§ Mr. Patrick Hall (Bedford)I am grateful for the opportunity of securing a debate on the United Kingdom banking sector. I would like to focus on banks overcharging small businesses. That is a serious matter of considerable public interest with significant implications for Government.
My attention was drawn to the problem through the experiences of a small business that trades in Bedford. Its proprietor had become convinced over the years that he was being charged too much on his business account. Strenuous efforts succeeded in generating a refund of £16,000 from the relevant bank as a final settlement of the dispute. However, my constituent persisted because he knew that more money was owed. He secured the services of a firm that specialises in recovering alleged overcharges. Even then, the bank delayed, blocked and prevaricated. I became involved at that stage, at my constituent's request. I was surprised that the bank, although it sent me lengthy and courteous letters, initially refused my request for all the parties to meet in an effort to resolve the matter once and for all. It eventually agreed to a meeting, which I attended as an observer.
After two or three hours of vigorous negotiation, the matter was settled and the bank wrote out a cheque on the spot that was well in excess of £20,000. I was taken aback. Together with the earlier cheque, the bank had returned to my constituent's business more than £36,000, including compound interest. That £36,000 should not have been taken from the business in the first place. It constituted overcharges, which represent valuable cash flow—the life-blood of any small business. It should have been available to underpin the business's activities, and assist its employment capability and its contribution to the local economy. That £36,000 was returned only after five years of effort—which would have been better expended in running the business—by the proprietor and after he involved a specialist firm and his Member of Parliament.
My first thoughts about the case were that the unfortunate experience was simply the consequence of a series of human errors and misjudgments by the bank in dealing with an individual customer. I was rather sceptical when the overcharge recovery specialists, Anglia Business Associates, told me that my constituent's experience was not uncommon and was, indeed, so widespread that several firms and individuals specialised in and made a living from recovering bank overcharges for business customers all over the country. Those firms describe themselves as the bank audit industry.
Anglia Business Associates showed me its evidence, which was not only drawn from people who had contacted the company because they believed that they had a problem, but from random testing by spot audits on business accounts in various parts of the country, organised on separate occasions in the past few years by, for example, BBC World's "Watchdog", ITV's "World in Action", Granada's "Tonight with Trevor McDonald" and The Daily Telegraph. That evidence showed that approximately 75 per cent. of all bank business customers have been overcharged at some time 221WH and that the average overcharge amounts to about £4,000. Those figures have been in the public domain in recent years and have not been countered with evidence from the banks.
High street banks claim to have approximately 3.2 million business customers. The Department of Trade and Industry says that, out of a total of 3.7 million business, 3.5 million are described as microbusinesses—small businesses, which employ fewer than 10 people. It follows that the majority of bank business customers must be small or microbusinesses. The banks will not reveal the proportion of their customers who have bank borrowing, and use overdrafts and loans. However, it is fair to suppose that businesses use bank borrowing for cash flow and other purposes.
If we make a conservative estimate that 50 per cent. of businesses use bank borrowing and apply the figures that I mentioned—75 per cent. of business customers overcharged an average of £4,000—it suggests a staggering total of £4.8 billion in overcharges. If 80 per cent. of business customers use bank borrowing, the total in overcharges is £7.7 billion. Those amounts are shocking. Doubtless, some people will be sceptical, and I do not ask anyone to accept the figures blindly. There is credible, verifiable evidence of a serious problem of bank overcharging in this country; it should be put to the test.
I want to consider what is meant by overcharging. Don Cruickshank, who is chairman of the independent Treasury review of banking services in the United Kingdom, has identified an absence of competition in the sector, especially among those that offer services to small businesses. In an uncompetitive market, it is likely that we will find uncompetitive pricing. That is a definition of overcharging. However, the overcharging identified by some customers and the specialist recovery firms to which I referred is different.
We are considering circumstances in which the advertised rate is not the rate that is applied to the customer. The advertised rate may be competitive, perhaps 5 per cent., but, on later inspection, the applied rate turns out to be 8 per cent. Overcharging does not appear in an identifiable way in accounts. Other devices include calculating interest on wrong overdraft limits; applying penalty rates that should not have been applied; and charging hidden management fees. All those devices have been used without informing the customer. That is not only uncompetitive practice; it is sharp practice.
The question is not whether such practices happen, but to what extent they happen. I would welcome testing the available evidence and gathering more. That should be done through an independent investigation commissioned by the Government. It should be done because strong evidence, beyond prima facie indications, exists of a significant and unjustified diversion of resources from businesses to banks. That can only harm the productive economy and employment prospects in this country. It represents appalling, unethical, socially irresponsible business practice, which is a national scandal and an abuse of trust.
222WH May I draw briefly from the executive summary of British invisibles 1997 report on banking? To paraphrase, the banking industry operating in the UK is a crucial and integral part of the UK economy. The sector consists of UK and foreign banks operating in the UK and its broad customer base encompasses individuals, companies and public sector organisations. The industry's assets are well in excess of £2,000 billion. Slightly under half are held by the UK banks, which are dominated by the high street retail banks. I am not arguing with any of that. The banks are a crucial and integral part of the economy and most people's lives. It is right, therefore, to expect that they are efficient, competitive and transparent and that they serve their customers and the country well, deal straight with people, charge them fairly and, as a result, earn and are worthy of their trust. It seems that all the high street banks, in varying degrees, have overcharged at one time or another, and not only as a result of human error. Of course there is human error, but if that were the principal cause of overcharging one would expect there to be plenty of gainers as well as losers. The bank audit industry is absolutely convinced that that is not the case.
I have described what is meant by overcharging. The process also involves going into denial if and when a customer inquires or complains. There is, so I understand, a clear pattern of making excuses and saying that there is insufficient staff time to investigate. Paperwork has been lost or never existed. Progress is slow and grudging and, at some point, a partial refund is offered. After a year or so, a fuller amount may be offered to those customers who have survived the obstacle course. May I refer to an example of that?
