(a) require banks to provide clear and prominent warnings to consumers where deposits are not covered by the Financial Services Compensation Scheme; and
(b) make and maintain effective arrangements to consult consumers on the prominence and method of such warnings.’.
With this it will be convenient to discuss the following: amendment 160, in schedule 10, page 239, line 36 at end insert—
New clause 2—Depositor preference in insolvency—
‘The Treasury shall 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 or any imposition of losses in resolution.’.
Given that there are a number of issues in this group of amendments, I might not be able to make quite such speedy progress as we did on the past couple of clauses.
I will begin with amendment 143. Paragraph 180 of the pre-legislative scrutiny Committee’s report stated:
“The PRA and the FCA should seek to ensure that the public understand when a banking group is not subject to UK prudential regulation. Where deposits are not covered by the Financial Services Compensation Scheme the regulators should require banks to make this clear with prominent warnings in branches and on websites. The regulators should work with consumer groups to plan how best to get this message heard and understood.”
In earlier debates, we heard about the issues around consumers and information being made available in a way and in a format such that they not only have access to it but are aware of its existence in the first place. They will then be able to understand the information in plain language—I was going to say plain English, but I will say plain language. Part of the problem, as always, with the language of legislation and of Bills is that it is not easily accessible for people and it therefore has to be translated.
In asking the Minister for his response, can he confirm—he referenced this earlier, but I ask him again—whether this will be a priority for the new regulators? In particular, raising awareness of the FSCS is on the front page of the consumer section of the SFA website. That is perhaps unsurprising, given the prominence of this issue in the recent financial turmoil, when thousands of savers found that their savings in, for example, the Icelandic banks were not covered. People are obviously looking for information.
In the annual FSA survey on the consumer awareness of the FSA and financial regulation, which was published in February, there was not a single mention of the FSCS. That indicates that it is not a real priority for the FSA to find whether consumers understand whether their money falls under a protection scheme. Will the FCA or the PRA fare any better on that?
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.
Let me talk about each of the amendments in turn. Amendment 143 would particularise to a considerable degree the powers the FCA and PRA would have in future to make rules for the financial services compensation scheme and would force them to use these powers. In practice I do not think it is necessary. First, the FSA already has these powers, which are continued in FSMA by the Bill. Both the FCA and the PRA will be able to exercise them where appropriate, including in relation to information about compensation given to depositors, payable by the FSCS.
Secondly, the FSA has used these powers to make rules on the subject and is currently consulting on further changes. The current rules already prescribe what information firms must give depositors where their deposits are protected by the FSCS and impose requirements about their frequency and method of communication with depositors. A firm must also disclose—this is relevant to amendment 160—where it operates under more than one trading name or brand and the effect that this has on the amount of compensation payable. We will touch on this a bit more on amendment 160, but it is important—notwithstanding the outcomes of debates in Europe—that where people are banking with individual brands, they understand that the compensation limit is shared across those brands, rather than having one limit per brand.
The FSA has been consulting since December last year on whether to impose additional disclosure requirements on firms to inform depositors about how deposits are protected, and the limits to deposit protection. Those proposals include requiring deposit takers to display prominently, in their branches and on their websites, standardised notices or stickers detailing deposit protection arrangements. European economic area deposit takers with branches in the UK will be required to produce their own equivalent material, including a mandatory statement that clearly identifies their deposit protection scheme and makes it clear that they do not participate in the Financial Services Compensation Scheme. There is nothing to stop consumers, or indeed, members of the Committee, from responding to that consultation. If they have not done so, however, it closes on 9 March.
I therefore say to the hon. Lady that the powers are in place. The FSA is using them, as the consultation demonstrates, but I agree with her that it is absolutely vital to ensure that people understand what they are covered for and who is covering them.
Amendment 160 brings back happy memories because, on 23 October 2008, during the Committee stage of the Banking Act 2009, we spent a happy morning and part of a happy afternoon discussing these issues, in a debate that I instigated. One issue covered was that addressed by the amendment—the requirement for the FSCS to pay compensation on a per brand basis, rather than on a per authorised institution basis.
