Financial Services (Banking Reform) Bill

Jonathan Edwards Excerpts

Tuesday 9th July 2013 Commons Chamber

We are supposed to have had a commitment from the Government that they would try to get that level of data from the big banks so we could see where there were deserts in terms of financial provision. In some communities access to finance is a real problem, as is access to basic bank account services and other services which people have a right to these days as part of the warp and weft of modern lifestyles. Credit is really a modern utility, and we need to make sure that, as the CIC has campaigned for, the Government press the banks to be more transparent and to come forward with more data so we can decide what further local provision may be required.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

Does the shadow Minister therefore believe we should follow what the US has done? It has a community reinvestment Act, which ensures that the major banks are investing equitably on an area basis. The major problem in the UK is that investment is directed towards London, of course.

[Chris Leslie]

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

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[Andrea Leadsom]

I am delighted to be able to speak about this Bill on banking reform, which is so crucial to the future success of the British economy. All that time ago, Adam Smith said in “The Wealth of Nations” that for free enterprise to exist one needed both free entry and free exit of market players. Over the past 20 years, we have had neither in banking. Failing banks have certainly not been allowed to exit the market, hence all the problems with “too big to fail” and the massive taxpayer bail-outs. New players have also not been able to enter the market, as there have been enormous barriers to entry, and my new clause is an attempt to establish a real game-changer once and for all for the fate of competition in our banking sector, to enable new entrants to come into the market.

I know that the Government have already done a huge amount of work to change the plight for would-be banks. For example, we already know that the new Prudential Regulation Authority and the Financial Conduct Authority have made it easier for new banks to apply for a banking licence. Previously, there were enormous regulatory hurdles to entering the market for new banks, but now it has become slightly easier because they can get a banking licence that is conditional on their being able to recruit the right people and so on. They do not have to spend millions of pounds up front to evidence the fact that they can be competent as a bank.

The regulatory barriers to entry are gradually coming down, but an incredibly significant point that has not been addressed until now concerns the competition barriers to entry for new players in the market. The Government have made great strides in that regard, not just through the Vickers commission and the recommendations on seven-day switching, which will be a game-changer in enabling individuals and businesses to switch between banks, creating the competition that has been so lacking, but through some of the structural reforms they have announced more recently and the amendments to this Bill.

When I was elected to Parliament in 2010, one of the first things that my colleagues on the Treasury Committee —who are almost all in the Chamber today—and I did was consider the proposal from the Payments Council to get rid of cheques. We discovered in our evidence sessions that the proposal came purely from the banks. It was convenient only for them and absolutely was not convenient for the millions of people in this country who rely on cheques to settle bills, to pay their window cleaner or newsagent or to pay the neighbour who picked up their shopping for them. Millions of people still needed cheques, but it was very clear that the Payments Council planned to get rid of them for the convenience of the banks that owned and ran it. For me, that was the road to Damascus moment; I realised that the banking sector is the last great closed shop. The Payments Council, owned and run by the banks, governs the payments system, the big banks are the clearing banks through which every new challenger bank must go, and the payments infrastructure, VocaLink, is also owned and governed by the big banks.

For decades, the Payments Council has been able to permit or deny innovation in the payments industry. The big banks have been able not to allow challenger banks direct access to the payments system and have required them to go through the clearers, charging them up to 10 times more for accessing the payments system than they have been paying themselves. The first significant decision on which I want to congratulate the Government is that to consult on a new independent payments regulator. That is key to breaking open the banking sector and enabling new competition and transparency. It will be interesting to see just what has changed after the new regulator’s first few months of operation; it will be fundamentally transforming.

Importantly—this is where my new clause comes in—and as the hon. Member for Nottingham East (Chris Leslie) has said, for decades there has been a key barrier to competition in the banking system: the inability to move bank accounts freely and easily. People might be sick and tired of their bank. The Treasury Committee took evidence on opinion polls that suggested that certain banks had negative values when it came to whether customers would recommend them to a friend. People would say, “No, whatever you do, don’t go to my bank.” It is unusual to have such utterly negative recommendation levels between friends for a supplier. Even the energy sector fails to achieve such low levels of recommendations between friends. Something is clearly desperately lacking in customer service.