In February 1997, Anglia Business Associates lodged a claim on behalf of a family-owned engineering business based in North Yorkshire that had been overcharged by more than £15,500. The bank's immediate response was to say that its own review of the account showed not an overcharge, but an undercharge of £650. A month later, however, it changed its mind and offered a refund of slightly more than £4,000 in full and final settlement, stating categorically that it had not made an error. After being pressed to reconsider, three months later the bank's final settlement was raised to £5,700. A little later, it was raised to £6,000 and later still there was a breakthrough to £13,000. Finally, in January 1998—almost a year after the claim was first lodged—it was raised to £15,200, which was about £500 short of the refund originally asked for. Time after time, in every letter that it wrote, the bank stressed that it had not made any mistakes at all. That is interesting: it had not made an error, but was prepared to give money away to its customer if it asked hard enough.
I am sure that you, Mr. Deputy Speaker, are aware that concern about bank overcharging and other matters in respect of the relationship between banks and their customers has been in the public domain for a long time—well over 20 years—and is not exactly new. It is remarkable that it has not been firmly addressed. Pressure from the National Consumer Council led to the banks setting up and sponsoring the voluntary banking ombudsman scheme in 1986. It has become clear that the scheme is somewhat weak. For example, it cannot recommend on policy or make rules for the banking industry. It can deal only with individual complaints, and does so only if and when all the internal procedures 223WH of the banks have been exhausted and if the matter is deadlocked, but the banks can be pretty expert in delaying the internal investigation of complaints. The ombudsman scheme as currently formulated therefore turns away a high percentage of complaints.
As I interpret the presentation of the banking ombudsman's 1997–98 annual report, which is the most recent I could find, he received almost 20,000 concern calls on his helpline and 12,000 written complaints. Conciliation settled 960 before formal investigation and 630 went through formal investigation. The indications from that are that thousands of complaints and potential complaints are not being addressed through that route. Another initial weakness of the scheme was that it was limited to personal customers and unincorporated businesses. Continuing public pressure in the 1980s led to the then Conservative Government setting up a Treasury review into banking services—the Jack committee, which reported in 1989.
The Jack committee recommended that the banks adopt a code of practice, that the ombudsman scheme be extended to cover incorporated businesses and that it be made statutory. The then Government rejected the latter two recommendations and the banking code was not introduced until 1992. It is voluntary and not all the banks signed up to it. Those that did are prepared sometimes—perhaps too often—to ignore it, as well as their own company versions of it. In 1991, again in response to representations from small businesses, the public and Members of the House, the then Chancellor of the Exchequer asked the Bank of England to carry out a survey of lending to small businesses. The concern was that cuts in base rates were not being passed on to small business customers.
As part of the outcome of that survey, the Chancellor asked the banks to suggest a code of conduct for small business customers. That is also part of the scene. By 1993, continuing public pressure led to him asking the Bank of England to repeat its survey of bank lending to small firms and, in addition, he agreed to the recommendation of the Jack committee of 1988 that the banking ombudsman scheme should include small incorporated businesses. He accepted, however, the banks' recommendation that that should be restricted to businesses with a turnover of less than £1 million a year, which is not a huge amount for a successful small business. That means that the only option for many small businesses, apart from involving a specialist firm, is legal action, which is an expensive and difficult route for them and for individuals. Only the banks are properly equipped to pursue it.
It is fair to say that, although the issue of alleged overcharging has been around for a long time, it has managed to avoid being put under the rigorous scrutiny of the Government and the regulatory authorities. The usual response has been that charges are a matter for the banks—which exercise their commercial judgment—not for action under competition legislation, and should be resolved through their internal procedures or the banking ombudsman. I am an optimist and I am pleased to sense that there are indications that the worrying and unsatisfactory state of affairs that I have described could at last be effectively addressed. As part of the general context of that, my right hon. Friend the Secretary of State for Trade and Industry has recognised the poor deal on prices that British customers get in a number of 224WH areas, compared with those on the continent and in the United States. He has promised action, for example on international price comparisons for cars.
With regard to the banking industry, the interim report of the independent review chaired by Don Cruickshank, which is due to report soon, was published last July and was responded to by the Government in the form of changes to the Financial Services and Markets Bill, which was then in Committee. One of the positive features of a very long and complex Bill is the proposed one-stop shop statutory financial ombudsman scheme, combining and replacing eight schemes, including that of the banking ombudsman. Unlike the voluntary scheme, it is proposed that the decisions of the new ombudsman will be binding on respondents, which is helpful. The new scheme provides us with a golden opportunity to address the weaknesses of the previous arrangement. There are two areas to which I wish to draw attention.
First, there is a failure to address thousands of complaints. I have no objection to requiring that a customer with a complaint first puts it to the bank for consideration by its internal procedures under its customer code; that makes complete sense. However, the new financial services ombudsman will need to be mindful of the techniques too often deployed by banks before a state of deadlock is agreed in writing.
Secondly, it is important that the ombudsman seeks to improve voluntary customer codes. The banking code, to which I have referred, is, so I understand, drawn from a number of banks and building societies, and tends to reflect the lowest common denominator rather than standards that might best serve the customer. In dealing with complaints over the years, it is essential that the new ombudsman scheme looks to raise standards and improve codes. My hon. Friend the Economic Secretary knows that I have raised that point with her in Committee, and I ask her to reflect further on it today.
There is also the key matter of regulation. Banks are regulated by the Financial Services Authority with regard to capital structure and their accounts, and to ensuring that they are run by fit and proper persons. Although the FSA is developing and is very much encouraged and required to develop an outlook more mindful of the customer—to become more customer-friendly—the regulation of banks does not include pricing, or matters that might be seen as relevant to a consumer watchdog. Indeed, there is no consumer watchdog for bank customers. The financial services ombudsman is intended not to act as a consumer watchdog but to be impartial in reaching balanced decisions. That ought to lead to a consideration of how such a state of affairs could be addressed.
How about having "Ofbank"—an office of banking? Ofbank could be an independent banking regulator, complete, perhaps, with regional customer services committees and a national customer council, charged with advising the regulator on policy issues. Such a development would tune in with the independent banking review's observations that the UK banking sector lacks competition—a position strongly supported by the Consumers Association.
Other regulators, such as the Office of Water Services, the Office of Electricity Regulation and the Office of Telecommunications, were introduced because of the 225WH obvious monopolistic nature of the privatised utilities created by the previous Government. There is not enough competition among banks. The degree of regulation would of course reflect the extent of the competition and, where competition develops, a light touch may be all that is necessary.
