Banking Competition

Gareth Thomas Excerpts

Thursday 12th July 2012 Westminster Hall

[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.

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[Teresa Pearce]

That is completely right. Debt is a big issue in my constituency, and I believe that that is why there is no particular interest in opening a branch, which would alleviate some of that debt through giving advice. That said, the staff in a branch of Barclays, which was a Woolwich, in my constituency have taken it upon themselves to try to help their customers. If they see people coming in and just paying off the minimum amount on their credit card for three months in a row, they sit them down, talk to them and explain that they are not paying off the debt. The people in that branch do a fantastic job. I feel sorry that they do not find saying, “I work for Barclays” something to be proud of at the moment. We should be thinking of the people who work in such branches and call centres in the current environment.

[Mr Thomas]

North Harrow, in my constituency, sounds a little like Thamesmead in that it does not have a bank branch. It has a post office through which personal banking customers of Lloyds can access services, but there is no equivalent for small businesses in north Harrow. Given our anecdotal experience of areas of the country that are unbanked, does my hon. Friend think there would be benefits from full disclosure by the banks of what and where they lend by postcode? We could then have proper understanding of which areas are unbanked and a proper debate about how to respond to that gap in the financial market.

[Teresa Pearce]

That is an excellent idea. There are very few things in society that do not benefit from transparency; the more we know, the more we can make a judgment. We should all press for it.

The hon. Member for South Northamptonshire mentioned that people are more likely to get divorced than switch their bank account, which is certainly the case in my experience. Only 36% of consumers have ever switched their bank account, and 45% of marriages are expected to end in divorce. I have been with the same bank since I left school, but it has changed, because it has been taken over repeatedly. That is a common experience. Lots of us will have sat in an office with a friend or spoken to a family member who has tried to switch bank accounts and heard the catalogue of horrors that ensued—from mortgages not paid to bounced direct debits.

As we heard today, the hesitancy to embrace bank account portability is a big barrier to customers being able to exercise choice. The seven-day switching programme is good step forward, but we should be working towards full bank account portability in the long term. I ask the Government to commit today to undertaking a full and comprehensive cost-benefit analysis of account number portability to start that process. Years ago, it was not easy to transfer a mobile phone number from one provider to another—in fact, the mobile phone companies told us that it was impossible. As consumer pressure grew and more providers entered the market, it became very possible, and now is common and simple to do. I see no reason why banks accounts cannot go down the same road. It would make a big difference to consumer behaviour—43% of consumers say that they would be more likely to switch their current account if they could keep the same number.

Even after the banking crisis, our banks are still too big to fail. It is not a proper market when the huge rewards are taken by some, but the risk is always sold on further down the line to other people, ultimately ending with the taxpayer. With only one new high street bank launched in over 100 years, it is pretty obvious that there is no true competition. Increasingly, new entrants need to be backed by one of the big five banks—as with the Marks and Spencer bank, which is backed by HSBC—or to have benefited from Government sell-offs, such as Virgin’s acquisition of Northern Rock.

The big banks are represented on standards-setting bodies, such as the Payments Council, which sets the level of access. There is clearly not a lot of incentive for them to lower the barriers to access for new entrants and thereby decrease their market share. That is why the Government should step in and establish a framework with increased competition and customer experience in mind. To increase competition, it is important to increase not only the number but the diversity of organisations operating, so that consumers have real choice.

Many of us will have read in the papers this week that there is a big consumer push towards ethical alternatives after the recent banking scandals: Charity bank, which lends its savers’ money to charity, has had a 200% increase in depositors; the Ecology bank has had a 266% jump in applications; and there has been a 51% increase in applications at Triodos, a Bristol-based sustainable bank. Credit unions also report week-on-week increases of at least 20% and up to 300%.

Building societies and credit unions obviously have an important role to play in constituencies such as mine. Unlike banks, they are accountable to their members, who are also their customers. There is no discrepancy between the aims of the shareholders and the customers, because they are one and the same. Building societies and credit unions are a true service industry, not a self-serving industry. There is usually a big culture difference in the way they operate in comparison to banks. Most markedly, they are free from the pursuit of short-term returns for shareholders that has contributed to risky behaviour in the big banks and in turn threatened the stability of banking system as a whole.

What we are seeing with the banking crisis is the result of the demutualisation agenda kick-started in the 1980s and peaking in 1997, when a host of building societies became banks, including Woolwich building society, which is a mere mile from my constituency. The Woolwich was founded in 1847 as one of the first permanent building societies. It had a proud local tradition—it was a major employer and an asset to its community. Ultimately, it demutualised and was eventually taken over by Barclays. People used to say, “I’m with the Woolwich.” They were proud to be so, but I do not think they say, “I’m with Barclays and I’m proud to be.”

During the demutualisation period, the investment banks toured the boardrooms of the building societies, putting the case for demutualisation, often making large fees as advisers in the eventual takeover. The end result is that there are now five big banks—Lloyds, the Royal Bank of Scotland, HSBC, Santander and Barclays—with a disproportionate market share. They have an estimated market share of 85% of the personal current account market and 67% of the mortgage market.

When I was writing my speech, I thought back to when I was young, which was a long time ago, and to when the Greater London council used to give mortgages to homebuyers. The GLC was one of the two biggest mortgage lenders in London at the time. Getting a mortgage from the GLC was a great incentive for local people. They felt a sense of ownership of the GLC, and the GLC had invested in their homes, which created a stable society. They did not have what we now have in parts of London—rogue landlords profiteering from renting out terrible accommodation. Giving people a stake in something makes them better citizens. It is a shame we do not have the same model now.

