Financial Services (Banking Reform) Bill
Lord Sharkey Excerpts(11 years, 7 months ago)
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Lord Sharkey
“Part 4ARegulation of High Cost CreditRegulation of high-cost credit agreements
(1) The FCA shall, within 6 months of the passing of this Act, include among the regulations governing high-cost, short-term credit agreements provisions to—
(a) restrict such loans to one outstanding loan per customer at any given time;(b) provide for a 24-hour cooling off period between loans in which no new loan may be entered into less than 24 hours after the settlement in full of a previous loan;(c) establish at the lender’s cost a real time database of loans outstanding to be used in the enforcement of paragraphs (a) and (b);(d) restrict the amount of any loan to a maximum face value of £300, exclusive of permissible fees; (e) restrict any transaction fees and charges of any kind to a maximum of 10% of the face value of the loan plus a £3 verification fee;(f) restrict the term of any loan to between 7 and 31 days;(g) allow the borrower to extend the loan term for an additional 60 days beyond the due date without any additional charges of any kind;(h) require borrowers who avail themselves of the extension in paragraph (g) to undergo credit counselling with a designated professional counsellor or organisation and to abide by the plan established to retire the debt.(2) For the purposes of this section—
“high-cost credit agreement” means a regulated credit agreement as defined by section 137C of the Financial Services and Markets Act 2000 (as inserted by the Financial Services Act 2012) that provides for—
(a) the payment by the borrower of charges of a description from time to time specified by the FCA; or(b) the payment by the borrower over the duration of the agreement of charges that, taken with the charges paid under one or more other agreements which are treated by the FCA’s rules as being connected with it, exceed, or are capable of exceeding, an amount specified by the FCA;“charges” means charges payable, by way of interest or otherwise, in connection with the provision of credit under the regulated credit agreement, whether or not the agreement itself makes provision for them and whether or not the person to whom they are payable is a party to the regulated credit agreement or an authorised person; “authorised person” has the same meaning as in the Financial Services and Markets Act 2000.”
Lord Sharkey (LD)
My Lords, this amendment has been somewhat overtaken by events. As little as four weeks ago, the Government were claiming in this Chamber that there was insufficient evidence for a cap on the cost of payday loans. They said:
“The Government do not believe that current evidence provides sufficient justification to support a cap on the cost of credit”.—[Official Report, 23/10/13; col. 1109.]
On Sunday, the Chancellor underwent a kind of Damascene conversion. He is now convinced that there is sufficient evidence for a cap. That is very good news. Surely it would be unkind to point out that there was no more evidence available to him on Sunday night than there was four weeks ago.
After the Chancellor’s announcement that there would be a mandatory cap, there was another late intervention. At nine o’clock last night, like all of us, I was e-mailed a letter from the noble Lord, Lord Deighton. Without elaboration, it says that,
“the balance of evidence has tipped in favour of a cap”.
He says that the Government,
“will give the FCA a clear duty in legislation to use the powers we have given it to implement a cap”.
He continues:
“The FCA must ensure that it designs a cap that works in UK consumers’ interests and fits the UK market”;
but he goes on to say that the FCA will draw upon,
“the analysis and findings of the Competition Commission, whose investigation of the payday lending market is currently underway”.
The investigation is indeed under way, but it has a statutory reporting date of 26 June 2015. That is far too late. It means that any cap is unlikely to be in place before the end of 2016. That would mean millions of the most financially troubled people continuing to pay millions of pounds to PDL companies entirely unnecessarily. The Chancellor, in his interview on the “Today” programme on Monday morning, said clearly that installing a cap could happen in parallel with the Competition Commission investigation. I spoke to the noble Lord, Lord Deighton, about this issue earlier today. At the close of our conversation, he committed the Government to have the cap fully implemented by the end of January 2015. This seems to me to be reasonable and to allow the time necessary to put all the systems in place. I would be grateful if the Minister would explicitly confirm to the House the commitment made to me by the noble Lord, Lord Deighton.
The main difficulty this evening, of course, is the lack of any concrete proposals from the Government. We cannot know exactly what the Government will propose. This is a fundamental problem because the devil is very much in the detail when it comes to the regulation of payday loans. We can only make a little progress tonight, but it would help to hear the Minister confirm to the House that they will by legislation oblige the FCA to impose a cap on the total costs associated with any payday loan.
It would help to hear the Minister say that the FCA will be instructed to look again at the restrictions on rollovers. The FCA has said that it is minded to restrict rollovers to two. This is completely wrong. Some 28% of all borrowers have one or more rollovers, and a full 50% of payday lending revenue comes from rolled-over loans. Rollovers should be banned. We should do here what they have been doing in Florida for the last 11 years. In Florida, no loan may be taken out until any previous loan has been settled in full; and no new loan may be taken out within 24 hours of the settlement of a previous loan.
Will the Minister confirm that he will instruct the FCA to consider this system? In Florida there is a real-time lending database in operation. This database prevents rollovers. It also prevents borrowers having multiple simultaneous loans. Will the Minister confirm that we will have a similar real-time database here in the UK? Will he confirm that the FCA will be instructed to consider banning multiple simultaneous loans?
