Financial Services Bill

Debate between Lord Flight and Baroness Kramer

Monday 12th November 2012 Lords Chamber

[Lord Flight]

My Lords, perhaps I may just add a brief comment. I had a conversation this morning with the entrepreneur Luke Johnson. He made a point to me that resonated strongly. Would it not be a good idea if we could organise key entrepreneurs to take up the challenge of different towns around the country to give a lead in entrepreneurial rejuvenation? I can certainly think of examples, particularly Swindon in the past, where that sort of principle has worked extremely well. Then the SME lending makes more sense.

[Baroness Kramer]

I join the strong voices that we have heard so far on the amendment and again thank the Minister for the commitment that he has made on behalf of the Government to meet the essential needs that the amendment sought to fill. Amendment 27, which we discussed earlier, in effect wills the end. Amendment 28A in effect wills the means. Providing the database that tells us where the market is failing means that not just the regulator but also many other parties can begin to step in to take action to fill that gap.

Many people know that this has the nickname of the CRA amendment because the focus on making sure that data are exposed comes out of the Community Reinvestment Act in the United States. It started out as a civil rights measure but has ended up exposing vacuums in lending across that country and action has been taken that follows on. I suspect it will be the work of many years, quite frankly, to help to build the appropriate financial institutions to provide these services. It may be that it is not necessarily the major banks themselves. It may be the major banks working in partnership with community development institutions, social entrepreneurs, charities and local communities. There may be many varieties of response. In the United States we have seen that response happen and we need that response here.

We have been in the frustrating situation since the crisis of 2007 of looking at the small businesses that are the backbone of any country’s economy and recognising that they have not been able to expand at their potential rate because of the lack of credit availability. That is merely one example. Again, many individuals turn to payday lenders and others with absolutely extortionate interest rates and borrow just to be able to function financially. Frankly, if you can repay a payday lender, you can certainly repay a properly priced loan. This proposal lets us address that.

I wanted to make two comments on the CRA, reflecting communications that I have had with the United States over the past week. The first is an e-mail from John Taylor, president and CEO of the National Community Reinvestment Coalition. In his e-mail of last week, attempting to explain to me how this programme had worked there, he said:

“The success of the CRA cannot be overstated. Where once lenders feared to tread, they now make loans. CRA requires that such loans be made in a safe and sound manner, which is why so few CRA mortgage loans were involved in the recent widespread fiasco in the US mortgage industry”.

It is exactly that which we seek to come out of this—organisations and arrangements that are capable of lending into these areas where the big banks have chosen not to tread. They can do it in a safe and sound manner, which many general lenders might decide is beyond their particular capabilities—but at least we can get institutions that can fill the gap.

My noble friend Lord Sharkey talked about the importance of public awareness and the ability to put data into the public arena. I am quoting now from the manual of the National Community Reinvestment Coalition from 2007, which says:

“If banks and regulators are the only stakeholders involved in a secretive or mysterious CRA process, chances increase that CRA exams and merger applications become rubber stamps without imposing meaningful obligations to serve the community. On the other hand, if the general public is actively engaged in providing thoughtful and penetrating insights and comments on bank performance, CRA becomes a rigorous process, holding banks accountable to serving community needs. Consequently, bank lending, investing, and services increase for low- and moderate-income communities”.

That, I would argue, is what we all wish to see and seek to achieve with this amendment and with the Government’s commitment that stands in its stead.

Financial Services Bill

Debate between Lord Flight and Baroness Kramer

Wednesday 24th October 2012 Lords Chamber

[Lord Flight]

My Lords, in relation to these proposed new clauses, can the Minister tell me where lender-of-last-resort doctrine stands with regard to this legislation? A brief piece of history I observed in the course of my career was that at the time of the collapse of Johnson Matthey and Barings, there was a change in lender-of-last-resort doctrine. Since the 1870s it had operated on the basis that, in the event of a run, the central bank stood behind any bank that was properly managed. It was changed to stand behind any banks which were too big to fail. That led on to moral hazard and cartel, and a lot of smaller banks like Hambros closed, resulting in much less competition. At the time I had conversations and correspondence with Eddie George when he was Governor of the Bank of England, who virtually said he agreed with me but it was the way the then Conservative Chancellor of the Exchequer, Ken Clarke, had cast things.

