Clause 31

Financial Services Bill – in a Public Bill Committee at 5:30 pm on 15th December 2009.

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Asset protection scheme etc

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 5:45 pm, 15th December 2009

I beg to move amendment 10, in clause 31, page 47, line 4, at end add—

‘(10) The Treasury will lay before Parliament a report on the losses incurred by the person participating in the scheme which are included within the qualifying scheme.

(11) The first report will be laid for the period from 26 February 2009 to 30 June 2009 and will be laid six monthly thereafter until the relevant scheme agreement has expired.’.

The amendment relates to the asset protection scheme, with which Committee members from all parties will be fully conversant. That scheme is the deal through which the taxpayer supports the Royal Bank of Scotland by providing an insurance policy for the losses it makes on some of its assets. The scheme has been in design for some time: it was announced in February, when the original agreement was tabled with RBS and Lloyds. We went through a subsequent iteration of the scheme recently and Lloyds was able to buy itself out of the arrangements, but RBS is still taking advantage of those.

Clause 31 puts some obligations on RBS and gives the Treasury the opportunity to request information or documents from RBS. In my amendment I was suggesting that the Treasury should provide us or the taxpayer with a bit more information. We are standing behind RBS and are prepared to underwrite its losses, so it would be helpful if, on a six-monthly basis, the Treasury laid before Parliament a statement setting out the losses that have been incurred under the scheme so that it can keep a close eye on how much all this is costing us.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The amendment would impose in primary legislation an obligation upon the Treasury in relation to losses incurred by participants in the asset protection scheme. It further sets out a timetable for the reporting process: the first report to be laid for the period 26 February  2009 to 30 June 2009 and further reports to be laid every six months thereafter. Although I recognise what the hon. Member for Fareham is getting at, the Government’s view is that the amendment is neither necessary nor desirable, because appropriate procedures are already in place to ensure accountability to Parliament in respect of reporting on any losses incurred under the asset protection scheme. I should like to explain why I believe that that is so.

First, the Treasury has already announced procedures for reporting publicly on losses incurred by a participant to the ATS. On 7 December 2009, the Treasury published on its website a document entitled “Royal Bank of Scotland: details of Asset Protection Scheme and launch of the Asset Protection Agency”, in which it was noted that in the 2009 Budget, the Treasury set out its assessment of losses on all its financial sector interventions. The document also stated:

“Based on the due diligence of APS assets and assessment of the outlook for asset prices and the economy, HM Treasury’s central expectation is that overall net losses on the insured pool of assets will not exceed the £60bn first loss. The direct cost to the taxpayer from the APS is therefore expected to be nil.”

The document also explained that in the 2009 Budget, the Treasury set out its assessment of overall losses on all its financial sector interventions, including on the Government's equity holdings. In particular, it was stated that this assessment would be updated in the next pre-Budget report, and then in future Budgets and pre-Budget reports. It was also stated that the Treasury will make equivalent updates to its accounting treatment when producing its future annual report and accounts through the parliamentary estimates process.

Accordingly, in the pre-Budget report on 9 December the Chancellor set out the Government's expectation in relation to net losses on the assets covered by the APS. He explained that, based on due diligence of the assets and the outlook for asset prices and the economy, the central expectation is that net losses on the insured pool of assets will not exceed the revised £60 billion first loss that will fall to RBS.

Secondly, the Banking Act 2009 places a statutory obligation on the Treasury to prepare reports about any arrangements that involve or may require reliance on payments made out of money provided by Parliament for expenditure incurred by the Treasury when financial assistance has been given to a bank under section 228 of the 2009 Act. For that purpose, financial assistance includes Government guarantees. In the case of the APS, the Treasury will have to prepare reports under that Act about payments made in respect of 90 per cent. of the losses incurred over the first loss amount.

If the usual parliamentary estimates procedure is used, the Treasury will be required to prepare a report during each six-month period, beginning on 1 April and 1 October, in which payments are made. Those reports must be laid before the House of Commons, and the Treasury must aim to give as much information as possible in the report, subject to restrictions on the identification of individual arrangements or beneficiaries, and taking account of other public interest considerations.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Given that for the asset protection scheme there is obviously only one beneficiary, can we assume that we will be able to see the numbers for the asset protection scheme?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

It is my understanding that that will be the case.

