Financial Services Bill

Lord Russell of Liverpool Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

Against that background, which I hope has been helpful, I hope that the noble Lord will feel able to withdraw his amendment.

[The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)]

I understand that the noble Baroness, Lady Jones of Whitchurch, may not have completed her remarks before the Minister began. Does she have anything that she wishes to say?

[Baroness Jones of Whitchurch (Lab) [V]]

Obviously the Minister has now responded. I think I made the point in conclusion that the high-level leadership and thinking, including from the Chancellor and the Governor of the Bank of England, are moving in the same direction. Something more urgent is needed, and the Bill is the ideal mechanism for delivering these changes on the ground; otherwise, we are in danger of this becoming aspirational, when the urgency is more immediate.

I apologise to the Minister. I have just been trying to find out what happened, so I did not hear everything he said. Underpinning all this, I feel that the amendments are worth while and deserve further consideration, and that we need a mechanism to have more targets and better data, assumptions and methodology. We need the regulators to set that; otherwise, if we are not careful, we will end up with annual reports that, as we have said in the past, are just greenwashed and are not in any way held to account. I will finish there and I apologise to noble Lords if they did not hear all the things that I had to say.

[The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)]

Does the Minister wish to respond? No? In that case, I call the noble Lord, Lord Oates.

[Lord Oates (LD)]

I thank noble Lords from all sides of the Committee for their contributions. I am particularly grateful to those noble Lords who signed the amendments and spoke in the debate. I am grateful also to the Minister for his courteous response and for agreeing to continue to discuss these issues.

The noble Lord, Lord Sharpe, made the point that we are going to need fossil fuels for some time to come. That is precisely the point I covered in my opening remarks. That is why we need to risk existing fossil fuel operations properly and effectively so that they can continue as we transition.

The noble Lord, Lord Sharpe, and the noble Baroness, Lady Noakes, questioned which companies Amendments 31 and 32 might apply to. The intention was for them to apply to activities as opposed to specific companies, and specifically to fossil fuel activities to try to avoid capturing some companies’ non-fossil fuel activities. I am perfectly happy to accept that the amendments’ wording might be improved, but that was the intention. The issue we have to deal with is the threat of continued fossil fuel activities beyond what we have the carbon budgets for.

Overall, however, I was struck by the absolute complacency from the Government Benches—the lack of realisation of the issue that we are facing and of the urgency of dealing with it and of trying to use whatever tools we can to address it. The noble Baroness, Lady Noakes, appeared to question the very concept of using prudential regulation to achieve the objective of averting climate change. She said that the impacts of climate change were unlikely to find their way into credit risks in the short term. She also said, as the noble Baroness Lady Bennett, reminded us, that banks do not lend in situations where there is a high risk of default. History explicitly and categorically refutes that. The noble Baroness also informed us that credit agencies did not need any help in assessing credit risk—the same agencies which gave their highest ratings to complex securities associated with the subprime mortgage crisis.

Prudential regulation is a tool through which we can, necessarily and legitimately, regulate the sector and ensure its financial stability. My noble friend Lady Kramer quoted the current Bank governor’s rather extraordinary statement that we were not going to use the results of the stress tests of different climate scenarios to inform the size of firms’ capital buffers. But he did say that that does not mean firms should not be thinking about near-term capital requirements. He set out that firms must assess how climate risk could impact their business and review whether additional capital needed to be held against this. He expressly recognised the legitimacy of using capital requirements to tackle climate change.

The IPCC has warned us that if we do not act decisively to mitigate climate change, we are on a global warming path of between 3.8 and 4.8 degrees centigrade by the end of the century, with a range of median values between 2.5 and 7.8 degrees centigrade. That is the seriousness of the situation we face. Central bankers are clear about the huge risk that climate change poses to the financial system. But what is the reaction of the noble Baroness, Lady Noakes, and the noble Lord, Lord Sharpe? It is to say: “We don’t need to do anything now. Let’s wait and see.” We do not have time to wait and see.

We know the risks we face. If we do not act, we are culpable. Is our excuse to our children and grandchildren, nieces and nephews, and grand-nieces and grand-nephews going to be: “Oh, sorry, it was all too difficult. We were busy trying to measure everything and we thought the banks were quite good at predicting risk anyway, and they all let us down”? The noble Baroness, Lady Noakes, asked: why would we deny the City the opportunities of a relatively low-risk, profitable business? There is a simple answer to that: if those activities continue unabated, they will threaten the very future of human society. That is a reality. That is why we have to act.

