Financial Services and Markets Bill (Second sitting)

Peter Grant Excerpts

Committee stage
Wednesday 19th October 2022 Public Bill Committees

[Tulip Siddiq]

Q The Bill does have provisions for access to cash, but not many provisions for free access to cash. Do you think that is a cause for concern?

Paddy Greene: Yes, it is a cause for concern. When we are talking about consumers, for the objective in the Bill on access to cash to be met, consumers must have free access to cash. Without that, I think the objective may be undermined. It is the case that we have paid-for provision—it is in theory available now—but it does not serve the market. We must ensure there is free access to cash. A huge raft of people rely on cash. It is massive numbers, but it is also the case that they tend to be vulnerable and on lower incomes. If it is the case that it is not free, when somebody goes to take out £10, they are paying £2 to get it. That is just an example, but that doesn’t seem right. The fact is, we need to have a minimum, base level of free access to cash. We are delighted that the provisions have been brought forward and that we will have this in legislation, but for it to work effectively, it has to be free access.

[Peter Grant (Glenrothes) (SNP)]

Q I do not know whether your responsibilities at Which? include consumer protection, particularly in relation to the financial services market, but from your perspective do the millions of small-scale retail consumers of financial services have confidence in the current regulatory framework of the United Kingdom?

Paddy Greene: I cannot speak for small and medium-sized enterprises—I am here to represent consumers—but fundamentally I do think that the regulatory framework in this country provides confidence. I think it has been robust, relatively speaking, over the years. If we compare it to some other international sectors, I think it is a framework that can provide people with confidence. We would be remiss to weaken that in any way.

[Peter Grant]

Q Does the Bill as it stands strengthen or weaken that regulatory framework? Or does it leave it as is?

Paddy Greene: We have some concerns about the current wording around competitiveness. I think we need to be mindful of that. I want to get across that whatever changes are brought in, the primary objectives of the FCA must not be inadvertently undermined. The FCA has a challenging time to balance those objectives at the moment. We would seek amendments that ensure that, from the consumer perspective, if we are going to see changes brought in, in no way shape or form do they undermine the consumer protections that are in place.

On the argument for competitiveness for consumer protection, I would add, similar to my earlier remarks, that a confident, well-protected consumer will lead to a competitive environment. It will lead to innovation and confident consumers interacting in that market.

[Peter Grant]

Q I was interested that the Minister in his question used the metaphor of a good seatbelt. Some of us think that the regulatory environment for road traffic should ensure that nobody needs to rely on a seatbelt, but that is perhaps a discussion for later.

I have had a number of representations, as I think other members of the Committee have, from individuals or groups of people who have been victims of financial services scams on a colossal scale. One of their common comments is that they do not think it is justifiable for the regulators to have such a strong degree of immunity from civil liability, even in cases where it is clear that the regulator has failed and that that failure has contributed to members of the public losing what for them are significant amounts of money. Do you have a view as to whether it is time to revisit that very broad immunity that so many of the regulators have?

Paddy Greene: I am struggling to hear your questions.

[Peter Grant]

I am sorry. I will try to speak into the microphone, so forgive me for not looking at you. Do you have a view on the numerous representations we have had from victims of financial scams who think it is time to revisit the very broad immunity from civil liability that the regulators have?

Paddy Greene: I will talk specifically to parts of the Bill. This is essential, but I am thankful for the provisions that have been brought forward to introduce a mandatory requirement for people who have been the victims of push payment scams to get their money back. In terms of a first step, that is crucial. On changing the regulatory framework, that is a first step and we welcome it.

[Peter Grant]

Q Is there a need to specify in the Bill, or to enable in later regulation, a widening of the mandatory compensation scheme to types of scams that we do not yet know about?

Paddy Greene: Yes, I believe there is. It is right that the Bill starts with faster payments—I think 87% of APP scams are run through faster payments. We do not want to delay action. It has taken too long: it has been six years since our super complaint to get to this point, so we must not slow that down. The revisions—the two-month and the six-month provision in the Bill—are ones that we absolutely endorse. As I said, we do not want to slow that down.