When there is urgency, such that payments are made out of the consolidated fund under section 228 of the Banking Act, the Treasury is obliged to report to Parliament as soon as reasonably practicable, specifying the amount paid, although it shall not identify the institution to or in respect of which it was paid. We have discussed that on the Floor of the House. We believe that the amendment would unnecessarily duplicate the existing reporting obligations that I have outlined at length, and which are substantial.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister talked about two sets of information, and I want to check that we have the full deck of cards here. He referred to the statements made by the Chancellor in the pre-Budget report and the Budget about the expected level of losses, and said that those losses would fall within the £60 billion limit. He also referred to the payments to be made under the scheme. Those payments would be made if the losses exceeded £60 billion. How would we know how far through that £60 billion layer RBS had got? Would we know, for example, twice a year that RBS had incurred losses of, say, £10 billion at the end of a six-month period, and that at the end of the next six-month period the losses had risen to £20 billion? Would we know what losses had been kept in the pool of assets covered by the APS, even if no payments were expected to be made, or had been made in respect of that pool of assets?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

As I have indicated, we would certainly report to Parliament on losses incurred over and above the £60 billion limit. We said at the time of the PBR that we did not expect such losses to occur on the basis of our central assumption. I also indicated that we would need to report on matters at the Budget and the pre-Budget report process in future. I would imagine that we would want to report on the Government’s liabilities at that time.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Can the Minister understand what I am concerned about? We might end up in a situation where it is expected that there will be no losses, and where RBS is sitting just below the £60 billion threshold. We could then suddenly be told in the next pre-Budget report that there was an expectation of £20 billion in losses, because RBS had blown through the £60 billion. How will we monitor how far below that £60 billion RBS is?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The best that I can do is explain the process that we go through—and indeed have gone through recently—in the pre-Budget report and the Budget, due to the exceptional circumstances. A lot of work went on before the pre-Budget report to consider the central case, with regard to the asset protection scheme. We would want to conduct a similar exercise, or take a similar view, in considering and reporting the central case at Budget time and, should it be necessary, in future pre-Budget reports and Budgets. An assessment of whether the central case was still the same would need to be conducted at that time.

We are publicly committed to reporting on losses. There is no reason why we should not do that. I am told that the section 231 reporting procedure applies. If RBS did burn through its first loss, there would be a report,  but I do not think that the intention is to provide regular updates about how far things had got. However, as I have said, we would need to assess the situation at each Budget and each pre-Budget report, given the potential Government liabilities.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am a bit concerned about what the Minister is saying, perhaps because I do not understand it, as I freely admit. It appears that we could get into a situation where there are several beneficiaries under the scheme, the Government are incurring expenditures of billions of pounds and nobody outside the charmed circle—certainly not parliamentarians or the public—will know who is receiving those billions. If that is the case, it is deeply worrying.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I do not believe that that is the case. I have tried to explain that we have a process of reporting through the pre-Budget report and the Budget. We also have annual accounts and the estimates process. The procedure that I was explaining is as follows. During the run-up to this pre-Budget report, we calculated what we thought a central loss case would be on RBS’s assets, as RBS is the only company in the asset protection scheme. I have no doubt that similar work will go on in the preparation of the 2010 Budget, given the significant scale of the asset protection scheme. Indeed, I have no doubt that the Treasury Committee will want to examine the work of the Asset Protection Agency in that area.

Photo of Andrew Love Andrew Love Labour, Edmonton

Yes, the Treasury Committee has moved carefully on that. I must say that I am certainly reassured that the possible losses under the scheme have decreased significantly since the time of the Budget, when I understand that they were £20 billion to £50 billion overall. That is not just under the asset protection scheme but as a result of all the Government’s exposure to the banking crisis. That figure has decreased to £10 billion, so we are reassured. We are also reassured by the renegotiation in relation to the Royal Bank of Scotland; that provided for an exposure of up to £60 billion before the Government must put their hand in their pocket.

I accept that the appropriate way to report is through Parliament, but is not the difficulty the continuing level of uncertainty out there? The amendment calls for a report on losses; it is not yet appropriate to say that they have crystallised, but you have given a commitment here today—

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order, on two counts: first, I have given no commitment at all, and secondly, it is a long intervention.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 6:00 pm, 15th December 2009

I appreciate what my hon. Friend the Member for Edmonton says about the way in which such matters are being scrutinised. He is right to point out that in the pre-Budget Report we announced that our assessment of the potential liabilities as a result of our interventions has gone down from £50 billion to £10 billion.

It is always the practice that if expenditure is incurred, it is reported to Parliament, and that will remain the case. However, it needs to be recognised that we have to be as open and transparent as possible when it comes  to the contingent liabilities that the Government have taken on regarding the asset protection scheme. Any Government will want to report if there are significant adverse circumstances. As we indicated at the time of the pre-Budget Report, we thought that the situation had improved substantially, so we could change our assessment. I believe that we would want to have a similar assessment conducted on our potential liabilities, which should be announced at the Budget. That would be the normal thing to do, and would provide an adequate level of scrutiny and challenge.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I still do not quite understand. Is the Minister saying that if there were several beneficiaries in the asset protection scheme—I understand that it is not the case at the moment, but there might be; the Presbyterian Mutual Society in Northern Ireland, for example, or other institutions—with outstanding liabilities for and actual expenditure or cost to the Government, under the current regime, the taxpayer and Parliament would not know the identities of the institutions to which those sums related, and would get only the gross figures?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

No, I am not saying that at all. There is only one member of the scheme at the moment, and the Government anticipate there being only one—although we cannot foresee future events. Participation in the asset protection scheme would normally be a matter of public record, and one would expect that if an organisation were to participate in it, it would be clear public knowledge.