In view of the Minister’s willingness to continue to discuss these issues, I beg leave to withdraw my amendment.

Amendment 28 withdrawn.

[The Deputy Speaker (Lord Russell of Liverpool) (CB)]

We now come to the group beginning with Amendment 29.

Amendment 29

Moved by

--- Later in debate ---

[Lord Stevenson of Balmacara (Lab) [V]]

My Lords, I declare my interest as a former chair of StepChange, the debt charity. I put my name down to speak in this group of amendments because they give me an opportunity to raise a wider concern about the access we need to low-cost credit. In fact, this fits in very closely with points already made by the noble Baroness, Lady Bowles, on Amendment 29 and the noble Lord, Lord Holmes of Richmond, on Amendment 126, and his important point about financial inclusion and the need to make sure that we do not forget that. I am looking forward to the comments to be made by the noble Baroness, Lady Kramer; she will also touch on these issues when she comes to speak.

When responding to a group in an earlier debate, my noble friend Lord Tunnicliffe mentioned that he grew up in a household where poverty was a constant worry. He mentioned the “jam jar economy”, which often characterised low-income households. It was cash-based: putting small amounts of coin away for future expenditure. Indeed, research a few years ago showed the surprising conclusion that the lowest paid in our society were often the heaviest savers on many measures, mainly because they had to be. It was done outwith traditional credit sources and topped up where necessary by house-to-house lenders, which were often a vital lifeline.

A key problem I want to highlight is the need to solve the problem of how to expand low-cost credit. My noble friend Lord McNicol, when he was speaking in an earlier group, mentioned the problems revealed by a very interesting report by the University of Edinburgh Business School on the financial health of NHS workers—people who were in employment but receiving low wages. It was based on real-time open banking figures. It showed across the 20,000 or so NHS workers who were surveyed that far too many were heavily reliant on a regular basis on persistent overdrafts and high-cost credit, often borrowing to meet the emergency needs they had from time to time, at APRs of well over 1,000%. The report makes for very interesting reading, and I hope that the Government will have access to it when they come to consider these issues further.

I know that the Government are concerned about this and that their financial inclusion work recognises, as previous Governments have, that the availability of low-cost credit is a major blockage to financial well-being. As the noble Lord, Lord Holmes of Richmond, said, it also affects the ability of SMEs and sole traders to operate successfully in a difficult economy.

I hope that the Minister can say a bit more about the plans the Government have when she comes to respond. I know that the Government will pray in aid the idea that credit unions will often be the solution; they have been mooted so often in the past but do not seem to grow. Other countries have other models—Germany has its particular banks focused on the local economy and America has the Community Reinvestment Act—which have solved the problems. Is there not time to consider things that might operate more successfully here in the UK?

None of the individual measures outlined in the amendments in this group, welcome though they are, will solve low-cost credit and the drought that we are suffering from. But they make the point well that the regulatory measures in the Bill should not restrict much-needed support from institutions, banks and other organisations such as credit unions to help those who need to borrow but who cannot do so at the rates or in the period of time which are often required by our major institutions. I look forward to the Minister’s response.

[The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)]

The noble Baroness, Lady Neville-Rolfe, has withdrawn from this group, so I call the next speaker, the noble Baroness, Lady Noakes.

[Baroness Noakes (Con)]

My Lords, various amendments in this group address different aspects of small and medium-sized banks and other financial institutions, and I am not opposed to having more and different banks in the financial system. Indeed, anyone who has had a bad customer experience with one of the major banks, as I have in the past year, supports more competition and choice. However, I sound a note of caution: we have to be very careful not to send the regulators down a path that could lead to poorer outcomes for consumers.

I am always reminded of the history of building societies, the number of which has shrunk dramatically over the past 100 years or so. These were often small and regionally based, and the numbers have reduced for two main reasons. One reason for this was obviously the liberalisation measures which allowed a number of them to demutualise—one of the more recent trends—but, over time, the other reason was that these were small organisations which were often not managed particularly well and had insufficient financial resilience, and they often had to effectively sell themselves to other building societies in order to protect members when things went wrong.

Against that background, regional banks, as suggested in Amendment 126 in the name of my noble friend Lord Holmes of Richmond, are, in my view, unlikely to be a panacea. It is less than clear that the failure of a regional bank could easily be prevented in the current regulatory environment. I do not oppose the report that he suggests but I am a bit of a cynic when it comes to seeing that as a useful way forward.