Taxpayers have ploughed enormous sums of money into rescuing the banking system. Northern Rock, RBS and Lloyds TSB have received direct bail-outs, and all banks have benefited from some form of public subsidy, especially quantitative easing and deposit guarantees. The publicly funded support of the taxpayer does not appear to have translated into banks acting in the public interest. In fact, it appears that in some areas of banking, few lessons have been learned, and the banks’ existing priorities and practices seem to be a return to business as usual.

UK banks also hold 85% of the business banking market. In other countries, the picture is different. In the US, there are some 15,000 banks and credit unions operating in the market. In Germany, there is a network of 431 locally controlled banks with public interest criteria in their governing constitutions. Change, therefore, is possible. With the political will and the right Government intervention, it could take place.

Earlier this year, the chief executive at the Office of Fair Trading said:

“For too long banks have needed pressure, often sustained, from regulators and enforcers to introduce the things they should have already been doing.”

In a relatively short period of time, we have ended up with banks taking over each other, leaving just five major banks, and with the deputy governor of the Bank of England describing his own industry as a cesspit. That is a reflection not only on London as a financial centre but on the whole of the UK. The finance sector is a major employer and we should be proud of it. As this issue crosses party lines, it is important that we all put our minds to finding a solution to the problem. We have made piecemeal alterations, but we need a full-scale inquiry into the banking sector. Opening up the sector to competition is one of the major ways to achieve that aim. So far, regulation has not altered culture or behaviour. Perhaps losing profits and customers will bring about such a change in the banks.

We need Government intervention to put the experience of customers at the heart of regulation. The Labour leader and the shadow Chancellor recently made a series of proposals for a banking system that serves not just the bankers but the real economy. They include a British investment bank backed by the state to increase lending to small businesses; a code of conduct for bankers; a greater push for international changes to limit bonuses; selling off high street branches; and greater transparency. All of those proposals would be welcome steps forward.

I have a couple of ideas to float to the Minister. The big high street banks could control the clearing systems, and any new entrant would have to use those systems. As it is unrealistic to presume that a new entrant could create their own systems because of the cost of infrastructure, why not use the Bank of England to monitor and regulate the cost of accessing the clearing systems? Even better, we could make it a condition of the big banks’ banking licence.

Businesses, especially small businesses, pay higher fees to the banks. Will the Minister discuss this matter with the Minister for Housing and Local Government? We could get local authorities to set up a membership system to negotiate bank charges on behalf of local businesses. For example, some small businesses are paying around 50p per £100 cash banked, while the big supermarkets are paying around 6p per £100. Those businesses should come together and collectively borrow. A local authority could perhaps help in this regard, through the local chambers of commerce. We must look at using customer power in a way that helps customers.

I have one final thought, which I doubt the Minister will agree with. Government, both national and local, could pay all their salaries into the local credit union or similar not-for-profit institutions such as Postbank. Obviously, each individual would be free to withdraw their money and put it somewhere else once it has been paid in, but many would keep their money in the local credit union and that would provide a strong impetus for alternative retail banking. Although I doubt the Minister will agree with me, it is a possible way forward.

In conclusion, I hope that one day, the residents of Thamesmead can choose which bank to go to, rather than choosing which bus to catch to get to the nearest bank.

[Mark Garnier (Wyre Forest) (Con)]

Let me apologise to the Minister at the start, because I will miss his winding-up speech. Unfortunately, I have to rush back to Kidderminster for an important meeting about Kidderminster hospital. Members who remember the 2001 general election will know that any Member of Parliament who does not pay attention to Kidderminster hospital when called upon can suffer dire consequences.

I am grateful to my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) for securing this debate and for gathering such enthusiasm for it. It is an incredibly important issue in the regeneration of our economy.

I specifically want to turn the focus of attention to the problem that arises when a regulator is still reeling from the fall-out of the banking crisis. Here we are, nearly half a decade on from the crisis, and we have just started a new round of scandal as the results of the FSA investigation into LIBOR fixing hit the headlines. The story will no doubt run and run for some time as other banks are brought into the mire. The Government’s response—the so-called Tyrie commission—is as good a start at understanding the problems as I can imagine, and, I hope, a significant step in the direction of truth and reconciliation between the banks and the taxpaying consumers.

The FSA’s response to the banking crisis has been reactive, and it is in its reaction that significant barriers have been established that limit competition in banking. Over the past few months, my hon. Friend the Member for South Northamptonshire and I have been meeting a number of smaller, existing banks as well as potential challenger banks to the banking marketplace. In nearly every case, their experience of the FSA has been problematic. All parties concerned were either small banks—banks with balance sheets under £2.5 billion—or individuals representing organisations that had experienced the FSA’s application process. Those interested parties came forward with points about the FSA’s process of issuing banking licences, and the regulator’s attitude to, and regulation of, smaller banking institutions.

It is significant that just one of the organisations we met detailed a positive experience of the FSA and its practices. It is also worth noting that banking licences are very rare commodities. There has been just one ab initio banking licence granted in the past 100 years and that was to Metro Bank. All other new entrants to the market, such as Virgin Money and Tesco, have done so as a result of buying existing licences and transferring their use to the new operation, or from overseas banks passporting in their expertise. That in itself says a great deal about banking competition in this country.

