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It seems that only now the chickens are coming home to roost, and people have realised what they let themselves in for, but at the time it appeared to many people who were less forward-thinking than the hon. Lady that demutualisation was all upside. At the time, there was no obvious downside.
However, it is fair to say—I shall inject a note of politics into this discussion—[Interruption.] No, it is important, because it is almost exactly a quarter of a century since the big bang, and the financial deregulation mood took hold in this country and there was a sea change in the way that we viewed and approached financial services. During that quarter of a century, the Conservatives and Labour have governed for almost precisely the same proportion of time. They were both in power for about 12 or 13 of the past 25 years and, in that sense, have presided equally over the process.
Anyone viewing the financial catastrophe that has engulfed the whole financial services sector could reasonably ask what the motivation was that led to both the Conservative party initially and then the Labour party being so remiss when it came to trying to prevent it. Why were they asleep at the wheel? Was it simply incompetence, or were other motivations and forces at work?
It was the Conservative party, of course, that sowed the seeds of many of the problems that we face today. There was a belief in high-risk, high-return capitalism. I am trying to look at the situation as dispassionately as possible and I think that was the main motivation for many Conservatives in the "loadsamoney" 1980s—you will remember, Mr. Amess, that the 1980s were satirised as being about loads of money and, as there often is, there was truth in the characterisation. It was a me-first decade, and a time to make money as quickly as possible.
As I try to understand why that mood gripped the Conservative party at the time, and is probably still very much a characteristic of its outlook, I suppose that it was a reaction to the cloying corporatism of the 1970s. The sense took hold that dynamic, entrepreneurial people were being held back and needed to be liberated, and that we needed a higher-risk, lower regulation economy. That was a world away from the benefits of prudent mutualisation that we are discussing this morning and, of course, the chickens have come home to roost.
I have not informed the right hon. Gentleman that I would mention him because he has only just come into my mind, but Members such as
What is harder to understand is why in the second half of that quarter century the Labour party, which one traditionally thinks of as the party of the left, of trade unions and even of socialism in the United Kingdom, presided over disaster in the financial services sector. Again, I am trying to look at the situation as dispassionately as possible and trying to understand. I have heard several Labour Members make extremely reasonable, sensible speeches, but one would think from listening to them that Labour had not been in Government for the past 12 years, and that a Labour Government had not set up the regulatory system that allowed the failure to happen.
As I try to understand how the Labour party came to preside over the collapse in Britain's banking system, I conclude that the motivation was probably a desire to rebrand as Labour after Tony Blair became leader of the party in 1994.
In a moment. There was a desire to come up with a wholly new entity—new Labour—and it was important that it was branded as something separate from the Labour party that had gone before, which had lost the previous four general elections, as you, Mr. Amess, will remember more than anyone.
On a point of order, Mr. Amess. That is straying way beyond the terms of the debate. We have been listening for the past 10 minutes to something that has no direct bearing on the subject before us.
Mr. Amess, you took the words out of my mouth. The FSCS is, of course, a body that was set up by the Labour Government in 2001—traditional values in a modern setting—and part of the regulatory regime and one of many measures introduced by the Government. The first Standing Committee I ever sat on was about regulating credit cards. I am delighted with the regulation that we introduced. However, we face a global economic crisis that neither this nor any other Government predicted.
Interventions from Parliamentary Private Secretaries remind me of speak-your-weight machines. One puts in the necessary information, and it comes out the other end.
For many years, there have been warnings from my hon. Friend Dr. Cable and many others, so I observe only that the Labour Government are the Government now and have been for 12 years. One burden of being in government—an opportunity that, sadly, I have yet to experience—is that one has to take responsibility when things go wrong as well as taking the credit when they go right. That is the misfortune that Labour must face, having presided over a collapse not only in the number of mutual building societies but, more importantly to some people, in the viability of many financial institutions.
My party opposed demutualisation—as did the hon. Member for Keighley and others. We need a mixed sector, comprising a banking segment and complementary mutual building societies. There should not be one dominant model; it is not desirable for all mutuals to turn themselves into banks, because mutuals offer different and complementary services. We also need to move to a different banking model altogether, separating the high street banks and their depositors—the people we meet in our constituencies who put their savings and money into banks and borrow small amounts from them under the protective umbrella of insurance schemes and, ultimately, if need be, the state—from the high-risk investment banks.