There are another couple of features of the Florida regulatory system which should be closely examined on the basis that we should use them here unless there is overwhelming evidence to the contrary. First, in Florida, any loan may be extended by 60 days without any additional charge at all. That is certainly not true here, but it should be true here. Secondly, any borrower in Florida who extends a loan by 60 days is required to undergo approved credit counselling and to abide by the plan agreed to retire the debt. This helps stop the spiral of increasing debt and provides a way out. We should have this here in the UK too.
The fact is that the Florida regulatory system is a model for payday loan regulation. Perhaps this is what the Chancellor suddenly realised on Sunday night. I ask the Government to ask the FCA to consider all aspects of the Florida regime for adoption here in the UK. At its simplest, in Florida, if you borrow £300 for 30 days you pay back £333. Here, if you borrow £300 for 30 days from Wonga, you pay back £397. That is three times as much—a wholly unjustifiable transfer of cash from the poor to the rich.
In closing, I simply ask the Minister to confirm that when we come to the capping amendment at Third Reading, we can operate under the less restrictive Committee-stage rules, as I think is entirely appropriate given the late stage at which the amendment is being introduced. I beg to move.
Lord Selsdon (Con)
My Lords, I support the noble Lord, Lord Sharkey, but I speak from a slightly different point of view. After so many years in your Lordships’ House, from time to time certain problems are raised with me when people have nowhere else to go. I want to talk about the link between the payday loan and credit and other things, particularly unemployment.
Take the situation at the moment of the young unemployed, or with some sort of weighting allowance in some form or other, who want to buy a mobile telephone or an iPad or something like this. They go along to any one of the suppliers, which then offers them a package that means they do not need to pay £500 up front but can pay it later. They sign up to something that they do not quite understand and then find that they cannot meet the necessary payments. They may have various allowances but, before they know it, the pressure builds up. So what starts as a £500 transaction can multiply into £1,000 fairly quickly. They cannot afford to pay the bill, so they go to a payday loan company—I will not mention their names—which, without the necessary research, offers them facilities at an exorbitant rate of interest. What starts with the wish to buy an iPhone or something of that sort for £500, when they have not got the money up front, can turn into nearly £5,000.
Lord Newby
Absolutely, I am very happy to do that. I hope that the rules would send that message very clearly, but I am very happy to reinforce it.
I go back to the terms of the amendments. I am concerned that some of the provisions could make it more difficult for a consumer to cancel an agreement—for example, requiring borrowers to sign for cancellation of a CPA. I am confident that the FCA’s proposals will give consumers control with respect to CPAs and in managing their repayments. I strongly support the noble Lord in seeking to protect consumers using the high-cost credit market and ensuring that they know their rights. However, I believe the objectives of transparency and protections for consumers are already provided for by the new regulatory regime; the FCA has already set out the action that it proposes to take in this area.
I turn to the amendment proposed by the noble Lord, Lord Sharkey. His proposal would require the FCA to implement a number of rules from the Florida model of payday regulation, including a requirement for a cap on credit. I can give the noble Lord at least some of the assurances that he seeks in terms of the FCA considering the Florida approach to regulating payday lenders very closely, as it decides how to design a cap on the total cost of payday loans for the UK market and make sure that it works effectively here. It will consider rollovers and look, for example, at the experience of Florida with a real-time database.
While I completely support the noble Lord’s desire to learn lessons from other countries’ experience, I have some doubts as to whether it is as straightforward as he thinks to simply import almost an entire regulatory framework from another jurisdiction. The UK has a very different market from other countries, and it is right that the rules governing regulation of payday loans in the UK reflect our own unique national characteristics. The FCA will be charged with doing that, building on the international evidence and examination of the UK market, and drawing on the Competition Commission’s analysis among other things. Therefore, while I share the noble Lord’s commitment to ensuring the UK consumers are protected when they borrow from high-cost lenders, I hope that he will agree that the best way to achieve that is through development of evidence-based rules that are tailored to protect UK consumers. We have a clear action plan to deliver this objective.
The noble Lord, Lord Eatwell, raised the question of the content of the amendments and the relationship between the Government, in setting policy in this area, and the FCA—where the Government stop and the FCA begins. I heard very clearly what he said. The exact nature of the amendment that we will debate at Third Reading is currently being formulated, and I shall make sure that his point is very much in the minds not only of Ministers but of officials as they set about that task.
With those assurances about the amendment that we will introduce, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Sharkey
I was struck by the point made by the noble Lord, Lord Eatwell, that the Government must at some point surely say how the FCA is to arrive at a rate or an amount for a cap and by what criteria the cap should be determined. I am sure that they will want to revisit that whole notion again at Third Reading.
As to Florida, I am encouraged by what the Minister says. I make the overriding point that the Florida system has been operating for 11 years; it is simple, it is easy to understand and it works. What we have here now does not work, is not simple and is not easy to understand—and it costs three times as much as Florida. That is a powerful reason for looking carefully at Florida and assuming that there is something that we can really learn here, no matter the differences between the two jurisdictions. However, I am very grateful for the Government’s decision to cap the total cost of payday loans, and I look forward to a further discussion of the issues at Third Reading under Committee stage rules. In the mean time, I beg leave to withdraw the amendment.
