Financial Services (Banking Reform) Bill

Debate between Mark Garnier and Pat McFadden

Tuesday 9th July 2013 Commons Chamber

[Mark Garnier]

Yes, without a shadow of a doubt. A great many of the smaller banks that are looking to enter the marketplace have to use a piggyback system with the big clearers. For example, C. Hoare & Co., which has been around for 341 years and is still a private bank, uses RBS for its clearing. To that extent, the larger banks are providing a service, but ultimately it is causing a great problem for them. Over the past two years I have met about 20 potential challengers looking to enter the marketplace, and certainly it is largely the regulatory barriers to entry that have caused the problem.

Ultimately, the challenger banks are going to be running current accounts. Some of the larger ones, such as Metro Bank and Virgin Money, are 100% behind having full account number portability and recognise—I think that this is one tribute to them—not only that that will be an opportunity for them to attract accounts from existing banks, but that they will have to work incredibly hard to meet the challenge of a more sophisticated consumer in order to keep those accounts once they have them. That is crucial to one of the key points of the Parliamentary Commission’s report, which is the need to ensure that we drive better standards.

I return to the fundamental point that the best way to drive better standards is to have a very discerning and demanding consumer in order to ensure that those banks provide a service, and for that discerning consumer, once we have taught them how to do it, to hold the banks’ feet to the fire, so they need to be able to move their account very simply and overnight.

[Mr McFadden]

I want to make a few points about new clauses 10, 12 and 14.

New clause 10 deals with securing the best interests of the taxpayer as regards the state-owned banks and their future. If the best interests of the taxpayer were in the Government’s mind in recent weeks in their stewardship of RBS, that has been shown in a very peculiar way. This story does not begin with the departure of the chief executive. It begins before that with a briefing from the Minister’s Department about the share price in which it said that the previous Government had overpaid for the shares, and the briefing tried to set the scene for a pre-election fire sale of the bank that would have short-changed the taxpayer. I am glad to say that despite that briefing, the Government seem to be edging away from that strategy. If they were holding out hope that the banking commission would have given them comfort on that front, it did not turn out like that, and rightly so, because it would have been wrong to give a running commentary on the share price for an institution. An institution’s share price should be determined by the market, based on its future prospects.

After the briefing, we then had the unseemly departure of the chief executive at the Government’s hands. Most people saw him as doing a good job of reducing the risks on the bank’s grossly overblown balance sheet and trying to get it back into a healthier position, in the best interests of the taxpayer. Not only was he bundled out before he had completed that task, but this was done without any proper succession plan being put in place. Over the period of a month, we have had political briefing about the bank’s share price and the announced departure of the chief executive with no successor in place, and, as a result, a loss of investor confidence in the Government’s future strategy for the bank. That is no way to exercise stewardship of arguably one of the most important banks in the country. It has undermined the Government’s reputation as regards these state-owned assets and done harm and damage to the bank. I hope that in future the best interests of, and best value for, the taxpayer will be uppermost in the Minister’s mind rather than the politically motivated dabbling that we have seen in recent weeks.

On a happier and more bipartisan note, I turn to the new clause tabled by the hon. Member for South Northamptonshire (Andrea Leadsom) and the very similar new clause tabled by my hon. Friend the Member for Nottingham East (Chris Leslie). At the heart of this is how much banks care about reputational loss; the hon. Lady referred to that. If the banks were in a normal business environment and there were a big IT failure or another failure of conduct such as mis-selling or LIBOR interest rate fixing, they would care because they would worry that their customers would walk, but they are not in a normal business environment. Banks seem to be immune to, and careless about, reputational damage that would really matter in another business environment.

During the banking commission’s deliberations, a parallel was drawn with the car industry. When a fault appears in a model of one of the big-brand car makers, they will very quickly issue a recall notice to ask the customer to come in and have the fault fixed at no expense and at a time that is convenient to them. Car companies do that because they care about their reputation and want that customer to buy a car from them the next time they get one. The same logic does not apply in banking, because the same forces of easy departure do not apply. There are two sides to this story. It is not all about the easy transfer of accounts, although that is important; it is also about what one would be transferring to and from. There is little point in creating a perfect exit system if the choice is merely between three or four offers that are all much the same anyway. There is inertia on both sides. We need more competition among the banks as well as an easier system of transferring accounts.

