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Financial Services Compensation Scheme

Volume 489: debated on Tuesday 10 March 2009

May I mention that I have ditched half of my speech to accommodate those who wish to participate in the debate? On 13 January, I tabled early-day motion 426 entitled “Financial Services Compensation Scheme Levy on Building Societies”. It now has 158 signatures, which is why I requested a long Adjournment debate this morning.

Let me give some background to the debate. The Financial Services Compensation Scheme is a safety net for customers of financial institutions in the UK and it steps in when institutions fail. In the recent economic turmoil, a number of banks have failed, including Bradford & Bingley, Kaupthing Singer & Friedlander, Icesave, Heritable and London Scottish Bank. However, not one private individual with a UK deposit in a failed bank has lost any money. In cases in which the amount insured by the FSCS has been exceeded, the FSCS covers the first £50,000 of an individual’s deposit, and £100,000 in the case of a couple. At the time of the Bradford & Bingley failure, the equivalent figures were £35,000 and £70,000. The Government—or the taxpayer—have paid the remainder. That is to be welcomed and has helped UK depositors feel confident that their money is safe. However, the impact on building societies is unfair, which is why I requested this debate.

The compensation payments have been made in the first instance by the UK Government. Part of such payments have been in the form of a loan to the FSCS, which currently amounts to £18.7 billion. The principal of the loans will not become due until September 2011 by which time it is hoped that there will have been substantial recoveries from the assets of the failed banks. However, it is likely that a significant proportion of the £18.7 billion will still be outstanding. Although there may be some rescheduling of the loans, the principal will still need to be repaid and will need to be met by the FSCS levies on the industry.

In the meantime, building societies and banks are being required by the FSCS to service the interest on the loans made by the Government to the FSCS. Those interest payments are capped at £1 billion a year, of which the Building Societies Association estimates that building societies will be required to pay a fifth—up to £200 million a year—in each of the next three years. Building societies consider that a disproportionately high share of the compensation costs associated with failed banks. Societies are annoyed that although, by and large, they behaved prudently during the housing market upswing they are now being forced to pay for organisations that acted much less prudently. As mutual member-owned organisations, any additional costs such as those ultimately work to the detriment of society members—both savers and borrowers.

The cost to societies of up to £200 million per annum in each of the next three years would be equivalent to about 15 per cent. of the sector’s annual pre-tax profit—based on the 2007-08 financial year. With the recent reductions in interest rates, the latest estimates are that the £1 billion per annum cap will not be reached this year. The Financial Services Authority’s forecast is that the FSCS levy for 2009-10 will be £645 million, of which the BSA estimates that building societies will be required to pay £130 million. The impact on building societies contrasts starkly with the banking sector, in which the levy for FSCS management expenses is typically between 3 and 5 per cent. of pre-tax profits over a similar accounting period. It is particularly galling that in the few cases in which societies have got into difficulty, mergers have been arranged with stronger building societies, without recourse to the public funds. Such funds have been needed to bail out depositors at Bradford & Bingley and the other banks.

The fact that building societies are not profit-maximising organisations is fundamental to their mutual ethos. However, their modest profits, which contribute to their reserves and increase their financial strength, are being hit hard by the FSCS levies. Several building societies have recently announced their financial results for 2008, and all show the significant impact of FSCS levies caused by the bank failures of late 2008. Based on the 10 building societies that have reported annual results for 2008 so far, FSCS provisions have reduced reported pre-tax profit by a staggering 75 per cent. Without the FSCS levy, pre-tax profits for the 10 would have been £135 million. After providing for the levy—not all societies have provided for the levy in the same way—pre-tax profits were reduced to £34 million.

Building societies are a model whose time has come and should be encouraged. However, the FSCS-driven onslaught on building societies comes at a particularly bad time when one looks at the bigger picture. There is a backlash against the reckless, bonus-driven excesses that have characterised some sections of the banking industry over the past 20 years, which ultimately led to the near collapse of the system. A consensus is emerging that there is a need for a return to the old and possibly boring values of risk-averse banking.

There are 55 building societies in the UK, with total assets of £395 billion. They hold about 20 per cent. of the total outstanding mortgages in the UK, with about 2.9 million borrowing members, 20 per cent. of retail savings in the UK and more than 23 million investing members. Building societies employ more than 51,500 full and part-time staff and operate through more than 2,000 branches. On 22 February, the Prime Minister, in The Observer, said:

“We do want to see the reinvention of the traditional savings and mortgage bank in Britain, for loans to be made on prudent, careful terms.”

Building societies fit that bill. They are, in many ways, an antidote to the banking excesses of the recent past—a small corner of sanity. It thus makes no sense to be kicking them via the FSCS levy. Instead, they need to be nurtured and encouraged.

There are some possible solutions. Having demonstrated that the building societies and their 23 million investing and 2.9 million borrowing members are being treated unfairly under the arrangements for allocating FSCS levies, and that that is not a good idea given the valuable role performed by the societies, what now needs to be done to give building societies a better deal? Building societies are very supportive of the need for a deposit protection scheme. Although it is unlikely—though not impossible—that they will ever need to call upon it, they are happy to pay an appropriate share of the costs of the scheme. The point at issue is what that share should be. Societies consider there to be a strong case in equity for the allocation of the FSCS levies to be modified to reflect better the relative risk profiles of building societies and banks.

There are several ways in which that could be done. For example, the contribution groups for deposit takers could be recast to include sub-pools so that the banks meet in full the first slice of any FSCS levy resulting from a bank failure. By that I mean before building societies and other deposit takers are required to contribute. Similarly, in the event of a building society-generated call on the FSCS, building societies would meet in full the first slice of any FSCS levy, before the banks and credit unions were required to contribute. Secondly, FSCS levies could be capped at a proportion of a deposit taker’s pre-tax profits—for example, at 5 per cent. of the rolling average of the most recent three-year pre-tax profits. Thirdly, we could base the FSCS levies wholly on balance sheet quantities, but take account of the size of the total balance sheet rather than simply the retail balance sheet. Any of those things is likely to produce an outcome that is, over time, more fairly reflective of the relative riskiness of bank and building society businesses models.

How might the FSA and FSCS respond? I was encouraged to read the report of the Treasury Committee’s questioning of the chairmen and chief executives of the FSA and FSCS on 25 February. They confirmed that in the light of the building societies’ concerns, they would be embarking on a review of the FSCS. Loretta Minghella, the FSCS chief executive, told the Committee:

“I think we are all very conscious of the fact that the compensation scheme has to be funded by the live industry and that does mean that good firms pay for bad firms that have gone, so there is always an element of unfairness about any of the bills that we produce for people…I do think it is time to look again at the way the scheme is funded. One of the things that has come out over the past few months is that of course we have had the money that we have needed to pay the claims as they have fallen due, but the bills are coming at a difficult time and this does raise the question again of whether or not there should be an element of pre-funding for the scheme which I think will now come back onto the agenda.”