Some of what the Minister just talked about touched slightly on the issue, but I would very much hope that the intent is to go back to lender-of-last-resort arrangements as originally intended, and as operated amazingly well for more than 100 years. I am not at all clear where we are.

[Baroness Kramer]

I have a couple of comments —they are really questions—on both amendments. Amendment 193F, as the Minister has said, essentially extends the Banking Act 2009 special resolution regime to investment firms. In the next two groups there are similar amendments extending that same resolution regime to holding companies and clearing houses. I am sure the Minister does not want me to speak three times on the same point, so perhaps he could extend his comments to those two groups as well.

I share some of the concerns expressed by the noble Lord, Lord Barnett, that we are getting a set of amendments which, by definition, will have to change fairly significantly because this area is being driven by European directives. Even the definition that we are using for an investment firm is a European directive. It is very difficult to understand how this works when the context and framework will be constantly changing. Perhaps the Minister could help us understand how that process is going to happen. With ring-fencing likely to change the way in which we look at and define an investment firm, that is one obvious set of problems. It may end up being different under European law from the application in the UK, because we may draw lines at different points. We may choose ring-fencing, and others separation. I cannot see how this set of language manages to comprehend all those complexities.

It is not just me who is concerned; I know that I have raised this issue before. This time, the BBA is very concerned about marching all the troops up the hill in one direction, finding that there has to be substantial change, and marching them all the way down and back up in another direction. I cannot understand why we are doing this now when we will have clarity in just a few months’ time.

I also want to raise a question which I have asked before but to which I have not had much of an answer, under Amendment 193BA. Again, it concerns the central clearing houses and the central counterparties. I am trying to understand if that amendment deals with an issue that concerns me: the waterfall of the resolution and whether, at the end of that waterfall, it is permissible under the legislation to tear up contracts. That is a reading which the Minister will know that the industry has asked about. When he talks about the protection of client assets, does that apply to contractual relationships—for derivative contract or whatever else—where the clearing house may not be able to meet its obligations because it has got into difficulties and has been put into a resolution procedure? I am unclear whether the legislation establishes that that contract may be torn up as the last resort in the resolution process. That is a big issue that needs general discussion, if that is right. It would be extremely helpful if the Minister could give us some clarity on that.

Financial Services Bill

Debate between Lord Flight and Baroness Kramer

Monday 8th October 2012 Lords Chamber

[Baroness Kramer]

My Lords, I will speak to Amendment 173AAZA in this group and I will be brief. Your Lordships will recognise that this amendment is part of the family of amendments that we on these Benches have moved. Amendment 173AAZA addresses the issue of social enterprise. It gives the FCA the power to make general rules for social enterprises to advance the consumer protection objective and the competition objective, and for services to small and medium-sized businesses, to defined groups within the more deprived economic and social environment and for environmental purposes.

It is the contention on these Benches and through much of this House that the current organisations that provide financial services fail to meet the needs of important communities, especially small and micro-businesses and deprived communities, and very often they certainly do not provide the necessary financial services to environmentally-oriented projects. Part of the barrier to the entry of new organisations that could meet those financial needs is the approach of the regulator which is very much a one-size fits all approach. Throughout this Bill we have been calling for the regulator to have the power to deliver appropriate regulation. This amendment addresses those issues particularly around social enterprises and other organisations with a social objective.

We recognise that the Government are somewhat sympathetic to the issues that we have raised. This is a probing amendment but also a reminder that although we went away for the summer we have not dropped, and will not be neglecting, these issues as this Bill proceeds to its end.

[Lord Flight]

My Lords, three different sets of amendments that I have tabled are grouped together here and they cover rather different territories. I will be as organised as I can in presenting them.

