Payday Loan Companies

Sajid Javid Excerpts

Monday 20th January 2014 Commons Chamber

[The Financial Secretary to the Treasury (Sajid Javid)]

I congratulate hon. Members on securing this debate, and balanced and thoughtful contributions have been made by hon. Members on both sides of the House. In particular, I thank the hon. Member for West Bromwich West (Mr Bailey) for his contribution and his work on the issue in chairing the Business, Innovation and Skills Committee.

I recognise that the issue has caused concern not just in the Chamber but across the country. I should like to reassure all the hon. Members who have spoken today that the Government are taking decisive action to protect borrowers from the harm caused by payday lenders and that we are fundamentally reforming the regulatory system that governs them. I will do my best to answer hon. Members’ questions, but first I should like to take a little time to set out the main course of action that is being undertaken.

As many hon. Members will be aware, thanks to the changes made by the Government, the Financial Conduct Authority will take on new consumer credit responsibilities from the Office of Fair Trading in April. The OFT has done a good job with its powers and resources. However, the FCA will have far stronger powers than the OFT. It will be a regulator with teeth. It will have the power to set its own rules, rather than having to wait for the Government to pass legislation each time a new problem arises. That will put it in a stronger position to keep pace with a fast-moving market.

Furthermore, for the first time those rules will be binding on lenders. The FCA will have far stronger powers to enforce breaches of its rules and standards. For example, currently the OFT can fine up to a maximum of only £50,000, whereas there is no ceiling on FCA fines. For the first time the regulator will have powers to award redress to wronged borrowers. The FCA will thoroughly assess every single lender over the next two years. Those that are not fit to trade will be ejected from the market. It will approve key executives to ensure that they are personally accountable for the way their firms operate. In short, we are moving from PC Plod to Sherlock Holmes.

It is encouraging to see that the FCA is already flexing its regulatory muscle. It set out proposed new rules in October, as we have heard today, including: a cap on roll-overs; curbs on the use of continuous payment authorities; and mandatory risk warnings on adverts. The Government, as many Members will know, have welcomed the FCA’s proposals, and we look forward to its confirmation of the final rules next month.

Our absolute priority in this area is to ensure that the FCA can clamp down quickly on the causes of harm in the payday lending market, particularly the unfair and extortionate cost of borrowing from certain payday lenders and the spiralling costs faced by those struggling to repay. We took the opportunity in the Financial Services (Banking Reform) Act 2013 to give the FCA a clear mandate, and indeed a duty, to put a cap on the cost of payday loans by the beginning of next year, which means that it will not have to spend precious time making the case for a cap and can instead focus on the best way of implementing a cap and protecting consumers from those unfair and damaging costs.

The FCA is already on the case on that front, and we should see rules to implement a cap in place this year. It will be not just an interest rate cap, but a cap on all fees and charges associated with a payday loan, including default charges and roll-overs, which many hon. Members made the case for today. The total cost cap will work alongside the regulatory interventions already proposed by the FCA to tackle decisively the causes of consumer harm in the payday lending sector.

I will endeavour now to cover some of the important points raised in the debate. A number of hon. Members mentioned real-time data sharing. The Government believe that lenders must make proper assessments of an individual’s ability to repay before they lend and that that should be based on accurate, timely and comprehensive information. The FCA is looking at real-time data sharing as an absolute priority and has committed to bringing about a real improvement in the way data are shared, including looking at the role of credit reference agencies and at international examples of data-sharing systems.

The FCA has warned the industry that it must improve the way data sharing works, including how quickly lending data are made available. A number of Members referred to last week’s announcement by Callcredit that it will introduce real-time data sharing from this April, which I think is a welcome step. However, if the industry fails to improve properly, the FCA has been absolutely clear that it will not hesitate to act. The Government wholeheartedly endorse both that message to the industry and the regulator’s commitment to action.

The hon. Member for West Bromwich West and several others rightly mentioned advertising, particularly advertising aimed at children. The idea that children might see payday loan adverts and then put pressure on parents to take out loans is very concerning. The Broadcast Committee of Advertising Practice, the body that writes the broadcast advertising code, is considering the extent to which payday loan advertising features on children’s TV and whether there are any implications for the regulation of the sector. However, it is important to note that recent Ofcom research found that payday loan adverts make up just over 0.5% of TV ads seen by children aged between 4 and 15. Many payday loan firms, including Wonga and those that are members of the Consumer Finance Association, have stated that they do not advertise on children’s TV. It is essential that all payday loan advertising is responsible and is not designed to target children. That is why payday loan adverts are subject to the Advertising Standards Authority’s strict content rules. I hope that I will reassure hon. Members when I say that the ASA will not hesitate to ban irresponsible adverts. In fact, it has a strong track record of doing so, including, recently, Wonga and Cash On Go adverts. I hope that I will provide further reassurance by saying that the FCA is consulting on new rules for consumer credit adverts, and it will have the power to ban those that breach its rules.

Several hon. Members mentioned affordability tests. The Government believe that it is crucial that loans are made only to those who can afford to repay them, so we welcome the FCA’s tough action to make sure that that is the case. This will include ensuring that firms have suitable and sustainable business models, including appropriate affordability assessments. The FCA has announced in its rule book consultation that it will transpose much of the OFT’s affordability guidance requiring lenders to check borrowers’ ability to repay loans sustainably into binding rules that will, for the first time, be enforceable with the full range of FCA enforcement powers. This package of measures should help to address the problem of lenders giving loans to those who will struggle to repay them.

A number of hon. Members rightly raised credit unions as an alternative for people looking for short-term credit. The Government believe that credit unions provide an invaluable service to people on lower incomes, offering sound financial advice and responsible lending. That is why we have already taken action to try to help the sector by, for example, increasing the interest rate that credit unions can charge, as we found that many—indeed, almost all—were making losses, and this was clearly not sustainable. The interest rate was therefore increased from 2% to 3% per month. We also have the credit union expansion project, with £38 million of Government money designed to modernise the sector. I want to do more for it, and the Government are considering what further action they can take.

I congratulate the hon. Member for West Bromwich West on securing this debate and thank all hon. Members for their thoughtful and balanced contributions.

Banking

Sajid Javid Excerpts

Wednesday 15th January 2014 Commons Chamber

[The Financial Secretary to the Treasury (Sajid Javid)]

I thought that Labour Members had turned over a new leaf this year: they admitted that they got it wrong on immigration and they admitted that they got it wrong on education, so I hoped that the hon. Member for Nottingham East (Chris Leslie) would follow suit and admit that they also got it wrong on banking. I hoped he would admit that it was Labour’s changes to banking regulation that led to the world’s largest banking bail-out—changes that meant that when the alarm bells were ringing, no one was listening. The Bank of England was completely powerless to act. I hoped that the hon. Gentleman would also admit that City bonuses rocketed under Labour’s 13 years in office, while Labour Cabinet Ministers were telling the world that they were

“intensely relaxed about people getting filthy rich”

and they were handing out gongs to the likes of Fred Goodwin. City bonuses were surging to all-time highs, rising year after year, more than tripling over five years and peaking in 2008 at over £12 billion. Instead, this is a new year and the same old Labour.

[Michael Connarty]

rose—

[Sajid Javid]

I will give way to the hon. Gentleman; I might be about to hear an apology, so I will listen carefully.

[Michael Connarty]

I think anyone who reads the transcript deserves an apology from the Minister, who forgot to mention that the relaxation of banking controls started with Mrs Thatcher and the Conservative Government. He forgot to tell people on the record that when people like me on the Opposition Benches were urging constraint—I am an economist—the Minister’s right hon. and hon. Friends were calling for fewer controls and a lighter touch with the banks, as was the SNP in Scotland.

[Sajid Javid]

I think the hon. Gentleman has a challenged memory of events. I am sad to see that he had an opportunity to apologise, but did not take it.

Let us look at the facts. At the time of the changes Labour was making to the financial sector, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) warned the then Government in November 1997:

“The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”—[Official Report, 11 November 1997; Vol. 300, c. 732.]

Let me share another quote, in this case from the current shadow Chancellor from a speech he made as City Minister in 2006:

“Nothing should be done to put at risk a light-touch, risk-based regulatory regime.”

What we are hearing from Labour is the same old headline-chasing nonsense that we have come to expect and no answers at all to the problems they created.

I agree with the hon. Member for Nottingham East on one thing: public confidence in the banking system and in bankers is still low, just as—let us be honest—public confidence in the political system and the people in this Chamber is still low. That is precisely because, five years ago, partly as a result of the irresponsible decision of some bankers, but largely as a result of the policies of the then Labour Government, our country found itself in a huge mess. When trust is lost on that scale, it is not won back overnight.

[Steve Brine (Winchester) (Con)]

Perhaps the Minister can answer this question because the shadow Minister did not give way to me. The shadow Minister said that restricting the number of branches that banks can hold will not close branches, but of course it will. What does he think closing branches will do to people’s faith and belief in the banking sector. I have three branches of Barclays in my constituency—in Chandlers Ford, Alresford and Winchester—so if, God forbid, a Labour Government were ever elected, which one would they propose to close?

[Sajid Javid]

My hon. Friend highlights the fact that the Labour party has no ideas about how to increase competition in the banking sector, and any kind of approach that includes arbitrary quotas will clearly lead to the sort of problems that my hon. Friend outlines.

[Harriett Baldwin (West Worcestershire) (Con)]

It is reported today that the Opposition are proposing specific market shares on specific banks. Has that ever been tried in any other country?

[Sajid Javid]

My hon. Friend is right. It is reported that, this Friday, the Leader of the Opposition will make a speech on the economy and attempt to set out an economic policy. I am afraid that his last such speech did not go very well. From what we know about this proposal—very little at this stage—I am not aware of any country in the developed world that has a similar approach, with the possible exception of the former Soviet Union, which adopted a similar approach to its banking sector.

[Lyn Brown (West Ham) (Lab)]

I am glad we are discussing history, because I am aware of the hon. Gentleman’s own history as a banker. I wonder what his remuneration and bonuses were back in those days. Given his history and the fact that he should be saying sorry—I presume—will he tell us whether he believes that bankers deserve a bonus in excess of 100% of their salary. Does he think so and does the Chancellor think so?

[Sajid Javid]

The hon. Lady seems to suggest that it is best to have Ministers who have no experience or knowledge in the areas for which they are responsible. We saw that under the previous Government, and look what happened. To win back the confidence of the British people, we need a long-term economic plan for recovery.

[Chris Leslie]

I would not want the Minister unintentionally to miss answering the important question that my hon. Friend the Member for West Ham (Lyn Brown) asked. For the record, do the Government believe that the senior bankers at the Royal Bank of Scotland should or should not be allowed to pay bonuses of over 100% of pay?

[Sajid Javid]

I will come to that later in my speech when I will deal with some of the issues that the hon. Gentleman raised.

Bringing back confidence to the economy will of course mean dealing with the banking sector to make it more stable, more resilient and more efficient. That is exactly what this Government have been doing for the last three years.

[Mr MacNeil]

Does the Minister agree that, as with the debate on the bedroom tax before Christmas, this debate is really one about the symptoms of inequality in our society. Since the 1970s, we have seen 80% of the gains in productivity going to the top 1%—an inequality level roughly equivalent to that of the 1920s. Governments all over Europe and in the United States are not getting to grips with inequality and the hampering of life chances that it is causing. What does the Minister think should happen? The bankers should not receive the bonuses they are getting and people should not have their life chances halted by the bedroom tax. Are this Government going to do anything serious on this issue?

--- Later in debate ---

[Sajid Javid]

The hon. Gentleman will know that inequality surged under the previous Government and has come down under this Government. In fact, the rich pay a higher proportion of tax than they have ever paid, with the top 1% of earners paying almost 30% of income tax for the first time and the top 5% paying almost half of the total income tax take. The Government are proud of making sure that the rich make a fair contribution to public finances.

