Good morning, Mr Leigh. It is a pleasure to serve under your chairmanship.
It is useful to move on now to issues relating to financial services compensation and how the Financial Services Compensation Scheme operates. This short clause—five lines in length—refers to schedule 10, so it is a moot point whether issues should be raised now or when we discuss that schedule.
The key points on the FSCS mostly relate to its accountability and the lines of accountability to the new Prudential Regulation Authority and the Financial Conduct Authority, as well as how that dual accountability will work. Apparently, between the FSCS and the new regulators, there will be memorandums of understanding, which will be key. The concept of trilateral contact has been raised and the FSCS has made recommendations on how the Bill should be framed, in respect of the contact and harmony that are required for joint working, co-ordination and collaboration between the FSCS and the two new regulators.
In its written evidence to the Joint Committee on the draft Bill, the FSCS said that it considered that
“the Bill should ensure the flexibility for full disclosure gateways between the FSCS and the FOS.”
Therefore, clarity is needed over who is covering what aspects of work between the Financial Ombudsman Service and the FSCS. Some of the memorandums of understanding will be important, but I am slightly nervous that they will not receive much scrutiny, in terms of how the practical operation of joint working and collaboration might take place between the FSCS, the PRA, the FCA and the FOS, and so forth. It would be useful if the Minister can assure us that the memorandums will be put in the public domain, so that we can look through them and check their efficacy, because that point is incredibly important.
The Financial Services Compensation Scheme has fared relatively well recently and it is clearly operating as it was designed to. However, there have been considerable concerns, particularly among levy payers—the industry—who are the principal funders of the FSCS arrangements. Significant costs are involved in being a financial services practitioner, because of the levy arrangements as they stand. Although I am not steeped in the issue, as I understand it, levy payers are split into sub-classes, so there is a sense of trying to get a proportionate spread of contributions where issues will arise. However, there are concerns that an unfair burden will sometimes fall on one class of financial services practitioner, as opposed to others. For example, if failures occur—the Keydata scheme, Arch Cru, Wills & Co and MF Global are significant, as, potentially, are others—a particular class of financial services practitioner, such as independent financial advisers, might end up with a levy being charged upon their shoulders, and they might not understand how those sums have come about. Perhaps there should be a smoother application of those levy charges across a broader category of classes, rather than concentration on one particular class. That is a difficult balance to get right and I do not have an alternative proposal on how it should work. I am sure that the Minister is constantly keeping these things under review, because there are some occasions where significant concerns have been raised.
Will the Minister, in layman’s terms, paint a picture of the costs that can fall on an independent financial adviser or a typical small financial services practitioner? The levy is obviously not a tax on their work, but it is a cost—a burden to some extent—that they have to factor into their running costs, which include paying their business rates and their staffing costs and all those other things.
On some occasions I have been told that the levy is 5% or 10% of turnover. Does the Minister have a way of characterising the impact of the levy on the sector in those particular terms? If we could get a grip of what the levy is as a typical share of turnover, that would give us a sense of the significance of this issue. We hear a lot in the trade press—in Money Marketing and elsewhere—about how that levy hits the particular classes of financial services practitioners, so getting some sense of that in layman’s terms would be useful.
Will the Minister take this opportunity to try as hard as he can to improve the transparency of how the levies are calculated? There have been a number of concerns about people who might find that the final sum of money that they are due to pay has landed upon them. There is great frustration that there is not a much clearer methodology to specify how those particular liabilities have come about in that particular way. It would be useful if he gave us some assurances on those points.
The British Bankers Association and others have made a number of other points about the Financial Services Compensation Scheme and the ombudsman scheme. They have welcomed the publication of annual plans in the National Audit Office application to those particular schemes, but they have concerns about the budgetary responsibilities being properly co-ordinated as a whole within a single budgetary exercise across all the financial regulatory authorities. Again, there are concerns from the industry about the costs and the levies that fall on them in paying for that overarching regulatory arrangement. Those regulatory costs will increase significantly, and the industry is saying that it wants the compensation scheme budgets to be taken into account in the round with those wider regulatory costs. To what extent will there be an exercise by the regulators collectively to present an overall budget, so that there is some degree of co-ordination and so that the budget changes from one regulator to another will be taken in the round and not just done in isolation from each other?
