Banking Competition

Teresa Pearce Excerpts

Thursday 12th July 2012 Westminster Hall

[Teresa Pearce (Erith and Thamesmead) (Lab)]

Some of the points that I was going to make have already been raised by my fellow member of the Treasury Committee, the hon. Member for South Northamptonshire (Andrea Leadsom). I was glad to add my support to the application for the debate, because it is important to my constituents.

I represent Thamesmead and Erith. Thamesmead is an estate built by the Greater London council in the 1960s. There are 45,000 people living there and not a single bank in the whole of Thamesmead. I have met all the major banks to ask whether they would be wiling to open a branch or have a mobile bank—anything, really—but they have all said no because it would not be economic for them. They have no thought for the customers there—mainly basic bank account holders, some of whom cannot even use one of the few ATMs there. People in my constituency have to take two bus rides to draw their own hard-earned money out of an ATM without incurring a charge. The service is simply not good enough.

Markets are supposed to operate on the principle of the virtuous circle. I doubt whether anybody in the country at the moment thinks that that applies to the banking market. Well-informed consumers are supposed to drive a competitive business to deliver what people want, and that is simply not happening in my area or many other areas. Banks are not delivering what my local small businesses want or what my local bank account holders want—they are just not delivering at all.

The market is supposed to respond to customer need and customer power, but at the moment, consumers do not seem to have any real choice or power. When people come to me and say that they have a problem with their bank, and I ask if they have tried another bank, they say, “They all seem to be owned by each other; what difference will it make?” There is no consumer choice. It is a market, but not a proper market, because it does not operate as any other market would.

[Cathy Jamieson]

I know that my hon. Friend cares passionately about people’s exclusion from financial services. Would she agree that part of the problem is that it is not easy for people who are in debt or do not have high incomes to switch? Going to another bank is fine if they have money, but it is not easy at all if they are trying to pay off an overdraft or loan.

--- Later in debate ---

[Teresa Pearce]

That is completely right. Debt is a big issue in my constituency, and I believe that that is why there is no particular interest in opening a branch, which would alleviate some of that debt through giving advice. That said, the staff in a branch of Barclays, which was a Woolwich, in my constituency have taken it upon themselves to try to help their customers. If they see people coming in and just paying off the minimum amount on their credit card for three months in a row, they sit them down, talk to them and explain that they are not paying off the debt. The people in that branch do a fantastic job. I feel sorry that they do not find saying, “I work for Barclays” something to be proud of at the moment. We should be thinking of the people who work in such branches and call centres in the current environment.

[Mr Thomas]

North Harrow, in my constituency, sounds a little like Thamesmead in that it does not have a bank branch. It has a post office through which personal banking customers of Lloyds can access services, but there is no equivalent for small businesses in north Harrow. Given our anecdotal experience of areas of the country that are unbanked, does my hon. Friend think there would be benefits from full disclosure by the banks of what and where they lend by postcode? We could then have proper understanding of which areas are unbanked and a proper debate about how to respond to that gap in the financial market.

[Teresa Pearce]

That is an excellent idea. There are very few things in society that do not benefit from transparency; the more we know, the more we can make a judgment. We should all press for it.

The hon. Member for South Northamptonshire mentioned that people are more likely to get divorced than switch their bank account, which is certainly the case in my experience. Only 36% of consumers have ever switched their bank account, and 45% of marriages are expected to end in divorce. I have been with the same bank since I left school, but it has changed, because it has been taken over repeatedly. That is a common experience. Lots of us will have sat in an office with a friend or spoken to a family member who has tried to switch bank accounts and heard the catalogue of horrors that ensued—from mortgages not paid to bounced direct debits.

As we heard today, the hesitancy to embrace bank account portability is a big barrier to customers being able to exercise choice. The seven-day switching programme is good step forward, but we should be working towards full bank account portability in the long term. I ask the Government to commit today to undertaking a full and comprehensive cost-benefit analysis of account number portability to start that process. Years ago, it was not easy to transfer a mobile phone number from one provider to another—in fact, the mobile phone companies told us that it was impossible. As consumer pressure grew and more providers entered the market, it became very possible, and now is common and simple to do. I see no reason why banks accounts cannot go down the same road. It would make a big difference to consumer behaviour—43% of consumers say that they would be more likely to switch their current account if they could keep the same number.

Even after the banking crisis, our banks are still too big to fail. It is not a proper market when the huge rewards are taken by some, but the risk is always sold on further down the line to other people, ultimately ending with the taxpayer. With only one new high street bank launched in over 100 years, it is pretty obvious that there is no true competition. Increasingly, new entrants need to be backed by one of the big five banks—as with the Marks and Spencer bank, which is backed by HSBC—or to have benefited from Government sell-offs, such as Virgin’s acquisition of Northern Rock.

The big banks are represented on standards-setting bodies, such as the Payments Council, which sets the level of access. There is clearly not a lot of incentive for them to lower the barriers to access for new entrants and thereby decrease their market share. That is why the Government should step in and establish a framework with increased competition and customer experience in mind. To increase competition, it is important to increase not only the number but the diversity of organisations operating, so that consumers have real choice.

