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Andrea Leadsom (South Northamptonshire) (Con)
What an astonishing few weeks it has been in the banking sector. It is a pleasure to serve under your chairmanship today, Mr Chope. I am sure that my colleagues my hon. Friends the Members for Wyre Forest (Mark Garnier) and for Mid Norfolk (George Freeman), the hon. Members for Strangford (Jim Shannon), for Erith and Thamesmead (Teresa Pearce) and for Wells (Tessa Munt) who supported the application for this debate with me will be feeling, as I do, that the debate could not come at a more important time for such a key British industry.
Banks are incredibly important to Britain’s economic well-being. Financial services employ more than a million people in Britain and generate more than 10% of our annual tax revenue. The vast majority of those who work in the sector are doing an honest day’s job every day for an average salary and, if they are lucky, a modest bonus at the end of the year.
Banking is a vital industry that could lead us back to economic recovery. However, that will not happen on the back of what we have heard about the fraudulent and corrupt practices of the small number of massive earners who have done so much to destroy the image of our banks. It is vital that we re-establish banks as calm, measured and instinctively cautious guardians of the trust and confidence that account holders place in them. For a long time, I and many others have believed that more competition in the banking sector is key to that turnaround, and the events of the past few weeks have brought that sharply into focus.
I know it is annoying when people say, “It’s not like it was in my day,” but that is honestly how I felt after hearing Bob Diamond’s evidence to the Treasury Committee last week. For 25 years before becoming an MP, I worked in finance, including in Barclays’ dealing room just after the big bang in 1987. It was a different world. In those days, asking the treasury team what the LIBOR setting was would be a bit like asking you what the time is, Mr Chope; I would not expect you to tell me anything other than the facts.
However, that was in the late ’80s, when there were about 45 major banks in the UK. In the past 10 years, according to the British Bankers Association, that figure has halved to just 22. Not only that, but five of those banks have between them 80% of the personal current account market and the small and medium-sized enterprise market. I feel sure that the scandals of the past few years simply point to the disastrous consequences of the mergers and takeovers that took place during the 1990s. We now have a small group of vast institutions, where the culture has been shown to be, “Heads, I win; tails, the taxpayer loses.” That is a far cry from my day when “my word is my bond” was the ruling mantra in the City.
British people across the country are furious about the behaviour of the banks and they have every right to feel that way. Banks—already seen as greedy and arrogant— have stooped to a new low of corruption and fraud. The inquiry into wrongdoing, how widespread it may be among banks, and how many other areas of finance could have been manipulated has to run its course. However, we also have to think long and hard about the future. People are quite rightly asking, “What are the Government doing about it?” The answer is, “A lot.” Since 2010, the coalition Government have put forward radical proposals to ditch Labour’s appalling tripartite regulatory regime that enabled almost every regulator off the hook for the financial crisis. We have instigated the Vickers commission and accepted the retail ring-fencing proposal, as well as faster account switching. We have also proposed a new responsibility for financial stability for the Bank of England.
However, we could do more. In light of the Commodity Futures Trading Commission and Financial Services Authority judgments against Barclays, as well as investigations into other banks, we should be re-opening the debate in three key areas. The first is regulation. There is an old saying that investment bankers operate under equal measures of fear and greed. However, for years now, there has been vast greed with no fear of consequences. Regulators in the future will need extremely sharp teeth, so that if criminal behaviour is taking place in a financial institution, all those responsible go to prison like any other thief, and there should be new criminal negligence tests for bank boards.
The bizarre evidence from Bob Diamond that he found out only one month ago about the corruption and fraud that had gone on at Barclays since 2005 should not be an acceptable excuse. Enormous earnings require enormous accountability. And I say to those who think we will never find another bank chief executive, that I do not believe for one minute that banks will struggle to find people willing to take their shilling in return for that responsibility. I would be delighted to hear from anyone who thinks that they would not give it a go for a couple of million a year. There would be plenty of takers.
The Government should be returning to the objectives of the new regulators—the Financial Conduct Authority and the Prudential Regulation Authority. They should both be given a specific objective to reduce barriers to entry and promote competition. Only one new high street bank has launched with a full banking licence in the past 100 years; that was Metro Bank. Or was it in the past 300 years—[Interruption.] Sorry, 100 years. Other recent new entrants have tended either to be backed by one of the big five, such as Marks and Spencer financial services which is backed by HSBC, or have benefited from Government sell-offs, such as Virgin buying the good bit of Northern Rock.
Mr Andrew Love (Edmonton) (Lab/Co-op)
Before the hon. Lady moves on from the point about greater competition for banks, will she welcome the discussions between Lloyds bank and the Co-operative bank about a possible sale to the Co-operative bank, which would create one challenger bank in the marketplace?
Andrea Leadsom
Absolutely. I agree with the hon. Gentleman. That is a very good move. Personally, I think that a reversal of the Lloyds-HBOS merger would be better.
Secondly, the issue of a complete separation of retail and investment banking should return to the agenda. It is right that the Government should be the ultimate guarantor of retail deposits, but that guarantee should not extend to high-risk transactions. If an investment bank goes under, the losses should be borne by those who were happy to take the profits in better times, something to which the Government are already committed. Vickers has proposed ring-fencing already, but we should be examining again the prospect of a total separation.
Thirdly, the key issue is that of competition. The Government need to take further steps to inject greater competition into the banking sector. People have lost faith in the banking industry. Small businesses are finding credit hard to come by, taxpayers are furious at the billions spent on the bail-outs, pay for bankers is too often unrelated to performance, and customer service levels are, in many cases, utterly appalling.
Mr Sam Gyimah (East Surrey) (Con)
I congratulate my hon. Friend and her colleagues on organising the debate, which is long overdue. I thank her very much for that. On the issue of competition, one of the challenges, especially from the business banking perspective, is that 90% of the market is held by the five major banks. That means that if a small business is looking for a loan, it will find it incredibly difficult to get one if it has been turned down by its main bank. Also, if someone is offered a loan, they often have to agree to switch their account to the new bank. That lack of competition is a serious problem in terms of getting lending to businesses in the market. However, does my hon. Friend agree that such competition should be about not only having more banks but the diversity of provision in the sector? It does not have to be a bank that lends to a business.
Andrea Leadsom
My hon. Friend is absolutely right. We need far more diversity of financial service providers. Some of the issues I am about to discuss will address that because bringing down barriers to entry will, by definition in a capitalist society, encourage new entrants of all different sorts.
Mr Gareth Thomas (Harrow West) (Lab/Co-op)
I share the hon. Lady’s view and that of the hon. Member for East Surrey (Mr Gyimah) that more diversity in the financial markets is essential. Does she accept that it was a missed opportunity on the part of the Government to reject an amendment requiring the new regulators to have regard to promoting diversity in the financial markets?
Andrea Leadsom
I am not aware of the specific amendment that the hon. Gentleman is talking about. However, I certainly think that the Government will be wanting to promote diversity, and I am very much aware that they want to promote the diversity of financial service providers. I can tell him that, at a recent hearing with the Treasury Committee, the Governor of the Bank of England assured us that he, too, was very interested in promoting more competition and greater diversity. We unanimously agree on that point.
The best way to shake the banks out of their complacency is to allow new entrants into the market, bringing with them the high standards of service—including IT that works—that customers believe they should be able to take for granted. One significant step in that direction would be to break up and sell off the state-owned banks. That would create overnight potential new challenger banks in Britain, and I urge the Government to look at it again. The market concentration of the big five is appalling. Lloyds, the Royal Bank of Scotland, HSBC, Santander and Barclays have an estimated market share of 85% of the personal current account market and 67% of the mortgage market. That is a classic oligopoly, and they do behave like one. We can see all over the place barriers to entry, not least of which is the fact that those banks own, among them, the Payments Council and VocaLink—two crucial entities that enable the financial services markets to operate.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)
In an earlier Westminster Hall debate this week on the Royal Bank of Scotland, I heard from one of the hon. Lady’s colleagues what was essentially a call to mutualise RBS. Does she agree that that would be one option? Is she proposing that?
Andrea Leadsom
I am grateful to the hon. Lady for intervening. Not specifically, no. My point is more that we need the market to decide on diversity. I do not think that the Government, in any area of our economic life, should be the ones who pick who should be doing what. What Government need to be doing is facilitating greater competition and greater diversity so I would not be prescriptive in that way.
The key point that I want to focus on is that a real game changer for competition would be for the Government to introduce full bank account portability. We take that for granted with our mobile phones. Why should our bank accounts be any different? I have been pressing for it, along with various colleagues, since becoming an MP. If people were able to switch instantly between banks without having to change their bank account number, bank cards, standing orders, direct debits and all their online shopping, that would remove a massive barrier to entry that is currently constraining new, innovative banks.
Bank account portability has five basic benefits. The first, obviously, is that it creates greater bank competition. That is because a new bank can say to its customers, “Come and give us a try. If you don’t like us, you can move back to your old bank tomorrow.” The enormous inertia on the part of customers, who do not want to move bank because of the hassle and aggravation for them personally, would be removed instantly. They could switch between banks every day of the week if they chose to do so.
Secondly, personal and business customers would be able to force banks to compete for their business. New banks would therefore be putting forward innovative ideas—perhaps paying customers to move to them at one end and giving particular services to business account customers at the other end. That would completely change the choice available to consumers, and the consumer choice argument is a very strong one. At the moment, with the big banks, most people feel that there is no choice.
The third benefit is better regulation. The regulator would be able to shut down a failing bank while avoiding the risk of a run on the banks. With account portability, all personal and business accounts could be switched immediately to a survivor bank.
Fourthly, there would be a reduction in fraud. The highly overestimated costs of account portability need to be set against the significant reduction in bank fraud. I was talking to Intellect, the IT trade body, which reckons that bank fraud could be reduced by up to 40% if we had full account portability, because one of the major reasons for fraud is the poor legacy systems in some of the big banks.
The fifth benefit would be support for SMEs. It is crucial that we have that in our economy; we have to get businesses going again. Funnily enough, if banks had a single system, they would also have a single customer view, so they would be able to evaluate, calculate and assess their small business customers far more accurately, enabling them to meet the needs of small businesses far better.
Making it easier for people to switch bank account provider is not a new concept. Don Cruickshank, who led a review of the banking sector and whose report was published in 2000, has long been committed to the idea. In 2000, Halifax launched the stand-alone telenet bank Intelligent Finance, with the express aim of making it easier for consumers to switch bank accounts. In March 2001, the Competition Commission identified reluctance on the part of small and medium-sized businesses to switch banks as a major problem. Later that year, the Bank of Scotland announced its intention to capture business from what was at the time the big four with a new “Easy to Join” service, which would assign a staff member to oversee the account switching process and to deal with direct debits, standing orders, international transfers and the like.
In June 2002, James Crosby, then chief executive of HBOS, said that he was concerned by delays to greater account portability and that the move was vital for competition. More recently, the Independent Commission on Banking, led by Sir John Vickers, called for a system that would make account switching easier. However, the ICB’s proposals stopped short of full account portability.
This year, Virgin Money has added its support for full bank account portability. It has said that it is happy to support the ICB proposal that a current account redirection service should be established by September 2013, but that it is
“not sure that it will be sufficient to overcome consumers’ inertia, and their concerns that switching may be difficult.”
In its submission to the ICB, it expressed a preference for full account number portability.
The ICB published its final report in September 2011, following an interim report that April. The Treasury Committee took evidence in relation to both reports, and several bankers said that account switching was important. Mr Horta-Osorio, chief executive of Lloyds Banking Group, told the Committee:
“There has been progress made in terms of customers being able to switch effectively and without risk, but more progress can be made. We are proposing a seven-day automated redirection of direct debits whereby customers in seven days can be sure that their account and their direct debits are automatically redirected to the new account without any risk. All banks have now endorsed that solution and the Payments Council as well.”
At the weekend, Jayne-Anne Gadhia, Virgin Money’s chief executive, said that
“banking doesn’t have to be remote, distant and just transactional. There can be a new and different future where customers are at the centre of the banking experience…For too long, banking has been more head than heart. We want to put more heart into it.”
The ICB reported that there was a switching rate of just 3.8% for personal current accounts in 2010, that three quarters of consumers had never considered switching their current account, that 51% of SMEs had never switched their main banking relationship and that 85% of businesses surveyed by the Federation of Small Businesses had not switched their main banking provider in three years. Which?, the consumer focus group, estimates that people are more likely to get divorced than change their bank account. Those switching rates compare very unfavourably with those in other industries. In 2010, 15% of consumers changed their gas supplier, 17% switched electricity supplier, 26% switched telephone provider and 22% changed insurance provider.
Jayne-Anne Gadhia of Virgin Money says that
“retail banking has been underinvested in. When retail banking becomes the focus of senior banking executives again, which the splitting of retail and investment banking would bring about, bank customers will get a better service. If that happens, then I would be delighted.”
I agree with her. Making it easier for consumers to switch provider would be a boost to new entrants in the market and therefore to competition, because consumers would know that if they did not like the bank they had moved to, they could always move again.
Mr Love
The question that I am about to ask is one that I have some feeling about, as I have tried to shift my bank account in the recent past. The industry would argue that it is shortening the process and making it more secure, and that we should give that an opportunity to bed down in order to see whether it works. The industry also claims that it is very expensive. How does the hon. Lady respond to those concerns and how important does she think it is that we create a fully portable system?