The hon. Gentleman raises some helpful points and we should recognise that the FSCS plays an important role in providing confidence to investors. When a firm suffers financial problems and there is a regulatory issue, the scheme is there to stand behind that firm. The scheme has been used in a number of different ways during the past two or three years.
The hon. Gentleman asked about the memorandum of understanding. The Bill requires it to be published and I hope that that gives him reassurance. There is a challenge, which he is right to highlight and which often crops up in his conversations with trade bodies and individual levy payers—they have raised the issue with me, too—with the incidents of the levy. The scheme is designed so that individual sub-sectors have a limit on how much compensation they will pay out under the scheme. If the amount of compensation required exceeds that threshold it is cascaded to the next group up. Schemes are divided into various sections, such as insurance or investment, depending on their type of business. Deposit takers are also dealt with as a separate group.
The challenge has been that it is difficult to predict the calls on the scheme because they depend on how many firms go bust and what liabilities a firm has as a consequence of regulation. It is hard to predict. That is why I do not think one can forecast the total cost of regulation, because the FSCS levy will vary from year to year depending on what is happening in the sector. It is not a predictable flow.
My hon. Friend is right, but that is not to say that it will be a zero-failure regime. One purpose of ensuring that we improve the effectiveness of the regime is to try to reduce that incidence and, therefore, cost of failure to the industry. There is a trade-off there. There has been a level of failure in particular sectors in the past couple of years that have led to relatively high levies being imposed on firms. That has triggered a call for review. The FSA is currently conducting a review of the FSCS and its funding to look at the burden and find whether there are better ways to manage the interaction between different categories of firm. It is right that the FSA is doing that but the problem with all reviews is that there is a cost of failure that needs to be apportioned across the industry, and there will never be an entirely satisfactory outcome, because someone will always have to pick up the cost of failure. We need to encourage the FSA to continue the review, to engage fully with the industry and vice versa, and see the outcome and whether there is a better or fairer way to apportion the burden between different types of firm.
I had hoped the hon. Gentleman might come up with a solution. I have though about it and failed; the FSA is struggling with it, as are industry groups, because they recognise that the burden has to be shared, but who is prepared to pick up more to compensate someone for paying less? These are complex issues to get right, and the review is the right way to do so, and I encourage the FSA to continue with that process.
I am grateful to the Minister; it is useful to have on the record that there is a review process and we are looking at ways to ensure fairness. My other two points, to which it would be useful to have a response, concern the transparency of the methodology and getting a handle, in layman’s terms, on the costs to a particular firm. If we as legislators know that it is a marginal or insignificant burden, we can take that into account. However, if the FSCS levy is a significant slug of factor costs for a particular firm, we need to show extra concern and spend extra time checking that things are correct. The Minister will understand that it is sometimes difficult to peer into the application of the levy on particular classes of firms. Nevertheless, it must be possible to get a metric or snapshot of how much cost falls on the shoulders of particular types of firm. I am sure he understands my point.
I think I am right in saying that the FSCS annual report provides a historical snapshot of the incidence of levy between different sectors. Broadly, what the FSCS does with a sub-sector is try to find an appropriate metric for allocating the levy across a range of firms, so, for deposit takers, it is based on their retail deposits. So, the larger the deposit base, the greater the share. On investments, normally, it funds under management. There is an industry-specific metric to allocate the share of the levy, but the other side of the equation is the cost of failure. That could be zero in one year, but a great deal in another year. So, that is why it is hard to predict.
There is a proper consultation process going on as part of the review, and a rigorous cost-benefit analysis is emerging from that. That will help inform the levy payers as to the right allocation. The last time there was a review, everyone was content with the allocation mechanism. Events subsequently suggested that the mechanism was not appropriate, and it is now being revisited. There is no perfect solution to this, but it is better that the industry pays, rather than the taxpayer.
I am grateful to the Minister. It is incumbent on us to show that we are aware of and attuned to the sensitivities of the sector regarding the levy and the methodology. However, we do not have any particular problems with the clause, and schedule 10 is simply a set of consequential changes. Having focused on the issue of dual accountabilities and what will happen with the review, I am content with the Minister’s comments.