The seven-day switching process that will come into play in September is an advance, and it should be given a chance to work; we should test it properly. At the same time, the new clauses tabled by the hon. Member for South Northamptonshire and by my hon. Friend the Member for Nottingham East call for proper reports to be produced on full account portability. The hon. Lady set out very well the reasons why we need a proper report, one of which is the issue of cost. The incumbents say, typically, that this will cost a fortune and that it will have to be passed on to the consumer, so let us explore the cost properly and get to the bottom of whether that argument is valid.

--- Later in debate ---

[Mr McFadden]

The hon. Lady may be right and that is another reason that we should have a proper report to drill into the issue.

On privacy, in addition to the cost argument I think that customers could also be discouraged by the argument that all their account details could be held in a single black box to which all the banks in the country have access.

[Mark Garnier]

The right hon. Gentleman raises an incredibly important point. I think that the vast majority of consumers would be very fearful of a central database holding their bank details. The beauty of the system proposed by VocaLink is that, although the payment system and the central infrastructure will hold the sort code and account number, the identity of the holder of the account number will be held by the bank. Therefore, the customer’s relationship will be with the bank, not with the payment system.

[Mr McFadden]

I thank the hon. Gentleman for making that important point. If consumers are going to have confidence in a system of speedy switching such as that being advocated by the hon. Members for South Northamptonshire and for Wyre Forest (Mark Garnier), these questions about privacy and security of information will have to be bottomed out to the public’s satisfaction. My view is that that will be a more important argument than the one about the cost to the banks of whatever IT changes will be necessary to put this system in place.

In conclusion, it is important that we give the seven-day switching service a chance to operate, but the report that the hon. Member for South Northamptonshire and my hon. Friend the Member for Nottingham East are asking for is also important, because it would bottom out theses issues and others that I have not mentioned. It is a shame that the hon. Lady does not intend to put her new clause to the vote. After all, it only asks for a report; it does not seek to mandate a change before we have done the work and got the proper evidence. I hope that the Minister will respond positively to her suggestion and that of my hon. Friend. It is really important that there is proper competition between providers in this sector to attract consumers and that the kinds of free choices that enable consumers to walk away and get another product from another provider are available in practice, not just in theory.

Financial Services (Banking Reform) Bill

Debate between Mark Garnier and Pat McFadden

Monday 8th July 2013 Commons Chamber

[Mr McFadden]

I entirely agree.

[Mark Garnier (Wyre Forest) (Con)]

To follow up on that point, rather than having a gun in the locker, some of these powers should be seen as akin to a nuclear deterrent. As parliamentary commission members will remember from doing the media rounds after the publication of the report, one of the big questions was whether Fred Goodwin would have gone to prison if we had had these powers in place. The answer to that is that RBS would not have gone bust in the first place. The deterrent element of these powers, rather than the enforcement element, is what is important.

[Mr McFadden]

The hon. Gentleman makes a very good point. Without wishing to pursue this analogy too far, the difference between a gun in the locker and the nuclear deterrent is that it is conceivable we would use the gun in the locker, but less so the nuclear deterrent. I am therefore not entirely sure which of the two commission members has got this quite right, but deterrence is certainly part of the effect we are looking for.

To return to the issue of the power to separate in respect of one institution or the sector as a whole, my overall reflection, having served on the commission for the past year is that, although its recommendations should be supported, even if we take all the steps set out—even if we put a new system of regulation in place, including the twin peaks system, even if we have the ring-fencing powers on structure that are in this Bill, and even if we faithfully implement the standards and culture recommendations to which the hon. Member for Chichester referred—it would still be rash to come to the conclusion that we had fully resolved the problems of too big to fail or too complex to manage. These reforms should be implemented and they can make a difference, but if we think we have fully resolved the problems of this huge sector, we will be guilty of complacency and possibly kidding ourselves. The problem of too big to fail is still there.

Our recommendations will make a difference but we also need powerful weapons, even if their use is unlikely, to enforce good standards and to make those running banks think long and hard about the consequences before they decide to test or game the system in any situation in future. That is why I think my hon. Friend the Member for Nottingham East (Chris Leslie) is right to say that a periodic review of ring-fencing and how it is operating is a good idea. It is why I support a more general power, to be held by the Government, to allow broader separation if the ring-fencing reforms do not work. That is what amendments 17 and 18 are designed to achieve and they are very much in line with the recommendations of the commission’s first report.