Banking Competition

Andrea Leadsom Excerpts

Thursday 12th July 2012 Westminster Hall

[Andrea Leadsom (South Northamptonshire) (Con)]

What an astonishing few weeks it has been in the banking sector. It is a pleasure to serve under your chairmanship today, Mr Chope. I am sure that my colleagues my hon. Friends the Members for Wyre Forest (Mark Garnier) and for Mid Norfolk (George Freeman), the hon. Members for Strangford (Jim Shannon), for Erith and Thamesmead (Teresa Pearce) and for Wells (Tessa Munt) who supported the application for this debate with me will be feeling, as I do, that the debate could not come at a more important time for such a key British industry.

Banks are incredibly important to Britain’s economic well-being. Financial services employ more than a million people in Britain and generate more than 10% of our annual tax revenue. The vast majority of those who work in the sector are doing an honest day’s job every day for an average salary and, if they are lucky, a modest bonus at the end of the year.

Banking is a vital industry that could lead us back to economic recovery. However, that will not happen on the back of what we have heard about the fraudulent and corrupt practices of the small number of massive earners who have done so much to destroy the image of our banks. It is vital that we re-establish banks as calm, measured and instinctively cautious guardians of the trust and confidence that account holders place in them. For a long time, I and many others have believed that more competition in the banking sector is key to that turnaround, and the events of the past few weeks have brought that sharply into focus.

I know it is annoying when people say, “It’s not like it was in my day,” but that is honestly how I felt after hearing Bob Diamond’s evidence to the Treasury Committee last week. For 25 years before becoming an MP, I worked in finance, including in Barclays’ dealing room just after the big bang in 1987. It was a different world. In those days, asking the treasury team what the LIBOR setting was would be a bit like asking you what the time is, Mr Chope; I would not expect you to tell me anything other than the facts.

However, that was in the late ’80s, when there were about 45 major banks in the UK. In the past 10 years, according to the British Bankers Association, that figure has halved to just 22. Not only that, but five of those banks have between them 80% of the personal current account market and the small and medium-sized enterprise market. I feel sure that the scandals of the past few years simply point to the disastrous consequences of the mergers and takeovers that took place during the 1990s. We now have a small group of vast institutions, where the culture has been shown to be, “Heads, I win; tails, the taxpayer loses.” That is a far cry from my day when “my word is my bond” was the ruling mantra in the City.

British people across the country are furious about the behaviour of the banks and they have every right to feel that way. Banks—already seen as greedy and arrogant— have stooped to a new low of corruption and fraud. The inquiry into wrongdoing, how widespread it may be among banks, and how many other areas of finance could have been manipulated has to run its course. However, we also have to think long and hard about the future. People are quite rightly asking, “What are the Government doing about it?” The answer is, “A lot.” Since 2010, the coalition Government have put forward radical proposals to ditch Labour’s appalling tripartite regulatory regime that enabled almost every regulator off the hook for the financial crisis. We have instigated the Vickers commission and accepted the retail ring-fencing proposal, as well as faster account switching. We have also proposed a new responsibility for financial stability for the Bank of England.

However, we could do more. In light of the Commodity Futures Trading Commission and Financial Services Authority judgments against Barclays, as well as investigations into other banks, we should be re-opening the debate in three key areas. The first is regulation. There is an old saying that investment bankers operate under equal measures of fear and greed. However, for years now, there has been vast greed with no fear of consequences. Regulators in the future will need extremely sharp teeth, so that if criminal behaviour is taking place in a financial institution, all those responsible go to prison like any other thief, and there should be new criminal negligence tests for bank boards.

The bizarre evidence from Bob Diamond that he found out only one month ago about the corruption and fraud that had gone on at Barclays since 2005 should not be an acceptable excuse. Enormous earnings require enormous accountability. And I say to those who think we will never find another bank chief executive, that I do not believe for one minute that banks will struggle to find people willing to take their shilling in return for that responsibility. I would be delighted to hear from anyone who thinks that they would not give it a go for a couple of million a year. There would be plenty of takers.