Many of us will have read in the papers this week that there is a big consumer push towards ethical alternatives after the recent banking scandals: Charity bank, which lends its savers’ money to charity, has had a 200% increase in depositors; the Ecology bank has had a 266% jump in applications; and there has been a 51% increase in applications at Triodos, a Bristol-based sustainable bank. Credit unions also report week-on-week increases of at least 20% and up to 300%.

Building societies and credit unions obviously have an important role to play in constituencies such as mine. Unlike banks, they are accountable to their members, who are also their customers. There is no discrepancy between the aims of the shareholders and the customers, because they are one and the same. Building societies and credit unions are a true service industry, not a self-serving industry. There is usually a big culture difference in the way they operate in comparison to banks. Most markedly, they are free from the pursuit of short-term returns for shareholders that has contributed to risky behaviour in the big banks and in turn threatened the stability of banking system as a whole.

What we are seeing with the banking crisis is the result of the demutualisation agenda kick-started in the 1980s and peaking in 1997, when a host of building societies became banks, including Woolwich building society, which is a mere mile from my constituency. The Woolwich was founded in 1847 as one of the first permanent building societies. It had a proud local tradition—it was a major employer and an asset to its community. Ultimately, it demutualised and was eventually taken over by Barclays. People used to say, “I’m with the Woolwich.” They were proud to be so, but I do not think they say, “I’m with Barclays and I’m proud to be.”

During the demutualisation period, the investment banks toured the boardrooms of the building societies, putting the case for demutualisation, often making large fees as advisers in the eventual takeover. The end result is that there are now five big banks—Lloyds, the Royal Bank of Scotland, HSBC, Santander and Barclays—with a disproportionate market share. They have an estimated market share of 85% of the personal current account market and 67% of the mortgage market.

When I was writing my speech, I thought back to when I was young, which was a long time ago, and to when the Greater London council used to give mortgages to homebuyers. The GLC was one of the two biggest mortgage lenders in London at the time. Getting a mortgage from the GLC was a great incentive for local people. They felt a sense of ownership of the GLC, and the GLC had invested in their homes, which created a stable society. They did not have what we now have in parts of London—rogue landlords profiteering from renting out terrible accommodation. Giving people a stake in something makes them better citizens. It is a shame we do not have the same model now.

Taxpayers have ploughed enormous sums of money into rescuing the banking system. Northern Rock, RBS and Lloyds TSB have received direct bail-outs, and all banks have benefited from some form of public subsidy, especially quantitative easing and deposit guarantees. The publicly funded support of the taxpayer does not appear to have translated into banks acting in the public interest. In fact, it appears that in some areas of banking, few lessons have been learned, and the banks’ existing priorities and practices seem to be a return to business as usual.

UK banks also hold 85% of the business banking market. In other countries, the picture is different. In the US, there are some 15,000 banks and credit unions operating in the market. In Germany, there is a network of 431 locally controlled banks with public interest criteria in their governing constitutions. Change, therefore, is possible. With the political will and the right Government intervention, it could take place.

Earlier this year, the chief executive at the Office of Fair Trading said:

“For too long banks have needed pressure, often sustained, from regulators and enforcers to introduce the things they should have already been doing.”

In a relatively short period of time, we have ended up with banks taking over each other, leaving just five major banks, and with the deputy governor of the Bank of England describing his own industry as a cesspit. That is a reflection not only on London as a financial centre but on the whole of the UK. The finance sector is a major employer and we should be proud of it. As this issue crosses party lines, it is important that we all put our minds to finding a solution to the problem. We have made piecemeal alterations, but we need a full-scale inquiry into the banking sector. Opening up the sector to competition is one of the major ways to achieve that aim. So far, regulation has not altered culture or behaviour. Perhaps losing profits and customers will bring about such a change in the banks.

We need Government intervention to put the experience of customers at the heart of regulation. The Labour leader and the shadow Chancellor recently made a series of proposals for a banking system that serves not just the bankers but the real economy. They include a British investment bank backed by the state to increase lending to small businesses; a code of conduct for bankers; a greater push for international changes to limit bonuses; selling off high street branches; and greater transparency. All of those proposals would be welcome steps forward.

I have a couple of ideas to float to the Minister. The big high street banks could control the clearing systems, and any new entrant would have to use those systems. As it is unrealistic to presume that a new entrant could create their own systems because of the cost of infrastructure, why not use the Bank of England to monitor and regulate the cost of accessing the clearing systems? Even better, we could make it a condition of the big banks’ banking licence.

Businesses, especially small businesses, pay higher fees to the banks. Will the Minister discuss this matter with the Minister for Housing and Local Government? We could get local authorities to set up a membership system to negotiate bank charges on behalf of local businesses. For example, some small businesses are paying around 50p per £100 cash banked, while the big supermarkets are paying around 6p per £100. Those businesses should come together and collectively borrow. A local authority could perhaps help in this regard, through the local chambers of commerce. We must look at using customer power in a way that helps customers.

I have one final thought, which I doubt the Minister will agree with. Government, both national and local, could pay all their salaries into the local credit union or similar not-for-profit institutions such as Postbank. Obviously, each individual would be free to withdraw their money and put it somewhere else once it has been paid in, but many would keep their money in the local credit union and that would provide a strong impetus for alternative retail banking. Although I doubt the Minister will agree with me, it is a possible way forward.

In conclusion, I hope that one day, the residents of Thamesmead can choose which bank to go to, rather than choosing which bus to catch to get to the nearest bank.