I want to concentrate on two specific areas of concern: the FSA’s application process for banking licences, and the FSA’s regulation of smaller banks.

[Mr Thomas]

I share the hon. Gentleman’s concern about the regulators and his understanding of the potential for new players in the financial markets. The all-party group on building societies and financial mutuals held an inquiry into the work of the regulator in relation to building societies, friendly societies and credit unions. It was far from clear that regulators had any real experience of working for and in those organisations. Will he support a call to encourage the new regulatory bodies to ensure that among their senior staff they have people with real practical, hands-on experience of working for a financial mutual?

[Mark Garnier]

Yes, I will. One of the problems is that, with the potential move of the FSA into the new regulatory regime, there has been an exodus of staff. As the hon. Gentleman suggests, that is of course something to do with the employment process within the new regulators, but it is absolutely right that any regulator should draw on people’s extensive experience. As we look forward, it is important that we provide leadership and that mutuals and other models of banking should be encouraged. The regulator should accordingly take account of that when employing staff. I wholeheartedly agree with the hon. Gentleman on that point.

The second problem is the FSA’s regulation of small banks, starting with the application process for banking licences and significant changes. That process has two tiers. It starts with an initial inquiry, and if an applicant is given the nod, the process continues with a formal application. The initial inquiry can be likened to a conversation on the doorstep of the FSA, with the aspirant bank seeking permission to come through the door simply to start the application process formally.

However, that initial inquiry—it should be remembered that it is not a formal inquiry but just an opening conversation—can cost the applicant more than £1 million to process. That is because the applicant requires a corporate body to make the application, which is not unreasonable, but also needs evidence of capital committed, advisors, auditors and, it seems, evidence of system design and building, which can be very expensive as there are no off-the-peg systems available.

So far we have found just two organisations that have proceeded past the initial stage from an ab initio enquiry. Trying to establish the reasons for that, we found that the cost and delay involved in the application process appear to be disproportionate. New applicants are effectively required to create a functioning, fully staffed banking operation before any type of licence is granted. We found that one applicant was forced to resubmit their application because the application process was stretched beyond the 12-month time limit and consequently a second application fee of £25,000 was demanded. One individual spent £1.3 million just to get to the formal stage of the application process. The application was then denied by the FSA.

The applicants we met had many complaints about the FSA process, and I will go through some of them. All applicants felt that the FSA had an arbitrary power to grant or refuse applications. They felt that the FSA should provide a publicly available checklist of criteria that, if satisfied, will result in the award of a licence. Such a change would lead to a more transparent application process. Apparently there is no requirement for the FSA to apply the same criteria to all applications in its internal processes or to explain its reasons for advising that applications should be withdrawn. Representatives of one small licensed bank said that they were given the “impression” that their application was progressing but “never a green light”. A representative of an individual who tried to buy a failing bank said that, although the FSA might appear to favour an applicant, they were capable of

“changing their opinion with no prior warning”.

One applicant was encouraged by an FSA official to proceed with an application for a change of control. However, a few months later, and after incurring considerable cost, they were advised by a different FSA official that their application would not succeed and should therefore be withdrawn. Worryingly, in one case the absence of objective criteria allowed the FSA to engineer the withdrawal of the application by putting the applicant in a cleft stick. The FSA imposed a very high tier 1 capital requirement, which had the effect of suppressing the profitability of the applicant’s business plan. The applicant was then told that the proposed venture was not sustainable because it was insufficiently profitable, and they were advised to withdraw.

In short, applicants felt that the individuals concerned within the FSA feared the prospect of having their name associated with any bank that might possibly fail in the future, and so they felt that the FSA staff regressed to having a bias of ultimate safety, and that bias meant that they favoured rejection of applications.

Let me turn to the regulation of existing smaller banks, of which there are 50 or so. Those banks are penalised for being small. It is quite interesting that the department within the FSA that looks after smaller banks is called “Smaller banks, smaller building societies and spread betters”. It seems curious that banks that are so important to this country can be regulated alongside spread betters, which are perhaps less important to the financial system.

The first and most basic problem that the smaller banks face comes in the form of the capital ratios that they must have. Small start-up banks are required to have a capital ratio that is potentially three times larger than that of a big, systemic bank. Although it can be argued that that is to ensure the bank is stable as it builds up its lending book, it restricts the opportunity to become a new entrant to the market to those who have very deep pockets indeed. Even if a new bank grows, its capital ratios are frequently twice that of the big banks’ capital ratios. Moreover, risk-weighted valuations of property lending, with regard to items such as a property lending book, are skewed against small banks, which may lack the database and breadth of client type available to the big banks to justify a similar risk-weighting. That means that a small bank will need a third more capital for its property books than its bigger competitors.

Small banks are also likely to have a more limited loan book. For example, a small bank’s loan book might be restricted to the UK. That incurs a 1% increase in capital ratios. That is quite an interesting proposition because it implies that big banks lending to Greece and Spain face a lower risk than those banks that are just lending in the UK. That so-called “concentration of risk” has further implications, as small banks are likely to seek niche markets. Doing so means that a bank incurs a further 2% increase in its capital ratio.

Meanwhile, liquidity reporting has resulted in small banks seeing the cost of their compliance increase tenfold. Representatives of a small private retail bank whom we met said the bank used to charge its customers £25 a month for the privilege of banking with it. Those customers are now being charged £65 a month, just to cover the increased cost of compliance. Another small bank that has only a £50 million balance sheet is required to submit 160 liquidity reports every year.