After hard questioning by my hon. Friend the Member for Leeds, East (Mr. Mudie) on the unfairness of the FSCS levies on building societies, Lord Turner of Ecchinswell assured the Committee that the issue would be looked into. The Committee also had considerable sympathy for the plight of building societies. The Chairman, my right hon. Friend the Member for West Dunbartonshire (John McFall), said:

“We have had unsung witnesses here who came after the press, namely the Building Societies Association, who did not get themselves into trouble and that has made quite an impression on us.”

Finally, I was puzzled that there was absolutely no mention of a review in two letters that I received subsequently from Mr. Jon Pain of the FSA. I shall pursue that with the FSA, but it would be helpful if my hon. Friend the Minister said what he knows of the review that was promised by the FSA and FSCS to the Treasury Committee, and when it is likely to happen.

I congratulate my hon. Friend the Member for Keighley (Mrs. Cryer) on her excellent early-day motion and on securing this important debate.

I have the good fortune of having the headquarters of two mutual building societies in Leek in my constituency—Britannia and Leek United. They differ in size, but they are trusted institutions and very much part of the local community in Moorlands. In the late 1990s, they were subject to the challenges of the carpetbaggers, but they resisted because of the loyalty, good sense and commitment of their members, who would not be bribed by cash handouts in return for demutualisation. How right they were. The 10 building societies that went down that route no longer exist as separate entities: they have been swallowed up by larger banking groups such as Barclays and Lloyds.

Leek United and Britannia offer something special to their customers: a safe haven for cash, trustworthy advice, sympathetic handling of mortgage arrears and membership benefits. They also make a huge contribution to the local community through charitable giving, volunteering and financial education. No wonder that, as trust in banks slid in the past year, 1 million new building society accounts were opened. That shows that building societies are perceived by their customers as outperforming banks in every aspect of customer service. That is not surprising, because, as mutuals, building societies do not have shareholders to please and are accountable only to their members. Some 74 per cent. of building society borrowers are extremely satisfied or very satisfied compared with 63 per cent. of borrowers from other institutions; 67 per cent. of building society customers think that their provider offers value for money, compared with only 48 per cent. of bank customers; and 68 per cent. of building society customers agree that their institution treats customers fairly compared with 55 per cent. of bank customers.

Building society business models are based on old-fashioned values that are relevant today in our financial crisis. The money deposited by building society customers is used as a basis for lending to other customers. Unlike the banks, which borrow in the wholesale markets to lend to customers, building societies are legally required to obtain a minimum of 50 per cent. of their funding from retail savings. Therefore, their exposure to the wholesale money markets is significantly less than that of banks. Building societies operate far less risky business models and take a prudent approach to lending. That is borne out by their low level of arrears and repossessions, which are in stark contrast to the latest figures published by the banks.

Building societies support the aims of the FSCS. In the current climate, it is important that savers in the UK feel confident about investing in the UK. The FSCS is an insurance policy, and it is right that building societies pay a fair premium. However, I cannot believe that the Treasury intended the FSCS to discriminate against prudent organisations such as Britannia and Leek United. By calculating the levy based on the share of the savings market and excluding, for example, current account balances, the burden is falling disproportionately on building societies and, more particularly, on their members, for it is they who will pay. For 2009-10, the FSCS bill will be around £130 million to the building societies, which is about 9 per cent. of the sector’s pre-tax profits for the 2007-08 financial year. The societies’ share of the levy for the years beyond 2011 is totally uncertain, but it could well cost as much as £200 million per annum.

That contrasts starkly with the banking sector, in which the FSCS levy for management expenses is typically less than 3 per cent. of pre-tax profits over a similar accounting period, or one third of building societies’ exposure. There are two reasons for that. First, the current allocation of FSCS levies relates to the size of each contributor’s retail deposit balances. Building societies, which have always raised the great majority of their funds from their traditional retail savings customers, will pay, relative to their total balance sheet, much more than the banks. Secondly, building societies aim to provide the best rates to both borrowers and savers, rather than maximise their profits and pay dividends to external shareholders. That is why so many building societies are at the top of the best-buy tables. Building societies’ stated profits, even in good times, are much lower.

Having said that, Britannia has produced some excellent results for the past year—it must be congratulated on its ability to sustain itself in this period of financial turmoil. Leek United is by far the smallest of the two building societies in my constituency. The charge against its 2008 accounts will be a whopping 20 per cent. of its pre-tax profits. It will also be faced with significant charges in future years and a great deal of uncertainty about the size of the levy beyond 2011.

Proportionately, the cost to Britannia is not as great, but the cost to its members will be huge, as it is the members who will bear it. I should declare an interest: I am a proud member of Britannia building society. The 2008 charge to Britannia was £19.8 million. In 2009, it expects the figure to be about £12 million. That money would otherwise have been returned to Britannia’s 3 million members, either through better rates or directly through its annual profit sharing scheme, which gives money to members based on the building society’s performance in the previous year.

Surely it is grossly unfair that building societies should pay for the failure of dysfunctional banks. No building society has ever called on the FSCS or its predecessor schemes. That is not to say that it will never happen, but it never has, and that should be recognised. The Financial Services Authority should overhaul the UK’s deposit protection scheme to ensure that building societies do not bear a disproportionately large share of the £1 billion annual bill. Should not building societies’ and banks’ payments into the compensation scheme be risk-related, as my hon. Friend said? Methods exist to do that, and they must now be considered urgently. It is not fair that building societies, which have operated such a prudent financial system, should be so penalised.

It would be ironic and devastating if, having seen off the rapacious carpetbaggers of 1999, Leek United should find its position compromised by the FSA’s bid to bail out the very building societies that went down the risky, high-profit route of becoming banks. Leek United, helped in the battle by Britannia building society, rightly rejected that route because it decided that that was the best option for its members, and those members overwhelmingly supported it. Let us ensure that building societies are given the confidence to go forward rather than being penalised for being prudent and risk-averse.