It is the intention of the Financial Services and Markets Bill to create the legal base for innovation, competition and greater efficiency in financial services, but until that happens in the UK banking sector, Ofbank will have a job to do.
There is one other major issue that I want to raise. It is clear, is it not, that I believe bank overcharging to be a serious problem; I want it to stop. If it were to cease from today, what would be done about the past? Customers have been overcharged and that needs to be addressed, just as the mis-selling of personal pensions during the first part of the 1990s is slowly and steadily being addressed. It is worth recalling that a final total of—perhaps—1.8 million cases will have been examined in trying to resolve the mis-selling scandal, and that compensation of between £5.3 billion and £7.6 billion may have to be paid.
I ask the Government to do six things: first, to acknowledge that there is a problem of bank overcharging, particularly on small business accounts; secondly, to commission an independent investigation to examine the evidence and establish the scale of the problem nationally; thirdly, and somewhat dependent on the outcome of the investigation, to take proactive, effective measures to compensate customers for past overcharging; fourthly, to create the legal and regulatory framework in which effective competition can take place; fifthly, to ensure that the financial services ombudsman seeks to improve the banking code; and sixthly, to give serious consideration to the establishment of a bank regulator who encompasses the role of consumer watchdog.
I do not expect my hon. Friend the Economic Secretary to be able to agree to all of that today, but I ask her to give all the matters very careful thought. I am asking for nothing less than a new deal for bank customers—without whom banks would not exist—which serves the British people and British business and makes it absolutely clear, once and for all, that the practice of bank overcharging is unacceptable, intolerable and must cease.
§ Mr. Tim Loughton (East Worthing and Shoreham)I am pleased to be able to make a short contribution to this important debate. I should first declare an interest, as recorded in the Register of Members' Interests. Secondly, I apologise to the hon. Member for Bedford (Mr. Hall) and the Minister because, owing to a longstanding engagement just after 12 o'clock, I may not be present for the winding-up speech
I feel that I have been brought on my first outing to Westminster Hall on false pretences. I thought that this debate was about competition, regulation and the review of the banking sector. The issue of competition crept lightly into the hon. Gentleman's comments, but only in rather scornful terms; regulation did not feature much; and Don Cruickshank was mentioned just twice. Instead, we heard something of a bank-bashing session.
226WH I was interested to read the press release that the hon. Gentleman issued in advance of the debate. To give him his due, he referred to Anglia Business Associates, to which it might be helpful to allude further. It seems that that company is the basis for the hon. Gentleman's raising this subject. Although it might be seen in his eyes to be providing a public service, it is a commercial, profit-making organisation, which makes its money by taking a 35 per cent. cut of any money that it is able to retain on behalf of clients whose cases against banks it takes on. That should be put on record.
The press release describes the organisation's fairly alarmist claim that in excess of £5 billion has been wrongly extracted from clients of banks over a number of years: 35 per cent. of £5 billion makes Anglia Business Associates a rather wealthy company.
It would be interesting to hear more about who regulates that company and whether they are acting in the best interests of customers and the whole banking sector. The hon. Gentleman's press release refers to a Mr. Mark Radin, who I believe is the owner of the company, and gives his phone number for further inquiries.
I am no great fan of retail banks, and indeed I would be the first to admit that they have been exceedingly hapless with their public relations over a number of years, especially on the subject of charges. They certainly gained a very poor reputation in the recessions of the 1980s and early 1990s for the way in which they treated small businesses. They were greatly at fault, although the matter may not have been quite as one-sided as the hon. Gentleman made out. On average, the banks made a 21 per cent. return on their equity, so they were very successful.
The British banking sector accounts for about 4.2 per cent. of the UK economy and last year paid more than £4.5 billion in tax to the Exchequer, so there is no denying its importance. Because of the common poor perception of the sector, the Chancellor announced an independent review into its working on 3 November 1998 under Don Cruickshank, as the hon. Gentleman said.
The remit of the review was to consider the UK banking industry, with the exception of investment banking; to examine the levels of competition, innovation and efficiency in various sub-markets, and especially the relationship with small and medium-sized enterprises; and to make international comparisons. In January 1999, a consultation document was produced. For all the qualms about the extent of co-operation from the banking sector, it took a great deal of work on the part of commercial banks to provide the information that was required to make the review meaningful.
In April 1999, a progress note was issued by Mr. Cruickshank and the review was widened to include e-commerce. Specific teams were set up to deal with the subject of small businesses in deprived areas and their interaction with the banking sector. Perhaps most notably, in July 1999 Mr. Cruickshank produced an interesting interim report, focusing on the dynamic interaction between competition law and banking regulation, and making six main recommendations designed to ensure that competition considerations are more closely factored into the regulatory process.
227WH The theory is that in future competition problems should be less likely to occur if the possible effects of regulatory decisions on banking competition are the subject of more rigorous scrutiny at the time when they are made. There was also discussion of the future role of the Competition Commission, taking advice from the Office of Fair Trading.
The publication of the report was timely for those of us, including my hon. Friend the Member for Arundel and South Downs (Mr. Flight) and the hon. Member for Bedford, who have served for many, many months on the Standing Committee considering the Financial Services and Markets Bill, which is to continue its path through the House next week. The Conservative Opposition closely agreed with the comments made by Don Cruickshank.
Indeed, the Official Report of our deliberations in Standing Committee A shows that the Conservative Opposition tabled amendments specifically to promote competition in the UK financial services industry—which includes banking—and international competitiveness. Amendment No. 46 dealt with the objective—an objective rather than just a principle—of competition, to include
the maintenance of competition and promotion of United Kingdom competitiveness".—[Official Report, Standing Committee A, 8 July 1999; c. 42.]We also tabled two new clauses defining the whole subject. Interestingly, in all our sittings—I was at virtually all of them—no comment was made by the hon. Member for Bedford on that subject, which overlaps neatly with today's debate. Indeed, it is clearly recorded that on 8 July the hon. Gentleman voted against proposals that would have included a competition objective and a competitiveness requirement in the Financial Services Authority. Where did his new-found interest in competition come from? When we could have done something tangible about it, by influencing relevant legislation, he had nothing to say and voted against our proposals.The most important factor that would allay the fears that the hon. Gentleman and many others quite reasonably share is the promotion of competition in the UK banking sector. Conservative Members' entire approach to the Financial Services Authority has been to limit the impeding by regulation of the financial services industry.
