Oral Answers to Questions

Mark Garnier Excerpts

Tuesday 12th March 2013 Commons Chamber

[Mr Osborne]

The advice from the rating agency could not be clearer: a reduced political commitment to fiscal consolidation would put Britain’s creditworthiness at risk. That reduced political commitment would come from the Opposition, who oppose every single spending cut, who have no credible economic policy and who, despite having promised for two years to produce a deficit reduction plan, still do not have one. We hear that a draft Labour manifesto is coming this July; perhaps then we will see a proper plan to deal with the deficit Labour created.

[Mark Garnier (Wyre Forest) (Con)]

Does my right hon. Friend agree that the only true measure of creditworthiness is the price paid by the Government to borrow? Gilt yields are still 16 points lower today than before Moody’s downgrade. Does that not reconfirm the international markets’ confidence in this country’s ability to pay its debts and the Chancellor’s programme to tackle Labour’s deficit crisis?

[Mr Osborne]

My hon. Friend is right that our credibility as a nation is tested every day when we seek to borrow money to pay for the deficit that the Opposition racked up. We can borrow at historically low rates, which means low rates for people’s mortgages and low rates for people’s small business loans. Of course, if we lost that credibility by pursuing the Opposition’s policies, interest rates would rocket, people would be put out of their homes and businesses would go bust. That is exactly what we will avoid.

Financial Services (Banking Reform) Bill

Mark Garnier Excerpts

Monday 11th March 2013 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I add my congratulations to the hon. Member for Eastleigh (Mike Thornton) on his maiden speech. I remember when I made my maiden speech: it was the most terrifying event of my life. If he continues with that masterful performance, the good people of Eastleigh will be very well represented in the years to come.

I am grateful to my hon. Friend the Member for Chichester (Mr Tyrie), who is no longer in his place. He started by talking about the members of the Parliamentary Commission on Banking Standards. As one of those members, it falls on me to pay tribute to the extraordinary work he has done in the past nine months or so, pulling together what is quite a tour de force.

At the heart of this debate lies the balance of interests within banks. Any commercial organisation—or, indeed, any bank—must balance the interests of its shareholders, the interests of its staff, and, importantly, the interests of its customers and the wider society at large. When those interests become unbalanced, we end up with problems. When staff are over-incentivised with bonuses, they will take greater risks at the expense of shareholders. When shareholders see stellar returns, they will fail to provide the governance oversight needed to protect the organisation. When looking after customers is seen as a tricky task in an ever-increasingly competitive world, the customer takes second place to proprietary trading, and is relegated to providing mere liquidity to help the proprietary traders. When those balances of interests become too skewed in favour of staff and shareholders, society loses out altogether, with the banking collapses and the bail-outs we saw, and which we are trying to avoid in the future.

One of the concerns that I have been wrestling with is that of over-regulating our banks. Can we, unwittingly, drive our banks to relocate offshore by supposedly over-regulating them? We need to look closely at the problem. What do we mean by relocating? In part, we are looking at banks changing their domicile, and in part we are looking at the moving of specific operations to different parts of the world. Those are two very different things, and it is important to make sure that we do not confuse them. Setting up a trading desk in Spain, for example, is decided by where the traders want to work. Moving a global bank to Singapore is a very different thing indeed.

First, these banks are huge. One has to asked oneself the question: who would want to have one of them located in their economy? If HSBC went to Singapore, its balance sheet would be over 1,000% of Singapore’s GDP. Not many countries can take a bank of that size, and, of those that could, do they have the same offering that we have here? There would be no question whatever of any implicit guarantee. London offers some key elements that banks need: we speak English, we are in the centre of the global time zone, we have a transparent and well-tested legal system, and, importantly, we have what amounts to a relatively good regulatory system. All those points are absolutely key.

The banks benefit from an implicit guarantee—valued at between £10 billion and £40 billion, depending on where we are in the cycle—that comes as a result of the expectation that the British Government would stand behind a failing bank in exactly the same way that we saw in 2007 and 2008.

[Steve Baker (Wycombe) (Con)]

I am glad that my hon. Friend raises that point. Does he agree that if we subsidise anything, we get more of it, and that this actually subsidises risk taking?

