Mutualisation of the Royal Bank of Scotland

1st reading: House of Commons
Tuesday 13th December 2016 Commons Chamber

Motion for leave to bring in a Bill (Standing Order No. 23)

13:29

[Mr Gareth Thomas (Harrow West) (Lab/Co-op)]

I beg to move,

That leave be given to bring in a Bill to transfer the ownership of the Royal Bank of Scotland to its customers and employees; and for connected purposes.

Taxpayers saved the Royal Bank of Scotland; they should now be allowed to own it. It should become a people’s bank that every tax-paying British citizen has the right to be a part-owner of. Making it the Royal Building Society of Scotland would mark a decisive break with the disastrous Fred Goodwin era.

There are new entrants to the banking market and there have been many reforms to banking regulation, many of which have made a difference, but the structural problem in Britain’s banking market—a lack of competition between different types of financial services institutions—is as bad now as it was in 2008, and arguably worse following the banking mergers that the crash precipitated. The problems of 2008 can be traced back, in part, directly to 1992, when the wave of building society demutualisations began. Although only 10 of the 89 societies that existed demutualised, because those 10 were among the largest, they represented about 70% of the mutual sector’s assets.

Before 1992 in the UK, as is still the case in most of the rest of Europe, banking services were provided by financial service providers with a range of ownership structures and, therefore, with different incentives and business ambitions. After 1992, the gradual takeover of most of the big players in the building society world led to a steady decline and deterioration in competition in banking in the UK.

Although many other countries have had serious problems in their banking sector, few have suffered as much as the UK and, crucially, few others have been so dominated by traditional shareholder investor-owned banks. Each of the last two Governments have been wrong to leave in place what is effectively a cartel of the major banks, with just one building society challenging their dominance.

There have been persistent concerns about the level of competition in the banking market and its structure. I am pleased to say that those finally led to the Competition and Markets Authority being called in to investigate. In August this year, it published its retail banking market conclusions. For anyone who is tempted to think that banking is a wholly reformed and properly functioning market, its report makes sobering reading.

The CMA report describes the personal banking market as concentrated and states that concentration levels have increased since the crisis and that competition is not working well. On lending to small and medium-sized businesses, the CMA notes that the four largest providers—RBS, Lloyds, Barclays and HSBC—had a combined market share of over 80% and that new entrants had reduced their market share by just 1%. It found that there had been little product innovation in SME lending and went on to note the adverse effects on competition in personal banking, basic current accounts and SME lending caused by the combination of persistent concentration in the market and the very high barriers to entry and expansion for new lenders.

Almost 60% of banking staff work in just two banking groups and almost 70% of bank branches are held by just three banks. In 2014, of the top 10 banking groups by market share for personal current accounts, only two could reasonably be described as mutual and only one of those had a market share of 5% or higher.

What was striking about the remedies package that the CMA advanced was that it did not consider reforms to the ownership model of any of the major banks as a possible part of the solution. It did discuss the idea of breaking up the big banks, but I repeat that it did not discuss changing the ownership model. State ownership of RBS has steadied a sinking Titanic, but it has not fundamentally changed the key structural weakness in British banking: the lack of competition between different types of financial services business. Full private ownership of all the big banks—the stated aim of the last two Governments—is only likely to exacerbate the lack of competition.

There has been discussion about mutualising one of the banks. Indeed, for some time, the Co-operative party tried, ultimately unsuccessfully, to convince both the last Governments to consider remutualising Northern Rock. Neither of them, for slightly different reasons I suspect, was willing to countenance that option. There has been consistent support across all the main parties for reinvigorating competition and choice in the banking sector, first by fostering more diversity and secondly by promoting mutuals. The case for mutualising RBS, rather than selling the rest of its shares at some future point on the open market, is partly that it would encourage a more diverse group of big banking businesses, partly that it would enhance the critical mass of the mutual sector and partly that it would accelerate improvements in the culture and practice of RBS itself.

Andrew Haldane of the Bank of England has argued that a more mixed system of different corporate structures is likely to produce a more stable financial system. While there is evidence that building societies offer their customers a better deal, on average, than traditional banks, I am not making the case for mutuals per se, although I declare an interest as chair of the all-party parliamentary group for mutuals. I am making the case for the systemic advantages of a mix of banks and mutuals, which turning RBS into the Royal Building Society of Scotland would deliver. Mutuals, although affected by the downturn, proved more stable than traditional proprietary banks. Given the huge barriers to entry to setting up a new mutual of any significant size in the financial services, it makes sense to explore the mutualising of a mature business, while conserving the remaining mutuals.

As we have had to suspend the sale and reprivatisation of shares in RBS, there is an opportunity to consider an alternative to state or private ownership. After all, no one thinks the Government will get their money back in full from the sale of RBS shares for the foreseeable future. Indeed, the Office for Budget Responsibility is no longer factoring in any sales of RBS shares in this Parliament. Those shares that were sold resulted in a net loss of £1 billion to the taxpayer.

The mutualisation of RBS would not mean that its debt to the taxpayer could not be repaid. A new mutualised Royal Bank of Scotland would need to make annual payments to the Treasury for some time to come. An asset lock for the new Royal Building Society of Scotland would also be needed to ensure that members—that is, customers or employees of the society—would benefit only from their ongoing financial relationship with the business. Crucially, it would be clear up front that membership of the new society could not lead to a demutualisation-style handout, so members would have no incentive other than to see the business stick to its core activities.

The trade sale of RBS shares was to other financial services players. If Goldman Sachs, Citigroup and Morgan Stanley are allowed to continue with that, it will simply reinforce ownership of the big banks by the wealthiest in our country and beyond.

A Royal Building Society of Scotland would be a chance to change the culture fundamentally at one of Britain’s biggest financial players. Above all else, it would inject some competitive energy and dynamism into what is, to all intents and purposes, still a monopoly industry.

Question put and agreed to.

Ordered,

That Mr Gareth Thomas, Luciana Berger, Stephen Twigg, Stephen Doughty, Stella Creasy, Geraint Davies, Mr Mark Hendrick, Mr Adrian Bailey, Mike Gapes, Ms Karen Buck, Christina Rees and Mr Steve Baker present the Bill.

Mr Gareth Thomas accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 24 March 2017, and to be printed (Bill 111).