I congratulate the hon. Member for Keighley (Mrs. Cryer) on securing the debate and thereby doing a great service to building societies in the UK, which are angry—furious—that they are being penalised for other people’s mistakes. I have signed her excellent early-day motion. I declare an interest of which she just reminded me— I am grateful to her for triggering my memory—in that I am a member of Dunfermline building society in my constituency. Unfortunately, I will have to leave early, if you will excuse me, Mr. Pope. I have another engagement, but I will read closely the Minister’s response in Hansard to ensure that all points have been dealt with.

In the heart of my constituency sits a modest but important building, the Dunfermline building society headquarters. Dunfermline building society has been a strong constant in west Fife and Scottish society for almost 150 years. While others have boomed and many have gone bust, it has stayed steady and strong. It is now the largest Scottish building society, with assets topping £3.3 billion and a network of 34 branches and 37 agencies. It is playing a crucial role in the expanding social housing sector in Scotland and recently announced an additional £30 million in funding for 500 affordable homes across Scotland during the next three years. In its strong support for social housing, Dunfermline building society has made a huge contribution to something important not just to the Government, but to all politicians in the House during these difficult times for the construction industry. I hope that the Government recognise that building societies contribute hugely to such important Government objectives and help the Government to achieve their aims.

Other institutions have chosen to travel a riskier route over the past decade or so. They have made substantial profits during that time, but those have profits have proven unsustainable. Meanwhile, societies such as the Dunfermline building society have steered a much steadier course involving lower profits and have turned out to be much stronger institutions in the long term as a result.

My mother and father are in their 70s. They are safe drivers who have hardly had an accident during their whole time as drivers and who, in recent years, have had no accidents at all. They secured a special deal through their insurance company that involves lower premiums. They are not required to pay as much as Jimmy Smith who lives next door, drives at breakneck speed at every opportunity and crashes regularly. They are rewarded for safe and responsible driving. That policy is not available only to my parents, by the way—it is not a special deal that I secured for them—but is available to lots of people throughout the country who are responsible drivers. Driving discounts arise through no-claims bonuses, but some are due also to age. Organisations such as Saga offer cheaper insurance for older drivers, who are regarded as safer.

The Government and the state seem to offer a different scheme. Those who are irresponsible—those who have the car crashes of the financial sector—have others to pick up the tab for them. That is fundamentally unfair and does not reflect fair and decent regulation. We require urgent change so that people are not penalised for responsible behaviour. We have encouraged people to save, and now they are being penalised for doing so. That is extremely unfair.

When the Financial Services Compensation Scheme was at a lower level, the building societies accepted the fee that they were required to pay. They might have felt that it was disproportionate and unfair, but still they accepted it, perhaps because they could afford it. However, now that the fee has increased dramatically, those anomalies are being magnified—they have mushroomed tenfold. That must be addressed. Even though the arrangement might have been accepted in the past, that does not mean that it is acceptable now that the fee is much higher.

As a proportion of their profits, building societies are required to pay almost three times as much as the riskier banks. I am genuinely puzzled why that is the case. Why have we not got a better balance between value and risk? Surely we have learned something over the past year to 18 months. What is important is not just value and profits, but the associated risk. We should be encouraging the behaviour that encourages fine saving and safe saving, so that we do not end up having to pick up the tab for those who behave inappropriately. Does the Minister believe that we require an urgent change? Will there be a review to ensure that those who have chosen safer and more secure routes are not penalised for it?

Dunfermline building society is part of my community. It is well respected throughout west Fife and Scotland and it is a safe institution. There is an important point to be made in the wider perspective. When even the safe bodies that have not chosen the rocky road of high profits are under threat, the whole fabric of society begins to unravel and people have even less confidence in Government institutions and the advice provided by Government, Ministers and politicians. We must take an extra step to ensure that institutions such as the Dunfermline building society are rewarded, not penalised, for being trusted.

I am here to support my friend and constituency next-door neighbour the Member for Keighley (Mrs. Cryer), who tabled the early-day motion that has attracted huge support from colleagues across the House. There is a problem, as everyone who has spoken has identified, and we are all looking to the Minister to give us a solution this morning.

The Marsden building society is located in the heart of my constituency, just as the Dunfermline building society is in the heart of the Dunfermline constituency, but the Marsden’s reach extends across Lancashire. It has been a highly regarded and profitable building society for about 150 years; it was established in 1860 and has about 40,000 members. It does not pay dividends to shareholders, any profits are ploughed back into the organisation and it offers good rates to borrowers and depositors alike. It is a good, highly regarded organisation that supports the community and has a strong regional identity. Earlier this morning I visited its website, which tells its 40,000 members:

“As a member of Marsden Building Society you can rest assured that your savings are in safe hands. The Society’s business model is well placed to protect the interests of members.”

That is true—and what a contrast to the banks, which have let everyone down.

I do not know the last time that someone was knighted for their services to building societies, but we have the grotesque example of Sir Fred Goodwin, who still has his knighthood for services to banking. I am not going to be diverted down that road, Mr. Pope—I see you looking at me in that admonishing way of yours. As long as we have knighthoods and damehoods, I should like to see one go to someone who promotes the mutuals and building societies that play fair.

Does the hon. Gentleman have it in mind to put forward the hon. Member for Keighley (Mrs. Cryer) for a damehood for services to building societies?

I would be delighted to do that, but I am against any name-changing titles, whether they are knighthoods, damehoods or anything else, but let me move off that point, interesting though it is.

I had a word with Neil Shoesmith, the chief executive of the Marsden building society, to tell him that my friend from Keighley had secured the debate, and the first thing that he said was that the Marsden accepts, without question, its responsibilities under the Financial Services Compensation Scheme. I would expect him to say that, because all the building societies realise that the burden should be shared fairly; however, it is not being shared fairly. As other Members have said, the liability for the levy favours organisations that are funded by the wholesale markets rather than by retail deposits. The Marsden, like most building societies, is almost 100 per cent. funded by retail deposits and the levy is equivalent to about 15 per cent. of its pre-tax profits, whereas a bank with high wholesale funding pays about 5 per cent., as we have heard. That is wholly disproportionate.

Despite those additional burdens, the Marsden has come through the crisis profitably, with strong capital and low-risk residential mortgage books, but that is not to say that building societies do not fail sometimes. The Skipton and Scarborough building societies recently merged; that is how building societies respond when they get into difficulties. They have not gone cap in hand to the public purse, expecting a bail-out as the banks have. We are now in a grotesque situation in which risk-averse building societies are funding, through the perverse levy, the losses of banks and other organisations that have failed because of their imprudent lending. That is the reality. The levy erodes building societies’ ability to offer the best rates to savers and borrowers.

