Business of the House

Debate between Andrea Leadsom and Steve Baker

Wednesday 13th March 2019 Commons Chamber

[Andrea Leadsom]

The hon. Gentleman is simply wrong. The Prime Minister set out, in response to the strong desire of this House, a trajectory towards a second meaningful vote, and if that was not passed towards giving the House the opportunity to take leaving without a withdrawal agreement off the table, and if that was passed giving the House an opportunity to ask for an extension to article 50. The Prime Minister has been clear that she will comply with the House’s request, and all I am pointing out is two things. One is that it will be a request—the Government cannot insist on it—and, secondly, the motion tomorrow will be amendable. So if the hon. Gentleman wants to put forward an alternative proposal that he believes will carry the House then of course, by definition in an amendable motion, he is able to do so.

[Mr Steve Baker (Wycombe) (Con)]

Since the last vote I have taken the opportunity to canvass the external Brexit campaign groups to find out their opinion as to whether, in the light of all this, we were right to vote down the deal, and I can tell the Government that unanimously so far the opinion is that the deal was so rotten that we were absolutely right to vote it down and that come what may we should continue to do so. And I tell the Government now that when meaningful vote No. 3 comes back I will see to it that we honour—honour—what we owe to them: to keep voting this down however many times it is brought back, whatever pressure we are put under, and come what may. Please don’t do it: go back to the EU and say, “It won’t pass.”

[Andrea Leadsom]

My hon. Friend and I clearly have a different perspective on this. In my opinion the Prime Minister’s proposal delivers on the will of the people as expressed in the referendum. It means we are leaving the single market and the customs union; we are taking back control of our money, our laws and our borders; we are getting out of the common agricultural policy and the common fisheries policy; and, importantly, we will have the opportunity to write free trade deals with other nations around the world. But important too is the fact that the Prime Minister’s deal respects the views of so many who did not want to leave the European Union, because it ensures that we will continue to have a close and collaborative relationship with our EU friends and neighbours. So in my opinion it is the best combination to deliver on the will of the referendum.

Money Creation and Society

Debate between Andrea Leadsom and Steve Baker

Thursday 20th November 2014 Commons Chamber

[The Economic Secretary to the Treasury (Andrea Leadsom)]

I too congratulate hon. Members on securing this fascinating debate. It is long overdue and has allowed us to consider not just what more we can do to improve what we have but whether we should be throwing it away and starting again. I genuinely welcome the debate and hope that many more will follow. In particular, I pay tribute to my hon. Friend the Member for Wycombe (Steve Baker), who now sits on the Treasury Committee on which I had the great honour to serve for four years. I am sure that his challenge to orthodoxy will have been extremely welcomed by the Committee and by many others. I wish him good luck on that.

[Steve Baker]

May I just say how much I am enjoying my hon. Friend’s place on the Committee? I congratulate her on her promotion once again.

[Andrea Leadsom]

I am grateful to my hon. Friend.

My right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) gave a fantastic explanation that I would commend to anybody who wants to understand how money is created. He might consider delivering it under the financial education curriculum in schools. It was very enlightening, not least because it highlighted the appalling failure of regulation in the run-up to the financial crisis that is still reverberating in our economy today. All hon. Members made interesting points on what we can do better and whether we should be thinking again. I pay tribute to the right hon. Member for Oldham West and Royton (Mr Meacher) for his good explanation of the Positive Money agenda, which is certainly an idea worthy of thought and I will come on to it.

Money creation is an important and complex aspect of our economy that I agree is often misunderstood. I would therefore like quickly to set out how the system works. The money held by households and companies takes two forms: currency, which is banknotes and coins, and bank deposits. The vast majority, as my hon. Friend pointed out, is in the form of bank deposits. He is absolutely right to say that bank deposits are primarily created by commercial banks themselves each time they make a loan. Whenever a bank makes a loan, it credits the borrower’s bank account with a new deposit and that creates “new money”. However, there are limits to how much new money is created at any point in time. When a bank makes a loan, it does so in the expectation that the loan will be repaid in the future—households repay their mortgages out of their salaries; businesses repay their loans out of income from their investments. In other words, banks will not create new money unless they think that new value will also in due course be created, enabling that loan to be paid back.

Ultimately, money creation depends on the policies of the Bank of England. Changes to the bank rate affect market interest rates and, in turn, the saving and borrowing decisions of households and businesses. Prudential regulation is used if excessive risk-taking or asset price bubbles are creating excessive lending. Those checks and balances are an integral part of the system.

