The government has today given an emergency guarantee to B&B secured liabilities but also of the liabilities of the Financial Services Compensation Scheme itself. Darling revealed that any shortfalls will be covered by the financial industry at some point in the future.
The Association of Mortgage Intermediaries says the annual interest bill could come to around £1.8bn meaning that only banks would have to foot the bill with IFAs and brokers avoiding any payout. However if a £2bn threshold is reached then the whole financial services industry becomes partially liable with IFAs and brokers picking up some of the cost above £2bn. A leading city lawyer has warned that the figure could ultimately be a lot higher than £2bn.
AMI director general Chris Cummings says: “The enormity of the loan from the Bank of England and subsequently HM Treasury to the FSCS raises some serious questions for the industry – and has potential ramifications for the wider financial services sector, not just banks.
“At current LIBOR rates we estimate that interest due on the loan stands at around £1.8bn per annum. FSCS funding for the broad depositor protection class is around £2bn, before the wider industry – from insurers to IFAs and mortgage brokers – are required to contribute. We need to remember that the ultimate cost will be borne by the market, and so the implicit impact on consumers must be carefully monitored over coming months.”
But CMS Cameron McKenna partner Paul Edmondson says that the industry could face a much bigger bill than £2bn. He says: “Current FSCS levy limits are too low to cover the £14bn paid to Abbey via the FSCS and do not cover the further £4bn paid directly by the Treasury.
“On Sunday, the FSA made emergency changes and increased the annual limit on FSCS management expenses by 2000%, payable by banks and deposit takers – up from £30 million to £630 million.
“This is intended to cover the cost of the FSCS borrowing from the Bank of England, estimated at about £450 million per annum.
“Repayment of the loan would exceed by a large margin the levy which FSCS can impose on the industry. The annual compensation limit is currently £1.8bn from banks and deposit takers plus a further £2.2bn from insurers and other financial services firms. This would need to increase by approximately 350% to cover the full £1.4bn loan.”
On BBC’s Today Programme this morning, chancellor Alistair Darling assured the British taxpayer that they would not have to foot the B&B bill.
He said: “We are using special powers to take the B&B mortgage book. They will be redeemed and we will be repaid.
“If this is not sufficient, the outstanding assets will be covered by the industry, not now but at some point in the future. I stress that the taxpayer will not have to cover the outstanding assets, they will be covered soon, but I have no intention of calling on the money now during this difficult time.
“There were no other options. Thinking we could have done anything else is clutching at straws.”