I beg to move Amendment 7, in Clause 9, page 15, line 25, at end insert—

‘Category 8: Deposits of charitable bodies

15D Any amount owed at the relevant date by the debtor in respect of deposits made by charitable bodies up to the amount of nine tenths of the amount owed to the persons to whom the amount is owed.

Interpretation for category 8

15E (1) In paragraph 15D “charitable body” means any organisation with charitable status under section 1 of the Charities Act 2006.

(2) For this purpose a “deposit” means rights of the kind described in—

(a) paragraph 22 of Schedule 2 to the Financial Services and Markets Act 2000 (deposits), or

(b) section 1(2)(b) of the Dormant Bank and Building Society Accounts Act 2008.’.

With this it will be convenient to discuss the following:

Amendment 8, in Clause 9, page 15, line 35, after ‘Financial Services Compensation Scheme’, insert ‘and deposits of charitable bodies’.

Amendment 9, in clause 9, page 15, line 36, at end insert—

‘Deposits of charitable bodies

‘(6C) Any amount owed at the relevant date by the debtor in respect of deposits made by charitable bodies up to the amount of nine tenths of the amount owed to the persons to whom the amount is owed.’.

Given international events, Clause 9 has suddenly become significant. Amendments 7, 8 and 9 were tabled before we heard about the Cypriot crisis in any great detail, but they provide an opportunity to ask what would happen in the event of bank insolvency, especially to depositors. The amendments are probing and seek to tease out the Government’s thinking about the impact on charities that are depositors in banks that may become insolvent. We will discuss why banks have preferential creditors in the clause stand part debate.

Many charities in this country painstakingly raise funds from their supporters, benefactors and donors, but they do not keep those funds stashed away in a safe at the back of the office. They trust them to the banks for safekeeping. Imagine the thoughts going through the minds of trustees of charities of Cyprus, where, as I understand it, if they have deposits of over €100,000—they may not be classed as individual depositors at all and even that first €100,000 may not be safe—they may find that, with the swipe of the pen of the Eurogroup of Finance Ministers, all their hard efforts were for absolutely nothing. We must think through the consequences of what would happen in this far larger country with far larger charities. There would be many significant downstream consequences.

Amendment 7 is perhaps the best actively to show how one solution could be pursued. It is only one solution, but I shall be grateful if the Minister will give us some reflections on it. The clause amends the schedule to the Insolvency Act 1986 that sets out the ranking of various categories of creditors in the event of insolvency. The taxman obviously comes pretty high up in that list—that will not be a surprise to hon. Members—and there is a pecking order for the scramble of creditors trying to get the remaining resources and assets. Amendment 7 would give a measure of specific protection to the charities.

We need to protect charities’ deposits when constructing this new financial architecture. We should not allow such deposits, which may have been built up over decades, simply to be flushed away if a bank fails. According to the submission to the Parliamentary Commission on Banking Standards from the Charity Finance Group, the charity sector in this country holds some £18 billion in cash deposits. The amendments would include charities’ deposits under the deposit insurance scheme known as the Financial Services Compensation Scheme.

Amendment 7 represents the meat of the changes. Amendments 8 and 9 are consequential and relate to the Bankruptcy (Scotland) Act 1985. The amendments probe what might be the right solution. We picked up the position that was the case under the Financial Services Compensation Scheme up until 2007. At first, 100% of deposits were covered up to £2,000 and 90% of deposits up to £33,000. Those were the old rules. By extension, we are asking what would be the case if there  were a 90% protection regime for charities’ deposits. On reflection, particularly in the light of Cyprus, we should have tabled a parallel amendment that would have protected 100% of charities’ deposits. That would also be a reasonable suggestion. I am not sure that even a 10% haircut for charities would be acceptable.

It is a pleasure to serve under your chairmanship for the first time, Mr Bone. My hon. Friend makes a strong point and I am interested to know the Minister’s views. As the Committee is aware, I was previously head of Oxfam Cymru and had a career in the charity sector. There will be great concern about the Clause, particularly in the light of the Cyprus example. I hope we would never get to that situation in this country, but it is important to have adequate safeguards in place.

It is also important to be aware, as my hon. Friend might not be, that a number of British charities often hold substantial amounts of funds transferred from the UK Government before they transfer them to overseas projects, in the case of the international development sector. Funds of possibly hundreds of millions of pounds could be put at substantial risk.

I am grateful to my hon. Friend who has a lot of experience in this field. Any further observations would be useful. His point that charities often hold public funds in trust is key. As the Charity Finance Group said in its written submission to the Parliamentary Commission:

“Charities have a unique set of requirements when it comes to banking. Their funding structure, public benefit function and activities all mean that they bank differently from other classes of customer (for example, individuals and businesses), however the protections in place for charities (i.e. Financial Services Compensation Scheme coverage) does not recognise the distinctive nature of charity banking.