[Jesse Norman]

My hon. Friend is making an extremely powerful case, but may I remind him of the central fact of the past 15 years? The banks had the same level of leverage for 40 years, until 2007, after which it went up by two and a half times. It was that explosion of leverage, under Labour, that destroyed the banking system both in this country and internationally.

[Sajid Javid]

As always, my hon. Friend is spot on. Because of the changes that Labour made in the regulatory system, no one knew what was going on, and if they did, they were absolutely powerless to act, especially those in the Bank of England. That is the legacy of the last Government.

Let me now say something that the Labour party seems to be scared of saying. We need well-run successful banks in this country. We need the services that they provide. We need the loans that they give to small businesses, and the mortgages that they offer to home owners. We need the jobs that they produce—more than 450,000 throughout this country, and more than two thirds of those are outside London. We, as a Government, also need the huge taxes that the financial sector and its employees pay—some £60 billion last year—so that we can run our schools and hospitals.

[Dr Eilidh Whiteford (Banff and Buchan) (SNP)]

Small businesses have been among the biggest victims of the financial crisis, because banks have stopped lending to them. I share some of the Minister’s scepticism about the advantages of shutting bank branches, which may indeed only harm banking and access to financial services in rural areas, but I nevertheless think that the Government could be doing a great deal more to ensure that the banks lend more to small businesses on fairer terms. What will the Minister do about that?

[Sajid Javid]

I agree with the hon. Lady that businesses rely on the banks for the lending that they need. The action that we have already taken through, for example, the funding for lending scheme has ensured that the banking sector has had more money at lower rates to on-lend to small businesses and, indeed, households. We also recently announced a consultation on collecting small and medium-sized enterprises credit lending data, which will help to spur further competition in that sector.

[Ian Lucas]

The Minister is endorsing a noble cause in recommending support for small business and for manufacturing in particular, but given that manufacturing accounts for 10% of the economy, why does only 2.6% of bank debt stock result from lending to it? Why does the Minister not do something about that?

[Sajid Javid]

Part of the answer might be that manufacturing was decimated under the last Government. Its share of the economy fell from about 17% to the 10% to which the hon. Gentleman referred, and, of course, lending fell with it. If the hon. Gentleman were honest and recognised the damage that his party did to the manufacturing sector, perhaps what he says would be taken more seriously.

We need a more stable, resilient, efficient banking sector, and it is on that requirement that we have focused our reforms. As Members will know, back in June 2010 my right hon. Friend the Chancellor announced the establishment of an Independent Commission on Banking, chaired by Sir John Vickers, to explore how the sector should be reformed in the wake of the financial crisis. Last year the House passed the Financial Services (Banking Reform) Act 2013, which has enabled us to implement the commission’s recommendations. The changes will mean that banks must ring-fence the deposits of individuals and small businesses, so that everyday banking can be separated from volatile investment banking.

As all Members, and, indeed. all members of the public will know, the financial crisis saw taxpayers bailing out the banks that got into trouble, but we have taken steps to ensure that that will not be repeated. Our banking reform Act introduces a bail-in tool, as a result of which shareholders and creditors, not taxpayers, will be first in line to bear the costs of future bank failures.

[Chris Williamson]

I think that the Minister should admit that the Government have watered down the Vickers commission. Will he now come clean with the House, and tell us that that is what they have done?

[Sajid Javid]

That is exactly what we have not done. We have accepted the central recommendations of the Vickers commission.

We have not just been working to prevent a repeat of the crisis. Many Members on both sides of the House have been rightly appalled by the revelations of poor behaviour on the part of some in the industry, such as payment protection insurance, interest rate swap mis-selling, and LIBOR manipulation. Those practices were going on right under the noses of Labour Treasury Ministers, including the current shadow Chancellor, who did nothing at all to stop it.

[Guy Opperman]

My hon. Friend attended the local banking conference that I organised shortly before Christmas. Does he agree that “challenger banks” such as Aldermore, Virgin, Metro, and even the Bank of Salford—which is run by Labour and Unite, and is excellent—are a key element in the greater competition that we need in order to reinvent the banking market in this country?

[Sajid Javid]

My hon. Friend’s intervention gives me an opportunity to commend him for his initiative to promote regional banks. He is absolutely right in his assessment.

We also set up the Parliamentary Commission on Banking Standards, chaired by my hon. Friend the Member for Chichester (Mr Tyrie). As a result of the commission’s work, we amended the banking reform Act in order to implement its recommendations on holding bankers to account more effectively for poor behaviour. If a bank were in future to enter resolution because of reckless mismanagement, senior bankers could face a prison term of up to seven years.

[Chi Onwurah (Newcastle upon Tyne Central) (Lab)]

The Minister has spoken in strong terms about the experience of the financial services. Does he accept that the unique way in which bonuses drive short-term risk taking led to the scandals that we witnessed, and, indeed, to the financial crisis? Does he really believe that the reward for short-term risk taking behaviour to meet bonus targets should be more than 100% of the reward that someone receives for doing his or her own job?

[Sajid Javid]

What I do accept is that badly structured and badly designed bonuses will lead to bad behaviour. I am sure that the hon. Lady herself accepts that if an arbitrary cap is imposed on bonuses and it leads to an increase in fixed pay but no overall fall in overall pay, the bad behaviour will actually worsen.

We are putting our house in order. We are learning from the huge mistakes of the last Government, and are ensuring that we create a country in which the public can trust that their money is secure and our banking sector can flourish.

[Dr Coffey]

My hon. Friend is making great progress in the debate. Will he also mention the fact that taxpayers are now benefiting from the fines that have been levied on the industry, and that the Chancellor has extended the arrangement to ensure that military charities and others benefit?

[Sajid Javid]

I am glad that my hon. Friend has referred to that. It was the right thing to do, and it demonstrates that we can take some of the money that is coming from the banking sector and use it for good causes.

[Sir Andrew Stunell (Hazel Grove) (LD)]

My hon. Friend mentioned the shadow Chancellor’s failure to tackle the abuses that were taking place in the banking system. Will he confirm that the shadow Chancellor encouraged the development of a less regulated environment, and that that contributed to the problems that we now face?

[Sajid Javid]

My right hon. Friend has made an important point. I have already quoted what the shadow Chancellor said in 2006, when he was the City Minister, but those were not just his views; they were also the views of his boss, the then Prime Minister, the man who did more damage to our financial sector than any other. This is what the last Labour Prime Minister said in his 2007 Mansion House speech:

“I congratulate you Lord Mayor and the City of London on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London.”

Shortly afterwards, he carried out the world’s largest banking bail-out.

[Kwasi Kwarteng]

Will the Minister share with the House his thoughts about which member of the last Government recommended that Fred Goodwin should receive a knighthood as an honour from the Government?

[Sajid Javid]

I have to tell my hon. Friend that I am not sure who it was, but I know that the knighthood was widely supported by members of the then Government, which shows what their priorities were.

[Jesse Norman]

Was it not the previous Prime Minister who said, “We will do for Great Britain what we have done for the City of London”, and is it not a disaster that he said and did that?

[Sajid Javid]

Again, my hon. Friend makes an excellent point.

[Huw Irranca-Davies]

The Minister is understandably making a case for the financial sector, as he also should for manufacturing and all other sectors. What my constituents fail to understand is why, when public and private sector employees over the last few years and now have accepted pay restraint and real-terms squeezes on their earnings, and we in this House, including Ministers, are facing public demands to accept pay restraint on our pay and conditions as well, top bankers are immune from those constraints.

[Sajid Javid]

I will come on to that topic shortly and share with the hon. Gentleman some numbers that show what has happened to the pay of top bankers.

[Chris Leslie]

Do it now.

[Sajid Javid]

I will come on to it. The hon. Gentleman raised the two issues of banking competition and remuneration and I want to cover them.

I was very pleased that the hon. Gentleman talked passionately about the importance of competition. It is a shame that the previous Government did absolutely nothing to encourage it for 13 years. It is worth reminding the Chamber that when the last Government took office there were at least 10 major UK banks, but over their 13 years of incompetence they continued to permit and manage banking takeovers which shrank the number of market players and left the big banks to dominate.

Greater competition in banking is good for people and businesses and the economy. That is why we are implementing the recommendations of the Independent Commission on Banking for improving competition; indeed, we are going further. We are addressing the issue of too big to fail through ring-fencing, meaning that big banks will no longer get a competitive advantage from this implicit guarantee. We have put competition at the heart of financial services regulation by giving the Financial Conduct Authority a formal competition objective as well as making provision for a secondary competition objective for the Prudential Regulation Authority. We are also making sure that the FCA has the right tools to get the job done on competition by giving it concurrent competition powers.

While competition dropped under Labour’s stewardship, it is increasing under ours. As we have heard, since the crisis Metro Bank, Virgin Money and the new TSB brand have entered the market. Indeed, RBS also announced recently that it has teamed up with investors, including the Church Commissioners, to launch a 300-branch challenger bank, Williams & Glyn’s, focused on small businesses.

In fact our financial regulators are currently in talks with 22 potential new bank applicants because of the steps we have taken to promote banking competition. On top of that we are creating a new payment systems regulator so that smaller banks and others can access the payment systems fairly and more transparently, and we have secured a seven-day current account switching service to make sure that people have the confidence to change accounts. There are further innovations coming on cheque imaging and mobile payments. This is a Government who are bringing competition back to banking.

On bankers’ pay, we understand the depth of public anger but we will not take any lectures from the Labour party. While bonuses continued to increase year after year on its watch, even after 2007, they are now down 85% from their peak in 2008. Since 2010 we have been leading the way on tackling unacceptable pay practices. First, we have introduced rules that require significant parts of bonuses to be deferred and paid in shares, which means there is now a much better alignment of pay with risk and performance. While we make sure that only good performance can be rewarded, we are also making sure that poor performance can be punished by introducing measures that mean firms have clawback policies to reduce or revoke pay retrospectively.

Those steps are having an impact. The 2012 bonus pools at almost all major banks have declined massively since this Government came to office. The truth is that while Labour talks about clamping down, this Government get on with the job.

[Emily Thornberry]

If the public are watching this debate, they may well want to ask the question I shall ask now, and I hope we get an answer. Do the Government have a view on the maximum amount a banker should be given by way of either a salary or a bonus, and does the Minister agree with the bonuses currently being given out by Chase Manhattan bank?

[Sajid Javid]

First, I am not sure even whether the Opposition have a view on what the right level of bonuses is. Also, I am not sure about Chase Manhattan bank because it does not exist any more as far as I know.

[Kwasi Kwarteng]

Will my hon. Friend explain to the House what the last Government said about bonus levels, if they said anything about them, and the gratitude with which they spent bankers’ tax receipts?

[Sajid Javid]

My hon. Friend again rightly points out that the previous Government did nothing when bonuses were reaching a record high. Even after they had carried out the world’s largest bank bail-out, pumping in over £40 billion of taxpayers’ money, they still allowed bonuses the next year to reach an all-time peak of almost £12 billion. That is their legacy.

[Chris Leslie]

We now come to the point that the Minister has twice said he would address later on, so will he address it now? Will the Chancellor of the Exchequer be using his power as a shareholder in the Royal Bank of Scotland to allow its senior bankers to exceed the level of bonus beyond 100% of pay: yes or no?

[Sajid Javid]

That is exactly what I was coming on to next. It is important for taxpayers that any proposals by RBS are considered fully and properly. The Government have not yet received a proposal from RBS on bonuses; once we do, we shall be in a position to judge whether it represents value for taxpayers.

The Government do not support the EU cap on bonuses. The Government have fought against it and we are currently challenging it in court. The bonus cap creates perverse incentives by removing the link to performance. It is damaging to financial stability; it is opposed by the PRA and the Bank of England; and, indeed, the cross-party Parliamentary Commission on Banking Standards rejected crude bonus caps as unworkable.

Let me turn finally to the bank levy.

[Chris Williamson]

Will the Minister give way?

[Andrew Gwynne]

Will the Minister give way?

[Sajid Javid]

No, I have given way enough and others want to speak.

