leave to withdraw the amendment.