Financial Services Bill
Lord Sharkey Excerpts(13 years ago)
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Lord Sharkey
“(d) the deprived communities objective (see section 1F).”
Lord Sharkey
My Lords, in moving Amendment 102, I shall speak to Amendments 118AA and 121. They are aimed at addressing three financial problems in our deprived communities. The problems are significant and so is the size of our deprived communities. The last indices of deprivation report published by the Government notes that more than 5 million people in England lived in the most deprived areas in 2008; 56% of local authorities contained at least one area among the most deprived; and 88% of the most deprived areas in 2008 were also among those most deprived in 2007.
The first problem that the amendment seeks to address is that many individuals in these communities face very great difficulty with financial services. In August 2010 a report to the Treasury called Realising Banking Inclusion: The Achievements and Challenges summarised the situation. The report concluded:
“Efforts on banking inclusion have moved 1.1 million into banking but the benefits appear to be unevenly distributed and barriers to banking remain”.
The report found that penalty charges had been a harsh reality of the banking experience for many. Around half of the newly banked had been hit by penalty fees and individuals who incurred these charges tended to be charged multiple times, averaging nearly six times per year each. Although there had been savings gains for some, the tendency to cash management and the impact of penalty charges had undermined overall gains. Worse, there had been a significant increase in debt among the newly banked, resulting in an overall increase in spending on debt servicing. Perhaps not surprisingly, in view of all this, there has been a relatively high degree of account failure. Net account failures are close to one in five. The report concluded that there is a case to be made that a penalty charge system constitutes an effective market failure in the provision of banking services to those on low incomes. This market failure is the first problem which the amendments seek to address.
The second financial problem in our deprived communities relates to the funding of SMEs. It is generally accepted that the health and supply of SMEs is critical to the health of our economy, but there is even more to it than that. Data from the Kauffman Foundation study published in July 2010, The Importance of Startups in Job Creation and Job Destruction, suggest that the role of start-ups is absolutely critical among SMEs. The study found that, on average, and for all but seven of the 28 years between 1997 and 2005, in the USA, existing firms were net job destroyers. All net new jobs came from start-ups and job creation in start-ups during recessionary years remained stable while net job losses in existing firms were highly sensitive to the business cycle. This is probably true for the UK too, and is undoubtedly why the Government announced its start-up loan scheme, four weeks ago, offering loans of £2,500 to people aged between 18 and 24. It is a clear indication of both an unmet need and a failure of the banks to supply this need.
This is all very small-scale stuff and marginal. The fact is that the SME sector as a whole has significant funding difficulty. The Breedon report of March this year estimates that, by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. As the latest quarterly report from the Federation of Small Businesses shows, the situation is not improving. It is not just that the banks are not helping; they may actually have made the situation worse. We now know that they have mis-sold hedging products to around 28,000 small businesses. Andrew Tyrie said that the FSA’s investigation into this mis-selling is a damning indictment of the banks’ behaviour, that such products took advantage of small businesses and that this behaviour is completely unacceptable. This is just the national picture: it would conceal areas where there are more significant problems. The deprived communities will suffer more. According to a 2012 report by the Centre for Responsible Credit, only 4% of all lending goes to businesses in deprived areas. It is clear that the banks are failing in this area and this is the second problem the amendments address.
The third problem addressed by the amendments is related to the other two. It is not possible, at the moment, to have an accurate picture of what the banks are actually up to in our deprived communities. The data provided by the largest banks concerning their lending to SMEs are provided on an aggregated basis. This means that there is no information to allow local economic development agencies, including local enterprise partnerships and community development finance initiatives, to enter into an effective dialogue with the banks. There is no way of assessing performance, suggesting improvement, or of knowing which banks are performing better than others; there is no way of telling the terms on which credit is being made available in these deprived areas or of telling the extent, if any, to which banks are supporting the third sector to take advantage of their new rights under the Localism Act. We need access to disaggregated data and postcode level data so we can see clearly which banks are doing what in the deprived areas. This is what our amendment proposes.
Lord Sassoon
No, we are not abandoning a tool; partly because in this country, of course, we do not have the tool. However, I think it would be perfectly feasible for the Government, essentially as a matter of social policy, to decide on any number of actions that might require the regulators to play a part in implementing them. I do not believe that anything in the Bill would rule that out. That is quite different.
