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Banking Bill

As the Committee will be aware, the principal function of the FSCS is to pay compensation to eligible complainants if financial services firms are in default and unable to meet claims. The Banking Bill will also allow the scheme to contribute to the costs of the special resolution regime, which we will debate later. But to do these things, funds are needed, and it is clear that under the current pay-as-you-go model of the FSCS, if a very large firm went into default—say a bank or building society—the scheme could not realistically levy sufficient moneys from the industry or raise funds by borrowing in the ordinary way from commercial sources. Two solutions have been put forward for the problem: borrowing money from the Government to be paid back through future levy payments, or building up funds in advance. The FSCS is already able to borrow from the Government, and as I shall describe later, the Bill makes provision to make government borrowing administratively more efficient. However, Clause 167 allows for the second of the solutions, the setting up of contingency funds in advance of need, through a process commonly known as pre-funding. That is the issue before us. The Government know that now is not the right time to introduce pre-funding. My noble friend Lord Myners at Second Reading, my right honourable friend the Chancellor of the Exchequer at Second Reading in the other place, and my honourable friend the Economic Secretary to the Treasury at every stage of the Bill in the other place, have all made it quite clear that we do not propose to introduce pre-funding at this time. Amendments 158B and 158C would ensure that levies to build up contingency funds could be collected only from banks and building societies, and in combination with Amendment 159D, which as the noble Baroness has explained is intended to prevent cross-subsidisation within the FSCS, the overall effect would be that contingency funds built up through pre-funding could be used only to meet the expenses arising from the failure of banks and building societies. A further effect of Amendment 159D might be that there would have to be separate contingency funds for banks and for building societies. This looks inflexible to us and is therefore unnecessary and undesirable. The Bill already allows for different funds to be established for different purposes, and for different persons to contribute to the different funds. We place great emphasis on this flexibility and we have no intention of bringing forward pre-funding in the near future. The time is clearly not right, nor would it be appropriate to speculate on when it would be right. We do not know what changes the future may bring and therefore we need flexibility. In the future, the nature and structure of the financial services industry may be completely different, and we have all become accustomed to rapid change in this sector. We should not tie down our options in primary legislation which may become outdated in two, five or 10 years’ time. Future problems, should they arise, may be confined to banks and building societies, but equally they may not. As I have said, Clause 167 already allows for the creation of more than one fund. It is therefore possible to bring in contingency funds for one type of financial services firm built up with levies raised from that type of firm and not for other types. There could be separate funds for banks and building societies, but I do not see why we should set out to prejudge the issue now. The Bill confers a flexible power to bring in pre-funding at the right time and in the right way. This flexibility would be exercised subject to full parliamentary scrutiny. The necessary statutory instruments will have to be laid in draft and debated in both Houses before they are made. There would be consultation beforehand involving the Bank of England, the Financial Services Authority, the Financial Services Compensation Scheme and the industries concerned before any such regulations were drafted. I turn now to Amendment 162B. Clause 170 allows the public sector to make loans to the FSCS in what is administratively the most efficient way, by making loans from the National Loans Fund. The amendment would have the effect of restricting those firms which could be called on to contribute towards the cost of repaying loans from the National Loans Fund to banks and building societies. However, any type of firm could be in default, and loans from the National Loans Fund might be needed to finance the compensation payable. Flexibility is also important in this area and we should not tie our hands too much when we cannot anticipate what future circumstances might arise. I hope, therefore, that the noble Baroness will accept that the Government have drafted the clause on the basis of the necessary flexibility and that she will not press the amendment.