Financial Services Compensation Scheme

Part of the debate – in Westminster Hall at 11:44 am on 10th March 2009.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 11:44 am, 10th March 2009

Thank you, Mr. Pope, for giving me the opportunity to speak in the first of the winding-up speeches on this extremely important subject. I congratulate Mrs. Cryer on securing the debate. She has not yet been recognised for her services to the building society sector by Her Majesty the Queen, but no doubt that time will arrive in due course. The hon. Lady has given us a welcome opportunity to discuss a vital topic, and it has been taken up by a number of hon. Members who have direct constituency experience of the benefits that building societies bring to their communities and, indeed, in most cases specifically to them as individual depositors and savers.

My party supports an insurance scheme because it is an extremely sensible safety net. The initial scare led to depositors queuing in an orderly British fashion outside Northern Rock to withdraw their deposits. One feels that in many countries people would have been breaking down the doors, but in this country people stood for hours and hours in queues. However, so far no one has actually lost their money in the banking crisis or storm that has hit our financial sector. That is very important because if the view took hold among the population that if banks or building societies were going down, people would lose their deposits and, in some cases, their life savings, panic would set in. People would want to withdraw their money and keep it under their mattress or put it into what they regarded as a safe harbour. That would obviously have profound implications for the banking and financial sectors, and indeed for the economy as a whole.

It is not just in the interest of the individual depositor or even the individual institution to have some sort of safety net to protect people, although obviously the primary beneficiaries, at least in the immediate term, are depositors who have confidence in the British financial sector. Of course, if we did not have a scheme of this type, people would still expect to be bailed out if their bank or building society failed, so in a way the insurer of last resort would be the state. That is increasingly what is happening, but the banks and building societies themselves have a responsibility to insure as far as possible against risk in their sector, and they should not assume that the state will always be there to pick up the pieces. If the state needs to do that on behalf of all of us, using the money we all give to the state as taxpayers, it should be the last resort rather than the norm. My party shares the wide consensus that an insurance scheme broadly of that type is a desirable and sensible way to proceed.

Engaging in the key point of the debate, I also agree that the share the mutualised building societies are being asked to contribute is unreasonable. The relevant calculation—a point made by my hon. Friend Willie Rennie and others—is surely not the overall share of the market for mutualised building societies compared with that for banks. Surely, the relevant consideration is the risk to funds of depositors in the building society sector compared with the risk to those in the banking sector. One does not need to calculate that risk in a particularly sophisticated way—although no doubt there is benefit in doing so—because the evidence is there for us all to see.

Many of the Members who have contributed to the debate have already made the point that so far no mutualised building society has had to draw on that insurance-based scheme. To use the example mentioned by my hon. Friend, the situation is like that of the extremely cautious driver who makes sure that their car is insured. Of course, they are legally obliged to do so, but their low premium reflects the low likelihood that they will ever have to draw on the insurance. That is surely the relevant and sensible model for us to follow. Its logical conclusion is that because building societies are much lower risk, they should pay a much smaller proportion to cover against risk than higher-risk institutions. It would be an extraordinary irony if building societies were threatened because of the size of the levy on them to cover the risks taken by the banks that got us into these difficulties in the first place.

While we have the opportunity, and because it is relevant to our deliberations, I want to widen the debate slightly and consider how we got into a situation where building societies feel that they are being put under unreasonable pressure and banks are much more likely to draw on the insurance-based scheme. I agreed with many of the comments that Charlotte Atkins made, but I do not necessarily take the view she seemed to imply that shareholder institutions inevitably deliver a lower level of customer service than organisations that do not have shareholders. I believe that shareholding capitalism has an important, dynamic part to play in our economy, and it would be wrong for us to conclude that shareholder capitalism per se has failed.

Clearly, many capitalist organisations with shareholders—in this case, banks and financial institutions—have failed. In part, that was caused by a failure of regulation and of leadership at the highest levels of the banks, and by pure greed. People put short-term profitability before the long-term interests of their institution.

I remember the unseemly clamour when many of the building societies demutualised. When the people who had previously been running the mutualised building societies went into work after demutualisation to do what, on the face of it, appeared to be exactly the same job as they had done before, they thought it only right that they should be paid an amount that was three or four times more because they were now running a swashbuckling financial institution—yet they were sitting in the same office doing what appeared to be much the same job.

That was also the case when many of the utilities were nationalised. Civil servants who appeared to be perfectly competently running utilities suddenly thought that they were right at the cutting edge of modern capitalism and paid themselves far greater salaries to do what appeared to be much the same job as they had done before.