[Mark Garnier]

Yes, it does, absolutely. I am going to develop that point in a second, if my hon. Friend will bear with me. We need to get rid of this implicit guarantee for exactly that reason and in order to encourage competition, because competition requires a guarantee for all banks, not just the big banks.

If we combined a transparent legal system with a robust and secure regulatory regime, international capital would come to this country—because of that security—and because capital would trust the UK’s legal and regulatory system, it would be prepared to take a slightly lower return. London would provide an environment in which the cost of funding for banks would be lower. That cheaper funding, as a result of regulatory security, should replace the banks’ implicit guarantee and thus result in a lower cost of capital. As a result of that cheaper funding cost, which is reliant on good regulation, we should not fear banks relocating when we introduce regulatory reform. They might complain, but they will ultimately thank us for the strongest regulatory regime in the world.

That also depends, however, on how the Government take forward the Bill. The Banking Commission has made its early recommendations, and the Government have responded. As we heard from my hon. Friend the Member for Chichester, we are grateful to the Government for listening to some of our recommendations, but they could pay more attention to certain other areas. We want a leverage ratio set at 4% by the Financial Policy Committee, a full reserve power for full industry-wide separation and regular reviews of the effectiveness of the ring fence in order to ensure the most effective and secure regulatory regime in the world. By winning the race to the top, we will ensure cheaper capital funding for our banks and help to preserve our country’s lead position in the financial world.

I turn to the thorny issue of proprietary trading. The term “casino banks” was coined by someone at a time when I suspect they were keener to play to the gallery than necessarily to address the serious issue of what investment banks actually do. It is important to remember that investment banks raise huge amounts of debt and equity capital, generating thousands, if not millions, of jobs in the UK and around the world in commerce and industry—jobs that create wealth and tax receipts for this country—but there is an element within investment banks of proprietary trading. The important thing is to define proprietary trading. Every bank that makes a loan makes it on a proprietary basis, but no one would want to prevent banks from doing that—it is the key to what they do. Pure proprietary trading, however, for the sole purpose of enhancing shareholder returns—with no benefit to the customer or society—has no place in our banks. It fails the balance of interest test and is incredibly difficult to define.

We can recognise the evil type of proprietary trading when we see it, but let us take market marking, for example. It provides a service to customers and liquidity to the markets, and so passes the balance of interest test, but at what point does a residual position on a trading book stop being that which is left over from normal market making activities and start being deliberate directional betting? That inability easily to distinguish between one and the other leads me to believe that, although a Volcker rule would probably be desirable, it would be too difficult to impose in a meaningful way. That is why, reluctantly, I come down on the side of not banning pure proprietary trading. If the Vickers proposals that the Bill implements seek to put a ring fence around the deer park, does it matter what type of predator is kept outside? The consumer will be protected from both the wolves of market makers and the tigers of proprietary trading.

Much of the commission’s work has looked at competition. With a handful of super-huge banks dominating the market, competition is tricky. Long before the commission was set up, however, I spent much time meeting smaller banks, including challenger banks, and those seeking to win new banking licences. It was clear that there was a huge problem with banks being too small to start—the regulatory hurdles facing small banks, such as licence applications and ongoing supervision, distorted the market in favour of the big banks—but the FSA has responded to pressure and had a change of heart. The regulator is moving in the right direction, and I am grateful to the FSA for taking heed of our warnings about new banking application processes and the treatment of asset risk weightings on the balance sheet. The regulator is moving towards greater opportunity for small banks in terms of regulation, which is very important.

There is also the thorny issue of account switching. Later this year, the seven-day switching programme, which is a significant step forward, will be put in place. I strongly believe, however, that the ultimate goal has to be full account number portability. VocaLink, which provides the payment system services, is considering doing for banks what the telecoms regulator did for mobile phones, and it is making good progress. My hon. Friend the Member for South Northamptonshire (Andrea Leadsom) has done a lot of work on this subject, and for four reasons her proposals for full portability are right: first, it will ensure greater competition, as I am sure we will hear later; secondly, the financial system will be more transparent and so provide greater oversight for the FPC, which is charged with ensuring stability in the financial system; thirdly, in the event of a collapsing bank, full portability will make bank resolution far easier and cheaper; and finally, the legacy IT systems in many banks have their foundations in the ’50s and ’60s, with the punch-card system. At some point, the banks will have to massively update their systems, and combining everything makes huge economic sense.

