Financial Services (Banking Reform) Bill

Caroline Lucas Excerpts

Tuesday 9th July 2013 Commons Chamber

[Chris Leslie]

And not just towards London, as a lot of the major banks have had their appetites whetted to make big profits by focusing on overseas. That disconnect with locality has been part of the problem. One issue for debate—on another day, perhaps—is the idea of having a regional banking network. The German Sparkassen system has a geographic mandate that requires those banks to do business within a particular locality. That is a dynamic for making sure there is a direct relationship between the banker and the customer, particularly for small businesses, but on a retail basis as well. That is a very good idea whose time has probably come.

[Caroline Lucas (Brighton, Pavilion) (Green)]

May I interpret the hon. Gentleman’s warm words to mean that Labour would support my new clause 15 if there were a vote on it?

[Chris Leslie]

Well, personally I prefer our new clause 10, but that is a good try by the hon. Lady. She has raised this issue in the spirit of trying to generate consensus on it, but I hope that in the limited time available to us we focus on the principle of making sure we get those commitments from the Government, which we all want in order to help get this transparency about what is happening in localities, as well as making sure we look at the state-owned assets and think about how they might be applicable to a regional banking network.

Government amendment 5 looks at some issues to do with competition, although they are mostly to do with the nature of ring-fencing and changes that might happen to the ownership of ring-fencing. I want to ask the Minister a question about the tensions between some of the objectives in the Bill. Government amendment 5 inserts a new requirement to consider competition issues, which seems to be slightly in tension with the existing provision to make sure there is no significant adverse effect from changing the ring-fencing arrangements. Can he clarify that that tension is resolvable, and confirm that the duty to consider competition will take effect subject to clause 4(3)?

On Government new clause 1 and new schedule 1, can the Minister help us by talking about the practical implications of the amendment to the Companies Act 1985 omitting disclosures to the regulators, done for the purposes of helping them fulfil their functions under part VI of the Financial Services and Markets Act 2000? In particular, this appears to stop such disclosures being exempt from section 449 of the Companies Act, which criminalises disclosure of information obtained in certain circumstances. What is the reasoning behind that change? Also, paragraph 2 of new schedule 1 amends section 376 of FISMA, changing “PRA-authorised” bodies to “PRA-regulated” bodies. Is that a significant change? Are there any bodies that are classed as PRA-regulated but which are not PRA-authorised? If so, which are they?

Our new clause 12 addresses the portability of bank accounts. I know that the hon. Member for South Northamptonshire (Andrea Leadsom) has been very active on this, and that she has tabled similar amendments. She has been vocal in favour of some of these changes, and has tabled a sensible set of proposals. I hope she would agree that we are mirroring each other on this question.

Our new clause 12 would mandate the Chancellor to publish a report on the adequacy of the current account redirection service and on a possible change in the law to compel all ring-fenced banks to introduce a current account redirection service that might include portability. The banks themselves have made proposals for a seven-day switching arrangement from this September. The Minister claimed in the Government’s response that they had secured that commitment, but that might be a little bit of exaggeration and spin; I suspect that the banks were heading in that direction, but I will let him off on this occasion. This all comes down to whether that seven-day switching will radically transform the convenience for the customer. It is all very well saying that there will be a year or so when some transactions from the existing current account will automatically be made into the new account, but I do not understand why that provision has been time-limited. Some people will forget that that provision expires after a certain number of months.

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[Andrea Leadsom]

Yes. The hon. Gentleman is absolutely right, and he has certainly been a keen supporter of bank number portability, as have many hon. Members in the Chamber today. The payments regulator that the Government are consulting on is the first step to achieving transparency. The next step is empowering that regulator to do something to enforce bank number portability when it finds, as I am sure that it will, that to date there has been a completely deliberate attempt to restrict competition in the banking system.