Andrea Leadsom
I am grateful to the hon. Gentleman for asking that question. If people consider the cost to the taxpayer of the financial crisis and if people believe, as I do, that the reason for the financial crisis was that banks were too big to fail, it makes sense that if banks were no longer too big to fail, the taxpayer would no longer bear that massive liability. We need to consider the costs of achieving competition in the context of what has happened in the recent past, but yes, it would be expensive to achieve it.
The likes of VocaLink and Intellect, the IT trade body, have advised me that the costs are not in creating the centralised account-holding system required for fully transferable bank accounts, but in the big oligopoly banks changing their systems of sort codes, cheque books, bank account numbers and so on to fit in with a new system. The ultimate irony is that the challenger banks, such as Metro Bank, Virgin Money and Aldermore, would love account transferability because it is a minor cost to them; it is a major cost to those banks that, by dint of having legacy systems, have a lousy ability to feed in to a single system, so would find it very expensive.
You will be pleased to know that I am coming to a conclusion, Mr Chope. Now is not the time for timidity over reform in our banking sector and nor is it the time for false economies. We need to focus on enabling new entrants into the market, taking the steps that will be good for the consumer and for small businesses, and beginning the long process of restoring the reputation of our banking sector.
Teresa Pearce (Erith and Thamesmead) (Lab)
Some of the points that I was going to make have already been raised by my fellow member of the Treasury Committee, the hon. Member for South Northamptonshire (Andrea Leadsom). I was glad to add my support to the application for the debate, because it is important to my constituents.
I represent Thamesmead and Erith. Thamesmead is an estate built by the Greater London council in the 1960s. There are 45,000 people living there and not a single bank in the whole of Thamesmead. I have met all the major banks to ask whether they would be wiling to open a branch or have a mobile bank—anything, really—but they have all said no because it would not be economic for them. They have no thought for the customers there—mainly basic bank account holders, some of whom cannot even use one of the few ATMs there. People in my constituency have to take two bus rides to draw their own hard-earned money out of an ATM without incurring a charge. The service is simply not good enough.
Markets are supposed to operate on the principle of the virtuous circle. I doubt whether anybody in the country at the moment thinks that that applies to the banking market. Well-informed consumers are supposed to drive a competitive business to deliver what people want, and that is simply not happening in my area or many other areas. Banks are not delivering what my local small businesses want or what my local bank account holders want—they are just not delivering at all.
The market is supposed to respond to customer need and customer power, but at the moment, consumers do not seem to have any real choice or power. When people come to me and say that they have a problem with their bank, and I ask if they have tried another bank, they say, “They all seem to be owned by each other; what difference will it make?” There is no consumer choice. It is a market, but not a proper market, because it does not operate as any other market would.
Cathy Jamieson
I know that my hon. Friend cares passionately about people’s exclusion from financial services. Would she agree that part of the problem is that it is not easy for people who are in debt or do not have high incomes to switch? Going to another bank is fine if they have money, but it is not easy at all if they are trying to pay off an overdraft or loan.
Teresa Pearce
That is completely right. Debt is a big issue in my constituency, and I believe that that is why there is no particular interest in opening a branch, which would alleviate some of that debt through giving advice. That said, the staff in a branch of Barclays, which was a Woolwich, in my constituency have taken it upon themselves to try to help their customers. If they see people coming in and just paying off the minimum amount on their credit card for three months in a row, they sit them down, talk to them and explain that they are not paying off the debt. The people in that branch do a fantastic job. I feel sorry that they do not find saying, “I work for Barclays” something to be proud of at the moment. We should be thinking of the people who work in such branches and call centres in the current environment.
Mr Thomas
North Harrow, in my constituency, sounds a little like Thamesmead in that it does not have a bank branch. It has a post office through which personal banking customers of Lloyds can access services, but there is no equivalent for small businesses in north Harrow. Given our anecdotal experience of areas of the country that are unbanked, does my hon. Friend think there would be benefits from full disclosure by the banks of what and where they lend by postcode? We could then have proper understanding of which areas are unbanked and a proper debate about how to respond to that gap in the financial market.
Teresa Pearce
That is an excellent idea. There are very few things in society that do not benefit from transparency; the more we know, the more we can make a judgment. We should all press for it.
The hon. Member for South Northamptonshire mentioned that people are more likely to get divorced than switch their bank account, which is certainly the case in my experience. Only 36% of consumers have ever switched their bank account, and 45% of marriages are expected to end in divorce. I have been with the same bank since I left school, but it has changed, because it has been taken over repeatedly. That is a common experience. Lots of us will have sat in an office with a friend or spoken to a family member who has tried to switch bank accounts and heard the catalogue of horrors that ensued—from mortgages not paid to bounced direct debits.
As we heard today, the hesitancy to embrace bank account portability is a big barrier to customers being able to exercise choice. The seven-day switching programme is good step forward, but we should be working towards full bank account portability in the long term. I ask the Government to commit today to undertaking a full and comprehensive cost-benefit analysis of account number portability to start that process. Years ago, it was not easy to transfer a mobile phone number from one provider to another—in fact, the mobile phone companies told us that it was impossible. As consumer pressure grew and more providers entered the market, it became very possible, and now is common and simple to do. I see no reason why banks accounts cannot go down the same road. It would make a big difference to consumer behaviour—43% of consumers say that they would be more likely to switch their current account if they could keep the same number.
Even after the banking crisis, our banks are still too big to fail. It is not a proper market when the huge rewards are taken by some, but the risk is always sold on further down the line to other people, ultimately ending with the taxpayer. With only one new high street bank launched in over 100 years, it is pretty obvious that there is no true competition. Increasingly, new entrants need to be backed by one of the big five banks—as with the Marks and Spencer bank, which is backed by HSBC—or to have benefited from Government sell-offs, such as Virgin’s acquisition of Northern Rock.
The big banks are represented on standards-setting bodies, such as the Payments Council, which sets the level of access. There is clearly not a lot of incentive for them to lower the barriers to access for new entrants and thereby decrease their market share. That is why the Government should step in and establish a framework with increased competition and customer experience in mind. To increase competition, it is important to increase not only the number but the diversity of organisations operating, so that consumers have real choice.
Many of us will have read in the papers this week that there is a big consumer push towards ethical alternatives after the recent banking scandals: Charity bank, which lends its savers’ money to charity, has had a 200% increase in depositors; the Ecology bank has had a 266% jump in applications; and there has been a 51% increase in applications at Triodos, a Bristol-based sustainable bank. Credit unions also report week-on-week increases of at least 20% and up to 300%.
Building societies and credit unions obviously have an important role to play in constituencies such as mine. Unlike banks, they are accountable to their members, who are also their customers. There is no discrepancy between the aims of the shareholders and the customers, because they are one and the same. Building societies and credit unions are a true service industry, not a self-serving industry. There is usually a big culture difference in the way they operate in comparison to banks. Most markedly, they are free from the pursuit of short-term returns for shareholders that has contributed to risky behaviour in the big banks and in turn threatened the stability of banking system as a whole.
What we are seeing with the banking crisis is the result of the demutualisation agenda kick-started in the 1980s and peaking in 1997, when a host of building societies became banks, including Woolwich building society, which is a mere mile from my constituency. The Woolwich was founded in 1847 as one of the first permanent building societies. It had a proud local tradition—it was a major employer and an asset to its community. Ultimately, it demutualised and was eventually taken over by Barclays. People used to say, “I’m with the Woolwich.” They were proud to be so, but I do not think they say, “I’m with Barclays and I’m proud to be.”
During the demutualisation period, the investment banks toured the boardrooms of the building societies, putting the case for demutualisation, often making large fees as advisers in the eventual takeover. The end result is that there are now five big banks—Lloyds, the Royal Bank of Scotland, HSBC, Santander and Barclays—with a disproportionate market share. They have an estimated market share of 85% of the personal current account market and 67% of the mortgage market.
When I was writing my speech, I thought back to when I was young, which was a long time ago, and to when the Greater London council used to give mortgages to homebuyers. The GLC was one of the two biggest mortgage lenders in London at the time. Getting a mortgage from the GLC was a great incentive for local people. They felt a sense of ownership of the GLC, and the GLC had invested in their homes, which created a stable society. They did not have what we now have in parts of London—rogue landlords profiteering from renting out terrible accommodation. Giving people a stake in something makes them better citizens. It is a shame we do not have the same model now.
Taxpayers have ploughed enormous sums of money into rescuing the banking system. Northern Rock, RBS and Lloyds TSB have received direct bail-outs, and all banks have benefited from some form of public subsidy, especially quantitative easing and deposit guarantees. The publicly funded support of the taxpayer does not appear to have translated into banks acting in the public interest. In fact, it appears that in some areas of banking, few lessons have been learned, and the banks’ existing priorities and practices seem to be a return to business as usual.
UK banks also hold 85% of the business banking market. In other countries, the picture is different. In the US, there are some 15,000 banks and credit unions operating in the market. In Germany, there is a network of 431 locally controlled banks with public interest criteria in their governing constitutions. Change, therefore, is possible. With the political will and the right Government intervention, it could take place.
Earlier this year, the chief executive at the Office of Fair Trading said:
“For too long banks have needed pressure, often sustained, from regulators and enforcers to introduce the things they should have already been doing.”
In a relatively short period of time, we have ended up with banks taking over each other, leaving just five major banks, and with the deputy governor of the Bank of England describing his own industry as a cesspit. That is a reflection not only on London as a financial centre but on the whole of the UK. The finance sector is a major employer and we should be proud of it. As this issue crosses party lines, it is important that we all put our minds to finding a solution to the problem. We have made piecemeal alterations, but we need a full-scale inquiry into the banking sector. Opening up the sector to competition is one of the major ways to achieve that aim. So far, regulation has not altered culture or behaviour. Perhaps losing profits and customers will bring about such a change in the banks.
We need Government intervention to put the experience of customers at the heart of regulation. The Labour leader and the shadow Chancellor recently made a series of proposals for a banking system that serves not just the bankers but the real economy. They include a British investment bank backed by the state to increase lending to small businesses; a code of conduct for bankers; a greater push for international changes to limit bonuses; selling off high street branches; and greater transparency. All of those proposals would be welcome steps forward.
I have a couple of ideas to float to the Minister. The big high street banks could control the clearing systems, and any new entrant would have to use those systems. As it is unrealistic to presume that a new entrant could create their own systems because of the cost of infrastructure, why not use the Bank of England to monitor and regulate the cost of accessing the clearing systems? Even better, we could make it a condition of the big banks’ banking licence.
Businesses, especially small businesses, pay higher fees to the banks. Will the Minister discuss this matter with the Minister for Housing and Local Government? We could get local authorities to set up a membership system to negotiate bank charges on behalf of local businesses. For example, some small businesses are paying around 50p per £100 cash banked, while the big supermarkets are paying around 6p per £100. Those businesses should come together and collectively borrow. A local authority could perhaps help in this regard, through the local chambers of commerce. We must look at using customer power in a way that helps customers.
I have one final thought, which I doubt the Minister will agree with. Government, both national and local, could pay all their salaries into the local credit union or similar not-for-profit institutions such as Postbank. Obviously, each individual would be free to withdraw their money and put it somewhere else once it has been paid in, but many would keep their money in the local credit union and that would provide a strong impetus for alternative retail banking. Although I doubt the Minister will agree with me, it is a possible way forward.
In conclusion, I hope that one day, the residents of Thamesmead can choose which bank to go to, rather than choosing which bus to catch to get to the nearest bank.
Mark Garnier (Wyre Forest) (Con)
Let me apologise to the Minister at the start, because I will miss his winding-up speech. Unfortunately, I have to rush back to Kidderminster for an important meeting about Kidderminster hospital. Members who remember the 2001 general election will know that any Member of Parliament who does not pay attention to Kidderminster hospital when called upon can suffer dire consequences.
I am grateful to my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) for securing this debate and for gathering such enthusiasm for it. It is an incredibly important issue in the regeneration of our economy.
I specifically want to turn the focus of attention to the problem that arises when a regulator is still reeling from the fall-out of the banking crisis. Here we are, nearly half a decade on from the crisis, and we have just started a new round of scandal as the results of the FSA investigation into LIBOR fixing hit the headlines. The story will no doubt run and run for some time as other banks are brought into the mire. The Government’s response—the so-called Tyrie commission—is as good a start at understanding the problems as I can imagine, and, I hope, a significant step in the direction of truth and reconciliation between the banks and the taxpaying consumers.
The FSA’s response to the banking crisis has been reactive, and it is in its reaction that significant barriers have been established that limit competition in banking. Over the past few months, my hon. Friend the Member for South Northamptonshire and I have been meeting a number of smaller, existing banks as well as potential challenger banks to the banking marketplace. In nearly every case, their experience of the FSA has been problematic. All parties concerned were either small banks—banks with balance sheets under £2.5 billion—or individuals representing organisations that had experienced the FSA’s application process. Those interested parties came forward with points about the FSA’s process of issuing banking licences, and the regulator’s attitude to, and regulation of, smaller banking institutions.
