Treasury Committee makes further proposals to protect depositors and enhance financial stability
In a report published today (16 September), the Treasury Committee sets out its proposals in the light of the recent consultation papers on financial stability published by the Tripartite Authorities.
The Report, Banking Reform, makes a series of recommendations in areas such as depositor protection, the proposed Financial Stability Committee of the Bank of England, and the work undertaken by the Financial Services Authority in relation to potentially failing financial institutions.
Deposit protection reforms
As we have previously noted, the Northern Rock crisis identified weaknesses in the depositor protection scheme. This Report identifies the priorities for reform of the Financial Services Compensation Scheme (FSCS). In particular-
the Tripartite authorities must stand firm in their determination to introduce tough deadlines for processing compensation payments;
the authorities must ensure that a bank’s inability to calculate individual compensation payouts immediately does not jeopardise the proposed seven-day payout target; and
the FSA must seek a resolution to the unreasonable difficulties faced by consumers having to know whether their bank has an individual, or shared, banking licence.
The Report reiterates our support for an element of pre-funding of the FSCS, but recommends that such a scheme should be flexible enough for contributions to be suspended at times of economic crisis. We also recommend that contributions vary according to the FSA’s assessment of each bank’s risk profile.
We highlight how deposit protection relates to UK deposits held with banks from the European Economic Area (EEA), and conclude that the arrangements are too complex. Our proposal is that the FSCS provide compensation to these depositors on the same basis as for those of UK-authorised banks, and then seek to reclaim compensation itself from the foreign deposit-protection scheme concerned.
Committee Chairman John McFall said:
“There has been much focus on whether the appropriate compensation limit should be £35,000, £50,000 or £100,000. This is irrelevant if we do not possess a deposit protection system that actually works. It is far more important that banks be able to identify who their insured depositors are, and that the FSCS be able to process compensation claims quickly. The overarching priority for the FSCS must be to design a simple and confidence-boosting scheme, which does not rely on consumers having an unrealistic knowledge of banking licences, European directives and foreign compensation schemes.”
The Financial Stability Committee of the Bank of England
The Committee concludes that in order to strengthen the Bank of England’s role in financial stability, the proposed Financial Stability Committee should be established in statute with a status comparable to that of the Monetary Policy Committee (MPC), with executive responsibility for the discharge of the Bank of England’s financial stability functions, and with a composition along similar lines to that of the MPC.
John McFall said:
“The Government’s proposals for the new Financial Stability Committee of the Bank of England are confused - the Northern Rock fiasco taught us that clear lines of responsibility are important. How can this new Committee both oversee the work of the Executive, and be chaired by the Governor? It should be either an executive body, or an oversight body, but not both. Our Report recommends a structure which clearly separates these two important functions.”
The Report concludes that ‘heightened supervision’, sometimes referred to as the amber zone of regulation, should be considered a distinct and separate state of supervision, segmented from both normal supervision and from the Special Resolution Regime. The Report goes on to recommend that the FSA be placed under a statutory duty to prepare and consult on a Code of Practice for Heightened Supervision.
Pulling the trigger
The Committee agrees with the current proposal that the FSA be granted the sole responsibility for the ‘pulling of the trigger’ to make an individual firm subject to the Special Resolution Regime, but recommends that the Bank of England be given a power enshrined in primary legislation to recommend to the FSA that a financial institution be brought within the Special Resolution Regime.
John McFall said:
“As the regulator, the Financial Services Authority should have the sole authority to place firms in the Special Resolution Regime. However, the Bank of England must have the power to recommend that the FSA pull the trigger to bring an individual institution into that Regime. The system we propose maintains a clear line of authority, while ensuring that the Bank of England has a reason to engage with individual institutions.”
Strengthening the Tripartite Committee
The Report argues that it is vitally important that the Tripartite Standing Committee should not become a sleepy backwater in normal situations, only for it to begin its work from scratch in a time of crisis. We see a need for the Committee to assume a central and continuing role in the financial stability work of the authorities at all times, supported by a small, full-time, secretariat. This work would include establishing, in advance, mechanisms for external communications in a financial crisis, and regular testing of the use of the new powers in different scenarios.