The big banks have said that bank account number portability would cost an absolute fortune, yet the technology already exists. Some people have asked whether it would not be an enormous risk to data integrity if the consumer’s bank account number, sort code and payments instructions were held by VocaLink, but in reality, all the consumer’s details are held by the bank, which passes them all on to VocaLink, so there are double risks to data integrity at the moment. Holding those account details in VocaLink would reduce, rather than increase, the risk.

People also say that other banks cannot access VocaLink’s payments infrastructure directly, because all the banks that clear direct have mutually to underwrite each other’s payments. The smaller challenger banks cannot possibly afford to underwrite the payments of the bigger banks. However, we could easily solve that; already, in various exchanges, banks pre-fund payments. If a bank’s balance were too low, and it was running short of cash with which to meet its outgoing payments, it would be called, intra-day, for more cash. That problem is easily solvable, and the reason why it has not been solved is that that is simply not in the big banks’ interests.

It has also been said that the proposal would surely be incredibly complicated from an IT point of view, but VocaLink has already set up bank accounts for the Department for Work and Pensions, because a lot of the Department’s benefits customers do not have bank accounts. VocaLink is already able to manage customer account details for DWP customers, so the technology already exists. I simply do not accept the idea that there would be eye-watering costs. Chief executives of big banks have literally said it would cost trillions—absolutely vast sums—but I challenge them to provide any scrap of evidence that shows that is the case, and that their refusal is not down to their desire to restrict access to new players.

The advantages of bank account number portability are, of course, the elimination of barriers to entry, and increased competition as a result. One of the big problems for new entrants is that it is so difficult to gain customer share, because people will not move bank accounts. With bank account number portability, if I, as a customer, was sick and tired of my bank, I could move tomorrow, the day after, and the day after that, if I was not getting good service, and it would not be any skin off my nose; it would be perfectly easy to do, and it would be the banks’ problem. That would be an enormous change in the competitive environment.

Likewise, there would be far greater consumer choice. Bank account number portability would encourage the likes of Tesco Bank and Marks & Spencer Financial Services—any big, multinational conglomerate—to go into the money business; it would become yet another product line. That in itself would eliminate some of the problems of “too big to fail”, because there would be many more smaller players, which would have many product lines, and therefore would not have all their eggs in one basket.



For small businesses the change would be revolutionary. At present one of the biggest problems for small businesses is that the big banks require that as well as their company accounts, small business people have their personal accounts and mortgage with the same big bank and do all their foreign exchange, overdraft, loans and other transactions through that bank. It is incredibly difficult for a small business to move accounts because of the complexity of all their suppliers and all the people they are trying to trade with. The barriers to entry for them are perhaps even greater than they are for us as individuals. Again, being able to take their bank account number with them would change the position dramatically.

Another huge advantage that is not often talked about is that since the 1990s, when I was running Barclays bank’s team, an enormous consolidation has taken place. There used to be 44 big banks in the UK; there are now about 22 banks of any size. The consolidation meant that during the 1990s many banks took over other banks, broker- dealers, small fund managers and so on, so they have an enormous number of legacy systems. They have managed to string them together over the years, but bank fraud in this country alone is huge. Changing the payment system would dramatically reduce the incidence of bank fraud. Intellect, the IT trade body, has said that the change could reduce the incidence of bank fraud by up to £30 billion a year.

Finally, another key advantage of bank account number portability is resolution. Andy Haldane, the Deputy Governor of the Bank of England, has gone on record as saying that it would be the solution when the day comes that a big bank fails again. We have, of course, put in as many steps as we can. Basel III will make great strides towards ensuring that banks cannot fail again. We have created our new regulators. We have ensured that banks have proper leverage and proper capital. All those measures are designed to ensure that banks cannot fail again, but we know that banks will always fail. That is the reality in a western developed market economy such as ours. We saw only too recently the problems with Northern Rock, when people were desperate to take their money out. The answer to resolution is for the Bank of England to be able to say, “You have failed. We are now taking all your accounts and putting them with survivor banks.”

