Banking in Scotland

Cathy Jamieson Excerpts

Thursday 14th October 2010 Westminster Hall

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

I should perhaps start by assuring hon. Members that, unlike some of my hon. Friends, I have never been led astray by bad boys. Indeed, I have made a career of challenging bad boys’ behaviour and threatening that all sorts of awful things would happen to them if they continued to misbehave. With those opening remarks, I should perhaps move quickly on to the start of my brief comments.

I begin with the place that to me is perhaps the centre of the universe—Auchinleck, in my constituency. A few weeks ago, during an unexpected lull in the excitement of the football match at Beechwood Park, which for the uninitiated is the home of Auchinleck Talbot football club, I felt a tap on my shoulder and a constituent asked whether he could have a quiet word with me. I am not unused to that sort of thing happening. Usually it is about a particular problem, and I am usually able to tell the constituent that he can call me at the office, or we have a chat about it. However, in that instance, the constituent prefaced his remarks by saying, “Before you say anything else, I have to tell you that I am a banker.” He went on to make the serious point that often he cannot now tell people what his employment is. He is not one of the high fliers, one of the big bonus earners. He is simply someone in the middle management sections, or rather he was before he was let go—I think that those are the words used these days. He finds the situation very difficult because he personally has faced some of the opprobrium that has been heaped on the banking community as a result of what happened with the banks.

I place on the record my thanks to the previous members of the Scottish Affairs Committee for this thorough report. I will refer to some of its conclusions and recommendations. It was a thorough piece of work, and timely. We can think back to just how awful things were when some of the major banks in Scotland and, indeed, elsewhere were on the brink of extinction. I hope that no matter what side of the House hon. Members sit on, they will understand that Government intervention was necessary at that stage and had to take the form that it took in order to ensure that those banks survived.

I shall focus on a couple of the recommendations in the report. My hon. Friend the Member for Glasgow South West (Mr Davidson) has already talked about bankers’ bonuses. It is clear when we talk to ordinary people on the doorstep that that issue is now in the public psyche. I am referring to the fact that many people in the banking system were simply paid far too much, very unfairly, and people did not see what those bankers had done to justify those very large amounts of money, when many of them were struggling to get by, whether on the minimum wage or on very low incomes, and were taking what they felt was the brunt of the crisis. We still have some way to go to convince people that that whole area has been evened out and that we have moved towards a fairer system.

My hon. Friend also referred to another point in the report—recommendation 5 in relation to viewing repossession as the last resort, saying that the banks and building societies should perhaps view matters differently. It took legislation, particularly in the Scottish Parliament, to ensure that that happened, because there were fears that, despite all the exhortations, the banks were still not looking at repossession as the last resort. Many people, particularly sole traders in small or medium-sized businesses, had been required to put their homes up as security in order for the businesses to continue and they found themselves in danger not only of losing their business for lack of finance, but of losing the roof over their head.

Some of the most awful experiences that I have had as an elected politician have involved seeing business men whom I knew to be pillars of my local community and who had contributed a huge amount in the local area suddenly finding themselves in very difficult times, coming to my surgery and breaking down in tears in my office because they felt that they had literally no one else to turn to. I hope that we shall not see any more of those situations and that people will be more sympathetic. In my role in the Scottish Parliament, I was one of the people who pushed for the relevant legislation.

I want to focus on the issue of fair treatment of customers, which has been mentioned and was the subject of recommendation 7. I think that my hon. Friend the Member for Glasgow South West has already referred to the wording:

“We conclude that banks continue to use aggressive tactics towards customers who have fallen into debt.”

Citizens Advice has given us an update on what that means for real people living in our communities. It states that, in 2009-10, 135,032 new debt issues were brought to Scotland’s advice bureaux, which helped people to deal with those issues. It states that more than 4,200 problems with bank accounts were brought to its bureaux in 2009-10 and that a number of those issues were connected with the interest and charges associated with the account, while a high number were connected with the difficulties of opening accounts. There are still situations in which that occurs, despite all that has happened.

We may talk about high finance and the economic impact of what is happening with the banks on a global scale, but many people living in our communities still cannot get a bank account that they can afford to operate, and of course they rely on that to be able to manage their business. Basic bank accounts are very important, but we should not underestimate the difficulty that people encounter if they do not have a credit history, if they have not been in employment or if they are a young person leaving the care system. In those circumstances, trying to open a bank account is extremely difficult, and there is much more to be done in that respect.

