Financial Services Bill

Lord Newby Excerpts

Monday 15th October 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, my Amendment 187CA in this group relates to another aspect of the operation of the Financial Services Compensation Scheme. The current wording by which the scheme operates gives it a lot of discretion in the way that the costs of the scheme are allocated. Section 213(5) of FiSMA states:

“In making any provision of the scheme … the Authority must take account of the desirability of ensuring that the amount of the levies imposed on a particular class of authorised persons reflects, so far as practicable, the amount of the claims made, or likely to be made, in respect of that class of person”.

There are two get-outs.

I make it clear that this is not about restricting the rights of consumers to obtain compensation. It is a critical and essential part of maintaining proper confidence in our financial system that there are proper and appropriate ways for people to claim and get compensation for mis-selling or other malfeasance. However, the amendment is about ensuring that the polluter pays. It has become more difficult in recent years to trace the allocations and levies made by the Financial Services Compensation Scheme to the particular class of persons and businesses to which they have been applied. Often, there appears to be a shifting of the pea around the plate, with a disproportionate share landing on those perhaps least able to complain. I hope that my noble friend will listen to the amendment with sympathy. The funding system must reflect the differences in risk and instability posed to the public and to the wider economy by firms and the financial products they offer.

I make it absolutely clear that my amendment does not enforce an unacceptable level of correlation. The words “as far as practicable” will remain, and will therefore provide the scheme with a degree of flexibility—a get-out, if you like. However, the additional words, “take account of the desirability of ensuring”, are too woolly. They lead to situations where people feel that the scheme is not operating fairly. Therefore, I would like to see those words replaced by the single word, “ensure”, as a means of ensuring that the Financial Services Compensation Scheme penalises the polluter and not the wider financial community.

[Lord Newby]

My Lords, Amendment 187AB, moved by the noble Baroness, Lady Hayter, would require the Government to notify other EU member states that the limits on compensation payments to charities in the event of a loss of their bank deposits should be reviewed. The noble Lord, Lord Peston, asked what on earth this had to do with the EU. I suspect that he, like me, had not heard of the deposit guarantee scheme directive, which is an extremely valuable piece of legislation. It means that across the EU there is a maximum harmonised limit of compensation per depositor in the case of banks or other financial institutions going bust. It makes sure that across the EU there is a common framework for paying out when organisations get into financial difficulties.

[Lord Peston]

The Minister said that that was a very good idea. I cannot imagine why it is such a good idea. What business is it of the European Union what the taxpayers of an individual country decide they will spend on compensating people who have lost money because of the misbehaviour of banks? Why is it a European issue? I do not want to pursue this because it is a European question that is broader than what the Bill is about. I merely made the rather tart remark that occasionally the overpaid officials in Brussels have to justify their overpaid existence by finding things to do. Otherwise, they might eventually be asked to retire—although I might say that then they get incredibly good compensation arrangements. I was just being my normal tart, nasty self.

[Lord Harrison]

My Lords, I came to listen to the Statement. However, it may be of interest to some of my colleagues that we on Sub-Committee A of your Lordships’ European Union economic and finance committee are studying the banking union proposals and the recovery and resolution directive. The deposit guarantee scheme is an integral part of Herman Van Rompuy’s proposals, and of the response that we have got from the four presidents. That is the reason I am here today. I was slightly taken aback when my noble friend Lord Peston mentioned charities. As I understand it, the deposit guarantee scheme is a separate matter. The proposal has yet to mature. This will be done in Brussels over the coming weeks and months. I do not know whether that helps.

[Lord Newby]

My Lords, it is extremely helpful—and it will be done over the coming months. First, it is a single-market measure, not a eurozone measure. The aim is to establish a level playing field for consumers across the EU that is funded not by the state but by the financial services sector wherever the scheme is in operation. This means that as people move around the EU, as they increasingly do, they will know that they will get broadly the same degree of consumer protection wherever they are. That is a good idea, not a bad one. However, whether it is a good or a bad idea, this is the framework within which the deposit protection level operates in the EU, and therefore in the UK. Within the discussions about the directive that are going on at the moment, the level of compensation and the bodies that are eligible for it are being considered.

I say to the noble Baroness that we have listened very carefully to her concerns, and that the Government will consider whether it is appropriate to review the eligible limit to charities in the context of our overall negotiating priorities on this proposal. This is just one of a number of issues that we are considering in the round and as part of the negotiating posture we will take up. I assure her that we will give careful consideration to whether this is the way of achieving what she wants to achieve.