Although the matter was debated in 2008, the hon. Lady rightly pointed out that it is currently subject to discussion during the recasting of the EU directive on deposit guarantee schemes. The European Parliament has voted through an amendment that would leave it up to member states whether to introduce per brand coverage. We are not seeking to oppose that amendment. However, negotiations on that directive are in progress. If the final version of the directive allows for coverage to be on a per brand basis, further consideration will be needed to decide whether that would be desirable. The FSA or, in future, the PRA would need to consult on any change to the compensation rules. It therefore would not be appropriate to include a requirement for per brand FSCS compensation to be on the face of the Bill, and I hope the hon. Lady will agree to withdraw the amendment.
New clause 2, as the hon. Lady said, would impose a requirement on the Treasury to ensure that the holders of deposits protected by the FSCS were moved above other unsecured creditors and holders of floating charges in the event of the institution’s winding up. As she said, that was recommended by the Independent Commission on Banking, and of course, as retail depositors will have been compensated by the FSCS in such cases, in effect, the FSCS will have taken over their claims on the estate of the insolvent institution. In practical terms, the main beneficiary would be the FSCS, in the first instance, together with depositors protected by the FSCS who have deposits in their accounts above the deposit compensation limit.
As the FSCS is paid for by the industry itself, an effect of bringing in depositor preference should be to reduce the costs for the vast majority of financial services firms—including banks—that do not fail. It could also encourage other unsecured creditors, such as market counterparties, to keep a closer eye on the banks that they have dealings with.
The Government have outlined their support for depositor preference in our response to the ICB report that was published in December last year. We acknowledged, however, that further analysis and consultation is needed on the scope of depositor preference. That should cover issues such as whether all deposits should be preferred, or only all retail deposits, or only FSCS-covered deposits. That work is ongoing, and we plan to publish details of our approach to depositor preference and other parts of the ICB reform package in a White Paper due in the spring. We remain firmly committed to introducing legislation for all reforms that require it by the end of this Parliament. It is very much on our agenda, and we have acknowledged that we see it as an important part of the ICB’s recommendations. It is something that we need to work through in a bit more detail. I hope that reassures the hon. Lady that the recommendation will not be kicked in the long grass or ignored.
I thank the Minister for his response, and I am glad that something in the Committee’s proceedings has brought back happy memories for him. He has not looked very happy at various points during the proceedings, and if we managed to cheer him up we will have achieved something. The Minister said that amendment 143 was unnecessary, because the FSA not only has the powers specified in the amendment but has already used them, which was heartening to hear. I do not intend to press the amendment to a vote.
Regarding amendment 160, it is important that we see some movement, especially in relation to branding. Consumers and consumer organisations are concerned to ensure that people understand what they are getting into with financial products. We are aware of the work that is being done in Europe, which the Minister referred to, but I was slightly surprised that he did not seem inclined to move ahead and do something now on a domestic basis rather than waiting for Europe to act. If I did not understand him correctly, I am willing to be corrected on that. I take it from the fact that he is shaking his head that he is waiting for Europe to act rather than taking the opportunity to do something domestically.
New clause 2 is important because the Government must move on the Vickers recommendations. We welcome the fact that the Minister has set out a time scale for bringing forward a White Paper, which gives us the opportunity to come back at a later date. I take his assurances that he has no intention of kicking anything into the long grass, and I welcome his commitment to doing something about the matter rather than delaying or dithering. I look forward to the White Paper with interest, and I beg to ask leave to withdraw the amendment.
‘(1C) The PRA shall provide regular reports to Parliament on its duty to co-ordinate with international regulators.’.
Amendment 144 links to similar comments that I have made in relation to other clauses, and we were moved to table it by the suggestions of the pre-legislative scrutiny Committee. We appreciate that the Government noted the recommendation of the joint committee:
“In order that the PRA can be effectively held to account for its duty to co-ordinate with international regulators we recommend a further duty to report on its work in this area.”
We note that appropriate amendments have been made to the Bill. To maintain consistency with the rest of the Bill we have tabled this amendment, which seeks to ensure that regular reports on passporting are provided to Parliament. Again, if we go back to the pre-legislative scrutiny Committee report, paragraph 181 says:
“There is a further way that the PRA’s powers will be limited in respect of firms operating in the UK and the EEA. The Bank of England and FSA state that the establishment of the new European Supervisory Authorities and the European Banking Authority ‘provides an opportunity for the PRA to influence further the supervision of incoming EEA branches’.”