Banking: Lending
Lord Sharkey Excerpts(11 years, 8 months ago)
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Lord Newby
My Lords, as the noble Lord knows, there was a review about whether there should be a formal good bank/bad bank split of RBS. The Government decided that the cost and disruption of doing this was not justified. However, as the noble Lord says, the bank has itself decided to make an internal split, enabling it to have a greater focus on lending and on dealing in a more orderly way with many loans which will not be repaid or will be only partially repaid. Many of these are related to the property sector.
Lord Sharkey (LD)
My Lords, in March it was noted that lending to SMEs had shrunk by 25% in real terms since 2009 and it has continued to decline since then. The Business Bank is intended to address the problem and BIS forecasts that the first SME loan portfolio guarantees will be in place by the end of this year. Can the Minister update the House on progress?
Lord Newby
My Lords, in respect of SME lending more generally, gross lending is now rising. The picture is clouded by the fact that a lot of SMEs are still paying back loans, so the net position is not as positive, but net lending is down by a much lower amount. As far as lending to SMEs as a whole is concerned, the picture is improving. The Business Bank was launched on 17 October and it aims to support economic growth by bringing together public and private sector funds to improve financial markets for SMEs. Very recently it announced its first commitment of £45 million from the initial £300 million investment programme.
Banking: Co-operative Bank
Lord Sharkey Excerpts(11 years, 8 months ago)
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Lord Sharkey
To ask Her Majesty’s Government to what extent their aims of producing more diversity in banking and of reforming banking culture will be affected by the change in ownership of the Co-operative Bank.
Lord Newby (LD)
My Lords, the Co-op Bank is negotiating a deal on its capital with its creditors. It will cease to be fully mutually owned, but will continue to compete in retail banking markets. The Government’s reforms will make the banking sector safer, more competitive and diverse. We are implementing the recommendations of both the independent and parliamentary banking commissions. These fundamental reforms will be unaffected by the change of ownership for the single bank.
Lord Sharkey (LD)
The fact is that the Co-op Bank will now be owned by a couple of vulture funds, which I suppose is diversity of a sort. What advice would the Minister give customers who are looking for ethical values in retail high street banking?
Lord Newby
My Lords, the Co-op is undoubtedly having a significant change in ownership, but one would hope that even vultures will be able to see that the Co-op’s USP is its particular ethical stance. Its strength appears to me, at least, to be very much in that direction. So for the development of the Co-op, one would hope that they would see continuation of those traits being in their own interests, as well as those of anybody else. Of course, there are other mutuals that the discerning customer can put their money with; the Nationwide is very successful, as are other building societies. We must be clear on the difference between “for profit” and “ethical”. I would not want to brand every other high street bank as unethical just because they are also making a profit.
Financial Services (Banking Reform) Bill
Lord Sharkey Excerpts(11 years, 8 months ago)
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Lord Sharkey
“High-cost credit agreements
(1) The Secretary of State shall by order provide for each local authority in England and Wales to regulate high cost credit agreements entered into by any person whose registered address for the purpose of obtaining credit is within the area of that authority.
(2) An order under this section shall—
(a) set a maximum level for—(i) the amount of any loan;(ii) the rate of interest that may be charged; and(iii) the associated fees that may be leviedas part of any such agreement;(b) limit the number of times and specify the terms on which such an agreement can be rolled over for any individual to whom this section applies; and(c) require the lender to demonstrate that the borrower has no outstanding high-cost loans.(3) Any local authority choosing not to exercise its powers of regulation once an order is made under this section shall publish a report setting out its reasons for not doing so, and shall make a similar report in each subsequent year in which it chooses not to exercise its powers of regulation.
(4) For the purposes of this section—
(a) “high-cost credit agreement” means a regulated credit agreement as defined by section 137C of the Financial Services and Markets Act 2000 (as inserted by the Financial Services Act 2012) that provides for—(i) the payment by the borrower of charges of a description from time to time specified by the FCA; or(ii) the payment by the borrower over the duration of the agreement of charges that, taken with the charges paid under one or more other agreements which are treated by the FCA’s rules as being connected with it, exceed, or are capable of exceeding, an amount specified by the FCA;(b) “charges” means charges payable, by way of interest or otherwise, in connection with the provision of credit under the regulated credit agreement, whether or not the agreement itself makes provision for them and whether or not the person to whom they are payable is a party to the regulated credit agreement or an authorised person;(c) “authorised person” has the same meaning as in the Financial Services and Markets Act 2000.(5) An order under this section shall be made by statutory instrument subject to approval by resolution of each House of Parliament.”
Lord Sharkey (LD)
My Lords, I will briefly argue in favour of four propositions. The first is that payday loan charges are much too high; secondly, that the current action on payday loans, although it is welcome, will not fix the central problem; thirdly, that we already have plenty of evidence for how to fix this problem; and fourthly, it is possible to act now to benefit payday loan customers and there is no need to wait.
The first proposition is that payday loan charges are much too high, and there is probably no need for me to argue the point extensively in this Chamber. Many Members of the Committee will agree that the scale of the charges amounts to exploitation of the poorest and the most desperate, and perhaps even that these charges are an affront to social justice, or even a sense of common humanity. In fact, there are established markets where the payday loan business flourishes with much smaller charges, of which the United States is a prime example. I shall talk more about the regulatory regime in the United States in a moment.