It is significant that just one of the organisations we met detailed a positive experience of the FSA and its practices. It is also worth noting that banking licences are very rare commodities. There has been just one ab initio banking licence granted in the past 100 years and that was to Metro Bank. All other new entrants to the market, such as Virgin Money and Tesco, have done so as a result of buying existing licences and transferring their use to the new operation, or from overseas banks passporting in their expertise. That in itself says a great deal about banking competition in this country.
I want to concentrate on two specific areas of concern: the FSA’s application process for banking licences, and the FSA’s regulation of smaller banks.
Mr Thomas
I share the hon. Gentleman’s concern about the regulators and his understanding of the potential for new players in the financial markets. The all-party group on building societies and financial mutuals held an inquiry into the work of the regulator in relation to building societies, friendly societies and credit unions. It was far from clear that regulators had any real experience of working for and in those organisations. Will he support a call to encourage the new regulatory bodies to ensure that among their senior staff they have people with real practical, hands-on experience of working for a financial mutual?
Mark Garnier
Yes, I will. One of the problems is that, with the potential move of the FSA into the new regulatory regime, there has been an exodus of staff. As the hon. Gentleman suggests, that is of course something to do with the employment process within the new regulators, but it is absolutely right that any regulator should draw on people’s extensive experience. As we look forward, it is important that we provide leadership and that mutuals and other models of banking should be encouraged. The regulator should accordingly take account of that when employing staff. I wholeheartedly agree with the hon. Gentleman on that point.
The second problem is the FSA’s regulation of small banks, starting with the application process for banking licences and significant changes. That process has two tiers. It starts with an initial inquiry, and if an applicant is given the nod, the process continues with a formal application. The initial inquiry can be likened to a conversation on the doorstep of the FSA, with the aspirant bank seeking permission to come through the door simply to start the application process formally.
However, that initial inquiry—it should be remembered that it is not a formal inquiry but just an opening conversation—can cost the applicant more than £1 million to process. That is because the applicant requires a corporate body to make the application, which is not unreasonable, but also needs evidence of capital committed, advisors, auditors and, it seems, evidence of system design and building, which can be very expensive as there are no off-the-peg systems available.
So far we have found just two organisations that have proceeded past the initial stage from an ab initio enquiry. Trying to establish the reasons for that, we found that the cost and delay involved in the application process appear to be disproportionate. New applicants are effectively required to create a functioning, fully staffed banking operation before any type of licence is granted. We found that one applicant was forced to resubmit their application because the application process was stretched beyond the 12-month time limit and consequently a second application fee of £25,000 was demanded. One individual spent £1.3 million just to get to the formal stage of the application process. The application was then denied by the FSA.
The applicants we met had many complaints about the FSA process, and I will go through some of them. All applicants felt that the FSA had an arbitrary power to grant or refuse applications. They felt that the FSA should provide a publicly available checklist of criteria that, if satisfied, will result in the award of a licence. Such a change would lead to a more transparent application process. Apparently there is no requirement for the FSA to apply the same criteria to all applications in its internal processes or to explain its reasons for advising that applications should be withdrawn. Representatives of one small licensed bank said that they were given the “impression” that their application was progressing but “never a green light”. A representative of an individual who tried to buy a failing bank said that, although the FSA might appear to favour an applicant, they were capable of
“changing their opinion with no prior warning”.
One applicant was encouraged by an FSA official to proceed with an application for a change of control. However, a few months later, and after incurring considerable cost, they were advised by a different FSA official that their application would not succeed and should therefore be withdrawn. Worryingly, in one case the absence of objective criteria allowed the FSA to engineer the withdrawal of the application by putting the applicant in a cleft stick. The FSA imposed a very high tier 1 capital requirement, which had the effect of suppressing the profitability of the applicant’s business plan. The applicant was then told that the proposed venture was not sustainable because it was insufficiently profitable, and they were advised to withdraw.
In short, applicants felt that the individuals concerned within the FSA feared the prospect of having their name associated with any bank that might possibly fail in the future, and so they felt that the FSA staff regressed to having a bias of ultimate safety, and that bias meant that they favoured rejection of applications.
Let me turn to the regulation of existing smaller banks, of which there are 50 or so. Those banks are penalised for being small. It is quite interesting that the department within the FSA that looks after smaller banks is called “Smaller banks, smaller building societies and spread betters”. It seems curious that banks that are so important to this country can be regulated alongside spread betters, which are perhaps less important to the financial system.
The first and most basic problem that the smaller banks face comes in the form of the capital ratios that they must have. Small start-up banks are required to have a capital ratio that is potentially three times larger than that of a big, systemic bank. Although it can be argued that that is to ensure the bank is stable as it builds up its lending book, it restricts the opportunity to become a new entrant to the market to those who have very deep pockets indeed. Even if a new bank grows, its capital ratios are frequently twice that of the big banks’ capital ratios. Moreover, risk-weighted valuations of property lending, with regard to items such as a property lending book, are skewed against small banks, which may lack the database and breadth of client type available to the big banks to justify a similar risk-weighting. That means that a small bank will need a third more capital for its property books than its bigger competitors.
Small banks are also likely to have a more limited loan book. For example, a small bank’s loan book might be restricted to the UK. That incurs a 1% increase in capital ratios. That is quite an interesting proposition because it implies that big banks lending to Greece and Spain face a lower risk than those banks that are just lending in the UK. That so-called “concentration of risk” has further implications, as small banks are likely to seek niche markets. Doing so means that a bank incurs a further 2% increase in its capital ratio.
Meanwhile, liquidity reporting has resulted in small banks seeing the cost of their compliance increase tenfold. Representatives of a small private retail bank whom we met said the bank used to charge its customers £25 a month for the privilege of banking with it. Those customers are now being charged £65 a month, just to cover the increased cost of compliance. Another small bank that has only a £50 million balance sheet is required to submit 160 liquidity reports every year.
In addition, it has been suggested that for a small bank the staff to accountant ratio, which is obviously an overhead cost, is 17 members of staff for each accountant who is examining what is going on. In a recent survey, chief executives of small banks complained that 40% of their time was spent on compliance. And non-executive directors, far from contributing a wide range of skills to the bank’s board, must now demonstrate extensive banking experience and sign up to what amounts to a full-time job. Is it right that banks’ boards should be so monochrome?
There are many reasons why businesses might face problems in getting started, but in an environment in which we expect banks to lend more and to contribute to our economic recovery is it right that the regulator is apparently creating a blockade for new entrants and increased competition? Including me, there are three members of the Treasury Committee still in Westminster Hall—the other two are my hon. Friend the Member for South Northamptonshire and the hon. Member for Erith and Thamesmead (Teresa Pearce); and there was another member here earlier, the hon. Member for Edmonton (Mr Love). I hope that the Treasury Committee will proceed with a forensic investigation of banking competition and seek to separate myth from fact as regards this problem. However, as we progress with the Financial Services Bill and the soon-to-come banking reform Bill, it is crucial that we consider competition as part of the mandate of the regulators.
This is a very difficult time for our financial services industry, including banking, and we must ensure that we strike the right balance between regulation that is effective and easy to apply and regulation that ensures international confidence in our financial system. Striking that balance is too important for us to get wrong, but we must ensure that in achieving it we allow, and indeed encourage, healthy competition within the banking community. That must be the approach taken by the regulator.
Mr William Bain (Glasgow North East) (Lab)
It is a pleasure to serve under your chairmanship once again, Mr Chope.
I congratulate the hon. Member for South Northamptonshire (Andrea Leadsom) on securing this important debate, which is of great interest and importance to all our constituents.
Our banking system is badly broken: Members of this House know it, the public know it and the industry knows it. Almost four years on from the collapse of Lehman Brothers and the part-nationalisation of two major banks in the UK, our banking system is failing to support the wider economy with the lending that is required to promote growth; there is still regulatory uncertainty over the mis-selling of derivatives; there is insufficient competition; and pay and bonuses in the banking sector are rocketing out of control. Last month, a major UK clearing bank could not even ensure that employees received their salaries or that businesses could pay their bills on time. The public are therefore right to demand further radical change and to seek new entrants to the banking sector.
Despite being given support—both directly and in guarantees from the taxpayer—on the awesome scale of £1.4 trillion during this crisis, and despite our central bank having printed £325 billion of new money since 2009 through quantitative easing, with up to another £50 billion on the way following the decision of the Monetary Policy Committee last Thursday, the banking system is failing to bolster growth or to provide a satisfactory supply of credit.
Steve Baker (Wycombe) (Con)
On that point, I notice that the banks are simultaneously failing to provide savers with a decent return. I am sure that the hon. Gentleman will agree that that is an astonishing failure of a system that is supposed to act as an intermediary between savers and those who wish to borrow money for productive uses. It is astonishing.
Mr Bain
Indeed. The hon. Gentleman makes a very powerful case.
Bank lending to businesses fell by 11% between 2008 and 2010 and it has continued to slump since, with bank lending to small and medium-sized businesses having fallen for five consecutive quarters. It is small wonder that in such circumstances economic demand in the UK is at rock bottom. In the G20 this year, economic demand is lower only in the eurozone, the Czech Republic and Hungary. As the Nobel laureate economist Joseph Stiglitz wrote about the financial system in an article in Vanity Fair in January:
“We have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.”
Sadly, the same is true of the financial sector in the UK too.
Studies by the International Monetary Fund and the European Central Bank powerfully demonstrate that financial systems in which there is more banking competition with institutions less dependent on wholesale funding are less prone to systemic shocks of the sort the UK and others experienced in 2008. The banking sector has expanded hugely in the past five decades. In 2010, the assets of the 10 largest UK banks had soared to 459% of GDP. Barclays assets exploded from 10% to 110% of GDP in the same period. That size, the implicit public guarantee and the resultant lower borrowing costs allow the big banks to maintain a large competitive advantage over any small competitors trying to enter the market. It comes as no surprise that business organisations such as the British Chambers of Commerce, the Federation of Small Businesses and EEF are calling for more competition in the banking system.
The European Commission found in its inquiry into the financial system in 2007 that the retail banking sector accounts for more than 50% of total banking activity, measured by the gross income indicator, but that banks face greater pressure on profits where consumers are more mobile. In this country, the Office of Fair Trading issued a report on the banks in 2008, finding that many consumers do not know the fees associated with their accounts, and that three quarters of them are not aware of the credit interest rate, because of both a lack of transparency in fees and their self-evident complexity. It also established that few consumers monitor the account market to switch to accounts offering better conditions. Only 6% of account customers had switched in the previous year and 61% of customers had held their main account for more than 10 years. It also found cross-subsidies from those consumers who incur insufficient fund charges, who are more likely to be in the socially or economically vulnerable categories, to those who do not—those on higher incomes or who have reasonable levels of savings with the banks—which create significant market distortions, as well as resulting in social unfairness.
On the structure of the banking system, the Independent Commission on Banking chaired by Sir John Vickers had a limited remit and was unable to consider the level of support that the banking system provides to growth in the economy, the existence of potentially criminal practices, the nature of the products being traded by banks, or the culture of greed exposed by excessive bonuses and pay. That is why we need to consider further whether the Vickers proposals for ring fences and higher capital buffers will be enough to protect against future scandals, or whether a complete separation of retail and investment banking services, or the break-up of those institutions, with the creation of new banks, is the only answer. As my hon. Friend the Member for Erith and Thamesmead (Teresa Pearce) and the hon. Member for South Northamptonshire said, there have been recent additions to the challenger bank market in the form of Metro Bank, and Virgin Money’s acquisition of Northern Rock. The Lloyds Banking Group’s divestment of branches will bolster the role of the Co-operative bank as a stronger mutual institution, too, which I welcome.
The Bank of England revealed in a report in 2010 that the implicit taxpayer subsidy to the banks could be as much as £100 billion, and a further Bank of England study from this year emphasises that that is largely a transfer of resources from Government and taxpayers to creditors, staff and shareholders. The effect of that could be to allow the amount of risk adopted by protected banks to rise. A more comprehensive examination of the banking system would make it possible to determine the underlying issue of whether it currently offers sufficient value for that investment by the taxpayer. There is much evidence from the IMF and the London School of Economics that it has not done so, and that higher pay and profits have been the principal results, at the cost of a slower flow of credit.
Interest rate swap arrangements that were mis-sold could affect up to 28,000 small businesses in Britain. The LIBOR scandal will undoubtedly draw in other financial institutions, and create the potential for court cases involving billions of pounds in compensation awards. Morgan Stanley produced figures today revealing that the global cost to the banking sector of every basis point of LIBOR suppression could be $6 billion, or $400 million for every bank affected. Other countries have been better able to survive the financial crisis because their banking systems have more competition, more effective direction from Government, and more socially beneficial lending practices. In Germany, the state-owned investment bank KfW last year provided €11.4 billion in new loans to small and medium-sized enterprises, focused on exports and job creation. Because of their statutory duty to put the good of the local economy over the maximisation of profit, the local savings banks, or Sparkassen, continued to lend even in the depths of the 2008-09 slump in output. While the major commercial banks in Germany cut lending to businesses by 10%, the Sparkassen increased lending by 17% between 2006-2011. Three in every four SMEs in Germany have links with the Sparkassen. A system whose ownership and remit were more diverse would help SMEs in the United Kingdom, too.