What is the point of banks? Why are we so keen to reform them? Those questions are crucial to the whole debate. Clearly, people need a safe place to deposit their money, to manage their finances and to plan for the future, but banks also provide an incredibly important social and economic function. There has yet to be devised a better way of taking money from where it has accumulated and distributing it to where it is needed. Successful investors and business men need a way to get their money to where it will work for them, and those with an idea but no cash need to be introduced to investors with surplus funds. So far, banks have done that job better than anyone else. No matter what we say, they have a fantastic distribution network, which we must utilise to the fullest extent.

[Mr Love]

Unfortunately, the banks are not doing a good job of providing loans to small businesses. In particular, those banks in partial public ownership seem to be struggling to do so. Is there any way—a funding for lending scheme, for instance—of encouraging more lending from banks to small businesses?

[Mark Garnier]

The hon. Gentleman is absolutely right. The two of us have spent much time together wrestling with this thorny issue over the past nine months—and before that on the Treasury Committee. Part of the problem is that, with the risk weighting of assets, a loan to a small business carries the least weighting, because it is deemed to be one of the greatest risks. The world is putting pressure on banks to reduce their balance sheets and become less risky institutions, and the simplest way to do that is to withdraw lending to small and medium-sized enterprises. That is the natural outcome, if we ask them quickly to reduce their balance sheets. Funding for lending schemes seek to bypass the risk-weighting element, but none the less it is incredibly difficult to encourage more of what the regulatory regime sees as the riskiest type of lending. It is a problem we have to resolve, however, because, as I said, there is no alternative way of getting money to businesses.

It is incredibly important that the Government never again have to bail out banks when things go wrong. Broadly speaking, the Bill is an enabling Bill. There is much more detail about the nuts and bolts to be introduced in secondary legislation, but it is important that it achieves what it is trying to achieve, which is to ensure that banks can go bust without bringing the system down with them. For a functioning financial market to work properly, it is important that poorly run banks be allowed to fail—but elegantly and non-destructively. The Bill will ensure that, in a crisis, the vital parts of a bank can be resolved in a dignified and stable way and that the British taxpayer will never again be left on the hook to bail out bankers for their foolhardy recklessness. That is why the Government are right to introduce it. They were right not to rush into anything, but to have spent a great deal of time listening to Vickers, Erkki Liikanen in Europe and others, including of course the Banking Commission. For those reasons, I have no hesitation in supporting the Government fully and look forward to working with them as part of my work on the Banking Commission.

--- Later in debate ---

[Stephen Barclay]

Yes, I can address that question head on. It is logical to have introduced measures to try to manage risk in the financial sector, but we are requiring banks to retain more and more assets at the same time as asking them to lend more. We are therefore asking them to do two conflicting things, as well as introducing a structural fix that innovative people will often be able to find ways around. For example, the shadow banking sector is not affected by this kind of proposal. If we want to address innovation, to be flexible and to move with the market, and retrospectively to impose fines for wrongdoing, we would be far more successful if we changed the culture than if we imposed rigid rules.

In many ways, I agree with the hon. Gentleman, in that we all have constituents who complain that the banks are not lending, but perhaps that is an issue for another day. There are many areas in which the banks’ behaviour is wrong, but we cannot change the culture through rules alone. We had more than 6,000 pages of rules, but that did not achieve the right culture. We can achieve it by having individual accountability, and one of the best ways of doing that is through personal fines.

I am sure that the hon. Gentleman read the Daily Mirror today, as I did; I always try to avail myself of the Daily Mirror. On the front page, there was a story about the “Fat cat in the hat”, who is a former Barclays executive, according to the report, and it must be true because it was in the Daily Mirror. The point is that it is individuals like that, where there is alleged wrongdoing, who are able to keep their bonuses and keep their profits. That does not send the right message on culture. Rules are too blunt a tool.