There is a huge amount going for bank account number portability, above and beyond the seven-day switching process. My new clause calls for the Government to ensure, within 12 months of Royal Assent, a full cost-benefit analysis of bank account number portability. Should the findings be that this is a good idea, and should it produce the kind of benefits that I have just described, the regulator should be empowered to implement bank account number portability. I welcome the Government’s assurances that they will move in that direction. On that basis I will not press my new clause to a Division, but I urge the Government to keep up the momentum and ensure that before too long we have full account number portability.

[Caroline Lucas]

Thank you, Madam Deputy Speaker, for the opportunity to speak to my new clause 15. It is a modest proposal for a full Government consultation on the potential for local stakeholder banks to be carried out before we sell off RBS or any other taxpayer-owned banking assets.

I was interested to hear the Minister mention yesterday his trip to Germany and how he saw in the pages of the Handelsblatt a big headline saying, “City of shame”, referring to the City of London. I agree that this is a stark illustration of the impact of financial mismanagement and of our current banking system on people’s views of the City. However, although I also agree that this highlights the need for improved standards in banking, I think it highlights, too, the need for a radical reappraisal of ownership and accountability structures, if we want to have a banking system that we can be proud of, not ashamed of.

I hope that during the Minister’s trip to Germany he also found time to look at the savings banks, the Sparkassen, that we have spoken about this afternoon and which make up about one third of the German banking system. They are run commercially with dual financial and social objectives, to make a profit and to support the local economy. Professional bankers take responsibility for day-to-day running of the banks and if they make incompetent lending decisions, they are more likely to get sacked than their counterparts in giant commercial banks. Local stakeholders, including local politicians, business leaders, employees and customer representatives, sit on a supervisory board. That is just one example of the sort of local stakeholder bank that my new clause seeks to promote.

The New Economics Foundation analysed data from 65 countries where such alternatives thrive. They include co-operative banks, credit unions, community development finance institutions and public interest saving banks. The common characteristic is the goal of creating value for stakeholders, not just for shareholders, and some exciting and incredibly positive trends emerge. First, a greater focus on the needs of customers, including more competitive products, better service and longer-term lending; secondly, provision for customers who are currently under-served by regular banks; thirdly, a boost to local economic development through lending to small and medium-sized businesses, preventing capital drain from the regions and maintaining branch networks; and finally, a positive impact on financial stability through less volatile returns, high levels of capital, prudent balance sheets and expansion of credit provision after the financial crash.

[Jonathan Edwards]

To what extent has the hon. Lady been influenced by the system in the US, where there is a strong network of local credit unions, that provide an economic function for the local business community, not merely banking for the poor?

[Caroline Lucas]

The hon. Gentleman cites one of the few examples in the United States and its economic system that I would want to emulate. Credit unions set an interesting example that we could learn from.

Although I welcome the findings of the Parliamentary Commission on Banking Standards, I worry that the commission was somewhat seduced by the assumption that RBS should be returned to the private sector in one form or another, without a sufficiently full and proper examination of the merits of publicly-owned alternatives. It is important to underline that “publicly-owned” does not mean state-run. The German public saving banks are managed by bankers, not politicians, but they are run to serve the interests of the local economy and of citizens, rather than those of remote shareholders. Managers are held much more accountable for incompetent lending than are private sector managers who drove their businesses to bankruptcy while exploiting their customers with mis-sold products.

It is important to understand also that local stakeholder banks are not unprofessional. The banks studied by the New Economics Foundation make a solid profit to ensure their own viability, and their first priority is always to make sure that the loan is repaid. Because they are not trying to make 22% return on equity, which is RBS’s current profitability on UK retail business, they are quite happy with 8%, so they can afford to meet their social purpose. If the Government are serious about becoming a champion of SMEs and regional prosperity, at the very least they need to look into the pros and cons of a network of regional banks.