We need to make sure, though, that there is an obligation for further action—for example, to look at CHAPS payments. UK Finance figures show that 79 million on CHAPS and on-us payments are already there. We know that scammers and fraudsters are very good at adapting to change, so they will move. I know there have been some debates about what the Bill does or could allow, but we need to make sure there is an obligation so that we know what will happen next. Just because there is provision for the regulator possibly to act in the future, that does not mean the regulator will—there is a lot of pressure on regulatory time and resources—so we would really like to see some clarity on what happens after the changes to faster payments are made. As I said, this is the opportunity to look at the future. We know that change is happening, so we should set out a timeframe for what happens next.

[Sally-Ann Hart (Hastings and Rye) (Con)]

Q Good afternoon. We were just talking about access to cash and the proposals in the Bill to safeguard access to cash and free ATMs. As an MP who represents a rural constituency, I am concerned about my residents being able to access cash. How far do you think people should be expected to travel to access free cash, or cash? Is it geographically dependent? Would you treat regions separately, on density of population?

Paddy Greene: I think we need community-based solutions. The fact is that it will not be one-size-fits-all. We need to recognise that communities have different challenges. When we look at the voluntary solution that the industry has put in place, it accepts that, first, we need not only a geographical spread but a community access point. We need the ability for communities to request a review of access in their areas.

Secondly, we need a raft of delivery channels. That again gets to the point of what is fit for purpose. An ATM might well be suitable in one town, but it might not be suitable for another town for a variety of reasons, be that geographical or the demographics of that part of that society. I do not think it is one-size-fits-all. It is very important that we get the policy statement from the Treasury soon, so that we and you can scrutinise properly what the close details will be, but it should be a basic geographical spread, with the option to interrogate further those who are not captured by the geographical spread and to ensure that we do not inadvertently leave people behind.

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[Tulip Siddiq]

Q On the catching up or lagging behind that you have mentioned, would you recommend any legislation? Is there a role that the Bill we are discussing could play to strengthen us and pull us forward?

William Wright: There is certainly a role for legislation; I am not sure that the right place for that role is this Bill in particular. It is important to step back and look at the huge amount of work that has already been done and is being done in and around green finance from a legislative perspective. The latest addition to that is the net zero review, and the green finance strategy is expected from BEIS early next year, maybe. There are sustainability disclosure requirements, the UK green taxonomy and the transition plan taskforce. That work, which is coming down the pipeline towards us, could contain a lot of the legislative impetus for the UK to close the gap.

More importantly, I think the industry is already beginning to fill the gap. Where the UK has a real opportunity in green finance in future is not so much in the level of capital raising by UK companies, but in the fact that it is in pole position to benefit from its existing expertise in markets such as risk management, derivatives and trading, as we see the emergence of a more sophisticated carbon market of green derivatives and green risk management, and in playing to its existing strengths, many of which have not been harmed or damaged in any significant way by Brexit.

[Peter Grant]

Q I know that your website describes one of your key aims as developing a larger capital market across Europe. There is a trick to be pulled off in encouraging all the right kinds of people to come and invest in your financial markets while keeping the wrong kinds of people out. How effective has the UK’s previous regulatory regime been at keeping Russian money out of our financial markets?

William Wright: On the substance of that question, I will have to put my hands up and say it is not an area that we have done a huge amount of work on, although we have recently hosted some events on that theme—for example with Edward Lucas, talking about Russia, Ukraine and links back to the City.

One point I will make is that back in 2007, in a previous life as a financial journalist, I was at the official launch of NYSE Euronext—this was the merger of the New York stock exchange and Euronext, the European-based stock exchange. The founding chief executive, John Thain, who was then chief executive officer of NYSE, said he thought that London would come to regret its campaign in the previous five or six years to attract Russian companies to list on the London stock exchange. If we look back on those comments with the benefit of 15 years of hindsight, he was probably correct.

[Peter Grant]

Q A number of transparency and anti-corruption campaigners regularly say that London has become or is in the process of becoming one of the go-to locations of choice for money laundering and similar activities. Is that a concern that you think is grounded in fact? Or is it just an urban myth with nothing behind it?

William Wright: I will have to fall back on saying that it is not something I have specific expertise on. I have opinions and views. I have recently read some of the works by Oliver Bullough on different aspects of this—“Butler to the World” and “Moneyland”—and it made me quite angry to read them, but it is not an area where I can claim any professional expertise to answer a question in this setting.