Amendment 173AA is about fair process for product intervention powers. I understand, and have a deal of support for, the regulator being able to ban promptly products that are clearly undesirable. However, if additional product intervention powers are put in place, there ought to be legislative safeguards to ensure that the powers are used as a last resort and not regularly. Amendment 173AA seeks to put in place safeguards for the use of product intervention powers, such as those set out in the EU markets in financial instruments directive.

Many noble Lords may have noted that Martin Wheatley, the designate head of the FSA, had made statements about shooting first and asking questions later and had perhaps over-made his point. One of the issues I want to speak about on Report regarding the new regulatory order is that I have encountered reluctance by the industry to raise criticisms with the regulator for fear of unpleasant reciprocal action. I fear we are slightly swinging from an era where regulation was very lax to one in which there may not be enough open debate between the regulator and the industry.

My Amendments 173ACA to 173AE seek to remove the requirement to publish details of directions prior to the conclusion of the representation process. There is an analogous issue that will come up in due course with regard to warning notices. In a world where anything published is a label of guilt, I am inherently opposed to the publication of notices before there has been fair representation and a fair judicial process.

My Amendment 173AF covers slightly different territory. The Bill already gives the FCA the right to introduce rules without consultation where it would be considered that a delay would be prejudicial to the interest of consumers. This additional power, which my amendment seeks to block, is unnecessary and provides the FCA with excessive powers without appropriate checks and balances.

Amendment 173AG raises the issue that very little detail is included about what should be covered by the statement of policy. It would be better if the statement of policy were clear and transparent, particularly if there is no consultation on the specific use of the powers. Finally, the statement of policy should be used for production intervention powers generally.

I cannot find the appropriate notes. Amendments 187RA and 173AAC both cover completely different territory. As noble Lords will be aware, financial advisers are the only category of people who do not have protection from the statute of limitations for a period beyond 15 years. In practice, this means that if there are any outstanding issues when a financial adviser retires, there is no closure. There are many such situations. Sometimes issues may be with the ombudsman or the regulator from way back and there is no indication whether any action will be taken. This is a messy situation and it is ultimately unfair to financial advisers, and not helpful to clients, as it stops financial advisers being able to hand on or sell their businesses to others in the industry. I can see no really fair justification why financial advisers should not enjoy the same protection as those in other industries. I may add something further after the Minister’s response.

Financial Services Bill

Debate between Lord Flight and Baroness Kramer

Tuesday 10th July 2012 Lords Chamber

[Lord Flight]

My Lords, I shall speak briefly to Amendments 108A and 117A, which essentially cover the same territory. They seek legislation which explicitly encourages the FCA to extend consumer access to financial services that meet their needs.

To that end, it is desirable that the FCA should assess the impact on markets and consumers when making regulatory decisions. For example—we have yet to see the result—the RDR reforms, though from many aspects fully justified, run the risk of having the reverse effect of reducing substantially the access to financial services and products for the great majority of people. In the absence of a requirement there is the risk that the FCA will always be steered towards risk-averse regulation, preferring to see markets restricted for large groups of consumers in order to avoid any individual consumer getting sub-optimal products.

The issue also arises in the context of the Government’s welcome initiative to encourage the development of simple financial products. If it is to succeed, it will need a regulator which is working with the grain of that policy rather than in the other direction, and which has a clear brief to act in a way to help extend consumer access to financial services that meet their needs, and not the reverse.

[Baroness Kramer]

My Lords, Amendments 102, 118 and 121 are very dear to my heart. They are perhaps some of the most important amendments to the Bill that have been brought forward. I have been interested in financial services for deprived communities for more than 20 years, partly from living in Chicago and seeing the impact that community development banking had on the revival and regeneration of Chicago’s south side. It was an area once written off because it was both black and impoverished and, in the end, it was only action by the banking regulator, under legislation, that drove forward change which was, and continues to be, dramatic.

The noble Lord, Lord McFall, who is not in his place today, will remember the visits that the Treasury Select Committee made to community banks in the United States in 2006—I take some credit for nagging the committee into making some of those visits—which made clear how much we are missing in this country. Both individuals and small and new businesses in the United States have a degree of access to financial services and credit that we cannot rely on in the UK.

