Motion to Approve
My Lords, the order excludes insurance companies from the scope of the special resolution regime established by the Banking Act 2009. The regime provides the authorities with powers to resolve banks that are failing. The regime is also applied to building societies, and may be applied, by order, to credit unions.
The usual way of defining a “bank” in legislation is to refer to a UK institution that has a regulatory permission granted by the FSA to accept deposits, and then to refine that definition excluding bodies that are not to be regarded as banks. Sections 2 and 91 of the Banking Act adopt exactly that approach, but give the Treasury the power to add to the exclusions from the definition of bank by making orders.
The reasons for excluding insurers are clear. The special resolution regime was not designed for insurance companies. The Banking Act is, of course, an,
“Act to make provision about banking”,
not insurance. This is also clear from the special resolution objectives. These refer explicitly to “banking services”, “banking systems” and “protection of depositors”, none of which are applicable to insurance companies.
The key provisions of the special resolution regime would not be suitable for use in the resolution of an insurance company and would require significant modifications if they were to be applied effectively to insurers. This reflects the differences in the structure of insurance and banking institutions, and the different ways in which they carry on their businesses, as well as the significant difference between banking and insurance as financial services. While the Banking Act provides powers to deal with mutual banks—building societies—there is no similar power to deal with mutual insurers, which perform an important role in the insurance industry in the UK. The statutory code of practice issued under Section 5 of the Banking Act refers only to banks and building societies. The banking reform consultation documents essentially referred only to banks and other institutions that carry out deposit-taking business.
However, it may be helpful if I explain why insurance companies often have a deposit-taking permission, which is why they are potentially caught by the definition of “bank” and the scope of Parts 1 to 3 of the Banking Act. Under the Financial Services and Markets Act 2000, institutions can apply for permission to carry on a number of regulated activities, such as accepting deposits and dealing in investments as principal or agent. Where an institution meets the conditions for authorisation, the FSA will issue a permission that lists all the regulated activities that the institution may undertake, and any restrictions that apply to those activities.
A view has been taken historically that, in some instances, the business of providing insurance might require a firm to accept deposits. Consequently, most institutions that are authorised by the FSA to carry on insurance business have the permission to accept deposits. This permission is granted for the purposes of carrying on insurance business.
Let me give an example of where an insurance company may need a deposit-taking permission. A life insurer may need to hold the proceeds of a matured policy while waiting for instructions from the policyholder as to what to do with the proceeds. To do this will require the insurer to hold a deposit-taking permission, but it can be used only in the course of carrying on its insurance business. I must emphasise, however, that even if an insurer has a deposit-taking permission, it does not carry out banking business. Indeed, insurers are prevented from carrying out deposit taking by European law. This is recognised in the limitation that the FSA applies to these permissions, under which insurers are limited to accepting deposits in the course of carrying on insurance business.
Like many industries, the UK insurance sector has been affected by the financial crisis. However, both the insurance industry and the UK’s prudential regulation regime for the insurance sector have so far stood up well to testing economic conditions, and the insurance industry continues to provide a vital contribution to the UK economy.
As I have made clear, the special resolution powers are not designed to deal with insurance companies, and the Government believe that it is appropriate that insurers should be expressly excluded from the scope of the definition of a bank in Sections 2 and 91.
I apologise if I have repeated elements of the Banking Act, with which I know that the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, are all too familiar, given their exertions on the Act when it went through this House. I beg to move.
My Lords, I thank the Minister for introducing this order. I was initially inclined just to nod it through as another example of the perils of legislating in haste, as we did with the Banking Act when it was considered in your Lordships’ House earlier this year, but I will explore the reasons for the order a little further.
I accept what the Minister has said about the Banking Act being written primarily with banks in mind, but the situation is not quite as simple as that. As has been pointed out, credit unions and building societies, which are not banks, are specifically excluded from the definition of a bank but are given their own special enabling powers later in the Banking Act to ensure that provisions that are analogous to those for banks can be made—and, indeed, have been made for building societies—so that the equivalent of the special resolution regime can be created for them.
I am slightly concerned that we have excluded some elements of deposit-takers but have then provided especially for them when we have not necessarily done so for insurers. My initial thought was that, if the problem arose from the insurance companies being given multiple commissions, the simple answer would be that the FSA should withdraw one element of the multiple commissions, but the Minister has explained that the insurers need to accept deposits in the context of their insurance business and are not allowed to conduct a banking business. However, my question is still: why are the Government excluding them completely from the ambit of the Banking Act? Are the Government making an a priori judgment that an authorised insurer could never pose a systemic risk by virtue of its deposit-taking business? If so, will the Minister explain the Government’s thinking? It is not enough to say that today’s business model for insurers would mean that they could never use a deposit-taking authorisation in a way that threatened financial stability.
