Financial Services (Banking Reform) Bill

Lord Flight Excerpts

Wednesday 24th July 2013 Lords Chamber

[Lord Flight]

My Lords, I first declare my interests as set out in the register, in particular as a co-founder and director of the new retail bank, Metro Bank. I agree very much with what the noble Lord, Lord Lawson, had to say about the separation of high street and investment banking. It is accepted that the ring-fencing regime is a compromise to see how it goes but it seems to me, above all, that these huge institutions have become unmanageable. They are just too large to manage effectively. I also note that investors, many of them pension funds, are still investing in a mixture of the two businesses, so it really is not much help to them.

The ring-fencing brings a lot of problems in terms of which services can or cannot be sold to retail clients. It is very complex but, to go only slightly in the other direction, one should not forget that it was essentially bad lending that led to the banking disasters. The noble Lord, Lord Lawson, made that point. There was bad lending of all sorts, including the buying of foolish CDO instruments. It was not particularly the derivatives or the investment banking side. It is important to remember that. I hope that a separation of the two sides of banking, should it come about in the future, may leave the banking sector to return to more reliable lending practices. That would go a long way to help address the issue of remuneration. In the past there was never any justification for huge remuneration. It was very much a carry-over from the investment banking world.

I, too, pay tribute to the Parliamentary Commission on Banking Standards and to Andrew Tyrie’s excellent leadership. I support the new senior person responsibility regime, but with the proviso that we should continue to have the principle that one is innocent until proven guilty. Some of the proposals seem to point in the other direction.

I want particularly to talk about competition. I used to think that competition was not so hugely important. The more that I focus on it, however, the more I consider it the one thing that could completely change banking in this country within as short a period as a decade. I will start by commenting on the Payments Council arrangements to enable seven-day current account switching, which come into operation this September, and on the debate about whether bank account number portability will be feasible in the foreseeable future. First, sort code account portability will not be feasible until banks have common sort code number systems. There is a lot of work to be done to standardise sort codes, which will be expensive. My second comment concerns a point that I raised at the time of the Financial Services Bill, to which there has been no reply. The anti-money laundering, or AML, “know your customer” requirement means that another two weeks or so is added to the time that it will take people to move their bank accounts. Banks will not accept a new customer’s account until they have satisfied themselves with an AML check. We all know that that goes on for ever; people have to see lawyers, get passports signed and goodness knows what. I would not mind if it was sensible—if there was a single body that did all AML “know your customer” analysis that was acceptable to all banks and which could be kept up to date. That would save a lot of duplication. With my Metro Bank hat on, we find that just by using a driving licence we can access all the data that we want and open an account within 10 minutes.

On the point about the essence of competition, until the latter part of the 19th century we were like America, with many regional banks. When local banks went down they caused 10-year depressions in parts of the country, which led the great Walter Bagehot to argue that if banks were consolidated, that would spread the risk. Certainly, one could argue that, in the 1930s, a Midland bank that had a very rough time in the north-west was sustained, in part, because of its spread of business all over the country.

Inevitably, things swing too far in the wrong direction. I would argue that in this country the amalgamation to reduce risk spread virtually to a cartelised banking system. When one of the large four banks decided to cut massively the services that it provided to customers, everyone else copied it. By and large, the big four have behaved in a similar way for a long time. When we have a cartel situation we tend to get problems and bad behaviour. Therefore, there is a sound case to be made for a significant revival of new banks in this country, which might take as much as half the total banking business—certainly the high street business—over the next 10 years or so.

Yesterday Metro had its third birthday. We have opened 19 branches, we have a balance sheet of nearly £1.5 billion, and we have about 210,000 account holders. That has all been built from scratch. If we can do it, why cannot everyone else do it? It is not that difficult. I am pleased to say that Vernon Hill, the American backer, considers this to be a more welcoming country than America in which to grow a bank. Although we may have our complaints about regulation, the multitude of American regulation is more exhausting than it is here. He is a great advocate of doing banking business in this country.