The Government should be returning to the objectives of the new regulators—the Financial Conduct Authority and the Prudential Regulation Authority. They should both be given a specific objective to reduce barriers to entry and promote competition. Only one new high street bank has launched with a full banking licence in the past 100 years; that was Metro Bank. Or was it in the past 300 years—[Interruption.] Sorry, 100 years. Other recent new entrants have tended either to be backed by one of the big five, such as Marks and Spencer financial services which is backed by HSBC, or have benefited from Government sell-offs, such as Virgin buying the good bit of Northern Rock.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

Before the hon. Lady moves on from the point about greater competition for banks, will she welcome the discussions between Lloyds bank and the Co-operative bank about a possible sale to the Co-operative bank, which would create one challenger bank in the marketplace?

[Andrea Leadsom]

Absolutely. I agree with the hon. Gentleman. That is a very good move. Personally, I think that a reversal of the Lloyds-HBOS merger would be better.

Secondly, the issue of a complete separation of retail and investment banking should return to the agenda. It is right that the Government should be the ultimate guarantor of retail deposits, but that guarantee should not extend to high-risk transactions. If an investment bank goes under, the losses should be borne by those who were happy to take the profits in better times, something to which the Government are already committed. Vickers has proposed ring-fencing already, but we should be examining again the prospect of a total separation.

Thirdly, the key issue is that of competition. The Government need to take further steps to inject greater competition into the banking sector. People have lost faith in the banking industry. Small businesses are finding credit hard to come by, taxpayers are furious at the billions spent on the bail-outs, pay for bankers is too often unrelated to performance, and customer service levels are, in many cases, utterly appalling.

[Mr Sam Gyimah (East Surrey) (Con)]

I congratulate my hon. Friend and her colleagues on organising the debate, which is long overdue. I thank her very much for that. On the issue of competition, one of the challenges, especially from the business banking perspective, is that 90% of the market is held by the five major banks. That means that if a small business is looking for a loan, it will find it incredibly difficult to get one if it has been turned down by its main bank. Also, if someone is offered a loan, they often have to agree to switch their account to the new bank. That lack of competition is a serious problem in terms of getting lending to businesses in the market. However, does my hon. Friend agree that such competition should be about not only having more banks but the diversity of provision in the sector? It does not have to be a bank that lends to a business.

[Andrea Leadsom]

My hon. Friend is absolutely right. We need far more diversity of financial service providers. Some of the issues I am about to discuss will address that because bringing down barriers to entry will, by definition in a capitalist society, encourage new entrants of all different sorts.

[Mr Gareth Thomas (Harrow West) (Lab/Co-op)]

I share the hon. Lady’s view and that of the hon. Member for East Surrey (Mr Gyimah) that more diversity in the financial markets is essential. Does she accept that it was a missed opportunity on the part of the Government to reject an amendment requiring the new regulators to have regard to promoting diversity in the financial markets?

[Andrea Leadsom]

I am not aware of the specific amendment that the hon. Gentleman is talking about. However, I certainly think that the Government will be wanting to promote diversity, and I am very much aware that they want to promote the diversity of financial service providers. I can tell him that, at a recent hearing with the Treasury Committee, the Governor of the Bank of England assured us that he, too, was very interested in promoting more competition and greater diversity. We unanimously agree on that point.

The best way to shake the banks out of their complacency is to allow new entrants into the market, bringing with them the high standards of service—including IT that works—that customers believe they should be able to take for granted. One significant step in that direction would be to break up and sell off the state-owned banks. That would create overnight potential new challenger banks in Britain, and I urge the Government to look at it again. The market concentration of the big five is appalling. Lloyds, the Royal Bank of Scotland, HSBC, Santander and Barclays have an estimated market share of 85% of the personal current account market and 67% of the mortgage market. That is a classic oligopoly, and they do behave like one. We can see all over the place barriers to entry, not least of which is the fact that those banks own, among them, the Payments Council and VocaLink—two crucial entities that enable the financial services markets to operate.

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

In an earlier Westminster Hall debate this week on the Royal Bank of Scotland, I heard from one of the hon. Lady’s colleagues what was essentially a call to mutualise RBS. Does she agree that that would be one option? Is she proposing that?

[Andrea Leadsom]

I am grateful to the hon. Lady for intervening. Not specifically, no. My point is more that we need the market to decide on diversity. I do not think that the Government, in any area of our economic life, should be the ones who pick who should be doing what. What Government need to be doing is facilitating greater competition and greater diversity so I would not be prescriptive in that way.

