Clause 29

Financial Services Bill – in a Public Bill Committee at 5:00 pm on 15th December 2009.

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Power to require FSCS manager to act in relation to other schemes

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

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 5:15 pm, 15th December 2009

This relatively straightforward clause tries to formalise something that already exists. It concerns the powers to require the Financial Services Compensation Scheme to act in relation to other schemes. Under the provisions, the FSCS can make payments on behalf of other compensation schemes, including arrangements that do not relate to other authorised financial services firms under the Financial Services and Markets Act 2000.

The impact assessment is quite instructive in explaining the motivation behind the provisions. It states:

“In 2008 the FSCS went beyond its formal remit to ensure that eligible claimants in failed banks were fully compensated for their deposits, including those in the UK (Icesave) branch of... Landsbanki...by paying the compensation due from the Icelandic deposit-guarantee scheme”.

The key word in that passage is “formal”, because what we have seen, in effect, is the FSCS acting in relation to other schemes. It would appear to have done so successfully last year, but I suspect that it is probably one of those areas—there are several cases in the Bill—where people have acted to do the right thing but have not necessarily had the legal basis to do it, so it would be helpful to put such things on a more formal footing.

I do not think that there is anything particularly objectionable in the clause, but a couple of points emerge. The Association of British Insurers has pointed out that the EU is looking at compensation schemes on a cross-border basis at present, and whether it should plan to include one compensation scheme acting as the agent of another as part of its reform of the deposit guarantee schemes directive.

As we clearly have interim arrangements that work, is it appropriate for us to push ahead with the measures in the Bill when we may have to revisit them as a consequence of an EU directive? Given that there are moves around the EU to harmonise rules in this area, why should we react now? Why not wait until the directive is formalised?

The British Bankers Association in its representation suggested that the Bill as drafted will permit the FSA to make rules that allow the FSCS to levy UK deposit takers for irrecoverable management expenses incurred in respect of overseas schemes. I am all for UK deposit takers picking up the tab for resolving problems around UK institutions, but are we sure that we understand the true extent of the additional liability that deposit takers will take on if they are to recover the FSCS management expenses as a consequence of administering overseas schemes? In the discussions Ministers have had with their counterparts in Europe about the move to a  harmonised directive, have they discussed any provision for a scheme acting as an agent on behalf of another scheme recovering such costs from the home state’s deposit protection scheme and its levy payers, rather than having to recover them from UK levy payers?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The power to require the FSCS manager to act in respect of other schemes has been widely welcomed by respondents to the “Reforming financial markets” consultation. They agreed that the measure will be of real and practical assistance to depositors. Respondents to the consultation were keen to stress that the authorities must ensure that there is no additional cost to FSCS levy payers. That is the point that the hon. Gentleman raised. I confirm that that has always been the Government’s intention, and that the Bill includes suitable safeguards to ensure that in carrying out the new function, the FSCS will take on minimal financial risk. When it is acting on behalf of another scheme or authority, that scheme or authority will be expected to meet all the compensational costs and additional management expenses incurred by the FSCS in making the payout. The FSCS will be able to decline to act if it is not satisfied that funding is being, or will be, provided to meet the expenditure and expenses it will incur. A number of other grounds on which it may decline to act are set out in detail under the clause.

On the wider point made by the hon. Member for Fareham about the European Commission’s consultation on co-ordinating deposit guarantee schemes, it has always been the Government’s view that effective cross-border arrangements for deposit compensation are crucial to ensure the protection of depositors and confidence in the banking system. It is well known that the FSCS has already had to act as a paying agent for a foreign scheme, so the provision is a basic measure to ensure that it has the legal basis for that co-operation so that United Kingdom depositors can be paid out quickly and effectively, which is in customers’ best interests.

Our approach is fully compatible with the existing provisions of the deposit guarantee scheme directive. If the directive is revised in the light of the Commission’s report, we consider that the measures are likely to be compatible with any such revisions. Of course, there is always the unlikely event of some incompatibility and, in those circumstances, the Government will take the usual approach and use the powers under section 2(2) of the European Communities Act 1972 to make any necessary amendments. However, we believe that what we are doing is consistent with what seems to be an emerging approach that will be operated on a pan-European basis.

Photo of Andrew Love Andrew Love Labour, Edmonton

I apologise for asking a probing question, but the Treasury Committee received a great many representations from people with deposits in offshore centres, particularly around the United Kingdom. Are there implications for people in those circumstances? Will they continue to have to look to the offshore centre for compensation?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Yes, that is the case. The situation is very much the same as has been outlined previously. It depends on the identity of the host regulator, which we have made clear on several occasions.

The measure has been welcomed as a result of the consultation exercise that we conducted. We are introducing it under the Bill, and I hope that the clause is accepted.

Question put and agreed to.

Clause 29 ordered to stand part of the Bill.