If we need an example of how little the Opposition understand the banking sector, we only have to look at their policies on the bank levy, a levy they turn to every time they want to fund a policy announcement. They seem to believe that the bank levy could raise enough money to pay for capital spending, a youth jobs guarantee, regional growth funding, housing, child care and community services. On top of that, they think they can cut the deficit with it, reverse VAT increases, reverse child benefit savings and reverse tax credit savings—in total over £30 billion of commitments. Only the economically illiterate would think that with £1 raised in tax, we could have £10 of spending power.

It is no wonder that Labour gave us the deepest recession in 100 years, the largest post-war budget deficit and the world’s largest banking bail-out. In short, whereas their old banking policy was to stick their heads in the sand, their new banking policy is to stick their heads in the clouds, so frankly I do not think they are in a position to tell this Government what to do. Instead we shall work to continue to make this sector more stable, more resilient and more efficient, and we shall continue to help our banks to help our country get back to our best. I urge the House to reject this motion.

[Several hon. Members]

rose—

Investment Bank Special Administration Regulations 2011

Sajid Javid Excerpts

Tuesday 14th January 2014 Written Statements

[The Financial Secretary to the Treasury (Sajid Javid)]

Today, HM Treasury is laying before Parliament the final part of Mr Peter Bloxham’s independent review of the Investment Bank Special Administration Regulations 2011. This report follows on from the interim report laid before Parliament on 23 April 2013.

The special administration regime came into effect in February 2011, following provisions made under the Banking Act 2009 to offer a modified insolvency procedure to investment firms. In accordance with section 236 of the Act, the Treasury were required to review the effect of the regulations within two years of the date that these powers came into force. Mr Peter Bloxham was appointed on 28 November 2012, and reported to the Treasury on 7 February to begin the review.

The Act required a review of the Investment Bank special administration regulations to consider if the regulations are achieving their specified objectives. These specified objectives are:

identifying, protecting, and facilitating the return of client assets;

protecting creditors’ rights;

ensuring certainty for investment banks, creditors, clients, liquidators and administrators;

minimising the disruption of business and markets; and

maximising the efficiency and effectiveness of the financial services industry in the United Kingdom.

Mr Bloxham’s terms of reference set out a two-stage process. The first stage, denoted by his interim report, asked him to address each of the objectives above in turn to determine whether they had been achieved. The second stage asked Peter Bloxham to consider further possible changes to the special administration regime that may improve the operation of the regime, and consider wider changes that may make the regime more robust. The final report being laid before Parliament today represents the completion of the second stage.

After completion of both stages of the terms of reference, Mr Bloxham concludes that the special administration regime stands as a useful provision under the Act and should therefore be kept, subject to change. Mr Bloxham makes extensive and considered recommendations for possible improvements to the regime, which are summarised within the final report.

I am personally very grateful to Mr Bloxham for all his work on this review over the last year, and to those who consulted with him.

The Treasury agrees with Mr Bloxham’s recommendation to retain the investment firm special administration regime. The Treasury also recognises that amendments can be made to the regime to allow it better to fulfil its specific objectives. The Treasury will now consider the rest of Mr Bloxham’s recommendations in full and take suitable steps to enhance the regime in due course.

Insurance Growth Action Plan

Sajid Javid Excerpts

Thursday 19th December 2013 Written Statements

[The Financial Secretary to the Treasury (Sajid Javid)]

The insurance industry is a vital asset for the UK. It employs over 300,000 people across the country, attracts global capital, serves the needs of consumers, and is a major British exporter. This Government are therefore committed to making the UK one of the most competitive places in the world for insurance.

The Government are today launching a UK insurance growth action plan, which sets out five areas where action will be taken by Government and industry, working with other partners, to strengthen the sector’s contribution to economic growth and work together to enhance the UK’s position as a global leader in a truly global industry.

The UK industry in overseas markets

The Government will develop a co-ordinated, targeted approach to promotional and other activity, focusing on five key markets—Brazil, China, India, Indonesia and Turkey—including establishing a programme of senior Government and private sector visits, as well as prioritising financial services and insurance within upcoming free trade negotiations.

The UK as a location for insurers

The Government will develop a programme to target overseas insurers to move their domicile to the UK, including developing a marketing campaign setting out the business case for locating in the UK, and the regulatory authorities have committed to streamlining authorisations processes for prospective insurance applicants.

Insurers as long-term investors in the UK

Building on the successful outcome the Government negotiated on the solvency II directive, the following insurers—Aviva, Friends Life, Legal and General, Prudential, Scottish Widows, and Standard Life will work alongside partners with the aim of delivering at least £25 billion of investment in UK infrastructure in the next five years.

Serving UK insurance customers

The Government want to see an insurance sector that helps customers manage risk, puts its customers first—by harnessing the power of new technology and creating products that meet their needs—and has their trust and confidence. The Government ask that the industry commits to ensuring consumers are able to access the insurance products they need with information that enables them to make informed choices.

Skills and diversity in insurance

The Government’s aim is to see an insurance work force in the UK representative of the customers it serves and well equipped to meet their needs. To this end, the Government welcome industry’s proposals to: establish a gateway project to help people find apprenticeships and graduate training places within insurance; double the number of technical apprentices over the next five years; and strengthen the pipeline of senior female executives in the insurance industry.

Copies of the UK insurance growth action plan will be available on the gov.uk website and have been deposited in the Libraries of both Houses.

Tomlinson Report

Sajid Javid Excerpts

Thursday 19th December 2013 Ministerial Corrections

[Sajid Javid]

I agree with the gist of the hon. Lady’s comments, but I am not sure what she means by foot dragging. The report was published on 22 October. On 23 October, it was given to the FCA, and, within days, the FCA announced that it would investigate, so it would be wrong to accuse the FCA or anyone else of foot dragging, but she is right to suggest that we must stay on top of this and make sure it is handled in a timely way.

[Official Report, 17 December 2013, Vol. 572, c. 166WH.]

Letter of correction from Sajid Javid:

An error has been identified in the response provided during the Westminster Hall debate on the Tomlinson report.

The correct response should have been:

[Sajid Javid]

I agree with the gist of the hon. Lady’s comments, but I am not sure what she means by foot dragging. The report was submitted to BIS on 22 October. On 23 October, it was given to the FCA, and, within days, the FCA announced that it would investigate, so it would be wrong to accuse the FCA or anyone else of foot dragging, but she is right to suggest that we must stay on top of this and make sure it is handled in a timely way.

Crowdfunding and the FCA

Sajid Javid Excerpts

Wednesday 18th December 2013 Westminster Hall

[The Financial Secretary to the Treasury (Sajid Javid)]

Welcome to the Chair, Mr Chope. I, too, congratulate the hon. Member for Huddersfield (Mr Sheerman) on securing this debate, and on the important work that he does as chair of the Westminster crowdfunding forum. I share his enthusiasm for crowdfunding and the peer-to-peer alternative funding platforms that he mentioned. I cannot think of a single thing he said that I disagree with; it is quite rare for me to say that to him. I say that not in a spirit of good will because it is close to Christmas, but because I thought he talked a lot of common sense. Clearly, he knows a lot about the issue, and I hope that he stays involved in it for a long time to come—it sounds like he will—because I think he can add great value to this area.

Small and medium-sized enterprises are a vital part of the UK economy and contribute significantly to economic growth, as we have just heard. In particular, access to finance is important to ensure that businesses reach their full potential. At times when there are greater constraints on credit, alternative finance markets, including crowdfunding, become even more crucial. That is why crowdfunding, though it may be a relatively new industry, is growing quickly.

[Meg Hillier]

May I draw the Minister’s attention to a donation-based crowdfunded organisation called Turning Earth in my constituency? It raised more than £13,000 through Crowdfunder and sells work spaces and classes in pottery. It says that, critically, the money levers in other money, because there is confidence in the community that the organisation will work. Does that not do something to tackle the asymmetry of banks, which are frankly letting down small businesses, and the challenge of funding small businesses?

[Sajid Javid]

The hon. Lady is right. There are examples of banks letting down small businesses. That shows the power of crowdfunding. I had not heard of Turning Earth before, but I am glad that she has brought it to my attention. I will take more interest in it now. If I heard her correctly, she mentioned that it has already raised £13 million—[Interruption.] Oh, £13,000. Well, that is an excellent start. There is great growth potential in that number.

Over the past two years, in total, more than £700 million has been lent through peer-to-peer platforms. There has been a 600% increase in equity platforms between 2012 and 2013, raising approximately £28 million this year. There has been significant growth in debt-based security platforms of more than 370% in a year, raising almost £26 million over the past three years.

The crowdfunding market has huge potential to expand much further, and the UK has a strong global position in crowdfunding investment. Like the hon. Member for Huddersfield, I am keen to ensure that we maintain and grow that position. As such, the Government have taken a number of steps to support this burgeoning industry. We have invested £30 million in peer-to-peer platforms through the business finance partnership: £20 million has been provided to Funding Circle, which facilitates loans to small businesses, and £10 million has been provided to Zopa, which has facilitated £432 million of lending since its launch in 2005.

Our generous tax reliefs, granted through the seed enterprise investment scheme, are widely used by equity platforms. Some platforms have reported that 80% of investors are using that scheme, which provides an important incentive for investors to invest in smaller, perhaps riskier businesses, allowing them to grow.

[Meg Hillier]

One of the FCA’s considerations is separating the sector into debt crowdfunding and equity crowdfunding. I represent Seedrs, which is based in Shoreditch and does a great deal of good work in this area. The sector is very diverse, so will the Minister comment on whether the Government desire to keep that diversity while ensuring that there is regulation, without making false divides and pigeonholing the diverse crowdfunding industry into the categories of debt, equity or, indeed, donations? Donations are not within the FCA’s remit at the moment.

--- Later in debate ---

[Sajid Javid]

I thank the hon. Lady for her intervention. I am just about to address regulation; that might help to answer her question. This is also a good opportunity to pay credit to Shoreditch as an area that is heavily involved in crowdfunding. It is a growing space, and I would like to see it continue to grow.

We listened to the peer-to-peer side of the industry when it asked about regulation. We are working with the FCA to regulate that side of the industry and develop a proportionate framework. The framework has been well received by the peer-to-peer industry. Although the equity and debt security side of the crowdfunding market is already captured by some regulation, it is keen for a more tailored framework. The platforms’ view is that regulation provides them with credibility and helps to attract investors. They actively lobbied the FCA for inclusion in the consultation, and we supported them to achieve that goal.

Although we recognise the importance of regulation for the industry at the request of the platforms, it is essential that regulation be proportionate, as all hon. Members have said, if we are to ensure that it does not stifle the market’s growth. The Government therefore continue to work with the platforms and the FCA to ensure that the optimum framework is implemented—a framework that satisfies the industry, provides increased certainty to investors, and enables the crowdfunding industry to continue on its upward trajectory.

Before I close, I would like to say that having proportionate regulation is also key to ensuring that there are no unnecessary barriers to entering the industry. One of the industry’s successes over the past few years has been the very light barriers to entry. The Government and the regulator are keen to ensure that we have regulation that is proportionate enough to achieve the objective of protecting consumers, both borrowers and lenders, without creating barriers to entry that make the industry grow at a slower pace or stifle growth.

[Meg Hillier]

I welcome the Minister’s comments, because some years ago I called for regulation, but not to such an extent that it might put people off. Perhaps he can write to us if he does not have this information. NANA in my constituency is a café run by older women that was funded through donations on Kickstarter. Nana is located in former toilets on Chatsworth road in Homerton, and people fund it by buying a tea towel or donating a cheque. At the moment, the FCA is not considering the regulation of that sector. Does the Minister have any information on whether regulation of the donation sector will at any point be considered by the FCA or the Government?

[Sajid Javid]

As the hon. Lady kindly suggests, I will write to her and take a closer look at what plans the FCA does or does not have.