The report mentioned overdraft charges and, again, Citizens Advice Scotland has given us an update on some of the problems that people face. It says that clients report incurring overdraft charges due to mistakes often made by others, including the banks themselves, benefit agencies and companies failing to cancel direct debits.

People will be aware of the case that was taken up by the Office of Fair Trading and pursued very ably by Mike Dailly, the principal solicitor at Govan law centre, in the constituency of my hon. Friend the Member for Glasgow South West. He will know it very well. People still face real difficulties as a result of what are seen by the banks’ customers as unfair charges.

Let me give a couple of illustrations, because it is worth having on the record what Citizens Advice tells us. It says that one client

“accumulated over £1,000 in bank charges over a three month period while his bank refused his application for an approved overdraft limit.”

The client was overdrawn by £270 and simply wanted an overdraft facility so that he could make arrangements to pay off the money that he owed without facing multiple charges. A single mother was being charged £5 by her bank for every day that she was overdrawn and £25 for every transaction that she made during that period. That woman was living on income support with a five-year-old daughter. Incurring bank charge after bank charge after bank charge, with no assistance to get out of those problems, is no way forward for people in those circumstances.

Again, my hon. Friend was right to highlight the problems in relation to set-off. If anyone has ever lived in a situation in which every penny is a prisoner, and they have to budget and know exactly where their money is coming from and where it is going week to week, they will know that they can manage in many instances because they have a degree of certainty. What is impossible for people on very low incomes to cope with is the unexpected. For some people, the right of set-off means that earnings that were paid into the bank were taken without their knowledge and without any discussion with them beforehand and were used to pay their debts. I am not suggesting for a moment that people should not pay their debts or should not be helped to budget where that is appropriate, but many people on low incomes are very good at budgeting.

What is happening is simply not acceptable. Citizens Advice gives the example of a lone parent’s bank taking £400 from her account to repay debts without her permission. After her wages had been paid in, that money was taken out and she had literally no money at all to live on. In another case, a client’s bank used the right of set-off to put the client’s wages towards arrears on a loan. That individual was working only 10 hours a week and receiving £11 a week in benefits. When they were paid, the bank took the full amount towards the arrears, leaving the individual with no funds whatever. There is more to look at on that.

The banks are saying in their responses that it is now easier for businesses to borrow, but I think that there are still difficulties. I regularly hear from start-up businesses that they have to use personal loans or continue to use their homes or other security. They are not able to access funding that would help to match the start-up funding that may be available for the business, so there is a disjoint in those contexts. There are still difficulties for businesses suffering temporary cash-flow problems. A reputable business in my area with lots of orders coming through contacted me recently. Simply due to delays in receiving payment owed for contracts, they are in a difficult cash-flow situation and looking to their bank to give flexibility, but they are not getting it.

In conclusion, I want to return to where I started in Auchinleck, which is not a bad place to return to, and talk about financial education. The hon. Member for Milton Keynes South (Iain Stewart) mentioned the days when there was a bank book and one could pay in money; in my school days it was into the Trustee Savings bank, and in my constituency it is the Cumnock and Doon Valley credit union, which goes into schools and has a junior credit union in Auchinleck primary school. Ironically, in the same week that some bailed-out banks sent letters advising me that I could go along and hear what they were doing about financial education in schools, I paid a visit to the young people who run the junior savers scheme in Auchinleck primary school. They seem to have got the message pretty clearly. They were involved in taking the money, keeping the accounts and looking at what they were responsible for, which was highlighted when the photographer who came to look at what we were doing asked whether he could have a pound coin out of the cashbox to illustrate what was happening. The young people said no, because he was not a member of the credit union, and it was not his money or their money to give away. I will finish on that very salient point. Others should perhaps take note.

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[The Financial Secretary to the Treasury (Mr Mark Hoban)]

First, let me congratulate both the Chair of the Select Committee on opening this debate, and you, Mr Rosindell, on chairing your first Westminster Hall sitting. You need no lessons from the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) on controlling bad boys.

