Banking in Scotland

Chris Leslie Excerpts

Thursday 14th October 2010 Westminster Hall

[Chris Leslie (Nottingham East) (Lab/Co-op)]

I declare an interest as a trustee of the Consumer Credit Counselling Service in Scotland. I act in a voluntary capacity, with no remuneration. The CCCS is a debt advice charity, which has been greatly active on many of the matters raised by my hon. Friends and others during this welcome debate.

The debate is about a most welcome report. As my hon. Friend the Member for Glasgow South West (Mr Davidson) said, the report, which was thorough and worth while, was published at the end of the previous Parliament. It was incredibly important, given the estimated one in 10 jobs in Scotland that are linked to the long-standing financial services industry. Jobs, of course, have subsequently been lost in Scotland, as they have elsewhere, bank branches have closed, and the whole economy has been affected by the credit crunch.

On this, my fourth day in my new role as shadow Financial Secretary, I anticipate having many debates on financial services and their impact on consumers in all corners of the country. Although I spoke far too much and at great length in my previous guise as a Back Bencher, I will take this opportunity to reiterate my default position on many of these matters and, in particular, on the three clear questions that I believe are fundamental to my new portfolio.

First, what reforms are necessary to minimise the systemic risk to a well functioning economy and society following the experience of the credit crunch? Secondly, how can we create a thriving and healthy financial services industry in the United Kingdom, including in Scotland, rebuilding it with a reputation for sustainability, solidity and trust? Thirdly, how can we ensure greater fairness for the consumers of financial services products, so that the industry operates on the basis of common sense and fair play?

It is heartening that many of the contributors to this debate not only focused on what might sometimes seem to be ethereal issues between the players in the industry, but considered matters very much from the consumer perspective, speaking of people’s encounters with issues that are central to their lives.

The report contains an excellent collection of evidence, taken over a long period, going back to November and December 2009. I am glad that my hon. Friend referred to the visits to Ireland and to evidence heard elsewhere, successfully bringing in the arc of prosperity and making important points on the changing circumstances and the erroneous arguments made by members of the Scottish National party.

Many interesting lessons on the housing market, on public sector deficit reduction and its impact on growth, on the regulation of credit rating agencies and so forth, are all brought out in the report. Perhaps most notable is the impact of the credit crunch on Scotland in respect of changes to the Royal Bank of Scotland and Halifax Bank of Scotland—HBOS—and we should not forget the difficulties that affected Dunfermline building society. The report is an eloquent exposition or post-mortem of the lessons that need to be learned from that period, and it is worth reiterating them.

[Julian Smith]

The report was eloquent. Did it make the hon. Gentleman reflect on the Labour Government’s role in what went wrong, and the lax regulatory regime that had been allowed to develop, which was the source of many of the problems for the financial services industry in Scotland?

[Chris Leslie]

Certainly we all have lessons to learn from the credit crunch. Countries across the world, including the UK, did not frame correctly the regulatory environment in which financial services operated. That is absolutely clear. However, it reminds me that we do not state often enough that it was the previous Labour Administration who saved our economy from falling over the cliff edge and into the abyss. Although the current Administration sometimes give the impression that they would not have committed the resources necessary to achieve that, I believe that any Administration of any colour would have had to take those steps. I am proud that my party did so, even though that may be the root cause of some of the deficit questions that have subsequently arisen.

Key lessons need to be learned. Too few people had proper cognisance of the true liabilities on the books of our major banks, either because of the complexity of the various products involved or because of the poor risk assessment of those financial instruments. Banks were over-reliant on the wholesale capital markets to finance their investments and lending, which created excessively leveraged positions and left the banks incapable of coping with the freezing up of the wholesale markets. In addition, the underlying market sentiment, which, like the banking practices, had existed for a long time, implied an assumption of continuous expansion, creating expectations of never-ending profitability with high-scale rewards and bonuses, which clouded the judgment of too many practitioners in the sector.

[Julian Smith]

Would the shadow Minister say that the banks were merely reflecting the zeitgeist and the leadership of the Government of the time by over-extending themselves, living beyond their means and paying far too much for their work force?

[Chris Leslie]

Much as we in politics might like to think that everything done in the political game shapes society at large, my view is that the economy and society around us—not only in this country but in the world at large—suffered from too much exuberance when it came to the allure and attraction of profitability in that sector. We should have taken a far more hard-headed approach all round. Much as I congratulate the hon. Gentleman on trying to make a party political point about the root cause of the global credit crunch, it would not be fair to pin it on one or two politicians in one or two countries. The problem was systemic and we must all learn the lessons from it; otherwise it will be repeated—and that will affect Scotland as well as the rest of the world.

HBOS was merged with Lloyds TSB to form Lloyds Banking Group, and subsequently took advantage of Government capitalisation, which led to 43% public ownership. RBS received public funds resulting in 63% public ownership, rising to about 84% with subsequent injections of new capital. Special liquidity support and a number of other instruments created circumstances where the Government were very much foisted into the driving seat of our financial services industry.

The Government set a number of conditions, and I am glad that the present Administration have maintained a number of them. They include urging the banks to maintain competitive lending to retail and business customers at 2007 levels and encouraging the banks to deal with several of the failings that they experienced, including issues of remuneration, restricting dividend payments, helping people struggling with mortgage payments and so on. Of course, experience tells us that we still need to hold the feet of the banks to the commitments drawn out of them in exchange for the resources that were given to save their very existence. We should certainly ask the Government and the Minister to what extent they are succeeding.