[Mr Sheerman]

Will the Minister do some missionary work with his colleagues? This is a cross-departmental issue, and one does worry. The Secretary of State for Business, Innovation and Skills is well apprised of the issue, and we have met him. We want a better relationship with the Treasury team, because people are having to think about this business of investing only 10% of their portfolio. Most people who invest, or who will potentially invest, in crowdfunding would have no idea what a portfolio was if it jumped up and bit them. Every time I complain about “sophisticated” investors, the FCA and other people say, “Well, it’s part of the literature.” It is demeaning to say that people can do something only if they have a certain net worth and if they are a “sophisticated” investor. I do not mind “experienced” or another term, but “sophisticated” upsets many people in crowdfunding.

[Sajid Javid]

I share the hon. Gentleman’s concerns, and if there are too many barriers to investment, it could stifle growth. I have relayed my concerns to the FCA. As we have heard, one of the consultations has just closed, and the other is about to close. I believe that we will get a report from the FCA by February. He makes an important point.

[Mr Sheerman]

Last week, here in Parliament, we hosted the founder of Indiegogo, which is a pioneer. Is it not interesting that bright, talented women are coming into crowdfunding because there are fewer barriers? Many sites are run by people such as Karen Darby. The sites are successfully changing the world, but they are also giving women an opportunity to use their talent, when, in some areas, they do not yet have that opportunity.

[Sajid Javid]

The hon. Gentleman again points out one of the successes of this growing industry. We heard from my hon. Friend the Member for Cambridge (Dr Huppert) that more young people are involved in the industry and, in some cases, are perhaps finding it an easier platform than banks for raising money.

I congratulate the hon. Member for Huddersfield again on securing this debate. I reassure him and all other hon. Members that we would like to encourage the growth of this industry.

Banking Reform

Sajid Javid Excerpts

Wednesday 18th December 2013 Written Statements

[The Financial Secretary to the Treasury (Sajid Javid)]

In July 2013 the Government published a consultation, “Banking reform: draft secondary legislation”, which invited comments on four draft pieces of secondary legislation proposed under the Financial Services (Banking Reform) Bill. The consultation closed on 9 October 2013.

The consultation set out key details on the ring fence, including the scope of the ring fence, the prohibitions on ring-fenced banks’ activities, and on the framework for applying loss absorbency requirements to systemic banks. It also set out provisions to enable expenses incurred by the Treasury as a result of UK participation in international organisations concerned with financial stability or financial services to be reclaimed from the financial services industry.

The Government are today publishing a summary of the responses they received to the consultation. The summary can be found on the Government website. The Government will take into account responses to the consultation document when producing revised and final versions of the secondary legislation.

I am placing copies of this document in the Libraries of both Houses.

Tomlinson Report

Sajid Javid Excerpts

Tuesday 17th December 2013 Westminster Hall

[The Financial Secretary to the Treasury (Sajid Javid)]

I will start by welcoming you to the Chair, Sir Roger, and congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this important debate. I will try to address the concerns raised, and I thank all hon. Members for their contributions in this debate.

SMEs are a vital part of the UK economy; they contribute significantly to economic growth. Access to finance is important for funding investment, ensuring businesses reach their full potential, and for facilitating new business start-ups. As hon. Members who have contributed to today’s debate have made clear, it is essential that our banking system works in the interests of SMEs and treats them fairly.

I will turn specifically to the report. Lawrence Tomlinson is one of BIS’s two entrepreneurs in residence. His appointment was made by BIS officials, not by Ministers, following an open competition for which there were more than 200 applicants. Mr Tomlinson is independent of BIS, but, as an entrepreneur in residence, he has the scope to explore and raise matters that he regards as important to SMEs. His report was prepared in that context, so it was not commissioned by the Department or by Ministers. It was a personal report by Mr Tomlinson; it is not a Government report.

I will deal with the questions asked by the hon. Member for Chesterfield (Toby Perkins), which were all in the same vein. He referred to the report coming from the heart of Government, so it is worth restating that this is a personal report by Mr Tomlinson. It is not a Government report, so Mr Tomlinson was free to publish whatever he saw fit. No Ministers or officials were involved. What was eventually published by Mr Tomlinson was entirely his own choice. It was also his own choice whether to involve the banks that he refers to in the report and what resources he wanted to use.

[Toby Perkins]

The hon. Member for Aberconwy referred a few moments ago to the smell test. I do not know whether the Minister is attempting to distance himself from the report, but anyone applying the smell test would say that an entrepreneur in residence at the heart of BIS was the person selected by BIS officials to do a report that was promoted and welcomed by the Secretary of State for Business, Innovation and Skills. It does not feel independent.

[Sajid Javid]

I disagree with the hon. Gentleman. The value of the report is that it is entirely independent. It was done by Mr Tomlinson in a personal capacity. He was free to look at any of the issues that he saw as important to the SME sector. I will look at the important issues he has raised, but at this stage I want to make it clear that it was a personal report by Mr Tomlinson and not a Government report. Once that is taken into account, the answers to the questions that the hon. Gentleman asked become clear.

The allegations made in Mr Tomlinson’s report are deeply concerning, and they have raised questions as to whether banks—particularly RBS—are treating their customers appropriately. We expect all banks to act with integrity across all the business activities that they engage in. Separately, as we have heard, the new management of RBS also commissioned Sir Andrew Large to conduct an independent review to examine RBS’s support to SMEs and the decisions that they make on SME lending. Following that review, a report was published on 25 November, and RBS has committed to implement its recommendations in full.

The reports, which were not Government reports, contained some very serious allegations, as we have heard from various hon. Members, particularly from my hon. Friend the Member for Aberconwy. It is now the responsibility of the Financial Conduct Authority to undertake investigations into allegations surrounding RBS’s lending practices and treatment of small businesses.

The FCA has now considered both reports. It has notified RBS that an independent skilled person will be appointed in accordance with the FCA power under section 166 of the Financial Services and Markets Act 2000 to review the allegations made against RBS.

[Natascha Engel]

Is there a time limit on the investigations being launched by the FCA? Foot dragging is a really serious issue, and every single day means more money lost to small businesses, so is there a specific time frame to which that person is working?

[Sajid Javid]

First, the FCA has yet to appoint the skilled person. I am not aware of a specific time limit, but it is fair to say that the FCA understands the urgency of the situation and the need to look into the allegations as quickly as possible. However, the hon. Lady will agree that it should take whatever time is necessary to get to the bottom of such serious allegations. The FCA will need to be satisfied that the skilled person appointed to review the allegations is sufficiently independent to carry out the work.

[Natascha Engel]

Will the Minister give way?

[Sajid Javid]

I will in a second. If the findings of the review reveal issues that come within the FCA’s remit, it can consider further regulatory action.

[Natascha Engel]

I am sorry to press this, but one of the very serious issues is the foot dragging, and the more time that is taken, even if it is under the guise of making sure that every i is dotted and every t is crossed, means more small and medium-sized businesses are unnecessarily going under, so the time pressure is really serious. I want to re-emphasise that the FCA must be put under pressure by the Treasury to ensure that the review is done as quickly as possible.

[Sajid Javid]

I agree with the gist of the hon. Lady’s comments, but I am not sure what she means by foot dragging. The report was published on 22 October. On 23 October, it was given to the FCA, and, within days, the FCA announced that it would investigate, so it would be wrong to accuse the FCA or anyone else of foot dragging, but she is right to suggest that we must stay on top of this and make sure it is handled in a timely way.[Official Report, 19 December 2013, Vol. 572, c. 7MC.]

The hon. Lady and other hon. Members mentioned the allegations of fraud in the report. They will understand it is not for Ministers to determine whether criminal activity by any institution or individual has or has not taken place. That is something that the courts and authorities must look into. If she or other hon. Members have been contacted by businesses with concerns, it is timely to remind her that micro-enterprises can go to the Financial Ombudsman Service with any such concerns. Businesses can also raise concerns directly with the FCA, which will investigate if it is appropriate, and of course any organisation is free to go to the police with any concerns about criminal activity. The police may involve other authorities such as the Serious Fraud Office.

[Mark Durkan (Foyle) (SDLP)]

In respect of some of the issues that hon. Members may be hearing about, as the Minister is aware, the arm of RBS operating in Northern Ireland is Ulster bank. Customers of that bank talked to Tomlinson, and other issues have arisen since the report. Will the skilled person appointed by the FCA look specifically at questions about the practices that seem to have been instilled into Ulster bank as well?

[Sajid Javid]

My understanding is that the FCA’s investigation through the skilled person will examine all allegations in the report and some similar allegations in Sir Andrew Large’s report.

I also mention, as my hon. Friend did, the Clifford Chance report commissioned by RBS and described by RBS as independent. I note my hon. Friend’s concerns about Clifford Chance; I listened carefully to what he said. Although it is for RBS to decide whom to appoint, I will ensure that his concerns are conveyed to RBS.

The hon. Member for Dumfries and Galloway (Mr Brown) discussed the future direction of RBS. He and others will be aware that on 1 November this year, the new management of RBS set out a new direction for the bank, which will lead RBS to boost the British economy rather than burden it. It will also enable RBS to focus on its core British business of supporting British families and companies. Ross McEwan, RBS’s new chief executive, has committed to improving RBS’s lending performance across the UK and announced the ambitious goal of becoming the No. 1 bank for small businesses and enterprises throughout the UK, as measured by a newly created independent survey to be run by the Federation of Small Businesses and the British Chambers of Commerce.

The Tomlinson report also recommended that state-owned banks be split into small banks focusing solely on retail and commercial lending as a means of improving competition in the banking sector. The Government are already committed to greater competition and diversity in the UK banking sector both locally and nationally, which is why we asked the Independent Commission on Banking to investigate competition issues in the UK banking sector as part of its work.

The ICB uncovered a number of issues, and we are taking forward its recommendations in the Banking Reform Bill and through other legislation. We are removing the competitive advantage that big banks get from the “too big to fail” system by introducing ring-fencing in the Bill. We have also secured a new seven-day switching service delivered by industry that will allow both consumers and SMEs to switch businesses accounts far more easily, and we have introduced a strong competition objective for the regulator, the FCA, to help it promote competition much more effectively.

The new regulators have already introduced big changes on the regulatory side to make it easier for new banks to enter the market, grow and compete with the large incumbent banks. We are also taking further action in the Banking Reform Bill by creating a new payments regulator to ensure that new and smaller banks have fair and transparent access to the payment system, and giving the Prudential Regulation Authority a secondary competition objective to strengthen its role in ensuring competitive banking markets. The Bill will also give the FCA further competition powers.

Hon. Members mentioned the future of Lloyds and RBS. At the national level, both RBS and Lloyds are in the process of divesting part of their UK banking businesses, creating new challenger banks. The Government have taken the first steps to return Lloyds to the private sector and are actively considering options for further share sales. The reintroduction of the TSB brand on the high street is great news for competition. That action is further evidence of the Government’s stated aim not to be a permanent investor in the UK banking sector.

The Government do not believe that there is a strong case for breaking up the core operations of any bank in which we have a stake. The cost of reorganisation would be attributable to the banks, and consequently to the taxpayer. The time required to execute such a reorganisation would also be lengthy, further delaying the Government’s ability to return the banks to private ownership.

Before I conclude, I turn to a couple of the other issues raised by hon. Members. My hon. Friend had concerns about insolvency, relating not just to the Tomlinson report but to the process more generally. His comments show how much he has researched the subject, so I take what he said seriously. He will know that the Department for Business, Innovation and Skills is the lead on insolvency issues, but I will ensure that my colleagues in BIS are aware of his concerns. Perhaps, if he finds it useful, I could arrange a meeting for him with the relevant Minister to discuss this important issue.

My hon. Friend will know, however, that insolvency procedures can be commenced only by a court order, and that the whole process is subject to supervision by courts. It is deliberately designed to ensure transparency, make the process legitimate and provide a forum for any disputes, as they often occur throughout such a fought process. I will take the issue forward for him and see whether more can be done to listen to his concerns.

[Toby Perkins]

I suspect that the extent to which the Minister has attempted to distance himself and the Government from the report speaks volumes. Does he believe that how BIS and the Business Secretary have handled the Tomlinson report and its impact on RBS’s performance is ultimately helpful to this Government’s future success, or does he think that it should have been handled differently?