There are something in excess of 560 banks in the City of London, including many foreign banks, many of which offer private banking facilities and any of which can apply for licences to set up as banks offering current accounts. There are in excess of 43 banks ordinarily offering current accounts in this country, and myriad other providers of other products along similar lines.
Such services are offered not only by the traditional banks but by the demutualised building societies, by an increasing number of credit unions—we would certainly encourage the freeing up of that sector, which plays a key role—and, perhaps most significantly of all, by the burgeoning internet services, which are proving to be extremely successful in the banking climate.
Only yesterday, the results from Prudential, which owns Egg, were published. In the space of about a year, Egg has brought in about £7.6 billion of private money on deposit, gained more than 800,000 depositors— 228WH bringing in an extra 100,000 in the final quarter of 1999 alone—and built up an asset book in excess of £2 billion. It has been enormously successful by being competitive and offering low or nil charges and preferential rates of interest. Like any other commercial company with a banking licence in this country, it is perfectly at liberty to do that. It is accessible to anybody who chooses to gain access to it and has the money to bank with it.
Similarly, Virgin is setting up a successful internet banking business. There is also much greater access for foreign banks—this has been a consideration in the Financial Services and Markets Bill—to offer facilities to British customers at competitive rates. The number of credit card providers has doubled in the past six years alone.
It is not only traditional banking houses that offer facilities to individuals. Largely with the approval of the Government—I agree with them—supermarkets such as Sainsbury's and Tesco and even car manufacturing companies are offering banking facilities to members of the public. It is interesting to note that, perhaps as a dry run, when the Government launched their initial hapless proposals on individual savings accounts in 1997, they strongly promoted new forms of providers, to increase competition in the banking sector and encourage savings schemes such as ISAs to excess.
Of course, ISAs have been an enormous disaster in terms of bringing in new investors, but that is the marketplace. The market has shown that the product is defective. The product will succeed only if there is a multiplicity of providers offering different products and services that appeal to different people.
Everything that the hon. Gentleman has, justifiably, said today, could be resolved to a large extent by the greater promotion of competition, for which Conservative Members have been arguing for a long time. In practice, there is more competition because of all the new providers entering the market. The hon. Gentleman would do better to concentrate on the prime considerations: the transparency of information on the availability of those products; greater upfront transparency on charges and agreement to them, which has happened since voluntary codes of banking practice came in in 1992; greater product innovation, which will only be hampered by excessive regulation, as has happened in other countries; and, greater moves towards making accounts portable and mobile.
The greatest incentive for a bank not to charge excessively is the power of the customer to say, "I don't like the service or the level of charges that you are imposing and I will take my account elsewhere." Some work could be done to improve the mobility of accounts, in particular when one is tied up with direct debits and such like. Those are the considerations to which the hon. Member for Bedford would do best to direct his ire.
I have no doubt that in future there will be a much tougher regime for banks that promote uncompetitive practices under the competition laws—for example, through the greater powers that are being given to the Competition Commission, the campaigns against so-called "Rip-off Britain", or whatever soundbite one wants to use. However, the marketplace and the greater mobility of customers will help most of all, in particular during the next few years as the way in which financial services operate changes radically.
229WH The hon. Gentleman's six-point plan contained little if anything about those considerations. He said that the Government should acknowledge that bank overcharging is a problem. There has been acknowledgement of a problem with bank charges—or the perception of them—which is why the Cruickshank commission was set up. The hon. Gentleman asked for an independent investigation. One would hope that the Cruickshank review has some degree of independence—certainly some of the comments in Mr. Cruickshank's interim report in July grated with what the Chancellor had said days earlier, but the Government have not so far been amenable to accepting our amendments to the Financial Services and Markets Bill.
The hon. Gentleman asked for compensation for past overcharging. Banking codes have existed since the early 1990s and it does no one any service to rake back over the past 10 or 15 years to prove that, in what was a different environment, banks should have been liable for all those charges. That would provoke a scandal like the pensions mis-selling scandal, on a massive and wholly impractical scale.
The hon. Gentleman also asked that a legal and regulatory base be created within which effective competition can take place. The Competition Commission and what Mr. Cruickshank is trying to do will deal with part of that problem. Furthermore, the hon. Gentleman asked that the new financial services ombudsman should improve the banking code, and he came out with the extraordinary statement that the ombudsman is not there to act in the interests of the consumer. The entire Financial Services Authority is there to act on and safeguard the financial interests of consumers, so that demonstrates a basic misunderstanding on the hon. Gentleman's part.
Finally, the hon. Gentleman said that we need yet another "Of-organisation"—an "Ofbank." We have the FSA, the Bank of England and the Competition Commission. We do not want yet another tier of regulation which could succeed only in stifling competition, which would result in fewer players in the market, fewer products, and less innovation. That could mean only that choice for the consumer and the charges that go with such choice would be diminished, which is not what we are trying to achieve.
This debate has been disappointing because of the way in which the hon. Gentleman moved it. It does no one any good simply to bash the banks and to hark back many years. If the Government are to succeed in many areas, such as saving schemes and the regional venture capital fund that they want to promote, it is important for them to liaise with the banks. The banking sector is vital to the economy. Many things have gone wrong and many need to get better, but it is competition, above all, that will bring that about.
§ Mr. Martin Salter (Reading, West)I congratulate my hon. Friend the Member for Bedford (Mr. Hall) on securing this important Adjournment debate. The hon. Member for East Worthing and Shoreham (Mr. Loughton) was somewhat mean spirited in his response. If he thinks that my hon. Friend was bank bashing, he should listen carefully to my contribution.
230WH I shall concentrate on the on-going review of banking services and the fact that the network of rural and district bank branches is shrinking fast. In doing so, I shall draw on the excellent contribution made by the hon. Member for South-East Cornwall (Mr. Breed) to his debate on financial services on 15 December, which also elicited a response from the Economic Secretary to the Treasury. I also want to demonstrate the concern felt by all hon. Members regardless of party—expressed in early-day motion 822, which attracted about 89 signatures, and early-day motion 962—about the lack of availability of banking and financial services and the worrying pace of district bank branch closures.