In the period following the crisis it became apparent that there was a clear gulf between charities’ exposure to risk and capacity to manage it, and their level of protection. This was also acknowledged by the Treasury Select Committee during their inquiry into the banking crisis.”

There is sometimes a cold attitude from the authorities when they say to institutions, particularly to businesses but also implicitly to charities, “If you are an institution you should simply know whether a bank is safe or not. You should do due diligence; you should not just trust that banks are naturally safe.” Some smaller charities could easily have sums above the FSCS level and may not be protected. It would help if the Minister could clarify that point. It is not reasonable for them to make a financial judgment about whether a bank is likely to go under and what individual insurance arrangements they should make for those circumstances.

Does my hon. Friend share my concern, also expressed by the Charity Finance Group, the National Council for Voluntary Organisations and the Association of Chief Executives of Voluntary Organisations? In the context my hon. Friend describes, charities will find themselves, as outlined in the CFG’s submission on banking reform, having to follow

“more conservative banking practices and deposit in those banks deemed lower risk, which typically pay a much lower deposit rate”.

That will mean that the income available to charities will decrease over time.

We debated on another Clause whether ring-fenced retail banks might find themselves in a low-return environment compared with investment banks. That leads to another facet about charities that might be tempted to invest their money outside the ring fence. We have a waiver for high net worth individuals. I am not sure what waiver protections exist for charities and their trustees, to ensure that, if they venture outside the ring fence, there is some process by which they have to prove that they have considered those risks. It would again be useful if the Government could reflect on those points.

The Parliamentary Commission on Banking Standards considered

“the Treasury’s case that all non-insured creditors, including charities and small businesses and temporary high deposits of households, would be treated alike in the event of failure”.

The Commission found that case “unconvincing”.

The depositor preference principle laid out in the Bill fails to recognise the unique position of charities. In fact, it increases risk by pushing them further down the creditor hierarchy, because the Bill would include recompense for the FSCS essentially in that process. There is the irony of potentially increased risk. Our proposed solution would grant charities preferred creditor status, so that charity deposits would rank alongside those of the FSCS in the event of bank failure.

I would not claim that the Amendment is perfectly formed. There is room for improvement—certainly, the level of reclaim is open for debate. However, it would be better than a 0% ability to reclaim.

The PCBS recommended that

“the Government and Bank of England establish a joint group to prepare and publish a full report on the implications for resolution of depositor preference and of the scope and extent of depositor insurance.”

That would be good as far as it goes, but I am not sure that it goes quite far enough. The PCBS also said:

“This report should, in particular, consider the feasibility of establishing a voluntary scheme of insurance for deposits over £85,000 with arrangements for opt-out. This report should be published at least two weeks before the House of Commons report stage of the Bill.”

I am grateful to the PCBS for its recommendation. It certainly helps to inform the debate, particularly now that the international spotlight is being shone on such questions. British charities were hit by the collapse of the Icelandic banking system in 2008. Surely we have to learn from those events.

In the UK, there are at least 5,700 charities with cash assets of more than £85,000, so it is a big issue here. Today, Britain’s charities are under significant pressures elsewhere: declining Government grants, higher overhead costs and knock-on effects of donors facing higher living costs. The Prime Minister used to talk about the big society—admittedly slightly less so these days—but it would be important for the Government to rediscover some of those principles and take specific action in the Bill. We could do that on an all-party basis, which would be welcome to the charity sector, showing that we are thinking about the sector’s potential situation in the event of a banking insolvency. It would be an important step to take, and I would be grateful if the Committee could support the spirit in which we have tabled the amendments.

It is a pleasure, as always, to serve under your chairmanship, Mr Bone.

We should treat the amendments with caution, because not all charities are small charities that creep over the £85,000 limit. In my business career, I have managed the funds of multi-billion-pound charities. They are sophisticated investors who do not need or want such protection. If they are too heavily protected, they may find that they cannot run their investment management side as effectively as they would want to the long-term benefit of their charity. If they are to be given an almost complete protection on deposits, there will in return probably be restrictions on the deposits that they can make. We should be careful about lumping all charities together. If such an Amendment were to be made, we might want a higher rather than an unlimited threshold.