I agree fully that the regulatory system was totally unfit in the run-up to the financial crisis. We saw risky behaviour, excessive lending and a general lack of restraint on all sides. The key problem was that the buck did not stop anywhere. When there were problems in the banking system, regulators looked at each other for who was responsible. We all know that the outcome was the financial crisis of 2008. I, too, see the financial crisis as a prime example of why we need not just change but a better banking culture: a culture where people do not spend their time thinking about how to get around the rules; a culture where there is no tension between what is good for the firm and what is good for the customer; and a culture where infringements of the rules are properly and seriously dealt with.

I will touch on what we are doing to change the regulations and the culture, but first I will set out why we do not believe that the right solution is the wholesale replacement of the current system by something else, such as a sovereign monetary system. Under a sovereign monetary system, it would be the state, not banks, that creates new money. The central bank, via a committee, would decide how much money is created and this money would mostly be transferred to the Government. Lending would come from the pool of customers’ investment account deposits held by commercial banks.

Such a system would raise a number of very important questions. How would that committee assess how much money should be created to meet the inflation target and support the economy? If the central bank had the power to finance the Government’s policies, what would the implications be for the credibility of the fiscal framework and the Government’s ability to borrow from the market if they needed to? What would be the impact on the availability of credit for businesses and households? Would not credit become pro-cyclical? Would we not incentivise financing households over businesses, because for businesses, banks would presumably expect the state to step in? Would we not be encouraging the emergence of an unregulated set of new shadow banks? Would not the introduction of a totally new system, untested across modern advanced economies, create unnecessary risk at a time when people need stability?

[Steve Baker]

I do not actually support Positive Money’s proposals, although I am glad to work with it because I support its diagnosis of the problem. Of course, this argument could have been advanced in 1844 and it was not. I have not proposed throwing away the system and doing something radically new; I have proposed getting rid of all the obstacles to the free market creating alternative currencies.

[Andrea Leadsom]

I am grateful to my hon. Friend for pointing that out. I must confess that before the debate I was puzzled that such an intelligent and extremely sensible person should be making the case for a sovereign monetary system, which I would consider to be an extraordinarily state-interventionist proposal. I am glad to hear that is not the case. In addition, of course, bearing in mind our current set of regulators, presumably we would then be looking at a committee of middle-aged, white men deciding what the economy needs, which would also be of significant concern to me.

Financial Services (Banking Reform) Bill

Debate between Andrea Leadsom and Steve Baker

Monday 11th March 2013 Commons Chamber

[Andrea Leadsom]

I always think that the proof of the pudding is in the eating, and the fact is that Barings was culpable for a potential massive run on the banks, because of rogue trading. It did not happen, and why? It was because one individual took responsibility, surrounded himself with people who could prevent it and ensured that it did not happen. We do not need to look any further to see that it was working.

There is one area in which the Bill is a lost opportunity. It offers us the chance to address the big elephant in the room, which is the lack of competition in the banking sector. We have the chance to go well above and beyond what John Vickers proposed. Retail banking in this country should be truly competitive. As we all know, one of the biggest problems in our economy right now is the lack of finance for small and medium-sized enterprises, which are the lifeblood of our economy.

[Steve Baker]

My hon. Friend is absolutely right, of course, but the other problem is the lack of return for savers. Is that not the other of the current system’s twin failings—that it is failing to intermediate between the two groups?

[Andrea Leadsom]

I agree completely, and my hon. Friend tempts me down the route of blaming quantitative easing for the extraordinarily diverse results in the savings market, particularly for pensioners and other savers whom we desperately need to spend more. The evidence is that as a result of reduced annuities, their propensity to save has increased. We would like people to spend more in the economy, but they are not doing so.

The best way to shake the banks out of their current complacency is to allow new entrants to get into the market, bringing with them the high standards of service that customers believe they should be able to take for granted, including IT that works. To go back to Adam Smith in “The Wealth of Nations”, a truly competitive environment requires that there is free entry and exit for market players. That is not the situation in banking in this country right now. New entrants have experienced massive barriers to entry not just from competitor banks but from the regulators. Likewise, failure has not been possible, as we have seen at eye-watering cost to the taxpayer. Rather, the trend has been towards consolidation and mergers, with a small number of very large banks dominating. In 2000, there were 41 major British banking groups and subsidiaries, whereas in 2010 there were just 22. Four banks have an almost 80% market share of the personal current account and SME lending market, so there is evidently a need for genuinely comprehensive action to increase competition in Britain.

