Financial Services (Banking Reform) Bill

Lord Whitty Excerpts

Wednesday 24th July 2013 Lords Chamber

[Lord Whitty]

My Lords, it is always interesting to follow the noble Lord, Lord Northbrook, in these financial services debates. I regard him as one of the more articulate and deft defenders of the status quo in the banking system. He may have slightly wrong-footed himself by quoting Bob Diamond at an early stage but the noble Lord nevertheless sets out the case.

I come from an entirely different perspective. I want to introduce in this debate the view of the customers of banking services—whether we are talking about individual deposit-holders, like most of us; those who are seeking a mortgage or a bit more credit; the middling businessman who is looking for a little help in expanding their business or some support for their forward business plan; or, as some noble Lords have mentioned, the roughly 20% of our population who are effectively excluded from the services of the mainstream banking sector. I regret to say that I agree with my noble friend Lord McFall, who is not in his place, that the lesson of the past few years is that consumers, whichever category they fall into, have been at the bottom of the pile.

We are five years on from a very serious financial crisis affecting pretty much all the globe and which was started in the banking sector. In this country and in this House, this is the fourth major piece of financial legislation that we have had to consider since that collapse of the system. At the time of government intervention by introducing a degree of state ownership in the banking sector, I probably had slightly better institutional consumer credentials than I have now because I have retired from that role, but I can recall—not in a partisan way but just to say to the Minister—when my noble friend Lord Mandelson was in his place advocating those emergency powers, that I argued that within 18 months of the state acquisition of two of our largest oligopolies there should be, within that statute, a clear commitment to refer to the competition authorities the whole structure of the UK banking system.

After two Governments, four bits of legislation, the Vickers commission and the Parliamentary Commission on Banking Standards, not all of whose recommendations appear in this Bill, as noble Lords have said, we are left with—and are likely to continue to be left with—a structure of banking that is extraordinarily similar, apart from the public ownership bit, to the structure that was there before the 2008 crash. As for the customers, they are left with a rather less responsive and sensitive service. There is less competition in the banking system than there was then. There is less sensitivity to individual account holders and individual businessmen who go to their local bank managers. More of the risk has been shifted from the banks to the taxpayer and bank customers. We have not moved forward from 2008.

In terms of the assessment of what we should be doing in a banking system, we have moved from an opportunity, in the face of that financial catastrophe, to have a serious, comprehensive reassessment of the banking structure in this country. We have gone from a position that considered total separation of investment banking from commercial and retail banking to the Vickers commission proposal for a strong ring-fenced position and then to one that is a pretty weak ring-fencing proposition with or without the additional electrification that the Minister is proposing, which we have yet to see.

That Chinese wall is frankly a little weak. It is a bit like the Great Wall of China itself; it is a fantastic edifice looked at from afar, indeed from outer space, but when we get close to it, it has always been pretty easy for the barbarians to overrun it. Our fear is that there are quite a few barbarians within the banking sector and the stipulations in this Bill, even if enhanced by further amendments by the Minister, are unlikely to stop them. We have an oligopoly in banking. The banks are too big to fail and too big, as the noble Lord, Lord Higgins, and others, have said, to be managed, so in terms of the totality of the British economy they are too big to succeed, as well.

From the perspective of the three groups of customers to whom I have referred, how does that look? What is the individual deposit holder faced with in the period since 2008? First, there is the lowest rate of interest almost since the Bank of England was created. They face a reduction in personal services from their local bank manager and an increase in charges. That has resulted in the financial ombudsman reporting in the past couple of weeks a 179% annual increase in the number of complaints. Some of those relate to the mega crisis of PPI, but half are general complaints about the banking system. On the ground, there are fewer branches, and likely to be yet fewer still, less effective competition and less personal service than 20 years ago.