The changes in the United States came through a piece of civil rights legislation, the Community Reinvestment Act. This amendment is not a copy of that Act, but it attempts to repeat its achievements. The data that the Act forced banks to publish exposed vacuums in lending across the United States and, to no one’s surprise, they matched very much with the boundaries of deprived communities and—I hope that we would not see the same thing here—the boundaries of communities of ethnic minorities. The regulator then stepped in and required those banks to meet the target of serving those communities, or to fund someone else who would, before allowing them to engage in mergers and acquisitions. It was an extremely effective strategy and continues to be so to this day.

The amendment is also a read-over from the banking reform White Paper, because it would allow the regulator to play a significant role that is described in paragraph 4.4 of that White Paper as,

“a more diverse banking sector”.

Surely the areas where banks are failing to play a role should be at the top of the list for new and diverse participants.

On our previous day in Committee, I said that the role of the regulator nowhere seems to touch on a responsibility to make sure that financial services are available all across our complex communities. Competition is focused on making sure that there is multiplicity of products, not that there is coverage of the full range of demand. Surely if we wish all our citizens to be able to participate in the economic growth of the country and want small businesses to become established, to grow and to build our economic future, we have to pay attention to that access and coverage issue as well. The requirements set out in these amendments get us to that point.

Small and Micro-Business Borrowing

Debate between Lord Flight and Baroness Kramer

Thursday 24th May 2012 Lords Chamber

[Baroness Kramer]

I very much thank the House for giving me the opportunity to bring forward a debate on small business and credit and the failure of high street banks to offer that credit and therefore the alternatives that we must look at. I warn the House beforehand that I am going to focus in the time that I have on two areas of particular interest to me, so I thank the other noble Lords who are going to participate in this debate in advance, because they will expand the conversation way beyond the range which I am capable of introducing.

There is very little dispute today that small and micro-businesses especially are struggling to access credit from the five high street banks that dominate banking in the UK, and that has been going on since the crash of 2008—and there were underlying problems before them. The Breedon report was very good; it quoted recent data that showed that 33% of SMEs applying for a loan were rejected and that the decrease in the supply of loans to SMEs in the UK has been much sharper than in other countries. We have a piece today in the FT that says that small businesses lament the shrinking pool of credit. If we needed a real illustration, the entry of Wonga into this field with potentially 2% of interest per week says in every way that there is a very serious vacuum. The truth is that the view of high street banks in this country is that “bankable” credit is a very narrow term indeed. Most lending for SMEs over past years has effectively been a form of real estate; it has not been an assessment of the business plan. It is not just that the high street banks will not do this lending—they cannot. They no longer have local knowledge; they do not have trained credit staff; they are now into a form of centralised tick-box commodity-type lending activity. The contrast is sharp with the German savings banks, the Swiss cantonal banks and the US community development banks, which are a backbone to SMEs in Germany, Switzerland and the United States. In those countries, lending has increased since the crash.

The banks that I just mentioned have a common characteristic: a social obligation as part of their mission, as well as profit—so not just a sole profit-maximisation obligation. Those banks are tied to a specific geography, so they are forced to make a success out of local businesses and to take a long-term view; they cannot diverge into other ways of earning money. Dr Thomas Keidel, who is very senior in the German savings bank association, talked to some in this House, making it clear that that local knowledge gives an intimate assessment of risk in a way that even a regional bank cannot accomplish. He said that many of the best credits in the German system are risks that would have been turned down had it not been for knowing management, understanding the order book and really being sensitive to the local issue. That is crucially different from the savings banks in Spain—they are in great trouble—which do not have that geographic link.