The second proposition is that the current action, although it is welcome, will not fix the central problem. The FCA, which will take over regulatory responsibility for the sector in April next year, published a consultation paper earlier this month. The paper noted that:
“We consider that the high-cost short-term credit sector poses a potentially high risk to consumers in financial difficulty”.
It put forward five key proposals that would require lenders to,
“assess the potential for a loan to adversely affect the customer’s financial situation; limit the number of times they can seek payment using a continuous payment authority; limit the number of times a loan can be ‘rolled over’; inform customers about sources of debt advice before refinancing a loan; put risk warnings on loan adverts”.
All these requirements were broadly welcomed, but there was no proposal to address the very high cost of payday loans themselves. The FCA confined itself to saying only that:
“After we start regulating consumer credit, our supervision teams will consider firms’ fees and charges practices to decide if we need to intervene further”.
That was it, but it is these fees and charges that are the cause of the present hardship and difficulty. Why wait until next April? The charges are obviously too high. They are lower elsewhere, and they could be lower here, too.
My third proposition is that we already have plenty of evidence about how to fix the high charge problem. I have heard it said that, in fact, self-regulation by payday loan lenders is the best way forward. Quite apart from the fact that it is difficult to see this bringing down costs, the evidence at the moment is that self-regulation is not working. Earlier this month, BIS published a large-scale and comprehensive review of how well the payday loan industry had been complying with its revised July 2012 customer charter and codes of practice. What BIS found was this:
“Overall, the results of the survey show that 9 months after the industry said they would comply fully with the charter and the improved codes of practice, self-regulation is not working effectively and compliance with key provisions is not good enough … lenders appear to fall down significantly in meeting the requirements … overall in relation to rollovers, Continuous Payment Authority (CPA) and the treatment of customers in financial difficulty”.
Lord Sharkey
I am happy to acknowledge the achievements of the noble Lord, Lord Mitchell. As the noble Lord, Lord Eatwell, may know, when I spoke to the noble Lord, Lord Mitchell, about my amendment, he said that, if he could, he would be happy to speak in support—qualified support, no doubt.
The question of local authorities is a red herring. I would happily trade off local authorities for the FCA if the Government would agree to the substance of the amendment. I do not intend to pursue the notion or the comments that have been made about local authorities by the noble Lord, Lord Eatwell, and my noble friend the Minister.
I am puzzled by the notion of there not being sufficient evidence to introduce a cap. I am hard put to understand how the situation in the United States—we mentioned only Florida but there are 17 other states with low interest rate caps; these systems work well—does not constitute something close to entirely sufficient evidence. I note in passing that Australia introduced the same system last year and there is evidence available from there as well. I also note in passing that this issue about payday lenders being able to avoid any cap by writing in additional charges is explicitly dealt with in the regulations that exist in Florida and the other states that cap these things. It is the total cost of any charges connected in any way with the loan that is capped; it is not just the interest rate.
I listened carefully to what my noble friend the Minister said and I will read it carefully again tomorrow morning. If we can dismiss the notion of local authorities for the moment, there may be merit in returning to this issue and of getting something done more quickly than April and afterwards so that we do not continue to have people taking on these loans at appalling costs. There may be merit in returning to that on Report but in the mean time I beg leave to withdraw.
Financial Services (Banking Reform) Bill
Lord Sharkey Excerpts(11 years, 9 months ago)
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Lord Sharkey
“Competition and diversity
The Secretary of State must bring before Parliament within 6 months of the passing of this Act proposals to increase competition and diversity in banking by imposing upon any bank in which Her Majesty’s Government is a majority shareholder a duty to apply the following principles—(a) the principle of regionality whereby each branch of the bank is permitted to take on new deposits, open new accounts and make loans to companies or individuals only when the registered addresses of these companies or individuals is within the defined geographical area of operation of that branch;(b) the network principle whereby regional groups of local branches are autonomous in terms of governance, publish separate reports and accounts, collaborate with other branches to share central services such as the provision of systems, marketing, specialist financial products, liquidity management and wholesale funding while also maintaining appropriate mutual guarantees and self-regulation within the group to ensure that failing local management and branches are dealt with within the group with no recourse to the taxpayer;(c) the stakeholder principle whereby the governance of regional groupings of local branches explicitly includes stakeholder representation, comprising local businesses, customers, suppliers and employer and elected employee representatives;(d) the social purpose principle whereby a broader social purpose is embodied either in the banking licence of the bank or other statute so that the directors do not have a duty to maximise profit, but to ensure the profitability and financially sustainability of their local operations in supporting the economy of their regions of operations and financial inclusion in those regions, and nothing in this social purpose principle requires making loans that could not reasonably be expected to be repaid.”
Lord Sharkey (LD)
My Lords, this is a probing amendment. It is designed to allow us to consider what progress we are making in generating competition and diversity in our financial system, and what steps we might take to accelerate this process.
From the start, the Government have recognised that there is a problem with the levels of diversity and competition in the financial system. The coalition agreement of May 2010 commits the Government to,
“bring forward detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry”.
A year later, the Commons Treasury Committee published a report entitled Competition and Choice in Retail Banking. This report showed competition to have declined. Part of the evidence for this decline was in the simple increase in concentration of financial services; part of the evidence was in the decline in customer satisfaction. The report notes:
“Competition policy should maximise the benefit to the consumer. Our evidence suggests that this is not happening. The large banks perform poorly on many consumer satisfaction surveys relative to other providers. Survey evidence consistently shows customers are dissatisfied by service quality and the lack of real choice on offer in the marketplace. In a genuinely competitive market we would expect firms which provide superior service, choice or prices to gain significant market share from rival firms, but we see little evidence that this is happening”.