If we accept that that is the case, paragraph 305 sets out how it hopes that the UK regulators will maximise their influence at a European level. The report does point out, however, that the European supervisory authorities will also have powers to direct the PRA and the FCA to act in certain circumstances. For example, the European supervisory authorities will be able to direct the PRA and the FCA if there is a disagreement between two of the EEA regulators in respect of a firm operating in different countries. For example, if the UK and the German regulators disagreed about the requirement that should apply to a bank headquartered in Germany but passported here, or a bank headquartered here but passported in Germany, then either the UK regulator or the German regulator could refer the issue to the European banking authority for mediation. The European banking authority would then have the discretion to mediate and, in some circumstances, to issue a binding decision on the national regulators. There are different interpretations as to when the EBA could issue that binding decision.
The PRA will be under a duty to co-ordinate with international regulators and that is an immensely important duty given the international dimension of many of the firms, the failure of which could impact on the stability of the UK financial system. In order that the PRA can effectively be held to account for its duty to co-ordinate with international regulators, we would like to see a further duty to report on its work in this particular area. Again, I would welcome a response from the Minister as to whether he believes that this is an appropriate thing to do, and if so how he intends to take this forward.
It is vital that the PRA and the FCA co-operate with international regulators; it is a key part of the job, as we have talked about before. As I indicated in the Command Paper that we published alongside this Bill, we have identified who the interlocutor assessor would be for the two new regulators in the European architecture. I expect that the PRA and the FCA would be as engaged, if not more so, than the FSA currently is with the three European supervisory authorities. The ESAs play an important role in ensuring that there is a common standard of supervision across Europe. They will deal with issues of dispute on the interpretation of detailed European rules, which is important. We saw the EBA in action this year and last year in the context of the European banking crisis. It tried to find some structure around stress testing. It is important that the PRA and the FCA should report on their work to a wider public. As the hon. Lady said, it was a recommendation of the Joint Committee that the PRA should report on its work and engage with international regulators. The Government agreed with that regulation and it has included provision in the Bill that the PRA should include such a report as part of its annual report and the FCA will also be under the same duty.
I draw the hon. Lady’s attention to paragraph 18(1) of proposed new schedule 1ZB and paragraph 10(1) of proposed new schedule 1ZA, which put those requirements into statute. I do not believe that there is a requirement for a separate report to be made to Parliament. There is a requirement under the Bill for the annual reports of the PRA and the FCA to be laid before Parliament anyway.
I seek clarity from the Minister, because the amendment is essentially trying to ensure that regular reports are provided on the specific duty to co-ordinate with international regulators. Is the Minister satisfied that that will be covered in the annual reports laid before Parliament? If any issues emerge in advance of the annual reports, how will they be reported to Parliament?
Because the annual report is laid before Parliament and because the Bill requires the PRA and the FCA to make a report on international co-operation as an integral aspect of their annual reporting, it will be brought to Parliament’s attention. The co-ordination committee, which was set up in response to a PLS recommendation, will help flush out such issues about co-operation between regulators and their international counterparts.
My experience is that, because the Treasury is also engaged in a number of these processes and because so much of it is in the public domain, we do not need to wait for an annual report to find that there is a problem. If there was a failure of the relationship between the PRA and the FCA and international bodies, the Treasury would certainly know about it pretty quickly. It would be apparent to the industry and would be a cause for concern. As part of its regular scrutiny of the PRA and the FCA, it is open to the Treasury Committee—we have two of its distinguished members on the Government Benches today—to ask such questions, so the annual report will not necessarily be the sole source of knowledge. I hope that that reassures the hon. Lady and that she is happy to withdraw her amendment.
I thank the Minister for making clear what can and will be reported to Parliament. At any suggestion of problems, it is important that not just the Treasury knows about it, but that something is actually done about it, that the various people who are required to put in place any action plans can get that moving, and that Parliament is kept fully updated. I heard what the Minister said about the annual reports, and I accept that that would cover this particular issue. I have some faith that members of the Treasury Committee will ask the pertinent questions, but I do not know whether they will follow that through to vote for particular recommendations; do not tempt me down the route of one thing happening in a Select Committee and something else happening in relation to the Bill. To be serious, I have every faith in the Treasury Committee’s ability to probe, to ask questions, to hold Ministers to account, and to ensure that issues are reported. With those comments, I beg to ask leave to withdraw the amendment.