The Minister, as I have said, made the point that the powers in the Act are written with banks in mind. I have accepted that, but I am less persuaded that the consultation and the codes of practice are written only with banks in mind, because those are relatively easy to change if the powers exist under the Banking Act. However, I remind the Minister that the holding company provisions in Sections 82 and 83 of the Banking Act, which were introduced at a late stage in the Bill’s progress, allow any holding company of banks to be grabbed without any detailed sector-specific legislation. Therefore, the legislation in the Banking Act is already mixed in scope. This provision could, for example, allow Tesco to be caught up in the legislation if the conditions were met, because Tesco is the holding company of a bank. If an insurer met the definition of a holding company of a bank because it owned a bank deposit-taker, it could be swept into the special resolution regime under the holding company rules. Why, then, would we want to keep out of the special resolution regime an insurer that was a deposit-taker?
At the heart of my questions is this: what are the Government doing to protect the UK’s financial stability from systemically important insurers? What legislation do they have in place that allows action similar to that contained in the Banking Act and which could operate for insurers? AIG showed us that insurers, too, could be a source of systemic risk and could threaten financial stability. If there is no sector-specific legislation to deal with the problems posed by systemically important insurers, why would the Government want to junk the powers in the Banking Act, even if they are imperfectly described in that Act?
My Lords, I am grateful to the Minister for explaining the Government’s thinking in bringing forward the order, and to the noble Baroness, Lady Noakes. There is a slight problem on orders, which is when someone who speaks before you sort of reads out your speech.
I fear not. Unusually, the noble Baroness made the points that I was going to make as well.
In a sense, I was surprised that the Government bothered with the order. As the noble Baroness said, one could conclude that the Government thought that either there were no circumstances under which a UK insurer would need bailing out; or, if such circumstances did come forward, there was some other means of doing it. If a UK insurer got into difficulty, the Government wanted to bail it out and this statutory instrument had not gone through, I suspect that they would find that the Banking Act was the easiest way in which to deal with it. If that route were closed, as it would be by the order, I fear that we would have another Northern Rock-type Bill to deal with an insurer that had got into difficulties. Echoing what the noble Baroness said, I would be grateful if the Minister could strengthen his arguments as to why it is necessary to bring forward the order; it brings no benefits to anyone whatever. However, it is a belt-and-braces provision that could in certain circumstances be useful.
My Lords, there was one blissful moment when the noble Lord, Lord Newby, said that his speech had been pre-empted in which I thought that he was suggesting that mine had pre-empted it. Alas, that was not so; he was referring to the noble Baroness’s speech, which means that I have to address myself to both noble Lords.
The issue is straightforward. It is a question of whether we think that the insurance industry is likely to face systemic risk in the way in which the banks did, and for which the Banking Act was subsequently passed to provide for the special resolution regime to deal with that matter. Insurance companies are different, a point that I made in my opening contribution. Above all, they differ from banks in the much lower importance of liquidity risks, which had a central role in the banking crisis. We all recognise that the liquidity risks to which the banks exposed themselves were somewhat removed from the general interpretation, hence the overextension of the banks into diverse financial systems, as a result of which some eventually suffered. The insurance industry has not suffered a general worldwide crisis over the past two years. The banks may have gone through their worst crisis for the past 70 years, but that is not the case with the insurance industry. That does not mean that it has not been affected; of course it has. However, the way in which risks crystallize, and the timescales in which they do so, are different in insurance. As we all recall from our long deliberations about the special resolution regime, it is directed towards an emergency and moves with force and speed to deal with a bank in crisis. We just do not see the insurance industry constructed in that way.
The regulation of insurance companies needs to be different from the regulation of banks. Of course we identify and track carefully all the potential consequences knocked on from any sector to another, but the simple fact is that insurance companies are not subject to the same risk as the banks. That is why the order provides for the exemption.
My Lords, the Minister said that insurance companies did not cause a problem in the recent financial crisis. That is true for the UK but not for the United States. Given that it can cause problems under certain circumstances, although it did not in recent years, the Minister said that the regulation for insurers needs to be different—which indeed it does. However, as we found with the banks, regulation was one of the contributory factors leading to the severity of the problems. I would like the Minister to answer this question directly. Are the Government satisfied that they have sufficient legislative powers to act if there were a systemic financial problem in the UK caused by the insurance industry?
Of course, my Lords. The noble Baroness does not always believe every word that I manage from the Dispatch Box but let me make the obvious point. If the Government had anxieties, why would they be bringing forth an order to exclude the insurance industry from regulatory powers—which is what the special regime introduces—included in the Banking Act, which applies to banks? The answer is quite straightforward, as I sought to establish in my opening remarks. The insurance industry is a different institution with a different level of risk. It has not shown that level of vulnerability with which the Banking Act was designed to deal during the extremes of the banking crisis a couple of years ago. There is a different regulatory regime for the insurance companies. I hope I am not giving the impression that the Government are utterly reckless about what might happen in the insurance world. Of course the FSA has its responsibilities and of course there is a regime of regulation. But the Banking Act deals with the specific problem of a much higher risk-taking operation and power which the banking system has and the insurance system does not avail itself of. That is why we are looking for the exemption.
House adjourned at 5.37 pm.