The American example shows that the right way to go is through a focused decision by the Government or a specific piece of legislation that tackles this issue, which may then impose responsibilities on the regulator. That is quite a different matter from giving the FCA a very general power to take on itself a responsibility that is rightly the responsibility of the Government.
It will not surprise the Committee if I say, in respect of Amendments 102, 118AA and 121, which seek to give the FCA this new deprived communities objective, that for the reasons I have given I do not think they are appropriate and I cannot support them.
Amendment 104AA also seeks to ensure that the FCA has regard to the issue of consumers’ ability to access affordable and appropriate products that meet their needs. It does that by seeking to add access to the list of matters to which the FCA must have regard in discharging its general functions. The “have regard” provisions that are currently listed there include only financial crime and the regulatory principles. That is why I cannot support the amendment. I cannot agree that the FCA should be required to have regard to something that it is not responsible for. This is the important distinction between financial crime, for which the FCA is responsible and which is listed in proposed new Section 1B, and access, which is not.
Amendments 108A and 108B seek to ensure that the FCA considers access when advancing its consumer protection objective by adding,
“the ease with which consumers can access regulated financial services that meet their needs”,
to the list of matters to which it must have regard in assessing what constitutes,
“an appropriate degree of protection for consumers”.
I have already set out why I cannot support these amendments, which seek to give the FCA a formal role in promoting access, but I will remind the Committee of the kind of considerations that the FCA will take into account when advancing its consumer protection objective to help consumers. The FCA must have regard to consumers’ differing experience and expertise and to their needs for timely, accurate and fit-for-purpose information. The FCA must therefore consider whether vulnerable or marginalised consumers engaging with financial services may need additional information, protection or support. The FCA’s consumer protection operational objective provides the mandate for the regulator to design a regulatory regime that delivers this.
Amendment 117A seeks to make sure that the FCA takes into account consumers’ ability to access financial services in advancing its effective competition objective. Again, I cannot accept this as I am absolutely clear that it is neither necessary nor appropriate for such a have regard provision to be added to the competition objective.
I turn to Amendment 118A. I have explained why I do not think it right to give the FCA an access mandate. Where there may be a case for action beyond the FCA’s objectives, this is a matter for government, but that does not mean that the Treasury should be able to direct the regulator on how it should interpret and indeed advance its objectives, as Amendment 118A seeks to provide. This would fundamentally go against the Government’s intention that the FCA should be an independent regulator and would, I suggest, blur the boundaries between regulatory and social policies. I also do not think it would be appropriate to have a power in statute, as proposed here, to allow the Treasury to give the FCA greater powers to act in an area that is rightly a matter for the Government to deliver, or indeed to give the Treasury the power to impose requirements directly on industry. We would be blurring the lines of responsibility. As I have explained, there is a lot we can do and are doing to advance some of these important social policy issues. If it came to legislation that impinged on the regulator’s prerogative, it is right that any powers in this area should be considered as part of that legislation and Parliament should consider the consequences for the regulator at that time.
Finally, Amendment 112A seeks to add “and products” to the regulated financial services for which the FCA will promote effective competition. I will briefly try to reassure the Committee that this amendment is not necessary. We agree that products are important. In fact, the focus on the design and governance of products will be one of the key ways in which the FCA will be different from the FSA. The Bill contains enhanced powers for the FCA to regulate products and I look forward to discussing in due course the new product intervention power, which is provided for in Clause 22. However, the outcome which this amendment seeks to deliver is already reflected in the Bill. A product in the context of financial services is ultimately an agreement under which one person agrees to provide a service of some kind to another person, so products are captured in the definition of “regulated financial services” as used in the Bill.
In summary, we are sympathetic to the aims of my noble friend’s amendment and to a wide range of the concerns that have come up in this debate. We are taking action on a significant number of fronts in this area. However, these are not matters for the financial regulator in the way that they have been drafted and I ask my noble friend to consider withdrawing his amendment.
Lord Sharkey
I thank all those who have spoken in support of the amendments in my name or in support of their general intent. At the beginning of his response the Minister said that the FCA is a conduct of business regulator. I say to him that it is precisely the inadequate conduct of the banking businesses that we want the FCA to regulate. I note that in the Bill the FCA is already required to take account of the needs of different consumers. All the amendments do is make this more explicit and more directed. I am disappointed by what seems to me to be a very narrow perspective in the Minister’s response. I do not agree that responsibility for helping funding into deprived areas is not a matter for this Bill. I will withdraw my amendment but I will return to the matter on Report. I beg leave to withdraw the amendment.