[Sajid Javid]

I say again for the record—I hope that I have made it clear to the hon. Gentleman—that this is a personal report by the entrepreneur in residence at BIS. That has always been the Government’s position, and neither BIS Ministers, Treasury Ministers or any other Ministers have ever said anything different. Nevertheless, it is an important report. He will know that the entrepreneurs in residence initiative was started by this coalition Government in order to allow further analysis of what can be done to help the SME sector.

In that vein, we welcome the Tomlinson report, which is why we take its allegations seriously and why we are pleased that the FCA has acted quickly so far to consider them. This debate has shown how much parliamentary interest there is in the issue on behalf of our constituents, due to the number of small businesses in our constituencies that have come to us with similar concerns.

[Guto Bebb]

The hon. Member for Chesterfield (Toby Perkins) highlighted concerns about the fact that there was no advance consultation with RBS, but in his comments, Sir Andrew Large said that managers at RBS had very little understanding or scrutiny of the global restructuring group. In view of the fact that the report highlights concerns about the GRG, is it really a huge loss that consultation did not take place with a group of managers who did not know what was going on within the GRG, according to Sir Andrew Large?

[Sajid Javid]

My hon. Friend raises an important point. I hope that all that will be considered in the independent inquiries taking place.

I congratulate my hon. Friend once again on securing this important debate on issues about which he and many other Members feel strongly. Those issues will be seriously considered by the FCA, and further as required. It is important at this stage, though, to allow the FCA, as the conduct authority, to investigate the claims made in the Tomlinson report.

Terrorist Asset-Freezing etc. Act 2010

Sajid Javid Excerpts

Tuesday 17th December 2013 Written Statements

[The Financial Secretary to the Treasury (Sajid Javid)]

My noble friend the Commercial Secretary to the Treasury, Lord Deighton, has today made the following written ministerial statement:

Mr David Anderson QC has completed his third annual report as independent reviewer of terrorist asset-freezing legislation. The report covers a 12-month period of the operation of the Terrorist Asset-Freezing etc. Act 2010 and will be laid before Parliament today.

The Government are grateful to Mr Anderson for his thorough report and will consider carefully the recommendations he has made. The Government’s response to this report will be placed in the Libraries of both Houses on or before 11 February 2014.

Financial Services (Banking Reform) Bill

Sajid Javid Excerpts

Wednesday 11th December 2013 Commons Chamber

[The Financial Secretary to the Treasury (Sajid Javid)]

I beg to move, That this House disagrees with Lords amendment 41.

[Mr Speaker]

With this we may take Lords amendments 42 to 62, 160 and 174.

[Sajid Javid]

It is a pleasure to introduce these amendments. Much work has been undertaken in this House and in the other place since my predecessor closed the Second Reading debate in March. That work has improved the Bill. The Bill has expanded greatly in length and content since it left this House. In large part, the variety of new issues that it covers reflects the Government’s acceptance of the vast majority of the recommendations that were made by the Parliamentary Commission on Banking Standards, which published its final report after the Committee stage in the Commons.

I pay tribute to the members of the PCBS and especially those who sit in this House: my hon. Friend the Member for Chichester (Mr Tyrie), the right hon. Member for Wolverhampton South East (Mr McFadden), the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), the hon. Member for Edmonton (Mr Love) and my hon. Friend the Member for Wyre Forest (Mark Garnier). It was their hard work that led to the reports.

I will speak in support of the amendments that resulted from the work of the parliamentary commission, but ask the House to reject the Opposition amendment that was made in the other place, Lords amendment 41. I will begin by explaining how the former amendments will deliver the goal of improving the standards of conduct in banking.

The Parliamentary Commission on Banking Standards concluded that the current system for approving those who hold senior positions in banks, the approved persons regime, had failed. The commission’s central recommendation was the creation of a senior persons regime that applies to senior bankers. The Government accepted that recommendation. The amendments will deliver on the recommendation by putting in place a senior managers regime with five key features.

First, the regime will reverse the burden of proof so that senior bankers can be held to account for regulatory breaches in their area of responsibility, without the need to prove that they were personally involved in the wrongdoing. Secondly, there will be mandatory statements of responsibility for senior managers. Thirdly, the regulators will be able to make conduct rules for senior managers in banks. Fourthly, there will be provision for time-limited and conditional approvals of senior bankers. Fifthly, the financial services register, which is kept by the Financial Conduct Authority, will state who is a senior manager in a bank and give details of the regulatory action that has been taken against them. The amendments will provide a clear and effective system for raising standards and increasing accountability among the country’s senior bankers.

Lords amendment 53 introduces a certification regime for bank staff. That will apply to all staff below senior management level who have roles in which they could seriously harm the firm or its customers. The Prudential Regulation Authority and the FCA will therefore be given a far-reaching new power to make enforceable rules of conduct for all employees in a bank. Banks will have to verify that employees who have roles in which they could do significant harm to a bank or its customers are fit and proper for those roles. Banks will have to do that on appointment and annually thereafter. They will have to issue certificates, which may be electronic, to those employees, confirming that they are fit and proper for their role.

The Government have always supported the spirit and substance of the commission’s licensing regime recommendations. However, we do not consider it appropriate to call it a licensing regime. That would imply that the individuals concerned had been given licences by a regulator. That is precisely the opposite of what the commission recommended. We therefore cannot use the words “licence” or “licensing”. It is in order to refer to “certificates” and “certification” because certificates will be issued by the banks. Banks will also have to notify employees of the banking standards rules that apply to them and take steps to ensure that they understand them.

I would like to say something about the firms that are covered by the senior managers regime and the new obligations under the certified persons regime. The parliamentary commission naturally focused on banks. However, the definition was extended to include systemically important investment firms that do not take deposits, but that are regulated by the PRA. We have also included a power to extend the senior managers and certified persons regimes to cover UK branches of foreign banks and investment firms if it is considered appropriate to do so. Some large branches of foreign banks and investment firms operate from London, so it is prudent to equip ourselves to bring them into the new regime.

[Neil Parish (Tiverton and Honiton) (Con)]

Does the Minister agree that it is essential that companies can trust their banks in order that they can do business? We must get the legislation right so that companies can again trust their banks. Companies must feel able to give banks confidential information in the expectation that it will remain confidential. Companies need to be able to access finance to compete in business and create employment. The banks are holding back our businesses.

[Sajid Javid]

I agree wholeheartedly with my hon. Friend, and I hope that he agrees that all the effort that has gone into setting up this new regime—in particular the senior managers regime and the certification regime—is a huge step forward in achieving that aim.

--- Later in debate ---

[Emily Thornberry (Islington South and Finsbury) (Lab)]

With hindsight, will the hon. Gentleman help the House and say whether Fred Goodwin would have been prosecuted under that provision?

[Sajid Javid]

It is possible, although it is difficult to answer that question specifically as it would depend on the legal process, as anticipated in the Bill. As I progress with my remarks, the hon. Lady will see the kind of actions that can lead to prosecution.

[Mark Garnier (Wyre Forest) (Con)]

Does the Minister agree that a lot of the changes that are coming through as a result of PCBS recommendations should in some respects be treated rather like the nuclear deterrent? It is not necessarily about trying to punish people; it is about trying to drive behaviour that avoids a crisis in the first place. Had these rules been around at the time, it is far more likely that Fred Goodwin would not have led his bank over the cliff, that we would not have had the financial crisis, and that we would have a more stable banking system as a result. That is the intention behind the proposed law.

[Sajid Javid]

My hon. Friend has explained well the reasoning behind the recommendation from the PCBS—which, of course, he was part of—and the deterrent effect this change could have should not be underestimated.

[Emily Thornberry]

I thank the Minister for giving way again; he is helpful in giving me the time because I am genuinely confused about this. If the proposed legislation is to have a deterrent effect and deter the sort of behaviour that was seen before the banking crash, had it been in place at the time, presumably people would have been prosecuted. All I want to know is: which people, and can the Minister give the House some examples?

[Sajid Javid]

As I discuss the issue I will provide more information on how the measure could work, and perhaps the hon. Lady will judge for herself, given the situation she has in mind, whether the measure would have acted as a deterrent, and whether a prosecution could have taken place.

[Mr Andrew Tyrie (Chichester) (Con)]

First, I think it would be inappropriate to try to assess the impact of the proposed legislation on any specific case that has passed, and secondly, we are trying to devise legislation that will work for the future. I completely endorse what my hon. Friend the Member for Wyre Forest (Mark Garnier) has just said. We must emphasise that we expect a change and improvement in behaviour as a consequence of much more considerable risks and responsibilities being placed on those individuals than currently pertain with the approved persons regime and system of regulation.

[Sajid Javid]

I thank my hon. Friend for his comments. As Chair of the Parliamentary Commission on Banking Standards, he helps to explain the commission’s reasoning, which the Government share.

The introduction of this offence means that, as we have heard, in future those who bring down their bank by making thoroughly unreasonable decisions can be held accountable for their actions, which, as we saw in the recent financial crisis, can lead to severe economic disruption and considerable loss for taxpayers. In line with the commission’s recommendations, the new offence will be applicable only to individuals who are covered by the senior managers regime I mentioned earlier. Senior managers could be liable if they take a decision that leads to the failure of the bank, or if they fail to take steps available to them to prevent such a decision from being taken.

The offence will apply to behaviour that falls far below the standard that could reasonably be expected of a person in their position—that is similar, for example, to the test applied in corporate manslaughter. Importantly, the offence will apply to senior managers in banks, building societies and investment firms, and be subject to PRA supervision. That reflects concerns expressed by their lordships that the failure of systemic investment firms could lead to similar adverse consequences for financial stability, and that the taxpayer may have to bail out a collapsed retail bank. The maximum sentence for the new offence will be seven years in prison, and/or an unlimited fine. That reflects the seriousness that the Government, and society more broadly, place on ensuring that our financial institutions are managed in a way that does not recklessly endanger the economy or the public purse.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

The Minister struck the correct note when he mentioned the seriousness of such situations. Much concern has been expressed that this provision applies only to financial institutions, but the conditions that would have to apply for it to be used—in other words, a serious threat to the systemic nature of our financial system—are such that it is likely the measure will not be used often.

[Sajid Javid]

I completely agree with the hon. Gentleman and I think we all hope that the new criminal sanction will not actually have to be used because the offence will act as a genuine deterrent against such recklessness.

[Emily Thornberry]

If I were a senior banker to whom this law applied, what would affect my decision on whether to behave recklessly? Would it be the thought, “If I do this, there’s a risk my bank and the whole financial system will crash around my ears and I will be seen as personally responsible”, or would it be the possibility of being prosecuted under this new legislation?

[Sajid Javid]

Both cases would be a deterrent. A key point of the change to criminal sanctions is that they would apply if a senior manager took part in any reckless action—there is a very strong test, as we have just heard—that led to the failure of a bank. It would not be appropriate to perform a legal analysis of what has happened in the past because we do not have the full facts before us, but if a board full of senior managers makes a decision on, let us say, a potential acquisition and they fail to carry out proper due diligence or they deliberately ignore certain risk factors, and that eventually leads to a failure and collapse of that bank, that will be an example of the situation that the new offence tries to capture. It is reasonable to say that, as those senior managers will be aware of the new criminal sanction, which did not exist before, it will bear on their minds when they make those important decisions. The Government amendments in this group will improve standards and the culture in banking.

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

I have listened with interest to the Minister. May I first add my thanks to all the members of the Parliamentary Commission on Banking Standards, who have done us a great service in examining the issues in great detail? They include not only Members of this House but Members of the other place—the Archbishop of Canterbury, my noble Friend Lord McFall, Lord Turnbull and Lord Lawson. Other Members in the other place, including my noble Friends Lord Eatwell, Lord Mitchell and Baroness Hayter, have ensured that particular issues have been put on the agenda.