I move on to Amendment 187CA in the name of the noble Lord, Lord Hodgson of Astley Abbotts. This amendment would amend FiSMA to require the regulators to ensure that levies imposed on a particular class of firm reflect the claims made, or likely to be made, on that class. Before I address this amendment directly I would like to use this opportunity to draw noble Lords’ attention to the fact that a draft of the statutory instrument allocating rule-making responsibility for the FSCS between the two regulators will be published on the Treasury’s website this week as part of a broader consultation on draft secondary legislation required by the Bill. I will place copies of this paper in the Library of the House.

I am not entirely convinced by the case for Amendment 187CA. FiSMA already requires the regulators, as the noble Lord, Lord Hodgson, said, to take account of the desirability of ensuring that the amount of levies imposed on a particular class reflects, so far as practicable, the amount of claims made, or likely to be made, in respect of that class. Ensuring that classes are levied in a way that fully reflects claims, or likely claims, as proposed in the amendment is likely to be an impractical and disproportionate approach to evaluating how the fund should be funded. The current drafting in FiSMA reflects my noble friend’s concern but also leaves sufficient flexibility for the expert regulators to use their judgment.

The FSA’s recent consultation document on its funding model in the new regulatory system gives a good indication of the complexity involved in determining the funding model of the FSCS. I have it here, and its 100-odd pages demonstrate that this issue is somewhat more complex than might immediately be apparent. It demonstrates, among other things, how difficult it would be to ensure, in any strict sense, that levies fully reflect claims, or likely claims, on a particular class while delivering a fair and equitable scheme.

I suggest to the noble Baroness that the correct way to address her concerns is to contribute to the consultation on this document, which is open until 25 October. On that basis I would ask her to withdraw her amendment.

[Baroness Hayter of Kentish Town]

I thank the Minister rather more positively than I did his colleague on the previous amendment. It appears clear that he and the Government have understood the problem and I thank him for agreeing to look at this again. Charities of course, unlike people, do not move around; British charities are only in this country. I thank the Minister for saying that they will look at that. If it is not possible by that method, perhaps he could ask others in the Government if there is another way to assist. That would be extremely helpful. On the basis of that offer I beg leave to withdraw this amendment.

--- Later in debate ---

[Lord Flight]

My Lords, I speak briefly in support of this amendment. Keydata did actually expose a great deal of feeling of unfairness among different parts of the industry. The point was made about the heavy burden on fund managers but SIPP administrators, who are purely administrators and not involved in managing money, are for some reason lumped into the same category as fund managers. There is a very substantial burden on their resources. The whole area wants looking at, particularly if we are increasingly to become a compensation culture and if the sorts of amounts expected from the scheme are going to grow and grow. There is quite a problem and quite an issue to address in deciding how to cut the cake in deciding who, in fairness, should pay what.

[Lord Newby]

My Lords, this amendment seeks to remove the possibility of any element of cross-subsidy between different classes of authorised firms. We do not feel that it is either necessary or helpful. We do not consider that the practice of allowing some cross-subsidies between classes is inherently wrong, and nor should it be prohibited in every case. Not only does the potential for cross-subsidy help ensure a sustainable scheme with lower levy thresholds, but it helps to ensure that the compensation supports consumer confidence in the financial services sector as a whole, by limiting the risk that compensation claims cannot be met. If the scheme has insufficient funds to pay out claims to policyholders of a failed insurer, bank customers are unlikely to have confidence that the scheme will be able to pay out if their bank fails.

As I have already stated, the decision on how the FSCS is funded is best made by the regulators and implemented through their rules. In particular, it is the regulators who understand what is appropriate and affordable by different classes of firms and so are best placed to determine when, or indeed if, cross-subsidisation is appropriate. I equally accept, however, that there is a need for proportionality in the different classes of firms that are expected to contribute. I am well aware, for example, that in the past the building society sector has felt that it has had to pay a disproportionate burden.

However, as I have mentioned, the FSA is consulting on how the FSCS will be funded, although in broad terms, as the noble Lord, Lord Teverson, said, both the PRA and the FCA will have rule-making responsibility for the scheme. The PRA will make rules for deposit takers and insurance providers and the FCA will make compensation rules for all other types of financial activity covered by the scheme.

The best way to deal with the specific issue raised by my noble friend is via the FSA’s consultation on the draft scheme, which I mentioned earlier. It is ongoing—it has several weeks left to go—and it is the best way now of ensuring that the scheme we end up with is the best possible scheme for all the different classes of firms which will be covered by it. On that basis, I ask my noble friend to withdraw his amendment.

[Lord Teverson]

My Lords, I thank the Minister for his reply. Obviously I am somewhat disappointed. Clearly the consultation is an area in which the sector and I will participate but there is a real issue around justice and equity in this sector and how the scheme will work. I shall perhaps take the opportunity to speak to him further between now and Report, but, in the mean time, I beg leave to withdraw the amendment.