[Sally-Ann Hart]

Q Good afternoon. I will pick up on a few things in respect of the competitiveness of the UK financial markets. Our competitiveness is really important for our economic growth; do you think the Bill goes far enough with regard to the deregulation of existing EU rules? When it comes to new regulation, does the Bill enhance the ability of Britain’s financial services to be agile and dynamic and to look at the best possible outcomes? We are very good in Britain at gold plating our rules and regulations, so we need to make sure we are not putting ourselves on the back foot and can be the most competitive, agile, dynamic market.

William Wright: That is sort of the trillion-dollar question, isn’t it? On EU rules, the Bill and the huge amount of work that the Treasury and others have done over the past three years address the obvious low-hanging fruit—the obvious areas of EU regulation and the framework that were not appropriate for the UK market, which has a unique dynamic within the EU. Most of those areas have been well addressed in the Bill.

On looking ahead at competitiveness, the Bill does create a more agile and nimble framework. By definition, one would hope that the UK can act more swiftly than the EU, and we are already seeing some signs of that. Again, it gets the right balance by making competitiveness a secondary objective and not a primary objective. It gets the right balance to ensure that it is something considered by supervisors and regulators but not something that overrides the fundamental purpose of supervisors to ensure a stable financial system that is competitive within itself, and where customers get appropriate protections.

We need to be very careful, in the debate on competitiveness, about assuming that competitiveness is a mechanical outcome of regulation and tax. One of the lessons we can take from the last few weeks is that a very important element of competitiveness is credibility, predictability and the robustness of independent institutions. It is important to bear that in mind when we talk about competitiveness.

In the short term, the biggest competitiveness threat to the UK—this comes back to the Minister’s opening question—is probably from additional pushback and pressure from the EU as it requires more EU business to be conducted inside the EU. We have this interesting dynamic: the UK is increasingly focusing on making people want to do business in the UK because it is an attractive environment, whereas the EU in many areas is trying to attract business by requiring people to do it there. We also need to be very careful in this debate—

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[Tulip Siddiq]

Q Compared with the US or the rest of Europe, in the UK we lack mutually and co-operatively-owned regional banks. You have touched on this already, Robin, but I want to hear a bit more about why you think that is. What is the role of regulators when it comes to that lack of access?

Robin Fieth: The first thing is to look at the tradition—the tradition of the UK has been that our regional mutual financial institutions have either been insurers or building societies, traditionally, or, in the last 30 or 40 years, credit unions—compared with the United States or large parts of Europe, where there is a very long tradition of mutually-owned community banks, co-operative banks, lifelines and so forth. Our tradition is very different. Apart from the Co-operative bank, we have never had a large, mutual, fully general-purpose bank. Nationwide is a full retail bank, but it does not do business lending, for example. We have never had that tradition.

As some of you will know, there are a number of small community banks in the mobilisation phase or coming to mobilisation phase. On the second part of your question, the Bank of England’s new banks team has been very good at helping challenger banks to get through the process and start up, and we have seen so many start up. I am not sure that they have the same experience and expertise in respect of what the mutual model looks like and why it is different. If you talk to any challenger bank, they will say it was much more difficult to get through mobilisation than it should be. If you talk to the community banks, they say it is very difficult to get through mobilisation. There are at least three that we are working with on the side, if you like, that are going through that process.

The real challenge, where perhaps there is a role for Government, is in creating the forms of capital that mutual start-ups can follow, because they cannot be venture-capital backed, so you need some form of mutual capital. We have suggested to both the main parties, for example, that whichever version of the British Business Bank you want, it could have a mandate for part of its capital being mutual capital.

Robert Kelly: Robin has covered the vast majority of the salient points, and we would agree with his comments. In terms of taking it maybe a step further or down in respect of the community banking model, as Robin mentioned there is a development agenda in a few areas of the country. There is certainly space for innovation and competition in SME lending and around transactional activity and transactional accounts and making sure there is something different from a competition perspective —maybe where the bigger banks are not necessarily in those spaces or where there is perhaps an opportunity for some more partnership and co-operation. We have talked to some of the community banking models about what space they and the credit union sector could co-exist in. We acknowledge that credit unions are already able to do corporate lending and SME lending, and some have done so. I think around 20 or 21 credit unions across the country have taken advantage of that. The ongoing PRA consultation on the future supervision and regulation of the credit union sector has some reference to that, in terms of additional checks and balances.

