Financial Services Bill

Lord Teverson Excerpts

Monday 15th October 2012 Lords Chamber

Moved by

[Lord Teverson]

187C: Schedule 10, page 240, line 12, at end insert—
“(5A) In making any provision of the scheme under subsection (3), the relevant regulator must so far as practicable establish classes of authorised person on which levies may be imposed such that the claims that are likely to be made in respect of that class of person share a close affinity.
(5B) For these purposes, a claim shares a close affinity with another claim if both the nature of the services or activities and the type of financial instruments in relation to which the claims arise exhibit a high degree of similarity.”

[Lord Teverson]

I can see that everybody wants to discuss the Statements on Europe and the potential independence of Scotland, so I will try to be brief. However, I say to the noble Lord, Lord Peston, that I have heard of the deposit guarantee schemes directive as well as the investor compensation schemes directive, both of which the Commission published in 2010 but neither of which has got anywhere very much since last year. The two directives have held up much thought around the financial services compensation service.

In this amendment I am trying to put into primary legislation a key principle regarding the close affinity of organisations which must help to compensate when other organisations have gone into liquidation or cannot meet their obligations to their customers. I am also putting down two tests: the first concerns the similarity of the service and the second the similarity of the financial instrument. Many Members will be aware of the history of this in that the Financial Services Compensation Scheme does make levies. In fact, in the fund management area it can ask for up to £270 million with 30 days’ notice, and indeed last year £233 million was called up, which is estimated to be 4% of the turnover of the total sector. Those of us who have worked in business will know that if you suddenly take 4% of your turnover out of the business, through a statutory note or the equivalent of a tax or a notice, it can hugely affect your business. The largest problem was Keydata resulting in a quarter of a billion pounds’ compensation having to be found, and it was a major problem. There have been a dozen smaller cases, and in the past five years there has been £600 million compensation involving investment intermediaries. In those cases of failure the overwhelming burden fell on the fund managers and independent financial advisers, who paid for the damage of what often were issues from spread betting, unquoted shares and life settlement portfolios. In practice there was a lack of affinity. There is also a question of what happens when regulators themselves have not been as good as they should be in ensuring regulated and authorised persons have worked responsibly in the past.

--- Later in debate ---

[Lord Newby]

My Lords, this amendment seeks to remove the possibility of any element of cross-subsidy between different classes of authorised firms. We do not feel that it is either necessary or helpful. We do not consider that the practice of allowing some cross-subsidies between classes is inherently wrong, and nor should it be prohibited in every case. Not only does the potential for cross-subsidy help ensure a sustainable scheme with lower levy thresholds, but it helps to ensure that the compensation supports consumer confidence in the financial services sector as a whole, by limiting the risk that compensation claims cannot be met. If the scheme has insufficient funds to pay out claims to policyholders of a failed insurer, bank customers are unlikely to have confidence that the scheme will be able to pay out if their bank fails.

As I have already stated, the decision on how the FSCS is funded is best made by the regulators and implemented through their rules. In particular, it is the regulators who understand what is appropriate and affordable by different classes of firms and so are best placed to determine when, or indeed if, cross-subsidisation is appropriate. I equally accept, however, that there is a need for proportionality in the different classes of firms that are expected to contribute. I am well aware, for example, that in the past the building society sector has felt that it has had to pay a disproportionate burden.

However, as I have mentioned, the FSA is consulting on how the FSCS will be funded, although in broad terms, as the noble Lord, Lord Teverson, said, both the PRA and the FCA will have rule-making responsibility for the scheme. The PRA will make rules for deposit takers and insurance providers and the FCA will make compensation rules for all other types of financial activity covered by the scheme.

The best way to deal with the specific issue raised by my noble friend is via the FSA’s consultation on the draft scheme, which I mentioned earlier. It is ongoing—it has several weeks left to go—and it is the best way now of ensuring that the scheme we end up with is the best possible scheme for all the different classes of firms which will be covered by it. On that basis, I ask my noble friend to withdraw his amendment.

[Lord Teverson]

My Lords, I thank the Minister for his reply. Obviously I am somewhat disappointed. Clearly the consultation is an area in which the sector and I will participate but there is a real issue around justice and equity in this sector and how the scheme will work. I shall perhaps take the opportunity to speak to him further between now and Report, but, in the mean time, I beg leave to withdraw the amendment.

Amendment 187C withdrawn.