The committee is there describing in restrained and measured language a cartel-like situation. In other words, there are too few banks, and those are too big and too similar. The banks themselves did not agree with that view. The committee noted:
“The large banks have told us that ultimately consumers will benefit from lower prices resulting from the economies of scale and synergies provided by larger more diversified banks. We agree that there are economies of scale/minimum efficient scale in retail banking which will ultimately limit the total number of firms in the market. However, we question whether the need for economies of scale justifies banks having a 30% share of the market or whether such benefits, if they exist, will be passed onto consumers in a market where competition is deficient. Indeed, such economies of scale benefits are likely to be outweighed by the negative impact on competition by those providers who are perceived to be ‘too big to fail’”.
In addition, there are two other factors. First, as Andy Haldane has noted, there is a case for concluding that over $100 billion in assets, banks actually become less efficient. They are too big. Secondly, the evidently corrupt culture we have seen in some of our banks is a clear symptom of a lack of real competitiveness and is probably chiefly caused by this lack. It is competitiveness—real competitiveness—that keeps companies honest, or at least very much more honest than some of our banks have been. I rehearsed all their recent and shocking failings at Second Reading, and I will not do so again now, but I will again point out that the PPI scandal is the clearest possible indication of non-competitive, cartel-like disregard for the interest of consumers. Banks sold policies which they knew did not serve the ends they were supposed to serve, and they did it on a gigantic scale. This would not happen in a truly competitive market.
This is the situation today: there is a lack of real competition and of real diversity. A study by the University of Oxford published in April this year by the Building Societies Association shows that across both the savings and mortgage markets diversity has dropped by about 20% since 2004. The report acknowledges some hopeful signs and says that in recent years the decline appears to have levelled off, but it concludes:
“If the Government is to fulfil its commitment to foster diversity it will need to do more to ensure that a variety of organisations are able to operate in financial services markets in the future, with the aim of reversing the decline in diversity... since 2004”.
It also says, bluntly:
“Consumers are likely to benefit less from competition than a decade ago and if another crisis were to hit, the system is more vulnerable than it was”.
The Government are clearly alive to the problems of competition and diversity and to their importance. Many initiatives, legislative or otherwise, have been aimed at bringing about improvements in both, but there is nothing in place which will produce any significant improvements in any near future, and there may be nothing in place at all that will really transform the competitive landscape. Divestment of branches and regulation of P2P and crowdfunding are welcome, and easing of the difficulties in acquiring a banking licence is very welcome indeed, but the plain fact is that we start from a position where the large banks have 80% or so of the market in the UK and have behaved in a cartel-like manner. The measures in place or in progress will surely not reduce this figure by much in the next 10 years. In fact, I would be very interested to hear if the Treasury has a medium-term forecast of market share of the big banks. Perhaps the Minister could help with that in his reply.
This 80% dominance of our big banks is the cause of the lack of diversity in our financial system, which is now very much less diverse than it was 50 years ago. The German savings bank association pointed out in May this year that 70% of German banks are mutually owned or not for profit. It also noted that in the UK just 3% of banks are local, compared to 34% in the USA, 33% in Germany and 44% in Japan.
The question is, of course: what can be done to speed up the progress of competitiveness and diversity? I do not think the answer to this question should be “Nothing”, or “We do not need to”, or “We can wait for some technological change to eventually produce the results we look for”.
I have spent almost my entire commercial life working with very large multidivisional and multinational corporations. They are fiercely competitive because they are committed to securing even the smallest possible profitable increase in market share. They are committed to doing this by being dedicated to serving the interests of their customers because they feel, no matter how big they are, the relentless threat posed by very much smaller, more agile and more innovative competitors. We need all these things, especially the last, to be true of our banking system.
I think any really substantive answer to the question of the lack of competition and diversity will have to address directly the lack of the true regional or local banking and the absolute dominance of one type of banking. This amendment sets out a proposal to do just that. We can do more and do it more easily with banks we own than with the other banks. We have an opportunity to use our ownership to begin to bring about the transformative changes we need.
The amendment proposes that the Secretary of State must bring before Parliament a plan to increase competition and diversity by imposing on banks we own a duty to apply the principles of regionality, networking, stakeholder involvement and social purpose. The principle of regionality is to restore real localism to banking, so that banks really know their areas and their customers in a way which is emphatically not the case right now. The network principle is to give regional groupings of branches a degree of real autonomy and some real identity. The stakeholder principle is to give representation in the banks’ activities to local businesses, customers, suppliers, and employees as well as employers. The social purpose principle is to explicitly give banks a local social purpose and responsibility. It is these principles that we need to see in operation if we are to introduce any real competitiveness, any real innovation, and any real diversity into our banking system.
Lord Phillips of Sudbury (LD)
My Lords, I, too, broadly support these two amendments. It is encouraging that every speaker so far has taken that broad point of view. As my noble friend Lord Sharkey said in opening this debate, the amendment in his name and that of the noble Lord, Lord Glasman, is a probing amendment. I hope that the noble Lord, Lord Eatwell, was advancing Amendment 102 in the same spirit. I very much hope that the Minister will say that he will take away the contributions made, so that we can come back together on Report with an amendment that answers some of these concerns.