The second reason to be cautious of the amendments—I may simply have been in the City too long—is that, in the few minutes that we have been discussing the amendment, I have been trying to think of a financial instrument that a charity could issue to a non-charitable body that it could deposit with a bank, to be covered by the ring fence, which it would then place with the most dubious ring-fenced bank, paying the highest rate of interest, to take a share of the revenue for the charity and make a guaranteed profit for the person who buys the financial instrument. I see that my hon. Friend the Member for Chelsea and Fulham is looking interested in devising such a product. The two of us, from our professional careers, find such things extremely interesting. There are always possibilities of that kind; it is the law of unintended consequences.

I am not unsympathetic to the amendments, but if they are to be adopted, large charities need to be able to carry on with the financial activities that lead to profit for them and allow more good causes to be undertaken. We also need to bear in mind that whenever the Government provide a protection, some clever person—or some not-so-clever person—will think up a scheme to use it in a way that was never intended.

The hon. Member for North East Somerset has made some important points, which are worthy of significant consideration. This issue clearly has to be looked at very carefully. My hon. Friend the Member for Nottingham East has made clear that the Amendment is not necessarily perfect and would need to be looked at in detail, but he made some important points about exposure, the ability to manage and that differentiation in the charity sector as a whole. He mentioned the example of Iceland and Icesave, which is an important one; I recall being in Oxfam at that time and having a number of conversations with others in the sector who were deeply worried. The situation came upon many people as a great surprise, and people were running around and saying, “Do we have investments there? Are there things we should be worried about that we were not even aware of?”

Nevertheless, following on from the points made by the hon. Member for North East Somerset, it is worth remembering that a number of larger charities have systems in place to guard against risks. Those that operate internationally, in particular, have fairly extensive  exchange rate hedging agreements. Charities take their fiduciary responsibilities seriously, particularly with regard to donor moneys. However, there is a differentiation in the sector, and in my experience of dealing with sub-grantees, with which the larger charities often operate in partnerships, they simply do not have the capacity, knowledge or awareness to make sure that they are hedging against all the risks. That creates challenges, particularly when sub-grantees also then take on significant contractual obligations to the ultimate donor, whether that be Government or a body such as the Big Lottery Fund, Comic Relief or other public funds that grant to larger charities, which then grant on to smaller organisations to deliver on the charitable objectives. That is before we think of moneys coming in from the public, which can often be significant, particularly in the case of high net worth individuals making bequests or other generous donations.

I would be interested to hear from the Minister how he and the Government will respond to the challenges, given that differentiated sector and the different levels of capacity and experience that exist to deal with this issue. Will they ensure that risks are looked at in quite careful detail at all levels of the system, so that we do not have a repeat of the Icesave example and others, which caused significant challenges to a number of charities both medium-sized and small, as well as to local authorities and others that I mentioned in previous contributions?

Some important points have been made. The amendments might not be perfect, but they hit on an important point, and I hope that the Committee gives them due consideration.

It has been a useful debate on an important matter, which is the more topical given the events going on in Cyprus as we speak. No one could be anything other than sympathetic to the concerns the whole Committee has about making sure that funds that have been subscribed by ordinary working people up and down the country are not lost somehow in the event of bank failure. The issue is germane not just to this discussion but to the one I hope we will have later today about bail-in provisions; it is not depositors—whether charities or individuals—who would be in line to bail out failing banks in this way.

Let me set out the context for why the Government have proposed the particular approach to depositor preference that we have, and then deal with some of the points that have been made. The Amendment would make the first 90% of charities’ deposits preferred debts in bank insolvency creditor hierarchies. The purpose of the Clause is, in effect, to align the deposits covered by the Financial Services Compensations Scheme with preferential debts in the hierarchy. It is designed to introduce consistency between the compensation scheme and the treatment in the hierarchy.

The context is important. I remind the Committee that this is, in essence, a zero-sum game. In the event of a bank insolvency, there is no extra money that could be found. Depositor preference is about distribution of risk. The more one group is protected, the less protection there is for another. Whatever the Committee and the House ultimately decide, as we have seen in Cyprus, it is  important to be clear in advance as to what would happen, so that people can make decisions on that basis rather than there being uncertainty as to what the consequences would be for depositors of all sorts. The fact that measures to that end are in the Bill and are being debated is important.

The recommendation of the independent Vickers Commission was that FSCS-covered deposits—that is to say, insured deposits—should be preferred, but not others. As the hon. Gentleman mentioned, the Parliamentary Commission looked at this again and was not able to come to any definitive conclusion, reflecting the difficulty of the choices it made. It recommends having a joint study group. We note that recommendation and will reflect on it. In some ways it points to the difficulty of the issue when such a distinguished and experienced body of people as the Parliamentary Commission did not feel able, even through one of the sub-committees set up to investigate different matters, to come to a firm response on this.