I particularly want to speak to Amendment 91 in this group, in which the noble Baroness, Lady Kramer, has suggested restricting access to the term funding scheme if it is not then available for onlending to other banks and providers of finance. I accept that there may be an element of protectionism in the large banks that have access to the term funding scheme not wanting to share that advantage source of finance with other lending institutions. But the scheme suggested by the noble Baroness, Lady Kramer, would require the major banks to accept the credit risk of dealing with these smaller organisations without any ability to price for that risk. These organisations often struggle to raise equity capital, for good reason: they carry higher risk, they are often not profitable, and they do not all survive.

It seems to me that if the Government think it is a good idea to fund more lenders at preferential rates in order to fund the various lending schemes that have been introduced, they should instruct the Bank of England to vary its lending criteria for the term funding scheme. At the moment, it is restricted to those with access to the discount window facility. It would not take too much to get that changed, without trying to distort the lending decisions of the major banks. If the Bank of England were unwilling to assume that risk itself, it would be open to the Treasury to underwrite it for the Bank, without distorting the decisions made by the banks that do take term funding scheme finance.

--- Later in debate ---

I will look at three aspects, starting with the credit unions, which have just been mentioned. There is a new opportunity here, which we should look at closely. I know that they have been around since the 1820s, but they are very strong in North America, particularly Canada and the USA, and they seem recently to have had a new lease of life in both those markets. It seems to me that consumer expectations are growing on an upward trajectory with no limits in sight. Evidence from both Canada and the USA confirms this. These elevated expectations are creating inherent challenges for any financial institution to keep pace with, due to the experiences being offered by large tech-based organisations such as Amazon. The difference, as we all know, is that the credit unions and all the mutual movements have a close association with their memberships. These memberships may be only as many as 150,000 customers, as in the United States, with possibly a similar number in Canada, but there has been a change in the consumer. The evidence comes from both those two countries—[Interruption.] The evidence is, if the noble Baroness, Lady Altmann, would get off the phone for a moment—

[The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)]

My Lords, we will stop for a minute while we sort out the problem with the sound.

--- Later in debate ---

[The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)]

My Lords, the noble Baroness, Lady Altmann, has been muted, I am glad to say, so we will now return to the noble Lord, Lord Naseby.

[Lord Naseby (Con) [V]]

I thank the Lord Chairman. As I was just saying, in both the United States and Canada there has been a change in young people’s attitudes to debt. This is one reason why the credit union movement there is seeing better times and beginning to come strongly back to life. However, two other things have happened here. First, during the pandemic, people have had a chance to look in great depth at their own financial situation; many are responding to approaches by building societies, credit unions and the other mutuals by having interactions, on the basis that they know somebody. They do not know anybody in the banks. I do not have a clue who looks after an account that I have at RBS; all I can do is act on the telephone. Secondly, and in addition, what do we see on the ground? Bank after bank are closing branches. Whereas in the old days I could go to the RBS in Biggleswade, and then to Bedford, now they have all gone. There is an opportunity here that should be encouraged.

Secondly, I will look not at cheap credit—I hasten to say—but what is called “home-collected credit”, which I covered to some extent at Second Reading. That is all about consumer choice and a fair price. Home-collected credit has been around for 150 years. It is highly successful: it is the credit of choice for the working classes, if I may use that phrase in today’s world. People who use home-collected credit take out small, short-term loans perhaps three or four times a year, probably around Christmas, Easter, birthdays and days such as that. They know what the terms are; the terms do not change, and if they run over in terms of repayment, there is not some swingeing increase in the rate charged. They get a single credit charge.

On the other side, there are payday loans. Every one of us in politics knows exactly what those loans are about: they compound interest and offer high-frequency, weekly loans that people get hooked on. When they go a bit wrong, the claims management companies—CMCs—leap in with a huge volume of complaints, most of which are manufactured. The problem is that today the FCA appears to be treating all high-cost credit models in the same way. The regulator is taking a singular sector-wide approach to affordability and repeat lending and pays less or no attention to the crucial differences between these two products. Whereas officials once differentiated between the responsible and the harmful models, now they treat them all the same. There is therefore a real danger of the HCCs being driven out of business.

In 2018 no less a man than Andrew Bailey said that people viewed home-collected credit differently from rent-to-own and payday ones, and that this was the model he thought about because the difference with home-collected credit is that the borrower knows the lender. The agent is the lender; that is, it is a different, almost social relationship that goes on and creates different attitudes. I ask the Minister to have a close look at this, and perhaps a discussion with the FCA and the Financial Ombudsman Service, to ensure that there is a clear differentiation in any investigations that they might want to undertake between these two very different models.