What if best value for the British taxpayer is the long-term ownership of a successful bank or banks that support the British economy? An obsession with privatisation on either side of the House should not blind us to that possibility. My amendment simply proposes a full examination of various forms of local stakeholder banks to ensure that we take decisions about the future shape of RBS and our banking sector more widely on the basis of practical economics and evidence, not just ideology.

I support new clause 10 that was tabled by the Labour Opposition. Sub-paragraph (iii) refers to

“the impact of any sale on the creation of a regional banking network.”

What I set out in new clause 15 is exactly the kind of positive impacts that we would want to see. Rather than simply guarding against negative impacts on any regional banking network, I would like to see us actively, explicitly and energetically promoting the alternative of greater local and regional banking. I hope very much that there might be some chance that the Minister will look favourably upon my new clause.

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[Greg Clark]

I do not know whether the hon. Gentleman will be reassured or alarmed to learn that I had not left the subject of regional banking just yet. Indeed, I want to come to the precise subject he has just raised.

The Prudential Regulation Authority’s changed procedures were referred to—by, I think, my hon. Friend the Member for Wyre Forest. It is now possible to license new entrants, who could require up to 80% less capital up front than previously. That means that the time is now ripe for new banks in the regions to be established. The hon. Member for Brighton, Pavilion, in her new clause 15, and the hon. Member for Edmonton (Mr Love) refer to CDFIs—community development finance institutions. Some £60 million of wholesale funding for CDFIs is available through the regional growth fund. Tax relief up to 25% is already available on investments made by individuals and companies into CDFIs. Of course I will talk to my hon. Friend the Exchequer Secretary and carry forward the hon. Gentleman’s representation for further changes, but a significant set of advantages is available. Similarly, the more flexible rules for credit unions that have been introduced and the £38 million of funding for this movement have also created greater opportunities.

[Caroline Lucas]

Does the Minister accept that constraints on the amounts that larger credit unions—such as the East Sussex Credit Union, which I know well—are allowed to accept in deposits or are allowed to lend are stopping them fulfilling their potential? Will he look at that again?

[Greg Clark]

I am happy to take that forward. The hon. Lady will be aware that we have liberalised the rules for credit unions, but if problems are being caused, not least in East Sussex, I would be happy if she dropped me a line or came to see me.

We have great enthusiasm for the proposals that the hon. Lady makes, but what is required is not a study, but action. I make this commitment to her, and to any hon. Member who is interested in helping to establish a new regional bank in their area, that I will help them to do so. I hope that they will allow me to do that.

New clause 10 would require the Government to lay a report before Parliament before selling any banking assets. All hon. Members are aware of what the Chancellor said in his Mansion House speech about the next steps for Lloyds and RBS. For Lloyds, the Government are actively considering the options for how its shareholding can be returned to the private sector. Value for money for the taxpayer will be the overriding consideration, and there is no pre-determined time scale. Indeed, the disposal process may involve multiple stages over time, rather than a single moment.

For RBS, share sales are some way off. In line with the recommendation of the Parliamentary Commission on Banking Standards, the Chancellor has announced a review, to conclude in the autumn, into whether a bad bank should be set up for risky assets from RBS. Following the criteria suggested in the commission’s report, the review will assess whether creating a bad bank would accelerate the path back to private ownership, deliver benefits for the wider economy and be in the interest of taxpayers.

As I have mentioned, the OFT is looking specifically at the impact that new challenger banks created by the Lloyds and RBS divestments will have on competition in small business banking. UK Financial Investments has a remit to provide value for money in executing its requirement to devise the means of selling the Government’s shareholdings in the banks, and, in doing so, to pay due regard to maintaining financial stability and to act in a way that promotes competition. In doing so, UKFI and the Treasury must follow the value-for-money principles set out in the Green Book, and they will be accountable, through the Accounting Officer, to the National Audit Office and the Public Accounts Committee, as well as to the House and the Treasury Select Committee.