Why would the approach recommended in the amendment—to insert charities into the hierarchy alongside the preferred depositors in the Financial Services Compensation Scheme—have drawbacks? First, one of the principal purposes of the Bill, which comes straight out of Sir John Vickers’s recommendations, is to protect the taxpayer—the ordinary working people of this country—from the costs of bank failure. Insured deposits are guaranteed by the FSCS. It pays out immediately to insured depositors and then takes on their claims as creditors of a failed bank.

What happens if there is a shortfall in the recoveries? The FSCS levies other, well run banks. It is important to reflect that doing that can be a source of potential contagion. It can impose risk and costs on other banks’ creditors and depositors. The liabilities have to go somewhere. That may be on perfectly reasonable grounds, as set out in terms of the establishment of the FSCS, but we should remind ourselves that it means other banks with other customers and other depositors being exposed to that risk. In circumstances in which the FSCS cannot pay immediately, or perhaps ultimately, the taxpayer bears the contingent liability. The Bill is designed to protect the taxpayer from the consequences of bank failure that were evident in the past, so there are strong reasons to align precisely the terms of the FSCS and the depositor protection preference category.

Having done that, should we include charities? Moreover, should they be included in the FSCS? If we want to maintain consistency, perhaps a clearer and more consistent way of doing it would be to address whether they should be part of the depositor hierarchy. That gives rise to a debate that we have started to have in the Committee about whether depositor preference should be extended to good causes. Good causes certainly include charities but are not limited to them. For example, schools, hospitals, local authorities, medium-sized businesses that are important for the community and private sector pensions into which people have paid are all sources of funds that could constitute good causes in no lesser way than charities. The trouble is that if everyone is prioritised, no one is prioritised.

We need to make some decisions here. It could give rise to some difficult consequences if we drew the line at charities, no more and no less. If charities were to be included, the deposits held by a private and independent  prep school could be included, whereas the reserves held by a state primary school would be excluded. I think most people would consider that to be anomalous. As my hon. Friend the Member for North East Somerset pointed out, the vast Majority of charities are covered under the FSCS at the moment. About 1.8% of charities are not eligible for any FSCS protection on account of their size. In total, some 3.5% would have deposits above the £85,000 limit. It is important that our constituents, who—you never know—might be reading this debate, are reassured that the vast majority of charities’ deposits are already covered under the Financial Services Compensation Scheme under the Bill, and that it is recommended that they will enjoy the protection of that scheme.

I would be grateful if the Minister clarified something. Forgive me for my lack of familiarity with the particular terms of the Financial Services Compensation Scheme, but I think that he is saying that charities, and presumably therefore all depositors, including businesses, schools or others, are covered up to that £85,000 level, or is it only individuals who are covered up to that limit?

The hon. Gentleman raises an apposite point. The current coverage of the Financial Services Compensation Scheme is for individuals whose deposits are protected up to £85,000, and for small organisations—he will want to know the definition, which has come up previously in Committee—that meet at least two of the following conditions: they should have a turnover of less £6.5 million per annum; they should have fewer than 50 employees; and their balance sheet should be less than £3.26 million. Those are the current criteria. The scheme is limited to small organisations and individuals.

Having said that, the hon. Gentleman will be aware that the terms of the Financial Services Compensation Scheme have changed from time to time. He noted that before 1 October 2007, the total limit was £31,700, with 100% protection of the first £2,000 and 90% of the next £33,000. That increased between October 2007 and October 2008 to 100% of the first £35,000. Between October 2008 and 2010, it increased to 100% of the first £50,000, before being aligned with the European standard of 100% of the first €100,000—or £85,000—of deposits. Measures are being debated in Europe to extend some of the categories of coverage of the European standard, which may address some concerns and about which I will say more in a moment.

It is important to send a message to charities in this country that the vast Majority of them are covered by the existing arrangements. Only 1.8% of charities fall outside the size threshold for organisations and only 3.5% fall outside the criteria for deposits over £85,000. We are therefore dealing with a small minority of charities. As my hon. Friend the Member for North East Somerset said, some charities are organisations of sophisticated financial expertise, which is quite right given the extent of the deposits that they control and of their financial resources. For all the reasons that the hon. Members for Nottingham East and for Kilmarnock and Loudoun gave about charities getting the best returns for their investments, if they are sophisticated, well run and have the financial acumen and advice to make with clear sight investments that may entail a degree of judicious  risk, they should not be prevented from doing that. The ring-fencing rules provide that charities with sophisticated individuals can invest outside ring-fenced bodies. Indeed, charities with a gross income of more than £6.5 million will be able to bank outside the ring fence, which reflects those matters.

