Financial Services (Banking Reform) Bill

Lord Sharkey Excerpts

Tuesday 15th October 2013 Lords Chamber

Moved by

[Lord Sharkey]

43: After Clause 8, insert the following new Clause—
“Competition and diversity
The Secretary of State must bring before Parliament within 6 months of the passing of this Act proposals to increase competition and diversity in banking by imposing upon any bank in which Her Majesty’s Government is a majority shareholder a duty to apply the following principles—(a) the principle of regionality whereby each branch of the bank is permitted to take on new deposits, open new accounts and make loans to companies or individuals only when the registered addresses of these companies or individuals is within the defined geographical area of operation of that branch;(b) the network principle whereby regional groups of local branches are autonomous in terms of governance, publish separate reports and accounts, collaborate with other branches to share central services such as the provision of systems, marketing, specialist financial products, liquidity management and wholesale funding while also maintaining appropriate mutual guarantees and self-regulation within the group to ensure that failing local management and branches are dealt with within the group with no recourse to the taxpayer;(c) the stakeholder principle whereby the governance of regional groupings of local branches explicitly includes stakeholder representation, comprising local businesses, customers, suppliers and employer and elected employee representatives;(d) the social purpose principle whereby a broader social purpose is embodied either in the banking licence of the bank or other statute so that the directors do not have a duty to maximise profit, but to ensure the profitability and financially sustainability of their local operations in supporting the economy of their regions of operations and financial inclusion in those regions, and nothing in this social purpose principle requires making loans that could not reasonably be expected to be repaid.”

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[Lord Sharkey (LD)]

My Lords, this is a probing amendment. It is designed to allow us to consider what progress we are making in generating competition and diversity in our financial system, and what steps we might take to accelerate this process.

From the start, the Government have recognised that there is a problem with the levels of diversity and competition in the financial system. The coalition agreement of May 2010 commits the Government to,

“bring forward detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry”.

A year later, the Commons Treasury Committee published a report entitled Competition and Choice in Retail Banking. This report showed competition to have declined. Part of the evidence for this decline was in the simple increase in concentration of financial services; part of the evidence was in the decline in customer satisfaction. The report notes:

“Competition policy should maximise the benefit to the consumer. Our evidence suggests that this is not happening. The large banks perform poorly on many consumer satisfaction surveys relative to other providers. Survey evidence consistently shows customers are dissatisfied by service quality and the lack of real choice on offer in the marketplace. In a genuinely competitive market we would expect firms which provide superior service, choice or prices to gain significant market share from rival firms, but we see little evidence that this is happening”.

The committee is there describing in restrained and measured language a cartel-like situation. In other words, there are too few banks, and those are too big and too similar. The banks themselves did not agree with that view. The committee noted:

“The large banks have told us that ultimately consumers will benefit from lower prices resulting from the economies of scale and synergies provided by larger more diversified banks. We agree that there are economies of scale/minimum efficient scale in retail banking which will ultimately limit the total number of firms in the market. However, we question whether the need for economies of scale justifies banks having a 30% share of the market or whether such benefits, if they exist, will be passed onto consumers in a market where competition is deficient. Indeed, such economies of scale benefits are likely to be outweighed by the negative impact on competition by those providers who are perceived to be ‘too big to fail’”.

In addition, there are two other factors. First, as Andy Haldane has noted, there is a case for concluding that over $100 billion in assets, banks actually become less efficient. They are too big. Secondly, the evidently corrupt culture we have seen in some of our banks is a clear symptom of a lack of real competitiveness and is probably chiefly caused by this lack. It is competitiveness—real competitiveness—that keeps companies honest, or at least very much more honest than some of our banks have been. I rehearsed all their recent and shocking failings at Second Reading, and I will not do so again now, but I will again point out that the PPI scandal is the clearest possible indication of non-competitive, cartel-like disregard for the interest of consumers. Banks sold policies which they knew did not serve the ends they were supposed to serve, and they did it on a gigantic scale. This would not happen in a truly competitive market.

This is the situation today: there is a lack of real competition and of real diversity. A study by the University of Oxford published in April this year by the Building Societies Association shows that across both the savings and mortgage markets diversity has dropped by about 20% since 2004. The report acknowledges some hopeful signs and says that in recent years the decline appears to have levelled off, but it concludes:

“If the Government is to fulfil its commitment to foster diversity it will need to do more to ensure that a variety of organisations are able to operate in financial services markets in the future, with the aim of reversing the decline in diversity... since 2004”.

It also says, bluntly:

“Consumers are likely to benefit less from competition than a decade ago and if another crisis were to hit, the system is more vulnerable than it was”.

The Government are clearly alive to the problems of competition and diversity and to their importance. Many initiatives, legislative or otherwise, have been aimed at bringing about improvements in both, but there is nothing in place which will produce any significant improvements in any near future, and there may be nothing in place at all that will really transform the competitive landscape. Divestment of branches and regulation of P2P and crowdfunding are welcome, and easing of the difficulties in acquiring a banking licence is very welcome indeed, but the plain fact is that we start from a position where the large banks have 80% or so of the market in the UK and have behaved in a cartel-like manner. The measures in place or in progress will surely not reduce this figure by much in the next 10 years. In fact, I would be very interested to hear if the Treasury has a medium-term forecast of market share of the big banks. Perhaps the Minister could help with that in his reply.

This 80% dominance of our big banks is the cause of the lack of diversity in our financial system, which is now very much less diverse than it was 50 years ago. The German savings bank association pointed out in May this year that 70% of German banks are mutually owned or not for profit. It also noted that in the UK just 3% of banks are local, compared to 34% in the USA, 33% in Germany and 44% in Japan.

