Bankers’ Bonuses and the Banking Industry

Debate between Guy Opperman and Chris Evans

Wednesday 25th February 2015 Commons Chamber

[Guy Opperman (Hexham) (Con)]

It is a pleasure to speak in this debate. I must first mention the Register of Members’ Financial Interests and point out that I am attempting to create two banks in the north-east at present. My life savings, virtually, are in the Atom bank, which is an internet start-up that has been set up by individuals just outside Durham. We are also attempting to merge the Tynedale community bank with the Prince Bishops bank in Stanley in County Durham, with a view to creating an enhanced credit union.

Having made that declaration, I would like to take the House on a journey. The very first constituent who came to me after I had been elected in 2010 had had his bank finance taken away and, for that reason, his business had failed. It was not through any fault of the business, but because of the bank lending provisions at the time. The bank was local, in Newcastle and then London, and was one of the large banks. That case made it patently clear to me that we needed greater competition. To that end, we have spent much time in this Parliament, both as the Government and individually, trying to create that greater competition.

When we assess the quality of the Labour proposals—I confess that I have not had the great joy and pleasure of reading the shadow Chancellor’s proposals for banking reform, to which the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) referred, but I have glanced at some of the issues—we must look at the record over the last few years. That must start—and I twice raised this with the hon. Lady and did not get a reply—with the Financial Services Act 2012. On 23 April 2012, I spoke in the debate on the Bill. To the Labour party’s eternal shame, it tabled amendment 28, which sought to delete clause 5 of the Act. That would have removed “The competition objective”. Labour claims to be in favour of competition, but I find it utterly illogical and wrong that it should have sought to vote down the specific proposals in the Act that encourage competition. The proposals are simple and I would have thought that those who profess to want competition in banking would be in favour of them. They include

“the ease with which consumers who obtain those services can change the person from whom they obtain them”—

bank switching, and

“the ease with which new entrants can enter the market”.

That is challenger banks and local banks. The clause also includes

“the ease with which consumers who may wish to use those services…can access them”.

I could go on.

I refer to clause 5 because the House and the country will have to judge Labour on what it has done in the past. I have looked briefly at the grave and weighty tome—I speak ironically, I am afraid—published by the shadow Chancellor and the shadow Financial Secretary on proposed banking reform. It says that Labour wants to see

“At least two new challenger banks”.

I hate to say it, but over the last four years some 20-plus new challenger banks have been created under this Government. I have met many of them, including Metro, which is the biggest and the best, Aldermore and Virgin. Those of us who have been trying to increase competition would view the hon. Lady’s argument—which is, presumably, that 20 is good but we want two more—as illogical. I want an awful lot more than two more. Why she chose two, rather than one or 10, I am at a loss to understand, but doubtless when I read the grave and weighty tome, all will become clear.

We need to assess the way in which the Government have addressed the creation of greater competition. The creation of a new bank faces four fundamental challenges—I know because I have attempted to navigate my way through them over the last four and three quarter years. The first was a lack of legislation to facilitate such change. My hon. Friend the Member for Chichester (Mr Tyrie) and I went to see Sir Hector Sants, the then chairman of the regulatory authority, and he agreed and changed the rules. Previously, if I wished to create a challenger bank or new local bank, I would have been judged on the same basis as Barclays or the other big banks. I would have to have capital up front massively in excess of £50 million and my board would have to be set up years in advance—to say it was bureaucratic would be an understatement.

The point I was trying to make to the hon. Member for Kilmarnock and Loudoun was that, in some respects, for the creation of local challenger banks, regulation had to be tweaked slightly so that it was not light-touch—to return to the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) who, as usual, is not in his place—but different and better. First, we introduced the Financial Services Act 2012, which provides the framework for the regulatory authorities to encourage greater competition. Secondly, having passed that legislation, notwithstanding Labour opposition, we tackled the length and complexity of the authorisation process. Setting up a new bank traditionally took years and a huge amount of money. We all want greater competition, and for the FSA to abbreviate the process—in planning, this is done through a pre-authorisation process—and help a potential new bank through it. The long and short of it is that the FSA has dramatically reduced the bureaucratic process and the number of years it took to set up a new bank. As a result, some extraordinarily successful new banks—for example, the Hampshire Trust and the Cambridge and Counties bank, which is effectively a local authority utilising its pension fund to do LEP-style investments in local businesses and communities—have come forward in the past few years.

The third big change was the reduction in the capital requirement. Huge amounts of money were needed to create a local or any kind of bank, but local banks are not now being judged on the scale of Barclays, because they do not want to be like Barclays or any other high street bank. Finally, the scale and complexity of the infrastructure and the information exchange between all the bank authorities was changed, as it needed to be.