If we want to change the banks, the Bill is extremely welcome, but I hope that the very constructive proposals put forward by my hon. Friend the Member for Chichester will be given further consideration. There is much to support in the Bill, however.

[Mark Garnier]

Does my hon. Friend agree that the Chancellor’s measures stating that the fines levied on RBS should be taken from the bonus pool go some way towards addressing the point that he makes?

[Stephen Barclay]

Those measures are a step in the right direction, but they will also catch the legitimate people, rather than focusing on those who have done wrong. There will be no means of clawing back from wrongdoers. Let us take the example of Sir James Crosby. To what extent would he face retrospective clawback? He is long gone, and he has taken the money.

Economic Policy

Mark Garnier Excerpts

Monday 25th February 2013 Commons Chamber

[Mr Osborne]

Infrastructure spending—actual money being spent on infrastructure—is higher in this Parliament than it was in the previous Parliament. That is, I am afraid, the simple fact produced and audited by the independent Office for Budget Responsibility. We have increased capital spending compared with the plans that we inherited, and under this Government in this Parliament it is higher as a percentage of GDP than under the previous Labour Government. That is what has happened.

[Mark Garnier (Wyre Forest) (Con)]

Does my right hon. Friend agree that it is going to take slightly longer than two and a half years to sort out a problem that was 13 years in the making?

[Mr Osborne]

My hon. Friend puts it very simply. It is a bit like the arsonist calling the fire brigade and then complaining that we have not put the fire out quickly enough.

Banking Reform

Mark Garnier Excerpts

Monday 4th February 2013 Commons Chamber

[Greg Clark]

As I am sure that the hon. Gentleman would acknowledge, the Government have promoted the sale of Northern Rock to Virgin, for example, to try to encourage new entrants, and he will see more of that in the future. On interest rates, those that are being paid on mortgages and small business loans at the moment are very much lower than they would have been had we not taken the necessary action on the economy to keep them competitive.

[Mark Garnier (Wyre Forest) (Con)]

The British Bankers Association has said this morning that the electrification of the ring fence might cause some uncertainty in the City. Does my right hon. Friend agree that the only banks that need to be worried about the future are those that game the ring fence and try to burrow underneath it?

[Greg Clark]

My hon. Friend is absolutely right. Any bank can have complete certainty that it will not be subject to being broken up if it respects the ring fence. Indeed, given the standing of the City of London, it is important that we all have confidence and trust in the British banking system, on which the credibility of that standing depends. The reforms recommended by Sir John Vickers and his commission will achieve precisely that.

Air Passenger Duty

Mark Garnier Excerpts

Thursday 1st November 2012 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I congratulate my hon. Friend on introducing the debate. Does she agree that APD can act as a barrier to expansion for some regional airports? Were it not for the high level of APD, they could attract other carriers, thereby rebalancing our economy.

[Priti Patel]

I completely agree with my hon. Friend. That is part of the challenge of our wider aviation policy and strategy.

Already in this Parliament, the Government have rightly recognised a number of counter-productive and damaging taxes, and scrapped a number of them, including the cider tax, the jobs tax and the broadband phone tax, and the planned increase to the small profits rate was replaced with a cut. On that basis, I urge the Minister to consider the economic impact of APD.

Banking Competition

Mark Garnier Excerpts

Thursday 12th July 2012 Westminster Hall

[Mark Garnier (Wyre Forest) (Con)]

Let me apologise to the Minister at the start, because I will miss his winding-up speech. Unfortunately, I have to rush back to Kidderminster for an important meeting about Kidderminster hospital. Members who remember the 2001 general election will know that any Member of Parliament who does not pay attention to Kidderminster hospital when called upon can suffer dire consequences.

I am grateful to my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) for securing this debate and for gathering such enthusiasm for it. It is an incredibly important issue in the regeneration of our economy.

I specifically want to turn the focus of attention to the problem that arises when a regulator is still reeling from the fall-out of the banking crisis. Here we are, nearly half a decade on from the crisis, and we have just started a new round of scandal as the results of the FSA investigation into LIBOR fixing hit the headlines. The story will no doubt run and run for some time as other banks are brought into the mire. The Government’s response—the so-called Tyrie commission—is as good a start at understanding the problems as I can imagine, and, I hope, a significant step in the direction of truth and reconciliation between the banks and the taxpaying consumers.