It would be remiss of me not to say a few words about how we have arrived where we are today—considering a vast number of Lords amendments at this stage. The concerns about that have been well rehearsed during discussion of the Bill and how it has been brought forward and considered. The Government commissioned the Parliamentary Commission on Banking Standards to ensure that recommendations could be added to the Bill, but we had a very thin Bill for Second Reading and in Committee. The commission recommended a three-month gap between the publication of the Bill and the commencement of the Committee stage, but the Government rejected that idea. Instead, this House had to consider the partial Bill before the final report on standards and culture had been published. It is pertinent to reflect on that, given some of the comments made by the Minister. Many of the issues that will be taken forward when the legislation is enacted will still depend on judgments being made and on getting the message across that the culture of banking, at whatever level, has to change. That would have been helped by further scrutiny at various points.

We must also remember that the Government’s response to the commission’s report was published only three or four hours before we started considering the Bill on Report. We had 183 amendments tabled during the next stage of the Bill, and I wish to put on record our concerns about that method of legislation. The Bill is now three times bigger than the one that was originally introduced, and consideration of Lords amendments took place only a couple of days after Third Reading—again, without much opportunity to consider matters in detail.

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[Mark Garnier]

I agree entirely. A number of professional bodies in the banking industry have a code of conduct. I, for example, am a fellow of the Chartered Institute for Securities and Investment, which has a code of conduct. Many people working in investment banks will be fellows of the CISI. Indeed, Sir Richard Lambert’s proposals, about which we shall hear more in the new year, will include a code of conduct. It is also worth bearing in mind that the banks are producing their own code of conduct that is being fed back to the regulator, which will consider what they are saying.

Let me wind up, because I think the Minister would like to speak at some point. I would be the last person to stand in his way, because I know that he will have some intelligent things to say. Suffice it to say that I think amendment 41 will prevent the behavioural changes we desire, and that is why I will reject it.

[Sajid Javid]

I thank the shadow Minister, the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), for her comments and all other—

[Madam Deputy Speaker (Mrs Eleanor Laing)]

Order. With the leave of the House, Minister.

[Sajid Javid]

Thank you, Madam Deputy Speaker. With the leave of the House, I thank the shadow Minister for her comments and all other Members who contributed to the debate. In particular, I thank my hon. Friend the Member for Chichester (Mr Tyrie) for the work that he has done in this area, especially in chairing the Parliamentary Commission on Banking Standards. I have listened to all hon. Members with great interest over the past couple of hours, but in particular to my hon. Friend. I thank him for all his efforts and also for his supportive comments, which I take as broad support for the Government’s amendments.

In the time available, I shall deal quickly with some of the key issues that came up. The shadow Minister raised the issue of timing and her understanding that there was not enough time to scrutinise the Bill and the amendments. She will know that the Bill started with the recommendations of the Independent Commission on Banking, which were scrutinised extensively in the House and in the other place, including the recommendations of the PCBS. The Government produced their response as quickly as they reasonably could to the PCBS, which was in July, in advance of the Commons Report stage so that it could inform debate as soon as possible.

The shadow Minister also asked why the Government resisted Opposition suggestions on improving professional standards. Again, she will know that because the PCBS had been set up and had been asked specifically to look into this area, the right thing to do was to listen to the commission and take its views into account when drafting amendments, before anything was settled upon. She asked about minimum standards and competence. She is right to do so, as we all recognise the importance of those. It is worth pointing out that, because of Government amendments that were introduced, banks will be required to check all new applicants to ensure that they are fit and proper, and not just at the point that they start with the bank; annual checks will have to take place and regulators will have important powers to specify any qualifications that they believe are required for the job.

A number of hon. Members raised the issue of a code of conduct. The regulators, both the Financial Conduct Authority and the Prudential Regulation Authority, will have broad powers, including the ability to set up a code of conduct for banks in general or for a particular bank, as they see fit. These are the kind of powers that regulators can use in future. My hon. Friend the Member for Redcar (Ian Swales) asked how we could scrutinise regulators. He is not in his place, but he will know that an annual report produced by the regulators about how they discharge their functions will be provided to Parliament, where it can be given proper scrutiny.

There was a discussion about remuneration. Hon. Members will know that the PCBS made recommendations on remuneration which the Government have accepted, particularly on longer deferrals and clawbacks, including a full clawback if a bank ends up receiving state aid. I understand that the PRA will make further recommendations on that next year.

I have time only to touch on Lords amendment 41 which, as I said, the Government oppose. It is worth taking into account the comments of my hon. Friends the Members for Chichester and for Wyre Forest (Mark Garnier) that, although the amendment is well intended, it will lead us back to a box-ticking culture and confuse regulation and professional standards. Both are necessary, but it would be wrong to conflate these—

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regulation of payment systems

[Sajid Javid]

I beg to move, That this House agrees with Lords amendment 63.

[Madam Deputy Speaker (Mrs Eleanor Laing)]

With this it will be convenient to discuss the following:

Lords amendments 64 to 154.

Lords amendment 155, and amendments (a) and (b) thereto.

Lords amendments 156, 161 to 163, 169 to 172, 175 to 180 and 182 to 184.

[Sajid Javid]

The second group of amendments introduce substantial changes that will ensure that consumers get a fair deal. They will drive up competition and improve outcomes for consumers. Amendments 63 to 134 introduce a new competition-focused, utility-style regulator as a separate legal entity established under the FCA.

The Government have concerns about the payment systems market, with particular problems in three main areas: competition, innovation and responsiveness to consumer needs. Under the current arrangements, there is nothing holding big banks, payment scheme companies and infrastructure providers to account for consumers. The regulator will therefore have strong powers and objectives: to ensure that the operation of payment systems promotes fair and open competition in banking; to promote innovation in payment systems, for the benefit of consumers; and to support the interests of end users.

The regulator will have bespoke objectives and powers to address problems particular to the market for payment systems, allowing for the benefits of close co-ordination with the FCA. Once a payment system is brought into scope, the regulator will have powers over the system’s operators, infrastructure providers and providers of payment services using the system.

The payment system regulator will be equipped with a broad range of regulatory powers, enabling it to address the significant issues causing problems in the market for payment systems. To open up access and encourage greater competition, the regulator will be able to intervene and require changes to any anti-competitive fees or terms and conditions of an agreement for access to regulated systems. It will have powers to require the provision of access to payment systems. The regulator will also have competition powers exercisable concurrently with the Competition and Markets Authority.

My hon. Friend the Member for South Northamptonshire (Andrea Leadsom), who is in her place, will be pleased to know that the regulator will examine the case for full account number portability within 12 months of its establishment—although, with the successful seven-day switching service, which was launched by banks in September, hon. Members should know that they do not have to wait until then if they want to switch their account quickly.

[Ian Swales]

With regard to account number portability, is the Minister concerned that in the period between now and spring 2015, when the regulator will come into force, work might slow down, rather than speed up, because of the unpredictability of the regulator?

[Sajid Javid]

I have listened to my hon. Friend carefully, and others have made that point previously, but I do not share those concerns. I think that the regulator will move on that swiftly. The changes that have so far been made to payments, such as the switching service, are already making a real difference.

Ultimately, if the payments system regulator determines that the current ownership structures need to be broken up to achieve adequate competition, it will have the power to require disposals of interests in operators of the regulated systems. It will also have the power to enforce Competition Act 1998 prohibitions against anti-competitive agreements and abuse of dominance and to make market investigation references to the Competition and Markets Authority.

The amendments create a competition-focused regulator in this key market.

[David Mowat (Warrington South) (Con)]

I very much welcome the role that the payments regulator will have. For the avoidance of doubt, though, can the Minister confirm that part of its scope will be credit interchange fees and that it will have a role in potentially regulating their level over time?

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[Sajid Javid]

Yes, I can confirm that. Although it remains for the regulator, once set up, to deem the regulated systems, we envisage that that will be part of its scope. My hon. Friend will know that the issue is being considered right now through a proposed European Union initiative. We would expect the regulator to take that into account as well.

[Cathy Jamieson]

What analysis have the Government undertaken of the impact of designating card payment systems for regulation? If the system will not come in until spring 2015, is there not a genuine danger of blight in terms of planning the way forward?

[Sajid Javid]

Before we made the final decision to create the regulator, a full consultation was carried out. We received input into that consultation from many stakeholders, and that formed part of the analysis of how the regulator could carry out its function, as well as the importance of having such a regulator. We expect not only that the regulator will be fully up and running in around 2015, but that once the Bill receives Royal Assent the FCA will begin the process of setting it up early next year. The FCA has resources that can be called on, and it has already started working on exactly how the regulator would operate, so I think that it will be able to start at least some of its work sooner than 2015.

Amendments 135 to 152 establish a special administration regime to be known as the financial market infrastructure, or FMI, administration. Inter-bank payment and settlement systems are integral to the efficient operation of the financial system, processing transactions worth hundreds of billions of pounds a day. Currently, if such a system becomes insolvent, it will typically enter the normal administration procedure and the administrator will be under a duty to look after the interests of the company’s creditors without regard to the implications for the wider UK economy. In those circumstances, the continued operation of crucial payment and settlement services could be threatened, which could have a significant adverse impact on the market and the wider economy. The amendments will ensure the continuity of crucial service provision of recognised inter-bank payment systems and security settlement systems in a time of crisis by imposing a duty on an FMI administrator to maintain the company’s crucial services during administration.

The key features of FMI administration are: the FMI administrator is placed under a duty to maintain the company’s crucial services during the period of FMI administration; the Bank of England is given the ability to apply to the court to place a relevant company into FMI administration and has conferred on it a power of direction over the FMI administrator; powers are granted allowing for the property, rights and liabilities of the relevant company to be transferred; and restrictions are established on early termination of contracts for the supply of certain goods and services to a company that has entered FMI administration.

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[Yasmin Qureshi]

We welcome the change, but it will not start until January 2015. Our amendment (a) says that it should start from October 2014, because people spend the most, and often build up the most debt, in the period up until Christmas. Therefore, what is the harm in bringing the date forward by three months?

[Sajid Javid]

If the hon. Lady will allow me, I will answer her questions when I consider the amendment she mentions.

There is a growing evidence base, including lessons from other countries, that a cap on costs is the right way forward for consumers. That is why the Government tabled an amendment in the other place to require the FCA to impose a cap on the cost of high-cost credit and short-term loans—not just an interest rate cap but a cap on all fees and charges, including default charges and roll-overs.

[Bob Stewart (Beckenham) (Con)]

Does my hon. Friend have any idea what level of cap there might be on such charges?

[Sajid Javid]

My hon. Friend asks a reasonable question that I am sure many Members would be concerned about. The cap should be set by the FCA at a level designed to protect consumers. I hope that when I go on to talk about the process, that will give him a bit more definition regarding his concerns.

[Mr Graham Stuart (Beverley and Holderness) (Con)]

I do not really understand what the Minister says about a cap protecting consumers. Before we had these payday lenders who get so much opprobrium, the alternative was very often door-to-door loan sharks who would break your legs if you did not pay them back. The great feature of the payday lenders is that they do not do that. What assurance can he give that any caps we impose will not force people back into the hands of unscrupulous and illegal lenders instead of the payday lenders, who at least work within the law?

[Sajid Javid]

My hon. Friend raises a good point. A number of charity groups involved in the debt advisory sector share those concerns. However, most of them agree, especially in the light of emerging evidence from other countries such as Australia and from certain parts of the United States, that it is possible, if researched properly, to set a cap at a level that can protect consumers but at the same time prevent extortionate costs. That will be the job of the FCA when it looks at the matter, and I know that it will take it very seriously.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Following on from the previous question, surely the Minister agrees that we can do better than offer people a choice between having their legs broken and interest rates of several thousand per cent. Government Ministers accepted that logic in their recent announcement about an interest rate cap. Surely it is possible to bring in a system that gives some measure of protection to the consumer without driving them into the arms of illegal loan sharks.