Mr. Prentice touched on my next point. When I look at the very highly paid chief executives and senior managers of banks, I am always reminded of the expression about criminals: "If you do the crime, you have to be man enough to do the time." If bankers are willing to take the big pay when times are good, they have to be big enough to take the losses when times are bad. It is no good people saying, "We want the state out of our lives—all those people trying to regulate and frustrate our entrepreneurial spirit," as they make lots of money and award themselves huge bonuses, when as soon as things do not go so well for them, they suddenly want to be propped up and looked after.
I cannot either. It may be displacement theory—a cry for help from the party that presided over disaster.
In conclusion, my party strongly supports the point that early-day motion 426 makes. It is extremely regrettable that we are in this deep financial crisis, which has affected our whole economy and continues to do so. There are big lessons that we can learn about how our financial institutions are regulated and the merits of a mutual sector that works much more prudently and modestly on behalf of its members than banks have on behalf of their account holders. I hope that the Minister will look kindly upon the case that the hon. Member for Keighley and others make, because the hon. Lady makes an eminently reasonable point about the balance between risk and reward. At the moment, the building societies are being very unfairly treated.
I congratulate Mrs. Cryer on securing this interesting and thoughtful debate. It raises a host of issues, some of which are relevant, and others, including many remarks that Mr. Browne made in his 14-minute speech, which seem wholly irrelevant, given the title of the debate.
I shall probe the issues that have been raised and, in doing so, comment directly or indirectly on the speeches made by the hon. Members for Staffordshire, Moorlands (Charlotte Atkins), for Dunfermline and West Fife (Willie Rennie), for Pendle (Mr. Prentice) and for South Swindon (Anne Snelgrove). I intervened on the hon. Member for South Swindon regarding credit unions, because, importantly, the Financial Services Compensation Scheme shares the risk of failure between sectors, and if one part of the deposit-taking pool wanted to go it alone, there would be an issue about how it affected other parts of the pool.
Having had time to reflect on the hon. Gentleman's point, my response is that credit unions are so small and deal with so few people that they will not call on the FSCS as much as he makes out. I take his point, but any measure must be part of an overhaul of the whole system.
The hon. Lady makes an important point. We must think about what risk we are trying to assess, because although the absolute amount that credit unions may call upon from the FSCS may be small, credit unions collapse more frequently than banks or building societies, so the assessment of risk is much more complex than the debate has so far addressed. The hon. Lady and the hon. Member for Pendle pointed out that building societies have swallowed their own smoke in this financial crisis and, indeed, problems with building societies have led to mergers.
The hon. Lady mentioned Nationwide acquiring the Derbyshire and Cheshire building societies. It is worth pointing out that they were the two societies that sold their offshore deposit-taking activities—Derbyshire in the Isle of Man to Kaupthing Singer & Friedlander, and Cheshire in Guernsey to Landsbanki—and created a raft of problems for savers inside and outside the United Kingdom. Building societies must remember that rescuing smaller institutions involves a cost to them and to their members. No merger is cost-free, even if only the cost of the transaction is involved. Indeed, building society members pick up costs from two sources: first, the levy from the FSCS and, secondly, the cost of the merger with their stronger counterparts.
Everyone on both sides of the House—or around the hemicycle, whichever way one refers to Westminster Hall—agrees about the importance of the financial mutual sector and wants it to survive and to continue to strengthen, because its ethos gives a distinctive character to its organisations and how they deal with their members and customers. There have been legislative changes to strengthen the sector. The hon. Member for Staffordshire, Moorlands referred to Britannia building society, which is merging with Co-operative Financial Services and taking advantage of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, which my hon. Friend Sir John Butterfill promoted during its passage through the House. That legislation is being used to help to strengthen the mutual sector.
The hon. Member for Keighley made a cogent argument about the building society levy's disproportionate effect on building societies, and I noticed yesterday, when Newcastle building society published its results, that the levy amounted to about £6 million. Unfortunately, the other major factor affecting that institution's results was its exposure to Icelandic banks, so it has been caught twice by the financial crisis.
