Financial Services Industry

John Bercow Excerpts

Wednesday 4th March 2015 Commons Chamber

[Douglas Carswell (Clacton) (UKIP)]

I am grateful to the Minister for taking part in this debate, following the previous long and onerous one.

This issue is desperately important: the need for more competition in financial services is urgent. Choice and competition are always and everywhere a good thing. They drive up standards, force innovation and always manage to give customers better value. In many areas of our lives, we take choice and competition for granted—we assume that they happen naturally—but I simply do not think that there is enough choice and competition when it comes to financial services. In fact, financial services in this country have in many respects become something of a cartel, in which the different provider interests do not have any incentive to give the customer what they want, or to innovate and do better.

Historically, there has been a great loss of diversity in the financial industry in this country. We have a handful of banks in the UK today, but my researcher tells me that there are 417 savings banks in Germany. There has been a steady process of centralisation over the past few generations. Within living memory, cities such as Leeds and Norwich were financial centres in their own right; today, London predominates. We used to have many more types of governance structure in banks and financial institutions, with many more credit unions, partnership banks, friendly societies and old-style building societies. Banking is now dominated by big corporate plcs, which is a model that detaches management from ownership. Today, 77% of the current account market is dominated by the big four banks.

It is interesting to ask whether that is a natural process that has happened because of market-driven consolidation. I think it is a consequence of a regulatory system that has created and enforced homogeneity not just of providers but of products. It is has led to a system in which compliance is elevated above the need for customer service. I cannot help noticing that growth in many financial institutions and businesses has happened through acquisition, rather than through increasing the number of happy customers.

It is worth asking whether regulation has proved to be a barrier to entry in financial services. We commonly hear the complaint that people with money to invest are looking for a way to save it with a good rate of interest, and at the same time it is often said that businesses complain that they cannot get credit. In a normal market, the former would be put together with the latter and those who want to lend at a competitive rate of return would lend to those who want to borrow. Might it be that something about the regulatory system in this country is preventing that from happening?

The old Financial Services Authority issued some 6,000 pages of regulation between its inception and the financial crash. It is fair to say that the new regulators are carrying on with the blizzard of regulations. There are thousands of pages of compliance. Ultimately, I suspect that that is an attempt to restrain the worst excesses of some aspects of fractional reserve banking and to mitigate risk by decree or fiat. I wonder whether one consequence of that regulation is that it prevents us having new competitors, a broader spectrum of products and a broader range of providers.

It is no surprise that Metro bank, which I believe is the first new high street bank to open in this country in a generation, is so customer focused. We need to do far more to ensure that there are more banking start-ups. I will go on to elaborate on what I mean by that. We need to do more to ensure that regulation encourages banking innovation. We must allow the changes that the internet will bring about in banking to happen and ensure that regulation does not inhibit those natural, organic changes.

I am full of praise for the Minister’s magnificent idea in her former incarnation about allowing greater portability of bank accounts. I strongly support that. It is a wonderful scheme. I would love to hear a bit more about it. To put it a different way, since 2008, the percentage of personal current account holders who switch banks has grown. I would love to hear the Minister talk about ways in which we can encourage that. I am not certain what the correct percentage ought to be in a properly competitive market, but I imagine that it would be a good deal more than the current 3%. In any properly competitive market, there ought to be quite a high level of customer turnover. Should it be closer to 5% or 10%? I would love to hear the answer.

I would also love to hear whether the Minister has any sympathy with the idea that the regulatory system needs to encourage more banks to enter the market. The Prudential Regulation Authority has responsibility for that, but is it making it easier for start-ups—the equivalents of Metro bank and Handelsbanken—to come into the market? Are we making sure that capital requirements, although important, do not inhibit change?

On a slightly different note, I would love to hear whether we could review the regulatory system not only to allow new banks, but to allow new kinds of banking. We are all familiar with the idea that we can use our mobile phones to pay for things. That would have seemed like science fiction or magic 20 years ago and perhaps even 10 years ago. Similarly, might we not be able to have banking without banks—without those costly institutions that require big buildings and big bonuses? Might it not be possible to have banking through a company like O2, Google or Facebook? Those organisations have a huge customer base and know a great deal about their customers. Could we have a regulatory system that would allow a Google, a Facebook or an O2 to get a banking licence if they wanted to? It is key that if a company like that wants to acquire a banking licence, we make sure it is able to do so.