In addition, it has been suggested that for a small bank the staff to accountant ratio, which is obviously an overhead cost, is 17 members of staff for each accountant who is examining what is going on. In a recent survey, chief executives of small banks complained that 40% of their time was spent on compliance. And non-executive directors, far from contributing a wide range of skills to the bank’s board, must now demonstrate extensive banking experience and sign up to what amounts to a full-time job. Is it right that banks’ boards should be so monochrome?

There are many reasons why businesses might face problems in getting started, but in an environment in which we expect banks to lend more and to contribute to our economic recovery is it right that the regulator is apparently creating a blockade for new entrants and increased competition? Including me, there are three members of the Treasury Committee still in Westminster Hall—the other two are my hon. Friend the Member for South Northamptonshire and the hon. Member for Erith and Thamesmead (Teresa Pearce); and there was another member here earlier, the hon. Member for Edmonton (Mr Love). I hope that the Treasury Committee will proceed with a forensic investigation of banking competition and seek to separate myth from fact as regards this problem. However, as we progress with the Financial Services Bill and the soon-to-come banking reform Bill, it is crucial that we consider competition as part of the mandate of the regulators.

This is a very difficult time for our financial services industry, including banking, and we must ensure that we strike the right balance between regulation that is effective and easy to apply and regulation that ensures international confidence in our financial system. Striking that balance is too important for us to get wrong, but we must ensure that in achieving it we allow, and indeed encourage, healthy competition within the banking community. That must be the approach taken by the regulator.

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[Cathy Jamieson]

Before the Division, I was talking about banking being seen as a respectable job that people vied for and expected would be a lifetime career, if they were lucky enough to get a start in the industry. That is certainly how things were when I was considering my career—not that I ever actually considered a career in banking. I do feel, however, for the decent, honest, hard-working staff of the banks, and that has been echoed by Members from across the House, and particularly by my hon. Friends the Members for Erith and Thamesmead (Teresa Pearce) and for Islwyn.

I feel for those decent, hard-working people who have seen their industry and work force castigated and vilified. Bankers now appear to be even less popular than politicians and the media—we would once have found that hard to believe—and that is despite the fact that the individuals, the ordinary workers in the banks, have done nothing wrong. Indeed, as we have heard, many of them probably did query, at whatever level they could, the hard-sell sales targets that they had to achieve, but because of decisions taken by others, they now face guilt by association and they are the ones on the front line who have to deal with the public.

I also feel sorry for the front-line staff who lost their jobs in the aftermath of the banking crisis. Those people did not walk away with millions of pounds and, as we heard from my hon. Friend the Member for Islwyn, if they did get a bonus, it was part of what they had to work to achieve in order to make a decent wage by the end of the month. Those people did not walk away with multi-millions, and indeed, as I know from some of my constituents, many have been unable to secure permanent employment since. That makes it all the more galling when those who made the bad decisions—the wrong decisions—are able to leave with massive pay-offs, and that is also why the public are so angry.

What more should the Government be doing? This debate is about banking competition, and we have heard a little about that. We have also heard, in one of the interesting threads running through the debate, about mutuality and different forms of common ownership of the banking system. Over recent weeks and months I have found it absolutely fascinating to hear about the number of converts to the principles of mutuality and that form of common ownership. That is very welcome. I do not want to sound a discordant note, but that level of support for and understanding of the principles of mutuality would have been helpful a number of years ago, when the media and other commentators were urging people to become customers of particular banks in order to get a windfall on demutualisation. Many of us argued against that, saying that it was short-termism of the worst sort. We said that a day of reckoning would come, and we have now seen that happen.

However, mutuality and co-operation must not be just for a time of crisis or to fill a gap when the private sector has failed or stalled. They offer a successful alternative business model, which should at least have a level playing field. Opposition Members remain disappointed that the Government did not accept the strong case made during the campaign run by the Co-operative party, called “The Feeling’s Mutual”, which focused on the need for remutualisation of Northern Rock. That sent the rather unfortunate message that the Government did not have much faith in the mutual sector in reality, despite the warm words in policy documents and the coalition agreement, which stated that the Government would bring forward detailed proposals to ensure a strong and growing mutual sector. Again, I hesitate to sound a discordant note, but I do not think we have seen evidence of such proposals yet. I recognise, though, that the building societies White Paper, which we had been waiting for, was published this week. I will go through that with interest. I see the Minister nodding. I am sure that he knows, from our time together on various Bill Committees, that we will indeed scrutinise it closely.

Many hon. Members have pressed the Government on a range of issues relating to financial services, including the capping of interest on loans, financial inclusion, financial education and access to finance. We have heard about many such issues today.

[Mr Thomas]

Before my hon. Friend moves on to deal with the particular remarks of hon. Members, may I ask her about Northern Rock? The Government have clearly made their decision, but does she think it would be helpful for the Government to publish their assessment of the different proposals? Clearly, some information would have to be redacted for commercial reasons, but would it not be helpful to release the paperwork and enable us to have a proper understanding of the assessment that the Government made? That would perhaps inform the debate about the building societies White Paper and it would certainly help financial mutuals to understand what on earth they have to do to convince the Government of the case for expansion of their part of the sector.

[Cathy Jamieson]

My hon. Friend makes a very interesting and valid point. Opposition Members are reasonable people. We understand that sometimes things have to be held in confidence and that it may not be appropriate to put some information in the public domain. We would not be unreasonable about that, but my hon. Friend makes a valid point about informing the debate and looking to the future, because if we are serious about promoting and supporting the mutual sector, we need to understand exactly why the Government did not think that was the right thing to do in the case of Northern Rock.