The Committee also heard some pretty shocking statistics about the failure of certain key banks to respond to customer service inquiries, to manage their call centres properly and to deal with complaints when they happen. It has taken all these banking scandals—payment protection insurance mis-selling, the bank swaps mis-selling and various other scandals—before the weight of evidence became enough for regulators to take action. Clearly the banks have not been good at policing themselves, and clearly it has been extraordinarily difficult for individuals and businesses to vote with their feet and move.

The difficulty is not only the decision to move bank; the person making that decision also faces having to make arrangements as regards their online shopping, their contract with the milkman and newspaper man, and their standing orders for, say, their television licence or their car insurance. If they change bank account, they have to change all those things, because they change bank account number.

The issue is not just whether a person can be bothered to change and go through all that hassle; very often, because of the consolidation that has taken place over the past 20 years, banks will force that situation on a consumer. A colleague told me in the Lobby the other day that their bank had just notified them that they have to change their bank account number, credit cards, debit cards, and cheque-books—everything—regardless of the fact that they do not want to do that, because the bank decided, off its own bat, to send them to another brand name. Of course, there is no compensation, or any way to get the bank to help the person to make all the notifications that they need to make.

Many people, particularly the elderly, have a real concern that if they change bank account things might just not happen; their regular payments might not be made, and everything might go horribly wrong. That puts them in a very difficult position. Of course, there is plenty of evidence of things having gone wrong. Perhaps the seven-day switching process will solve the problem of switching simply going wrong.

It would be a far better solution if, when a person moved bank, they took all their bank details with them. A similar thing happens in the case of mobile telephones.

[Jonathan Edwards]

The hon. Lady alluded to the allegedly competitive market in the energy sector, where there is a right to switch, although it can be difficult to do so, as I found out. Switching in itself does not stop companies from acting as a cartel. How confident is she that switching in banking would lead to greater competition in the market?

[Andrea Leadsom]

I will come on to that, and that will become clearer in the course of my comments. Certainly, in terms of barriers to entry, the lack of competition and switching—in other words, people’s inertia—has meant that banks simply have not had to compete on customer service. They have not had to fight to keep their customers. As those of us who have been in business know, there are times when we have lain awake at night, wondering how to stop our customers from leaving us tomorrow; that is the big motivator, whereas in the past it was how to nick a tiny bit of market share from one of the big players. The fundamental point is: “How do I hang on to my customers?” Customer retention is always the biggest challenge for every business, where there is free and open competition. That is what bank account portability would ensure.

If a person was switching between banks, instead of having to change all their bank details and cards, and having to remember the new numbers and notify all their suppliers, they would simply take their bank details with them, just as a person who changes mobile telephone provider takes their telephone number with them. That is what the amendment proposes.

I am delighted that the Government have said the following, in a press release responding to the work of the Parliamentary Commission on Banking Standards:

“On top of introducing 7-day account switching from September this year the government will ask the new payments regulator, once established, to urgently examine account portability and whether the big banks should give up ownership of the payments systems.”

I take that as a warm move towards the idea of bank account number portability.

Bank account number portability is a game-changer, but it is no surprise that the big banks, when asked about this back in 2010, virtually told us that it would cost so much that the entire world would end. That comes as no surprise to us; they would say that. However, if we scratch beneath the surface and talk to the likes of VocaLink, which provides the payments infrastructure, we find that many of the technological requirements of bank number portability already exist.

At the moment, the big banks own a person’s sort code and account number, and give the payments instructions that they hold for that person to VocaLink, so that it can make that payment. Instead of having that two-step process, in which a person instructs their bank, the bank instructs VocaLink, and VocaLink makes the payment, with bank number portability the consumer’s bank account number, sort code and payment instructions would be held within VocaLink. Instead of a two-step process with the bank at the front end, there would be a one-step process, in which the consumer communicated with VocaLink, and the bank instead provided the customer service front end and the customer proposition. That would completely streamline the system.

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[Caroline Lucas]

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

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

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

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

[Jonathan Edwards]

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

[Caroline Lucas]

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

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

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

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

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

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

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