I need to jump up more quickly. I sometimes feel that I am still getting used to having to catch the eye of the Chair. In my former career in another Parliament, most things were done through the pressing of a button—[Hon. Members: “Terrible.”] It is terrible even to talk of such things in this place. It certainly did not mean that I was always called to speak, but it was somewhat easier than remembering to stand up, so I apologise, Mr Howarth.
I want to comment on clause 10. It is important that we debate passporting and treaty rights, address overseas regulators and get clarity about which regulators will be making consent notifications. It is also important to press the Minister on what he intends to do about Europe. He has answered a question that I was going to ask on whether the FCA or the PRA would be the appropriate regulator.
The Minister also gave some information regarding procedures and processes that have been put in place to ensure that the FCA and the PRA will have time to consult and liaise with each other. However, I still have some concerns about the ability to meet the required statutory time frame as set out in EU directives. A whole range of them are relevant in this particular case. I will not go through them all, as I am sure the Minister is absolutely aware of everything, from the markets in financial instruments directive right through to the electronic money directive for approving passport applications, which we have also discussed.
I want to raise one point, and again, the Minister may just want to make some final comment on it. Where the authorised person is a PRA-authorised person, the appropriate regulator is the PRA, but in other cases, the appropriate regulator is the FCA. Where an incoming firm is a PRA-authorised person, both the PRA and the FCA may exercise powers of intervention, and in other cases, only the FCA may exercise those powers.
As we discussed earlier, the FCA must consult the PRA before exercising its powers of intervention in relation to a PRA-authorised person or a member of a group that includes a PRA-authorised person. The PRA must consult the FCA before exercising its powers of intervention in all cases. I am sure that that is as clear to every member of the public as it is to all of us. I say these things simply because it is vital that when firms are passporting into the UK, most of the matters that might be of concern to the UK regulators have to do with the conduct of business rather than prudential issues, because the host state regulator remains responsible for prudential matters. I hope that the Minister agrees that the process needs to be made as straightforward as possible. It needs to be made less confusing and more efficient by giving the FCA the obligation to deal with all passporting matters.
We are not just trying to ensure that the Bill works in practice and provides safeguards for consumers, but to have open and transparent procedures and processes, so that the general public will be able to understand what is happening, whom to go to and where different authorities would intervene when problems arise. That is important, which is why I have raised the issues.
The hon. Lady has raised important issues. One of the benefits of the European Union is the ability for firms authorised in one member state to do business in another through the passporting arrangements. It is vital to have clarity about the responsibilities of different aspects of the regulatory structure and to ensure that we know precisely what is happening, given the varying nature of firms.
Regarding the draft memorandum of understanding on co-operation, we have sought to look at passporting in subsection (3), so that we are clear. In situations where an institution passports inward via the banking consolidation and insurance directives, the PRA will be the lead regulator and the FCA may make representations. If the passporting is under other directives, the FCA will be the lead regulator. However, the PRA may make representations in certain circumstances, when the applicant firm is in the same group as a PRA-regulated firm. It is likely that the groups such activities will be well aware of where the division of responsibility is.
To be clear, the FCA will supervise the market conduct and consumer protection elements of any incoming firm’s business. The PRA will scrutinise the safety and soundness of the incoming firms that would normally qualify for PRA regulation, but working closely with the home state supervisor so that they can co-ordinate action when the activities of passporting firms cause a financial stability risk. The reality, as I think the hon. Lady indicated, is that the most prudential regulation of an inward passporting firm rests with the home state, except for the setting of liquidity standards. I think the boundaries are clear.
The hon. Lady referred to the powers of intervention, which are exercisable only when the home regulator has failed to act. One would expect such interventions to be very rare indeed, but it is right that when there is an intervention that might have a prudential impact, the PRA is involved, and that is the point of the consultation.
It is almost so rare that I cannot envisage one immediately, but it might be when the PRA believes that there is a threat to financial stability and the home state has not acted. One role of the European Supervisory Authorities, which I alluded to earlier, is consistency supervision, so that should tackle that problem.