The FSA’s response to the banking crisis has been reactive, and it is in its reaction that significant barriers have been established that limit competition in banking. Over the past few months, my hon. Friend the Member for South Northamptonshire and I have been meeting a number of smaller, existing banks as well as potential challenger banks to the banking marketplace. In nearly every case, their experience of the FSA has been problematic. All parties concerned were either small banks—banks with balance sheets under £2.5 billion—or individuals representing organisations that had experienced the FSA’s application process. Those interested parties came forward with points about the FSA’s process of issuing banking licences, and the regulator’s attitude to, and regulation of, smaller banking institutions.

It is significant that just one of the organisations we met detailed a positive experience of the FSA and its practices. It is also worth noting that banking licences are very rare commodities. There has been just one ab initio banking licence granted in the past 100 years and that was to Metro Bank. All other new entrants to the market, such as Virgin Money and Tesco, have done so as a result of buying existing licences and transferring their use to the new operation, or from overseas banks passporting in their expertise. That in itself says a great deal about banking competition in this country.

I want to concentrate on two specific areas of concern: the FSA’s application process for banking licences, and the FSA’s regulation of smaller banks.

[Mr Thomas]

I share the hon. Gentleman’s concern about the regulators and his understanding of the potential for new players in the financial markets. The all-party group on building societies and financial mutuals held an inquiry into the work of the regulator in relation to building societies, friendly societies and credit unions. It was far from clear that regulators had any real experience of working for and in those organisations. Will he support a call to encourage the new regulatory bodies to ensure that among their senior staff they have people with real practical, hands-on experience of working for a financial mutual?

[Mark Garnier]

Yes, I will. One of the problems is that, with the potential move of the FSA into the new regulatory regime, there has been an exodus of staff. As the hon. Gentleman suggests, that is of course something to do with the employment process within the new regulators, but it is absolutely right that any regulator should draw on people’s extensive experience. As we look forward, it is important that we provide leadership and that mutuals and other models of banking should be encouraged. The regulator should accordingly take account of that when employing staff. I wholeheartedly agree with the hon. Gentleman on that point.

The second problem is the FSA’s regulation of small banks, starting with the application process for banking licences and significant changes. That process has two tiers. It starts with an initial inquiry, and if an applicant is given the nod, the process continues with a formal application. The initial inquiry can be likened to a conversation on the doorstep of the FSA, with the aspirant bank seeking permission to come through the door simply to start the application process formally.

However, that initial inquiry—it should be remembered that it is not a formal inquiry but just an opening conversation—can cost the applicant more than £1 million to process. That is because the applicant requires a corporate body to make the application, which is not unreasonable, but also needs evidence of capital committed, advisors, auditors and, it seems, evidence of system design and building, which can be very expensive as there are no off-the-peg systems available.

So far we have found just two organisations that have proceeded past the initial stage from an ab initio enquiry. Trying to establish the reasons for that, we found that the cost and delay involved in the application process appear to be disproportionate. New applicants are effectively required to create a functioning, fully staffed banking operation before any type of licence is granted. We found that one applicant was forced to resubmit their application because the application process was stretched beyond the 12-month time limit and consequently a second application fee of £25,000 was demanded. One individual spent £1.3 million just to get to the formal stage of the application process. The application was then denied by the FSA.

The applicants we met had many complaints about the FSA process, and I will go through some of them. All applicants felt that the FSA had an arbitrary power to grant or refuse applications. They felt that the FSA should provide a publicly available checklist of criteria that, if satisfied, will result in the award of a licence. Such a change would lead to a more transparent application process. Apparently there is no requirement for the FSA to apply the same criteria to all applications in its internal processes or to explain its reasons for advising that applications should be withdrawn. Representatives of one small licensed bank said that they were given the “impression” that their application was progressing but “never a green light”. A representative of an individual who tried to buy a failing bank said that, although the FSA might appear to favour an applicant, they were capable of

“changing their opinion with no prior warning”.

