Community Reinvestment (Hansard, 5 July 2000)

§ Mr. David Kidney (Stafford)

I beg to move, That leave be given to bring in a Bill to extend the regulation of financial institutions so as to require them to demonstrate that their deposit facilities serve the convenience and needs for credit services and deposit services of the communities in which they are regulated to do business; and to require the Financial Services Authority to encourage such institutions to help meet the credit needs of the local communities in which they are regulated to do business, consistent with the safe and sound operation of such institutions. There was a great outcry when, on one day last April, Barclays Bank closed more than 170 branches. For 86 communities, the decision marked the end of access to any local banking services whatever. Customers complained, community leaders complained, and hon. Members complained, but the decision was not changed. This week, people power was successful in overturning another decision of some banks. The news that plans to charge for the use of cash withdrawal machines have been dropped is very welcome. However, I suggest that those two great issues demonstrate that banks cannot be trusted always to put the interests of their customers first.

Banks make their profits in the communities that they serve, and they should put something back into those communities. The Government believe that. The Government have ambitious plans to regenerate areas of social exclusion, to make cash banking cheaper for the poor and to maintain services in rural areas. The Government see banks as partners in achieving those aims, but seek a voluntary compact rather than a formal system of regulation. I think they are slightly wrong in that, although I certainly share the view that heavy-handed regulation is undesirable. My Bill seeks to achieve a light-touch addition to the current regulation of banks.

The Bank of England Act 1998 transferred the Bank of England's current supervisory powers to the Financial Services Authority. I propose that the FSA's powers be extended to mirror those of United States bank regulators under that country's Community Reinvestment Act 1977. In a moment, I shall describe those powers in a little more detail. However, I stress now that they are not intended to interfere with proper commercial decision making. Regulation must be consistent with safe and sound operation of banks' business activities.

Building on initial work by the social exclusion unit, the Treasury has set to work to tackle problems of financial exclusion. There are many manifestations of social exclusion, but I shall only give the example of the unbanked and the practice of so-called red-lining, which is a refusal to lend to certain areas. I support the Treasury's stated intention of encouraging wider access to financial services for individuals and communities who may be suffering detriment from not having access to facilities such as a bank account or some types of insurance.

I welcome the Cruickshank report on competition in United Kingdom banking. I welcome, too, the reports of the Treasury's policy action teams on "Access to Financial Services" and on "Enterprise and Social Exclusion". The former points the way to developing new and alternative means of delivering and providing banking services, such as the recent suggestion of a universal bank operated by the Post Office. The latter led directly to the Treasury inviting 333 the Bank of England to report regularly on finance for business in deprived groups and communities. I understand that the Bank of England intends to publish its first such report this autumn, with its regular review of finance for small and medium-sized enterprises.

Reports such as those help to inform debate concerning those who have no bank account and those who cannot gain access to suitable finance. They also help to determine the future direction of public policy. The extent of branch closures, for example, has contributed to the policy of offering a basic banking service through post offices. Additionally, the estimate that 3.5 million people are without basic banking facilities has contributed to the Treasury deadline to banks to provide, by October, a new form of basic account.

I believe that for policies such as those to succeed, we have to have the right regulatory framework in place. I want community reinvestment to be a matter of partnership, and the Government of the day to represent the public interest in such a partnership. I want communities to be represented in a variety of ways, including through customer organisations and voluntary organisations such as the Campaign for Community Banking Services. I want the private sector to be represented not least by the banks themselves. However, in my view, the banking regulator should have the powers to ensure that the banks keep their side of the bargain that that partnership reflects.

On the very first page of the Cruickshank report, there is a call for a new policy framework for the relationship between Government and the banking industry. Although I might quibble about the absence of a reference to Parliament, I agree that a new framework is desirable. I argue that, as part of that new framework, there is a need to underpin by statute the very good work that is being done to combat social and financial exclusion.

The Cruickshank report calls for action to be taken in a number of spheres of banking practice, including money transmission, small business markets and the reform of merger law. Although my Bill may not make it to the statute book on this occasion, may I ask Ministers, while they are contemplating implementation of those Cruickshank recommendations, also to consider seriously adjusting the powers of the regulator in the manner that I suggest?

There will be those who will be nervous about calls for additional regulation. There is an understandable fear that it may add to bureaucratic burdens and lessen competitiveness. Let me try to reassure anyone harbouring such fears. The model for my proposal is the US Community Reinvestment Act. America is not generally regarded as a country overburdened by state controls—nor are American banks seen as uncompetitive. However, for more than 20 years, the Act has encouraged banks and financial institutions to meet the credit needs of their communities. A bank's record on serving the community, including disadvantaged sections of it, will be taken into account when regulatory permissions are considered. The regulator's permission is required for such matters as mergers and branch openings.

In 1999, a group of Democrat Senators claimed that the Act's achievements included significantly improved availability of credit in historically under-served communities, a dramatic increase in home ownership by low and moderate-income individuals and investment by 334 commercial banks and thrifts in housing development and rehabilitation and in community economic development. The scale of community financing needs is obviously bigger in the US, but the principle is the same. When I mention that the US initiatives are channelled through community development banks, credit unions, loan funds, micro-finance funds and neighbourhood equity funds, it is plain to see that those initiatives are easily transferable to the UK.

Under the American Act, banks are assessed from time to time against three tests—the lending test, the investment test and the service test. As a result of the assessment, the regulator assigns the bank one of four ratings—outstanding, satisfactory, "needs to improve" or substantially non-compliant. The ratings are made public. Obviously, banks will want to maintain a high reputation by seeking the best rating. If we apply that regime to the example—hypothetical, of course—of a bank in this country that seeks to close a lot of branches, gives little notice of its intentions and makes little effort to provide alternative arrangements for the people affected by the closures, it is difficult to see how a bank that behaved in that way would obtain a rating of outstanding.

Instead, the desire to maintain the best rating might persuade a bank having a commercial plan to close branches first to set in place alternative arrangements for the communities affected. Greater use of information technology, collaborative arrangements with other banks and now arrangements with the local post office are the kinds of measures that could be planned in advance.

In that example of how a community reinvestment Act might bring positive benefits to this country, I chose to highlight branch closures because they have been of concern recently. That issue has illustrated the shortcomings of relying entirely on a voluntary approach in tackling financial exclusion. It is easy enough, however, to imagine other situations in which banking services to communities could be improved because banks would wish to behave in a manner that preserved the best rating.

I started my speech by referring to Barclays' programme of branch closures, so I shall finish with the reported words of Mathew Barrett, the new chief executive of Barclays. Speaking at the bank's annual general meeting in April, he said: The lesson is clear. Where we have difficult closures, there must be a debate among the people affected and we have to do all that we can to eliminate the inconvenience. We did not. We must do better. I want British banks to do better, and that is why I commend the Bill to the House.