I have had direct experience of the sheer lack of concern shown for the elderly and disabled customers of Lloyds TSB in my constituency. Last summer, Lloyds TSB introduced an ill-fated pilot scheme, which completely removed cashier services from four branches in the Reading area. It showed no concern for the elderly or the disabled. How are blind people supposed to use a fully automated bank branch? How are the disabled supposed to access some of the services via what are known as ATMs? What small business can tolerate a system that will offer only £200 in cash? What jobbing builder can operate in this day and age on only £200 per day for building materials? What small shops can cope with the loss of a day's interest on their deposits as a result of it taking four days to clear cheques and deposits as opposed to three when one deposits over the counter?
Only after an extremely high-profile and vigorous campaign, which I brought to this place, supported by local people and also ably supported by our local newspaper, the Reading Chronicle, was Lloyds TSB, the largest and most profitable of our banks, forced to back down and reinstate the cashier service.
I worry that that bank's ill-fated pilot scheme in Reading is simply a nasty glimpse into the future. Robots may well replace people in banking. The disabled, the disadvantaged and those living outside the large town centres would then be denied local access to a range of financial services. That is called financial exclusion and the Government need to lead the way in tackling that serious threat to the quality of life of many of our constituents.
The branch network of Britain's retail banks is shrinking as I speak. More than 4,000 branches of high street banks have closed in the past 10 years and the independent consultant, Deloitte, predicts that a similar number will close in the next five years, which is a significant quickening of the pace of closure. Barclays announced 200 more closures starting this month and, if last Sunday's The Mail on Sunday is to be believed, although I accept that it is not always right, Barclays' new Canadian chief executive, Matthew Barrett, is likely to announce a further round of closures with the bank's results next month.
NatWest has announced a further 200 closures as part of its defence against the Scottish take-over bids and for Lloyds TSB the closures are a continuing process. The closures are hardly likely to stop there. For a growing number of communities in rural areas, urban suburbs and inner-city areas, the result is a complete loss of local banking representation.
The campaign for community banking services, with which many hon. Members have been in touch in the past few years and which acts as the voice of 24 of some 231WH of the country's best-known charities and trade organisations, has forecast that at least another 1,000 communities will become bankless if present trends continue unabated.
The lack of local banking services impacts most heavily on the vulnerable, the elderly and disabled and on shopkeepers and small business people. It also impacts on those on low incomes or without the use of a car. For many, the lack of such services can mean not only inconvenience but major difficulties—early loss of financial independence and exclusion from mainstream financial services. For the shopkeeper, it often means lost turnover, as the more mobile go elsewhere for banking and take their shopping needs with them. Some of those businesses then have to close, and the lifeblood is drained from our district, rural and inner-city communities.
My hon. Friend the Minister should appreciate that, beyond the obvious problems, there are serious implications for community sustainability and environmental damage, as many are forced to use their cars to travel further—not only for their banking needs, but to shop for items that were previously available within their local communities. The situation will undoubtedly get worse as the full effects of the current takeover battle in the retail banking sector are felt. Frankly, it is spurious for the hon. Member for East Worthing and Shoreham to claim that the market will be the answer to all our needs. Clearly, it will not, and there is a need for Government action and intervention.
The Government's current attitude—which seems to be to leave the question of branch closures to self-regulation—worries hon. Members, including myself. Self-regulation by an industry in turmoil, driven by the desire to slash costs and increase profits, is likely to achieve little.
Let us look at the banks' record on self-regulation. NatWest gave five weeks' notice to close the only branch in Killamarsh in Derbyshire, which has a population of some 10,000. That was done just before Christmas in 1998. The bank refused to listen to the concerns of thousands of local people. I have referred to the tactics and behaviour of Lloyds TSB in my constituency. The company was quite happy to remove the last bank from the village of Theale in my constituency, and it moved to the self-service, fully automated scheme with no consultation with its customers—those stakeholders who provided the bank's record £3.2 billion profit last year. The village of Wheathampstead in Hertfordshire—featured in the BBC's "Panorama" programme in October—was deserted by Barclays at only two weeks' notice, either side of an August bank holiday.
So much for self-regulation—so much for community consultation. So much for giving a damn about the interests of the people who made those banks so successful and profitable. Can the industry be trusted to self-regulate? I think not.
§ Mr. LoughtonWill the hon. Gentleman give way?
§ Mr. SalterNo, I will not.
In anticipation of what the social exclusion unit's policy action team might say, we have seen token experiments in social banking being planned by 232WH individual banks in half a dozen deprived areas—notably Portsmouth and Salford. By their own admission, the banks concerned see these merely as expensive one-off experiments. That is not much help for the hundreds—soon to be thousands—of communities throughout Britain who are losing their banks.
Three quarters of the cases brought to the notice of the campaign for community banking services over the last two years were not in deprived areas. What sort of help will those token social banking schemes be to middle England, or to rural areas in Scotland or Wales?
I make a plea to my hon. Friend the Minister that she, unlike her predecessor, finds time to meet representatives of the campaign for community banking services, which has been requesting such a meeting since January 1999. If not, will she at least meet hon. Members, such as myself, who are in the process of establishing an all-party campaign for community banking? Why is provision not being made in the Financial Services and Markets Bill to give the Financial Services Authority at least reserve powers regarding local access to basic banking services?
I thoroughly endorse the six points made by my hon. Friend the Member for Bedford in his measured and thoughtful speech. I believe that we have made the case for a banking regulator to guarantee access to financial services, and to tackle head-on the growing menace of the exclusion of hundreds of thousands of people from financial services.
§ Mrs. Louise Ellman (Liverpool, Riverside)I congratulate my hon. Friend the Member for Bedford (Mr. Hall) on securing this debate. It is important because it puts an increasing focus on banking, particularly the relationship between banking and the small and medium-sized business sector. That is particularly important, because more than 90 per cent. of new jobs are generated through small and medium-sized enterprises. The success of SMEs depends very much on their access to finance, whether venture capital or financial services. The banks have a particular role to play in that respect.
Historically, banks have failed the SME sector in this country by failing to provide funding for small businesses, and by their lack of support in their day-to-day dealings. They have failed also to understand the needs of businesses in areas such as access to cash, cash flow and the ability to give support and advice that are valid and helpful, without the people receiving that support finding that they are then liable for large bills that they did not know about and find difficult to meet.