One significant step in the right direction would be to take the opportunity to sell off the state-owned banks, as the Governor of the Bank of England himself suggested last week at the Parliamentary Commission on Banking Standards. Selling off the taxpayer-owned banks in small parcels would instantly create potential new challenger banks, and I urge the Government to consider doing so again. The Governor regretted the fact that RBS remained in public ownership and pointed out that we had not yet solved the “too big to fail” problem. He urged the Government to do more.

As right hon. and hon. Members have heard me say a few times before, the real game changer would be introducing full bank account number portability. We take that for granted with our mobile phones—if we change our provider, we take our mobile phone number with us. Why should it be any different with our bank accounts? Earlier this evening, the Father of the House told me that one of his ex-colleagues had spent years banging away in the Chamber about the importance of mobile pensions in the private pension sector. I was unaware that it had ever not been possible for someone to take their pension with them when they changed jobs, but apparently one of the greatest revolutions in the pensions sector happened when account number portability was achieved. We know what such portability did for the mobile phone sector; surely the time has come to introduce it to the banking sector.

At a recent round table meeting with various luminaries from the banking sector, Which?, the Bank of England and so on, all those present agreed on a show of hands that if anyone is to achieve bank account number portability, the UK should be first. Let us, as the world’s leading financial services centre, be first to innovate and not wait until someone else does it.

Switching instantly between banks would remove the huge barrier to entry that currently constrains new, innovative banks. Several benefits would accrue from that policy. First, it would cut barriers to entry for new challenger banks. Increased competition would force existing and new banks to differentiate themselves to retain customers, leading to enormous improvements in customer service and the differentiation of bank offerings. Secondly, new challenger banks would mean more banks and increased access to new and different sources of funding, and over time that would reduce the risk of banks being “too big to fail”. The US has more than 3,000 banks and when a retail bank fails there is just a ripple and hardly anyone notices. We need diversity of financial service providers, which I genuinely believe such a measure would provide.

Thirdly, industry experts argue that the impact of creating a new shared payments clearing infrastructure would mean the banks sorting out the problem of multiple legacy systems that dates back to the consolidation of the 1990s. Clearing banks currently spend billions each year on string and Sellotape solutions for creaking systems, and we have seen twice recently the problems that RBS subsidiaries had in managing payments for their customers because of poor systems and systems failure. New systems could lead to a reduction of up to 40% in bank fraud that costs the sector billions of pounds each year.

Fourthly, multiple legacy systems within banks make it hard for them to evaluate business ideas. The banks’ poor systems make it harder for them to assess good business ideas versus good collateral, and better and new systems would enable them to make better lending decisions to SMEs. Finally, and importantly, account number portability would offer the potential for the orderly resolution of a failed bank. The potential to close down a bank and transfer its accounts overnight to a solvent bank would be a valuable tool in any future financial crisis.

To kick-start a move to account number portability, the Government would need to introduce a new payments regulator with the power and mandate to require equal and fair access to money transmission systems. Only an independent regulator of money transmissions would get the job done, and using an existing regulator or the Office of Fair Trading is unlikely to be effective. I therefore welcome the Minister’s announcement of a consultation on establishing a new, independent payments regulator.

I conclude by saying that seven-day switching, as proposed by John Vickers, is not the same or even similar to full bank account number portability. It is a costly, overly-manual way of way of improving the customer experience, and does not solve the problem for small businesses, many of which—some 80%—have felt unable to change bank account provider in the past three years. Banks have SMEs tied up and want them to have personal overdrafts and bank accounts, business accounts and fully funded bank loans, whether or not they draw them down. It is extremely complicated for an SME to move banks in the current environment, and trying to change bank account number is part of that problem, as well as the lack of other banks that are willing to lend.

The first problem with seven-day switching is that it will not change the future for SMEs. Secondly, it does not address the administrative burden for SMEs. If we find that seven-day switching dramatically increases the number of people who switch bank accounts, that will simply increase the burden on all of our milkmen, dry cleaners, Tesco or whoever it might be. We will all have to change our bank account numbers with them, and they will have to change their systems. For big businesses that might not be a problem, but it is certainly a problem for small businesses. Which? has provided a wealth of evidence showing that SMEs are concerned about the impact of seven-day account switching on their administrative burden. I urge my hon. Friend the Member for Chichester (Mr Tyrie), in his Parliamentary Commission on Banking Standards, to put forward proposals on bank account number portability when he produces the final report later next month.

Now is not the time for timidity in reforming our banking sector, and it is not the time for false economies. We have to focus on enabling new entrants into the market, taking steps that are good for the consumer and for small businesses, and beginning the long process of restoring the reputation of our banking sector.

Banking Competition

Debate between Andrea Leadsom and Steve Baker

Thursday 12th July 2012 Westminster Hall

[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.