As I said, many hon. Members have pressed the Government on a range of issues. We think it rather unfortunate that the Government have not agreed to include those measures in relevant Bills, despite the fact that sometimes there were, in our view, appropriate amendments that would have given them the hook to do so. As the Minister will be aware, my hon. Friend the Member for Nottingham East (Chris Leslie) and I tabled detailed amendments to the Financial Services Bill to allow the Government the opportunity to deliver on the coalition pledge on mutuality, but unfortunately they used their majority to vote them down.

The financial mutual sector has proved to be robust during the economic crisis. It was not the sector that required bailing out. The regulated industry, of course, required a public bail-out of £60 billion. In that context, the criticism aimed at some of those in governance structures in mutuals, whether in the Co-operative bank or elsewhere, is ill-founded. Having a few more lay people with a common-sense approach and a grip on what is right and wrong, who would be prepared to flag it up when greed was overtaking responsibility to customers, would have been no bad thing in some of the banks, which had become so out of touch that they had forgotten that it was other people’s money they were gambling with.

I ask the Minister to say in his response to the debate exactly what the Government intend to do to help the mutual sector. I hope, for example, that they will look carefully at the demutualisation regulations, tax system support for the sector and the capital raising requirements for mutuals. Again, we have debated that in various Bill Committees. There is an opportunity to do so again in relation to the legislation that flows from the Independent Commission on Banking.

I hope that we will see speedier progress on that than perhaps we saw on implementing the legislation passed by the previous Government. It took about 18 months to implement the vital changes for credit unions. It is very welcome that hon. Members on both sides of the Chamber have today expressed support for credit unions. Perhaps the Government will take the opportunity to look again at the elements of the Co-operative and Community Benefit Societies and Credit Unions Act 2010 that remain unimplemented and see whether anything else should be done to assist credit unions.

Of course, as well as the Co-operative bank, we have the Nationwide building society, which points out, with some justification, that it is a challenger brand that provides a mass market, mutual alternative to the banks. Like the Co-op bank, it has seen a sharp increase in the number of people looking to join it. I understand that Nationwide has seen an 85% increase, week on week, in the number of customers opening and transferring their main current account online. It has consistently made the point that it needs a level playing field with the plcs if it is to continue and enhance its role. It is not looking for special treatment. It is not looking for anything other than recognition of particular regulatory impacts on mutuals. I am sure that the Minister will want to examine that.

The Nationwide is one of the organisations that support the creation of a current account redirection system to improve switching, and it is actively involved in work on that at the moment. We have heard during this debate about the difficulties there can be in switching accounts. Partly it is a cultural thing—people may have stuck with the same bank for many years—but there is also an issue about financial exclusion. As I said in an intervention on my hon. Friend the Member for Erith and Thamesmead, I know of many constituents who have found it difficult to get a bank account at all. If anyone has ever tried or knows anyone else who has ever tried to open a basic bank account in the not-too-distant past, they will know the hoops that people have to jump through. In addition, the finances of many people on low incomes work in such a way that when it comes to anything that is out of the ordinary or that would upset their regular system of payments or income coming in and going out, on a weekly or a monthly basis, they simply cannot afford to take the risk. They will not take the risk of upsetting things, even for a month or so, to move accounts. Sometimes it is a case of “Better the devil you know” than the uncertainty of what they do not know. Therefore, anything that could be done to assist people in the process of moving accounts would be helpful.

To conclude, I shall make a few remarks about what Opposition Members have set out as a sensible way forward. I have not had the opportunity to say much about the small business sector. I have focused mainly on individual consumers. I of course echo the comments made by various hon. Members about how we support small businesses. That is extremely important. The German model of Sparkassen is creating quite a lot of interest. That is certainly worth looking at, because all of us know what small businesses in our local areas are finding, notwithstanding all the warm words from the banks. I am sure that the people saying those warm words believe them—from their perspective, everything is fine. However, the reality is that week after week, small business people are coming to see us at our surgeries and telling us that their business is under threat, perhaps because of cash-flow problems and perhaps because of changes in banking arrangements that they have had for years and that no one has ever previously questioned. That the banks have a wider responsibility than simply what they do to make money for themselves comes through at that point.

We set out our proposals earlier in the week. We strongly believe that there is a case for a British investment bank—indeed, we have worked on it and published a report. We also believe that greater competition in the banking industry, with at least two challenger banks, not simply one other entrant, would at least make some difference. Banks on high streets are very important, because people need to access local branches and, if we are to change the culture, to build up individual relationships. We need transparency about which communities and sectors do not get services from the banks, as has been mentioned today. We also need a code of conduct for bankers, with those breaking the rules having to suffer the consequences. It happens in other professions; why not in the banking sector? We heard a powerful contribution from my hon. Friend the Member for Islwyn, who worked in the industry, about the lack of training and the downgrading, as he saw it, of professional standards.

We ought to proceed with a new unit in the Serious Fraud Office to tackle fraud in financial services. We must change the bonus culture, by backing international changes to limit bonuses. We want the Vickers proposals implemented in full, not watered down, particularly not the ring-fence between the casino and the retail banks. We want to ensure that it happens. I know that it was controversial in the debate last week, but we continue to believe that we need a further public inquiry to enable us to address the deeper cultural challenges that the banking industry faces and to examine how we genuinely change the way that our banks work and how we make them focus on stewardship once again.