Perhaps the most striking statistic that we have had was that given by the noble Lord, Lord Eatwell, who said that in Germany 80% of banking is provided by local regional banks whereas here the figure is only 3%. I think that was said by the noble Lord, Lord Eatwell, or perhaps it was the noble Lord, Lord Glasman.
Lord Phillips of Sudbury
I am sorry, it was my noble friend. That is a stunning statistic. The fact that some of the small German banks failed in the great crisis seems to reflect a strength and virtue as compared with the situation in this country where, but for the injection of in excess of £80 billion of taxpayers’ funds, as far as I can see the whole banking system would have failed. The big clearers would have gone to the wall—that is the truth. We do not even have a market banking system that complies with the supposed basic virtues of a capitalist system: when they were tested, they could be held up only by immense government input.
Lord Newby
My Lords, as far as immorality is concerned, later we will deal with amendments on the reversal of the burden of proof and on the new criminal offence which will be available should banks behave in a grossly immoral way. That is the way to deal with the narrow point my noble friend makes. The whole question of the culture of the banks is addressed only partially in the legislation because it is by definition a cultural issue. We are taking very significant steps to regulate individual senior managers and hold them to account for what they do in a way that has never been the case in the past. Again, that is quite a revolutionary change. Regarding the specific point raised by the noble Lord, Lord Flight, I believe that local authorities at least can bank wherever they choose, but I will look into the point and write to him. I simply do not know what the position is.
Lord Sharkey
My Lords, I will be brief because I see that I am holding back an avalanche of 158 government amendments. There have been a lot of strong, very well argued and diverse views, but there have also been some general themes. For example, there was a feeling that getting close to the customer is absolutely critical. I entirely agree with that. In fact, I fear that without this there is little chance of reforming the banking culture at all. There also seems to have been a general desire in the Chamber to discuss again the issues raised and to see whether on Report there could be a way of advancing some of the arguments put forward today. In the mean time, I beg leave to withdraw the amendment.
Lord Phillips of Sudbury
My Lords, for the record, these amendments cover exactly 52 pages. The only other point I wish to make—I agree with the noble Lord, Lord Eatwell, here—is that, despite the payment system having its own regulator, new subsection (3) of government Amendment 60B states:
“The FCA must take such steps as are necessary to ensure that the Payment Systems Regulator is, at all times, capable of exercising”,
its functions. It has the job of overseeing the regulator, so why on earth does it not do the job itself?
Lord Sharkey
My Lords, I have two simple questions. One is to do with the innovation objective. Government Amendment 60M states:
“The innovation objective is to promote the development of, and innovation in, payment systems”.
It just occurred to me to ask whether there is any example of a regulator successfully promoting innovation. I would be interested to hear the Minister’s reply to that.
Lord Sharkey
Government Amendment 60U is headed, “Power to require disposal of interest in payment system”. New subsection (2) states:
“The power conferred … may be exercised only if the Payment Systems Regulator is satisfied that, if the power is not exercised, there is likely to be a restriction or distortion of competition in—
(a) the market for payment systems, or
(b) a market for services provided by payment systems”.
How is that a remedy for anything? When it comes to divestment or disposal, is it the Government’s notion that someone will pick up the shares that have been disposed of; and, if so, who will it be? What would be the incentive for anyone to pick them up?
Lord Newby
My Lords, I am grateful for the wide welcome given to these provisions.
Economy: GDP Forecast
Lord Sharkey Excerpts(11 years, 11 months ago)
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Lord Newby
I am sure that the noble Lord will therefore have been very pleased to have seen the growth figures last week. I point out to the House that a key factor in growth is the level of interest that people have to pay and that, as a result of the Government’s decisive action in 2010, interest rates have fallen compared with the forecast, as a result of which we will, by 2015-16, have paid £31 billion less in interest payments than was expected in 2010-11.
Lord Sharkey
My Lords, what impact will the improved growth figures have on the public finances in general and, in particular, will they allow the Government to do more to help supply funding to SMEs?
Lord Newby
My Lords, the increased growth figures will of course have a materially positive impact on the debt forecast going forward. With regard to lending to SMEs, the Funding for Lending scheme was strengthened at the Budget and I am pleased to say that the figures published this morning show that there has been for many months a slight uptick in lending to SMEs.
Financial Services (Banking Reform) Bill
Lord Sharkey Excerpts(11 years, 11 months ago)
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Lord Sharkey
My Lords, there are lots of things about the banking system that need reforming, and I would like to talk about four that do not feature yet, or enough, in this Bill—payday loans, central counter parties, the payments system and the whole area of competition in general.
Let me turn first to payday loans. I think all noble Lords will recognise the justified concerns about payday lending. It is true that the Government are alive to these concerns and that the FCA will take over responsibility for regulating this sector in April next year. But that is eight months away and, in the mean time, the use of payday loans continues to grow alarmingly. In a Written Answer on 1 July, the Government estimated that payday lending had risen from £900 million in 2008-09 to £2.2 billion in 2011-12, with around 8 million new loans. Your Lordships will recall that Wonga recently increased its interest rates from just over 4,000% to just over 5,000%.