However, there are four areas in which we see scope to improve competitiveness. None of them is absolutely huge, but all are important. The first concerns the need to have a level playing field with regard to capital and liquidity requirements. The second concerns the payments system. The Minister commented on that in terms of the Government’s commitment. Thirdly, our antiquated high street planning rules tend to make it difficult for new banks to open up in good retail spots. The final point concerns the guidance to all government departments on doing business with new banks. As everyone knows, not so long ago the advice was to place money where one got the highest interest rate. Then came the Iceland banks crisis and the advice swung the other way: “You mustn’t go to any bank unless it’s got a credit rating”. We have all seen how useful credit ratings are.

On the first point, it is unacceptable that small banks—not even just new banks—often have four to five times the capital ratio requirements for SME and mortgage lending as do large banks. Clearly, a set of common industry standards for both liquidity and capital requirements is needed. I accept that both requirements should be higher in the early years of a new bank. There are high risks in setting up a bank and it is appropriate that there should be protection. However, the regulator should know what is going on and after three or four years it should be able gradually to phase in the capital and liquidity requirements to be broadly the same for all sizes of bank. I am hopeful that the PRA will use the occasion of Basel III and the EU’s CRD IV proposals, which come in at the beginning of next year, to move in that direction. I cannot see why we are where we are today and why the PRA should not get more of a move on.

On the payments system, new and smaller banks are dependent, as everyone knows, on large competitors to provide them with agency banking services, for which they invariably are significantly over-charged. It would be best to remove the payments system completely from banks’ internal mechanisms and to create an independently run licensed payments platform that would provide the service to all banks. The US clearing house inter-bank payments system is effectively that. It services several thousand banks within the United States quite satisfactorily. I cannot think why we might not think of copying the US in that direction.

On planning, we have classes A1 and A2 planning designations where banks are treated as A2 and therefore do not qualify for A1 retail sites. If a bank wants to open an operation in a shopping mall in an area where there is a lot of retail custom, it is not allowed to have that site. If the bank thinks it worth the effort, it has to go through substantial expense and time-consuming activity in seeking to get a change of use from A1 to A2 before it can take on such a site. Needless to say, landlords do not like that much, given that there is a delay in the period in which they are likely to earn their rental. The costs of dealing with planning add about £100,000 per site. The sensible solution might be to amend class orders to reclassify banks that keep retail hours, have retail customers and provide retail services as being suitable for A1 and A2.

Finally, on doing business with local authorities, it is clear that what is needed—whether it is guidance from DCLG or local authorities themselves—is to take a wider view of rating banks. Indeed, it is an insult to the PRA, which is supposed to ensure the creditworthiness, security and liquidity of all size of bank, to assume that credit agencies are better and that the smaller, newer bank is automatically less secure. Quite often it is, in fact, the other way round. The guidelines ought to be amended inviting government bodies to make their own judgments and potentially to place deposits on a more pro rata basis to the capital of different banks.

There are two other issues I shall address briefly which are somewhat indirect. One is that the EFG small business loan guarantee scheme is working poorly in this country, particularly in comparison with the small company loan scheme in the United States. The banks do not like it as it is a nuisance and a hassle. However, in the United States, there is effectively full security cover because the lenders, including the Government as guarantor, take a charge over the entrepreneur’s residence whereas over here that is not permitted. In the United States, that makes such loans more easily on-sellable, so the banks can go on making more.

Finally, as noble Lords will have noticed, UK banks in America have now been fined many billions for breaches of various regulations. I am very mindful that America has reduced its international indebtedness by about $1,000 billion as a result of the mis-selling of CDOs and that has been substantially paid for by our banking system. I wonder whether the Treasury has looked at whether the mis-selling of CDOs is a regulatory offence for which we might look at levying some compensating US fines.

We have a lot of work to do on this Bill. It is very important, but my sit-down message is that I feel that all efforts need to be made to make this country have a much more competitive banking system.