One would not want inadvertently to constrain charities who make good returns for their beneficiaries through having built up, over time, an impressive track record of sophisticated investment management. That is not the intention here.

The Minister has been generous in giving way. To be clear, would it be possible for charities with less than a £6.5 million turnover to bank outside the ring fence, or would they be prevented from doing so? I am worried that there may need to be a waiver provision for charity trustees, if they are to venture into those slightly riskier banking environments, to make sure that they are fully aware of what they are doing with their members’ funds.

Just to clarify, if charities do not have a turnover above £6.5 million, they are required to stay within the ring fence. As in the discussions that we had on sophisticated high net worth individuals, if they are below that amount, they are assumed to be—in a non-pejorative way—unsophisticated and are required to keep their deposits within the ring fence. That is the state of affairs.

It is sensible to align the protections of the FSCS with the depositor preference hierarchy to have a rational approach to the risk to the taxpayer. It is not possible to draw a bright line between charities and other good causes, however appealing that may be. I suspect that that lies behind the Parliamentary Commission’s reluctance to endorse this simple principle, but that would give rise to instant anomalies that would be troubling to members of other organisations. As I said earlier, the FSCS coverage has been extended to include not just individuals, but small organisations.

Proposals to amend EU law through the deposit guarantee scheme directive—this is currently being debated and the directive is likely to be amended well before 2019 when the depositor preference hierarchy provisions would come into effect—are in motion already. Actually, as currently proposed, the European compensation scheme standard, to which the FSCS would comply, would extend to other organisations, including charities of all sizes, which is the approach recommended here.

The Government are certainly sympathetic to the concerns that lie behind the amendments. I am conscious that, as the hon. Gentleman said, the amendments were tabled to give rise to a debate and to probe the Government’s position. During the passage of the Bill, the Government will certainly listen. We want to keep things simple, as the ICB and Parliamentary Commission have recommended, because a proliferation and a cat’s cradle of exemptions and inclusions can serve only to confuse.

The vast Majority of charities are already protected. The clarity and simplicity of our approach in aligning the interests of the FSCS and the depositor hierarchy makes sense, but there is the question of the scope of  financial services compensation schemes in this country and around the world. My inclination is to think that, for the Bill, the important requirement is to align the compensation scheme with the creditor hierarchy and that any extension of protection to other organisations might best be done through the debate, between now and 2019 when it takes effect, about what the depositor insurance schemes in this country and across Europe cover. I hope that the opportunity to set out the Government’s views has been useful. I am certain that we will have occasion to debate this matter again during the Bill’s passage.

It is helpful to hear the Minister’s careful thoughts on this issue. I do not doubt that he has been looking at this question in some detail, but I think that the Parliamentary Commission on Banking Standards had a point when it said that the notion that somehow charities, small businesses or individuals with temporary high deposits would be treated just like everybody else in the event of an insolvency is unconvincing. I think that that is probably right. Let us face it, if that happened in this country, there would be a massive amount of political pressure on elected representatives and Ministers. Of course, there would be some reaction from the body politic if charities were crying out for extra assistance in such circumstances.

We have to be realistic and confront that imaginary scenario—perhaps less imaginary given the Cypriot circumstances—and for the sake of preparedness and contingency spend a bit of time now thinking through what would happen, rather than bodging together some taxpayer bail-out for particular organisations at the last minute. The Minister implied that his preference would be to start with a depositor protection scheme, as opposed to a depositor preference scheme, as a way to look at expanding the insurance arrangements. That is a perfectly viable scheme.

However, in his opening comments, the Minister said that the Parliamentary Commission obviously found this issue very tough, that they are very eminent and that the best they could do was call for a review group to be set up jointly with the Bank of England. He said that he will note and reflect on that recommendation. With the greatest respect, I do not think that we should have a review into whether we should have a review. We should just have the review, be done with it and get on with it so that fairly soon we can put in place a process that reaches a conclusion so that we can plug this gap—this lacuna—that clearly exists in the rules.

Clearly, if we accepted that definition of good causes, it does spill out beyond charities. That is a perfectly viable argument. As I said, the Amendment is probing. On reflection, the 90% is a moot point as it would entail a 10% haircut, which is an even greater haircut than the hon. Member for Chelsea and Fulham had yesterday at the barber’s. He must have asked for a Cyprus, but I digress. It is important that we find a way to have the maximum possible protection for charitable bodies, because even though there may be only a small number that spill beyond the FSCS protections, they are nevertheless good causes and people would be shocked if they were fleeced by insolvency arrangements.