In a very good discussion of the banking system on “Newsnight” last night, it was startling that Jim O’Neill, the investment banker from Goldman Sachs, powerfully made the case for a state investment bank in this country, to support economically important industries. A more comprehensive examination of the banking system, including its structure and competition, could also consider the case for making the bank balance sheet levy more progressive, as Duncan Weldon, the chief economist of the TUC, has recently proposed, and whether it should be larger for bigger banking institutions, while greater competition would be promoted through a lower levy for smaller banks.
Lack of competition is also leading to a culture of excessive pay and bonuses within the banking system. The work of the High Pay Commission last year exposed the fact that within Barclays, while the average pay of employees rose by 866% in the three decades from 1980, the pay of top directors in that bank rose by a staggering 4,899%. Top directors’ pay at Barclays and Lloyds Banking Group rose from 14 times that of ordinary tellers working in the bank’s branches to some 75 times that of an average Barclays or Lloyds employee’s pay by 2011. That is the extent of the culture of greed that has grown in our banking system.
In other countries, over the decades, the need for a wider examination has been clear. The Pecora commission, founded in the United States in 1932, under an independent chief counsel, led to the uncovering of the reasons behind the Wall street crash of 1929, and to radical legislation to separate retail from investment banking under the Glass-Steagall Act. It created new criminal penalties and re-regulated the stock exchange. The work of that commission safeguarded the US financial system for the next fifty years. Afterwards, in his memoirs, entitled “Wall Street Under Oath”, Ferdinand Pecora wrote of the ills of the banking system across the world in the 1930s:
“Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies.”
It is our constituents, particularly the poor and working families with children, and most of all the growing army of unemployed and underemployed, who are paying the price for the recession—the longest since the 1870s—that has resulted from this financial crisis. They did not cause the recession, but they have been asked to shoulder the heaviest burden, while the super-wealthy at the top of the financial services sector have continued to enrich themselves, and our banking sector is being protected from the radical structural reforms we now need. The very least that we as parliamentarians can do is to give them the fullest account of why our banking system is so badly broken, why it lacks effective competition, and why it is failing to promote any kind of recovery or sense of responsibility from people at the top. Only then can we begin the task of creating a banking system that serves the people of this country, and not the other way around.
Steve Baker (Wycombe) (Con)
It is a pleasure to serve under your chairmanship, Mr Chope. I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) on securing this debate with particular serendipity. She called for more heart in banking, and tonight there will be a documentary on TV that I expect will be wonderful. “Bank of Dave” is about David Fishwick, an entrepreneur who sought to start a bank. It is a remarkable tale, and I hope the Minister will take a look at the programme because it speaks very much to the problem of barriers to entry.
Mr Fishwick is a successful entrepreneur who sells minibuses. He owns a Ferrari, a helicopter and a nice pad. He is a self-made man. He discovered that his customers could no longer get finance to buy his minibuses, and so his own business was endangered by the lack of credit. He therefore began to lend them the money himself. It seemed straightforward enough, and he thought, “I could do this, and serve my local community.” He set out to establish a bank, and his documentary, which is a series, talks about the difficulties he had. He is legally forbidden to call his institution a bank, so he does not take demand deposits but instead takes people’s life savings, personally guarantees them with his own wealth, and then lends them to productive businesses based on trust and relationships. That speaks very much to all the calls we have had from Members on both sides today for a new kind of banking. It is super local, personally guaranteed and based on trust and relationships, so I very much hope the Minister will watch Channel 4 at 9 pm to see Dave Fishwick and “Bank of Dave”.
I want to talk about the personal guarantee in particular. Members have talked about the loss of faith, and Mr Fishwick is restoring faith by knowing the people from whom he is borrowing and those he is lending to, and personally guaranteeing the finance. I introduced a private Member’s Bill in the last parliamentary Session to give directors of financial institutions strict unlimited liability for their banks’ losses, and to require them to post personal bonds to be used as capital and to place the bonus pool into capital for five years. That might seem a harsh measure, but it is based on the idea that without moral hazard, people will behave well.
Andrea Leadsom
That takes me back to the old days—I sound very old. Before the big bang, most small banks and financial institutions were run on a partnership basis and people ate what they killed. If they had a good year they took a huge bonus, but if they had a bad year they gave back the car, the house and the children’s school fees—I do not quite know how they would have done that. That changed when the institutions all became plcs and it was one-way traffic only, so I have a lot of sympathy with what my hon. Friend is saying.
Steve Baker
My hon. Friend demonstrates that the accusation of inexperience that is often levelled at this House is wholly false. Both she and my hon. Friend the Member for Macclesfield (David Rutley), who is sitting next to me, have extensive experience in the City and understand the changes and how things have moved on.
Historically, there were three ways of restoring trust in an industry—taking deposits—that has always been risky: mutuality; the historic trustee savings bank model, in which the directors were not able to take any personal reward; and unlimited liability. Some of the greatest bankers in history—the original J. P. Morgan and Nathan Rothschild—operated with unlimited liability, so everyone understood what they would lose if they got a deal wrong, and there was trust.
The implications of my private Member’s Bill would be, first, that banks would have a much better culture and people’s interests would all be aligned to the banks’ success. Secondly, if we gave directors sufficient warning that they would shortly be accepting unlimited liability for their banks’ losses and that the losses would come out of their personal possessions—their pensions and homes, and forgone school fees—we would soon find that they would break up the banks for themselves, because they would not wish to try to manage unmanageable behemoths. That would stimulate a natural diversity across the banking system, as directors created institutions that they could manage and understand. Similarly, as someone is hardly likely to keep retail and investment together if it is not in their interests, I would expect them to separate them.
Thirdly, if directors and staff stand to lose, there is a good case for lowering barriers to entry. If we can expect good behaviour from bank staff, and responsible lending, it is legitimate to lower barriers to entry, and a virtuous circle could be created. It might well be that going for strict, unlimited personal liability for directors would be a step too far as a first measure, but I invite the Government to consider it as an alternative way forward, which could lead to a more self-regulating banking system that served society more positively.
I think I am well known for believing that the state is the problem and that there should be less intervention, but if we must have intervention the suggestion of account portability made by my hon. Friend the Member for South Northamptonshire is a good one, because it promotes competition. We just need the banks to move accounts into.
I urge the Government to be cautious about the idea of a state investment bank. Whenever any Government—not necessarily this one—get into lending, it is to ensure that loans are made that would not otherwise be made because they would be bad loans. There is no kindness in encouraging a small business man to put his home at stake by taking on a loan he will never repay, because small business men, in all practical terms, often take unlimited liability. It would be better if they were employees. I urge the Government not to intervene too excessively in credit markets, although I realise that there are some elements they will proceed with.
Finally, I have some questions for the Minister. To what extent have the Government considered how their policies, such as the national loan guarantee scheme, promote big banks? We have all seen examples of officials being institutionally better at dealing with large companies, including banks, be it risk aversion or the simplicity of dealing with a small number of contacts to achieve a big result. Does current policy promote a small number of large institutions? That is the antithesis of the direction we want to go in.
Chris Evans (Islwyn) (Lab/Co-op)
Thank you, Mr Chope, for calling me to speak. In debates such as this, I always think of the time I spent working in a bank, in the retail sector.
Last week I sat behind Bob Diamond at the Treasury Committee, and watched as he was grilled by parliamentary colleagues. It got me thinking: this man is walking away with a £2 million bonus for doing something that is categorically wrong. It made me realise why people are so angry. The worst thing, which people do not seem to understand, is that Bob Diamond will not get the dogs’ abuse that someone working behind the counter in Newbridge or in Risca will get. They will be told that they are criminals, thieves and crooks. It is the people working on the front line who will get the abuse.
What really annoys me is the current sales culture in banks. I understand that banks are private businesses and need to make money—nobody needs to intervene on me to tell me that—but they seem to be pushing their staff to the limits. For example, when I worked in a bank, I was told to stay until 7 o’clock at night to phone people who were arriving home from work to arrange sales appointments for the following day. My contract of employment ended at 5 o’clock, yet I was expected to stay until 7 o’clock, because, I was told, my bonus would be my payment for doing so.
Another frustrating thing—this annoys me when people bash bankers about their bonuses—is that, while most people who work in a bank get a bonus and often make up their money with it, they have to look on and see those in charge who have done wrong and who have affected people’s trust in bankers walk away with big bonuses. The term “bonuses” is absolutely meaningless.
People who work in banks also have a raw deal on training. When recruits turn up at a bank, they are not told anything. Many of my colleagues when I worked at a bank did not know what a clearing house automated payments system or a bankers’ automated clearing services payment was, and did not understand mortgages, yet they were being told to sell to people. The fundamental question we have to ask ourselves on the future of banking in this country is not what do we want, but what do consumers and those working in banks want? First, when people go to a bank, they do not want to be flogged products that they do not want. When I move my money between accounts every month, I do not want to be asked, “Mr Evans, have you paid off your credit card? Do you want a loan? Do you want to buy a new car?”, when all I want to do is transfer my money.
We need to get away from a culture of high-pressure sales and of computers making decisions, and get back to a culture of bankers actually offering advice. When I first joined the bank, I naively thought that it was a profession similar to that of a lawyer, but then I was told—this was 20 years ago—that people did not bother with banking exams because they were meaningless. I find that strange. When I ask the Financial Services Authority, Lloyds TSB or HSBC what they are doing to train staff so that people know that their bank manager is giving them the best possible advice, they reply, “We have in-house training,” but is such training given across the board and is it an industry standard? On education—I hope the Minister will focus on this, because nobody ever talks about it—can we find a way of returning banking to its previous status as a profession with recognised exams at an industry standard, so that everybody knows that their bank manager is giving them the best possible advice? That would be good for the banks and for the consumer.
In March, I tabled a private Member’s Bill called the Banking (Disclosure, Responsibility and Education) Bill. It was based on the Dodd-Frank Act in America, which enables each and every bank transaction to be monitored. Perhaps we would have discovered the LIBOR scandal earlier if we had been tracking everything and had an office of financial research.
The constituency represented by my hon. Friend the Member for Erith and Thamesmead (Teresa Pearce) is not like mine—mine is a valleys seat—but we have similar problems with huge amounts of debt and illegal lenders. We have organisations such as Provident Personal Credit and Shopacheck. Cash Converter has popped up on the high street and its representatives even want to meet me to discuss their social responsibilities. Many people are unbanked and it would be a good idea, as my hon. Friend the Member for Harrow West (Mr Thomas) suggested—he is not in his place—to track people by their postcode and for the banks to release a report every year stating to whom and to which demographics they are lending money, and how they are contributing to society. That way, we could introduce a rating system so that, if people wanted to change banks, they would know whether they were moving to a bank rated A, AA, B or C. Also, there would be competition between banks and they would have to “up” their game, which is something I want to see.
I support switching and agree with the hon. Member for South Northamptonshire (Andrea Leadsom) that we need to have more portability between bank accounts, but from what I can see—I will probably be attacked for this—the services offered by banks are much of a muchness. The interest rate on loans provided by different banks is usually the same—it is very low—and the differences between individual savings accounts are small, as are the interest rates on credit cards, so people do not actually move to anything better. I want to remove the barriers to entry, which many hon. Members have mentioned, and we could achieve that by considering the role of credit unions.
I represent the Co-operative party as well as Labour, and it says that the way forward is to have community banks and to introduce regulations for more credit unions. In Wales, everybody has access to a credit union, which is fantastic. A credit union is owned by members and all its profits are pumped back into lending to people. I want to see its role expanded, so that it lends not only to people but to businesses—micro-businesses and small businesses—that cannot get money elsewhere. We need to consider that.
I want to address what was a personal bugbear of mine when I worked at a bank. I have raised this issue on numerous occasions with various Ministers from the Ministry of Justice and the Department for Work and Pensions—I am now raising it with a Treasury Minister—and I hope it will be addressed. Whenever I go into banks, members of staff tell me that they have a number of very good customers who pay their bills on time and whom they want to lend to and develop a relationship with. However, when they credit score some of those customers’ accounts, it reveals bad credit information, because they have received a county court judgment. When the bank’s staff speak to them, they discover—this happened when I worked at a bank as well—that they have a bad credit rating not because they defaulted on their mortgage or on a financial product, but because they got into a dispute with a gym or a mobile phone company, which, rather than trying to resolve the issue, went straight to a county court to get a judgment against them that completely messed up their credit record.
[Philip Davies in the Chair]
I recently read Duncan Bannatyne’s book, “Anyone Can Do It”, in which he says that if someone does not pay their final payment, even if they have cancelled their contract, he would have no hesitation in taking them to court. I hope the Minister will address that issue, because it is a real one for many customers and for banks whose good customers are being cut off. If someone is in a dispute with a mobile phone company or a gym, such organisations should not be allowed to impose a CCJ and wreck their credit rating, especially if they can show that they have been in a dispute.
On the unbanked, I still have serious concerns about the basic bank account. It has been a very good innovation that has brought more people into the banking sector, but, even though it allows people to have an electron card and a bank account, it does not credit score for any products. Therefore, if someone is put through a credit-scoring process for a classic account or a traditional bank account, the credit score agency cannot be told that they have been a basic bank account holder for five years and that things have gone really well; it can only go on the information that it has. How can we manage people from the basic bank account on to mainstream banking, which is a huge issue, especially in areas such as mine? That would break down the fear that some people have of talking to their bank manager. They think that it is easier to borrow money from the woman from Provident, or Shopacheck, who visits on a Monday night. We need to tackle those issues.