This is a helpful report. Every hon. Member at the start of their speech has positioned themselves in relation to it. It was my predecessor, Lord Myners, who gave oral evidence to the Committee, but it is this Government who responded to the report. I want to take the opportunity to talk through our response and the progress that we have made since July and to address some of the issues that hon. Members have raised. It is worth bearing in mind some of the remarks that have been made about the Scottish financial services sector. Although the problems at RBS and Lloyds TSB and the failure of the Dunfermline building society cast a long shadow, they are only part of the Scottish financial service sector—a point made to me when I visited fund managers and insurers in Edinburgh earlier this year.

It was more than 300 years ago that William Paterson founded both the Bank of Scotland and the Bank of England. Today, that heritage of innovation, education, and expertise is still very much alive, and reaches across a whole range of financial services, beyond the roots of banking in Scotland in the 17th century. General insurance, life and pensions, asset management and related services all have a place in Scotland’s financial hubs of Glasgow and Edinburgh, and also in people’s high streets. We think of financial services as being related to the City, Canary Wharf or the big centres in Glasgow, Edinburgh and Aberdeen, but of course they are part of our high streets too. We cannot forget that.

Some of the reasons why we see a vibrant financial services sector in Scotland are the highly talented and educated work force, the strong infrastructure and the first-class support businesses such as law and accountancy, which all provide a firm foundation for the Scottish financial services sector. I believe that the sector will play a role in our recovery and future prosperity, not only in Scotland but in the United Kingdom as a whole. However, that will happen only if it reconnects with businesses and families.

The financial services sector in Scotland has been through difficult times. Extraordinary action has been taken to restore stability to the financial services sector, as the hon. Member for Nottingham East (Chris Leslie) said in his remarks. Since March, when the Committee’s report was published, I think that the situation in Scotland and throughout the UK has improved considerably. Actions taken by financial authorities, along with improving global conditions, have enabled banks and building societies to stabilise, begin restructuring and slowly start to restore consumers’ trust.

However, we must continue to be vigilant. We cannot take the strength of Scotland’s financial sector for granted and I welcome the Committee’s contribution to the discussion about how improvements can be made. The opportunity exists now to deliver real and lasting reform of the financial sector, to ensure that it is stronger, safer and more resilient. The Government are determined to deliver that reform.

In the future, we must examine the structure of banking, including the links between size, risk and competition. To that end, we have tasked the Independent Commission on Banking, under the chairmanship of Sir John Vickers, to consider structural and non-structural reforms to the UK banking sector, in order to promote stability and competition.

My hon. Friend the Member for Argyll and Bute (Mr Reid) talked about competition in the banking sector. Clearly, we need to think about issues such as the transparency of the financial information available to customers, so that they know how much their bank account is costing them. During an intervention, my hon. Friend the Member for Skipton and Ripon (Julian Smith) talked about improving data on interest rates and the Government have made steps, following a super-complaint on individual savings accounts, to ensure that there is much more transparency and that people can move their accounts from one provider to another more quickly.

[Cathy Jamieson]

As a follow-up to that point, I wonder whether the Minister can ensure that the mutual sector is not unfairly disadvantaged, given that it largely avoided the problems that we have seen with some of the other banks. Will he ensure that any changes in legislation support the continuation of the mutual sector?

[Mr Hoban]

Indeed. I am very grateful to the hon. Lady for mentioning that point, because one of the commitments in the coalition agreement is, of course, to foster diversity and ownership in the financial services sector, including strengthening the mutual sector. The hon. Lady’s intervention also reminds me that she raised issues about set-off. I know that set-off is very important to many consumers and she will be pleased to know that the Financial Services Authority is reviewing it at the moment.

I was talking about reducing risk and the role of the Independent Commission on Banking. The debate about how we reduce risk is not just a UK debate. We have been at the forefront of developing common international standards of regulation—for example, in Basel and through the capital requirements directive negotiations in the EU. In addition, we have led the way in developing approaches to minimise the risk of failure and to ensure that, when failures do occur, the call on the taxpayer is minimised. Of course, it was the previous Government who introduced the special resolution regime, which we supported, and “living wills”—the recovery and resolution plans that were in the Financial Services Act 2010. We also supported that measure.

We will continue to work with international colleagues to ensure that the implementation and sequencing of regulatory changes are taken forward in a way that balances the need to act now on the lessons of the crisis with the need to maintain the competitiveness of the industry.

