Financial Services (Banking Reform) Bill

Barry Sheerman Excerpts

Tuesday 9th July 2013 Commons Chamber

[Chris Leslie]

Here we are again—a second bite at the Financial Services (Banking Reform) Bill. Today, we debate a series of amendments and new clauses that have been loosely grouped together under the title “Competition etc.” I shall speak in particular to new clauses 8, 10 and 12 in due course, but I shall start with new clause 8.

We felt it important to discuss the obstacles in the way of better competition in the banking sector. I am sure that it is not true of you, Madam Deputy Speaker, but many hon. Members have probably been with their retail bank since they were very young—not so long ago in your case, Madam Deputy Speaker. Although an aficionado of switching and looking at different services in banking, I must confess that I have been with the same bank since I was 14, and with no real logic other than the inertia that afflicts many customers: we tend to think that it is inconvenient to change bank accounts; we tend to think, “There is not much choice, so what is the difference or the point of shopping around?” It is this sense of a lack of competition and lack of choice that we want to remedy with the new clause, tabled with other amendments in the group.

There are significant obstacles to competition, particularly to new challenger banks coming into the system, breaking into the business and trying to do something to challenge the absolute dominance of the big five banks. The new clause would require the Treasury to publish a review considering the obstacles to those new challenger banks and ways of increasing the number of new banks coming into play.

Under the new clause,

“The Chancellor of the Exchequer shall instruct the Competition and Markets Authority to begin a full market study…into UK financial services institutions involved in the provision of core services”—

in other words, retail banking. The aim is to provide a structure to support better competition, dealing with obstacles in the way of allowing new institutions to break into the market and to consider what actions could be taken to facilitate the new institutions entering into general competition.

[Mr Barry Sheerman (Huddersfield) (Lab/Co-op)]

Does the Minister accept that help is needed not just for new entrants, but for unusual, smaller players in the present financial system? As a Labour and Co-operative Member of Parliament, I have an interest in the Co-operative bank. When HBOS and RBS got into difficulties, everyone rushed around throwing taxpayers’ money at them, but when the Co-op gets into serious difficulty because of its unique ownership basis and its lack of shareholders, it receives very little help from either the Treasury or the Department for Business, Innovation and Skills.

[Chris Leslie]

I hope that the Co-operative bank, and all other institutions, will now be in a position to make secure and stable progress. However, I do not think that there is really a parallel between the Co-operative bank and institutions that would have disappeared had it not been for the intervention of the taxpayer in keeping the cash machines operating. We hear Government Members say that the public deficit was somehow created as a result of ministerial choices. It is sometimes forgotten that the state—the taxpayer—had to intervene to rescue the banks. Thank goodness that happened, but it left us with a phenomenal problem with which we are still struggling years later.

[Mr Sheerman]

Many of my constituents worked for the Halifax mutual building society, and we saw what really caused the ruination of two banks. Wicked, evil, unethical people took over a bank and ran it into the ground. That was not about the Government; it was about greed, and about particular people.

[Chris Leslie]

Absolutely. Those are the very issues that should be in the Bill, but it is a pretty thin measure. We are still waiting, apparently endlessly, for the Government to decide to populate it at some point with the recommendations of the hon. Member for Chichester (Mr Tyrie) and the Parliamentary Commission on Banking Standards.

We need support for mutuality and greater diversity in the banking sector, and that is why the new clause refers to competition. We do not just want more plcs to enter the market; we want institutions of many different types, including mutuals, to be given a chance to compete for business. My hon. Friend’s Co-op bank, for example, might wish to have that greater choice were it available. The new clause was largely inspired by the recommendations of the parliamentary commission, whose most recent publication made it very clear that the sector suffers from a lack of serious competition.