Finally, I want to see the development of a mutual sector in banking. Conventional banks used £60 billion when they were bailed out, but the mutual sector did not use any money. Bradford and Bingley was a building society for 150 years, but it lasted only 10 years as a bank. We have to do more to encourage mutuality in the banking sector, and the starting point for that is a discussion about community banks and credit unions. I hope the Minister will address some of those issues.
David Rutley (Macclesfield) (Con)
It is a pleasure to serve under your chairmanship today, Mr Davies—the first time I have done so.
I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) on securing the debate. She is a champion of competition in banking, which she has consistently fought for and campaigned on as a Member of Parliament.
It is great to participate in the debate, because financial services are undoubtedly an important part of our economy, which we have all discussed. The sector is vital in its own right—10% of GDP, more than 1 million employees and a contribution of £53 billion in tax to the UK Exchequer in 2009-10—so we cannot afford not to pay attention to what goes on in it. More to the point, the sector has major implications for a sustainable recovery, because if we do not have a sound banking system that is trusted by all participants in the economy, we will not see the sustained economic growth that we all want and that we all champion—on the Government Benches at least.
According to the World Bank, the UK banking sector, and in particular its assets, is one of the most concentrated banking markets in the G8—if not the most concentrated market—with the combined assets of the three largest banks comprising 88% of the market; in the US, the three largest banks comprise 37% of the market, which is a fundamental difference. That state of affairs cannot be attributed to the financial crisis, because in 1993, almost 20 years earlier, the UK still had 86% of assets tied up in the three largest banks, while the US stood on a much lower total of 21%. For a market economy, which my hon. Friends and I fully support, such a situation is clearly sub-optimal and must be addressed, and I am delighted that the Government are taking it seriously.
I am pleased to see new entrants to the market. The hon. Member for Islwyn (Chris Evans) was concerned about the lack of new entrants and the over-emphasis on a sales culture. I understand such concerns, but the fundamental approach of Metro Bank on entering the market has been about customer service, and it is encouraging to see businesses trying to take a different approach and a different market niche. Not only Metro Bank has a presence in this important market but Virgin Money, Tesco, Sainsbury’s and Asda, my old employer—yours, too, Mr Davies. Their role is increasingly important in making life more challenging for those banks that have been all too comfortable about their position in the marketplace.
Recently, The Times reported on the retail financial services sector, and I will refer to that article, because to see what has been happening is important. Tesco bank now has 6.5 million customers; it started in 1997, after buying out RBS, and in the near future intends to offer mortgages—an important step by a non-traditional bank or retail financial services operation. Marks and Spencer, with 3 million customers, will soon open bank branches in its stores—again, a chance to make a bit of a difference and to move things on. Sainsbury’s has 1.4 million customers and Asda, which I had the chance to establish in financial services, has rebranded this past week as Asda Money and is looking to launch a new credit card.
There are moves afoot therefore, and given the new depths of the lows of trust in banks and financial services, businesses such as retailers have a clear opportunity to come in with their much higher levels of brand trust and to reassure customers that they have something different to offer. I wish them success in making progress; it is not all doom and gloom on increasing competition, but we need to get behind the providers offering new opportunities for customers.
I agree with my hon. Friends the Members for Wycombe (Steve Baker) and for South Northamptonshire about the portability of accounts and increasing the switching capability. It cannot be right that inertia is the basic building block of a business model. The model has to be more dynamic. We must ensure that dynamism and competition lead to profit, not inertia, which is insulting to customers, frankly. From our own experience we all know that trying to transfer banks is an absolute nightmare—that must be addressed.
United Kingdom Financial Investments has a real opportunity to contribute to shaking up the lack of competition in financial services. The paper by the Free Enterprise Group has set out some bold, radical alternatives—characteristic of the group—and UKFI should look carefully at how it disentangles taxpayers from the Lloyds Banking Group and RBS, to sell off business units and branches to enable the more competitive financial services marketplace that we all want and shout out for.
We also need a stronger foundation to enable that competitive environment to thrive and flourish, and it is worth while pointing out how fast the Government are moving on regulation to help put that into place. I applaud the Government for introducing the Financial Services Bill—it was an honour to be on the Committee—which will be critical to restoring accountability to the Bank of England and away from the completely failed tripartite model that was found so wanting in the previous crisis.
The Government also intend to introduce a banking reform Bill, on which they should be congratulated. Others will want it to go further, but it is important that the Bill will provide for the ring-fencing of investment banks, separating them from the retail banking functions in the same organisation. The LIBOR-fixing scandal is only further evidence for the importance of the proposed legislation, which has the potential to be a vehicle for change. The proposed parliamentary inquiry, which we could call the Tyrie commission, can use the Bill as a vehicle to bring about any recommendations, which are so urgently needed. I hope that my colleagues on the Treasury Committee will have a chance to play their role in that commission, to help restore the trust needed in the financial services sector.
Regulation alone will not help bring about the foundations for genuinely competitive and trusted markets. We need to look at the shareholders, who have been too absent in the past. They need to speak out. The shareholder spring of increased shareholder activism is to be applauded, and it was refreshing to see BlackRock, one of the major shareholders in Barclays, speak out quickly and urgently during the recent problems with leadership in the bank. We need to see more of that. Shareholders must not duck their responsibilities in recalculating and rebalancing reward for results. In my opinion, those excessive bonuses are discrediting the market and the trust that we have in our financial institutions.
Having said all that, Members present might find it odd for me to say that I agree with Bob. That is, I agree with something that Bob said on the “Today” programme business lecture in November 2011:
“Culture is difficult to define, I think it’s even more difficult to mandate—but for me the evidence of culture is how people behave when no-one is watching.”
Sadly, while thousands if not millions of our constituents are working professionally when no one is watching, or even when their customers are watching, the leaders of our banks—recently, of Barclays in particular—have not displayed those virtues. Ultimately, real leadership will be required, and I wish Barclays well in finding a successor to Bob Diamond—an individual who will help to create that culture.
As we proceed with many of the ideas we have discussed today—to put in place the regulatory foundations, proper shareholder activism and the right culture and leadership—we stand a chance to have a financial sector that we are proud of. We will only achieve that, however, when we have proper levels of competition. I support the efforts of my hon. Friend the Member for South Northamptonshire and urge the Minister to press forward with every effort and his strength of character to enable us to see the new measures put in place so that we have true competition in the financial services and banking sector.
George Freeman (Mid Norfolk) (Con)
I thank Mr Speaker for allowing this important debate to take place, and for my chance to contribute to it. I congratulate my hon. Friends on securing the debate and on their contributions, particularly my hon. Friends the Members for South Northamptonshire (Andrea Leadsom), for Wyre Forest (Mark Garnier) and for Wells (Tessa Munt), but other hon. Members who have spoken, too.
I am not, never have been and never will be a banker, unlike hon. Friends who have specialist expertise in the world of high finance and banking. It is important that hon. Members bring to the House expertise in sectors that we need to regulate and guide. My interest, and my contribution today, is offered not with great expertise in the specific measures needed to put the banking sector right, but to articulate concerns about the implications of the banking crisis for what is sometimes referred to as the real economy.
I speak as somebody with a deep interest in growth, small business, enterprise and innovation. In a 15-year career before coming to the House, I was involved in starting small companies in the field of science and innovation, principally the biosciences. Typically, they were companies with an idea, a small team, a business plan and no money, raising funding for ambitious businesses to develop innovative products and services, often through a number of financing rounds, before acquiring another company or being acquired, or achieving an exit through the public markets.
I therefore speak with a particular interest in the life sciences, of which colleagues will be aware. The sector has much to offer the nation, as we seek to build a rebalanced recovery and a sustainable economic model. It has vast potential to help us to grow our trade links with the emerging world—the BRIC economies. A reference to Jim O’Neill and Goldman Sachs has already been made, and we met recently to discuss his latest analysis that, on top of the BRIC countries, the next 11 coming behind have phenomenal rates of growth in already large economies. Our life sciences have the potential to allow us to seed—literally, in some cases—the markets of tomorrow and to grow the alliances of tomorrow, which will, among other things, have the benefit of de-leveraging our financial dependence on the sclerotic eurozone.
I speak also as somebody with a long and passionate interest in the East Anglian innovation economy, a region that the Government increasingly recognise as a key driver for sustainable growth. It is a net contributor to the Treasury and has at its heart Cambridge, a globally recognised centre of science innovation, entrepreneurship and companies in need of finance. In my own county of Norfolk, the Norwich Research Park, a globally recognised centre of innovation, is becoming increasingly linked to Cambridge through the Government’s excellent investment in infrastructure.
I speak also as the father of two children. I am concerned about the world in which they will grow up and the economy in which they will have to make a living. Our generation in Parliament is important if we are to get this right. I want to touch on the context in which it is helpful to view this issue. This is not just a crisis of debt, although it is surely that. It is not just a crisis of regulation. It is not even just a crisis of political leadership. We are living through a deep crisis of political economy, which is shaking the very foundations of the world as we have come to know it in the past 20 or 30 years. One of the profoundly unsettling things about crises of political economy is that they undermine the very legitimacy of the institutions through which we seek to tackle them. That creates something of a perfect storm—a financial and political hurricane that fuels itself. As we see trust in the media, trust in the political class, trust in the bankers and trust in the regulators undermined—not least by the way in which those groups, in the past 20 or 30 years, have become too cosy—we start to fuel a growing public distrust of the idea that there is any institution capable of fundamentally tackling this problem. I am more optimistic than that. If we are honest about the causes of the problem, and rigorous and robust in our analysis, we can be optimistic about the future.
Steve Baker
My hon. Friend is making an absolutely magnificent speech. He has reminded me that, in his Bagehot lecture, the Governor of the Bank of England said:
“Of all the many ways of organising banking, the worst is the one we have today.”
I am sure that my hon. Friend can be assured of Sir Mervyn King’s support.
George Freeman
I thank my hon. Friend for that helpful and extremely generous intervention.
As the Chancellor put it so eloquently in his Budget speech, the recovery will require a new economic model. That is at the heart of this debate. The banks have a crucial role to play in that economic model, but for them to play that role we need to restructure the way they work, and retune what we expect of them and the people who run them. I shall concentrate on that point.
At the heart of the new economic model, we need a much more profound commitment to an enterprise economy and to a rebalancing of the relationship between risk and reward. I do not think any of us on either side of the House—indeed, I think it was the former Member for Hartlepool who said he was passionately relaxed about wealth creation—have a problem with wealth creation through people who take risks, or for reward to flow from risks. At the heart of the problem is the fact that people have been receiving huge rewards without taking the risks. If the public saw people paying back some of what they have earned for success on failure, there would be much more public support for the industry. It is about the break-up of some of the old structures, the big and literally bankrupt structures, that are saddling this economy with debt and a lack of leadership. It is about unleashing a creative revolution of hungry, entrepreneurial little platoons who can rebuild an economy of which we can be proud and on which we can rely.
I come now to three points: the nature and causes of the problem; my particular rural constituency interest; and what we need to do, with particular emphasis on the importance of competition and new entrants, and encouraging new sources of finance for the small companies that we will need to grow our sustainable recovery.
As other hon. Members have more eloquently testified, we are seeing multiple failures: the mis-selling of payment protection insurance; a manipulation of LIBOR, which, of course, is a benchmark used to set payments on a vast amount of money, up to $800 trillion-worth of financial instruments affecting the price of everything from simple mortgages to interest rate derivatives, as The Economist set out clearly recently; and the mis-selling of complex interest rate products. They are symptomatic of a much deeper shift in recent years in our banking culture out in the regions.
Banks in Norfolk and East Anglia have moved from the traditional model of looking after savings and lending money to small companies. They have shifted their emphasis, closing local branches and investing in new types of staff who are more salesmen than bankers in the traditional mould, and they seem to be much more interested in making money from complex charging structures, and instruments and derivatives. Instruments and derivatives may be appropriate—indeed, vital—for the City of London. There is a perfectly legitimate trade in such instruments; indeed, they sit at the heart of any functioning market economy. They are not, however, appropriate instruments on the high streets of such towns as Watton in my constituency, which has been the victim of the inappropriate selling of inappropriate products. I will say a little more on that in a moment. Swaps, options, warrants, futures and forwards should not be the concern, and are not the concern, of most couples taking out their first mortgage, or most entrepreneurs starting a small business. The mentality which says that complex bank products and charging structures are a more attractive source of revenue than the traditional role of banking has been deeply corrosive of the real economy.
I plead guilty to being slightly misty-eyed—I am, after all, a Conservative. I remember as a boy going with my stepfather, who was starting a business, to our local bank. The bank manager knew his name. Rather to my amazement, he knew mine. He offered us a cup of tea. He had a notepad and a file, he knew the business and he knew what had happened at the last meeting. He wanted to talk about the cash flow, the harvest, the outlook for business and how he could help. What a long way that is from small businesses’ experiences of banks in today’s economy.
