Creation of a mandatory scheme

‘The Treasury may by order require all banks and building societies, as defined by this Act, to transfer the balances of all dormant accounts to the reclaim fund.’.—[Mr. Jones.]

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

It is pleasure to serve under your chairmanship, Dr. McCrea. It is interesting to be sitting on this side of the Committee after so many years sitting in the Chair.

In moving the new clause, I am addressing what can best be described as the elephant in the room. Throughout the life of the Bill and long before its existence, the use of a voluntary rather than mandatory scheme has been a controversial issue in the debate on dormant accounts. The new clause tackles that issue head-on. To some extent, I feel that it reaches a compromise and that there is something in it for people in both camps.

I start by underlining what the new clause is not. It does not suggest the introduction of a mandatory scheme. It seeks to enhance the nature of the voluntary scheme, and although it could be used to create a mandatory scheme, that is not its core purpose. It is, however, a crucial bargaining tool that would ensure compliance from the banking industry in handing over money voluntarily to the reclaim fund.

Banks and building societies will be more likely to co-operate if the alternative to non-co-operation is enforced co-operation. In that sense, the new clause would function much like a veto at the Council of the European Union. Its most useful legislative quality would not be its use, but rather the threat or shadow of it looming in the background, which would ensure compliance and debate.

The new clause has been mentioned in Committee, and I should like to address some of the issues raised thus far. The hon. Member for Fareham does not share my cynicism about the banks’ co-operation with the reclaim fund, but I suspect that he will not deny that the definition of dormancy in the Bill leaves leeway for interpretation. Such leeway can be interpreted either advantageously or disadvantageously from the banks’ point of view. That is entailed in the voluntary scheme. The hon. Gentleman will also acknowledge the risk of partial co-operation and agree that there should be no occasion when the banking industry realises that it can simply fob off the reclaim fund with a pittance.

The hon. Gentleman raises various points. The triennial review, which was removed from the Bill during yesterday’s sitting, would have created the power to ensure that banks comply with best practice and do not accept the minimum definition. Some light has been  shone on the matter, and that is why a statutory requirement for a triennial review is a good idea, to ensure that the banks keep up to the mark.

I certainly agree with the hon. Gentleman’s idea about regular reviews. I hoped that the Minister’s promise was sufficient in that regard. If one of my amendments, which was not selected, had been accepted, it would have given teeth to the triennial review, including the idea of a mandatory fall-back position if the voluntary nature of the scheme did not to deliver the goods.

I should like to echo the supportive words of my hon. Friend the Member for High Peak when he spoke about creating a purpose to the review that we were all so strenuously in favour of yesterday, when dealing with the triennial report in what was formerly clause 12. We all believe that the project should be scrutinised, especially as the Bill is a novel concept to the British banking system, and even more so as it is the first voluntary regulatory system in the world. My hon. Friend rightly stated that the scrutiny required teeth. Such teeth would be undoubtedly present if the Government had a fall-back option in a mandatory scheme.

If such a report was to condemn the voluntary nature of the scheme in three years’ time, the Government would have an easy recourse. In that sense, the new clause is less of a major shift than a work of minor dentistry in restoring the Government’s teeth. Installing a mandatory scheme is the ultimate deterrent to the banks’ non-compliance with the voluntary scheme.

I am not alone in the view that we require some sort of mandatory threat to underline the voluntary scheme. In that view, I am joined by the National Council for Voluntary Organisations and the cross-party Treasury Committee, which stated

“we are unconvinced that the Government is correct to pursue a voluntary approach. A compulsory scheme has the overwhelming advantage of guaranteeing fairness and consistency between institutions. We urge the Government to reconsider the voluntary basis of its proposals. If the Government is still minded to continue with a voluntary scheme, we recommend that the forthcoming legislation be prepared so as to include reserve powers for Ministers to establish a compulsory scheme at a later date without recourse to further primary legislation, should a voluntary scheme prove unsuccessful”.

All that new clause 2 seeks to do is to give powers to the Government in the future.

I want to address the issue of fairness. Why should some banks contribute and others not? In about 2001, I wrote to all banking institutions and sent over 100 letters. Not that many banks have closed in that time. However, the British Bankers Association says that only 11 banks have pledged to take part, and some of those have disappeared in the past few weeks. There is a disparity, and that sentiment is echoed in my early-day motion, which had the support of nearly 100 hon. Members, including the current Treasury spokesman for the Liberal Democrats.

Yesterday, the Minister seemed to suggest that too much bureaucracy was entailed in inserting such a proposal into the Bill and that such a clause was too wide ranging. In an attempt to pre-empt the Minister from taking such a line of logic, I ask him to name any of the bureaucratic challenges that such a clause would pose.