The key point that I want to focus on is that a real game changer for competition would be for the Government to introduce full bank account portability. We take that for granted with our mobile phones. Why should our bank accounts be any different? I have been pressing for it, along with various colleagues, since becoming an MP. If people were able to switch instantly between banks without having to change their bank account number, bank cards, standing orders, direct debits and all their online shopping, that would remove a massive barrier to entry that is currently constraining new, innovative banks.

Bank account portability has five basic benefits. The first, obviously, is that it creates greater bank competition. That is because a new bank can say to its customers, “Come and give us a try. If you don’t like us, you can move back to your old bank tomorrow.” The enormous inertia on the part of customers, who do not want to move bank because of the hassle and aggravation for them personally, would be removed instantly. They could switch between banks every day of the week if they chose to do so.

Secondly, personal and business customers would be able to force banks to compete for their business. New banks would therefore be putting forward innovative ideas—perhaps paying customers to move to them at one end and giving particular services to business account customers at the other end. That would completely change the choice available to consumers, and the consumer choice argument is a very strong one. At the moment, with the big banks, most people feel that there is no choice.

The third benefit is better regulation. The regulator would be able to shut down a failing bank while avoiding the risk of a run on the banks. With account portability, all personal and business accounts could be switched immediately to a survivor bank.

Fourthly, there would be a reduction in fraud. The highly overestimated costs of account portability need to be set against the significant reduction in bank fraud. I was talking to Intellect, the IT trade body, which reckons that bank fraud could be reduced by up to 40% if we had full account portability, because one of the major reasons for fraud is the poor legacy systems in some of the big banks.

The fifth benefit would be support for SMEs. It is crucial that we have that in our economy; we have to get businesses going again. Funnily enough, if banks had a single system, they would also have a single customer view, so they would be able to evaluate, calculate and assess their small business customers far more accurately, enabling them to meet the needs of small businesses far better.

Making it easier for people to switch bank account provider is not a new concept. Don Cruickshank, who led a review of the banking sector and whose report was published in 2000, has long been committed to the idea. In 2000, Halifax launched the stand-alone telenet bank Intelligent Finance, with the express aim of making it easier for consumers to switch bank accounts. In March 2001, the Competition Commission identified reluctance on the part of small and medium-sized businesses to switch banks as a major problem. Later that year, the Bank of Scotland announced its intention to capture business from what was at the time the big four with a new “Easy to Join” service, which would assign a staff member to oversee the account switching process and to deal with direct debits, standing orders, international transfers and the like.

In June 2002, James Crosby, then chief executive of HBOS, said that he was concerned by delays to greater account portability and that the move was vital for competition. More recently, the Independent Commission on Banking, led by Sir John Vickers, called for a system that would make account switching easier. However, the ICB’s proposals stopped short of full account portability.

This year, Virgin Money has added its support for full bank account portability. It has said that it is happy to support the ICB proposal that a current account redirection service should be established by September 2013, but that it is

“not sure that it will be sufficient to overcome consumers’ inertia, and their concerns that switching may be difficult.”

In its submission to the ICB, it expressed a preference for full account number portability.

The ICB published its final report in September 2011, following an interim report that April. The Treasury Committee took evidence in relation to both reports, and several bankers said that account switching was important. Mr Horta-Osorio, chief executive of Lloyds Banking Group, told the Committee:

“There has been progress made in terms of customers being able to switch effectively and without risk, but more progress can be made. We are proposing a seven-day automated redirection of direct debits whereby customers in seven days can be sure that their account and their direct debits are automatically redirected to the new account without any risk. All banks have now endorsed that solution and the Payments Council as well.”

At the weekend, Jayne-Anne Gadhia, Virgin Money’s chief executive, said that

“banking doesn’t have to be remote, distant and just transactional. There can be a new and different future where customers are at the centre of the banking experience…For too long, banking has been more head than heart. We want to put more heart into it.”

The ICB reported that there was a switching rate of just 3.8% for personal current accounts in 2010, that three quarters of consumers had never considered switching their current account, that 51% of SMEs had never switched their main banking relationship and that 85% of businesses surveyed by the Federation of Small Businesses had not switched their main banking provider in three years. Which?, the consumer focus group, estimates that people are more likely to get divorced than change their bank account. Those switching rates compare very unfavourably with those in other industries. In 2010, 15% of consumers changed their gas supplier, 17% switched electricity supplier, 26% switched telephone provider and 22% changed insurance provider.