[Sajid Javid]

I agree with the right hon. Gentleman that it is certainly possible to have a better system than the current one. There will be a number of changes, including the moves towards a cap and the change of regulator from the Office of Fair Trading to the FCA, which set out in October some of its planned measures with regard to continuous payment authorities, roll-overs, advertising and affordability. Those are all part of a package that will help to protect consumers in the sector.

[Sir Edward Leigh (Gainsborough) (Con)]

I am sorry to say this to the Minister, but he has not replied to the point made by my hon. Friend the Member for Beverley and Holderness (Mr Stuart). Of course, the Government can do what they like—they can set a cap—but the Minister must respond to the point that the Government cannot legislate against sin. The fact is that people are desperately hard up. If we legislate or put a cap on one thing, the evil moves to another, almost worse practice. The Minister must make some effort, in the real world, to answer my hon. Friend’s point.

[Sajid Javid]

If my hon. Friend will allow me, I will, as I move on, provide more information on that particular point.

[Mr Love]

I thank the Minister for giving way so liberally on this issue. He mentioned the FCA’s role not just in setting the cap, but in other critical arrangements, such as roll-over, continuous payment authorities and proper administration of the high-cost credit sector. Does he think that that goes far enough? If we are going to get this sector right, many organisations think that the consumer needs more protection.

[Sajid Javid]

The measures that the FCA has already suggested, and on which it is currently consulting, go a long way to protect consumers in this sector. Of course, the FCA has broad powers in this area and there is nothing to prevent it from considering future measures as it learns more about aspects of the market. For example, the hon. Gentleman may know that the Competition Commission is currently looking into this sector. It is due to report back with its preliminary findings next May and a final report around November. It will look at the sector for about 18 months in total. I am sure that the FCA will take that into account and see what further measures it could take, if necessary, with the broad set of powers it already has. I hope that is of some reassurance to the hon. Gentleman.

Designing the cap on the cost of credit is a job not for the Government but for the independent and expert regulator. Nor is it right that the detail of a cap should be enshrined in primary legislation, given that the industry it is intended to bind is so fast-moving and innovative.

Lords amendment 155 makes clear the FCA’s overarching objective in this endeavour: it must make rules to impose a cap to protect consumers from excessive charges imposed by high-cost, short-term lenders. This language echoes the FCA’s consumer protection objective. The FCA must make rules to advance one or more of its operational objectives, namely consumer protection, market integrity and competition. That applies to the rules to implement the cap, just as it does to all FCA rule-making. The FCA’s competition duty also applies. It must consider how the rules affect the ability of the market to serve consumers’ interests.

As we have heard, introducing a cap is not without risks or potential adverse consequences, including reducing access to credit for some individuals who find themselves in financial difficulty. The FCA will not be able to eliminate those risks, but it will seek to manage them. It will be important that the FCA strikes the right balance in designing and setting the cap.

[Stephen Doughty]

Given that the Government have moved belatedly on this issue—I hope it will make a big difference, notwithstanding the risks mentioned—will the Minister pay tribute to organisations such as Sharkstoppers and Movement for Change and the many community activists around the country who have highlighted the dangers posed by the payday loan industry, which is getting people into thousands of pounds’ worth of debt? The Government have listened to those voices, so will the Minister pay tribute to them?

[Sajid Javid]

I assure the hon. Gentleman that we as a Government have spoken to many stakeholders, including hon. Members, on this issue. Many people have done a good job and deserve credit for looking at the evidence in more detail.

[Yasmin Qureshi]

rose—

[Sajid Javid]

I will take this as a final intervention, because I need to plough on in the interests of time.

[Yasmin Qureshi]

I thank the Minister for giving way; it will not take long. Following the point made by my hon. Friend the Member for Cardiff South and Penarth (Stephen Doughty), will the Minister also congratulate my hon. Friend the Member for Walthamstow (Stella Creasy), who has played a great part in raising and campaigning on the issue?

[Sajid Javid]

I will. The hon. Member for Walthamstow, my hon. Friend the Member for Worcester (Mr Walker) and many other Members have shown great concern in this area and have made a welcome contribution to the debate.

[Nigel Mills (Amber Valley) (Con)]

Will the Minister give way?

[Sajid Javid]

I will give way for the last time.

[Nigel Mills]

I am grateful to the Minister for giving way one very last time. I am not sure that I agree with him that it is not for Parliament to decide roughly where the cap should sit, because if we set it too high it will be meaningless and if we set it too low we will drive too many people out of the loan market. What will the Minister do if the FCA pitches the cap in a different place from where the Government think it ought to be? Would he want to come back to Parliament to take another look at the situation?

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[Sajid Javid]

I thank my hon. Friend for his intervention. I think that the FCA, acting independently and looking at the evidence, is the right organisation to set the cap. I do not think that politicians setting the cap would be as productive; actually, it could be counter-productive.

I now turn to the cost-benefit analysis that the FCA will have to conduct, which I think will help reassure Members that it will approach the task in the proper way. The amendment specifically requires that the FCA must consult the Treasury before it publishes and consults on any draft rules. To reflect the importance of keeping the rules current and effective, the FCA must report, each year in its annual report, on any rules it makes under its capping powers.

Finally, it is worth spending a moment on the issue of defining payday lending in primary legislation. Putting a narrow definition in primary legislation could lead to unintended consequences. Lenders may just try to circumvent the definition. The amendment therefore allows the FCA to specify precisely which types of high-cost, short-term loans are captured when it makes its rules to effect the cap.

Amendment (a) to Lords amendment 155, which was tabled by the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), relates to data sharing. I am grateful to her for raising that important issue and the Government fully agree that urgent action is necessary to tackle it. The whole system needs to improve to support responsible lending. Lenders must make proper assessments of an individual’s ability to repay before they lend, based on accurate, timely and comprehensive information on their outstanding loans.

The FCA plans to put strict requirements on firms to undertake affordability assessments to ensure that a borrower can afford to make sustainable repayments. The FCA is not stopping there. It has warned the industry that it must improve the way in which data sharing works, including how quickly lending data are made available. The chief executive of the FCA, Martin Wheatley, has made a commitment to me today in writing that if the industry fails to improve, the regulator

“will not hesitate to act”.

The Government wholeheartedly endorse the message to the industry that the FCA will act if it does not respond quickly enough. This matter is a priority for the FCA. It is committed to improving the way in which data are shared and lending decisions made.

I therefore believe that amendment (a), although well intended, is not necessary. I hope that on the basis of those reassurances, the hon. Member for Kilmarnock and Loudoun will not feel the need to press it.

The hon. Lady also tabled amendment (b) to Lords amendment 155, which relates to the timetable. The Government want the cap to be in place as soon as possible. That is why we are taking this opportunity to introduce legislation that requires the FCA to impose a cap on costs. The FCA will then be able to get on with implementation without delay. Let us be clear that the Lords amendment provides a statutory backstop date for implementation. The cap must be in place by 2 January 2015. If the FCA can deliver it sooner, it will. However, it must not rush and risk getting the wrong result for consumers.

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[Stephen Doughty]

Notwithstanding the points that the Minister is making, many consumers and campaigners on this issue will be concerned about what he has said about the time scale. The Government have dragged their heels on this issue for a number of years and could have taken action well before the date that has been set. I would like to see a cap before this Christmas. I agree with other hon. Members that it is crucial that the cap is in place before next Christmas. One of the campaigners from Swansea whom I met, a woman called Serai, got into more than £1,000-worth of debt with one of these lenders after taking out a very small loan to help pay for her kids’ Christmas presents. This is a crucial point, so I hope that the Minister will give a little more hope to the many campaigners who would like to see the cap introduced before next Christmas.

[Sajid Javid]

I will say a little more about the timetable in a moment, but it is a bit unfair of the hon. Gentleman to say that the Government have had years to introduce the cap, when the Government whom he supported had 13 years to introduce a cap and did nothing.

A number of steps must be taken before the cap can be implemented. All of those steps are important and if they are rushed, it will put consumer protection at risk for the sake of speed. There must first be evidence gathering and analysis. That is critical in getting the cap right. The FCA will draw on the evidence that the Competition Commission has collected. It might also have to get information from lenders and others in the market to get on with its work as quickly as possible. Yesterday, the Government laid secondary legislation before Parliament that will allow the FCA to seek information from the industry. That will support the design of the cap and the cost-benefit analysis that the FCA must issue.

The second and most vital part of the process is the consultation with interested parties on the proposals and their impact, as set out in the cost-benefit analysis. The final component that is necessary for the successful implementation of the cap is that lenders must be given a short period in which to update their systems and processes to meet the new requirements and become responsible, compliant lenders. Difficult though that is, we are not prepared to compromise on the process because that could lead to poor outcomes for consumers.

[John Woodcock (Barrow and Furness) (Lab/Co-op)]

rose—

[Sajid Javid]

I need to plough on; I am sorry.

I thank the hon. Member for Kilmarnock and Loudoun for giving me the opportunity to set out the FCA’s plans for implementation. I hope that has provided reassurance that the FCA is committed to taking action as soon as possible, and that she will feel able to withdraw her amendment.

In summary, the Government believe that a cap on the cost of payday loans is necessary better to protect consumers from excessive spiralling costs, working alongside regulatory interventions that the FCA is already proposing to clamp down on the causes of consumer harm in the payday lending market.

Amendments 162 and 163 will provide significant benefit to consumers and financial services businesses that have been affected by poor practice in the claims management industry. Claims management companies have a legitimate role in helping consumers claim compensation, but a minority have acted irresponsibly. Despite the threat of suspension or cancellation of authorisation, some CMCs act speculatively and submit illegitimate claims that clog up the system and ultimately impose costs and delays on consumers. The amendments will give the claims management regulator power to impose financial penalties on CMCs that are guilty of misconduct.

The Government’s amendments provide a new form of redress—including financial compensation for consumers affected by a poor service from CMCs—by introducing a mechanism for the cost of handling complaints to be recouped from the industry. Together, the amendments will help ensure that the claims management industry acts more responsibly, and where it does not the regulator and Office for Legal Complaints can take action.

The Government agree with Lords amendments 153 and 154 that provide the PRA with a secondary competition objective and the FCA with competition powers that are exercisable concurrently with the Competition and Markets Authority. The Government are committed to improving competition in our banking sector to drive up consumer outcomes. A secondary competition objective for the PRA was recommended by the PCBS, and the Government accepted it. That objective will ensure that the PRA remains above all the watchdog for financial stability, but we will require it to play a more proactive role on competition.

[Nigel Mills]

If the Minister had had the pleasure of sitting on the Bill Committee, he would know that I tabled an amendment to suggest we cap the market share that banks could have in certain markets. What will he do if, perhaps by 2020, we have not seen a great increase in competition and still have too few banks with too high a market share? Does he think further action by Parliament would be needed?

[Sajid Javid]

My hon. Friend will know that the Government have introduced many initiatives to increase competition in the banking sector. Just today we heard that Tesco Bank will enter the current account market next year, creating hundreds of jobs in Scotland. That is welcome news, and other innovations such as current account switching also help to engender more competition. I do not think any of us know what the situation might look like in the future, but I am sure a future Government will take that into account in 2020, and beyond, and see whether any further measures are required.

[Mr Tyrie]

The Treasury Committee and the Banking Commission are extremely grateful that the lion’s share of the proposals on competition have been implemented. We think that will be a step forward, and the Treasury Committee has been pretty active in that field for more than three years. As I alluded to earlier, one recommendation has not been acted on by the Government, and I would be grateful if the Minister explained why. Perhaps it can be best summarised in this way: what additional benefit is conferred by the FCA’s strategic objective that is not provided for through the operational objectives of the FCA?

[Sajid Javid]

My hon. Friend will know that the FCA currently has an objective to promote competition, and I know that he supports that. The Government have accepted the recommendation from the commission to give this secondary objective to the PRA, so those two objectives for the key regulators—the FCA and the PRA—will make a difference. If my hon. Friend has some further suggestions for the future, I will certainly take a closer look at them.