In a nutshell, prudent, profitable organisations such as the Marsden, with low-risk assets, are having to pay disproportionately for the excesses of those with high-risk assets and low capital. I do not know what we need to do get out of that situation. We have heard that the Treasury Committee is to conduct a review, and that Lord Turner is to look into the issue. Whatever happens, we need an early review of the scheme because of the corrosive impact that it is having on the Marsden and other building societies across the country.

I, too, congratulate my hon. Friend the Member for Keighley (Mrs. Cryer) on securing the debate, which is of equal interest to me because the headquarters of the Nationwide building society is in my constituency. I know that she has also been assiduous in taking this matter up in private meetings at the very highest levels of Government, and I congratulate her on that. Although I do not sign early-day motions, because I am a parliamentary private secretary, I support hers completely. [Interruption.] The hon. Member for Taunton (Mr. Browne) needs to speak to the Chief Whip, who reaffirmed last week, in a private meeting, that that is absolutely so.

The Nationwide employs many people from my constituency and the surrounding constituencies, many of whom have written to me about the levy because they are concerned about the effect it will have on the Nationwide in Swindon and the great part that it plays in the community and the knock-on effect on that community. It is one of those businesses that makes a major contribution to our local and national economy, being the largest building society, and the initiatives that it takes on locally and nationally are ones that the Government would support, because it helps Swindon residents and the wider society. We are asking the Government to support it and all the other building societies that hon. Members have discussed today.

I was seven years old when I opened my first building society account. My parents took me to the Halifax because they banked there and they felt that it was a safe place to put their money. It was once the biggest mutual and was the watchword for safety, but then it demutualised. I kept my account into my adulthood, as I am sure many other hon. Members did. I voted against demutualisation, and I think that those who thought demutualisation the wrong thing to do have been proved right. Both my right hon. Friend the Member for Birkenhead (Mr. Field) and I knew that something was wrong with the Halifax in 2006, when the Christmas hamper firm Farepak collapsed and HBOS grabbed £30 million of savers’ money to add to its £4.8 billion profit. We said then that something fundamental had changed in that institution that would lead to its downfall. Even so, we called on the bankers, in early-day motion 117 of the 2006-07 Session, to repay that £30 million, and we warned that the collapse of Farepak would be a greater portent of what was happening to that demutualised society.

Although many financial institutions, such as HBOS, have not been prudent in recent years, the Nationwide has been. It has remained mutual and it has protected savers. I have a lot of time for the Co-operative party’s campaign to remutualise Northern Rock and Bradford & Bingley, as mutual ownership has long been shown to be a good solution for ensuring a stable, long-term future for Nationwide and other building societies. However, instead of being rewarded for that, they are being punished, as my hon. Friends have said.

As the Building Societies Association argues, it is particularly galling that, in the few cases where building societies have got into difficulties, mergers have been arranged by stronger building societies without recourse to public funds—a phrase my hon. Friend the Member for Keighley used and one that we should repeat. I therefore congratulate the Nationwide on taking on board two smaller societies—the Derbyshire and the Cheshire—to safeguard those building societies and the whole sector.

Conversations with the chief executive of Nationwide, Graham Beale, who would be an admirable candidate for a knighthood, have shown that both he and the board felt strongly that it was their duty to take on the societies that had been exposed to some toxic debts and that they should do so at no expense to the taxpayer. However, as a mutual, all the Nationwide’s profits are ploughed back into the organisation and any losses have to be absorbed by the organisation. The Nationwide has no shareholders to cream off the dividends so it keeps a much smaller amount in reserve, most of which is in its retail balances. Even in good times, building societies’ stated profits will always be lower, so they will still suffer from the system that the Financial Services Compensation Scheme has created.

The Nationwide is being forced to pick up the bill for the failure of banks, and rather than being supported at a time of stress, it is being leant on. That gives the building society sector less room for manoeuvre and leaves it with less money to lend to its customers at a time when the Government are asking them to lend more. Nationwide favours a pre-funded scheme based on risk. I would like the Minister to consider such a scheme and give us his opinion on it. Last year, the Treasury Committee said that it favoured such a scheme, which would provide greater consumer confidence and encourage institutions to act prudently. Last June, the Governor of the Bank of England also said:

“A degree of pre-funding is one of those ideas that is bound to be unpopular before the fund is called upon, but seems decidedly wise after the event as it lessens the burden on the banking system in a time of stress”.

A risk-based levy could be introduced whereby banks meet the first slice of any FSCS levy resulting from a bank collapse, with building societies contributing only after the banks have paid their dues.

The hon. Lady has plenty of time in which to take interventions. Does she think that the same principle should apply to credit unions and that they should bear their losses first? At the moment, when a credit union collapses, the cost of compensation or of meeting customer balances is spread between banks, building societies and credit unions. Does she think that credit unions should stand alone too?

Credit unions in this country do a fantastic job, particularly for the small savers in my constituency who suffered from the collapse of Farepak. We should consider all those points, but I will not go as far as saying yes to the hon. Gentleman’s question because I know that some credit unions are small organisations and that they are not nearly as large as the building societies that we are discussing. We need to look at credit unions as a separate case.

Finally, I ask the Government to consider increasing the compensation limit to £100,000. That is something that the building societies have also asked for. Doing so would help them to compete with European and American banks and would protect 99 per cent. of building society deposit balances. As hon. Members have said, no building society has ever made a call on the FSCS levy, and Nationwide and all the building societies that we have heard about today are paying for institutions that have behaved far less prudently than they have. I hope that the Minister will listen to our pleas and will stop this iniquitous levy on our local building societies, which are local and national heroes.

Thank you, Mr. Pope, for giving me the opportunity to speak in the first of the winding-up speeches on this extremely important subject. I congratulate the hon. Member for Keighley (Mrs. Cryer) on securing the debate. She has not yet been recognised for her services to the building society sector by Her Majesty the Queen, but no doubt that time will arrive in due course. The hon. Lady has given us a welcome opportunity to discuss a vital topic, and it has been taken up by a number of hon. Members who have direct constituency experience of the benefits that building societies bring to their communities and, indeed, in most cases specifically to them as individual depositors and savers.

My party supports an insurance scheme because it is an extremely sensible safety net. The initial scare led to depositors queuing in an orderly British fashion outside Northern Rock to withdraw their deposits. One feels that in many countries people would have been breaking down the doors, but in this country people stood for hours and hours in queues. However, so far no one has actually lost their money in the banking crisis or storm that has hit our financial sector. That is very important because if the view took hold among the population that if banks or building societies were going down, people would lose their deposits and, in some cases, their life savings, panic would set in. People would want to withdraw their money and keep it under their mattress or put it into what they regarded as a safe harbour. That would obviously have profound implications for the banking and financial sectors, and indeed for the economy as a whole.