The Bill has already more than ably created a reclaim fund, a distribution network and a report system. A body already exists in the Financial Services Authority capable of market regulation. In the unlikely event that the clause should ever need to be activated, little else seems to be required. The banks would be legally compelled to do that which is already perfectly consistent for them to do voluntarily.

I say to the Minister that concerns about the potential technicalities of the new clause when activated are not worthy of consideration, for the nature and existence of the new clause in the Bill as a threat should mean that it would never need to be activated. The shadow of a mandatory scheme, rather than a mandatory scheme itself, would ensure total compliance with the voluntary scheme.

Throughout these debates, the Minister has assured us of the banks’ co-operation with the Bill and the future voluntary scheme. Such a view should not create any opposition to the new clause’s insertion. If the banks co-operate fully, the voluntary scheme will work—a report will say so—and there will be no need to activate the new clause. Following the Minister’s line of logic, the worst that the new clause can ever be is slightly redundant.

Many of us have been sceptical from the outset about the voluntary scheme and the banks’ co-operation with it. However, the Minister has largely brought us round to the idea of banking co-operation. I confess that I still am sceptical about the numbers adding up and about how £400 million can change into £50 million overnight in response to the loss of just 10 years’ worth of dormant funds. However, I am willing to accept the flexibility and the less regulatory benefits of a voluntary scheme. I have come half way; I ask the Minister to come the other half of the distance, by agreeing to the new clause, so that we can meet in the middle.

The apposite words of my hon. Friend the Member for High Peak seem to echo throughout these debates. One should not try to smash a nut with a sledgehammer—I have no desire to do so—but inserting some shadow of enforcement to the regulatory scheme will ensure that we are not smashing a nut with a feather either. The new clause is fit for purpose if it ever needs to be enacted. However, most importantly, its dormant presence in the Bill would provide a perfect deterrent to ensure compliance with the voluntary scheme. The worst that it could ever be is an unused power. I do not see that as something to fear, and I hope that the Minister will support this change to the legislation.

I congratulate my hon. Friend on his robustly moderate proposal, which is highly appropriate, and I echo every word of his speech, not least because he quoted me at length. I simply want to add that we have, at the moment, taken the stand that we are the only country in the world that will proceed with a voluntary scheme. All the other schemes are mandatory. I am saying not that that is wrong, but simply that if the voluntary scheme does not work, we do not have a fall-back position in the Bill.

All that my hon. Friend’s new clause would do is provide that fall-back position so that we could put things right if they did not work as they should, without resorting once again to primary legislation. I hope that the new clause receives a welcome.

These dormant accounts have been enormously valuable to the banks and the truth is that they were an unwritten, unannounced, highly profitable source of effectively free money for them over a huge period. The growing awareness of that has led other countries and this Government to take action. Bluntly, it is hard to understand why such a practice should have continued. It seems better to put the money into good causes. There are arguments about how that should take place and about the good causes process. Those arguments have been had during consideration of the Bill, and the Government have a settled position on them.

All I would say in support of the new clause is that we have experienced a period of weeks in which we have seen just how wrong the banks can get things. Not just in this country but internationally, a tighter hand is needed on the tiller to ensure that banks act properly and that they take into account their countries’ and the economy’s long-term interests, rather than just the short-term payouts to those on bonuses. There has never been a better moment to introduce measures that say to the banks, “We are serious about you doing this. We believe it’s right for the country and the right use of those funds, and if you don’t take that course of action as seriously as you should, we will take action.” That is what the new clause would do.

The large banks are likely to act on these measures. If they do not, there will be queries at the margin. Some people may think that the matter is just not important enough for primary legislation—there may be complaints or criticisms—but it is unlikely that the Government would wish to initiate primary legislation to crack a nut with a sledgehammer, to use the words of the hon. Member for Clwyd, South and others.

The new clause would let the nuts know that the Government do not need to take a sledgehammer to them, but that they have that power if they need it. That is why I support new clause 2.

I will try to reply to the arguments put by my hon. Friend the Member for Clwyd, South, who is a long-standing champion of using dormant accounts for good purposes. I appreciate the genuine difference between our views on the matter. I shall set out why we propose a voluntary approach before turning to the specific question of using empowering legislation to change our approach in future, as new clause 2 would allow.

Participation in a scheme will be voluntary for individual banks and building societies. I am pleased that support for that approach was voiced on Second Reading and that it is being voiced in the Committee. It is clearly right to introduce a voluntary scheme where we believe that one will work.