I will be nice to the hon. Member for Kilmarnock and Loudoun: of course I would welcome two more new challenger banks. The consequence, however, of the past four and three quarter years of change in the regulatory, legal and bureaucratic process and in the general climate of FSA behaviour is that we have in excess of 20 new start-ups. For the first time, we have new banks taking people on in the high street. I see that myself, because not only am I able to play a tiny part in the creation of a significant new bank in the north-east based in County Durham, but we are trying to fill a gap in the high street in my community in Northumberland.

The Government have changed the rules on credit unions to make it possible to have two types of credit union. You and I, Mr Deputy Speaker, will know that the traditional credit union model requires people to borrow for a very long period of time. The credit union is a very laudable and good thing and we should continue to support it, but there is a gap in the market. That gap has been filled, in my community and up and down the country, by payday lenders. As a result of high street banks not being able to lend in one way and credit unions being relatively restricted, there is a gap. The gap can be filled by community banks, which would effectively be bulked-up credit unions. There is a fantastic number of examples. Several are in large Labour areas, such as Glasgow. The Salford credit union is going from strength to strength. I have spent considerable time getting to know the Prince Bishops bank, which is based literally on the high street in Stanley in County Durham. It competes with what we would think of as high street banks and is, effectively, a bulked-up credit union. That surely shows that the Government are taking things in the right direction.

[Chris Evans (Islwyn) (Lab/Co-op)]

Many credit unions, which are run mainly by volunteers, are the victims of their own success, as they become too large and usually disband because they cannot handle the administration, the back-office work, that comes with it. How does the hon. Gentleman envisage credit unions being able to manage themselves as community banks and, potentially, as building societies? What legislation would help with that?

[Guy Opperman]

The legislation is already there. The hon. Gentleman should speak to the hon. Member for North Durham (Mr Jones), who is doing a fantastic job on the board of the Prince Bishops bank. I happily praise him for the work he is doing with the local community—with the church, the local authority and the housing association. To improve the quality of a credit union and make it viable, one has to, for example, ensure that payments to local authorities and housing associations go through the credit union, so it becomes a clearing bank in the normal way. There must be a greater degree of lending on a long-term basis. To put it bluntly, the credit union needs to go after middle-class lenders, because they are the ones who will make the deposits.

In Northumberland, a large proportion of my constituents are off-grid and have to purchase 500 litres of oil at a time. That costs approximately £350, now about £275. Banks will not give the lending facility to many unbanked people, because the number is too low, but if they were to save with a bulked-up credit union or community bank, that community bank could be the lender of choice for that specific purpose. Such people would, because they are mostly homeowners, be the sort of new lenders and new depositors who can provide the critical mass and the clout for the enhanced credit union-community bank to be more viable. The traditional problem with a credit union is that it does not have the deposit savings unless it has a white knight or a very strong church or trade union backing it.

We can discuss this another time—Mr Deputy Speaker will say that I am straying from the substance of the motion—but opportunities are out there. The point goes to the substance of the motion, which is competition. A credit union should provide competition on the high street to high street banks. Traditionally, credit unions have struggled. The Government’s changes have made it easier for them.

I will touch on two further points and then bring my remarks to a close. The sins of the bad, all of which we deprecate, are now paying for the good works of the good. We cannot have this debate without talking about LIBOR and about the terrible things that happen. However, the Government have done a wonderful thing in saying that the 96 military charities should receive the funds of the LIBOR fines and that air ambulances should receive a considerable amount of money. Last night, I was at No. 11 Downing street with the Chancellor. Representatives of many of the air ambulances throughout the country, including from Essex, were there. They are receiving significant sums of money by reason of the Chancellor’s decision on LIBOR funds. That is a fantastic thing. It was first announced in the 2012 autumn statement, originally for just military charities. It has now developed into other areas—the Minister spoke of GPs and other health services. The great work done by the air ambulances should be noted. The support we are giving to them is crucial.

I want to make one final point on the motion, which refers to tackling unemployment and youth unemployment as the purpose behind everything that it proposes. It is hard to read the House of Commons Library unemployment statistics and find a single Member of Parliament who has not benefited from a dramatic reduction in unemployment.

High-cost Credit

Debate between Guy Opperman and Chris Evans

Thursday 5th September 2013 Commons Chamber

[Chris Evans]

I agree entirely with my hon. Friend. As I said before, we are faced with an absolute juggernaut of advertising. A credit union might promote itself to 70 people whereas a payday loan company can promote itself to 7 million if it puts its advert on television at the right time. As I develop my argument, I shall suggest strategies to take on the goliath that is the payday lenders.

[Guy Opperman (Hexham) (Con)]

I wholeheartedly congratulate the hon. Gentleman on securing this important debate. Does he agree that just as we wish to expand and enhance credit unions we should also consider local community banks? They are trusted providers backed by the local community, and profits go back to the community after a limited time. They have strong local representation and an ability to lend at a better rate than even credit unions.