The initiative for finding funding for SMEs has come not from the banking sector, but from outside. Principally among those outside sources is the much-derided local government sector. I was leader of Lancashire county council between 1981 and 1997, and one of our major policy innovations was to find a way in which the public and private sectors could work together to support businesses. Specifically, we found a way in which venture and loan capital could be supplied to small businesses which the banks had abandoned and, in many cases, had not even tried to help.
In 1986, through Lancashire Enterprises, now Enterprises plc—the county's economic development company—we set up the Rosebud fund. The fund was 233WH one of the first attempts to assist small businesses. It made—and still makes—loans to small businesses. Those loans were at times as small as £1,000, but, typically, they have reached £100,000 and £200,000. Those funds were then matched with funding from other sources and, in the years since the fund started, more than 260 investments have been made, over £3.5 million has been invested in small businesses in the Lancashire economy—which otherwise would not have received support—and 5,000 jobs have been supported.
The fund was set up with the support of the European Commission through European objective 2 funding. It was innovative—it still is—in that it showed how small businesses could be supported on a commercial basis. The secret of the fund's success is that finance is provided in an appropriate way and on appropriate terms, and is linked to specialist business advice. Firms—particularly small firms—that found themselves in difficulties after the first year or two are able to secure re-financing and have access to proper advice in a way that helps them to prosper.
The Rosebud fund was needed because the banking sector had failed small businesses. Since that time, parts of the banking sector have tried to step into that gap—in a variable way, but with some success. Other funds involving banks, such as the Local Investment Fund, have attempted to assist in localised, poor areas. Organisations such as the Prince's Trust do very good work, and the innovative Merseyside investment fund, using European objective 1 funding, has invested—together with other finance generated—£62 million to support 4,000 jobs in the Merseyside area.
Those schemes were required because of the failings of the banking sector. The ideas started in the 1980s through, in my case, Lancashire county council have been picked up through the new regional development agencies. The agencies are looking at setting up their own venture capital funds, geared particularly to the needs of small and medium-sized businesses. I am glad to note that Barclays has said that it will be willing to invest in the North West regional development agency's regional fund. I also pay tribute to the work that the Co-operative bank has done in identifying the banking sector with the needs of small businesses.
When we think about small businesses, the possibilities of community and co-operative businesses are often ignored. Through co-operative development agencies and the Industrial Common Ownership Fund, attempts have been made to find funding for co-operative development. That is another area in which the banking sector, apart from the Co-operative bank and—to a limited extent—one or two others, has ignored the needs of small and new businesses. I hope that, in the future, the banks will pay more attention to those needs.
Businesses need access to capital through banks, but they must also have day-to-day dealings with the banks. My hon. Friend the Member for Bedford has drawn attention to many of the problems that businesses and individuals face in their daily operations. Banks are often not friendly to small businesses. They often do not understand the cash flow needs of small businesses or understand the problems that charges for cash deposits impose on small businesses, especially the smallest. 234WH The consumer, whether a business or an individual, is often unclear about the rate of interest being charged. All too often, small businesses undertake the necessary consultations with banks, but then face a large, unexpected bill, often to the small businesses' detriment.
I support my hon. Friend's proposals for openness, support and clarity for the consumer. The Consumer Association has conducted surveys and drawn attention to the similarities in the difficulties faced by small businesses and consumers in their dealings with banks. The association also points to the difficulties that many consumers believe they would face in changing their bank if they can find a better service. Sometimes, changing banks is not as complex as it is made out to be. The association has performed an important role in drawing attention to those areas, and has assessed of the appropriateness of the different services offered by the banks according to the varying needs of their clients. There is a need for clear information, whether for individual consumers or for small businesses, on the various services offered by different banks and the charges imposed. I support any initiative that will bring more clarity to that information and make it more readily available to the consumer.
I agreed with my hon. Friend the Member for Reading, West (Mr. Salter) when he expressed disappointment with the comments made by the hon. Member for East Worthing and Shoreham (Mr. Loughton), who seemed more concerned about defending banking interests than considering the needs of small businesses and the community. I cannot share his view that the only problem is lack of competition in some sectors. Banks have responsibilities, and they must meet them—preferably by following Government guidance. If that does not work, regulation may be required.
Banks are an important part of our economy and our society. They are rightly under scrutiny because they have failed, and in many cases still fail, the needs of small businesses. Banks also have consumer and community responsibilities. In a recent statement, my right hon. Friend the Chancellor spoke about his intention to set up new investment funds in areas of particular deprivation, including one in my constituency in Liverpool. Those funds will be extremely important and will take their place with other funds that are directed to those particular needs. However, the businesses set up through the availability of such funds—like other businesses—can be successful only if they have continuing access to sympathetic and reasonable banking services.
So far, banks have not faced up to their responsibilities. I hope that they will do so under the new scrutiny of their dealings with the commercial sector, which is important in generating our economy, and with consumers in general, who are important to our society.
§ 12.6 pm
§ Mr. Howard Flight (Arundel and South Downs)This is an important debate because it raises serious issues and heralds the full Cruickshank report, which is expected by the end of June. Two important specific issues were also raised by the hon. Members for Bedford (Mr. Hall) and for Reading, West (Mr. Salter). All of us will have met constituents with problems in both 235WH categories. I sympathise particularly with those problems raised by the hon. Member for Reading, West, because my rural constituency suffers from similar problems.
Better competition is not the full answer, but it is an important part of it, as has been demonstrated in the United States of America. Another issue is exactly how the FSA will regulate banks. Despite the monumental nature of the Financial Services and Markets Bill, which has 378 clauses and deals in detail with many issues, the actual banking regulation that the FSA will deliver remains to be considered.
My biggest concern is that the Cruickshank report will be subject to too much spin. The Government will say that the report proves that they are doing something about the issue, but the report will be sidelined. That has already begun to happen, as my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton) pointed out. We have consistently argued that competition should be an objective of the Financial Services and Markets Bill; the FSA is not too keen to focus on it. It has been made clear that the FSA will focus on the objectives laid down in the Bill, and that the principles are considered secondary to the objectives. The Treasury has been successful in heading off Cruickshank's intention, which we share, and has replaced it with competition arrangements that are weak by comparison, albeit worth having.