We recognise that there is opportunity for the credit union sector to do more. A big part of the legislative reform package that will ultimately impact credit unions can be described as an enabling factor that allows product and service innovation and development. Alongside the community banking and mutual banking model, the development that we have seen, and all the background that Robin has already mentioned, it should be made clear that we in the credit union sector believe that we can also fill some of that space. If the overall objective is around competitiveness and enabling competition, we should be ready to act, and to respond to the needs of communities and small businesses across the country.

[Peter Grant]

Q Mr Fieth, let me first come to you and the comment that you made previously about the UK not really having a tradition of mutually owned lending banks. Was not the first trustee savings bank set up in Dumfriesshire in 1810? There has been a very long and proud tradition of locally and community-owned banks, which survived for a long time. They were basically wiped out in a series of corporate takeovers in the 1970s and ’80s. Is that not the case?

Robin Fieth: Whether the term is “corporate takeover” or “demutualisation”, which was very much encouraged by the Government of the day, is a moot point, but you are absolutely right: there is or was a very proud trustee savings bank tradition, and of course it started in the lowlands—well, the borders—of Scotland. Sadly, the last trustee savings bank went into run-off within the last five or six years. That was the Airdrie Savings Bank. It is a tradition that we no longer have. Again, those institutions were not a full service of the kind that the shadow Economic Secretary was talking about. They were not a full service model. They were very much a savings and loans model, largely for retail purposes. That is the tradition we had, yes, but it is now sadly part of our economic history.

[Peter Grant]

Q Thank you. Mr Kelly, a lot of the evidence that we heard earlier today—I do not know how much of it you were able to watch—came from the big institutions, which clearly have a large part of UK exports—a significant part of the UK economy. Could you briefly explain the importance of credit unions, particularly with regard to the promotion of financial inclusion?

Robert Kelly: Yes, of course; thank you for the question. Credit unions play a unique role in the economic infrastructure of this country. I mentioned that we serve 2 million people, but we have huge aspirations to make sure that that goes much further. After this session, I am joining a call on the cost of living crisis and the impact that the credit union sector is having in different parts of the country. A really good example is Bradford District Credit Union, which is working in tandem with the local authority on a range of products and initiatives that have built financial resilience and financial inclusion in that part of the country. There are many more examples across the UK.

The financial inclusion agenda chimes perfectly with our objectives, our ethics and the co-operation and mutual model that credit unions are built on. The important point to state is that we believe that that work can be accelerated and amplified in a significant way. We can do much more. The phrase that we would use is that we manage to put in place a balanced demographic of membership. The credit union should be seen as a safe and innovative place for any member of society, any consumer, to go to. It goes back to the comment that Robin made on full service. We believe the legislative reform package that is on the table for the credit union sector will allow us to do that. It will allow us to be more competitive, to look at risk-based pricing and to make sure that we are seen as more mainstream—and to serve a wider part of the population. Doing that creates an environment where additional financial inclusion initiatives and objectives are made possible, because we are building sustainability and the strength of balance sheets for credit unions across the country; those things go in tandem.

We have worked closely with a range of Governments over many years to deliver great value, and also financial inclusion objectives, but we need to make sure that there is a balance of products and services, and a balanced demographic that allows us to do much more of that. We have said that in the past, credit unions have unfortunately been seen as the poor person’s bank. We have worked incredibly hard to move away from that area—with, I think, great success. The legislative reform package that is on the table for the credit union sector will allow us to do much more, and it should be seen as very positive.

[Peter Grant]

Q Thank you. You referred to the need to be competitive. When earlier witnesses used that phrase, they often clarified it with reference to overseas businesses or overseas financial services sectors. When you talk about being competitive, who are you competing with? Is there anything in the Bill that helps you to become competitive, or is there anything that could be added that would help?

Robert Kelly: I will give two examples. Credit unions will have, for the first time, the ability to offer car finance under personal contract purchase or hire purchase—conditional sale activity. We can also be immersed back into the general insurance mediation process. That means that we can diversify our product range. It should mean that we can diversify our income lines, which should result in greater sustainability for the sector. Those are two examples where we were very firmly part of the legislative programme that has been developed for the credit union sector.