I accept that our proposals are innovative. The unclaimed assets scheme will not be like mandatory schemes elsewhere, such as in Ireland or the United States, but it would be wrong to assume that because we are doing it differently we are mistaken. From the start, our approach has been based on the sector’s clear and full commitments to participating in a voluntary scheme and making it a success. We welcome those commitments, which distinguish our scheme from the Irish and US examples. That is one reason why we can take forward a voluntary scheme with confidence.

I draw attention to the public commitments set out in the joint foreword to last year’s Treasury consultation document, which was signed by the BBA and the Building Societies Association. Again, in press notices released by the industry in November last year, and as recently as 2 October this year, the industry confirmed its commitment to the scheme. That commitment is further illustrated by the commitments made by the major UK banking groups that have participated in discussions with the Government. Those banking groups represent an estimated 90 per cent. of all retail and savings balances held by such institutions in the UK.

My hon. Friend suggested that a significant number of banks and building societies might not participate. The fact that institutions representing about 90 per cent. of all retail and savings balances have committed to participation is to be welcomed, and I hope that that reassures him.

Therefore, 10 per cent. of balances are not represented. Only 11 organisations have said in the BBA document that they will take part. There are a great many other banks. They might be small, but they have been going for a long time. Coutts, for example, is not on the bankers’ list. What worries me is that significant funds will not be included. The element of fairness is also an issue. How will the banks that take part in the scheme feel about banks that do not—in other words, that are using this money as a float, as the hon. Member for Truro and St. Austell said earlier? The banks like having this money. Some of them are happy to give it up; others are not. To ensure fairness and that everybody complies, we should include the new clause in the Bill.

I said that an estimated 90 per cent. of retail and savings balances are held by institutions that have agreed to participate in the scheme, but I want to emphasise that that is, so far. As we move forward with consideration of the Bill and as the reclaim fund becomes established, I expect that banks and building societies that are not participating at the moment—the smaller ones that my hon. Friend refers to—will come on board. It is a healthy sign that, even before day one, we have 90 per cent. of savings and retail balances committed to the scheme. Let us also ensure that we up that figure.

Coutts is part of RBS, which is one of the banks participating in the scheme. A large number of banks will not be participating because they do not do any retail business. Some of the big US banks here do predominantly wholesale business and do not have the retail deposits. We need to be careful when saying that only 11 groups have signed up, as it is 11 out of a much smaller population that does just retail transactions.

The hon. Gentleman makes a good point. I also want to respond to the points about whether the banks have a disincentive to participate in the scheme. I do not believe that that is the case. The high levels of participation already achieved should reassure the Committee.

When the banking industry estimates that only seven hundredths of 1 per cent. of the total in retail banking and savings balances are dormant accounts, I do not think that there is a strong disincentive to participate in the scheme. The industry itself clearly rejects any arguments that retaining money on its balance sheets is a disincentive to participation, even in these turbulent times. We must ask whether seven hundredths of 1 per cent. is a real incentive. I do not think it is. I do not believe it is a significant motivation for the banks, but it is a significant amount for us as we consider its potential to be used for good causes.

I certainly echo the Minister on that last point. One has to be aware that the banks have effectively treated this money as capital, not as a normal deposit fund with the associated costs. Over time, those dormant accounts are transferred and in effect treated as part of the capital base of the bank. That money is of more significant value to them than this.

If only 10 per cent. of banks have not agreed—presumably, some of those will participate later—and a few per cent. of what are effectively freeloaders are not participating, is it realistic that the Minister will return to the House asking for new primary legislation? Presumably, he is saying that he is willing to accept up to 10 per cent. of this cash not being paid over and the banks sitting on it.

I do not think that hon. Gentleman makes a very good argument. So far, 90 per cent. of all retail and savings balances will be taken into account, given the commitments already made by the banks. I expect that figure to increase as more want to participate.

My hon. Friend the Member for Clwyd, South also asked about the bureaucracy of a mandatory scheme. The voluntary approach in the Bill brings flexibility and clear advantages. There are downsides to a compulsory approach. Our legislation provides a clear, minimum definition of dormancy, but allows institutions to refer to a range of indicators to determine whether an account is genuinely dormant. We discussed that in the early stages of consideration of the Bill. As a result, the scheme will be less rigid than other international examples. Therefore, it can be based on existing industry systems, helping to reduce unnecessary administrative costs, and it can be kept up to date, in line with the latest technology.

We are not requiring an additional system to be imposed on all the banks, which would create bureaucracy if we followed a mandatory approach. The voluntary approach also enables us to use private sector expertise in the reclaim fund so as to manage the liabilities to account holders. It is right to ask the private sector, which has the expertise, to manage the reclaim risk and to take on that function.