One applicant was encouraged by an FSA official to proceed with an application for a change of control. However, a few months later, and after incurring considerable cost, they were advised by a different FSA official that their application would not succeed and should therefore be withdrawn. Worryingly, in one case the absence of objective criteria allowed the FSA to engineer the withdrawal of the application by putting the applicant in a cleft stick. The FSA imposed a very high tier 1 capital requirement, which had the effect of suppressing the profitability of the applicant’s business plan. The applicant was then told that the proposed venture was not sustainable because it was insufficiently profitable, and they were advised to withdraw.

In short, applicants felt that the individuals concerned within the FSA feared the prospect of having their name associated with any bank that might possibly fail in the future, and so they felt that the FSA staff regressed to having a bias of ultimate safety, and that bias meant that they favoured rejection of applications.

Let me turn to the regulation of existing smaller banks, of which there are 50 or so. Those banks are penalised for being small. It is quite interesting that the department within the FSA that looks after smaller banks is called “Smaller banks, smaller building societies and spread betters”. It seems curious that banks that are so important to this country can be regulated alongside spread betters, which are perhaps less important to the financial system.

The first and most basic problem that the smaller banks face comes in the form of the capital ratios that they must have. Small start-up banks are required to have a capital ratio that is potentially three times larger than that of a big, systemic bank. Although it can be argued that that is to ensure the bank is stable as it builds up its lending book, it restricts the opportunity to become a new entrant to the market to those who have very deep pockets indeed. Even if a new bank grows, its capital ratios are frequently twice that of the big banks’ capital ratios. Moreover, risk-weighted valuations of property lending, with regard to items such as a property lending book, are skewed against small banks, which may lack the database and breadth of client type available to the big banks to justify a similar risk-weighting. That means that a small bank will need a third more capital for its property books than its bigger competitors.

Small banks are also likely to have a more limited loan book. For example, a small bank’s loan book might be restricted to the UK. That incurs a 1% increase in capital ratios. That is quite an interesting proposition because it implies that big banks lending to Greece and Spain face a lower risk than those banks that are just lending in the UK. That so-called “concentration of risk” has further implications, as small banks are likely to seek niche markets. Doing so means that a bank incurs a further 2% increase in its capital ratio.

Meanwhile, liquidity reporting has resulted in small banks seeing the cost of their compliance increase tenfold. Representatives of a small private retail bank whom we met said the bank used to charge its customers £25 a month for the privilege of banking with it. Those customers are now being charged £65 a month, just to cover the increased cost of compliance. Another small bank that has only a £50 million balance sheet is required to submit 160 liquidity reports every year.

In addition, it has been suggested that for a small bank the staff to accountant ratio, which is obviously an overhead cost, is 17 members of staff for each accountant who is examining what is going on. In a recent survey, chief executives of small banks complained that 40% of their time was spent on compliance. And non-executive directors, far from contributing a wide range of skills to the bank’s board, must now demonstrate extensive banking experience and sign up to what amounts to a full-time job. Is it right that banks’ boards should be so monochrome?

There are many reasons why businesses might face problems in getting started, but in an environment in which we expect banks to lend more and to contribute to our economic recovery is it right that the regulator is apparently creating a blockade for new entrants and increased competition? Including me, there are three members of the Treasury Committee still in Westminster Hall—the other two are my hon. Friend the Member for South Northamptonshire and the hon. Member for Erith and Thamesmead (Teresa Pearce); and there was another member here earlier, the hon. Member for Edmonton (Mr Love). I hope that the Treasury Committee will proceed with a forensic investigation of banking competition and seek to separate myth from fact as regards this problem. However, as we progress with the Financial Services Bill and the soon-to-come banking reform Bill, it is crucial that we consider competition as part of the mandate of the regulators.

This is a very difficult time for our financial services industry, including banking, and we must ensure that we strike the right balance between regulation that is effective and easy to apply and regulation that ensures international confidence in our financial system. Striking that balance is too important for us to get wrong, but we must ensure that in achieving it we allow, and indeed encourage, healthy competition within the banking community. That must be the approach taken by the regulator.