Economic Policies
Lord Sharkey Excerpts(13 years ago)
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Lord Sassoon
We are working extremely hard on the reforms that I have talked about to make sure that we have sustainable public finances and a more balanced economy.
Lord Sharkey
My Lords, the latest report from the Federation of Small Businesses shows, in the second quarter of this year, an increase to 73% in the number of small businesses finding access to credit difficult and an increase to 41% in refusals of credit applications. Given the Government’s efforts to provide funding for the banks to lend to businesses, can the Minister explain why this is so?
Lord Sassoon
My Lords, even though the latest business surveys show that private sector employment is significantly up and that manufacturing and service sector sales continue to grow, it is certainly the case that that is happening in the face of very tough financing conditions. That is why, among other things, the national loan guarantee scheme and the announcements from the Chancellor and the governor about the new funding for lending scheme, details of which will be put out in the coming weeks, were very important.
Financial Services Bill
Lord Sharkey Excerpts(13 years ago)
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Lord Sharkey
I shall speak briefly in support of Amendment 35, in particular the inclusion of the requirement to promote the Government’s objectives for growth and employment. I emphasise the importance of promoting a healthy and flourishing SME sector in achieving those objectives. The report of the noble Lord, Lord Young, last month, Make Business Your Business, noted that 50% of private turnover, excluding financial services, and 60% of private jobs are provided by SMEs, but SMEs still face great difficulty in finding funding.
The Breedon report of March this year estimates that by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. The Government need to take direct action further to improve the supply of finance to the SME sector, in particular in our deprived communities. SMEs in those communities attract only 4% of all investment in SMEs and are in areas where unemployment, especially youth unemployment, is likely to be high.
There is another urgent reason for providing finance to the SME sector. That is to do directly with job creation. The Kauffmann Foundation, a highly respected United States think tank, published a study in July 2010 entitled, The Importance of Startups in Job Creation and Job Destruction. I will have more to say about the findings of the report later in the debate, but its most striking findings were that in the 28 years it surveyed, all net new jobs came from start-ups and that during recessionary years, job creation in start-ups remained stable while net job losses in existing firms were highly sensitive to the business cycle.
That surely has lessons for the UK. If the Government are to succeed in creating the right number of new jobs, they must strongly and actively promote not just SMEs but the start-up subsector of SMEs. To have the appropriate effect, they must do that particularly in our deprived communities. Without such strong and directed promotion, the growth and employment objective is in danger of remaining just that—an objective.
Lord Blackwell
My Lords, I apologise to the House that I was unable to contribute to the Second Reading debate. The fact that all these amendments recognise the interlinking of financial stability policy and the wider economic objectives is a major step forward. However, the amendment proposed by the noble Lord, Lord Eatwell, is mistaken in its wording. It is a fallacy to believe that monetary policy and financial policy can be conducted orthogonally, independently of general economic and fiscal policy. The two inevitably interact, and it is fallacious to believe that we can have a government Chancellor of the Exchequer in one corner deciding on a fiscal policy and an independent bank deciding on monetary policy in complete isolation—and, if necessary, disagreeing and conducting an alternative economic policy.
We are in this situation only because the previous Government separated monetary policy from the independence of the Bank of England in 1997. Until that point, the assumption was that the Chancellor of the Exchequer and the Government were accountable to Parliament and to the electorate for economic policy in the round. The Governor of the Bank of England certainly had a crucial role in advising the Prime Minister and the Chancellor of the Exchequer on monetary policy.
At the end of the day, however, a common policy was agreed that ensured that monetary policy and fiscal policy were aligned to the same objectives. They might be the right objectives, they might be the wrong objectives, but at the end of day the Government and the Chancellor of the Exchequer were accountable to Parliament and to the electorate for those decisions. The idea, as the noble Lord said, that at times you want a Bank of England or a financial policy committee to pursue a policy that is at odds with government policy is mistaken and misrepresents the way in which these functions ought to work together.
I therefore much prefer the wording of my noble friend’s amendment, Amendment 35A. Although I agree with much of what the noble Baroness, Lady Kramer, has said, my noble friend’s amendment has the great advantage of simplicity, and I support him in that.