[Chris Evans]

I agree wholeheartedly. If the hon. Gentleman proposed that, he might gain cross-party support. As my hon. Friend the Member for Telford (David Wright) said, payday lenders have been extremely innovative in using advertising and the internet to reach people and we, as supporters of the credit union movement and community banks, must take a leaf out of their book, become innovative and consider other ways to reach the vulnerable people who see short-term lenders as the only solution to their problems.

After I was granted the debate, a constituent wrote to me about the problems he has faced with short-term lenders. When we met, he told me how payday loan companies added a range of administrative charges, interest and fees on top of initial loans. He borrowed in an attempt to pay back some of the money, but he fell further into debt as he took out loan after loan. He borrowed £400 from Wonga, but now must pay back £739. If he cannot afford the initial £400, how is he to afford £739? Where is the logic in that? It baffles me that payday loan companies seem to think that if someone is unable to pay back a loan, the answer is to take out another one. With Wonga breathing down his neck, he was forced to borrow £100 from QuickQuid, but now he owes that company £201.

My constituent told me that at no stage when taking out the initial loan was he asked about his income or expenditure, which bears out the findings of the Office of Fair Trading’s compliance review that only six of the largest 50 firms in the market made any attempt whatsoever to carry out proper income checks. That is simply not good enough. Had I not carried out such checks when I worked at Lloyds TSB, I would have faced disciplinary action—and rightly so—but such companies continue to follow those discredited practices.

The Office of Fair Trading also found that 75% of payday lenders renewed loans without checking whether they would be affordable, despite the fact that rolling over loans is a strong indicator that the borrower cannot pay back the money. It is especially worrying that each time someone fails to pay back a loan and takes out another one, they are committed to paying not only the interest on the initial loan, but admin fees and hidden charges on the new one.

My constituent was the victim of the culture of multiple loans, but he is not the only one. Some 30% of the people who contact StepChange Debt Charity for urgent help hold four or more loans. Parts of the industry are getting people into a vicious cycle of borrowing from one creditor to pay another. UK borrowers can end up paying back 74% of their initial loan in charges and administration fees on top of the money they borrowed. That figure is capped at 7% in Canada, meaning that the maximum payable in default interest and charges for a £300 loan is just £25. That practice needs further study in the UK. The consumer group Which? has called on the Financial Conduct Authority to replicate existing rules for mortgages and other credit products to help borrowers struggling with repayments. There is already a cap on default charges and fees in the credit card and mortgage markets, and we must consider extending such a cap to credit consumers.

I have further examples of how payday loans mean just piling on the debt. A payday loan company issued a man with a claim for £1,830 in penalty charges that were incurred for defaults on a loan of just £120. Each time the company went to his bank and was unsuccessful in recovering the money, it cost him £5, and the company made 330 attempts to get back the money. On top of that, the lenders added £178 of interest. It would be farcical if it was not true, but for many people in communities such as Islwyn, that is a sad fact of life each and every day. A Which? survey found that one in five users of payday loans were hit by unexpected charges and that, in the past 12 months, more than half of payday loan users had incurred charges because of missed or bounced payments.

We need to accept that borrowing from a payday lender is not like borrowing from a bank. When I worked in a bank, I would meet someone to discuss their needs. We would look at their income and expenditure, and talk about the affordability of loan and why they needed it, but even if the customer credit scored for a loan, I would still have no hesitation in saying no. However, with payday loans, because of the internet and fast access through iPhone technology, there is no one at the end of the line to say no, and what is worrying is that a person taking out such a loan may have the money in their bank account within 10 minutes.

For many, payday loans are a last resort. Many of the people I talk to have basic bank accounts that do not credit score for financial products. They have never got into mainstream banking, principally because they have seldom come across a bank in their lives. They see walking into a bank as a scary experience, so when they find themselves in dire straits and see the friendly advertising of Maud and Errol and the granny puppets from Wonga, or Amigo Loans, they think that there is a friendly place to go and they pick up the phone—they find it so easy. I therefore welcome the Government’s actions to investigate the effects of advertising and the year-long study of the market. I also look forward to the Financial Conduct Authority formulating a strategy in the autumn. However, I and others who have campaigned on the matter find the speed of implementing such measures frustrating.

As those processes are going on, short-term loan companies are devoting huge budgets to advertising, which I talked about in response to the intervention made by my hon. Friend the Member for Telford. The many daytime adverts predominantly reach the old, the young and the unemployed. Much as I welcomed the Government’s announcement in June 2012 that the Department for Work and Pensions would proceed with a credit union expansion project and make up to £38 million available to credit unions until March 2015, that is just a drop in the ocean.