LIBOR (FSA Investigation)

Mark Garnier Excerpts

Thursday 28th June 2012 Commons Chamber

[Mr Osborne]

I agree with the hon. Gentleman. Of course the Financial Services Bill is before Parliament and there is still some time to go before it completes its passage, so it is a readily available vehicle, but we want to make sure that we get this right, given what went so badly wrong with the previous attempt to regulate the financial services industry.

[Mark Garnier (Wyre Forest) (Con)]

While £60 million may sound like a great deal of money to the average man in the street, when it is compared with the size of Barclays’ balance sheet and the potential claims for compensation, does my right hon. Friend not agree that it is a relatively small amount of money? When he is looking at compensation for those who have lost out, will he take care to ensure that Barclays is liable for its own liabilities—that they will not necessarily be shared with other banks and that each bank takes care of its own liabilities?

Interest Rate Swap Products

Mark Garnier Excerpts

Thursday 21st June 2012 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I, too, would like to add my name to the long list of people who will be congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on securing not only the debate, but a great deal of support from the outside world and a community that has been badly affected by these events.

I suspect that we are now at the beginning of what will amount to yet another large mis-selling scandal. I completely endorse the comment of my hon. Friend the Member for Aberconwy that the last thing we need is the spectacle of bus loads of ambulance-chasing lawyers charging across the countryside looking for businesses that have been mis-sold these products. It is incredibly important that we try to resolve the problem before members of the legal profession take advantage of it as an opportunity to feather their nests. These events come at a time when small businesses are struggling to make sales and win orders and contracts. It is a time when the banking system is adding yet another problem to small businesses. It is something we need to try to resolve.

These products, which really amount to caps and collars, should have been relatively straightforward products. They should not be dissimilar to a fixed rate mortgage. Rather than being like a fixed rate mortgage stating that the customer will pay 3% or 5% for five years, for example, they should have stated that the customer would pay between no less than 3% and no more than 8% over a five-year period or whatever. In that respect, such a product would have been a very straightforward cap and collar.

The problem is that the products were written before this period of super-low interest rates. Of course, interest rates have since fallen well below the collar, so the products are not actually cap and collar products; they are cap and noose products. Rather than holding the interest rate at the lower level, the noose has the effect of bouncing the interest rate up, thereby creating a higher rate than the customer would otherwise have expected and, in some cases, than they would have paid at the rate of interest in the first place.

The result is that these products are far more complex than they would normally have been. I declare a history of serving as a compliance officer for an FSA-regulated firm before being elected to this place. We used to spend a huge amount of time ensuring that we classified our clients properly to make sure that the products that were sold were aligned with the abilities. I fear that what is happening here is that we have a misalignment of customer classification. There are salesmen who are not experts in the products and do not know a huge amount about them, and they are selling them to customers who are clearly not experts in the products at all. Under these circumstances, a huge problem is brewing.

The Chair of the Treasury Committee mentioned the fact that in yesterday’s Sub-Committee meeting we met Adair Turner, who assured us that he would go to great lengths to investigate the whole process. Subsequently, I asked Martin Wheatley, the other witness and director of the FSA’s conduct business unit, whether the authority will be looking into the whole business of misclassifying clients as well as salesmen, and he said that without a shadow of doubt it will be specifically doing so, so I sincerely hope that we will reach a speedy resolution on that issue.

[Ian Swales]

The hon. Gentleman makes the powerful point that we do not expect small business owners to be experts, but that their accountants are not often experts, either. The people whom they deal with who will most often be experts are their bankers, so where does he feel that small business owners should get their independent financial advice from?

[Mark Garnier]

That is an incredibly important point. We live in an ever-increasingly complex world, and banks are competing against each other to come up with more and more sophisticated products that appear to be user-friendly, such as simple fixed rate mortgages. But as products become more complex there are more hidden elements in the contracts that people sign, such as in the one under discussion, whereby in a completely unforeseen period of super-low interest rates, business owners have to pay what amounts to a fee to buy themselves out of the contract’s residual value.