Which?—formerly the Consumers Association—reported recently that 55% of people had never switched their main personal current account, and that the larger banks had not earned their market share by dint of innovation or the provision of competitive services but simply through “first mover” advantage, because they had been there for such a long time. It also reported that, sadly, customer surveys had indicated that the big five high street banks—Lloyds, RBS, HSBC, Santander and Barclays—consistently gave less satisfaction than others. Those banks have a very large market share, which has increased over the last few years. They control 85% of the current account market as opposed to 71% before the financial crisis, 67% of mortgage gross lending as opposed to 38% before the crisis, and 61% of the savings account market compared with 47% before the crisis. The inertia of their customers enables those large banks to sit on a fairly stable customer base. It has often been said that people are more likely to divorce than switch current account, although I am sure that that does include those who are in the Chamber today. The lack of dynamism and choice in the market is a significant worry, and it is no wonder that it has been criticised by the Office of Fair Trading.

There are major barriers to entry for new banks, which need to establish an infrastructure to have a fair chance of competing more widely. Recent suggestions include the adoption of utility platform sharing, and an extension of the payments system machinery beyond the big banks. I think that such ideas should be given serious and detailed consideration, but they pose a challenge to institutions that own and control payments systems, and we must think carefully about how they can be tackled.

Some of the big banks were supposed to divest themselves of branches. RBS was supposed to float off a number of its branches to Santander, but that did not get very far. Similarly, as my hon. Friend the Member for Huddersfield (Mr Sheerman pointed out), Lloyds was supposed to divest itself of many of its branches to the Co-op, and we all know what happened in that instance. In all, 1,000 branches were supposed to be out there creating a proper challenger bank, or at least mixing it up a little by increasing the number of players in the system. That has not happened, and I have to say to the Minister that the Treasury has not exactly covered itself in glory. I am not claiming that it is entirely the Treasury’s fault, but I think that it had a hand in overseeing some of the divestment strategy. I hope that the Minister will update the House, because divestment is very relevant to the issue of proper competition.

John Fingleton, chief executive of the OFT, has said:

“More than a decade on from the Cruickshank report, we still have a banking sector where competition is manifestly not working well for consumers.”

The hon. Member for Chichester, the Chairman of the Parliamentary Commission on Banking Standards, who has left the Chamber—oh, there he is, next to the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso). I apologise to him. He is clearly negotiating away as we speak. He has said:

“The lack of competition in banking has been reinforced by a regulatory regime favouring large incumbents. Customers have lost out as a result. Moves to remove barriers to entry are essential.”

We all agree with that.

We constructed new clause 8 very much along the lines of the commission’s recommendation of

“a market study of the retail and SME banking sector, with a full public consultation on the extent of competition and its impact on consumers. We make this recommendation to ensure that the market study is completed on a timetable consistent with making a market investigation reference, should it so decide, before the end of 2015.”

The time scale is very important, because the issue has drifted on year after year.

[Chris Leslie]

I hoped that legislation would not be necessary, but I think it worth while for the House to express its view, particularly in response to the commission’s recommendation. Heaven knows, we have been here before. We have heard plenty of warm words from Ministers. They have said “We will certainly consider this, because there is a strong case in favour of it”. When it comes to the crunch, however, if the House of Commons is to do anything through this Bill—and we shall not be doing a lot, because so much is being left to the other place—I think that it is worth our trying to insert the new clause, just to keep the Minister’s feet to the fire. All that we are asking for is a market study in preparation for the proper market investigation reference before the end of 2015.

When the Vickers report was published in 2011, Labour Members felt that specifying 2013 would allow an appropriate time in which to assess the issue, and, two years on from Vickers, I do not think that anything has changed our minds in that regard. Getting that market study under way is the very least that should be done, and the Minister needs to commit to doing that. This is a critical point. When Members listen to what the Minister has to say, they must read between the lines. He will make all sorts of warm noises and say, “The OFT has started this process for SME customers”, but it has not done so for retail customers. That is the crucial difference; focusing merely on SMEs is not sufficient.

The Government have already claimed in their response to the commission’s recommendations that they will be fulfilling the commission’s proposal, but that is not the case. They are not putting in place that retail review, and I do not understand why they are so resistant to doing that. The Minister must explicitly set out why they are holding back from having a market study and investigation of the issues in respect of retail banking.