The hon. Member for Macclesfield (David Rutley) mentioned culture being measured by what happens when no one is looking. Notwithstanding the many people who have done well, are doing the right thing, are socially responsible, are working ethically and are supporting their customers, given what has happened, the banking industry will not be judged by the best—it is being judged by the worst. That is what we have to address. I hope that the Minister will outline how he intends to do that.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

It is a very great pleasure to serve under your chairmanship, Mr Davies, and to see you, not for the first time, follow in the footsteps of Mr Chope, who chaired the sitting earlier. I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) and thank her for securing this timely debate. Her thoughtful speech set the tone for the good debate that we have had this afternoon. In addition I thank my hon. Friends the Members for Wyre Forest (Mark Garnier), for Wycombe (Steve Baker), for Macclesfield (David Rutley), for Mid Norfolk (George Freeman) and for Wells (Tessa Munt) and the hon. Members for Erith and Thamesmead (Teresa Pearce), for Glasgow North East (Mr Bain) and for Islwyn (Chris Evans). Hon. Members have brought considerable personal experience to the debate, which has assisted the quality of our debate.

Let me begin by stating clearly that the Government are committed to fostering a strong, competitive banking sector for the benefit of consumers and the UK economy. That is why we asked Sir John Vickers, along with other members of the Independent Banking Commission, to examine the issues as part of his review of the banking sector, and are implementing his recommendations and, in some cases, going further. It is essential that consumers are able to apply competitive pressure and hold their bank to account as to the services it offers. In a competitive market, customers should be able to vote with their feet and switch their custom to banks that provide the best products and services to meet their needs. There should also be a diversity of institutions in the market, capable of meeting the varying needs of consumers. The Government’s strategy for competition encompasses many things, which I will mention in turn.

Creating the right environment for competition to flourish is essential to ensure that consumers benefit in the long term. The Government’s major financial stability reforms will help to enhance competition in financial services. Those reforms implement the recommendations of the IBC, which reported last year. Banks will no longer receive a competitive advantage by being perceived to be too big to fail—a point that my hon. Friend the Member for South Northamptonshire made. The Government’s plans to ring-fence banking services and increase banks’ capacity to absorb losses are also a vital step in creating the right environment for competition in banking to flourish.

By improving the authorities’ ability to deal with the failure of financial institutions in an orderly manner, the Government are substantially reducing the perceived implicit guarantee that benefits the large incumbents. That is part of a broad programme of financial sector reform to solve what my right hon. Friend the Chancellor has called the “British dilemma”—how to host a world-class financial services sector without putting UK taxpayers at risk.

We have seen a number of new entrants into the current account market in recent years, including Metro Bank. It is however essential that prospective new banks can enter the market to compete and that the requirements are not overly onerous or disproportionate. To ensure that that is the case, in the banking reform White Paper the Government announced that the FSA and the Bank of England are conducting reviews of the prudential and conduct requirements for new entrants to the banking sector.

The reviews will reassess the prudential requirements of the new Prudential Regulations Authority and the conduct requirements of the new Financial Conduct Authority, to ensure that they are proportionate and do not pose excessive barriers to entry or to expansion for new entrants. The conclusions of those reviews will be published in the autumn, and the FSA and the Bank of England have committed to introduce, where possible, any changes in advance of the new regulatory structure. That point was raised by a number of hon. Members; in particular, my hon. Friend the Member for Wyre Forest set out his concerns about the difficulties for new banks entering the market and how difficult it can be to obtain authorisation. He raises a fair concern, but of course the right balance, which we have to strike, would ensure that those receiving a banking licence were able to perform the activities that they needed to perform in a secure way. It is right that standards are robust.

That said, the FSA should administer a process that is as smooth as possible. It has already improved the bank authorisation process to make it easier for prospective new banks, and is encouraging potential applicants to attend pre-application meetings, for example. Those meetings allow the FSA to understand better the applicant’s business model and offer tailored guidance. It has also introduced a milestone document on a modular approach to assessing deposit-taking applications. Where appropriate, it will provide a letter stating that it is minded to approve applications subject to specific final conditions for the applicant to satisfy.

The changes significantly improve the process for becoming a new bank and many prospective new entrants will benefit from them in future. The changes also make the process of completing an application easier, while keeping standards high. Combined with the reviews I mentioned on the prudential and conduct requirements, which are under way, the changes help to ensure that the bank authorisation process is not a barrier to entry for prospective new banks.

I note the comments made by my hon. Friend the Member for Wyre Forest on publishing a checklist of the criteria that prospective new banks need to fulfil. I had a little experience of that in my previous career. Becoming a new bank is complex and it is right that the system is robust, but I am grateful for the constructive comments made.

I am also grateful to my hon. Friend the Member for Wycombe for highlighting this evening’s “Bank of Dave” programme and for his suggestion about my television viewing. I happened to be driving in my constituency yesterday, when I heard an interesting interview with Mr Fishwick. I look forward to the programme this evening. In reference to that particular example, the requirements are robust, as is generally the case. I do not want to be drawn into a specific case and I cannot comment on the precise activities that that business undertakes, but it is right that we ensure that the system has no undue barriers to entry. The regulation regime could potentially be such a barrier, and we must be vigilant on that point.