As for my particular constituency interest, the mis-selling of complex instruments has devastated a number of individuals and businesses, the most celebrated of which—if that is the word—is Adcocks of Watton, featured recently on the BBC. Adcocks is a historic business on the high street of Watton, one of the four towns in my constituency, that is now saddled with £175,000 in bank charges. They threaten to cripple that small business, which is at the heart of the high street as a major employer. Also, a constituent of mine, Mr Leonard, was the subject of international property fraud by an equity trust. Investigations have been conducted over the past several years, and still have not concluded.
Those are just a couple of examples, and the more the debate unfolds—I do not know whether other Members have had the same experience—the more people come forward. I believe that we are witnessing the beginnings of something rather bigger than has hitherto been apparent. There is an iceberg of hidden claims and effects in my constituency, and if that is true in Norfolk I suspect that it is true elsewhere. The impacts in a rural area are far more profound than in an urban area. It takes only one business to fail on the high street of a town like Watton for the whole town to feel the reverberation. In that context, it is important that whatever the small print in the contracts says and whatever the findings may be under contract law, the Government should be sensitive, as I know they are, to the need for accountability, responsibility and appropriate compensation in order to send a signal that such things must and will stop, and to prevent the fall-out from undermining the Government’s efforts to drive an economic recovery and growth in the regional economy.
I have one or two thoughts on what needs to be done. Several colleagues have discussed culture and the importance of a new culture, and whether we should agree with Bob. I remember hearing Mr Diamond say, as The Economist reported:
“We all know that these events are not representative of our culture.”
I do not believe that to be true. It is precisely because much of that activity was deeply representative of a culture that we need to tackle that culture.
Not all in the City take that view. I was struck by the comments of John Nelson, chairman of Lloyd’s of London, who stated in a recent Financial Times article that
“the future for banks…is dependent upon finding the right model, and critically the right culture…None of the revelations over the last week means that the City is inherently corrupt”,
but:
“It is imperative that we tie performance to longer-term incentives and sustainable profits.”
We need responsible banks with a culture of fostering local business growth and a strong understanding of their role in helping to generate economic growth and innovation on the ground, and good banks that encourage a competitive marketplace in which the local bank can flourish and real banking for the real economy.
A number of good measures have been put in place. I commend the Government for the fundamental restructuring in the banking reform Bill, and the Treasury White Paper issued in June on banking reform sets out numerous important initiatives and measures. I suspect that more may have to be done over the coming years. The Merlin agreement covered a number of important initiatives, and it is important that we ensure that it is enforceable and has appropriate teeth to guarantee that it is followed through.
Principally, my concern and my call are for much greater focus on competition and new entrants into the banking sector, as other Members have discussed. Colleagues may be familiar with some of these facts, but I think they bear repeating. The size of the top 10 banks in proportion to UK GDP in 1960 was 40%; in 2010, it was 459%. Something has gone profoundly wrong with how we have allowed the banking industry in this country to develop. It needs serious reform. In the US, the top 10 banks were equivalent to 10% of GDP in 1960 and 62% in 2010, so it is not a global phenomenon; it is a distinctively British one. Only one new high-street bank has launched in more than 100 years. The big five have an estimated market share of 85% for personal current accounts and 67% for mortgages.
Statistics from the Federation of Small Businesses show that 15,000 financial institutions compete in the US market: about 7,700 banks and 7,000-odd credit unions. The German Sparkasse network comprises 431 locally controlled banks, and Switzerland has 24 cantonal banks, which explicitly recognise social and economic responsibility. We should not be hidebound as we deal with the fallout from the crisis. There are other models for reforming our banking system in terms of retail banking on the ground that supports the local economy. I encourage us to look as far and widely as we can.
We need two things: a much more competitive retail banking sector with many more new entrants and a regulatory structure that encourages rather than hinders new entrants. After the glad, confident dawn of new entrants to the banking sector in recent years, I was depressed to see that a number of them had floundered against reportedly impossible regulatory barriers. It is shutting the stable door after the horse has bolted. What we need now are new banks. Cambridge Bank is one, and there are numerous other excellent local initiatives. We should do whatever we can to encourage local entrepreneurs to set up new banks.
Finally, alternative sources of finance are important for our innovation sector. In my 15 years of starting more than 20 companies, the banks never came in and invested in risky ventures in the first five years. They needed to see positive cash flow and revenues, and they always wanted all their risks covered. The innovation sector relies on a much broader group of people who should be promoted, celebrated and encouraged. Angel investors put their personal wealth into extremely high-risk ventures. Their return is often more personal wealth, but I argue that if the reward is balanced to the risk, it is all to the good and should be encouraged. Venture capital trusts have put substantial funds to work in less risky but still emerging ventures. Corporate venture funds are coming into the UK, and there is good news in the sector. In the past six months, we in the life sciences sector have raised more than £1 billion. International money is coming to the UK, not through banks but through new investment vehicles.
More locally, I highlight the importance of credit unions, mutuals and innovative microfinance schemes such as the excellent Kiva, which I commend to you, Mr Davies, when you are next browsing the internet. It is a powerful global microfinance network providing debt finance to small ventures in the emerging world. A lot of money in this country sits in our banks earning very little, and it could be put to use supporting small ventures. Particularly in the localities with which people are affiliated, such as counties, towns or urban neighbourhoods, we may be able to consider unlocking money from personal bank accounts to provide £500 or £1,000 microfinance loans to support small companies. We need an innovative, entrepreneurial and early-stage company financing sector, and we need to reform our banks to allow one.
Tessa Munt (Wells) (LD)
I meant no discourtesy by not being here earlier; I had another meeting. I wish purely to echo the concerns expressed by my colleagues. Although tradition requires that, as I am Parliamentary Private Secretary to the Secretary of State for Business, Innovation and Skills, my right hon. Friend the Member for Twickenham (Vince Cable), I should not necessarily contribute fully to this debate, my enthusiasm for it and for the whole subject is without bounds, which is why I backed the request for this debate.
The Liberal Democrats have been warning for a long time that banks are precariously large and inadequately regulated. I found myself reading an Adjournment debate initiated on 19 June 2000 by my right hon. Friend, in which he discussed the Cruickshank report. It is good to see that the Government are now making moves in the right direction.
Many of the headline issues that I would have mentioned have been brought up by my colleagues. For example, people do not transfer from bank to bank; banks are still too big to fail; there are barriers for entering and exiting the banking market; and the market is concentrated into fewer providers, with little choice for consumers and customers, because of various things that have happened over the years.
I should like to highlight some concerns of my constituents in rural Somerset. The situation is such that everybody must have a bank account. Those who work have to be paid through a bank account, and those who do not work and may need some assistance from the taxpayer with their everyday costs therefore need to have a bank account to receive any benefit or help that they get. The move to universal credit will require larger numbers of people to have basic bank accounts. I am concerned that those bank accounts—that sector of the market—may be concentrated in a few ethical banking organisations, particularly the Co-operative bank and credit unions. I should declare that I hold a Co-operative bank account. I made a positive decision to switch to the Co-op, mainly because I felt that it was an ethical bank. However, it should not carry an undue burden in helping people who need more assistance with their banking than others.
The restrictions that are being placed by various banks on the features and functionality of basic bank accounts make it much harder for people to access their own cash, particularly in a rural area, where they may have to travel eight or 10 miles to find a free cash point. I am particularly concerned about that. The ATM network is creaking slightly. Certain parties withdraw from offering free ATM services, meaning that others have to carry a greater burden. I am acutely aware of that issue and we, as a Government, might want to deal with it. We should try to ensure that more people have access to their own cash. I am glad that a number of banks are now issuing £5 notes in their cash machines. That is particularly helpful in my constituency for people who need to use small sums and want to keep complete control over their cash flow. However, only a certain number of banks are helping to bring such elements together. We should consider carefully how they might be developed and how we might ensure greater fairness across the whole market.
The portable account number mentioned by the hon. Member for South Northamptonshire (Andrea Leadsom), who called the debate, is a fantastic solution. We do that with our phones and all sorts of things, and it would be helpful if people could switch their accounts much more smoothly.
I do not wish to add more—otherwise, I shall find myself in trouble. I hope I have expressed adequately my concerns and those of my colleagues.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)
I declare my interests, which are in the Register of Members’ Financial Interests. I am a Labour and Co-operative Member of Parliament and have connections with various parts of the co-operative movement and a number of credit unions.
I thank the hon. Member for South Northamptonshire (Andrea Leadsom) who ensured that the debate took place, and other hon. Members who supported the application for a debate. This has been a welcome opportunity to look in more detail at competition in banking and to hear some thoughtful speeches. The fact that nine hon. Members have contributed, in addition to the hon. Lady’s opening speech, and that hon. Members have made many interventions shows the level of interest.
I should like to respond to points made in the debate and set out our policy position. It goes without saying that there was consensus on this matter; I am glad about that. We need real change in the British banking system if we are going to rebuild our economy. That message was set out clearly as a way forward by the Labour leader, my right hon. Friend the Member for Doncaster North (Edward Miliband), and the shadow Chancellor earlier in the week, when they visited the Co-operative bank. That message is important and worth restating today, notwithstanding differences of emphasis across the political parties. I think hon. Members agree that we need to build a banking system that recognises that it is not just an industry that serves itself. That came through in a number of hon. Members’ speeches. Banking must have a fundamental and higher responsibility to serve the economy, but Members gave examples of banks not necessarily having served either constituents or local businesses.
As the hon. Member for South Northamptonshire said, the revelations of the past two weeks have shown precisely what has gone wrong in some aspects of banking—it has had an impact on our economy—and what has gone wrong over decades, with cultural changes taking place slowly and not necessarily being picked up until crisis point. Problems have been highlighted that require further scrutiny.
As in the wider economy, we need a banking system that is based not just on short-termism. It is not about making the fast buck and not about people taking what they can and not worrying about the longer-term consequences. Instead, we should begin to look again at how we can rebuild the economy and our banking system through patient investment, looking to do the right thing in the longer term and sharing responsibility for how the process moves forward.
The short answer is to try to shift the culture so that it is not about predatory behaviour and banks trying to make the hard sell and the quick extra buck by selling a product and pushing it on people, whether they want it or not. It is about productive behaviour and considering how we encourage people to save and how to use those savings productively for local communities and small businesses. Hon. Members have focused on that.
Above all, I want an economy and a system that do not work just for the powerful, privileged few. My hon. Friend the Member for Islwyn (Chris Evans) mentioned how angry people are when they see what has happened in the banking system, particularly when they have worked all their lives and saved and done the right thing, and now find that they and their families and communities have been let down and left out, because many of them have used their savings and now have nowhere else to turn. It will be difficult for many people approaching their retirement years, or in retirement, who thought that they would be okay and that they had done the right thing, but now discover that they are in difficulty.
Again, as the Labour leader set out earlier in the week, the move from what has been described as casino banking to stewardship banking is important. That use of language is interesting, because the idea of stewardship is that we have responsibility for looking after the money and the people who have invested their money in the banks.
The point was made strongly that we need a banking system in which the bankers are not given incentives, overtly or in other ways, to focus only on a short-term return. We should move to a system that is about building up long-term, trusted relationships with customers, whether individuals or small businesses. The hon. Lady also made an important point: we need a banking system in which no bank feels that it is either too big to fail or too powerful to be challenged. Yes, banks need to face real competition and customers must have proper choices, but above all we need a banking system in which all the people in the UK have confidence once again.
I say with feeling as a Scot—we have at times been castigated for our thrifty nature, and sometimes even been described as mean rather than thrifty—that the values and principles I spoke about are the foundations on which the Scottish banking system was built. Many of us have taken it badly that those values and principles were cast aside. Not only did the banks find themselves in difficulties, but there were wider questions about the culture of Scottish banks, which we were once upon a time extremely proud of.
Steve Baker
I have always admired the Scottish banking system. My friend Professor Kevin Dowd is a huge advocate of Scottish free banking. At its height, its key distinguishing feature was the almost complete absence of the state. Banking was at its best when the state was at its least intrusive.
Cathy Jamieson
That is an interesting point, but I will speak about some collective approaches to banking. The nub of much of this debate is what caused the banking system, which at its height was doing well for the economy and working well for people, suddenly to tip over. It put people on the wrong side of the decision-making process, and forgot that it was supposed to be looking after other people’s money. That is the issue I would like to explore in more detail when we have the opportunity to scrutinise the matter.
In her opening speech, the hon. Member for South Northamptonshire referred to the culture in her day. As a young person, I saved threepence a week in old money and took it to school every week to put in a school bank account. I still remember the day I got to the wonderful point of having £1 and, in addition to having a school bank account in which to save threepenny bits, or whatever it was, became the proud owner of a Trustee Savings bank account book.
I did not live in an affluent area—far from it—and my family was not well off. My father was often unemployed, but the principle of saving a little every week for a rainy day established for me and many of my generation at a young age the importance and responsibility of saving. I remember my horror at secondary school when I had to buy a set of drawing instruments and had to go the bank and take money out. That was the first time I realised the trauma of having to take money out instead of putting it in, and then to work doubly hard to replace it.
At that time, banking was a respectable job, as hon. Members have said. It was a job that people vied for.
Cathy Jamieson
Before the Division, I was talking about banking being seen as a respectable job that people vied for and expected would be a lifetime career, if they were lucky enough to get a start in the industry. That is certainly how things were when I was considering my career—not that I ever actually considered a career in banking. I do feel, however, for the decent, honest, hard-working staff of the banks, and that has been echoed by Members from across the House, and particularly by my hon. Friends the Members for Erith and Thamesmead (Teresa Pearce) and for Islwyn.