Jayne-Anne Gadhia of Virgin Money says that

“retail banking has been underinvested in. When retail banking becomes the focus of senior banking executives again, which the splitting of retail and investment banking would bring about, bank customers will get a better service. If that happens, then I would be delighted.”

I agree with her. Making it easier for consumers to switch provider would be a boost to new entrants in the market and therefore to competition, because consumers would know that if they did not like the bank they had moved to, they could always move again.

[Mr Love]

The question that I am about to ask is one that I have some feeling about, as I have tried to shift my bank account in the recent past. The industry would argue that it is shortening the process and making it more secure, and that we should give that an opportunity to bed down in order to see whether it works. The industry also claims that it is very expensive. How does the hon. Lady respond to those concerns and how important does she think it is that we create a fully portable system?

[Andrea Leadsom]

I am grateful to the hon. Gentleman for asking that question. If people consider the cost to the taxpayer of the financial crisis and if people believe, as I do, that the reason for the financial crisis was that banks were too big to fail, it makes sense that if banks were no longer too big to fail, the taxpayer would no longer bear that massive liability. We need to consider the costs of achieving competition in the context of what has happened in the recent past, but yes, it would be expensive to achieve it.

The likes of VocaLink and Intellect, the IT trade body, have advised me that the costs are not in creating the centralised account-holding system required for fully transferable bank accounts, but in the big oligopoly banks changing their systems of sort codes, cheque books, bank account numbers and so on to fit in with a new system. The ultimate irony is that the challenger banks, such as Metro Bank, Virgin Money and Aldermore, would love account transferability because it is a minor cost to them; it is a major cost to those banks that, by dint of having legacy systems, have a lousy ability to feed in to a single system, so would find it very expensive.

You will be pleased to know that I am coming to a conclusion, Mr Chope. Now is not the time for timidity over reform in our banking sector and nor is it the time for false economies. We need to focus on enabling new entrants into the market, taking the steps that will be good for the consumer and for small businesses, and beginning the long process of restoring the reputation of our banking sector.

--- Later in debate ---

[Steve Baker (Wycombe) (Con)]

It is a pleasure to serve under your chairmanship, Mr Chope. I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) on securing this debate with particular serendipity. She called for more heart in banking, and tonight there will be a documentary on TV that I expect will be wonderful. “Bank of Dave” is about David Fishwick, an entrepreneur who sought to start a bank. It is a remarkable tale, and I hope the Minister will take a look at the programme because it speaks very much to the problem of barriers to entry.

Mr Fishwick is a successful entrepreneur who sells minibuses. He owns a Ferrari, a helicopter and a nice pad. He is a self-made man. He discovered that his customers could no longer get finance to buy his minibuses, and so his own business was endangered by the lack of credit. He therefore began to lend them the money himself. It seemed straightforward enough, and he thought, “I could do this, and serve my local community.” He set out to establish a bank, and his documentary, which is a series, talks about the difficulties he had. He is legally forbidden to call his institution a bank, so he does not take demand deposits but instead takes people’s life savings, personally guarantees them with his own wealth, and then lends them to productive businesses based on trust and relationships. That speaks very much to all the calls we have had from Members on both sides today for a new kind of banking. It is super local, personally guaranteed and based on trust and relationships, so I very much hope the Minister will watch Channel 4 at 9 pm to see Dave Fishwick and “Bank of Dave”.

I want to talk about the personal guarantee in particular. Members have talked about the loss of faith, and Mr Fishwick is restoring faith by knowing the people from whom he is borrowing and those he is lending to, and personally guaranteeing the finance. I introduced a private Member’s Bill in the last parliamentary Session to give directors of financial institutions strict unlimited liability for their banks’ losses, and to require them to post personal bonds to be used as capital and to place the bonus pool into capital for five years. That might seem a harsh measure, but it is based on the idea that without moral hazard, people will behave well.

[Andrea Leadsom]

That takes me back to the old days—I sound very old. Before the big bang, most small banks and financial institutions were run on a partnership basis and people ate what they killed. If they had a good year they took a huge bonus, but if they had a bad year they gave back the car, the house and the children’s school fees—I do not quite know how they would have done that. That changed when the institutions all became plcs and it was one-way traffic only, so I have a lot of sympathy with what my hon. Friend is saying.

