Financial Services Bill

Lord Teverson Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Teverson]

My Lords, I was always rather in favour of the old FSMA system with the FSA as the one regulator. As the chief executive of a very minor fund management company, I knew where I was and where to refer to. When I rang up the FSA and asked it a question about how to operate my business, the fact that it felt unable to tell me in case that prejudiced the principles of regulation was not particularly useful, but the system was there and it was understandable. Nevertheless, it failed. That failure was not necessarily attributable to the fact that there was a single authority. Failure also occurred in the United States, which has multi-regulators comprising the Federal Reserve, the SEC and a number of others. It was quite clear that there was failure, particularly in macro-strategic risk, which was the one area missing—and it cost UK taxpayers £85 billion in bailing out the two banks. The National Audit Office put total UK taxpayer liabilities at £850 billion, or some £2,600 per taxpayer, in terms of exposure. That is truly a failure and it is why the system had to change.

There are four areas of importance. One is a stable financial sector. Because that sector in the UK is important and because, if things go wrong, there are such large gearing and multiplier effects in terms of bailing out, we also need a stable economic system in this country. It is also important, however, that we have a successful financial sector. Although I would agree as much as anyone else that we need to make sure that other sectors of our economy are equally successful, the financial services economy accounts for some 10% or 11% of GDP and employs 1 million people. That is not just in London; even in my own region of the south-west the sector is important, and we need to ensure that it remains competitive.

An area on which I wish to concentrate is the need to make sure that there is full competition in the sector. That is not the case in the retail banking sector—an issue mentioned strongly by my noble friend Lord Flight, and to which I shall return. The fourth important issue is the international area, not just regarding competitiveness but, given everything that is going on in the eurozone at the moment, including European banking and financial regulation. We need to make sure that our interests there are protected and that we work together with Europe to our mutual benefit.

In terms of stability, we have moved from twin peak to triple peak or, as my noble friend Lady Kramer said, there may be a small range of mountains in terms of the different regulatory bodies. However, I very much welcome the Financial Policy Committee, which has become part of this architecture. It nevertheless has one of the most difficult tasks in terms of what it needs to achieve and in recognising the problems as they come along. I am a member of a pension committee for Cornwall as a local authority or collection of public bodies. There I was shown on a slide a definitive picture of Sweden, or possibly the whole of Scandinavia, and its debt cycle split between personal debt, corporate sector debt and public debt. It demonstrated how those matters needed to be, and were, managed. However, frankly, even as an economist, I saw very little of those issues in relation to the financial crisis. We heard about numbers but did not understand such things. The tools that are used in that area will be important.

The degree of independence that can be operated by the Financial Policy Committee will be difficult and, as the noble Lord, Lord Burns, said, there will be a lot of challenges regarding who has what responsibilities and the way that the tools will be used. Will we go back to the rationing of mortgages and other financial instruments that I remember in my younger days, or can we control this through interest rates? Either of those will have political costs.

Primarily, I wish to talk about competition in the retail banking sector, where there is an estimated concentration of 85% in terms of individuals and the banking market. We have the top five banks, and it was interesting to see in the Financial Times that Marks and Spencer is moving into this area, but if you look at the full picture, its banking operation is completely owned by one of the five, HSBC. That represents no more diversification than there is at the moment. We had promises from Tesco and Sainsbury’s, the multiple retailers and Virgin Money of operating fully in this sector, yet we are not able to walk into any of those organisations and obtain a current account. These accounts are all promised but they do not yet exist. As has been mentioned, we have Metro Bank and internet lending through a company called Zopa, and of course we have the mutual credit organisations that have been in existence for some time. They are not mentioned specifically in the Bill but perhaps we could use them a great deal more. We need to make sure that we are able to take down the barriers, whether they be the payment system or, to some degree, the prudential requirements, but the problem is that the competition objective is very much in the area of the Financial Conduct Authority. The Bill does not talk about market concentration but it does say that the ease with which new entrants can enter the market is part of that objective. However, it will be the PRA and not the Financial Conduct Authority that will look after retail banking.

The international aspect is important. I think that we are better at dealing with the G8 and G7 than with the EU but it is very important that we have one unified voice.

One group that I do not see mentioned at all in the Bill is the rating agencies. Personally, I think that they have a lot to answer for in terms of the grief that we have gone through as a national and international economy, and I should be interested in understanding how any future regulation there will take place, particularly within a European context. Also, the Government have not really been able to move forward on the Financial Services Compensation Scheme, where there have been a number of problems. At the moment it is seen as a rather unfair system, particularly given Keydata and other such instances. I think that we are stalling there because of European recommendations or legislation that is coming forward, but I have a question for the Minister. At what point do we say, “Okay, we can’t wait any longer. Let’s change the way that the scheme works.”?

One thing is for certain: financial regulation, like democracy, is far from perfect. There is no perfect model. I was reading the magazine of the Chartered Institute for Securities and Investment, of which I am a member. It contained an article on this Bill called “Another New Dawn”. At the end, it said that whatever system comes out of this Bill and however good it is, at some point in the future it will be perceived as a failure. Our challenge is to make sure that it is not at a cost of £850 billion, as was the case under FSMA.