It is important that the Minister makes a decision about what the process should now be. It is perfectly reasonable for him to try to initiate the review set out by the Parliamentary Commission and it is right that the Bank of England and others should think about the potential for extensions to the FSCS if that is the Government’s preferred route, but it would be nice if we could find some way of resolving this in 2013. Heaven knows what is around the corner.

Obviously, the context of Cyprus injects a sense of urgency into our proceedings, but the Amendment that we are debating would take effect from 2019. If we thought that there was an urgent need to consider the arrangements for charities and other bodies, it could be that the Bill, taking effect in 2019, may not be the most opportune vehicle anyway.

That is true, except for the possibility of a Government new Clause being introduced that would change the Bill on Royal Assent, maybe in 2013—who knows?—but more likely in 2014. There are ways and means of using the Bill to deal with things more quickly, certainly in relation to the FSCS. We need to know that the Minister is in a dialogue with the FSCS and that he is talking to the Bank of England so that this will not simply be an interesting little vignette debate that took place in the spring of 2013. We need more than that.

However, it is important that we have had this discussion. I shall not labour the point. I am happy to withdraw the Amendment, notwithstanding the fact that we will want to come back to the matter. It is likely that we will want to revisit it on Report, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

We have had a useful discussion. I can certainly confirm to the hon. Member for Nottingham East that we will continue to think actively in this area. The points in the debate on the amendments were well made. It is not a debate for only the spring of this year. I suspect that their lordships will also give close attention to the subject.

The Independent Commission recommended the introduction of depositor preference, ensuring that the FSCS treat deposits as preferential. It is important that people have confidence in the deposits in banks, although the insurance scheme is not free of consequences for the taxpayer. The FSCS is to borrow £20 billion from the Government to fund its obligations during the crisis, and the taxpayer will continue to carry the contingent liability until that is repaid.

Depositor preference means that the compensation scheme can recover more of the sum that it pays out from the bank’s assets than would otherwise be the case if it were not preferred. It helps by reducing the likely charge through the levy on other banks, reducing the risk of contagion. Also, it sharpens the incentives on investors, rather than taxpayers, to monitor and manage the bank’s risk, given that they will bear more risk than other depositors.

I have already mentioned that the European deposit guarantee scheme directive will, as we anticipate, extend FSCS coverage further to businesses and many other  organisations. We will have a debate about that. We will reflect on this debate and see what further suggestions we can make during the passage of the Bill.

It is a pleasure to serve under your chairmanship this morning, Mr Bone. I want to address the obvious question of territorial extent. As I represent a Constituency in Northern Ireland, it is striking that the provisions on preferential debts apply to Great Britain with distinct references to England, Wales and Scotland. That is obviously because of our separate bankruptcy Laws. Given that the Financial Services Compensation Scheme and the other provisions are understood by everybody to be UK-wide, the question arises as to particular wrinkles potentially being built into the future arrangements by virtue of differential treatment for Northern Ireland.

I recognise that the Presbyterian Mutual Society was not a bank—it was an industrial and provident society—but when the crisis hit that organisation, widespread, misplaced assumptions and understandings emerged, including at levels of government, about what the regulatory set-up was in Northern Ireland. What was regulated did not extend in the manner that people understood. Of course, the Financial Services Authority should have been regulating much of what the PMS was doing, because it went beyond what an industrial and provident society should have been doing.

The situation revealed that a whole twilight zone had been created in which odd and strange things happened, in which the regulatory system, the Government and the legislative systems both here and in the Assembly were giving confusing answers and explanations to people who were in a state of distress and confusion. A lot of the moneys held by the Presbyterian Mutual Society were—as the previous discussion touched on—held by charitable trusts, and the question arose of who should have preference in the resolution of that situation. Given our discussion on previous amendments, it is appropriate to ask how far we are factoring in the future situation in Northern Ireland.

As a banking market, Northern Ireland is distinct. The high street banks in Northern Ireland are branded very differently from those here. It is also a banking market that will undergo change. First Trust is up for sale, there will always be rumours about Ulster bank being spun out of RBS, and we have experienced the collapse of Anglo Irish bank. That bank was wrapped up into the Irish Bank Resolution Corporation along with Irish Nationwide, which also had some business in the north, and recently the IBRC has, in effect, moved for insolvency. There is experience of banking players in Northern Ireland finding themselves in an insolvency situation, which is why I ask the Minister to shed some light on what he understands will be the situation in Northern Ireland. Has he been given any indication by the Department of Enterprise, Trade and Investment Minister in Northern Ireland of further legislative changes in Northern Ireland that might bring the position in Northern Ireland into some alignment with the position in England, Wales and Scotland as set out in the Bill?