Let me turn to the creation of new challenger banks. For competition to drive better consumer outcomes, new providers must be willing to enter the market to compete with the big banks. Two new challenger banks are being created and will be on the high street in the next 18 months. We have heard a little about the sale by the Government of Northern Rock plc to Virgin Money, which creates a new and innovative challenger to the established big five. The sale was completed on 1 January 2012 and the organisation is a useful addition to the high street. I am sorry that the Opposition party remains opposed to that move, because it has increased competition. The National Audit Office said that the process run by United Kingdom Financial Investments Ltd was fair and transparent and that an early sale was the best step the Government could take to secure taxpayers’ interests. As I have said, the sale has introduced, at an early stage, more competition.

In addition, Lloyds is in the process of selling off more than 600 of its branches—the Verde divestment—and the Government are committed to ensuring that the divestment creates another strong challenger. The Government welcome the news that the Co-op and Lloyds have agreed an understanding on the commercial terms for Verde. If the deal with the Co-op goes ahead, the combined entity will already have more than the 6% of the personal current account market that was recommended by the Independent Commission on Banking and by my hon. Friend the Member for Wells.

Along with the Government’s sale of Northern Rock to Virgin Money, the sale by Lloyds will deliver a much bigger challenger bank to the retail banking market. The potential purchase of those branches by the Co-op is a significant boost to the mutuals, which the Government are committed to promote. Once the deal is completed, Co-operative bank will be a realistic, mutually owned challenger to the big five banks.

The Government are determined to ensure that the Lloyds divestment results in a strong challenger, regardless of the final commercial arrangements that Lloyds arrives at. They have actively engaged with the European Commission and Lloyds to ensure that that is the case.

The Government are also committed to promoting the mutuals sector as an alternative to banks. They are looking to ensure that there is a level playing field for building societies, and that growth of the sector is not hindered. Last Thursday, the Government set out their vision for the building societies sector in their discussion document, “The Future of Building Societies”. The document, which has been warmly welcomed by the sector, confirms the Government’s support for the distinctive alternative offered by building societies. It sets out proposals including aligning building societies legislation with the ring-fencing requirements for banks, and applying loss-absorbency proposals to building societies in the same way as to banks. Those proposals have received warm support from the industry, including from the Building Societies Association and the Nationwide.

[Mr Thomas]

What steps is the Minister taking to ensure that the staff who work in the new regulators have at least some genuine understanding of the mutual sector, be it credit unions, building societies or friendly societies? How many staff who have actually worked in that part of the sector are now part of the regulatory environment?

[Mr Gauke]

The hon. Gentleman would not expect me to be able to give him a precise answer as to how many staff within the new regulatory bodies have got specific experience of mutuals and some of the bodies that are under discussion today. Of course it is important for a regulatory authority to have sufficient depth and breadth of knowledge of the institutions that it regulates, and the Government are keen to ensure that that is the case.

Let me say a little about credit unions. The Government have removed unnecessary burdens on credit unions through the legislative reform order. One important aspect of that was to allow credit unions to admit as members corporate bodies such as local charities and firms, and relax restrictions on membership. Those new members can both deposit in and borrow from their local credit unions, thus providing further opportunities for investment and growth in communities.

Credit unions can act as an alternative to banks and building societies in providing affordable financial services to people who may otherwise not be able to access them. The Government have also announced that they will bring forward a co-operative consolidation Bill. Last month, the Department for Work and Pensions announced its credit union expansion project, which will invest £38 million to help credit unions modernise and grow to offer a real alternative to high-cost credit providers. Through all such actions, the Government are creating an environment in which mutually owned institutions can offer a real alternative for consumers, and compete with the banks to serve families and businesses that need to save and borrow for their future. However, I may have to disappoint the hon. Member for Erith and Thamesmead. I am not sure that we are persuaded by the case that every public sector worker has to be paid through a credit union. Were we to do that, there would be certain issues with regard to competition. None the less, I note her comments.

Let me turn to the issue of switching and portability, which a number of hon. Members raised, not least my hon. Friend the Member for South Northamptonshire. It is essential that consumers are able to apply competitive pressure and to hold their bank to account for the services that it offers. In a competitive market, customers should be able to vote with their feet and switch their custom to banks that provide the best products and services to meet their needs. To that end, the banking industry has committed to introduce, by September 2013, a free, safe and hassle-free switching service to ensure that customers can switch accounts within seven days. To date, banks representing more than 97% of the current account market have committed to being ready to launch the new seven-day switching service by the September 2013 deadline and the Government continue to hold the industry to account to that timetable.

The new switching service will ensure that consumers’ accounts will be switched within seven days, and that all direct debits and standing orders from their old account will be redirected to their new one. The redirection service will last for 13 months. The new service, including a guarantee that the process will be smooth and that consumers will suffer no financial loss, will help to tackle the perception held by many consumers that switching is difficult, costly or risky.

A number of hon. Members have said that we should adopt full account number portability. There are a number of ways in which such an approach could work. In essence, a customers’ account number and sort code, which links the account to a branch, would not change when the customer switched banks, thereby avoiding the need for the customer to change any payment or credit instructions, which would reduce the risk of payments being sent to the wrong account.

The Independent Commission on Banking considered full account number portability carefully and decided not to recommend it in its report of 12 September 2011. As we all know, the ICB recommended that a current account redirection service should be established to smooth the process of switching current accounts for individuals and small businesses. It concluded that the costs and incremental benefits of full account number portability were “uncertain relative to redirection” and that

“it appears that redirection may deliver many of the benefits of account number portability at lower cost.”

