It is a pleasure to be back in this finely poised and balanced Committee debating clause 54.
I have made most of the detailed points that I want to raise so, in essence, I need the Minister to give us a little more of a sense of how he considers that the concept of material risk should be better defined in accordance with the points made by the Treasury Committee. Will he say something about the public funds test and, in particular, about whether the European directive on deposit guarantee schemes will be used to meet resolution costs, and whether that will have a downstream effect on the provisions of the Bill? Does he think that there is a little ambiguity in some of the later provisions in the clause, such as the phrase “general indication”?
It is a pleasure to serve under your chairmanship during this evening’s sitting, Mr Leigh.
Before the dinner break, the hon. Member for Nottingham East questioned subsection (7); it does mean that there should be notification in writing. “General indication” is a broad term, but the Bank will need to provide the Treasury with sufficient information to understand the nature of the risk, the type of analysis that might be required and what action might be needed. I do not want to get into the position of micro-managing what should be in the general notification, but it should make sufficient sense to enable the Treasury to respond to it. It should include a broad range of things, such as an explanation of the risk to public funds, an identification of the options that the Bank is considering to mitigate the risk, an assessment of the potential impact of each option and the identification of specific risks to public funds arising from any action.
The hon. Gentleman asked what is meant by “material”, but that term is difficult to define. Clearly, it is not a risk that is remote or negligible but, equally, it is not necessary for risks to be more likely than not for them to be material. The term requires judgment. I have already said clearly that the emphasis is on early notification. There is a low bar for notification, and we would expect the Bank to notify when it thinks that a risk could occur and that, if there were more notification, actions would be taken to get the balance right.
The hon. Gentleman asked about the procedure for scrutiny of the MOU. He has tabled amendment 190 on that subject, so I shall save my firepower until our discussion on that, rather than stealing the excitement of this evening’s proceedings by dealing with it now—[Interruption.] I am sorry to disappoint my hon. Friends.
That is in the hon. Gentleman’s gift more than it is in mine.
I come now to the alignment of the public funds notification with the special resolution regime, which has been raised by the BBA. The public funds notification is designed to create a formal mechanism for the Treasury to be notified early of circumstances that could lead to the use of public funds. It reflects the principle that it is the elected and accountable Government alone who can take decisions to deploy taxpayer money to resolve a threat to stability.
The use of the special resolution regime powers is not an appropriate proxy for public funds. In certain cases, the Bank can manage risks to financial stability using tools at its disposal with no risk to public funds. In other words, there may be cases where the SRR is used, but there is no risk to public funds. Of course, public funds can be put at risk without the SRR being used. For example, RBS and Lloyds were recapitalised with public funds without using the SRR. The use of the SRR is therefore the wrong test. To use the Goldilocks analogy, and to keep the hon. Member for Foyle amused, the test is both too wide and too narrow.
On the FSCS, the Banking Act 2009 already allows it to contribute to the cost of resolution. It is flagged up in clause 54(5), so the Bill reflects the fact that it can be used to contribute to the cost of resolution. It is not clear at this point whether changes will be required as a result of the deposit guarantee scheme or, indeed, the crisis management framework, which the Commission is yet to publish. However, there are routes we can take to amend legislation to take such things into account. I think that that deals with the issues raised by the hon. Member for Nottingham East.
The Minister was exceptionally thorough and I am grateful to him for addressing those points so helpfully. I can understand his point about material risk, and it is always difficult to know quite how to define such things. He set the balance out in broad terms, but the devil is always in the detail. That is why we should have more scrutiny of the memorandum of understanding, but we will come to that shortly.
The Minister dealt with the FSCS point. On the possibility that European rule changes might have consequences for these provisions, he indicated that he would be open-minded about amending the Bill to reflect whatever circumstances might arise. In the light of those helpful comments, I can see why clause 54 is framed in the way it is. I have certain questions about it, but I am happy for it to stand part of the Bill.