It is not just in the interest of the individual depositor or even the individual institution to have some sort of safety net to protect people, although obviously the primary beneficiaries, at least in the immediate term, are depositors who have confidence in the British financial sector. Of course, if we did not have a scheme of this type, people would still expect to be bailed out if their bank or building society failed, so in a way the insurer of last resort would be the state. That is increasingly what is happening, but the banks and building societies themselves have a responsibility to insure as far as possible against risk in their sector, and they should not assume that the state will always be there to pick up the pieces. If the state needs to do that on behalf of all of us, using the money we all give to the state as taxpayers, it should be the last resort rather than the norm. My party shares the wide consensus that an insurance scheme broadly of that type is a desirable and sensible way to proceed.

Engaging in the key point of the debate, I also agree that the share the mutualised building societies are being asked to contribute is unreasonable. The relevant calculation—a point made by my hon. Friend the Member for Dunfermline and West Fife (Willie Rennie) and others—is surely not the overall share of the market for mutualised building societies compared with that for banks. Surely, the relevant consideration is the risk to funds of depositors in the building society sector compared with the risk to those in the banking sector. One does not need to calculate that risk in a particularly sophisticated way—although no doubt there is benefit in doing so—because the evidence is there for us all to see.

Many of the Members who have contributed to the debate have already made the point that so far no mutualised building society has had to draw on that insurance-based scheme. To use the example mentioned by my hon. Friend, the situation is like that of the extremely cautious driver who makes sure that their car is insured. Of course, they are legally obliged to do so, but their low premium reflects the low likelihood that they will ever have to draw on the insurance. That is surely the relevant and sensible model for us to follow. Its logical conclusion is that because building societies are much lower risk, they should pay a much smaller proportion to cover against risk than higher-risk institutions. It would be an extraordinary irony if building societies were threatened because of the size of the levy on them to cover the risks taken by the banks that got us into these difficulties in the first place.

While we have the opportunity, and because it is relevant to our deliberations, I want to widen the debate slightly and consider how we got into a situation where building societies feel that they are being put under unreasonable pressure and banks are much more likely to draw on the insurance-based scheme. I agreed with many of the comments that the hon. Member for Staffordshire, Moorlands (Charlotte Atkins) made, but I do not necessarily take the view she seemed to imply that shareholder institutions inevitably deliver a lower level of customer service than organisations that do not have shareholders. I believe that shareholding capitalism has an important, dynamic part to play in our economy, and it would be wrong for us to conclude that shareholder capitalism per se has failed.

Clearly, many capitalist organisations with shareholders—in this case, banks and financial institutions—have failed. In part, that was caused by a failure of regulation and of leadership at the highest levels of the banks, and by pure greed. People put short-term profitability before the long-term interests of their institution.

I remember the unseemly clamour when many of the building societies demutualised. When the people who had previously been running the mutualised building societies went into work after demutualisation to do what, on the face of it, appeared to be exactly the same job as they had done before, they thought it only right that they should be paid an amount that was three or four times more because they were now running a swashbuckling financial institution—yet they were sitting in the same office doing what appeared to be much the same job.

That was also the case when many of the utilities were nationalised. Civil servants who appeared to be perfectly competently running utilities suddenly thought that they were right at the cutting edge of modern capitalism and paid themselves far greater salaries to do what appeared to be much the same job as they had done before.

Is the hon. Gentleman aware that at the time of the demutualisation of Bradford & Bingley and the Halifax, which are both adjacent to my constituency, I and many of my colleagues wrote to the two organisations and begged them not to demutualise? Now we feel like saying, “We told you so.”

I am sure that the hon. Lady did that. One of the things that I thought was interesting about the phenomenon was that when members got the letters through their door, many seemed to take the view that it was an opportunity to get a free cheque for £200, £300 or £400, with no downside at all. I do not think that the members who voted for demutualisation can completely absolve themselves of blame; there was a vote, and they chose to exercise it. The situation was presented to people—at least they chose to see it that way—as though the question was, “Do you want to be given several hundred pounds with no downside?” It is not surprising that many members of the building society, when the choice was presented to them in those terms, thought, “Why not take the money?” They would still have a mortgage with the same organisation, which would have the same name, and they would go into the same office to talk to the same people in the same uniforms, but they would have enough money to pay for a holiday in southern Europe, or whatever.

[Mr. David Amess in the Chair]

It seems that only now the chickens are coming home to roost, and people have realised what they let themselves in for, but at the time it appeared to many people who were less forward-thinking than the hon. Lady that demutualisation was all upside. At the time, there was no obvious downside.

However, it is fair to say—I shall inject a note of politics into this discussion—[Interruption.] No, it is important, because it is almost exactly a quarter of a century since the big bang, and the financial deregulation mood took hold in this country and there was a sea change in the way that we viewed and approached financial services. During that quarter of a century, the Conservatives and Labour have governed for almost precisely the same proportion of time. They were both in power for about 12 or 13 of the past 25 years and, in that sense, have presided equally over the process.

Anyone viewing the financial catastrophe that has engulfed the whole financial services sector could reasonably ask what the motivation was that led to both the Conservative party initially and then the Labour party being so remiss when it came to trying to prevent it. Why were they asleep at the wheel? Was it simply incompetence, or were other motivations and forces at work?

It was the Conservative party, of course, that sowed the seeds of many of the problems that we face today. There was a belief in high-risk, high-return capitalism. I am trying to look at the situation as dispassionately as possible and I think that was the main motivation for many Conservatives in the “loadsamoney” 1980s—you will remember, Mr. Amess, that the 1980s were satirised as being about loads of money and, as there often is, there was truth in the characterisation. It was a me-first decade, and a time to make money as quickly as possible.

As I try to understand why that mood gripped the Conservative party at the time, and is probably still very much a characteristic of its outlook, I suppose that it was a reaction to the cloying corporatism of the 1970s. The sense took hold that dynamic, entrepreneurial people were being held back and needed to be liberated, and that we needed a higher-risk, lower regulation economy. That was a world away from the benefits of prudent mutualisation that we are discussing this morning and, of course, the chickens have come home to roost.

I have not informed the right hon. Gentleman that I would mention him because he has only just come into my mind, but Members such as the right hon. Member for Wokingham (Mr. Redwood) were making such a case until a few months ago. This is not a history lesson. The Conservative party is still very much wedded to the approach that led to the failures of institutions in the financial services sector that are now becoming apparent even to them.