I remind my hon. Friend that I am not suggesting in the new clause that there should be a mandatory scheme. I want merely to give him the power to have that mandatory option should the voluntary scheme fail or not work to its fullest extent. I find it astonishing that a Government should reject having powers given to them.

I shall come on specifically to the reserve power that my hon. Friend proposes, but I thought it right to dwell on why we believe that a voluntary  scheme will work—because it is widely supported—and why it has advantages over a mandatory scheme. Generally, my view is that if I do not think something is the right thing to do, I do not want a power to do it.

The voluntary scheme has to be highly transparent to demonstrate that banks and building societies are delivering on their commitments, maintain public confidence in the scheme and strengthen further the incentives for institutions to reunite customers with their money and genuinely to transfer dormant accounts. We all want to see that. We have already discussed the disclosure requirements, but we believe that the voluntary scheme will work, be transparent and succeed.

Let me turn to the question of having a power to convert the scheme to a compulsory one. In light of the sector’s clear and demonstrable support for a voluntary scheme, we see no reason to take a reserve power to establish a compulsory one. Furthermore, we have fundamental concerns about the appropriateness of such a power.

A compulsory scheme would look completely different from a voluntary one. It could not rely on the industry’s willingness to establish the reclaim fund. The Bill would have to establish a reclaim fund as, in effect, a public body. It would have to set out the criminal sanctions that would apply to institutions that failed to comply with the scheme, and that would have to be monitored and regulated. Such an enforcement framework would not be compatible with a private sector-run reclaim fund. I could go on, but the implications are clear.

I understand a lot of what my hon. Friend is saying, although I think he is overstating his case a little. He would win me round if he answered my question in the affirmative. Yesterday, we were grateful for his undertaking to come back with an amendment on the review in three years’ time. Will he assure us that that review will be capable of making significant, radical and robust changes to the scheme to make it work better, if, in the opinion of the review, improvements need to be made?

I want the review three years after the fund has been established to be a proper one. It will be a review of the operational effectiveness of the fund. If there are clear deficiencies, I would expect action to be taken. The review will certainly look at the effectiveness of a voluntary approach. I have difficulties with taking a reserve power whereby the Government could, by order, take significant action that is really appropriate to primary legislation.

A compulsory scheme would require extensive legislation—significantly more than is proposed. I suspect that it would involve double the number of clauses. It would not be appropriate to deal with the issue through secondary legislation. If the review in three years’ time said that there was a major failing in the voluntary approach and that a mandatory one was required, we would have to look to primary legislation, because we  would be talking about compulsory participation and criminal sanctions for not participating, and quite extensive monitoring and regulation regimes would have to be put in place. It would not be appropriate to deal with such extensive legislation through the secondary legislation route.

I hope that, on reflection, hon. Members will agree with what I have said. It is not our intention to take substantial reserve powers that we do not believe are currently necessary. We might want to come back to the issue, but at the moment we believe strongly that the voluntary approach will work. It is widely supported by the banking and building society sector. Therefore, new clause 2 is unnecessary and I invite hon. Members to oppose it if it is pressed to a vote.

Having listened to the Minister and looked at my troops, I shall not press the new clause, but in the hope that the Government will come back on Report with solid proposals for a review with real teeth. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

Question proposed, That the Chairman do report the Bill, as amended, to the House.

I thank you, Dr. McCrea, and Mr. Benton for your efficient chairing of these proceedings. I thank my hon. Friends for participating and helping us to improve the Bill, and for giving up their time to do that. There is real interest in how dormant bank and building society accounts can be used for the benefit of the wider community. Following our debate on clause 12, I undertook to return to the issue of a review. We will discuss those matters on Report.

I, too, thank you, Dr. McCrea, and your co-Chairman, Mr. Benton, for how you have chaired our good-natured discussions during three sittings of the Committee, and I thank my hon. Friends for taking part. I advise my hon. Friend the Member for Henley, whose first Public Bill Committee this is, that not all Bill Committees proceed as smoothly and quickly as this one. I am sure that the Whips will find him something more challenging to get his teeth into shortly.

I am also grateful to the Minister for how he has approached the debates. We have disagreed on a number of areas, and the Bill that is leaving Committee is very different from the one that arrived, but we have had helpful discussions. I am grateful to him for being open in responding to those debates and open to the ideas that we have put across.

On behalf of Mr. Benton and me, I thank hon. Members for the co-operation and courtesy that they have shown throughout the debates.

Question put and agreed to.

Bill, as amended, to be reported.

Committee rose at sixteen minutes to Ten o’clock.