Thirdly, with the permission of the Committee, I would like to go back to the Mutuals’ Deferred Shares Bill, which I took through your Lordships’ House in 2015. I was motivated to do so by my interest in the mutual movement and by the financial crash of 2008. It seemed to me that there was a need for mutual insurers and friendly societies to have a means of raising capital. That is what I set about doing and it became law in 2015. That was, for me, a high day for the mutual movement. Today, there are not hundreds of mutual insurers and friendly societies: in fact, the active ones are the 52 that are members of the Association of Financial Mutuals.

What that Bill—which is now an Act—did was important, first, because it gave access to new capital, particularly for the friendly societies and mutual insurers. Secondly, without that new capital, many mutuals would have been driven into inappropriate corporate forms through demutualisation. Thirdly, a lack of capital limits mutuals’ growth and their ability to develop new services, which is what this amendment is all about. Fourthly, like all businesses, mutuals need to be able to benefit from economies of scale. Fifthly, it is important to learn lessons from that financial crisis I mentioned; if financial services businesses are to build up stronger capital bases, they require the legislated regulatory agility with which to do so. Sixthly and lastly, there are direct benefits of being able to issue new shares; debt—the alternative—is of lower quality than equity for firms wishing to build their capital base.

One dimension of the then Bill had two elements to it. I am afraid the Government of the day decided they would not accept the second arm that I put in the Bill originally, which was the proposal to have redeemable share instruments for co-operative and community benefit societies. At the time, the Government said they were

“unpersuaded about the merit of a redeemable share instrument as these societies already have a means of issuing redeemable shares. The Government do not see a clear need and demand for such an instrument”.—[Official Report, 24/10/14; col. 923.]

I think the world has not changed. The Government need to have another long, hard look at the second element of that Bill. Obviously, I withdrew that section, because I was happy to have what I could get.

The mutual world is dynamic. If we have learned nothing else from Covid—I was in isolation for my 10 days because I caught it at the beginning of January—it is that people work very hard on a local level. We need to capitalise on that. Society wants it. The wind is in the right direction. I hope very much that the amendments that both the noble Baroness, Lady Bowles, and my very good and noble friend Lord Holmes are putting forward find a following wind—not necessarily in the format they have produced them but certainly in some other format—and come to fruition.

--- Later in debate ---

I hope that I have provided sufficient reassurance to the noble Baroness, Lady Bowles, for her to withdraw her amendment and for other noble Lords in this group not to move theirs.

[The Deputy Chairman of Committees (Lord Russell of Liverpool) (CB)]

I have received no requests to speak after the Minister so I now call the noble Baroness, Lady Bowles of Berkhamsted.

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I thank all those who have participated in what has turned out to be quite an interesting debate. It seems that most or all noble Lords have managed to put their fingers on one or two points. It would be useful if the regulators could look through this debate, and maybe the Government could also look through it a little bit more when we get offline.

The noble Lords, Lord Holmes, Lord Naseby, Lord Stevenson, and the noble Baroness, Lady Kramer, all linked together the fact that, post-Covid, changes will be going on. Younger people in particular are looking to bank in different ways; they want to use their local services. Although I listened to what the Minister said about this Bill enabling the PRA to act in more proportionate ways, I know for a fact that they can already do that but do not. So there needs to be a little bit more encouragement. To go back to my first amendment, if things were more transparent in terms of having a category and saying, “This is how it is for a bank of small or medium size, or mutual,” we would be able to see how that proportionality works. At the moment, we are told that it is there, or “You can’t do it because of the EU”, and that is simply not true. Let us take the example given by my noble friend Lady Kramer about the MREL. You do not have to have the MREL kicking in at such a level for the medium-sized banks; that was very much introduced as something for the larger and more systemic banks.

My plea is: look at what this is asking. My basic “have regards” provisions were asking for us to have something that shows us the categorisations, layers, tiers and the strata—whatever you want to call them—so that it is clear for everybody. As the Minister herself said, there can be lots of places where things are too complex; it is not just for MREL. That is exactly the point I was trying to address: you have to go across the whole suite of regulations and bring together what is relevant for the different categories, not have the smaller banks having to fight their way through and find out that there is no consistent set of proportionality requirements.

We have started an interesting conversation here; there may well be some point that it is worth us pursuing when we get to Report on categorisation as a “have regard”. I see nothing wrong with that: we are not telling the regulators what to do but asking them to have regard because we think there has not been enough of it already. I am interested in carrying that forward, but, for now, I beg leave to withdraw the amendment.