What is harder to understand is why in the second half of that quarter century the Labour party, which one traditionally thinks of as the party of the left, of trade unions and even of socialism in the United Kingdom, presided over disaster in the financial services sector. Again, I am trying to look at the situation as dispassionately as possible and trying to understand. I have heard several Labour Members make extremely reasonable, sensible speeches, but one would think from listening to them that Labour had not been in Government for the past 12 years, and that a Labour Government had not set up the regulatory system that allowed the failure to happen.

As I try to understand how the Labour party came to preside over the collapse in Britain’s banking system, I conclude that the motivation was probably a desire to rebrand as Labour after Tony Blair became leader of the party in 1994.

In a moment. There was a desire to come up with a wholly new entity—new Labour—and it was important that it was branded as something separate from the Labour party that had gone before, which had lost the previous four general elections, as you, Mr. Amess, will remember more than anyone.

On a point of order, Mr. Amess. That is straying way beyond the terms of the debate. We have been listening for the past 10 minutes to something that has no direct bearing on the subject before us.

I have to advise Mr. Browne that a valid point has been made. I ask him to stick much more closely to the terms of the debate.

I seek your advice, Mr. Amess. Am I able to give way on a subject that you have ruled to be inappropriate for discussion?

The intervention must be specifically about the Financial Services Compensation Scheme and the levy on building societies.

Mr. Amess, you took the words out of my mouth. The FSCS is, of course, a body that was set up by the Labour Government in 2001—traditional values in a modern setting—and part of the regulatory regime and one of many measures introduced by the Government. The first Standing Committee I ever sat on was about regulating credit cards. I am delighted with the regulation that we introduced. However, we face a global economic crisis that neither this nor any other Government predicted.

Interventions from Parliamentary Private Secretaries remind me of speak-your-weight machines. One puts in the necessary information, and it comes out the other end.

For many years, there have been warnings from my hon. Friend the Member for Twickenham (Dr. Cable) and many others, so I observe only that the Labour Government are the Government now and have been for 12 years. One burden of being in government—an opportunity that, sadly, I have yet to experience—is that one has to take responsibility when things go wrong as well as taking the credit when they go right. That is the misfortune that Labour must face, having presided over a collapse not only in the number of mutual building societies but, more importantly to some people, in the viability of many financial institutions.

My party opposed demutualisation—as did the hon. Member for Keighley and others. We need a mixed sector, comprising a banking segment and complementary mutual building societies. There should not be one dominant model; it is not desirable for all mutuals to turn themselves into banks, because mutuals offer different and complementary services. We also need to move to a different banking model altogether, separating the high street banks and their depositors—the people we meet in our constituencies who put their savings and money into banks and borrow small amounts from them under the protective umbrella of insurance schemes and, ultimately, if need be, the state—from the high-risk investment banks.

The hon. Member for Pendle (Mr. Prentice) touched on my next point. When I look at the very highly paid chief executives and senior managers of banks, I am always reminded of the expression about criminals: “If you do the crime, you have to be man enough to do the time.” If bankers are willing to take the big pay when times are good, they have to be big enough to take the losses when times are bad. It is no good people saying, “We want the state out of our lives—all those people trying to regulate and frustrate our entrepreneurial spirit,” as they make lots of money and award themselves huge bonuses, when as soon as things do not go so well for them, they suddenly want to be propped up and looked after.

I am coming to my final point and want to leave time for the other speeches, but I shall give way once more.

I ask the hon. Gentleman to resist responding to it, because I cannot quite see its relevance to the debate.

I cannot either. It may be displacement theory—a cry for help from the party that presided over disaster.

In conclusion, my party strongly supports the point that early-day motion 426 makes. It is extremely regrettable that we are in this deep financial crisis, which has affected our whole economy and continues to do so. There are big lessons that we can learn about how our financial institutions are regulated and the merits of a mutual sector that works much more prudently and modestly on behalf of its members than banks have on behalf of their account holders. I hope that the Minister will look kindly upon the case that the hon. Member for Keighley and others make, because the hon. Lady makes an eminently reasonable point about the balance between risk and reward. At the moment, the building societies are being very unfairly treated.

I congratulate the hon. Member for Keighley (Mrs. Cryer) on securing this interesting and thoughtful debate. It raises a host of issues, some of which are relevant, and others, including many remarks that the hon. Member for Taunton (Mr. Browne) made in his 14-minute speech, which seem wholly irrelevant, given the title of the debate.

I shall probe the issues that have been raised and, in doing so, comment directly or indirectly on the speeches made by the hon. Members for Staffordshire, Moorlands (Charlotte Atkins), for Dunfermline and West Fife (Willie Rennie), for Pendle (Mr. Prentice) and for South Swindon (Anne Snelgrove). I intervened on the hon. Member for South Swindon regarding credit unions, because, importantly, the Financial Services Compensation Scheme shares the risk of failure between sectors, and if one part of the deposit-taking pool wanted to go it alone, there would be an issue about how it affected other parts of the pool.

Having had time to reflect on the hon. Gentleman’s point, my response is that credit unions are so small and deal with so few people that they will not call on the FSCS as much as he makes out. I take his point, but any measure must be part of an overhaul of the whole system.

The hon. Lady makes an important point. We must think about what risk we are trying to assess, because although the absolute amount that credit unions may call upon from the FSCS may be small, credit unions collapse more frequently than banks or building societies, so the assessment of risk is much more complex than the debate has so far addressed. The hon. Lady and the hon. Member for Pendle pointed out that building societies have swallowed their own smoke in this financial crisis and, indeed, problems with building societies have led to mergers.

The hon. Lady mentioned Nationwide acquiring the Derbyshire and Cheshire building societies. It is worth pointing out that they were the two societies that sold their offshore deposit-taking activities—Derbyshire in the Isle of Man to Kaupthing Singer & Friedlander, and Cheshire in Guernsey to Landsbanki—and created a raft of problems for savers inside and outside the United Kingdom. Building societies must remember that rescuing smaller institutions involves a cost to them and to their members. No merger is cost-free, even if only the cost of the transaction is involved. Indeed, building society members pick up costs from two sources: first, the levy from the FSCS and, secondly, the cost of the merger with their stronger counterparts.

Everyone on both sides of the House—or around the hemicycle, whichever way one refers to Westminster Hall—agrees about the importance of the financial mutual sector and wants it to survive and to continue to strengthen, because its ethos gives a distinctive character to its organisations and how they deal with their members and customers. There have been legislative changes to strengthen the sector. The hon. Member for Staffordshire, Moorlands referred to Britannia building society, which is merging with Co-operative Financial Services and taking advantage of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, which my hon. Friend the Member for Bournemouth, West (Sir John Butterfill) promoted during its passage through the House. That legislation is being used to help to strengthen the mutual sector.

