Financial Services Bill

Lord Davies of Stamford Excerpts

Tuesday 20th November 2012 Lords Chamber

[Lord Davies of Stamford]

My Lords, I was struck by my noble friend’s amendment. In reading it, I wondered whether this was already a provision which applied, quite outside the passporting context in which she moved it, to deposits in this country. I cannot see any reference to a rule of this kind elsewhere in the Bill. It may be that it is already part of statute law or part of the rule book of the FSA—and the FCA to come—but, looking back on my own experience, I do not normally have deposits which are greater than the threshold, which I believe is £85,000. On any such occasions when I have, I do not recall a bank telling me that part of my deposit was not subject to the national retail insurance scheme or to consumer protection. That seems to be a great weakness in the system and I would be grateful if the Minister could tell me what the rules are relating to the taking of deposits. Is this or is this not an obligation of a bank taking a deposit now which is in excess of that ceiling? I may be wrong in saying it is about £85,000, as it may have increased since I last heard a figure. If not, such an amendment should be made and this Bill presents us with an opportunity to do so.

I think we all agree that a balance needs to be struck here. No one is suggesting that the state should guarantee all banking deposits. That would be a massive moral hazard and would mean that depositors no longer had to interest themselves in the quality of the banks with whom they are investing. Equally, I think we all agree that it is unreasonable for small depositors to make a credit assessment of the banks with which they are depositing small amounts of money. It is not just a question of looking at the solvency ratios or capital adequacy ratios. You need to look beyond that if you want to assess the credit-worthiness of the bank. You look at the quality of the assets of the bank and the quality of its deposits. These are areas where it is not only difficult for an individual to come to a judgment but where we know that there has been fantastic regulatory failure throughout the world, particularly in this country.

The FSA’s behaviour in this matter was negligent to an extraordinary degree. It never seemed to interest itself in the declining quality of the assets of many British banks, which were buying more and more CDOs, for example. It never seemed to interest itself in the deteriorating quality on the liabilities side of the Northern Rock balance sheet and the fact that Northern Rock was becoming excessively dependent on wholesale deposits. If the regulators fail so badly, it is all the more important that the protection available for small or medium depositors is great.

It is very important that people should know because, as I have explained, even though I try to take an intelligent general interest in these matters I do not know exactly where the threshold currently lies. In my experience, I have certainly not had a notification from a bank that I may be placing deposits with it that are not in any way subject to such a guarantee. That is an enormously important aspect of the risk involved in such a transaction and, clearly, it ought to be brought to the attention of retail depositors. Is this currently part of statute law? Is it currently part of the rule book and, if not, is this amendment an opportunity to make it so or should we take another opportunity in this Bill to bring forward an amendment of that general kind?

[Lord Newby]

My Lords, I think everyone is agreed that the regulators should require banks to make their customers aware when their deposits are not covered by the Financial Services Compensation Scheme.

[Lord Davies of Stamford]

Did I hear the noble Lord say that it is a requirement from regulators that banks should notify their depositors when they are covered? If so, that is quite wrong. They should be notified when they are not covered. That is the important thing. It is no use notifying them when they are covered and saying nothing at all when they are not covered, for that is when the risks arise.

[Lord Newby]

My Lords, as I was saying, the regulators make considerable existing requirements in this area and I will explain what they are. Firms from the EEA that passport into the UK are covered by their home-state compensation scheme rather than by the Financial Services Compensation Scheme. It is obviously right that consumers are made aware of it but, as we have said before, this already happens. The FSA already has rules requiring this in the COMP 16 section of its handbook. Explicitly, EEA firms passporting into the UK are required to inform their customers that they are covered by their home state scheme. This is already included on customers’ bank statements and notices are prominently displayed in their branches.

This is what the text says:

“Your eligible deposits with [insert name of firm] are protected up to a total of 100,000 euro by [insert name of compensation scheme]”—

depending on which country is involved—

“… and are not protected by the UK Financial Services Compensation Scheme”.

Any deposits you hold,

“above the 100,000 euro limit are not covered”.

This wording is already being displayed and circulated to potential customers of these branches. In tandem, the FSCS has launched a programme to raise awareness of the scheme in general and to inform consumers how they can check whether they are covered by the scheme, so it is clear to us that this amendment is simply unnecessary. The FSA and FSCS are taking action in this area already and we strongly believe that that will continue once the new regulatory system is in place. It is right that the regulators and the FSCS have the flexibility to address this issue in the way that they see as most appropriate. On this basis, I trust that the noble Baroness will feel able to withdraw her amendment.

[Lord Davies of Stamford]

The noble Lord has read out the text of the communication which banks in this country must make to depositors who are resident in other EEA countries when they deposit more than the threshold amount of €100,000. Can he read out the text of the communication that banks in this country are obliged to make to depositors resident in this country when they deposit with them amounts over the threshold of £85,000 or whatever it is?

[Lord Newby]

I will check what I said, but it may have covered what the noble Lord is looking for. If it does not, I shall write to him with the relevant wording.