[Stephen McPartland (Stevenage) (Con)]

I congratulate the hon. Gentleman on his new role as shadow Minister. Does he agree that some of the rhetoric used, such as “holding the banks’ feet to the fire”, has created an awful situation for many of those working on the front line in the banks, who receive abuse or suffer the emotional difficulties that some Members have described today? We need to move away from that rhetoric and towards the understanding that only a small group of people were involved. The main reason for the banks’ difficulties was the lack of regulation in the past 10 years or so. The banks became such complex organisations that they almost lost control over what they were doing. Unfortunately, it is those now on the front line who are taking abuse for what was done by those who have now moved on to other highly paid roles.

[Chris Leslie]

I understand where the hon. Gentleman is coming from. It would be unfortunate if a cashier or teller was wrongly blamed by a member of the public for something that their bank or institution had done. I know that only a small number of individuals were involved in what happened, but this is an institutional problem and not just a personalised one. We cannot just change the faces of the directors at HBOS or RBS and expect that all the problems will be ironed out. Although we must consider the regulatory environment, we should understand that the problem is more the culture of the companies in that sector in general. As we know from other circumstances, Government can cajole and set the rules, but ultimately they are not the ones who should be running those firms responsibly. Good corporate governance should have taken a different path; it did not in the credit crunch. I hope that we can get things back on the rails, so that we have a sustainable and solid—perhaps some would say boring—financial services sector in future, and regain some of the trust that the City and the financial services industry both here and in Scotland truly deserve.

The report raises issues that definitely deserve attention. My hon. Friend the Member for Glasgow South West talked about the bonuses paid to high earners and the juxtaposition between ordinary front-line staff and the well paid senior executives. I am glad that the previous Chancellor instituted that one-off bank bonus levy of 50% on discretionary bonuses above £25,000. It yielded £2 billion, which was far more than expected. It will be interesting to watch how the current Administration and the Minister seek to deal with the ongoing concerns of the general public about excessive remuneration. Those concerns are legitimate and need to be addressed to rebuild the trust that is much deserved by those who are genuinely working hard to do their best in a very complex industry.

The hon. Member for Argyll and Bute (Mr Reid) mentioned the willingness of banks to lend to businesses. Discussions are under way with the British Bankers’ Association and others, and reports have been published today. We are hearing many conflicting reports. The banks themselves are adamant that money is available, yet the reports that we consistently receive in our surgeries across the country is that small and medium-sized enterprises are finding the hurdles that they have to jump over too high and that, too often, banks are not willing to do business with them. That exerts a lag effect on our economy in general and the problem definitely needs the Minister’s attention. We want the commitments that were given at the time of the rescue of the banking sector to be properly enforced. We should also see the public stake in our banking sector activated. Given that the public own that stake, they, like any owner of any company, should be able to ask that lending arrangements are fulfilled in the best interests of our economy.

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

Will the hon. Gentleman clarify whether he is moving away from the previous Government’s position of managing RBS and Lloyds Bank at arm’s length to one in which the Government play an active role in their day-to-day management and lending decisions?

--- Later in debate ---

[Chris Leslie]

I certainly do not mean in the day-to-day lending decisions. That would be an incredible position for a politician to take with a bank. None the less, our constituents could legitimately say that if we—through the Treasury and UK Financial Investments—hold a stake on their behalf in these large institutions that play such a valuable part in all our lives, but do not ask questions about the commitments that were given and do not scrutinise the attention that banks are paying to those commitments, we are failing in our duties. That is my point. There is a level of active scrutiny, attention and challenge that the Government should adopt in that respect.

It is important, too, to focus on the point made in the report about lending to homeowners. Although it did not crop up often in the debate, that is a problem in Scotland. First-time buyers are more likely to find it hard to get mortgage finance. The deposit currently required is something in the order of 25%, which is an incredible burden on many of my hon. Friends’ constituents. The Chartered Institute of Housing says that there are more problems with house lending arrangements in Scotland than there are in the rest of the UK.

Concerns about the fair treatment of customers were well set out. They include unfair banking charges and the mark-up in rates of interest. The difference between the wholesale rate of interest that the banks pay and the rate of interest that they charge their customers, both businesses and retail, has been growing, probably fuelled by the requirement of the banks to rebuild their own balance sheets. None the less, that is something that customers in Scotland and elsewhere are extremely sceptical about. There are also questions about aggressive debt collection. My hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson) said that something like 135,000 debt problems had been brought to Scottish citizens advice bureaux in 2009-10. The massive job of providing such advice is falling on the shoulders of a very poorly funded voluntary sector in Scotland.

The hon. Member for Milton Keynes South (Iain Stewart) raised the important topic of financial education. I should like to see us revisit the extent to which the national curriculum explores how we teach young people about the basics of money. Certainly, it is the responsibility of the new consumer protection markets authority to consider that as well in due course.

This debate has been very worth while. Both directly and indirectly, banking has a massive effect on the lives of people in Scotland. The report is a perfect example of how the Scottish Affairs Committee speaks out for the interests of Scotland.