The hon. Member for Keighley made a cogent argument about the building society levy’s disproportionate effect on building societies, and I noticed yesterday, when Newcastle building society published its results, that the levy amounted to about £6 million. Unfortunately, the other major factor affecting that institution’s results was its exposure to Icelandic banks, so it has been caught twice by the financial crisis.

The FSCS is an important tool that protects consumers in the event of a default and an important part of the architecture of this country’s financial regulation. Although the scheme came into effect in 2001, there were predecessors, including a stand-alone building society scheme that has now merged with the overall scheme for deposit takers. The FSCS exists to instil confidence in consumers, and it is important that the institutions that benefit from being able to offer their customers such protection recognise the costs that must be paid when there is a default.

One point that has come out a couple of times during the debate is that no one, either when the FSCS scheme was set up in 2001 or when its funding was reviewed in late 2004 or early 2005, envisaged the current financial crisis. I do not think that we would have had this debate had it not been for the fact that the FSCS has been used as a conduit for funding the transfer balances from Bradford & Bingley to Banco Santander and some of the balances from the Icelandic banks to ING and to make payments out to some people who have banked with the Icelandic banks and London Scottish. There is a cost attached to that. No one in this debate has argued that the industry should not bear that cost, because if it did not do so the taxpayer would.

The taxpayer is making a significant contribution to the funding of the bank rescues, but it is right that the cost of bailing out individual institutions is borne by the industry. The question then becomes how that burden can be shared. Clearly, the existing funding mechanism that has been reviewed and supported relatively recently comes under particular strain at a time such as the present. Building societies are not the only ones who are concerned: independent financial advisers are also worried about some of the costs that they are having to bear in respect of the collapse of Pacific Continental Securities, for example, which is a boiler room that has gone bust owing a huge amount to its customers, leaving IFAs to pick up some of the tab. It is not just building societies that are facing this situation. Even if we accept the inequity of how the cost of financing has been borne by building societies and others, the question is, how can we design a more equitable scheme? Obviously, the responsibility for that rests with the FSA, which designed the scheme rules, and it will need to think about that.

A number of suggestions have been floated in this debate, including one to cap the contribution under percentage of profits. That is fine when all businesses are profitable, but I am not sure how such a scheme would work in practice at the moment, given the losses that have been incurred by the large banking institutions, such as HBOS, Lloyds and RBS. Of course, the scheme needs to cover all its costs, but a cap on contributions may mean that an element of the cost of the scheme will not be met from that levy. So what would happen then? Who would pay the excess over the amount that would be generated if the levy was restricted to 5 per cent. of profits? It is not clear to me how such a scheme would work in practice and who would pick up any shortfall.

There has been some discussion about risk. The hon. Member for Dunfermline and West Fife talked about that in the context of a no claims bonus-type scheme, as used for motor insurance, but that presupposes a level of pre-funding. There has been a lot of debate about whether there should be a pre-funded compensation scheme. The Minister and I discussed that topic at some length during the Commons’ consideration of the Banking Bill. Pre-funding had its attractions, but some difficulties attach to a pre-funded scheme. When the Banking Bill Committee took evidence from various interested parties at the start of its proceedings, Adrian Coles, the chief executive of the Building Societies Association, was quizzed on a pre-funded scheme and he said that such a scheme, assuming that building societies had to hold the same capital, could lead either to savers being paid a lower rate of interest or to borrowers paying a higher rate of interest. So even a pre-funded scheme is not cost-free from a building society’s perspective in relation to how it supports its members. There are some complexities that would need to be worked through in respect of a pre-funded scheme.

I understand the hon. Gentleman’s point about the complexities, which need to be considered carefully. We are just asking the FSCS to look again at various approaches. The building societies are not asking to be let off scot-free: they are asking for a more level playing field, because at 3 per cent. of profits for the banks and 15 per cent. on average for the building societies, the levy is iniquitous.

I agree. There is a lot of sympathy out there for building societies, but the solution is not necessarily straightforward. That is why I reflected on the comments made by Adrian Coles of the BSA. A risk-based pre-funded scheme would have an impact upon a building society’s ability to serve its customers: it might have to either pay a lower rate to savers or charge borrowers a higher rate. Any review of the scheme needs to be carefully thought through, because there is no easy solution. The solutions proposed so far have their failings and will create a set of winners and losers. It is not necessarily about one sector winning and another losing. Some people in the building societies sector may lose out as a consequence, depending on how risk is assessed and quantified.

I am also concerned about the idea, which has been suggested, of moving away from the larger pools for deposit protection to smaller pools, with building societies perhaps picking up the first tranche of a series of losses. Would the building societies be in a position to bear the first loss? How big would that pool be? At what point would the risk be shared with banks and other deposit takers and then, at the next level up, with other financial services institutions? There has been a big debate already about how big the various pools should be and whether they should be tightly defined in relation to particular types of institution or whether they should be broader and what the transfer risk between them is. There is no easy solution to this problem; I wish there were, but I do not believe that there is. I do not think that there is a quick solution, either, as any solution will involve significant change and needs to be properly thought through.

I welcome the FSA’s consideration of the matter. It has already embarked on a review of the Financial Services Compensation Scheme to consider how it can introduce seven-day pay-outs or a single customer view and some other important issues. I hope that it looks at this matter carefully, because if there is to be change it is important that we get the right answer—one that is equitable and does not have any unforeseen consequences. We have seen in this crisis that a scheme that was supported by a range of institutions not that long ago is coming under pressure because of a specific set of circumstances. New circumstances may arise in future. Perhaps because of the consolidation of the building society sector, building societies will not be able to swallow their own smoke as they have done in the past. What would be the consequences of that if we moved to smaller pools or a pre-funded scheme, or one based on risk?

This is a complex topic. There is a great deal of sympathy with the views of building societies, but I do not think there is a clear solution—a clear way to tackle the problems—at the moment.

I congratulate my hon. Friend the Member for Keighley (Mrs. Cryer) on securing this Adjournment debate. Through the early-day motion and extensive lobbying, she has shown a great interest in the impact of FSCS levies on building societies, and we have previously discussed the matter. I hope to use this opportunity to go into greater detail on the current position.