This is all pretty depressing, but the real situation may be much worse. The Government have no plans to monitor stock of payday lending until the FCA takes over in April next year, when they will think about it. This seems wrong. I can confirm to the noble Lords, Lord Higgins and Lord Watson of Invergowrie, that the Government have announced today that they have arranged for the banks to publish disaggregated lending figures by postcode quarterly from December this year. Why cannot we do exactly the same for payday lending? We will certainly look to amend the Bill to make this possible.
Perhaps even more worrying than lack of accurate and timely data is the Government’s ambivalence about the whole sector. I understand their concerns about driving borrowers to loan sharks, but the fact is that there is a successful model already well established of imposing strict limitations on payday lenders. In Florida, the state strictly regulates payday loans. There is a maximum borrowing limit of $500 at any one time. You can have only one loan outstanding, and this is tracked and enforced by a state-wide database of all loans taken out. The maximum fee is 10% plus a $5 verification fee, with no rollovers without having paid off the previous loan and a wait of 24 hours before applying for a new one. The software that does all this is available for implementation in the UK right now. I am sure we will want to consider in Committee the merits of having a similar regime in the UK.
The second area of concern is to do with the regulation of central counter parties, the small number of exchanges through which derivatives and derivative-type products must now be traded. Concentration of these trades into a small number of exchanges had the objective of increasing transparency and therefore predictability and therefore stability. It is quite possible that this concentration may have the opposite effect. If our banks are too big to fail, Andy Haldane of the Bank of England has pointed out that CCPs are,
“too big to fail on steroids”.
If the primary purpose of the Bill before us can be seen, as the BBA rather optimistically asserts, as,
“the final step in financial stability orientated measures”,
it is by no means clear how this Bill contributes to the stability or the resolution of CCPs or how it reduces exposure for the taxpayer. Perhaps it was not intended to, but we need to address these issues somewhere.
The third area of concern is the payments system, which essentially means VocaLink. This is the system, owned by the banks, which makes all money and credit transfers happen. It has two products—faster payments and BACS, one very fast, one remarkably slow. There are fundamental problems with this system as it stands. Leaving aside the question of who has the use of your money when it is slow in transit—when it has left your account but has not reached the recipient’s account—there are issues of competition, ownership and innovation here. The large shareholders in VocaLink have typically charged a premium for smaller banks to have access to the system. The Government are doing something about this, but the abuse of power by the large bank shareholders does not stop there.
The big bank owners of VocaLink have no incentive to innovate. Indeed, they have every reason to avoid innovation. VocaLink itself says in its observations on the Bill that,
“there are few incentives (owing to the pricing structures, length of contracts and commercial arrangements in place) for VocaLink, the payment schemes themselves or the end user banks to invest in innovations”.
Here “end user banks” really means big owner banks. You can see why they do not want to innovate. It would probably cost only between £25 million and £50 million to develop new, better, faster, more comprehensive payment systems. But because the banks’ IT systems are essentially clapped out and starved of investment, it would cost each bank hundreds of millions to upgrade its systems to implement new services. Of course, in any really competitive, customer-focused market, at least one bank would do just this, but our big banks are not competitive and certainly not customer- focused and they do not do any of this. They do not even invest in their current IT systems enough to stop them falling over. This is cartel-like behaviour—and I will return to the issue of competition in more detail in a moment. The fact is that the banks should not own or control the payments system, and we need to fix that. I think I heard the Minister say that the Government will bring forward amendments to do just that, which is very welcome. I look forward to discussing those amendments when they appear in Committee.
Before I leave the financial plumbing system, I would like to touch briefly on the issue of account portability. There has been progress on this. The new current account switching service will be available from September and mobile to mobile payments from 2014. This is a good thing as far as it goes. But, again, the fact is that we could do much better without the cartel-like involvement of the big banks. For example, under the proposed account switching arrangements, know your customer checks will still have to be carried out by the new bank, as the noble Lord, Lord Flight, said. This will delay switching for many retail accounts and is virtually certain to delay switching for all SME accounts. It need not be like this. Know your customer checks could be the responsibility of the plumbing system of a newly liberated VocaLink, and so could all the details of direct debits and other payments. How nice it would be if the banks were really forced to compete to service these consumer packages. This is an issue that we will certainly want to return to in Committee.
What many of the previous areas I have mentioned have in common is competition or, rather, the lack of competition. This is the final area that I want to talk about. I strongly agree with what the noble Lord, Lord Eatwell, said on this subject. Our banking system is not even remotely competitive. Four big banks control more than 80% of the market, and it is this problem which is a key driver of many of our other problems with the banks’ behaviour—resistance to change, corruption, criminality and incompetence. It is worth reminding ourselves, very briefly, of the most recent scandals: the collapse of HBOS; the fixing of LIBOR; the involvement of Standard Chartered and HSBC in sanctions-busting and drug money laundering; the failure of the RBS payment systems last summer; and, last week, Barclays being fined half a billion dollars in the United States for allegedly rigging the gas markets. All this is compelling evidence of corruption, criminality and incompetence.