We have gone into the issue in some detail. There are a number of ways to ensure proper public scrutiny of what we are trying to do. There is absolutely nothing that the Government want to hide on this issue—we just want to ensure that we have the right reporting arrangements, and we believe that we have achieved that.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not sure that I am quite as convinced as the Minister is by the strength of his arguments. We will have two pieces of data: we know the actual payments the Government have made as a consequence of the £60-billion layer of insurance—once RBS has burnt through it—and we will have the Government’s estimate on whether we will have to make additional payments to RBS. The former will be in the public domain as a consequence of the reporting requirements under the Banking Act 2009, but the latter is a judgment, which will be published by the Government at the time of the Budget and the pre-Budget report. By the sound of things, the Government will not provide us with where RBS is, at the point they make the judgment between £0 and £60 billion. The Government may judge that it is unlikely that any payment will be made, but RBS could be up to £59 billion. However, we would not know it from the information published by the Treasury.

I appreciate that it is a dynamic process, and the hon. Member for Edmonton was right to say that some of that would be based on provisions, not crystallised losses, but that is the same for any company publishing its accounts. One publishes one’s account—if it is a provision for a liability—based on the probable extent of the liabilities. The information I am looking for may be published in the RBS accounts. Its shareholders may want to know where it is at on that pool of assets between the £0 and the £60 billion.

It would help parliamentary scrutiny if alongside the Government’s estimate of its expected liability they published where RBS is at that point in terms of the 0 to 60 range. People in Parliament could then decide whether the Government’s estimates are fair, over-optimistic or unduly pessimistic. Being presented with the number that the Government think is the estimated loss does not give us any context in which to gauge whether their judgment is reasonable. That is an additional piece of information that I would like to see published.

Photo of Andrew Love Andrew Love Labour, Edmonton

Would the hon. Gentleman accept that the level of uncertainty here is significant? I assume that most of the figures that he seeks from the Minister are deposited with the RBS, which must put a valuation on its assets and has indicated that it will have a programme of sale of assets. Only when it goes to market and realises a value for those assets will we know in truth what the situation is in regard to this asset deposit scheme.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not sure that I buy that, to be honest. I agree with the hon. Gentleman that this is a dynamic process and that the bank will look at the assets it holds and will put a value against them. That value will change depending on the circumstances of the individual business and of the economy. It is a dynamic process. That is the basis on which all the banks publish their annual reports. People are comfortable with that variability. It should not frighten parliamentarians to have to deal with that degree of uncertainty. That is why it should be possible for the Government to tell Parliament what the latest estimate is of where RBS is in that 0 to 60 range.

The Government are producing an estimate of their expected value of losses. Why can we not see what RBS currently estimates that book of assets as part of the APS to be worth and what losses it has incurred so far on that book of assets? I do not think that it is unreasonable to ask the Government to produce that little bit more transparency about the losses incurred to date by RBS in the pool of assets in the APS. Due diligence has been done. The Government know what assets should be included in the APS. I am sure that RBS as part of its internal procedures will do its own valuation of that pool of assets from the APS.

I want to make sure that there is a mechanism for Parliament to be aware of that rather than rootling through the highways and byways of RBS’s annual  accounts. Having looked at the annual accounts of one bank relatively recently, I know that there are pages and pages of disclosure. I was about to say that it makes the Red Book look transparent, but I had better not go down that route. But it is complex disclosure. There is an opportunity to present some more information to Parliament that enables Parliament to judge how realistic the Government’s estimates are and to have proper parliamentary scrutiny about where we are on the 0 to 60 range.

The dates in my amendment may not work, but the point I am making to the Government is that they should let us have that additional piece of information so that we can hold them to account about where they are in terms of their estimate, rather than simply having a figure for expected losses and then knowing what the payments might be. Let us know where RBS is in that 0 to 60 range. We have discussed this for some time and I hope that the Minister has taken the point on board.

Ian Pearsonindicated assent.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

He nods. We will see where we get to on this. The taxpayer has signed up to quite significant potential contributions to rescue these banks and it would be helpful to know exactly where we are on that. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 31 ordered to stand part of the Bill.

Clauses 32 to 34 ordered to stand part of the Bill.

Photo of Roger Gale Roger Gale Conservative, North Thanet

I remind hon. Members yet again that amendments for the next sitting will have to be tabled by 4.30 pm on Wednesday 30 December. The Table Office will not open during the new year holiday. The next sitting will be on Tuesday 5 January. May I take this opportunity to wish all members of the Committee and the Officers of the House a pleasant Christmas and a peaceful new year?

Ordered, That further consideration be now adjourned.— (Mr. Mudie.)

Adjourned till Tuesday 5 January at half-past Ten o’clock.