The FCA’s consumer panel, which represents the interests of consumers, is well placed to communicate its views to the PRA, and in the other place the Opposition have called for a role for the FCA’s consumer panel. Following constructive debates in the other place, I am pleased that the Government have been able to include amendment 156, which delivers the Government’s commitment to ensure that the FCA’s consumer panel can provide its views to the PRA effectively. This was warmly welcomed on both sides in the other place and by the chair of the consumer panel.

The amendments will simplify day-to-day operations for building societies, other banks and all the other entities that I have mentioned. They will enable banks and other institutions to compete on a more level playing field and improve things as suggested in the Bill and by the commission and others. I commend them to the House.

[Cathy Jamieson]

I will develop my arguments in a moment, but I give notice that at the appropriate stage we will seek to divide the House on both of the amendments that we have tabled in this group.

I shall start with the payments system regulator, because I was somewhat surprised by the number of representations on the Bill from the industry, even at this late stage, including on the payments system regulator. The Minister has responded to interventions on that point, but I hope that, when he has the opportunity to respond later, he will address some of the questions raised by the industry, such as the concerns expressed by VocaLink. Although it has said that it is broadly supportive of the regulator and welcomes the change in the Government’s position, it is none the less very keen to ensure that there is no planning blight—a gap between the point at which the legislation becomes law and the time at which the system would be fully operational.

We have also had representations from other sectors of the industry, including Visa and MasterCard, on the need for a level playing field and ensuring appropriate and clear definitions of which payment systems come under the regulator, taking into account the broad range of players that facilitate payments for consumers and businesses. Further representations have been made about the need to look in detail at the whole system and the challenges of establishing the PSR, creating the right skill set and ensuring that it operates correctly. The work load of the regulator will also need to be taken into account as part of its remit.

The Minister said that he believed that the FCA had the resources to ensure that the system will be set up on time and will make progress as planned. I contrast that to the approach on payday lending, and I shall move on now to considering that issue.

At the outset, I must say that we welcome the Government’s U-turn on the issue of capping the costs of the controversial payday loans. [Interruption.] I hear the hon. Member for Braintree (Mr Newmark) saying that that was not a U-turn. I gently remind him that the Government have repeatedly refused demands to deal with legal loan sharks. They now appear to have been dragged, kicking and screaming to their current position as a result of pressure from Labour and countless other campaigners, including many of my hon. Friends in the Chamber today who will no doubt wish to speak.

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[Paul Blomfield (Sheffield Central) (Lab)]

Like my hon. Friend the Member for Makerfield (Yvonne Fovargue), I rise to speak on amendment 155. The Minister has acknowledged that data collection is at the heart of effective regulation. Like many Members on both sides of the House, I welcome the Government’s conversion to capping the total cost of credit, but we need to recognise that it is not a silver bullet.

When I was fortunate enough to have the opportunity, through the private Member’s Bill ballot system, to prepare the High Cost Credit Bill back in July, I brought together Members from both sides of the House—I am pleased to see that one of them, the hon. Member for East Hampshire (Damian Hinds), is in his place—and all the major consumer voice and debt advice organisations, such as Which?, Citizens Advice, StepChange and the Centre for Responsible Credit, to try to develop a holistic approach to the regulation of payday lenders, with appropriate interventions at every stage of the relationship that lenders have with their borrowers from advertising right through to debt collection. At many points in that relationship, the issue of real-time data collection is absolutely vital to tackle multiple lending. We know that multiple lending is the source of many of the problems that people face. Unable to repay one loan, they are forced to resort to taking out additional loans, moving from a single unaffordable debt to multiple loans, creating completely unmanageable debt.

As my hon. Friend the Member for Makerfield has pointed out, the current reporting framework for credit reference agencies of 30 to 60 days simply cannot protect people from the problems that result from multiple lending. Only real-time data collection can effectively do that.

Secondly, we have the impact on the market. As part of the debate on payday lending, many people have argued that we cannot solve the problems by regulation alone and that we need a wider range of more affordable products. That is absolutely right, and real-time data are key to that too, because they will enable lenders to assess risk.

At a recent hearing of the Business, Innovation and Skills Committee, one of the lenders selected by the Consumer Finance Association as a representative of the industry said:

“We do not know in real-time what loans the customer has with other lenders.”

He said that they would

“love to know that information.”

It is impossible for lenders properly to evaluate risk, set interest at manageable levels and develop new products. As other Members have said, the opportunity that real-time data would provide for new entrants to the market is also crucial.

Above all, real-time data are essential to ensuring affordability, which is at the heart of the measures needed to protect people. The industry works in a distorted market. We know that: success is measured by the time it takes to get money into somebody’s bank account, not by the ability to repay. It sounds perverse that many lenders are not primarily concerned about ability to repay. As the OFT has highlighted, up to 50% of payday lending revenue comes from 28% of loans—those that are unaffordable—so providing real-time data is at the core of shifting the business model for payday lending from speed of lending to affordability and is the key to protecting people from spiralling and unaffordable debt.

I mentioned the recent Select Committee inquiry, which will report soon. My hunch is that it will say something along the lines of the report we published two years ago—that real-time data collection is critical to transforming the payday lending industry. We have heard from a number of Members that debt advice agencies are clear that we need real-time data collection and sections of the industry also want it. As the shadow Minister, my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson), has pointed out, the industry has been slow to respond. It has been considering the issue for two years and has failed to find a solution that all participants will buy into. As the industry has failed to produce an initiative, it is our responsibility to step in and secure real-time data collection.

I would cite in support of that assertion the response of the Financial Services Consumer Panel to the Financial Conduct Authority’s consultation on its proposals on payday lending. As Members will know, the Financial Services Consumer Panel is the statutory body that monitors how far the FCA fulfils its statutory objectives for consumers. It is a critical voice in this debate. The panel has said that

“better creditworthiness assessments must be underpinned by real-time data sharing capabilities.”

On affordability, it has stated:

“In order for this information to be available we believe the establishment of real-time data sharing is vital.”

It has also stated:

“In addition to limiting rollovers, the Panel also feels that real-time data sharing is essential in ensuring people do not end up with excessive numbers of loans at the same time.”

It goes on:

“The speed at which loans are granted is often cited as the reason for”

unaffordability and rollovers, and:

“Real-time data sharing would overcome this and should be something the FCA encourages…There are examples of other jurisdictions, such as Florida…where this has been achieved.”

Indeed, the Minister cited Florida as an example earlier.

The panel comes to the conclusion that it strongly calls for the establishment of real-time data sharing and I hope that the Government will listen to that.

[Sajid Javid]

With the leave of the House, Madam Deputy Speaker. I thank all hon. Members for their contributions. It has been a good debate and a number of important issues have been raised, so I want to take a few minutes to respond.

The shadow Minister, the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), started by making a number of points on the payments system regulator. One issue she raised was whether there could possibly be a gap before the payments system regulator came into full force. That is a reasonable question and of course we will do all we can to minimise that.

It is worth pointing out that although the Payments Council, to which my hon. Friend the Member for Chichester (Mr Tyrie) referred, has not always done a spectacular job as an industry body, particularly on cheques, it has recently put in place some useful innovations under the influence of the Government, such as the current account switching service. It is also developing a mobile phone database. We have been assured that such initiatives will continue and will not slow down because of the plans to set up a payments system regulator.

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[Yvonne Fovargue]

Will the Minister therefore set a time scale for the FCA to give the industry to work towards voluntarily, which will be imposed on the industry if it does not meet it?

[Sajid Javid]

There is already the tightest possible time scale. In his letter today Martin Wheatley of the FCA says that the industry is already working on this. He states:

“If the industry cannot overcome the obstacles, and we are best placed to bring about data-sharing we will not hesitate to act.”

The chief executive of the FCA and the Government understand the importance of this. We can all agree on its importance and the need to take action quickly. I do not consider it necessary to pass any legislation as action is already being taken.

[Cathy Jamieson]

To follow up the point from my hon. Friend the Member for Makerfield (Yvonne Fovargue), it would the help the House to know whether the Minister has had discussions on a time scale.

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[Sajid Javid]

I have had discussions with the FCA about this. We expect that by the end of next year the process will be set up, but there are a number of issues to be dealt with before that can be confirmed with more certainty. That is the time scale that the industry is working towards.

Let me move on to some of the other issues that were raised in relation to high cost credit. The hon. Member for Kilmarnock and Loudoun mentioned excessive bank charges, and I agree with her concerns. The Government are concerned about default charges across the unsecured lending market, not just the payday loan market. The Government are strengthening regulation for consumer credit across the board by giving responsibility to the FCA. The FCA recently committed to consider carrying out a thematic review of market practice in relation to fees and charges, once it has full regulatory authority over consumer credit.

I will turn briefly to the timetable for introducing a cap on the total cost of payday lending, which we discussed earlier. As the shadow Minister said, 2 January 2015 is just a back-stop. Of course I would like to see it introduced sooner, as I think we all would. However, as we have discussed, it is better to have a cap that works and protects consumers, rather than one that has been forced on the regulator by an artificial time scale. It is important to listen to the FCA, the regulator that will establish the cap, so it is worth reiterating what Martin Wheatley has said:

“It is very important that we are clear with you on the practical implications of any further shortening in the timetable, the principal one being that we believe it is impossible to have as strong a cap based on a shorter deadline. To such a tight timetable we would be forced to perform less analysis on the methodology and level for any cap, and so would be forced to set the cap at a more conservative level (that is, higher) to reflect the inherent legal risks. This cannot be the intended outcome from a consumer protection standpoint.”

It would be foolish for this House to ignore the FCA’s view, as I am sure we all share the objective of having a cap that works and protects consumers.

[Stella Creasy]

We know that 1 million families in this country have already said that they will pay for Christmas this year with a payday loan because of the cost of living crisis they are facing. The Minister is talking about delaying the introduction of any form of cap until 2015, so there is a real question about the impact that might have next Christmas, which will be the default position of not supporting the proposed amendment. Introducing even a conservative cap before next Christmas might do something to lessen the damage that those toxic types of lending are doing to people, given that the cost of living crisis will continue for the year ahead.

[Sajid Javid]

I thank the hon. Lady for her comments. As she will have noted from the letter I just quoted from Martin Wheatley, one of the concerns about a conservative cap is that it would be open to much greater legal risk. It would serve nobody in this House if there was some kind of legal challenge to a cap and how it works if the process has not been followed properly and if some people believe that the FCA has not followed its own rules, particularly on the time for consultation. Had the hon. Lady been here at the start of the debate, she might have heard that the Competition Commission’s investigation into payday lending, which is already under a tighter timetable than it usually has—it is normally around two years, but it has agreed to make that 18 months—will report in November next year. I think that everyone would agree that it is very important that the FCA takes into account the results of that investigation.

[Cathy Jamieson]

The Minister might have already answered this, but what specific legal risk has he identified in relation to the cap being introduced sooner rather than later?

[Sajid Javid]

I refer the hon. Lady again to the letter from Martin Wheatley, which states that the FCA

“would be forced to set the cap at a more conservative level (that is, higher) to reflect the inherent legal risks.”

I believe that she has a copy of the letter.

I will finish by answering an important point the shadow Minister made about the possibility that lenders from elsewhere in the European economic area will be able to passport their services and avoid UK legislation. She is entirely right to make that analysis, because that is indeed possible under the EU commerce directive and the single market in financial services. There are mitigations, although the situation is not ideal. Under the EU consumer credit directive, there is not a cap but there are certain rules that all lenders within the EU need to follow. Of course, there is nothing to prevent the UK regulator from contacting the comparable authority in another EU-based country to see whether there is any way in which pressure can be put on indirectly through the two bodies working together.

Lords amendment 63 agreed to.

Lords amendments 1 to 40; 42 to 62 and 64 to 154 agreed to, with Commons financial privileges waived in respect of Lords amendments 35, 37, 40, 149 and 150.

Before Clause 13

Duty of FCA to make rules restricting charges for high-cost short-term credit

Amendment (a) proposed to Lords amendment 155.—(Cathy Jamieson.)

Question put, That the amendment be made.