The question is, of course: what can be done to speed up the progress of competitiveness and diversity? I do not think the answer to this question should be “Nothing”, or “We do not need to”, or “We can wait for some technological change to eventually produce the results we look for”.

I have spent almost my entire commercial life working with very large multidivisional and multinational corporations. They are fiercely competitive because they are committed to securing even the smallest possible profitable increase in market share. They are committed to doing this by being dedicated to serving the interests of their customers because they feel, no matter how big they are, the relentless threat posed by very much smaller, more agile and more innovative competitors. We need all these things, especially the last, to be true of our banking system.

I think any really substantive answer to the question of the lack of competition and diversity will have to address directly the lack of the true regional or local banking and the absolute dominance of one type of banking. This amendment sets out a proposal to do just that. We can do more and do it more easily with banks we own than with the other banks. We have an opportunity to use our ownership to begin to bring about the transformative changes we need.

The amendment proposes that the Secretary of State must bring before Parliament a plan to increase competition and diversity by imposing on banks we own a duty to apply the principles of regionality, networking, stakeholder involvement and social purpose. The principle of regionality is to restore real localism to banking, so that banks really know their areas and their customers in a way which is emphatically not the case right now. The network principle is to give regional groupings of branches a degree of real autonomy and some real identity. The stakeholder principle is to give representation in the banks’ activities to local businesses, customers, suppliers, and employees as well as employers. The social purpose principle is to explicitly give banks a local social purpose and responsibility. It is these principles that we need to see in operation if we are to introduce any real competitiveness, any real innovation, and any real diversity into our banking system.

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[Lord Phillips of Sudbury (LD)]

My Lords, I, too, broadly support these two amendments. It is encouraging that every speaker so far has taken that broad point of view. As my noble friend Lord Sharkey said in opening this debate, the amendment in his name and that of the noble Lord, Lord Glasman, is a probing amendment. I hope that the noble Lord, Lord Eatwell, was advancing Amendment 102 in the same spirit. I very much hope that the Minister will say that he will take away the contributions made, so that we can come back together on Report with an amendment that answers some of these concerns.

Perhaps the most striking statistic that we have had was that given by the noble Lord, Lord Eatwell, who said that in Germany 80% of banking is provided by local regional banks whereas here the figure is only 3%. I think that was said by the noble Lord, Lord Eatwell, or perhaps it was the noble Lord, Lord Glasman.

[Lord Sharkey]

It was me.

[Lord Phillips of Sudbury]

I am sorry, it was my noble friend. That is a stunning statistic. The fact that some of the small German banks failed in the great crisis seems to reflect a strength and virtue as compared with the situation in this country where, but for the injection of in excess of £80 billion of taxpayers’ funds, as far as I can see the whole banking system would have failed. The big clearers would have gone to the wall—that is the truth. We do not even have a market banking system that complies with the supposed basic virtues of a capitalist system: when they were tested, they could be held up only by immense government input.

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[Lord Newby]

My Lords, as far as immorality is concerned, later we will deal with amendments on the reversal of the burden of proof and on the new criminal offence which will be available should banks behave in a grossly immoral way. That is the way to deal with the narrow point my noble friend makes. The whole question of the culture of the banks is addressed only partially in the legislation because it is by definition a cultural issue. We are taking very significant steps to regulate individual senior managers and hold them to account for what they do in a way that has never been the case in the past. Again, that is quite a revolutionary change. Regarding the specific point raised by the noble Lord, Lord Flight, I believe that local authorities at least can bank wherever they choose, but I will look into the point and write to him. I simply do not know what the position is.

[Lord Sharkey]

My Lords, I will be brief because I see that I am holding back an avalanche of 158 government amendments. There have been a lot of strong, very well argued and diverse views, but there have also been some general themes. For example, there was a feeling that getting close to the customer is absolutely critical. I entirely agree with that. In fact, I fear that without this there is little chance of reforming the banking culture at all. There also seems to have been a general desire in the Chamber to discuss again the issues raised and to see whether on Report there could be a way of advancing some of the arguments put forward today. In the mean time, I beg leave to withdraw the amendment.

Amendment 43 withdrawn.

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[Lord Phillips of Sudbury]

My Lords, for the record, these amendments cover exactly 52 pages. The only other point I wish to make—I agree with the noble Lord, Lord Eatwell, here—is that, despite the payment system having its own regulator, new subsection (3) of government Amendment 60B states:

“The FCA must take such steps as are necessary to ensure that the Payment Systems Regulator is, at all times, capable of exercising”,

its functions. It has the job of overseeing the regulator, so why on earth does it not do the job itself?

[Lord Sharkey]

My Lords, I have two simple questions. One is to do with the innovation objective. Government Amendment 60M states:

“The innovation objective is to promote the development of, and innovation in, payment systems”.

It just occurred to me to ask whether there is any example of a regulator successfully promoting innovation. I would be interested to hear the Minister’s reply to that.

[Lord Lawson of Blaby]

It would be an innovation.

[Lord Sharkey]

An innovation regulator.

[Lord Lawson of Blaby]

No, it would be an innovation.

[Lord Sharkey]

Government Amendment 60U is headed, “Power to require disposal of interest in payment system”. New subsection (2) states:

“The power conferred … may be exercised only if the Payment Systems Regulator is satisfied that, if the power is not exercised, there is likely to be a restriction or distortion of competition in—

(a) the market for payment systems, or

(b) a market for services provided by payment systems”.

How is that a remedy for anything? When it comes to divestment or disposal, is it the Government’s notion that someone will pick up the shares that have been disposed of; and, if so, who will it be? What would be the incentive for anyone to pick them up?

[Lord Newby]

My Lords, I am grateful for the wide welcome given to these provisions.