However, these are not the worst things. The very worst scandal, an almost unbelievably bad scandal, is the mis-selling of PPI policies. This scandal was the worst for three reasons. First, it was absolutely huge. The banks are going to have to pay at least £16 billion, and perhaps £30 billion, to settle the claims made against them. Secondly, it was not just one bank; it was lots of banks. But, most of all, it is worst because it was deliberate exploitation of their customers. It is worth quoting what John Lanchester recently said in the LRB about the PPI scandal. He said:
“PPI was about banks breaking trust by exploiting their customers, not accidentally but as a matter of deliberate and sustained policy. They sold policies which they knew did not serve the ends they were supposed to serve and in doing so, treated their customers purely as an extractive source”.
The PPI scandal is the clearest possible indication that the banks do not have their customers’ interests at heart—the opposite seems to be the case. It is precisely the lack of effective competition that has allowed the banks to develop and maintain this corrupt culture.
The Government are alive to all this and so, to an extent, are the banks themselves. The Government would like to see a more diverse and competitive banking landscape and have made important moves to produce this. In particular, it will be easier to set up new banks and this will help. They would like to see the equivalent of the Sparkasse here in the UK. That would help, too. P2P lending may also help, although I should say in passing that I am very alarmed to see Santander muscling in on Funding Circle. It is very hard to see how this would increase diversity in our banking landscape. But all this is very small and very gradual. It would take decades and decades before any of this had any real effect on the big banks’ market share.
The banks themselves offer two sorts of solutions. One is better, more ethical cultures and better, more ethical leadership. However, it is hard to be convinced that this would be sufficient. At the time that HSBC was busting UN sanctions and laundering drug money, it had an Anglican clergyman in charge of it. The other solution is better regulation. The Government agree with this and in this Bill and in the Financial Services Act put enormous faith in the ability of smarter, stricter regulation to help solve the problem. I am convinced that regulation will help a great deal but I am equally convinced that on its own it will not solve the problem. In fact, I do not think the problem with our banks can be solved unless we make them really competitive and really focused on serving their customers. How we might do this, we will want to discuss in detail as the Bill progresses, but we do need to do something radical. At the moment, our banks are too big to fail, too big to jail, too big to trust and too big to manage. We should not believe that they are also too big to break up.
Bank of England: Monetary Policy Committee
Lord Sharkey Excerpts(12 years ago)
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Lord Newby
My Lords, my understanding is that it is for the MPC to decide on the scale of quantitative easing. As my noble friend will know, there is a Treasury representative at all meetings of the MPC. That representative is allowed to speak but does not have a vote.
Lord Sharkey
My Lords, last week the New Economics Foundation suggested a new approach to quantitative easing. It suggested channelling investment directly into housing infrastructure and SME lending. Does the Minister agree with that suggestion?
Lord Newby
My Lords, the Government are looking at a number of ways of increasing investment in all those areas of infrastructure. We set out in the spending review our plans for doing that in 2015-16 and subsequently. Plans or programmes already in place, such as the finance for lending scheme, are already having a significant impact on new housing construction.
Bank of England: National Debt
Lord Sharkey Excerpts(12 years ago)
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Lord Newby
My Lords, this measure was taken to deal with the heart attack suffered by the British economy and over a period it will be unwound. This is a matter for the Monetary Policy Committee of the Bank of England to manage. At the point at which it feels it right to start unwinding, no doubt it will explain how it plans to do it.
Lord Sharkey
My Lords, the Prudential Regulation Authority has said that the banks must raise an additional £27 billion in capital. Will the Minister tell the House how the Government intend to make sure that this increase in capital requirements will not lead to further reductions in lending to SMEs?
Lord Newby
My Lords, the Government are not responsible for the way in which banks may or may not raise capital. We are very keen for the banks to continue to lend money to SMEs and, indeed, to increase the extent to which they do it. One way in which we hope that this will happen is through increased competition in the banking sector. We hope that current trends in some aspects of that, with some of the new smaller banks lending to SMEs, will continue.
Public Service Pensions Bill
Lord Sharkey Excerpts(12 years, 5 months ago)
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Lord Davidson of Glen Clova
My Lords, we on this side welcome the amendments. The Minister gave a commitment to the House which we are pleased has been honoured. We recognise that significant movement has been made by the Government in relation to governance and pension boards. In particular, we applaud what the Minister said about equal representation on pension boards. To have employees on such pension boards is a very welcome development.
Perhaps it is a small matter, but the Minister referred to the amendment dealing with conflict of interest. It is particularly gratifying to see that a small matter which might have been seen as an obstacle to equal representation on the pension board has been removed by careful drafting.
Lord Sharkey
My Lords, I shall speak briefly in support of Amendments 9, 10 and 11. I raised the issue of member representation on pension boards at Second Reading, and in Committee, as the Minister said, I tabled an amendment that would have required one-third of members of pension boards to be members of the underlying scheme. I was grateful then for the support of the noble Baroness, Lady Donaghy, and the noble Lord, Lord Eatwell, for the amendment.
With the amendments now before us, I think that the Government have taken a realistic and fair view of member representation. The equality of employer and employee representatives on pension boards is an entirely satisfactory resolution to the problems that we outlined earlier. In fact, I think that the amendments provide a better solution than those proposed previously here and in the Commons. Equality of representation is very simple and clear and completely unambiguous. I know that my noble friend has been instrumental in securing the amendments, along with my right honourable friend Danny Alexander, and I pay tribute to their efforts and thank the Government for proposing the amendments.