On competition, we recognise that we are a small player overall in the financial services landscape, but we can do more, and have huge aspirations. We have that wider product and service range. Investment in technology will allow us to be seen as being more mainstream. A bigger part of the financial wallet for many households across the country could be maintained by the credit union sector. The Bill certainly has its elements there.

We talked about credit union service organisations. It is important that we continue to have that conversation with all relevant stakeholders, look at where in the sector there is innovation in the overall infrastructure, and consider how we can learn from the successes of the model used in North American and other parts of the world. The Bill goes a long way to allowing us to diversify, and to become more competitive and more mainstream. That is to be welcomed. There are certainly follow-on elements that we will undoubtedly talk to officials and regulators about in the weeks and months ahead.

[Peter Grant]

Q According to the Financial Conduct Authority website, in just over the last year, eight credit unions have gone into administration; only one did in the preceding three years. Is there something about the current financial services sector, or about the credit union model, that means there is a systemic problem? Or is it simply that, if we move from having a small number of big players to a large number of small players, inevitably we will lose some of the small players?

Robert Kelly: We recognise the difficulties in terms of reputational risk, and the challenges that failure brings. We are working tirelessly with our member base. We are a very broad church. Our members have asset sizes from a couple of hundred thousand to well over £220 million, and everything in between. We recognise that failure is difficult and painful. We are working extremely hard behind the scenes collaboratively with the BSA and other interested parties. Credit unions that fail often have a couple of items in common. There tends to be a lack of good governance, and sometimes there is key person risk. Covid has exacerbated some of that, just in terms of volunteer burnout and sustainability challenges, demand for lending and bad debts. We have been impacted by insolvency and mis-selling in many cases as well. We have identified that it can be difficult to maintain a smaller asset range using a volunteer base—not always, but sometimes. We are working tirelessly behind the scenes to make sure that credit unions look at their business plans and numbers on a regular basis, and take the tough decisions.

Let me bring that to life, very quickly. The original development of the fiscal principles was in 2002. In that year, we had 698 credit unions in GB; we are now down to fewer than 250. Most of that reduction in numbers came through consolidation and mergers or acquisitions. Some of it has been failure. We certainly believe that the number will continue to come down. It would be appropriate to find solutions that allow credit unions to come together as part of mergers or acquisitions and maintain services in their local communities.

[Siobhain McDonagh]

Q Would both our witnesses support giving the FCA and the PRA an explicit remit to report on how they have considered specific business models—including credit unions, building societies and mutual and co-operative regional banks—to ensure that they are given parity of esteem with other providers? If so, how would that support your sector?

Robin Fieth: That is a great question; thank you very much. We are already part of the way there with the PRA. It has had a secondary competition objective since the 2014 Act, and it was subsequently enhanced at the BSA’s behest. Every time it consults, it has an obligation and a requirement to determine whether there are specific aspects that disproportionately affect the mutual sector, and that has been welcome. We have seen a real change in the PRA’s approach to the financial mutuals since the financial crisis, and it has been largely positive.

There is a very important question as far as the FCA is concerned. We saw it last year with the proposed demutualisation of LV. It was apparent that the FCA was entirely agnostic on the business model, in terms of their competition objective and the good competition that achieves better customer outcomes on the conduct side. There is certainly a case for the FCA to consider that far more closely. I am always very careful when we talk about conduct outcomes with the FCA because, as a consumer, you should not have a different outcome, but you might experience a different journey. There are some nuances in there. As to how it best achieves that without adding ever more reports and burdens, that is in its annual reports, which are obviously open to examination and scrutiny. In the regulator’s annual reports, it should report back on that; that would be the most straightforward way to achieve that.

Robert Kelly: Thank you again for the question. I echo Robin’s comments, but I will try not to duplicate them. Credit unions have an ongoing consultation with the PRA on future supervision and the regulatory environment. We have a long track record of working in tandem with the PRA, and there is a move towards making sure that the supervision model is in tandem with the legislative reform agenda, which seems eminently sensible. It also allows us to take cognisance of the fact that there are many more larger, asset-based credit unions than there were five or 10 years ago—we have to factor in whether that comes through consolidation, or just through business growth—which is hugely beneficial for all parties.