The Government response is full of warm words—they say they are in discussions and they are engaging with the problem—but it is not strong enough. It is too piecemeal and not sufficiently transparent, and they are not giving the commitment consumers, let alone commission members, would like. If the Government can at least acknowledge that they will not accept the commission’s recommendation, that will give us a clear choice when we come to consider what to do in respect of new clause 8.

The hon. Member for Brighton, Pavilion (Caroline Lucas) has tabled new clause 15, which focuses on local stakeholder banks and local banking. I agree that we should look at sub-national financial provision, particularly for customers, who can feel that they have very little choice at all. She will know that in new clause 10 we say that if state-owned banking assets are to be sold, options for a regional banking network ought to be fully considered. That is a very important proposal from the Opposition. There are some very plucky and hard-working institutions across the country—the credit unions, the community development financial institutions and other smaller building societies and mutuals—that do a lot of very worthwhile work at regional and local basis.

[Mr Sheerman]

Would my hon. Friend add to that list crowd funding and crowd sourcing, which many people think is the basis of a new, democratic capitalism in our country? It allows people to bypass the banks, which have so often failed us, and gives to our communities the power to regenerate businesses and communities.

[Chris Leslie]

As some have said in the past, the magic of the “interweb” will ensure that customers can avoid that intermediation—that middle-management step—and access finance. That may well develop very rapidly, although we need to make sure the regulators can keep an eye on how it develops.

[Mr Sheerman]

That must not be too heavy.

[Chris Leslie]

Well, I think it is important that we make sure the foundations are put in place to allow those new forms of finance to come to fruition in a safe environment.

My hon. Friend makes that point well, and I also want to give a name-check to the Community Investment Coalition: a number of financial institutions at local and regional level have come together to campaign on some of these issues, and in particular to call for greater transparency in the provision of financial services from community to community on a postcode-level basis, although that is anonymised as we do not need to know which organisations have been lending to which individuals.

--- Later in debate ---

[Chris Leslie]

Absolutely. Sir John Vickers pointed out in his report that a typical customer is likely to move current accounts every 26 years, on average, and it is estimated that about 6% of personal current accounts will be switched this year. All sorts of statistics prove that this is not a particularly active area, although there is a growing consensus among members of the commission, and even some of the banks, that portability might be an idea whose time has come.

[Mr Sheerman]

I switched a business account to HBOS, without knowing that anything was going to happen, because I thought that with KPMG as its auditors and with an auditor process in place my investment and my savings would be safe. What are we going to do to ensure that when people switch there is a guarantee that, at last, the accountants in this country and the auditors actually do their job?

[Chris Leslie]

That broadens things out into a whole new terrain, but suffice it to say, we should be able to trust our banks. We should be able to know that all these issues will be going on safely. To be fair to the banks—I do not say that often—some of their systems are able to cope, and complaints mechanisms are in place to deal with these things.

This is just about the customer being able to grasp and understand what is going on. The grey mist descends on many constituents—and, heaven knows, on many hon. Members, as we can see—at the mention of financial services, and that is without getting into pensions and some of those issues. Basic bank account services are incredibly important and we need the Government to say a little more than warm words in their response on this issue. I commend the hon. Member for South Northamptonshire on her campaign and we are very much behind the spirit of the changes she suggests, hence our new clause 12.

Finally, I wish to deal with new clause 10, which relates to the sale of state-owned bank assets. We feel that before a sale takes place of assets in the ownership of Her Majesty’s Treasury—we are very much focused on the Royal Bank of Scotland and Lloyds at the moment —the Treasury ought to set out clearly a report discussing the manner in which the best interests of the taxpayer will be protected in the sale, and the expected impact that any sale might have on competition for customers and on the rate of economic growth. That should be accompanied by a proper appraisal of the options for potential structural change in the banks concerned, including: whether there should be any changes to the division between retail banking and investment banking in those institutions; whether some asset classes need to be held back—this is sometimes characterised as a good bank/bad bank split; and, crucially, the impact of the sale on the creation of a regional banking network. We think that is essential.