It is important to set the matter in context. I do not think that I need to say that we are living through extremely uncertain times and that the banking crisis has made the past 18 months challenging for the industry, the Government and the general public. Now is not the time to debate the causes of the crisis or to decide who is to blame. Suffice it to say that the Government took action when they needed to in relation to Northern Rock, Bradford & Bingley and the Icelandic banks. As my hon. Friend noted, no retail depositor in British banks has lost out in the wake of the global financial crisis. I emphasise that the Government remain committed to doing whatever it takes to stabilise the banking system to protect depositors and taxpayers and to support the wider economy.

As hon. Members will be aware, we brought into force the Banking (Special Provisions) Act 2008 to give us the right mix of emergency powers to deal with deposit takers in difficulty. That Act’s successor, the Banking Act 2009, reformed those powers and put them on permanent footing. It made some changes to the legal framework for the FSCS and introduced a new bank insolvency procedure, which aims to allow speedier payouts to eligible depositors. We hope never to have to use those powers, but we are now in a position to deal swiftly and precisely, if necessary, with financial institutions that pose a threat to financial stability in the UK.

We have used the powers under the 2008 Act to protect the financial system by, as the hon. Member for Fareham (Mr. Hoban) noted, transferring deposits from Bradford & Bingley, Heritable and Kaupthing Singer and Friedlander. We have also ensured that retail depositors in UK branches of Landsbanki and London Scottish have been fully compensated. All that costs money. The Government contributed by paying for the transfer of deposits or compensation when depositors stood to lose more than £50,000. We expect the Icelandic Government to support deposits in branches of Icelandic banks.

That leaves a cost, which falls on the UK FSCS. As my hon. Friend the Member for Keighley clearly outlined, the principle behind the scheme is that the industry mutually meets the costs of compensating retail customers for losses caused by the failure of their peers, be they deposit takers, insurers, or other firms. I did not hear any hon. Member who spoke today argue with the general principle that the industry should meet its own costs of failure.

Under normal rules, a large part of the cost of compensating depositors could have fallen immediately on FSCS levy-paying firms. That would have left deposit takers facing a £1.8 billion bill and other firms a £2.2 billion bill. The Government recognised that that would be a serious burden for many firms and that the FSCS would still need large loans to meet costs over the first £4 billion. Accordingly, we arranged for the Bank of England to make loans. The loans are being refinanced by the Treasury, but they will have to be paid for. The interest costs on the borrowing will be met by deposit-taking firms, and the loans will be repaid over time by FSCS levy-payers after recoveries have been made from the assets of those banks that were the subjects of pay-outs.

As my hon. Friend explained, the deposit-taker category of firms includes banks, building societies and credit unions, which brings us to the nub of today's debate—that building societies believe that it is unfair that they must contribute to the cost of failed banks. I understand that, and I have every sympathy with societies who find themselves in that position.

I think the building societies object not to contributing to reimbursement in relation to failed banks, but to the proportion that they are paying compared with the banks.

I agree with my hon. Friend, and I will say more about that if I can. We face a zero-sum game: if one person pays less, someone else must pay more. My hon. Friend suggests that it is a matter of balance and that building societies are being unfairly discriminated against. She and my hon. Friends the Members for Staffordshire, Moorlands (Charlotte Atkins), for Pendle (Mr. Prentice) and for South Swindon (Anne Snelgrove) spoke eloquently about building societies in their constituencies—Britannia, Leek United, Marsden and Nationwide—and rightly made the point about the share of the FSCS levy that building societies are expected to pay. The hon. Member for Dunfermline and West Fife (Willie Rennie) said that the Dunfermline building society is a strong constant in his constituency and made the point that my hon. Friends made about the value of mutual societies. We all recognise that that is important.

Let me be clear about the current position and responsibilities. The detailed rules on levies for the FSCS are a matter for the Financial Services Authority, which was set up as an independent regulator under the Financial Services and Markets Act 2000. The Government have always been clear that the costs of the scheme should be met by the financial services industry, and one of the main reasons for the scheme is to protect consumers’ confidence in the industry. All parts of the industry benefit from it.

A question for the FSA to consider is how to divide the costs among levy payers. It is entirely rational and sensible that in the first instance each sector should consume its own smoke. Building societies are deposit-taking firms, and it would be extremely unfair if parts of the industry that are more remote from deposit-taking firms should pick up the tab before they do. If a building society encountered difficulties, depositors would be protected by the FSCS as much as if they had put their money in a bank. However, the problem remains, as my hon. Friend the Member for Keighley said, of whether it is appropriate to split off a separate sub-class of FSCS levies for building societies. As the hon. Member for Fareham said, that raises some serious and complicated questions. It could result in building societies not contributing in the first instance to the cost of bank defaults, but banks could not then be expected to contribute in the first instance to protection for building societies.

Under the legislation, that is a matter for the FSA, which is an independent body, and it considered it during the last major review of FSCS funding, in 2007. At that time, the FSA came out in favour of a single class covering all deposit-taking firms. When the review ended, the FSA published a policy statement which says:

“We discussed the revised proposal to keep a single deposits class with the British Bankers' Association…and the Building Societies Association…Neither trade association expressed opposition to the proposal.”

I have only a few minutes left, but I will give way in a moment if I can.

Other options have been considered, such as pre-funding, which is a system in which levies are used to build up contingency funds to meet future compensation costs. I want to make it clear again that the Government do not believe that it would be appropriate to introduce pre-funding in the near future and we do not intend to do so, but if a contingency fund had been built up, it could have been used to meet part of the costs that the FSCS has incurred. That would have reduced the burden on levy payers today, but levies would have had to be collected in the past to build up the fund, and banks and building societies have consistently opposed pre-funding.

How the levy is apportioned between firms and societies is a matter for the FSA, which is consulting on a new basis for apportionment between individual firms that reflects the deposits that are protected by the FSCS. We will monitor that with interest, but I am not entirely convinced that it will provide the sort of remedy that my hon. Friend the Member for Keighley seeks, because the review is quite narrow. The FSA has given a commitment to undertake a review of the funding model in 2010-11, and obviously the situation has become important because of what has happened in recent months. I shall ensure that this debate and my hon. Friend’s suggestions for solutions are brought to the attention of the FSA.

Inevitably, when there is a bill to pay, there will be a debate about who pays and how much. We all agree with the logic of a compensation scheme financed by the industry. Levies will be paid by firms that did not default, so most of them will pay for the failure of others. That is not ideal, and it is important that the FSA continues to consider alternatives, and that the Government and the industry continue to engage and to ensure that UK retail deposit takers continue to have the best possible protection.

I am happy to meet my hon. Friend and to discuss the subject further. She is aware that the FSA leads as an independent regulator, but the matter is clearly of great public interest and I have no doubt that we shall have further debates.