From the point of view of small or medium-sized business, my noble friend Lord Watson, who is not in his seat at the moment, has stolen my fire. There is a report in today’s paper that the net increase in lending to small firms in the last available year was negative. There is a £4.5 billion reduction in lending from the banking sector to small firms in a period when the deposits from small firms in those very same banks increased by £7.8 billion. Is that a service to depositors? Is it a service to the small businesses in the economy that are supposed to be providing the dynamics for coming out of the economic recession?

On top of that, we have to consider the Government’s attitude to better regulation of the banking system. The Government, with support from the City and elsewhere in the financial pages, are deeply resistant to Brussels innovation in regulation of the financial sector. From the other end—not the bankers’ but the business customers’ end—does the average small and medium-sized business in Britain get a better service than in Germany? Has that been the position in Germany for the past 60 years, never mind more recently, where small and growing businesses can go to the regional and co-operative banks for a personal service? Their advancements are based on their business plans. That includes not only the smaller companies but the all-important Mittelstand in the German economy, which is always pointed to as being a driving force of German economic growth.

In this country, we have had a decline in relationship management between local banks and businesses. Their requests for credit have been referred up to their central computer, based on nationally determined, or possibly internationally determined algorithms, the net result of which is that whatever the pleadings at the local level with local bank managers, the computer says no. That is what a lot of our business customers face. The right reverend Prelate and others said that there is a disconnection between what we expect and need from the banking service—the experience of SMEs, individuals—and what is actually happening in the banking service that is being provided.

The third group of customers that I have identified—those seriously outside the banking system—is one that the Government, on a different plank, recognised as being outside when they had to accept the amendment of my noble friend Lord Mitchell to the previous Financial Services Bill. Roughly 20% of the population either do not have banking facilities or have such basic banking facilities that they can never acquire credit or sophisticated services from the banking system. So what happens to them? They go to Wonga—the noble Baroness, Lady Kramer, referred to this earlier—or to pay-day lenders, or to the even more nefarious high-street lenders which are springing up around the country, or, even worse, they go to illegal money lenders, leading to serious distress in some of the poorest communities in our country.

In other sectors where we have an oligopoly and a regulator who is supposed to operate in the interests of consumers—whether we are talking about energy, water or telecoms, with all their shortcomings—there is something close to a universal obligation. This is because it is recognised in an oligopoly that they are vital to economic and societal needs. In the banking sector there is no such obligation. That leads to 20%, possibly more, of our population being outside the customer requirements of the banking sector.

My noble friend Lord McFall referred to the previous system of regulation and the FSA, in effect, being client-captured by the industry. We now have a new regulator, the FCA, and we have yet to see how it will behave in these circumstances and whether it will ensure that the banking sector provides a serious service to business and individuals and extends its services to the currently excluded part of the population. We need a more competitive structure, but the Bill as it stands is more likely to consolidate the existing structure than it is to challenge it. We need to ensure that during the Bill’s passage through the House we improve on that situation. I appreciate that there are statutory instruments to come, but I am not holding my breath that they will create a more positive, proactive direction to the banking sector to become more competitive and more sensitive to the needs of our business sector and our population.

Part of the problem is psychological. For a long period, we have regarded the banking sector and the City of London as being the apex of our economy. That is seriously wrong and damaging to our economy. The banking sector should be a service to our economy and to our consumers, both business and domestic. I appreciate and accept that further legislation will deal with the standards issue and that there will be secondary legislation under the Bill. I appreciate also that there is behind the Bill at least a vague notion of a nuclear option.

I appreciate, as the noble Lord, Lord Lawson, said, that we cannot deal with this overnight. However, the reality is that we have had five years since the financial crisis and there is still enormous unmet need in both business and society for effective services by our banking sector. I regret to say that the Bill is unlikely to meet that unmet need or to take us very far down the road of so doing. I hope that in the period of consideration that the House now has before it we will improve its ability, but the framework of the Bill is seriously limiting and I do not have great hope that we will improve it substantially. However, improve it we must. The Government must recognise that there will be a serious problem both for our society and our economy if the banking sector continues to fail us.