People then get into very complex calculations to try to understand what is going on, and the economic value of, and internal rate of return on, the contract. That is when things go way above the pay grade of most people, apart from those specialists sitting in dealing rooms in Canary Wharf who really understand such stuff. So, as part of the banking review and the Financial Services Bill that is passing through Parliament, we need to look very carefully at the classification of customers and of salespersons in order to get back to the fundamental point that we have to match products to a customer’s ability to deal with them.

[George Eustice (Camborne and Redruth) (Con)]

I have seen cases in which, through a process of legal discovery, a very clear e-mail trail has shown banks wilfully deciding not to explain the disadvantages of such products and, sometimes, a complete mismatch between the length of their loans and the length of the product they were selling. Does my hon. Friend agree that this is not just about people not understanding the situation, but about an intention in many cases by people not to inform customers because they wanted the business for their own bank?

[Mark Garnier]

The hon. Member—

[Mr Geoffrey Cox (Torridge and West Devon) (Con)]

Hon. Friend.

[Mark Garnier]

My hon. Friend has almost been reading my speech, because I am about to finish on that point.

There are mismatches of terms and objectives, and on this issue I have a fundamental problem with the banks. A bank manager used to be a customer’s friend, whom they could turn to for financial advice, who would look after them and who, much more importantly, had their interests at heart. The problem is that banks are now simply salesmen looking for another product to sell, and it does not quite matter to them what holistic package is being sold as long as an individual product is.

I simply do not understand why the banks are failing to get the message that they are breathtakingly unpopular. They have really made a pig’s ear of our economy and financial system, so why do they continue to do so—in the face of the public opinion? It does not make any sense, so I make this appeal to the banks: please take a look at this issue. If you have created what should be a collar and cap arrangement, but it turns out to be a cap and noose arrangement, negotiate with your customer, help them out, stop feeding solicitors lots of money and try to resolve it in order to get back to a situation where bank managers are people we can trust.

Banking Reform

Mark Garnier Excerpts

Thursday 14th June 2012 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I am grateful to my hon. Friend for his statement today, and also for these measures, which go a long way in dealing with the “too big to fail” problem, and in some ways deal with the “too small to start” problem. He will be aware that in the last 100 years, only one ab initio banking licence has been granted. Part of the problem is a reluctance on the part of officials at the FSA to grant new banking licences. Will he look again at the issue of competition in the Prudential Regulatory Authority, in order to try to help challenger banks enter the marketplace?

[Mr Hoban]

My hon. Friend makes a good point. As I have said, the Bank and the FSA are looking at prudential and conduct requirements to ensure that they are proportionate. However, the other thing I would say is that the implicit guarantee enjoyed by our bigger banks distorts competition. Our reforms tackle that, helping to create a more level playing field for new entrants and enabling them to compete properly with established players.

Static Caravans (VAT)

Mark Garnier Excerpts

Thursday 26th April 2012 Commons Chamber

[Mr Stuart]

I will give way to my other colleagues shortly, but let me first respond to my hon. Friend the Member for Lancaster and Fleetwood (Eric Ollerenshaw).

The Finance Act 1972 introduced zero rating of certain caravans. The notes on clauses relating to what was then group 10 of schedule 4 referred to relief for

“houses and other domestic accommodation”,

and stated:

“The caravans in the Group are akin to houses; they are too large to be towed on the road, and are usually permanently attached to the land.”

The deliberate intention of the law, which was debated in the House—with no anomaly, no forgotten section, and no category of products that had been missed—was to treat caravans, other than those towed by cars, as “other domestic accommodation” in the same way as houses.

[Mark Garnier (Wyre Forest) (Con)]

In my constituency, many people view static caravans as second homes. Is there not a case for the Treasury to treat them as second homes, subject to stamp duty, rather than making them subject to VAT like mobile caravans?

[Mr Stuart]

That would be consistent, because the qualities of a mobile caravan are completely different from those of a static caravan or a house. What are static caravans used for? They are second homes. Someone who buys a £240,000 cottage in one of the rural areas represented by my colleagues, which often means pricing out local workers, will pay tax of 1%, whereas it is proposed that someone who buys a static caravan for £24,000, a tenth of that amount, should pay 20%— 20 times as much—on a home that is used for precisely the same purposes. That is not getting rid of an anomaly, as Treasury civil servants originally suggested; it is creating an anomaly.