Queen’s Speech

Baroness Kramer Excerpts

Monday 13th May 2013 Lords Chamber

[Baroness Kramer]

My Lords, I do not flatter myself that so many noble Lords have remained in this Chamber for my speech, but rather for the speech of the noble Baroness, Lady Lane-Fox, who will follow me—and quite right, too. I very much hope that she will address the issues of entrepreneurship in such a cutting-edge industry. That will be fascinating, not just on a personal level, but because it lends itself so much to the issues of economic growth that we are talking about today.

The opening phrases of the gracious Speech indicated that the Government’s purpose is to focus on building a stronger economy and promoting a fairer society. Let me wholeheartedly endorse those two principles, which must go hand in hand. This country has, at times in its history, pursued one but not the other, and that has damaged us as an economy and a society.

Much of the work of rebuilding the economy is already under way. I will pick up on the latest measure that was in the Queen’s Speech, which is extremely positive, namely the commitment to introduce a new employment allowance of £2,000, not least because its simplicity should make it very attractive to small businesses. We have heard again today, from the right reverend Prelate the Bishop of Birmingham, and others, that small businesses are key to the future of this country’s economy. This should be a spur to new hirers.

I commend the Government on resisting the temptation to constantly think up more legislation in the finance area, where we already have crucial banking reform legislation to deal with. I am on the Parliamentary Commission on Banking Standards, and our report will come out in the next few weeks. The Government slightly surprised me today by saying that that Bill will come to this House before the Summer Recess. It is very important that the issues raised in our final report have the opportunity to be properly considered, and, on many fronts, incorporated into that legislation. I therefore ask the Government to take a serious look at the timing.

I agree with one part of the speech made today by the noble Lord, Lord Forsyth: it is sometimes a relief that we have a Government who do not constantly try to address every problem by producing yet another piece of legislation. When we heard the noble Lord, Lord Eatwell, essentially complaining that there were not enough new laws in the Treasury field for this section, I thought, “Labour’s continuing with its old habits of legislation”. I am glad that he finally agrees that implementation and governance are the right answers, but those are not the words that his colleagues have used.

In these uncertain times in which we live, it is unwise to overestimate green shoots in the economy. However, I have been struck by the very positive tone that I now hear from a wide range of those working in small businesses, in business accountancy, and even in the commercial sector of the banking industry. Help to buy is having a very big impact on the housing market; Barratts has reported the highest demand for five years, and now warns of a possible skills shortage in construction, which it is combating by planning for 600 new apprentices and graduates over the next three years. The CBI report also reinforces the sense that there is momentum.

We have seen these signs before. In 2011 confidence began to grow, but was knocked back with the problems in Greece, and in 2012 we began again to see gathering confidence, which was then shaken by concerns over Italy and Spain. This time, however, there is a broader base, with a pickup in the service sector, non-EU exports, manufacturing output and retail sales. I would love to hear from the Government about retail sales, but I understand that much of the pickup comes from the over-45 age group, which, frankly, was much less impacted by unemployment and by wage compression. That group has the capacity to spend, and if it is starting to again, that is a very important message for the economy.

Of course, any return to recovery has its own risks. A few months ago it was fashionable to suggest that many companies in the UK were essentially zombie companies—the walking dead that would collapse in an economic revival. Thank goodness that theory has largely been discarded because it does not fit the facts. However, it is true that as the economy improves many companies will quickly chew through their cash reserves, and it will be absolutely critical that we have a banking sector able to meet the demands especially of small and medium-sized businesses. I confess that this worries me.

The Government’s decision in the Budget to continue and expand Funding for Lending, with much more emphasis on small business lending, was significant and welcome. The big banks have been clearing their balance sheets and trying to retrain their staff to look at the sector, and they should have enhanced lending capacity—although I remain sceptical about the low levels of demand that they insist exist in the economy. However, as the economy recovers we will definitely see a very significant pickup in demand for credit. It will come not in steady increments but in waves of expansion. We cannot afford for the banks to fail us again. If they are correct that only lack of demand has been holding back the flow of credit, we should see that change. In case they do not, I hope very much that the Government are looking at additional contingencies. It would be terrible to lose the opportunity of a rising economy because our banking sector, which has never focused very much on the real economy in the UK, failed to live up to expectations.

In the long run, new banking players and non-banking players will enter the credit market. We must never again depend on just four institutions, as essentially we do today. I am very pleased that we are close to achieving a proper regulatory framework for peer-to-peer lenders, and that they are getting support from the business bank. I congratulate the regulators, the FCA and the PRA, on a complete about-face in historical strategy. They are now setting out to remove barriers to the entry of new banks. Measures such as seven-day account switching will finally let ordinary people change their banks to get a better service, and will open the opportunity for new players to thrive. The Chancellor has proposed that the regulator should take on the payment system—the plumbing of financial services and banking—which has been in a sclerotic state and made it almost impossible for any new players to enter the market. We are moving towards an environment where competition is encouraged.

I am still concerned that waiting for banking and credit markets to grow organically and provide us with new players of any size will take longer than we can wait, and longer than one economic cycle. For that reason, I urge the Government to look closely at RBS, and possibly Lloyds, and consider splitting them up. People talked about splitting RBS into a good bank and a bad bank. That would have made sense five years ago but we are past that point now. Much more interesting would be a split into a number of regional banks that could identify and focus on the needs of each regional business base. For decades we have let the market shape our banking industry. It has been a disaster; we have seen nothing but consolidation and homogenisation. We now need the Government to tackle the failings in the structure of the industry, not just the failings of individual banks, which they are tackling with capital requirements, ring-fencing and other measures, so that it is fit for purpose, and the purpose is serving the real economy.

I know that Lloyds and RBS have had trouble selling off the pieces of their own banks that they have been forced to sell by European law. Two points are relevant here. One is the appalling legacy technology that the institutions are burdened with, which has not been brought up to date. The other is a general expectation that they will simply consolidate into another new big bank rather than remain sustainable as regional organisations. Economies of scale have dropped sharply and dramatically with modern technology. Highly competitive regional banks have proved viable across the globe. If national banks cannot serve our businesses and regional banks can, we should seize the once-in-a-generation opportunity of returning two major banks to the private sector to build the banking structure that best supports our economy.