I was slightly uncomfortable to note that the hon. Member for Bedford focused on data produced by a particular organisation. We all admit that mischarging problems exist, but to quantify them as an amount for compensation is not the best approach. The new ombudsman scheme will address complaints more effectively, and I agree that he or she should review the banking code. I hope that the combined ombudsman will be more effective than the single banking ombudsman arrangements and that the relevant staff at the FSA will read the report of this debate, because it relates to the banking regulatory activities that they will undertake.
If we focus on the competitiveness of the market place, there are arguments both ways, but at the macro level there is a powerful case of insufficient competitiveness, because financial intermediation in the banking system is still enormously expensive. As a cost, it is 4 to 5 per cent. of assets. In the United States mutual fund industry, which has become as big a financial intermediator as the banks, it is about 1.5 per cent. One of the main reasons why the US has been much more successful is its ability to offer money funds that compete with bank deposits. That is not possible in this country, largely because of EU regulation, under which money funds may not account on what is called an amortisation basis. I have to say that, to protect their own position, German banks have not wanted to permit money funds to get off the ground. I have banged on about that for some time, and shall continue to do so, as I believe it extremely important to have competing money funds, as happens in the US.
The lender of last resort doctrine has also encouraged concentration. The original doctrine was that the central bank should stand behind any bank that was well run, whether large or small. That no longer prevails, and the market has been forced to conclude that the central bank—the lender of last resort—will stand behind only 236WH those banks that are so big that they cannot be allowed to fail. The resulting net reduction in smaller banks has led to increasing consolidation in the banking industry.
Conversely, the argument that banks' return on equity has risen constantly over the past decade is slightly unfair. The starting level was very low, and banks have had very low levels of bad debts for the past seven years, largely as a result of this country's economic success since 1992 and of the golden economic legacy bequeathed by the previous Government to the present Government. However, that situation will change in due course: I am afraid that the Chancellor is deluding himself if he thinks that he has abolished business cycles.
New competitive banks have emerged, such as Virgin, and Egg, which has £7.6 billion in deposits. Barclays bank has noted that it had lost 30 per cent. of the credit card market and now has only 10 per cent. The banking industry here is more productive and competitive than that in France or Germany. In principle, the internet ought to be a major vehicle for more competition, but will customers or providers benefit from the cost savings? That is the big question.
One problem for banking regulators and central banks is the fear of systemic risk. The last time that a Government really tried to get banking competition going was in the early 1970s. Hon. Members may recollect that that was followed by the 1974 banking crisis and the Bank of England's "lifeboat" to rescue a total systemic threat to our banking system.
That period of difficulty came about because lots of new, small banks founds that, although they could obtain deposits by paying high interest rates, their lending risks were high. When the economy turned down, those banks had appalling bad debts and the structure proved to be a house of cards. Regulators therefore have a bias in favour of cartels, which they feel they can manage more effectively against systemic risk, but a balance has to be struck.
I am slightly worried about the new banks that are joint ventures with supermarkets. They are not really new banks, but will be more partnerships between a supermarket and an existing large bank. Will that really provide competition? The Prudential, for example, is already a major financial services business.
Market entry remains a problem. The questions of who can be a bank and of what a bank is have not been clearly defined. Money transmission charges are high, and the relevant organisations operate to some extent as a cartel, representing a barrier to entry. In addition, there are high capital adequacy costs on change of control. Overall, banking concentration is increasing and will manifest itself on a pan-European basis, rather than merely in the domestic economy.
The hon. Member for Reading, West used the phrase "financial exclusion". I dislike that phrase, which I consider to be a politically correct usage, but the problems set out by the hon. Gentleman are real and need to be addressed. I was amazed when my own bank wrote to me to tell me that I could no longer get cash over the counter and that I had to use a machine. I wondered what a bank was for if it was not obliged to dispense my own cash back to me. The incident led me to believe that the services that banks provide might be determined when banking licences are granted. That could be a lever to help tackle some of the issues.
237WH The large banks would be foolish if they did not take the initiative in addressing those needs, but that will depend in part on the seriousness with which the Government address the issues raised in the Cruickshank report. However, it is only fair that large banks with greater powers should address some of the community issues that have arisen.
The hon. Member for Bedford made some specific points towards the end of his speech. I consider that overcharging must come within the territory of the competent ombudsman. The concept of following the phase 1 and phase 2 pension model is not practical; the necessary regulations do not exist to do so. I do not think that it is legally possible—even were it desirable—to do what the hon. Gentleman proposes in terms of a total financial compensation deal. The territory is for the ombudsman and a review of the banking code. We are awaiting the independent investigation, but the crucial political question is whether the Government will act in earnest or will sideline the findings of the Cruickshank investigation.
The matter of separate regulation arose. The Conservative party has expressed doubts about including banking in the remit of the Financial Services Authority. The US model, the Securities and Exchange Commission, deals with securities and related industries only. However, the decision has been taken, and it does not permit establishing a separate body that might be called Ofbank. The important question is whether banking regulation will simply combine the roles previously taken by the Bank of England and other central banks, or will be wider. The key to that is a more competitive banking environment.
I look to the US model in this matter. It is not perfect, but the US banking system is more competitive and delivers customer needs better than the system here, and substantially better than the system in continental Europe. I believe that the biggest enemy of banking competition is European Union banking regulation, which retains a major element of support for cartels. This debate also reveals one significant point—the importance of the initiative that the FSA will have in formulating its activities and objectives in the area of banking regulation.
§ The Economic Secretary to the Treasury (Miss Melanie Johnson)It is a pleasure to be able to congratulate my hon. Friend the Member for Bedford (Mr. Hall) on securing this Adjournment debate. He and other hon. Members have raised important matters, and the debate comes at an opportune moment.
First, I shall outline some of the background themes of this important issue. The financial services industry is one of the UK's success stories, accounting for 7 per cent. of national income and employing more than 1 million people. Increasingly, financial services are a key component of local economies throughout the UK. The work force survey shows that, of the 450,000 extra jobs created over the past year, one in three was in the financial services sector. The message is clear that financial services is a growth industry for many regional centres as well as for the City of London.
238WH Within the general financial services sector, the UK banking industry plays a central role in the economy. A modern economy depends on effective and efficient relationships between its savers and borrowers and its financial services industry. Firms need the investment that the banking industry provides. They also need the financial markets, on which they can raise the capital that enables them to invest, grow and create jobs.