I argue that, frankly, this is a tier of banking that we do not have in the UK. We have some valuable community development financial institutions, credit unions, funds and banks. I have visited many, including a brilliant business enterprise fund in Bradford, but they are small and fragmented, and their geographic coverage is fairly random. I know that the Government will say that there is now an agreement with the British Bankers’ Association that high street banks that turn down a credit will then refer that small business to a local CDFI. However, that is relatively meaningless unless CDFIs are coherent and comprehensive as a sector and have sufficient funding to meet demand. At present, the CDFI sector in this country is swamped. One of the banks calculated that if they were really going to meet need, they needed something like £125 million of potential lending a week, but they are nowhere near that. The irony is that plenty of investors would like to get engaged with the sector, especially social enterprises, charities and philanthropic individuals, as well as commercial players. With the additional growing capacity to raise funds through the new sector of social impact bonds, there is huge potential to support an equivalent to the local and community banking sector.

We have to remove the regulatory barriers to new entrants into the banking system in the UK, which prevents social entrepreneurs and others getting new banks started. The FSA would say that nobody applies, but look at the experience of Metro Bank, the only bank in recent history with a new banking licence. We all know the numbers—something like £25 million to get regulatory approval, in two and a half years. Consultants in the banking arena all say to anybody interested, “Don’t even try. See if you can buy a banking licence, but otherwise forget it in the current climate”.

[Lord Flight]

My Lords—

[Baroness Kramer]

If I take interventions I will not get through my speech, so I am going to carry on.

I refer anybody questioning the barriers that come through the regulator to a very good piece called Street Cred by Civitas. It is a bit melodramatic, but it underscores all the difficulties that people face. I have talked with people in the US, and they reckon that it takes roughly six months and costs $2 million to get a new bank started. That is a very different situation.

The Government must develop a specialised bank licence and an appropriate set of capital requirements for small local-community banks undertaking the social impact obligation. We need off-the-shelf packages for small bank start-ups to provide economies of scale, including basic regulatory approval, working software and other forms of support. The US does it—it is called “bank-in-the-box”. We need a regime to enable banks that fail to be dealt with quickly as that gives confidence, especially to the regulator, to lower entry barriers. The Banking Act 2009 failed to do that. The FDIC in the States does a far more effective job. We have to introduce such a regime. I do not see signs of it but I hope that it will come. We should also deal with the VocaLink payments system, which is owned by a cartel. There are many regulatory barriers and failures in the system. Their removal could make a fundamental difference to what we do.

I wish to make two suggestions. First, RBS is, frankly, an albatross around the Government’s neck. If RBS’s branch network were used to create a community banking network, we could see a massive and rapid step change in this area. Secondly, we should examine what kind of lending high street banks undertake, see where the gaps are, and whether they are genuine gaps. It seems to me that there is an argument for saying to those banks, “We are not going to make you undertake this lending but we will have you fund someone else who can through capitalising a local community bank”.

In the time I have left I wish to say a few words about the innovative online lending platforms. I am not talking about companies such as Wonga but about the platforms that have investors on the one side and borrowers on the other and offer non-exploitative lending rates. They are new in the field and have grown up in the past two years—for example, companies which offer crowd financing and peer-to-peer financing. I am sure that noble Lords find that term hilarious. This industry has significant potential but is begging for stronger regulation. There is an enormous fear in the industry that a couple of cowboys might come in and create havoc, resulting in terrible headlines, investors fleeing and the regulator intervening in an incredibly heavy-handed way. It is crucial that the Government provide a more constructive regulatory framework which is proportionate and does not stifle the industry’s growth but which engenders confidence in the industry so that it can move forward.

I do not want to pretend that the Government have done nothing in this area. I am sure that the Minister will list what they have done. I acknowledge that things have been done but not on the scale that is necessary to support our SME sector. It is vital that the Government understand the limitations of the high street banks instead of constantly telling them that they should lend to these companies. They will not and cannot do that. The Government must have a coherent plan to fill this vacuum and must enhance the opportunities for local banks and quality online lenders. One of the problems is that there is no one in the structure of government at the moment who leads on this issue. It is split between BIS and the Treasury, and within the Treasury there must be five Ministers covering different parts of it. The Government should identify a champion to try to resolve this problem and take it forward. If they do not, we will not sustain our small businesses which are the backbone of our economy and we will give all the space to our competitors.