Economy: Deficit Reduction
Lord Sharkey Excerpts(13 years ago)
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Lord Sassoon
My Lords, the debt figures that the noble Lord, Lord Barnett, recited precisely illustrate the structural deficit challenge that we inherited from the previous Government. We have already reduced the current budget deficit from 11% to 8% of GDP in two years, but there is much more to do, and we will do it. We will be reducing borrowing by £155 billion a year by 2016-7, compared to what it otherwise might have been under another Government. We will keep on with that task.
Lord Sharkey
My Lords, the Oxfam report, The Perfect Storm, published two weeks ago, says:
“The combination in the UK of economic stagnation and public spending cuts is causing substantial hardship to people living in poverty”.
In view of this, could the Minister tell the House what plans the Government have in place to mitigate the effects of their deficit reduction programme on our most deprived groups and communities?
Financial Services Bill
Lord Sharkey Excerpts(13 years ago)
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The Lord Bishop of Durham
I shall speak to the amendment in my name, which is in this group. The noble Lord, Lord Eatwell, and others, have commented that the governor’s powers under this Bill are extraordinary. In fact, in the internal running of the Bank the governor will become totally dominant and virtually unchallengeable, as it will the governor who sits on all the relevant key committees. By virtue not only of sitting on them but of chairing them, the governor will have power over the agendas and the conduct of business. That will enable the governor essentially to control the direction of the PRA, the MPC and the FPC completely.
The purpose of the amendment is to pick up some of the points that the noble Lord, Lord Barnett, made so well a few moments ago and which had been made earlier. It seeks to balance the powers in the committees so that the deputy governors have control of their own special areas and are capable of ensuring that the committees focus on the areas that they know well. Noble Lords are aware that in the crisis of 2008, part of the problem, which has been brought out in subsequent inquiries, was that the governor’s focus was inevitably on one area and that others were overlooked because they were not the governor’s principal concern at the time. It is therefore necessary to try to balance the internal powers to create a robust and demanding internal discussion within the Bank long before it comes to the oversight or review of what might have gone wrong in the past—in other words, to stop things happening before they happen rather than afterwards.
Government Amendment 13, which is a fascinating, interesting and useful amendment that will be discussed later, seems, with respect to the noble Lord, to be retrospective rather than prospective. There is quite a lot of closing the stable doors after the horses have left. We do not want another run on the banking system; we want people to stop one. It is the old pink elephant problem: how do you prove that the system has stopped pink elephants being around because you never see one? We will be looking backwards, not forwards, with Amendment 13. It is useful in helping us to understand what has gone wrong but not what happened at the time.
My other concern in trying to balance out these major three committees, two being chaired by a deputy governor, is to try to make the FCA slightly less of the runt of the litter. At the moment, with one person having so much control, the FCA, which is the only committee of the big four that the governor does not chair, ends up being overlooked, I fear. Will the Minister comment on whether he agrees with the point made forcefully earlier that the most rigorous models of governance today should be those that are modelled on the Bank, which include ways of ensuring that it is a learning organisation before rather than after disasters happen. What further action can he suggest to ensure that the FCA’s voice is heard clearly, given its widespread impact on consumer finance across the whole nation and not only in the major financial institutions in the City of London?
Lord Sharkey
My Lords, I support Amendment 9, to which the right reverend Prelate the Bishop of Durham spoke. On Second Reading, several noble Lords commented on the powers that the Bill gives to the Governor of the Bank of England. The noble Baroness, Lady Liddell, made the same point half an hour or so ago. It is clear that such a concentration of power calls for robust checks and balances. To an extent, the Bill recognises this, and some of the government amendments recognise it even more. Perhaps necessarily all the proposed checks and balances are formal and procedural, and many are backward-looking. This is necessary but not sufficient.
Financial Services Bill
Lord Sharkey Excerpts(13 years, 1 month ago)
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Lord Sharkey
My Lords, I shall speak about two aspects of the Bill regarding two areas that it needs to cover but does not. I think that it is commonly accepted on all sides that a significant problem facing the economy is the question of lending to small and medium-sized businesses. It is generally accepted that we have been unsuccessful in getting sufficient lending to take place. The Bank of England confirms that the UK’s biggest banks failed to meet last year’s lending targets. The five banks that signed up to Project Merlin lent £1 billion less to SMEs than their 2011 target—and the Merlin deal has of course not been renewed. The Bank’s trends and lending report for April this year reports that in the three months to February 2012 the stock of lending to small and medium-sized enterprises continued to contract, and had in fact been negative since late 2009. In January this year, BIS published a report on SME access to external finance. Among its findings, the report states that 21% of SME employers that sought finance from any source did not achieve success, which was a significant increase on the 8% seen in 2007-08.
