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Banking Bill

Debate on whether Clause 171 should stand part of the Bill. My reason for initiating this short debate is to look at some aspects of how the Financial Services Compensation Scheme operates for consumers, as opposed to how the banks contribute into it. We discussed one of these matters last week, on an earlier amendment that the noble Baroness proposed, when we talked about the £50,000 compensation amount. I wish to raise two further issues today. First, there is how the scheme covers temporary high balances. The FSA aims to make proposals to deal with such balances, and those are due in the relatively near future. As many noble Lords will be aware, the issue is that many people face situations in their lifetime when they hold temporary high balances in their bank accounts—when they sell a house, for example, or receive a redundancy payout or benefit from an inheritance. At the moment, it is impossible for customers who have such temporary high balances to cover themselves against the possibility of the bank failing. They can, potentially, spread the balance between different bank accounts once the money has cleared, but they will have to pay the lump sum into one account initially—and while it remains there, nothing over £50,000 will be covered. The FSA undertook research into that area, and found that consumers were unprepared to pay insurance to secure high bank balances, as they felt that they should not have to insure something that was supposed to be safe in the first place. We believe that the best solution would be some form of temporary 100 per cent guarantee. Of those possible solutions, one of the best options would be an automatically triggered guarantee for balances above the £50,000 limit for a specifically set time. That could be backed by an insurance policy paid for by the bank earning the interest on the large sum temporarily deposited with it. We welcome the Government’s views on that proposal. The second issue is broader. It relates to depositors in banks based elsewhere in the European economic area, but with branches in the UK. Measures proposed by the FSA do not go far enough to tackle the serious problems that apply to compensation arrangements for EEA banks operating within the UK. Currently EEA banks operate here by obtaining authorisation status with the FSA, also known as passporting. Consumers will be covered by the bank’s home state compensation scheme in the event of a bank failing. If that compensation is lower than UK compensation, EEA firms can volunteer to top up their compensation limits by joining the FSCS. Thus, if the Icelandic scheme had honoured its commitments, Icesave customers should have received their first €20,000 compensation, with the rest of the balance up to £50,000 provided by the FSCS. Different compensation limits and arrangements between countries cause confusion for consumers. It is not sufficient simply to require passporting firms to make what the FSA has described as, "““appropriate standardised disclosures to their customers””." Changes are needed to ensure a single point of contact for consumers to access the full amount of their compensation in their home country. The added risk, which must be addressed, is that foreign Governments will not honour their commitments to pay compensation to non-citizens. We suggest that the Government should lobby for a change in EU regulations, making topping up compulsory for passporting EEA banks and requiring member states to act as lenders of last resort for their compensation scheme. Only then can UK citizens feel confident in placing deposits with foreign banks. This might have seemed a rather far-fetched concern had we not had the situation with Iceland. That caused real problems and the Government had to step in and bail the banks out. We believe that now is the time for the Government to take up this issue at EEA level. We commend that proposal to Ministers.