I feel for those decent, hard-working people who have seen their industry and work force castigated and vilified. Bankers now appear to be even less popular than politicians and the media—we would once have found that hard to believe—and that is despite the fact that the individuals, the ordinary workers in the banks, have done nothing wrong. Indeed, as we have heard, many of them probably did query, at whatever level they could, the hard-sell sales targets that they had to achieve, but because of decisions taken by others, they now face guilt by association and they are the ones on the front line who have to deal with the public.
I also feel sorry for the front-line staff who lost their jobs in the aftermath of the banking crisis. Those people did not walk away with millions of pounds and, as we heard from my hon. Friend the Member for Islwyn, if they did get a bonus, it was part of what they had to work to achieve in order to make a decent wage by the end of the month. Those people did not walk away with multi-millions, and indeed, as I know from some of my constituents, many have been unable to secure permanent employment since. That makes it all the more galling when those who made the bad decisions—the wrong decisions—are able to leave with massive pay-offs, and that is also why the public are so angry.
What more should the Government be doing? This debate is about banking competition, and we have heard a little about that. We have also heard, in one of the interesting threads running through the debate, about mutuality and different forms of common ownership of the banking system. Over recent weeks and months I have found it absolutely fascinating to hear about the number of converts to the principles of mutuality and that form of common ownership. That is very welcome. I do not want to sound a discordant note, but that level of support for and understanding of the principles of mutuality would have been helpful a number of years ago, when the media and other commentators were urging people to become customers of particular banks in order to get a windfall on demutualisation. Many of us argued against that, saying that it was short-termism of the worst sort. We said that a day of reckoning would come, and we have now seen that happen.
However, mutuality and co-operation must not be just for a time of crisis or to fill a gap when the private sector has failed or stalled. They offer a successful alternative business model, which should at least have a level playing field. Opposition Members remain disappointed that the Government did not accept the strong case made during the campaign run by the Co-operative party, called “The Feeling’s Mutual”, which focused on the need for remutualisation of Northern Rock. That sent the rather unfortunate message that the Government did not have much faith in the mutual sector in reality, despite the warm words in policy documents and the coalition agreement, which stated that the Government would bring forward detailed proposals to ensure a strong and growing mutual sector. Again, I hesitate to sound a discordant note, but I do not think we have seen evidence of such proposals yet. I recognise, though, that the building societies White Paper, which we had been waiting for, was published this week. I will go through that with interest. I see the Minister nodding. I am sure that he knows, from our time together on various Bill Committees, that we will indeed scrutinise it closely.
Many hon. Members have pressed the Government on a range of issues relating to financial services, including the capping of interest on loans, financial inclusion, financial education and access to finance. We have heard about many such issues today.
Mr Thomas
Before my hon. Friend moves on to deal with the particular remarks of hon. Members, may I ask her about Northern Rock? The Government have clearly made their decision, but does she think it would be helpful for the Government to publish their assessment of the different proposals? Clearly, some information would have to be redacted for commercial reasons, but would it not be helpful to release the paperwork and enable us to have a proper understanding of the assessment that the Government made? That would perhaps inform the debate about the building societies White Paper and it would certainly help financial mutuals to understand what on earth they have to do to convince the Government of the case for expansion of their part of the sector.
Cathy Jamieson
My hon. Friend makes a very interesting and valid point. Opposition Members are reasonable people. We understand that sometimes things have to be held in confidence and that it may not be appropriate to put some information in the public domain. We would not be unreasonable about that, but my hon. Friend makes a valid point about informing the debate and looking to the future, because if we are serious about promoting and supporting the mutual sector, we need to understand exactly why the Government did not think that was the right thing to do in the case of Northern Rock.
As I said, many hon. Members have pressed the Government on a range of issues. We think it rather unfortunate that the Government have not agreed to include those measures in relevant Bills, despite the fact that sometimes there were, in our view, appropriate amendments that would have given them the hook to do so. As the Minister will be aware, my hon. Friend the Member for Nottingham East (Chris Leslie) and I tabled detailed amendments to the Financial Services Bill to allow the Government the opportunity to deliver on the coalition pledge on mutuality, but unfortunately they used their majority to vote them down.
The financial mutual sector has proved to be robust during the economic crisis. It was not the sector that required bailing out. The regulated industry, of course, required a public bail-out of £60 billion. In that context, the criticism aimed at some of those in governance structures in mutuals, whether in the Co-operative bank or elsewhere, is ill-founded. Having a few more lay people with a common-sense approach and a grip on what is right and wrong, who would be prepared to flag it up when greed was overtaking responsibility to customers, would have been no bad thing in some of the banks, which had become so out of touch that they had forgotten that it was other people’s money they were gambling with.
I ask the Minister to say in his response to the debate exactly what the Government intend to do to help the mutual sector. I hope, for example, that they will look carefully at the demutualisation regulations, tax system support for the sector and the capital raising requirements for mutuals. Again, we have debated that in various Bill Committees. There is an opportunity to do so again in relation to the legislation that flows from the Independent Commission on Banking.
I hope that we will see speedier progress on that than perhaps we saw on implementing the legislation passed by the previous Government. It took about 18 months to implement the vital changes for credit unions. It is very welcome that hon. Members on both sides of the Chamber have today expressed support for credit unions. Perhaps the Government will take the opportunity to look again at the elements of the Co-operative and Community Benefit Societies and Credit Unions Act 2010 that remain unimplemented and see whether anything else should be done to assist credit unions.
Of course, as well as the Co-operative bank, we have the Nationwide building society, which points out, with some justification, that it is a challenger brand that provides a mass market, mutual alternative to the banks. Like the Co-op bank, it has seen a sharp increase in the number of people looking to join it. I understand that Nationwide has seen an 85% increase, week on week, in the number of customers opening and transferring their main current account online. It has consistently made the point that it needs a level playing field with the plcs if it is to continue and enhance its role. It is not looking for special treatment. It is not looking for anything other than recognition of particular regulatory impacts on mutuals. I am sure that the Minister will want to examine that.
The Nationwide is one of the organisations that support the creation of a current account redirection system to improve switching, and it is actively involved in work on that at the moment. We have heard during this debate about the difficulties there can be in switching accounts. Partly it is a cultural thing—people may have stuck with the same bank for many years—but there is also an issue about financial exclusion. As I said in an intervention on my hon. Friend the Member for Erith and Thamesmead, I know of many constituents who have found it difficult to get a bank account at all. If anyone has ever tried or knows anyone else who has ever tried to open a basic bank account in the not-too-distant past, they will know the hoops that people have to jump through. In addition, the finances of many people on low incomes work in such a way that when it comes to anything that is out of the ordinary or that would upset their regular system of payments or income coming in and going out, on a weekly or a monthly basis, they simply cannot afford to take the risk. They will not take the risk of upsetting things, even for a month or so, to move accounts. Sometimes it is a case of “Better the devil you know” than the uncertainty of what they do not know. Therefore, anything that could be done to assist people in the process of moving accounts would be helpful.
To conclude, I shall make a few remarks about what Opposition Members have set out as a sensible way forward. I have not had the opportunity to say much about the small business sector. I have focused mainly on individual consumers. I of course echo the comments made by various hon. Members about how we support small businesses. That is extremely important. The German model of Sparkassen is creating quite a lot of interest. That is certainly worth looking at, because all of us know what small businesses in our local areas are finding, notwithstanding all the warm words from the banks. I am sure that the people saying those warm words believe them—from their perspective, everything is fine. However, the reality is that week after week, small business people are coming to see us at our surgeries and telling us that their business is under threat, perhaps because of cash-flow problems and perhaps because of changes in banking arrangements that they have had for years and that no one has ever previously questioned. That the banks have a wider responsibility than simply what they do to make money for themselves comes through at that point.
We set out our proposals earlier in the week. We strongly believe that there is a case for a British investment bank—indeed, we have worked on it and published a report. We also believe that greater competition in the banking industry, with at least two challenger banks, not simply one other entrant, would at least make some difference. Banks on high streets are very important, because people need to access local branches and, if we are to change the culture, to build up individual relationships. We need transparency about which communities and sectors do not get services from the banks, as has been mentioned today. We also need a code of conduct for bankers, with those breaking the rules having to suffer the consequences. It happens in other professions; why not in the banking sector? We heard a powerful contribution from my hon. Friend the Member for Islwyn, who worked in the industry, about the lack of training and the downgrading, as he saw it, of professional standards.
We ought to proceed with a new unit in the Serious Fraud Office to tackle fraud in financial services. We must change the bonus culture, by backing international changes to limit bonuses. We want the Vickers proposals implemented in full, not watered down, particularly not the ring-fence between the casino and the retail banks. We want to ensure that it happens. I know that it was controversial in the debate last week, but we continue to believe that we need a further public inquiry to enable us to address the deeper cultural challenges that the banking industry faces and to examine how we genuinely change the way that our banks work and how we make them focus on stewardship once again.
The hon. Member for Macclesfield (David Rutley) mentioned culture being measured by what happens when no one is looking. Notwithstanding the many people who have done well, are doing the right thing, are socially responsible, are working ethically and are supporting their customers, given what has happened, the banking industry will not be judged by the best—it is being judged by the worst. That is what we have to address. I hope that the Minister will outline how he intends to do that.
The Exchequer Secretary to the Treasury (Mr David Gauke)
It is a very great pleasure to serve under your chairmanship, Mr Davies, and to see you, not for the first time, follow in the footsteps of Mr Chope, who chaired the sitting earlier. I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) and thank her for securing this timely debate. Her thoughtful speech set the tone for the good debate that we have had this afternoon. In addition I thank my hon. Friends the Members for Wyre Forest (Mark Garnier), for Wycombe (Steve Baker), for Macclesfield (David Rutley), for Mid Norfolk (George Freeman) and for Wells (Tessa Munt) and the hon. Members for Erith and Thamesmead (Teresa Pearce), for Glasgow North East (Mr Bain) and for Islwyn (Chris Evans). Hon. Members have brought considerable personal experience to the debate, which has assisted the quality of our debate.
Let me begin by stating clearly that the Government are committed to fostering a strong, competitive banking sector for the benefit of consumers and the UK economy. That is why we asked Sir John Vickers, along with other members of the Independent Banking Commission, to examine the issues as part of his review of the banking sector, and are implementing his recommendations and, in some cases, going further. It is essential that consumers are able to apply competitive pressure and hold their bank to account as to the services it offers. In a competitive market, customers should be able to vote with their feet and switch their custom to banks that provide the best products and services to meet their needs. There should also be a diversity of institutions in the market, capable of meeting the varying needs of consumers. The Government’s strategy for competition encompasses many things, which I will mention in turn.
Creating the right environment for competition to flourish is essential to ensure that consumers benefit in the long term. The Government’s major financial stability reforms will help to enhance competition in financial services. Those reforms implement the recommendations of the IBC, which reported last year. Banks will no longer receive a competitive advantage by being perceived to be too big to fail—a point that my hon. Friend the Member for South Northamptonshire made. The Government’s plans to ring-fence banking services and increase banks’ capacity to absorb losses are also a vital step in creating the right environment for competition in banking to flourish.
By improving the authorities’ ability to deal with the failure of financial institutions in an orderly manner, the Government are substantially reducing the perceived implicit guarantee that benefits the large incumbents. That is part of a broad programme of financial sector reform to solve what my right hon. Friend the Chancellor has called the “British dilemma”—how to host a world-class financial services sector without putting UK taxpayers at risk.
We have seen a number of new entrants into the current account market in recent years, including Metro Bank. It is however essential that prospective new banks can enter the market to compete and that the requirements are not overly onerous or disproportionate. To ensure that that is the case, in the banking reform White Paper the Government announced that the FSA and the Bank of England are conducting reviews of the prudential and conduct requirements for new entrants to the banking sector.
The reviews will reassess the prudential requirements of the new Prudential Regulations Authority and the conduct requirements of the new Financial Conduct Authority, to ensure that they are proportionate and do not pose excessive barriers to entry or to expansion for new entrants. The conclusions of those reviews will be published in the autumn, and the FSA and the Bank of England have committed to introduce, where possible, any changes in advance of the new regulatory structure. That point was raised by a number of hon. Members; in particular, my hon. Friend the Member for Wyre Forest set out his concerns about the difficulties for new banks entering the market and how difficult it can be to obtain authorisation. He raises a fair concern, but of course the right balance, which we have to strike, would ensure that those receiving a banking licence were able to perform the activities that they needed to perform in a secure way. It is right that standards are robust.
That said, the FSA should administer a process that is as smooth as possible. It has already improved the bank authorisation process to make it easier for prospective new banks, and is encouraging potential applicants to attend pre-application meetings, for example. Those meetings allow the FSA to understand better the applicant’s business model and offer tailored guidance. It has also introduced a milestone document on a modular approach to assessing deposit-taking applications. Where appropriate, it will provide a letter stating that it is minded to approve applications subject to specific final conditions for the applicant to satisfy.
The changes significantly improve the process for becoming a new bank and many prospective new entrants will benefit from them in future. The changes also make the process of completing an application easier, while keeping standards high. Combined with the reviews I mentioned on the prudential and conduct requirements, which are under way, the changes help to ensure that the bank authorisation process is not a barrier to entry for prospective new banks.