A number of hon. Members talked about the regulatory framework. Clearly, the reputation and long-term success of Scotland’s banks also depend on trust. Customers need to know that they will be treated fairly and appropriately by all financial institutions. The robust regulatory framework that we are creating will help to cement the attractiveness of Scotland’s financial sector, by providing certainty for banks and confidence for consumers without stifling innovation and growth.

We have learned the lessons from the financial crisis and set out a radical reform to the architecture of financial regulation that we inherited. Earlier this year, the Chancellor announced that the Government will legislate to create a new prudential regulation authority as a subsidiary of the Bank of England. The PRA will be responsible for prudential regulation of all deposit-taking institutions, insurers and investment banks. It will cover all issues affecting the safety and soundness of individual firms, including remuneration. It will have the focus, expertise and mandate to ensure effective prudential supervision and regulation of individual firms, thereby strengthening the UK’s financial system and its resilience to future crises.

We will ensure that financial regulation delivers financial services and markets that are secure and within which private individuals, small businesses and multinational firms have all the information available to them to make the right choices, as well as the right level of protection if things should go wrong. That is crucial.

Consequently, alongside the PRA we will establish a consumer protection and markets agency, which will be a new and integrated conduct regulator. The CPMA will take a tougher, more proactive and more focused approach to regulating conduct in financial services and markets. That will ensure that the behaviour of firms—whether they are based in the high street or trade in high finance—is placed at the heart of the regulatory system, giving consumers greater clarity. The CPMA’s primary objective will be to ensure confidence in financial services and markets, with a particular focus on protecting consumers and ensuring market integrity.

Appropriate regulation is vital to instilling confidence in financial services, protecting customers’ interests and ensuring clean and efficient markets, where both retail and wholesale customers can engage confidently and with the degree of protection appropriate to their needs.

Regulators are continuing to monitor firms for poor practice and they will develop new initiatives to ensure that consumers are treated fairly. A specific focus will be given to cases of unarranged overdraft charges. Working alongside the industry, the Office of Fair Trading has developed commitments on unarranged overdraft charges. They include an agreement that consumers should be able to opt out of unarranged overdraft facilities and minimum standards for how that process of opting-out should work.

Furthermore, earlier this week we laid the regulations to turn on the new section 404 powers—a provision in the Financial Services Act 2010, which was passed just before the election—that will enable the FSA to require firms to establish consumer redress schemes. We believe that it is right to turn that provision on.

However, we also need to ensure that consumers have advice at their fingertips. We have already announced the introduction of an annual financial health check. That check will help families and individuals to get into the habit of taking a thorough look at their finances. It will show them where they are most at risk and how they can regain control of their finances and plan for the future. It will give people a “prescription” that will offer clear advice on what they can do to improve their financial situation now and for the years ahead.

My hon. Friend the Member for Milton Keynes South (Iain Stewart) and the hon. Member for Kilmarnock and Loudoun talked about the importance of inculcating the habit of saving among children early on in their lives—indeed, the hon. Member for Nottingham East also highlighted that issue. It is absolutely vital. Of course, it is a responsibility that we all share and it is an idea that is supported by a number of financial services bodies.

The hon. Member for Kilmarnock and Loudoun mentioned the Cumnock and Doon Valley credit union. Across the UK, credit unions play an important role in this area of education. I have been to see a project that HSBC sponsors in primary schools; I saw it in the Wallisdean infant school in my own constituency. It was quite interesting to talk to children between five and seven about the importance of saving and spending. Clearly, even at that early age they have thought about this issue very carefully.

The new consumer financial education body will roll out the national financial advice service, which will be free and impartial. Of course, that service will be funded by the industry through a social responsibility levy. The cost of the service will not be picked up by the taxpayer; the service will be industry-funded, as part of the industry’s contribution to tackling some of these issues. I think that the service will help consumers throughout the UK to get the best from their financial providers and to give them the information that they need to manage their finances responsibly. The service will be further complemented by the simple products initiative that we announced in July.

The hon. Member for Glasgow South West raised the issue of repossessions. I say to him that in 2009 47,700 homes were repossessed, compared with an estimate that 75,000 would be repossessed. In the first quarter of this year, 9,800 homes were repossessed and in the second quarter 9,400 homes were. In part, that is due to the forbearance of lenders, but clearly the low interest rate environment has made it possible for more people to stay in their own homes. That is to be welcomed. [Interruption.]