The FSCS is an important tool that protects consumers in the event of a default and an important part of the architecture of this country's financial regulation. Although the scheme came into effect in 2001, there were predecessors, including a stand-alone building society scheme that has now merged with the overall scheme for deposit takers. The FSCS exists to instil confidence in consumers, and it is important that the institutions that benefit from being able to offer their customers such protection recognise the costs that must be paid when there is a default.
One point that has come out a couple of times during the debate is that no one, either when the FSCS scheme was set up in 2001 or when its funding was reviewed in late 2004 or early 2005, envisaged the current financial crisis. I do not think that we would have had this debate had it not been for the fact that the FSCS has been used as a conduit for funding the transfer balances from Bradford & Bingley to Banco Santander and some of the balances from the Icelandic banks to ING and to make payments out to some people who have banked with the Icelandic banks and London Scottish. There is a cost attached to that. No one in this debate has argued that the industry should not bear that cost, because if it did not do so the taxpayer would.
The taxpayer is making a significant contribution to the funding of the bank rescues, but it is right that the cost of bailing out individual institutions is borne by the industry. The question then becomes how that burden can be shared. Clearly, the existing funding mechanism that has been reviewed and supported relatively recently comes under particular strain at a time such as the present. Building societies are not the only ones who are concerned: independent financial advisers are also worried about some of the costs that they are having to bear in respect of the collapse of Pacific Continental Securities, for example, which is a boiler room that has gone bust owing a huge amount to its customers, leaving IFAs to pick up some of the tab. It is not just building societies that are facing this situation. Even if we accept the inequity of how the cost of financing has been borne by building societies and others, the question is, how can we design a more equitable scheme? Obviously, the responsibility for that rests with the FSA, which designed the scheme rules, and it will need to think about that.
A number of suggestions have been floated in this debate, including one to cap the contribution under percentage of profits. That is fine when all businesses are profitable, but I am not sure how such a scheme would work in practice at the moment, given the losses that have been incurred by the large banking institutions, such as HBOS, Lloyds and RBS. Of course, the scheme needs to cover all its costs, but a cap on contributions may mean that an element of the cost of the scheme will not be met from that levy. So what would happen then? Who would pay the excess over the amount that would be generated if the levy was restricted to 5 per cent. of profits? It is not clear to me how such a scheme would work in practice and who would pick up any shortfall.
There has been some discussion about risk. The hon. Member for Dunfermline and West Fife talked about that in the context of a no claims bonus-type scheme, as used for motor insurance, but that presupposes a level of pre-funding. There has been a lot of debate about whether there should be a pre-funded compensation scheme. The Minister and I discussed that topic at some length during the Commons' consideration of the Banking Bill. Pre-funding had its attractions, but some difficulties attach to a pre-funded scheme. When the Banking Bill Committee took evidence from various interested parties at the start of its proceedings, Adrian Coles, the chief executive of the Building Societies Association, was quizzed on a pre-funded scheme and he said that such a scheme, assuming that building societies had to hold the same capital, could lead either to savers being paid a lower rate of interest or to borrowers paying a higher rate of interest. So even a pre-funded scheme is not cost-free from a building society's perspective in relation to how it supports its members. There are some complexities that would need to be worked through in respect of a pre-funded scheme.
I understand the hon. Gentleman's point about the complexities, which need to be considered carefully. We are just asking the FSCS to look again at various approaches. The building societies are not asking to be let off scot-free: they are asking for a more level playing field, because at 3 per cent. of profits for the banks and 15 per cent. on average for the building societies, the levy is iniquitous.
I agree. There is a lot of sympathy out there for building societies, but the solution is not necessarily straightforward. That is why I reflected on the comments made by Adrian Coles of the BSA. A risk-based pre-funded scheme would have an impact upon a building society's ability to serve its customers: it might have to either pay a lower rate to savers or charge borrowers a higher rate. Any review of the scheme needs to be carefully thought through, because there is no easy solution. The solutions proposed so far have their failings and will create a set of winners and losers. It is not necessarily about one sector winning and another losing. Some people in the building societies sector may lose out as a consequence, depending on how risk is assessed and quantified.
