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Banking Bill

The noble Baroness, Lady Noakes, has previously shared with the Committee her interest in the turf. I was minded to think, listening to her contribution, that perhaps she should have her money this afternoon on the 4.10 at Wolverhampton on a horse called Cash in the Attic in terms of whether that would be the right place to have a contingency fund. However, it is a seller and an outsider so it is probably not very charitable of me to recommend that. Instead, in the mood of the Committee, I would suggest Good Spirit in the 4 o’clock at Ludlow. Clause 167 provides for the possible future introduction of contingency funds, a method of financing for the Financial Services Compensation Scheme often called ““pre-funding””. I have already described how, if a very large firm such as a high street bank or building society went into default, the Financial Services Compensation Scheme would need far more money in a short time than it could realistically raise in levies from the industry or borrow in the ordinary way from commercial sources. I have also explained that the two solutions to this issue are pre-funding or access to borrowing from Government. The latter solution is already possible, and the Bill makes provision to make government lending to the Financial Services Compensation Scheme as efficient as possible. The clause we are debating provides for pre-funding, and I have already described the detail of how it would be implemented. My colleagues in the Government and I have repeatedly said, as unequivocally as possible: first, that we will not introduce pre-funding now, when the financial sector is already under strain and, secondly, that it would not be appropriate to speculate on when we would introduce it. Given that, I believe that we should also be able to agree that now is not really the time to debate the merits of pre-funding or of a particular proposal to put it in place. That time will be when the Government come forward with a specific proposal to introduce pre-funding to the Financial Services Compensation Scheme. There are, of course, cogent arguments for pre-funding, and they may help to address the noble Baroness’s perplexity about why we would step down this path. Pre-funding could allow the costs of bank failure to be spread over a longer period of time, before as well as after any failure, and reduce the pro-cyclicality of levy payments; that is, the collection of large levies during a financial crisis. Pre-funding could therefore reduce the risk of contagion and ensure that a failed bank had contributed to the cost of its failure. That is important. The banks would be contributing ahead of any claim on the scheme, and consequently the failed bank would have made contributions towards at least some of the consequences of its failure. We recognise there are arguments on the other side. Building up a contingency fund would put pressure on bank capital and cash flow. No one will doubt the importance of that issue at the present time. I can also see the more practical arguments of those who feel pre-funding would be unnecessary if Government give the Financial Services Compensation Scheme access to liquidity through borrowing from the National Loans Fund. I recognise the point that, in a concentrated banking system such as the UK’s—alluded to by the noble Baroness—there could never be a contingency fund that would be large enough to cope with every possible failure or more than one failure at the same time. Ex-post levies and borrowing from government would still be needed. However, these are arguments about timing and size; they are not arguments about the principle. It is surely right to recognise that there will come a time when it is right to have the debate, and the Bill allows us to do that. The Bill provides for pre-funding to be introduced only after full parliamentary scrutiny under the affirmative resolution procedure. The necessary statutory instruments will have to be laid in draft and debated in both Houses before they are made. There will be consultation beforehand involving the Bank of England, the Financial Services Authority, the Financial Services Compensation Scheme and, of course, the industry itself before any regulations are laid. I hope the Committee will see that there is no reason why this clause should not stand part of the Bill. I see the point the noble Baroness is making with Amendment 160, but I feel that it would be unnecessary to have a requirement to produce a rather narrowly focused report before the regulations are made. Regulations to bring in pre-funding would not appear suddenly and without warning. There would be full consultation, and I am sure that process would generate far more information and material than would be found in a report. Parliament will have to debate the regulations, and there will be plenty of briefing from a wide range of sources. I am not sure that an additional report from the Treasury would help noble Lords who are considering any draft regulations. Therefore, I hope that the noble Baroness will withdraw the amendment.