If the Minister is not in a position to answer all those questions fully now, I am prepared to wait for fuller answers until the debate on Clause 19, which deals with  the territorial extent and which refers specifically to this clause and the exception it contains. But given our experiences in Northern Ireland of thinking that everything would be all right because the spirit of the thing was good, we need to get this right. It seems strange that we have a compensation scheme for the UK that may operate differently in Northern Ireland. We had some experience of the difficulties that such differences may cause in the background to the Presbyterian Mutual Society. The investigation into the Presbyterian Mutual Society showed that in some parts of Northern Ireland, bank managers were saying to PMS customers, “You are not protected there. You should move your moneys into our bank, where you will be protected by the bank guarantee,” which started to create a bit of a run on the PMS.

Credit unions in Northern Ireland had similar problems. Although they managed to avoid a run, they were caught in a situation where credit unions in the south were covered by the very generous guarantee given by the Irish Government but credit unions in Northern Ireland were not covered by anything other than their own bonded guarantee within the Irish League of Credit Unions. Credit unions worked hard to make sure that that allowed them to survive a potential run, but in the sort of situations that we are looking at—people have mentioned Cyprus—if there is any gap in protection, and if people with certain accounts in Northern Ireland feel that they have less protection, even under the Financial Services Compensation Scheme, by virtue of the fact that they are banking in Northern Ireland, that will create risks. People will feel that they are at some hazard so they might engage in hasty or rash action, which might have its own implications.

We had a useful debate earlier about how charities would be affected, and I would like to echo the comments of my hon. Friend the Member for Foyle, who raised some crucial points about the territorial issues that arise from the way in which the Clause is structured. It would be useful for the Minister to answer those points.

The Parliamentary Commission’s main concern was about the areas that stray beyond the protection of the Financial Services Compensation Scheme, in which, in the event of insolvency, the uninsured depositors—whoever they are and whatever form they take—will scramble to recover some of their assets. The Cyprus situation brings that concern to the fore. I am not thinking just about the situation of charities, which we have debated, but of business. Most people think of small and medium-sized enterprises, but even mid-cap or larger companies can be significantly affected if a bank becomes insolvent, and obviously there are risks involved in that.

The Minister made a fair point when he said that if everybody is preferred, nobody is preferred. Similarly, it is worth stepping back here. We will come on to this issue when we talk about the bail-in arrangements because these issues bleed across. It is useful to imagine a scenario. We are adding higher preferential treatment to the FSCS arrangements. Clearly in this scenario there will be a greater knock-on consequence for uninsured depositors, who will be left with potentially greater risks as a result of the clause. I am not arguing against the clause; I think it is reasonable. Nevertheless, it is worth, in the balance of risk, trying to work out whether we  are unwittingly creating an extra level of risk for uninsured depositors, and if so, what it is. In designing future bail-in arrangements, we will need to bear in mind in a more thorough way the downstream consequences for depositors who are not covered by the FSCS arrangements. Certainly, they will need to be informed by the EU resolution and recovery directive, which we are talking about, and how it develops.

We talked about charities earlier. It would be wrong of me not to specifically ask about other businesses and individuals who have temporary high balances. One can imagine a scenario in which an hon. Member is moving house and has vested their total housing assets with a solicitor over the weekend, the solicitor’s funds are in escrow in a bank, and suddenly the bank goes bust. What happens if somebody has temporary high balances? It is not inconceivable that even depositors with modest means could exceed the FSCS threshold in such a scenario. Similarly, it is not inconceivable that individuals’ life savings or lump sum payments could exceed the threshold. It is not necessarily the Russian oligarchs that we have been hearing about who allegedly have money in Cyprus; it might just be individuals with life savings, who have received a particular amount in a particular set of circumstances.

It is important to hear what the Government’s attitude is towards giving a level of protection to depositors with temporary high balances, and to individuals in those circumstances. Those are my questions. The Minister has already indicated that he believes that the best route to follow is to think about enhancements to the depositor protection arrangements. Nevertheless, he will understand that there will always be some uninsured depositors, and there will be consequences of that. I just want to get the sense that the Minister is thinking through the design of the clause with some of those questions in mind.

Let me address the important and serious points made by the hon. Member for Foyle on behalf of his constituents. He will know that insolvency is a devolved matter in Northern Ireland, hence the different treatment of the arrangements here. However, the devolved Administration have said that they want to make the equivalent changes to the law in Northern Ireland in an insolvency Bill in the Northern Ireland Assembly. That is how they propose to ensure a degree of consistency in the arrangements. Should that not materialise, the Government have agreed with the Administration that they will table an Amendment to the Bill at a later stage to give effect to this policy across the whole of the United Kingdom. Their preference is to maintain the principle of insolvency being a devolved matter and to have an appropriate Bill, but should that not be possible and should it prove more convenient later on, we can address it here. Either way, the intention is clear that the arrangements should be consistent across all parts of the United Kingdom.