In terms of the FCA, obviously the credit union sector is dual-regulated. We have a relationship from the conduct side. It will be interesting to see how that approach develops. Again, I would echo Robin’s view: the FCA has such a broad remit, in terms of the firms that it looks after, and we are always championing the cause of proportionality. Consumer duties are an example of where we have to work in collaboration with all relevant stakeholders and interested parties to make sure that the good consumer outcomes that credit unions provide can be evidenced, and that we can go on that journey. There are live examples of those on both sides of the regulatory environment taking steps to be innovative and to future-proof the business development that we expect to see through this legislative programme. That is to be welcomed, but we are on a journey, and we are not yet at the end.

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[Emma Hardy]

Q And do you think there is a risk that if the invention powers are left, they could be perceived by markets as a threat to the independence of the Bank of England or the PRA? We have seen such recent turmoil in the markets over concerns. Do you think it could have a similar impact?

Martin Taylor: One of the problems that led to the recent turmoil—a very English description of what has just happened—was that the Prime Minister and the former Chancellor chose not to subject the mini-Budget to the scrutiny of the Office for Budget Responsibility. Had they done so, the OBR might of course have objected to various parts of it, which is perhaps why they did not do so.

However, international investors looking at London will have noted this and it has a bad smell, if I can put it that way. I am not worried about the bond traders who price the market day by day. The volatility was extreme and very dangerous. It has been settled by the Bank for the moment, I hope. I am much more worried about the people running really big blocks of money—big foreign sovereign wealth funds or big institutional investors—who look at London and say, “Is it worth having an allocation to gilt-edged stock? Do we want to be exposed to sterling if this is the sort of thing that goes on?”.

These are the strangers on whose kindness Mark Carney told us we relied and we antagonise them at our peril. That is what worries me more than anything else: that we suppose that foreigners will always want to buy gilts. Why should they? You could run a huge international portfolio and have zero allocation to sterling at the moment. If you were in Singapore or New York, you might be more tempted to do that than you would have been a month ago. We should not do anything else to make this worse. Everything is being done by the new Chancellor to steady the ship—thank goodness—but moves like this proposed measure just go in entirely the wrong direction as far as I am concerned. I think it is very dangerous.

[Peter Grant]

Q How effective has the UK been at keeping dirty money out of the financial services sector?

Martin Taylor: I do not know. I probably have the same suspicions that you have. London has a huge financial sector and dirty money is easier to hide in places where there is lots of money than in places where there is not very much. I have never worked in, or with, the Financial Conduct Authority, but sometimes it gets blamed when things go wrong, which is a bit like blaming the police for crime, if you know what I mean. There is a lot of dirty money in the world and a lot of it will try to come here. I think the regulators do their best.

[Peter Grant]

Q If there is a long-term downtick in the world’s willingness to invest clean money in the United Kingdom, does that increase the risk that dirty money will replace it?

Martin Taylor: I would rather not accept the premise. We have to ensure that the world is happy to invest clean money in the United Kingdom. It is extremely important that we do that. No, I do not see us becoming a sort of sewer market—I mean, God forbid—but we have to be careful and we have to keep standards up. In taking out some European regulation—which we ought to do, because not all European regulation is good and valuable, and I am glad that the Bill allows us to do that—we need to be very careful. There are babies in the bathwater.

[Peter Grant]

Q Is there a replacement risk with the EU legislation? Certainly a number of our witnesses from the big institutions said that there are parts of it that they would like to see removed or changed. Is it not the case that what it gets replaced with is vital? If it gets replaced by weaker regulation, does that threaten the stability of the markets in the longer term?

Martin Taylor: The FPC, for every quarter that I was a member of it—and I think it is still doing it—was saying that the intention was that the regulatory framework, when Britain left the European Union, would be a least as rigorous as the EU’s. In one or two places, it probably needs to be more rigorous than the EU’s, because there is some lowest common denominator there. In others, the EU has unnecessarily gold-plated things, but it needs to be done very precisely and carefully.

[The Chair]

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank the witness on behalf of the Committee. The Committee will meet again at 9.25 am on Tuesday 25 October to begin line-by-line consideration of the Bill.

Ordered, That further consideration be now adjourned. —(Joy Morrissey.)