These figures are bad enough, but they conceal areas where there are more significant problems. The effects of the financial crisis are being most keenly felt in those areas of the country that have long been the most deprived. Workless households are concentrated in the old industrial areas of the north of England, the Midlands, Scotland and Wales, as well as in a number of seaside towns and inner-city urban areas. We urgently need to stimulate demand for SMEs in our deprived areas and to make finance available to help them develop. At the moment, according to a 2012 report by the Centre for Responsible Credit, just 4% of all lending to SMEs goes to businesses in the most deprived areas.
The only data provided by the six largest banks concerning their lending to SMEs are produced on an aggregate basis. This means that there is no information available to allow local economic development agencies, including local enterprise partnerships and community development finance initiatives, to enter into effective dialogue with the banks with a view to assessing and improving performance, nor any way of knowing which banks are performing better than others. Similarly, the current dataset provided by the banks tells us nothing about the terms on which credit is being made available to SMEs. There are other indications that the shift by banks from term lending to overdraft lending will probably lead to a significant increase in financing costs, but we do not know how much or where. We also do not know to what extent, if at all, the banks are supporting the third sector to take advantage of the new rights under the Localism Act. The Act provides for local communities to take over the running of local authority services to build new homes, businesses, shops, playgrounds and meeting halls.
All this requires planning and funding. That means the active involvement of the banks. We need access to information to show us what the banks are doing, area by area, bank by bank, to support this agenda. All this can be achieved by making a couple of simple amendments to the Bill. I believe that we should consider adding a fourth operational objective to the three set out for the FCA. This new objective could be called something like “the sustainable economic growth objective” and could be defined as ensuring an appropriate level of financial services provision in disadvantaged areas by having regard to the needs of SMEs and third-sector organisations in deprived communities for affordable loans, savings and insurance products.
Lord Forsyth of Drumlean
How are the banks expected to provided more lending at the same time that they are being required to make greater provision for capital and liquidity purposes? Surely that is asking them to do two contradictory things.
Lord Sharkey
I had a more minimalist objective: to make it plain that that is the case with the banks at the moment. We need to make sure that we know that they have an obligation to support SMEs and third-sector organisations in deprived communities. I add in passing that the need for some growth objective is evident not only in this part of the Bill, but in the objective set out for the FPC itself. Stability is a necessary objective, but stability without growth is, at best, a recipe for stagnation.
The existing objectives for the FCA include a competition objective. This competition objective includes the statement that the FCA may have regard to,
“how far competition is encouraging innovation”.
Apart from noting that the word “may” should read “must” if the paragraph is to have any real meaning, I also want to note that this is the only time that the word “innovation” appears in the 330 pages of the Bill.
That brings me to the second area that I want to address. Innovation in the provision of traditional retail financial services is obviously important. The Breedon report, commissioned by BIS and delivered in March this year, estimates that by 2016 there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. In their response, the Government acknowledged the problem and said,
“The Government welcomes the development of new and innovative forms of finance such as peer-to-peer lending and recognises the potential of these models to have a positive impact on the SME lending market”.
Currently, the total amount of peer-to-peer lending in the UK is small, but growing rapidly, and even more rapid growth is projected. The Government are encouraging growth in this area with a £100 million investment. Earlier this year, Andy Haldane, head of policy at the Bank of England, even suggested that these non-traditional lenders could eventually replace banks, but if these new models are to succeed in providing real and substantial competition for the banks, they need more help from the Government than £100 million in pump priming. At the moment, the non-traditional peer-to-peer lending sector is unregulated. As the Daily Telegraph said two weeks ago,
“if it is serious about encouraging the growth of a genuine long-term alternative to bank lending for SMEs, the Government also needs to address the thorny question of regulation. At present, alternative funding providers are not regulated by existing financial services legislation, leaving both borrowers and lenders vulnerable to rogue players entering the market”.
Alternative funders are in favour of regulation. They recognise the dangers to their business model of a scandal generated by some rogue entrant to their market. This is not a theoretical danger or a distant prospect and is certainly not a trivial problem. There is nothing to stop such an event occurring and permanently destroying confidence in the peer-to-peer model. As the Daily Telegraph also said:
“SMEs desperately need a genuine alternative to borrowing from banks and those using alternative funders must be protected so that both they and the market can flourish”.
The Government need to take action now, and this Bill provides the perfect opportunity.