[Steve Baker]

My hon. Friend demonstrates that the accusation of inexperience that is often levelled at this House is wholly false. Both she and my hon. Friend the Member for Macclesfield (David Rutley), who is sitting next to me, have extensive experience in the City and understand the changes and how things have moved on.

Historically, there were three ways of restoring trust in an industry—taking deposits—that has always been risky: mutuality; the historic trustee savings bank model, in which the directors were not able to take any personal reward; and unlimited liability. Some of the greatest bankers in history—the original J. P. Morgan and Nathan Rothschild—operated with unlimited liability, so everyone understood what they would lose if they got a deal wrong, and there was trust.

The implications of my private Member’s Bill would be, first, that banks would have a much better culture and people’s interests would all be aligned to the banks’ success. Secondly, if we gave directors sufficient warning that they would shortly be accepting unlimited liability for their banks’ losses and that the losses would come out of their personal possessions—their pensions and homes, and forgone school fees—we would soon find that they would break up the banks for themselves, because they would not wish to try to manage unmanageable behemoths. That would stimulate a natural diversity across the banking system, as directors created institutions that they could manage and understand. Similarly, as someone is hardly likely to keep retail and investment together if it is not in their interests, I would expect them to separate them.

Thirdly, if directors and staff stand to lose, there is a good case for lowering barriers to entry. If we can expect good behaviour from bank staff, and responsible lending, it is legitimate to lower barriers to entry, and a virtuous circle could be created. It might well be that going for strict, unlimited personal liability for directors would be a step too far as a first measure, but I invite the Government to consider it as an alternative way forward, which could lead to a more self-regulating banking system that served society more positively.

I think I am well known for believing that the state is the problem and that there should be less intervention, but if we must have intervention the suggestion of account portability made by my hon. Friend the Member for South Northamptonshire is a good one, because it promotes competition. We just need the banks to move accounts into.

I urge the Government to be cautious about the idea of a state investment bank. Whenever any Government—not necessarily this one—get into lending, it is to ensure that loans are made that would not otherwise be made because they would be bad loans. There is no kindness in encouraging a small business man to put his home at stake by taking on a loan he will never repay, because small business men, in all practical terms, often take unlimited liability. It would be better if they were employees. I urge the Government not to intervene too excessively in credit markets, although I realise that there are some elements they will proceed with.

Finally, I have some questions for the Minister. To what extent have the Government considered how their policies, such as the national loan guarantee scheme, promote big banks? We have all seen examples of officials being institutionally better at dealing with large companies, including banks, be it risk aversion or the simplicity of dealing with a small number of contacts to achieve a big result. Does current policy promote a small number of large institutions? That is the antithesis of the direction we want to go in.

--- Later in debate ---

[Andrea Leadsom]

Thank you, Mr Davies, for calling me to speak.

First, I thank my hon. Friend the Minister for providing what I thought was an extremely helpful round-up of what the Government are doing. As I said in my own remarks, it is certainly true that this Government have taken huge steps to put right a lot of the problems that have given rise to the financial crisis and the later problems of fraud and the issue of banks being “too big to fail”. I am grateful to him and the rest of the Government for that.

I also pay particular tribute to my hon. Friend the Member for Wyre Forest (Mark Garnier), because he and I have been a kind of two-man whirlwind in trying to get to the bottom—acting on our own and in private—of the issues for those organisations that would like to set up a bank and indeed for those small banks that do not reach a critical mass. We have found evidence that there are some significant barriers to entry, both regulatory barriers and barriers erected by the big banks that are trying to shut them out. I hope that the Minister recognises that we have tried to share that evidence with him today for his information.

It has been an extremely helpful debate today. I am very grateful to all hon. Members who have contributed to it. Some interesting suggestions have been made, and I would just like to summarise what I think are the “highlights” of the debate. First, of course we need many more new entrants to the financial services sector. Secondly, diversity of providers is absolutely key; we need not only “one-stop shop” banks but all sorts of other providers. Thirdly, we want to see far greater transparency, so that customers know what they are getting. Fourthly, access to banks and to branches is vital. Finally, the barriers to entry put up by the big banks need to be broken down, and issues such as the ownership of VocaLink and the Payments Council need to be examined.

I will end with the words of Jayne-Anne Gadhia, of Virgin Money, who said that banking needs less head and “more heart”.

Question put and agreed to.