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Financial Services and Markets Act 2000 (Contribution to Costs of Special Resolution Regime) Regulations 2010

My Lords, the Financial Services Compensation Scheme, which I refer to here as the FSCS, was established under the Financial Services and Markets Act 2000 to compensate customers of authorised financial services firms when those firms were in default. When the financial crisis broke in 2007, paying compensation under the scheme was the only way to protect depositors. The Banking Act 2009 set up new arrangements that allow for the resolution of failing banks and building societies in a number of ways, including the transfer of all or part of the business of the failing institution to another institution or into temporary public ownership. These transfers can include the transfer of the retail deposits; that is, deposits held by persons who are eligible for FSCS compensation. The effect is that those depositors are protected not by the payment of compensation under the FSCS but by having new accounts with a different bank or building society. Transferring a business can involve a cost. A receiving institution will normally expect to receive payment for taking on liabilities such as deposits in excess of any assets that are transferred. However, if a failing institution’s retail deposits are part of the business transferred to a stronger bank or building society, the FSCS will not need to pay compensation to the depositors concerned. It is appropriate, therefore, for the FSCS to contribute to the cost of using the special resolution regime to resolve a failing bank or building society. It would have been spared the potentially large cost of compensating depositors. However, there has to be a limit on that contribution, which should obviously be the cost that the FSCS would have incurred in paying compensation to depositors. The Banking Act 2009 inserted a new section into the Financial Services and Markets Act 2000, usually referred to as FSMA, to give the Treasury the power to require the FSCS to make a contribution capped in the way that I have described. It also gave the Treasury the power to make regulations to deal with the detailed points that would arise. Regulations under this power were made in 2009, shortly after commencement of the Act, to allow the FSCS to contribute to the costs of the resolution of the Dunfermline Building Society. However, it was quickly realised that these new FSMA powers did not get some of the detail quite right. In particular, it was found that no account could be taken of the time that it would take to complete a bank resolution and, therefore, of the interest costs that would be incurred in financing the initial payments to receiving institutions while waiting for the proceeds of the disposal of other assets of the failed institution. Equally, no allowance could be made for the interest costs that the FSCS would have to pay on the borrowing needed to finance a compensation payout. These matters could not be addressed by making revised regulations under the original power provided in 2009. Amending legislation was therefore included in the Financial Services Act 2010 to correct the FSMA powers in these two respects. The regulations now before us complete the process by making use of the new powers to put the necessary detailed provisions in place to provide for interest costs to be included in the resolution expenses and to calculate the limit on the FSCS contributions to those expenses. They do this by requiring the Treasury to keep detailed accounts of the resolution costs actually incurred, of the recoveries actually made and of the costs and recoveries that the FSCS would have made in the hypothetical scenario in which the failed institution became insolvent and compensation was paid to depositors. Interest is then added to the outstanding balances of these accounts on a daily basis and any contributions that the FSCS pays are deducted. Finally, closing balances are calculated when the resolution ends and a final contribution to resolution costs is calculated and paid—or, if the FSCS has already paid too great a contribution, a refund will be calculated and paid. To enable the Treasury to do this, the regulations also provide for the FSCS to estimate the amount and timing of the compensation that it would have paid in the hypothetical scenario. They also provide for an independent valuer to estimate the amount and timing of the recoveries that the FSCS would have made from the winding-up of the failed institution in that scenario. There is also detailed provision on making interim payments, on referring disputes to the Upper Tribunal, on the appointment of independent valuers and on the independent verification of the accounts. The regulations also include transitional provisions to ensure that action taken under the previous regulations is properly allowed for. The previous regulations are then revoked. The powers inserted by the Financial Services Act 2010 provide that interest can be applied to accounts kept in respect of the Dunfermline Building Society under the new regulations as from 19 November 2009. I beg to move.