I fear that the regulatory system we have is very good at preventing new competition. That is one reason why the existing players tend to have such a close, symbiotic relationship with the regulator. There tends to be a revolving door between the regulator and the big corporate banks. I fear that corporate gigantism is a product of corporatist regulation. The regulatory system that we have is very prescriptive and detailed. It talks not simply about the outcome, but about the process that needs to be followed. I am not sure that that is a good way of regulating financial services. We must bear it in mind that Northern Rock was a highly regulated institution. The model in this country encourages financial institutions to create large compliance departments and to acquire armies of compliance officers, but those people often fail to ask the most basic questions about reserve ratios.

In financial services there is an inevitable correlation between risk and reward, and rather like the laws of gravity, if we try to create a regulatory system that defies the correlation between risk and reward, ultimately it will become unstuck. The basis for the investment industry is that correlation between risk and reward, yet I fear—particularly in the fund management industry—that some regulators try in effect to stipulate the investment mix, which has a big impact on that correlation between risk and reward.

The Building Societies Association and the Association of Financial Mutuals have made sensible suggestions about various aspects of our regulation, and interestingly they seem to recognise that our regulatory system prevents competition—it favours big corporate plcs and established players, and it does not help the mutual funds. They have come up with proposals to remove restrictive barriers to raising capital from mutuals, to change the regulation system that favours big corporate plcs, and to encourage market diversity. I would love to hear whether the Minister has sympathy with those ideas, and if so what we could try to change. The Competition and Markets Authority sounds like a wonderful idea—it is a wonderful name: who could be against it? It investigates cases where competition rules have been breached, and rightly so. Might it be, however, that Government regulation and Government fiat is doing more to restrict competition than any of the providers?

At various times in recent years there have been instances of alleged mis-selling in the financial sector, and people have been sold products on the basis of misinformation or facts that they regarded as misinformation. A constituent of mine was recently involved in the interest rate swap mis-selling scandal. That is not the first incident, and I fear it will not be the last. Every time there is an incident of mis-selling in the financial industry in this country, we ask about changing the rules and regulations, and rightly so, but we should not lose sight of the fact that the best regulator ought to be choice and competition. Happy customers ought to ensure that mis-selling does not happen, and behaviour that leads to mis-selling will be much less likely in a market focused on customer satisfaction, rather than simply compliance. We should not ask, “Are we able to do this?”, but “Does the customer want us to do this?”

I am afraid it is impossible for us to consider competition in the financial industry without considering the EU dimension—it is a sad reflection of how hollowed out our democracy has become that Ministers can really only reiterate the EU’s position on many of these issues. A couple of weeks ago Lord Hill issued a Green Paper on the capital markets union—another incident of further integration—and the Juncker Commission is pushing for standardisation in European capital markets. On the face of it, the aim is noble and it is a good ambition to remove the systemic risk in European capital markets. However, I fear that it has led to an alphabet soup of regulation in the form of the European system of financial supervision, and to unintended consequences. I will therefore touch on three rules that I think introduce such unintended consequences.

The first is the solvency II directive, which was enacted in January this year and regulates insurance companies across the EU. It is important for the House to understand that the insurance model ought to be an inherently stable model in the financial industry. It is no coincidence that during the financial crisis insurance companies tended to be pretty stable, which is because they tend to have a steady flow of income from premiums. Solvency II has the effect of imposing capital requirements on insurance firms, which would favour investment in sovereign bonds over corporate debt. I fear that would mean that there was less capital for companies—less choice, less competition and more homogenous products in the EU.

The second directive having unintended consequences is the markets and financial instruments directive II. Again, it aims to reduce risk, but as so often when one tries to remove the correlation between risk and reward through fiat, all sorts of unintended consequences are created. I fear that this will hinder the allocation of capital in markets in Europe. It will hinder the innovation in financial products.

The name of the alternative investment fund managers directive implies that left to their own devices there would be alternatives. I think the directive would inhibit the development of alternatives: the development of choice and competition in the financial markets. It would make it more likely that there would be homogeneity in the marketplace. I would be interested to hear if the Minister thinks that EU rules will help or hinder the development of competition in UK financial markets.

In conclusion, in most aspects of our lives we take choice and competition for granted. We take it for granted when we go shopping, when we buy groceries and shop around for holidays and entertainment. It is that choice and competition that I think makes life better, that improves standards and makes the world today so much better than it was a generation ago. We need to extend choice and competition into the financial markets too, and into financial services. Ever since the financial crisis, free market popular capitalism has been given a bad name. Free market capitalism needs to be given a good name again.