As I have mentioned, the Government strongly support the ICB recommendation on switching and are holding the industry to account to deliver by the September 2013 deadline. Once the new switching service is operational, the Government will assess whether the service has delivered the expected consumer benefits. If not, further measures, including full account portability, will be considered. Given where we are and the recommendations of the ICB, we believe that it is right to proceed with the plans currently in place.

A number of hon. Members raised the issue of transparency. They want to ensure that customers can see exactly what services are provided and the costs that apply. The Government are clear that banking needs to become more transparent, and that is a perfectly fair point. A number of transparency measures are already being implemented in retail banking, including making charges clearer on customers’ monthly statements and providing an annual statement of charges for each customer. The annual statement will allow customers to see how much their account has cost them and it will provide an opportunity for them to consider whether they are getting good value.

That is a welcome start, but more must be done. As set out in the recent White Paper on banking reform, the Government see increased transparency and financial capability as an integral part of a competitive banking sector. The Office of Fair Trading has announced that it will conduct a review of the personal current account market in 2012, assessing levels of transparency in the market and the impact of the measures that have already been taken to improve transparency, as well as taking forward the recommendations of the Independent Commission on Banking on including interest forgone on bank statements and annual summaries.

[Mr Thomas]

I thank the Minister for giving way again on the issue of transparency. Why have the Government not included in their proposals for banking reform the idea that there should be a requirement on banks to disclose what they lend and where they lend on a postcode basis, to help us understand where the Thamesmeads, the north Harrows and the other unbanked areas in the UK are, so that we can better direct resources and new challenger banks to those areas?

[Mr Gauke]

Indeed, that issue was raised by the hon. Members for Islwyn and for Erith and Thamesmead during the debate. I say to the hon. Gentleman that data releases by postcode by each bank for all customers would be a very considerable undertaking for banks. It would also create a significant regulatory burden, and let us not forget that considerable regulatory burdens can prove to be a barrier to entry. At a time when we want to ensure that there is more competition, we must bear that in mind. It is also worth pointing out that there are legitimate differences between different areas for lending figures, including differences in credit risk. One would not expect there to be similar lending figures across the country. I caution against a reaction that would mean the imposition of a further regulatory burden.

Let me return to the issue of transparency. The Financial Conduct Authority will take a proactive approach to consumer protection. It will focus on the transparency of information that is available to consumers of financial services. The FCA will carry out a fundamental review of how transparency will be embedded in the new regime, both by the regulator and by firms, and it will publish a discussion paper in the first quarter of 2013. The review will consider what further measures could be introduced to improve the quantity and quality of the information that customers receive, enabling them to make informed choices and exert competitive pressure on firms.

Let me pick up on some other points that were made during the debate. The hon. Member for Erith and Thamesmead made a point about the payments clearing system; she was concerned that the big banks controlled that system. My response is that the Bank of England already has a large role in the UK payments system, given that the stability of that system is of paramount importance, and shortly the Government will issue a consultation on the future strategy-setting of the payments industry to ensure that consumers and smaller banks have a louder voice. I hope that all Members support that process.

The issue of access to banking services was raised in the debate, including by the hon. Member for Harrow West (Mr Thomas) in his recent intervention. The Government are committed to improving access to financial services and in particular to bank accounts, which was another point made earlier in the debate. It has been amply demonstrated that having a bank account is an essential aspect of modern life for any individual. Being able to access counter services at a branch and interact face to face with staff is very much valued by many individuals and businesses. However, the issue of where particular branches are located and maintained is fundamentally a commercial decision and one for the financial institution in question, rather than the Government, to make. Therefore, the Government do not intervene in such decisions. All banking service providers will need to balance customer interests, market competition and other commercial factors when they consider their strategy. Nevertheless, banks must treat their customers fairly.

I will say a word or two about the FCA. To ensure that consumers are adequately protected in accessing financial services, the Government are reforming the regulation of financial services. Part of that process includes creating a new dedicated conduct of business regulator—the FCA. Securing effective competition in the market for financial services is a key mechanism for securing better outcomes for consumers, and the FCA’s new competition mandate will be central to achieving that. The FCA will have an operational objective to promote effective competition in the interests of consumers, and it will also be under a competition duty, driving it to look for competition-led solutions to conduct issues more generally and in pursuit of its “consumer protection” and “integrity” operational objectives.

The FCA will have the mandate to use its powers to tackle competition problems more swiftly and effectively than the Financial Services Authority did previously, for example by promoting switching, removing barriers to entry or addressing asymmetries of information. A more proactive approach will lead to better consumer outcomes as problems will be tackled sooner, before they give rise to significant detriment. For instance, the FCA will take a keener interest in how products are designed and distributed in the first place, and it will have a new power to ban or impose restrictions on products that it considers could cause significant detriment.

Greater transparency and disclosure will also be at the heart of the FCA’s new approach. For example, it will have new powers to disclose the fact that a warning notice in respect of disciplinary action has been issued, and to publicise details of actions taken against misleading financial promotions.

In conclusion, banking competition is essential for consumers, businesses and the economy to prosper. The Government are undertaking a number of significant reforms to enhance competition and we continue to work hard to consider how best to improve competition in banking while maintaining the UK’s position as a global financial centre. In that context, I thank hon. Members for their well-considered comments and suggestions today. A number of excellent points have been made today by hon. Members and they all contribute to the valuable debate about banking competition.