Some historical problems that the hon. Gentleman has identified, such as with credit unions, are now, as I think he understands, a thing of the past, because the arrangement has been brought into line and credit unions are now under FSCS protection, which I hope provides comfort to current depositors, if not to those  who lost out in the past and in terms of the disadvantage that credit unions suffered at the time. As I said, we might have a debate about that later in the Bill proceedings, depending on the progress in Northern Ireland.

The points raised by the hon. Member for Nottingham East come back to the question of preference applying to some people and, therefore, not to others. Inevitably, when it comes to the hierarchy of depositor preference, it is like squeezing a balloon; if more people are included, that has consequences for those who are excluded. The debate—which, to a certain extent, continues—in Cyprus over the past fortnight has been about to what extent it is reasonable to share the burden of that kind of forced bail-in between protected and unprotected depositors. As we have seen, the proposal last weekend was to have a higher contribution, it seems, from the uninsured depositors.

On the face of it, if we think only in terms of the depositor protection hierarchy, the consequence of including other categories is that we would increase the risk to others. However, that is a notional and theoretical risk, because as the clauses that we will debate on a bail-in show, it is absolutely our intention to ensure that other subscribers bear the responsibility for bailing in banks, should they fail in future, rather than depositors. The events in Cyprus make such discussions even more important.

I turn to the particular circumstances of people who ordinarily might be protected by the Financial Services Compensation Scheme, but might find themselves briefly outside it—for example, if there is a temporary holding of assets because of the sale of a house. In terms of the scheme’s simplicity, one can imagine circumstances in which including such exemptions could give rise to all sorts of litigation—where people were demonstrating that their holdings were fleeting and temporary—however clear the intention is to cover perfectly reasonable cases, such as constituents that are moving house over the course of a weekend.

However, as I said in our debate on the amendments, changes are being contemplated to the European directive on deposit guarantee schemes. We were pressing, at the European level, for precisely those sorts of contingencies to be included, and we were trying to find ways in which they could be specified that do not give rise to the unintended consequence that more or less any depositor could claim that they are covered by the compensation scheme, which would defeat the point of having the different categories with the protection that is there. That process is ongoing. The Clause, as I mentioned, would take effect from 2019. Were we minded to go further, it is highly likely that the European arrangements would kick in before the clauses in the Bill, but no doubt, when we come to talk about that issue during future stages of the Bill, we will reflect more on where the European discussions have got to.

I thank the Minister for addressing some of my questions. However, I am at a loss to fully understand his answer, in that the intention is obviously to respect the devolved nature of insolvency legislation in Northern Ireland, but any change to legislation, in respect of insolvency law, in Northern Ireland will not, of itself, be able to make provision about the Financial  Services Compensation Scheme. No aspect of that is devolved, so the Assembly cannot legislate on the Financial Services Compensation Scheme, even though it is meant to operate as a UK-wide scheme.

Is there not a case for making some sort of “watch this space” provision in the legislation to permit that at a given future point, by order of the Northern Ireland Executive or a Minister there and of the Treasury, provisions can be made to extend Clause 9—it exclusively covers Great Britain—to Northern Ireland as well? I am not sure that the Northern Ireland Assembly can legislate on the Financial Services Compensation Scheme. The Bill needs to make that provision in some way, or at least provide the housing for a future change.

The hon. Gentleman makes an interesting point, but Clause 9 is not about the operation of the FSCS; it is about insolvency law and who is protected in the event of insolvency. The hon. Member for Foyle is right that Northern Ireland legislation could not alter the FSCS, but the clause is about where the FSCS, with all the legislation that underpins it, appears in the creditor hierarchy in the event of insolvency. Insolvency law is a devolved matter and the discussions that have taken place with the Administration have established that deference should be paid to its being a devolved matter, although there is a clear expectation that either a law will be passed in Northern Ireland or an Amendment will be made.

The hon. Gentleman said we should have something that says, “Watch this space,” but as far as having a placeholder, he personifies the injunction to watch this space. He is a Member of this House and can do that as the Bill goes to Report and Third Reading. He has friends in the House of Lords and they will be able to watch this space there and ensure that the agreement that has been reached with the Administration is reflected. The Government have no objection to facilitating the active intention on both sides, and I see no problems in discharging that.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

It might be helpful to remind the Committee that, for reasons I am not entirely sure of, we are not allowed hot drinks in this room.