I am also concerned about the idea, which has been suggested, of moving away from the larger pools for deposit protection to smaller pools, with building societies perhaps picking up the first tranche of a series of losses. Would the building societies be in a position to bear the first loss? How big would that pool be? At what point would the risk be shared with banks and other deposit takers and then, at the next level up, with other financial services institutions? There has been a big debate already about how big the various pools should be and whether they should be tightly defined in relation to particular types of institution or whether they should be broader and what the transfer risk between them is. There is no easy solution to this problem; I wish there were, but I do not believe that there is. I do not think that there is a quick solution, either, as any solution will involve significant change and needs to be properly thought through.
I welcome the FSA's consideration of the matter. It has already embarked on a review of the Financial Services Compensation Scheme to consider how it can introduce seven-day pay-outs or a single customer view and some other important issues. I hope that it looks at this matter carefully, because if there is to be change it is important that we get the right answer—one that is equitable and does not have any unforeseen consequences. We have seen in this crisis that a scheme that was supported by a range of institutions not that long ago is coming under pressure because of a specific set of circumstances. New circumstances may arise in future. Perhaps because of the consolidation of the building society sector, building societies will not be able to swallow their own smoke as they have done in the past. What would be the consequences of that if we moved to smaller pools or a pre-funded scheme, or one based on risk?
This is a complex topic. There is a great deal of sympathy with the views of building societies, but I do not think there is a clear solution—a clear way to tackle the problems—at the moment.
I congratulate my hon. Friend Mrs. Cryer on securing this Adjournment debate. Through the early-day motion and extensive lobbying, she has shown a great interest in the impact of FSCS levies on building societies, and we have previously discussed the matter. I hope to use this opportunity to go into greater detail on the current position.
It is important to set the matter in context. I do not think that I need to say that we are living through extremely uncertain times and that the banking crisis has made the past 18 months challenging for the industry, the Government and the general public. Now is not the time to debate the causes of the crisis or to decide who is to blame. Suffice it to say that the Government took action when they needed to in relation to Northern Rock, Bradford & Bingley and the Icelandic banks. As my hon. Friend noted, no retail depositor in British banks has lost out in the wake of the global financial crisis. I emphasise that the Government remain committed to doing whatever it takes to stabilise the banking system to protect depositors and taxpayers and to support the wider economy.
As hon. Members will be aware, we brought into force the Banking (Special Provisions) Act 2008 to give us the right mix of emergency powers to deal with deposit takers in difficulty. That Act's successor, the Banking Act 2009, reformed those powers and put them on permanent footing. It made some changes to the legal framework for the FSCS and introduced a new bank insolvency procedure, which aims to allow speedier payouts to eligible depositors. We hope never to have to use those powers, but we are now in a position to deal swiftly and precisely, if necessary, with financial institutions that pose a threat to financial stability in the UK.
We have used the powers under the 2008 Act to protect the financial system by, as Mr. Hoban noted, transferring deposits from Bradford & Bingley, Heritable and Kaupthing Singer and Friedlander. We have also ensured that retail depositors in UK branches of Landsbanki and London Scottish have been fully compensated. All that costs money. The Government contributed by paying for the transfer of deposits or compensation when depositors stood to lose more than £50,000. We expect the Icelandic Government to support deposits in branches of Icelandic banks.
That leaves a cost, which falls on the UK FSCS. As my hon. Friend the Member for Keighley clearly outlined, the principle behind the scheme is that the industry mutually meets the costs of compensating retail customers for losses caused by the failure of their peers, be they deposit takers, insurers, or other firms. I did not hear any hon. Member who spoke today argue with the general principle that the industry should meet its own costs of failure.
Under normal rules, a large part of the cost of compensating depositors could have fallen immediately on FSCS levy-paying firms. That would have left deposit takers facing a £1.8 billion bill and other firms a £2.2 billion bill. The Government recognised that that would be a serious burden for many firms and that the FSCS would still need large loans to meet costs over the first £4 billion. Accordingly, we arranged for the Bank of England to make loans. The loans are being refinanced by the Treasury, but they will have to be paid for. The interest costs on the borrowing will be met by deposit-taking firms, and the loans will be repaid over time by FSCS levy-payers after recoveries have been made from the assets of those banks that were the subjects of pay-outs.