High levels of innovation, competition and efficiency are vital to an effective banking system and essential for meeting the productivity challenge. That is why, as my hon. Friend the Member for Bedford said, the Chancellor of the Exchequer announced in his pre-Budget report in November 1998 a review of the services provided by the United Kingdom banking sector.
The Government had a genuinely open mind on the issue, but a number of concerns have been expressed similar to those articulated so well by my hon. Friend about whether the United Kingdom banking industry fully meets the high levels of competition necessary. The review, announced by the Chancellor of the Exchequer and chaired by Don Cruickshank, was established to examine the innovation, competition and efficiency in various sub-markets of the banking industry, including lending to small and medium-sized enterprises, to compare them with international standards and to consider possible options for change.
Don Cruickshank published his interim report in July last year. He noted that it was crucial to get the right balance between regulatory and competition outcomes if there were to be more innovation, more effective competition and greater efficiency in the United Kingdom banking industry. He added that, in the Financial Services and Markets Bill, the Government had already taken a significant step forward in tackling the issue, and suggested ways in which it might be taken further.
Don Cruickshank made some specific recommendations. The Financial Services Authority should be responsible for making the trade-off between regulatory and competition outcomes in financial services. To ensure that that happens, the FSA should have a primary competition objective in addition to its regulatory objective. He recommended that the financial services sector should have no unnecessary exclusion from general competition law. The rules should be within the scope of scale or complex monopoly investigations by the Office of Fair Trading or the Competition Commission. The OFT should not be required legally to scrutinise every rule issued by the FSA, but its role of overseeing the financial services sector, including the impact of regulation, should be strengthened. The FSA's rule-making decisions should be open to review in respect of their impact on competition. The final recommendation was that the Competition Commission, not Ministers, should be the final arbiters of the public interest in the scrutiny or review procedures.
The Government considered the interim report very carefully and announced their response on 9 November. We accepted all but one of Don Cruickshank's recommendations, and we shall table amendments to the Financial Services and Markets Bill to give effect to them in due course. In the remaining area, although we share Don Cruickshank's objective that the FSA should have responsibility for making a trade-off between 239WH regulatory outcomes, we did not accept his conclusion that giving it a new competition objective would assist it in doing so. Instead, we believed it likely that such a change would confuse the responsibilities of the FSA, as the United Kingdom's prudential financial services regulator, and the roles of the OFT and the Competition Commission, which are responsible for competition regulation in the economy as a whole. We are considering the changes to the Bill that will be necessary to meet the underlying recommendations of Don Cruickshank's review.
In summary, the Government took Don Cruickshank's interim report very seriously. Our response demonstrated our commitment to effective competition in the banking sector. Don Cruickshank said in a statement at the time:
I welcome the changes the Government proposes to make to the Bill to ensure that markets in financial services are subject to effective competition scrutiny.I understand that the review team is close to finalising its report, and the Government should receive it in the next couple of months. The hon. Member for Arundel and South Downs (Mr. Flight) mentioned June.
§ Mr. FlightBy June.
§ Miss JohnsonI think that that is a generous estimate.
I should like to deal with some of the comments of my hon. Friend the Member for Bedford. He referred to the difficulties that some of his constituents have had with the banking sector, and we all sympathise with those problems. That is why the ombudsman proposals are in the Financial Services and Markets Bill and why matters are being dealt with under the FSA's supervision. We need those structures, and we are putting them in place. We recognise that there are issues to be addressed.
My hon. Friend also spoke of the details of the financial services ombudsman scheme as proposed in the Bill. I am grateful for his comments and questions. I understand why some hon. Members have attempted to turn this debate into a detailed discussion of the Bill. They will have further opportunities to do so shortly, but now is not the time. There have already been plenty of opportunities. However, the specific areas mentioned by my hon. Friend are relevant to this debate.
The first recourse for those who have a dispute with a bank or other financial institution is to try and resolve the dispute directly. My hon. Friend described some of the difficulties that occasionally arise when doing so. The banking code emphasises the need for fair dealing, transparency on charges and a willingness to correct errors and handle complaints speedily. The industry has shown a willingness to update the code regularly and to take account of the views of a range of outside bodies, including the current relevant ombudsmen.
240WH I recognise that it is not always possible to resolve disputes directly; that is why the schemes exist and why, as my hon. Friend is aware, the Financial Services and Markets Bill covers that important issue. Part XV sets out the framework for the operation of the ombudsman scheme, the detailed operation of which will be determined in rules made by the Financial Services Authority. This scheme will replace the existing dispute resolution schemes, including the existing banking ombudsman. It will provide a one-stop shop, which is extremely desirable. The scheme's main purpose is to provide easy access for individual retail consumers to a dispute resolution procedure that is speedy and informal. However, it will be open to the authority to define certain categories of firms as eligible complainants. The FSA is consulting on this; it issued a consultation paper in November last year and is seeking responses by 10 February.
As proposed by the FSA, the scheme would provide a free, simple, informal and accessible alternative to the courts. It would enable eligible customers of the banks to resolve a range of disputes similar to those currently covered. It would, of course, also be statutory and its findings would be binding.
The FSA has proposed that firms should be eligible to use the scheme if they have a turnover of up to £1 million, and no more than four employees. A number of people have commented on the proposals, and my hon. Friend may wish to do so. As for his comments about retrospective compensation, it is worth noting that many of the claims received pre-date the banking code. Some other changes, such as advance notification of charges, have been made since then.
Let me say to my hon. Friend the Member for Reading, West (Mr. Salter) that we recognise that there is a trend towards smaller branch networks. We welcome the banks' development of alternative delivery channels. Choice and diversity are important; a number of banking options are open for many people, but not everybody. However, there are now many options that were not previously available. Indeed, a number of banks, including Lloyds TSB, have successfully established links with Post Office Counters Ltd. to ensure that banking is available where there is a post office. The post office network is far more extensive than the banking network and provides a number of other options.
I was concerned to hear how events have developed in Reading and about the lack of consultation. That is not how banks should deal with their customers. I was passed a note offering inducements to have a meeting. I shall consider further the possibility of holding such a meeting. The inducement was that my hon. Friend will love me for ever—it says here. I find that quite tempting—
§ Mr. Deputy Speaker (Mr. John McWilliam)Order. On that appropriate note, time is up.