One key to doing that is to recognise that sometimes in financial services in this country there has been a cartel. One does not have to be Russell Brand or a leftist to recognise that there is a cartel in the financial services industry. We need to respond to that by breaking open the cartel, by allowing choice and competition and, in doing so, giving free market capitalism, the honest market and the financial services sector in this country a good name again.

I am sure the Minister agrees with me on this and I will be fascinated to hear what she thinks we need to do to ensure that we have proper choice and proper competition in our financial services industry once again.

[Mr Speaker]

I call the Minister.

[Mark Reckless (Rochester and Strood) (UKIP)]

rose—

[Mr Speaker]

Order. That would be the normal course of events. It is possible for another hon. Member to speak if there is time to do so, but ordinarily that is on the understanding that the Member concerned has the agreement of the sponsoring Member and of the Minister. I am not sure whether the Minister’s agreement has been sought. If the Minister were content for the hon. Gentleman to speak, I think he would intend to do so extremely briefly. Is the Minister content?

[The Economic Secretary to the Treasury (Andrea Leadsom)]

indicated assent.

[Mr Speaker]

The Minister is an accommodating Minister, and therefore a suitable expression of gratitude I know will be forthcoming from the hon. Member for Rochester and Strood, Mr Mark Reckless.

[Mark Reckless]

Thank you, Mr Speaker. May I first clarify whether the time limit of half an hour or 7.30 pm applies? It is not entirely clear from the Order Paper.

[Mr Speaker]

The answer is very straightforward: until 7.30 pm. That is the factual position, but the norm in these circumstances is for agreement to contribute to have been achieved in advance. In this instance, in which the Minister is graciously agreeing to accommodate the hon. Gentleman—and it is a case of graciously agreeing—luck should not be pushed. I am always happy to hear the hon. Gentleman in an orderly way. On that basis, we will now hear his thoughts briefly.

[Mark Reckless (Rochester and Strood) (UKIP)]

Thank you, Mr Speaker. I have no intention of speaking at any great length or keeping the Minister from her dinner or from her very important duties.

My hon. Friend the Member for Clacton (Douglas Carswell) talked about competition and breaking up a cosy cartel in banking. I have heard him use similar language about our political system. I think there is some commonality between what we see in banking and what we see in politics. I would like to add to his remarks on solvency II. As well as the risk of starving corporate sectors of credit they might otherwise receive, I have a concern that if there is a regulatory push to force insurers to hold Government bonds, particularly when they are required to hold those only within the eurozone for certain purposes, that actually may increase risk relative to holding diversified global corporate bonds.

I want to make three brief points. First, the barriers to entry in financial services, particularly banking, so often stem from regulation—in banking, there are minimum requirements in terms of assets, time and other things—and I credit the Minister, the Treasury and our regulators with reducing them in recent years. Will she give an assessment of how that has worked? Have we managed to relax the requirements without problems developing, and might it be possible to relax them further?

Secondly, the extent of competition in banking seems often to be the product of the state of the monetary cycle, whether globally or in a particular country. In the late 1980s, we saw what happened with the Japanese banks that kindly built Eurotunnel for us but made enormous losses in doing so. In the 2000s, we saw the explosion of credit, and particularly in this country, from 2001, we saw what happened in the inter-bank credit market and across Europe. In some ways, there were positives to that—for example, greater cross-border competition between banks in Europe—but it was driven by over-optimism about the eurozone and the state of monetary policy. Since we have retreated from that position, if anything the euro appears to have driven banks back to national markets, and it is the individual sovereign—the taxpayer—who has been required to bail out the banks, which I fear has reduced the competition we were otherwise seeing from that source.

Thirdly, my hon. Friend spoke about the limits and restrictions on the current account market. I am also concerned about the small and medium-sized enterprise market. A constituency case concerning the potential mis-selling of interest rate swaps and a company called Port Medway Marina has taught me that a small business can become so entangled with a bank that, when it gets into a dispute with the bank, even if over only one aspect of their relationship, it can be difficult to disentangle from the bank and move to another one. That is a limit on competition that I fear banks too often exploit. If the Minister could say something about that, I would be very grateful. I concur with my hon. Friend’s comments about her record in the Treasury.

[Mr Speaker]

I am grateful to the hon. Gentleman for his courtesy.