As my hon. Friend explained, the deposit-taker category of firms includes banks, building societies and credit unions, which brings us to the nub of today's debate—that building societies believe that it is unfair that they must contribute to the cost of failed banks. I understand that, and I have every sympathy with societies who find themselves in that position.
I agree with my hon. Friend, and I will say more about that if I can. We face a zero-sum game: if one person pays less, someone else must pay more. My hon. Friend suggests that it is a matter of balance and that building societies are being unfairly discriminated against. She and my hon. Friends the Members for Staffordshire, Moorlands (Charlotte Atkins), for Pendle (Mr. Prentice) and for South Swindon (Anne Snelgrove) spoke eloquently about building societies in their constituencies—Britannia, Leek United, Marsden and Nationwide—and rightly made the point about the share of the FSCS levy that building societies are expected to pay. Willie Rennie said that the Dunfermline building society is a strong constant in his constituency and made the point that my hon. Friends made about the value of mutual societies. We all recognise that that is important.
Let me be clear about the current position and responsibilities. The detailed rules on levies for the FSCS are a matter for the Financial Services Authority, which was set up as an independent regulator under the Financial Services and Markets Act 2000. The Government have always been clear that the costs of the scheme should be met by the financial services industry, and one of the main reasons for the scheme is to protect consumers' confidence in the industry. All parts of the industry benefit from it.
A question for the FSA to consider is how to divide the costs among levy payers. It is entirely rational and sensible that in the first instance each sector should consume its own smoke. Building societies are deposit-taking firms, and it would be extremely unfair if parts of the industry that are more remote from deposit-taking firms should pick up the tab before they do. If a building society encountered difficulties, depositors would be protected by the FSCS as much as if they had put their money in a bank. However, the problem remains, as my hon. Friend the Member for Keighley said, of whether it is appropriate to split off a separate sub-class of FSCS levies for building societies. As the hon. Member for Fareham said, that raises some serious and complicated questions. It could result in building societies not contributing in the first instance to the cost of bank defaults, but banks could not then be expected to contribute in the first instance to protection for building societies.
Under the legislation, that is a matter for the FSA, which is an independent body, and it considered it during the last major review of FSCS funding, in 2007. At that time, the FSA came out in favour of a single class covering all deposit-taking firms. When the review ended, the FSA published a policy statement which says:
"We discussed the revised proposal to keep a single deposits class with the British Bankers' Association...and the Building Societies Association...Neither trade association expressed opposition to the proposal."
I have only a few minutes left, but I will give way in a moment if I can.
Other options have been considered, such as pre-funding, which is a system in which levies are used to build up contingency funds to meet future compensation costs. I want to make it clear again that the Government do not believe that it would be appropriate to introduce pre-funding in the near future and we do not intend to do so, but if a contingency fund had been built up, it could have been used to meet part of the costs that the FSCS has incurred. That would have reduced the burden on levy payers today, but levies would have had to be collected in the past to build up the fund, and banks and building societies have consistently opposed pre-funding.
How the levy is apportioned between firms and societies is a matter for the FSA, which is consulting on a new basis for apportionment between individual firms that reflects the deposits that are protected by the FSCS. We will monitor that with interest, but I am not entirely convinced that it will provide the sort of remedy that my hon. Friend the Member for Keighley seeks, because the review is quite narrow. The FSA has given a commitment to undertake a review of the funding model in 2010-11, and obviously the situation has become important because of what has happened in recent months. I shall ensure that this debate and my hon. Friend's suggestions for solutions are brought to the attention of the FSA.
Inevitably, when there is a bill to pay, there will be a debate about who pays and how much. We all agree with the logic of a compensation scheme financed by the industry. Levies will be paid by firms that did not default, so most of them will pay for the failure of others. That is not ideal, and it is important that the FSA continues to consider alternatives, and that the Government and the industry continue to engage and to ensure that UK retail deposit takers continue to have the best possible protection.
I am happy to meet my hon. Friend and to discuss the subject further. She is aware that the FSA leads as an independent regulator, but the matter is clearly of great public interest and I have no doubt that we shall have further debates.