I note the comments made by my hon. Friend the Member for Wyre Forest on publishing a checklist of the criteria that prospective new banks need to fulfil. I had a little experience of that in my previous career. Becoming a new bank is complex and it is right that the system is robust, but I am grateful for the constructive comments made.
I am also grateful to my hon. Friend the Member for Wycombe for highlighting this evening’s “Bank of Dave” programme and for his suggestion about my television viewing. I happened to be driving in my constituency yesterday, when I heard an interesting interview with Mr Fishwick. I look forward to the programme this evening. In reference to that particular example, the requirements are robust, as is generally the case. I do not want to be drawn into a specific case and I cannot comment on the precise activities that that business undertakes, but it is right that we ensure that the system has no undue barriers to entry. The regulation regime could potentially be such a barrier, and we must be vigilant on that point.
Let me turn to the creation of new challenger banks. For competition to drive better consumer outcomes, new providers must be willing to enter the market to compete with the big banks. Two new challenger banks are being created and will be on the high street in the next 18 months. We have heard a little about the sale by the Government of Northern Rock plc to Virgin Money, which creates a new and innovative challenger to the established big five. The sale was completed on 1 January 2012 and the organisation is a useful addition to the high street. I am sorry that the Opposition party remains opposed to that move, because it has increased competition. The National Audit Office said that the process run by United Kingdom Financial Investments Ltd was fair and transparent and that an early sale was the best step the Government could take to secure taxpayers’ interests. As I have said, the sale has introduced, at an early stage, more competition.
In addition, Lloyds is in the process of selling off more than 600 of its branches—the Verde divestment—and the Government are committed to ensuring that the divestment creates another strong challenger. The Government welcome the news that the Co-op and Lloyds have agreed an understanding on the commercial terms for Verde. If the deal with the Co-op goes ahead, the combined entity will already have more than the 6% of the personal current account market that was recommended by the Independent Commission on Banking and by my hon. Friend the Member for Wells.
Along with the Government’s sale of Northern Rock to Virgin Money, the sale by Lloyds will deliver a much bigger challenger bank to the retail banking market. The potential purchase of those branches by the Co-op is a significant boost to the mutuals, which the Government are committed to promote. Once the deal is completed, Co-operative bank will be a realistic, mutually owned challenger to the big five banks.
The Government are determined to ensure that the Lloyds divestment results in a strong challenger, regardless of the final commercial arrangements that Lloyds arrives at. They have actively engaged with the European Commission and Lloyds to ensure that that is the case.
The Government are also committed to promoting the mutuals sector as an alternative to banks. They are looking to ensure that there is a level playing field for building societies, and that growth of the sector is not hindered. Last Thursday, the Government set out their vision for the building societies sector in their discussion document, “The Future of Building Societies”. The document, which has been warmly welcomed by the sector, confirms the Government’s support for the distinctive alternative offered by building societies. It sets out proposals including aligning building societies legislation with the ring-fencing requirements for banks, and applying loss-absorbency proposals to building societies in the same way as to banks. Those proposals have received warm support from the industry, including from the Building Societies Association and the Nationwide.
Mr Thomas
What steps is the Minister taking to ensure that the staff who work in the new regulators have at least some genuine understanding of the mutual sector, be it credit unions, building societies or friendly societies? How many staff who have actually worked in that part of the sector are now part of the regulatory environment?
Mr Gauke
The hon. Gentleman would not expect me to be able to give him a precise answer as to how many staff within the new regulatory bodies have got specific experience of mutuals and some of the bodies that are under discussion today. Of course it is important for a regulatory authority to have sufficient depth and breadth of knowledge of the institutions that it regulates, and the Government are keen to ensure that that is the case.
Let me say a little about credit unions. The Government have removed unnecessary burdens on credit unions through the legislative reform order. One important aspect of that was to allow credit unions to admit as members corporate bodies such as local charities and firms, and relax restrictions on membership. Those new members can both deposit in and borrow from their local credit unions, thus providing further opportunities for investment and growth in communities.
Credit unions can act as an alternative to banks and building societies in providing affordable financial services to people who may otherwise not be able to access them. The Government have also announced that they will bring forward a co-operative consolidation Bill. Last month, the Department for Work and Pensions announced its credit union expansion project, which will invest £38 million to help credit unions modernise and grow to offer a real alternative to high-cost credit providers. Through all such actions, the Government are creating an environment in which mutually owned institutions can offer a real alternative for consumers, and compete with the banks to serve families and businesses that need to save and borrow for their future. However, I may have to disappoint the hon. Member for Erith and Thamesmead. I am not sure that we are persuaded by the case that every public sector worker has to be paid through a credit union. Were we to do that, there would be certain issues with regard to competition. None the less, I note her comments.
Let me turn to the issue of switching and portability, which a number of hon. Members raised, not least my hon. Friend the Member for South Northamptonshire. It is essential that consumers are able to apply competitive pressure and to hold their bank to account for the services that it offers. In a competitive market, customers should be able to vote with their feet and switch their custom to banks that provide the best products and services to meet their needs. To that end, the banking industry has committed to introduce, by September 2013, a free, safe and hassle-free switching service to ensure that customers can switch accounts within seven days. To date, banks representing more than 97% of the current account market have committed to being ready to launch the new seven-day switching service by the September 2013 deadline and the Government continue to hold the industry to account to that timetable.
The new switching service will ensure that consumers’ accounts will be switched within seven days, and that all direct debits and standing orders from their old account will be redirected to their new one. The redirection service will last for 13 months. The new service, including a guarantee that the process will be smooth and that consumers will suffer no financial loss, will help to tackle the perception held by many consumers that switching is difficult, costly or risky.
A number of hon. Members have said that we should adopt full account number portability. There are a number of ways in which such an approach could work. In essence, a customers’ account number and sort code, which links the account to a branch, would not change when the customer switched banks, thereby avoiding the need for the customer to change any payment or credit instructions, which would reduce the risk of payments being sent to the wrong account.
The Independent Commission on Banking considered full account number portability carefully and decided not to recommend it in its report of 12 September 2011. As we all know, the ICB recommended that a current account redirection service should be established to smooth the process of switching current accounts for individuals and small businesses. It concluded that the costs and incremental benefits of full account number portability were “uncertain relative to redirection” and that
“it appears that redirection may deliver many of the benefits of account number portability at lower cost.”
As I have mentioned, the Government strongly support the ICB recommendation on switching and are holding the industry to account to deliver by the September 2013 deadline. Once the new switching service is operational, the Government will assess whether the service has delivered the expected consumer benefits. If not, further measures, including full account portability, will be considered. Given where we are and the recommendations of the ICB, we believe that it is right to proceed with the plans currently in place.
A number of hon. Members raised the issue of transparency. They want to ensure that customers can see exactly what services are provided and the costs that apply. The Government are clear that banking needs to become more transparent, and that is a perfectly fair point. A number of transparency measures are already being implemented in retail banking, including making charges clearer on customers’ monthly statements and providing an annual statement of charges for each customer. The annual statement will allow customers to see how much their account has cost them and it will provide an opportunity for them to consider whether they are getting good value.
That is a welcome start, but more must be done. As set out in the recent White Paper on banking reform, the Government see increased transparency and financial capability as an integral part of a competitive banking sector. The Office of Fair Trading has announced that it will conduct a review of the personal current account market in 2012, assessing levels of transparency in the market and the impact of the measures that have already been taken to improve transparency, as well as taking forward the recommendations of the Independent Commission on Banking on including interest forgone on bank statements and annual summaries.
Mr Thomas
I thank the Minister for giving way again on the issue of transparency. Why have the Government not included in their proposals for banking reform the idea that there should be a requirement on banks to disclose what they lend and where they lend on a postcode basis, to help us understand where the Thamesmeads, the north Harrows and the other unbanked areas in the UK are, so that we can better direct resources and new challenger banks to those areas?
Mr Gauke
Indeed, that issue was raised by the hon. Members for Islwyn and for Erith and Thamesmead during the debate. I say to the hon. Gentleman that data releases by postcode by each bank for all customers would be a very considerable undertaking for banks. It would also create a significant regulatory burden, and let us not forget that considerable regulatory burdens can prove to be a barrier to entry. At a time when we want to ensure that there is more competition, we must bear that in mind. It is also worth pointing out that there are legitimate differences between different areas for lending figures, including differences in credit risk. One would not expect there to be similar lending figures across the country. I caution against a reaction that would mean the imposition of a further regulatory burden.
Let me return to the issue of transparency. The Financial Conduct Authority will take a proactive approach to consumer protection. It will focus on the transparency of information that is available to consumers of financial services. The FCA will carry out a fundamental review of how transparency will be embedded in the new regime, both by the regulator and by firms, and it will publish a discussion paper in the first quarter of 2013. The review will consider what further measures could be introduced to improve the quantity and quality of the information that customers receive, enabling them to make informed choices and exert competitive pressure on firms.
Let me pick up on some other points that were made during the debate. The hon. Member for Erith and Thamesmead made a point about the payments clearing system; she was concerned that the big banks controlled that system. My response is that the Bank of England already has a large role in the UK payments system, given that the stability of that system is of paramount importance, and shortly the Government will issue a consultation on the future strategy-setting of the payments industry to ensure that consumers and smaller banks have a louder voice. I hope that all Members support that process.
The issue of access to banking services was raised in the debate, including by the hon. Member for Harrow West (Mr Thomas) in his recent intervention. The Government are committed to improving access to financial services and in particular to bank accounts, which was another point made earlier in the debate. It has been amply demonstrated that having a bank account is an essential aspect of modern life for any individual. Being able to access counter services at a branch and interact face to face with staff is very much valued by many individuals and businesses. However, the issue of where particular branches are located and maintained is fundamentally a commercial decision and one for the financial institution in question, rather than the Government, to make. Therefore, the Government do not intervene in such decisions. All banking service providers will need to balance customer interests, market competition and other commercial factors when they consider their strategy. Nevertheless, banks must treat their customers fairly.
I will say a word or two about the FCA. To ensure that consumers are adequately protected in accessing financial services, the Government are reforming the regulation of financial services. Part of that process includes creating a new dedicated conduct of business regulator—the FCA. Securing effective competition in the market for financial services is a key mechanism for securing better outcomes for consumers, and the FCA’s new competition mandate will be central to achieving that. The FCA will have an operational objective to promote effective competition in the interests of consumers, and it will also be under a competition duty, driving it to look for competition-led solutions to conduct issues more generally and in pursuit of its “consumer protection” and “integrity” operational objectives.
The FCA will have the mandate to use its powers to tackle competition problems more swiftly and effectively than the Financial Services Authority did previously, for example by promoting switching, removing barriers to entry or addressing asymmetries of information. A more proactive approach will lead to better consumer outcomes as problems will be tackled sooner, before they give rise to significant detriment. For instance, the FCA will take a keener interest in how products are designed and distributed in the first place, and it will have a new power to ban or impose restrictions on products that it considers could cause significant detriment.
Greater transparency and disclosure will also be at the heart of the FCA’s new approach. For example, it will have new powers to disclose the fact that a warning notice in respect of disciplinary action has been issued, and to publicise details of actions taken against misleading financial promotions.
In conclusion, banking competition is essential for consumers, businesses and the economy to prosper. The Government are undertaking a number of significant reforms to enhance competition and we continue to work hard to consider how best to improve competition in banking while maintaining the UK’s position as a global financial centre. In that context, I thank hon. Members for their well-considered comments and suggestions today. A number of excellent points have been made today by hon. Members and they all contribute to the valuable debate about banking competition.
Andrea Leadsom
Thank you, Mr Davies, for calling me to speak.
First, I thank my hon. Friend the Minister for providing what I thought was an extremely helpful round-up of what the Government are doing. As I said in my own remarks, it is certainly true that this Government have taken huge steps to put right a lot of the problems that have given rise to the financial crisis and the later problems of fraud and the issue of banks being “too big to fail”. I am grateful to him and the rest of the Government for that.
I also pay particular tribute to my hon. Friend the Member for Wyre Forest (Mark Garnier), because he and I have been a kind of two-man whirlwind in trying to get to the bottom—acting on our own and in private—of the issues for those organisations that would like to set up a bank and indeed for those small banks that do not reach a critical mass. We have found evidence that there are some significant barriers to entry, both regulatory barriers and barriers erected by the big banks that are trying to shut them out. I hope that the Minister recognises that we have tried to share that evidence with him today for his information.
It has been an extremely helpful debate today. I am very grateful to all hon. Members who have contributed to it. Some interesting suggestions have been made, and I would just like to summarise what I think are the “highlights” of the debate. First, of course we need many more new entrants to the financial services sector. Secondly, diversity of providers is absolutely key; we need not only “one-stop shop” banks but all sorts of other providers. Thirdly, we want to see far greater transparency, so that customers know what they are getting. Fourthly, access to banks and to branches is vital. Finally, the barriers to entry put up by the big banks need to be broken down, and issues such as the ownership of VocaLink and the Payments Council need to be examined.
I will end with the words of Jayne-Anne Gadhia, of Virgin Money, who said that banking needs less head and “more heart”.
Question put and agreed to.