New Clause 11 - Review into competitiveness

Financial Services (Banking Reform) Bill – in a Public Bill Committee am 2:30 pm ar 16 Ebrill 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

‘(1) The Treasury shall arrange for a review of the obstacles to increasing competition for UK institutions involved in the provision of core services.

(2) The review must be completed during the period of six months beginning with the date on which this Act comes into force.

(3) The review must consider, in particular—

(a) the major obstacle to new UK institutions emerging as competitors in the provision of core services, and

(b) possible actions that could be taken to facilitate new UK institutions being competitive in the provision of core services.

(4) The review must result in a report to the Treasury.

(5) The Treasury shall lay a copy of the report before Parliament.’. —(Chris Leslie.)

Brought up, and read the First time.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move, That the clause be read a Second time.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

With this it will be convenient to discuss the following:

Amendment (a), line 9 at end insert—

‘(c) any evidence of impaired access to competitive core services in identifiable regions of the UK or for particular classes of consumers.’.

New clause 22—Limits on excessive market power—

‘(1) With effect from 1 January 2020 no ring-fenced body or group of ring-fenced bodies may have excessive market power in respect of a core banking service.

(2) For the purposes of section (1) above core banking service means—

(a) the provision of personal current accounts and overdrafts;

(b) the provision of liquidity management services for small and medium-sized enterprises;

(c) the provision of mortgage services;

(d) the provision of savings accounts;

(e) the provision of unsecured personal loans.

(3) For the purposes of section (1) excessive market power is defined as a market share equal to 20% or higher.

(4) If any ring-fenced body or group of ring-fenced bodies is deemed by the appropriate regulator to have excessive market power in relation to any core banking service for two successive accounting periods, with effect from six months after the end of the second accounting period, the part 4A permission for the ring fenced body or group of ring-fenced bodies shall be treated as having been cancelled as it relates to that core banking service.’.

I wish to advise the Committee on how to handle the debate. It might sound somewhat complicated and convoluted, but I ask Members to consider it patiently. No doubt the Chair and the Committee will work through this; I will advise accordingly.

I shall first call Chris Leslie to speak to new clause 11. During the debate, I will call Mr Durkan to speak to his amendment (a) and then Mr Mills to speak to his new clause 22. If, after the debate, Mr Leslie wishes to press new clause 11 to a vote, we will move formally to the Second Reading decision, followed by a decision on amendment (a), if Mr Durkan wishes to press it, and then a decision on whether the new clause, as amended or not, should be added to the Bill. Government Members may, if they wish, safely vote for Second Reading because they can subsequently vote against the new clause on stand part.

If Mr Mills wishes to press new clause 22 to a Division, the Committee may vote when we reach the appropriate point as listed on the amendment paper. That will be at the end of our proceedings. The debate on new clause 11, amendment (a) and new clause 22 will, however, take place together. I hope that that was helpful.

Hon. Members:

Hear, hear!

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Thank you, Dr McCrea. May I put it on record that that was one of the finest speeches of your parliamentary career? I am grateful to have been present at a moment of history.

New clause 11 would require the Treasury to publish a review considering the obstacles to new challenger banks and ways to increase the number of new banks. We suggest in the new clause that the review should be completed within six months of this Act coming into  force, via a report that should be laid before Parliament. Obviously, there is a whole series of other connected debates, indicated by other amendments that have been tabled, but from our point of view the banking system suffers from a clear lack of competition. Research by the Consumers Association—Which?—found that 55% of people have never switched their main, personal current account. That is astonishing and it would be interesting to poll the Committee, on a show of hands, to reveal who among the best parliamentarians to have spent a long time thinking deeply about such questions have actually switched their personal account since their teenage years. Probably not that many—[Interruption.]Hansard will not be able to record this, but a couple of adept shoppers have done so, although they are the exception rather than the rule. Apparently, Dr McCrea, you are more likely to get divorced than you are to change your personal current account. I shall go no further, other than to congratulate the hon. Member for Carlisle.

Britain’s largest banks have not earned their market share through innovation or offering a competitive service, but simply because they have that first move advantage. The big five banks—HSBC, Lloyds, Barclays, NatWest-RBS and Santander—have consistently underperformed in customer satisfaction, although some of the banks will claim that they are better than their nearest rival. The big five have a total market share of 85% of the current account market, compared with 71% before the financial crisis, of 67% of mortgage gross lending and of 61% of the savings account market. Customers of British banks have relatively little choice of personal current accounts compared with customers in other parts of the developed world, according to the Office of Fair Trading. Its January report said that competition was weakened by a lack of dynamism among the banks, as well as customer inertia. Various reasons underpin that situation, but we will debate switching current accounts and people’s ability to shop around and choose under a different group of amendments. Simply put, there is such a dominance of market share by so few providers of banking services—an oligopoly, as it were—that it is no wonder there is a sense that things are not changing, and there is no pressure to change. That is one of the ingredients that should form the change we need in the culture of the banking sector.

Sir John Vickers was clear in his report that, even after the limited divestments by Lloyds and RBS, major retail banking markets will still be more concentrated than at the time of the Cruickshank report 13 years ago. Last month the Bank of England and the outgoing Financial Services Authority tried their best to announce new measures to make it easier to open a challenger bank and for new banks to find investors.

For example, the Bank of England and the FSA said that new banks should potentially be allowed to hold less capital than large institutions. That is a very interesting suggestion that we doubtless might want to debate at some point. That might speed up the timetable for authorising new banks, but the key things are the obstacles, particularly regarding the infrastructure they must have to facilitate current accounts. There are clearly ways to overcome those. Hence, we feel a serious review is needed to ensure that we can get to the bottom of these issues.

The Chairman of the Parliamentary Commission on Banking Standards, the hon. Member for Chichester (Mr Tyrie), said recently,

“The lack of competition in banking has been reinforced by a regulatory regime favouring large incumbents. Customers have lost out as a result. Moves to remove barriers to entry are essential.”

It seems there will be significant changes in the forthcoming report, and recommendations from the Parliamentary Commission.

I understand and agree with the amendment put forward by my hon. Friend the Member for Foyle, who wants to look into the customer experience in the regions and nations of the UK. That is a strong and important point to make. I am also interested that the hon. Member for Amber Valley has sought to specify a cap on the level of market share held by a bank—whether that is current account services or others—to limit its market power. I am sympathetic to the point he makes in his new clause, although he has chosen 20%, which prompts the question, “Why not 25% or 15%?” That is no doubt the debate we will have.

I am grateful to hon. Members for furthering the debate and for the thought they have given to their amendments and new clauses, but I would like to press my own.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury) 2:45, 16 Ebrill 2013

I have tabled an amendment to new clause 11. I fully support the thrust and logic of the new clause in trying to ensure the outcome that we are all working towards in the Bill, and through other changes taking place: effective and attractive competition in financial services. The new clause provides for a review looking at the obstacles to increasing competition. It seems to me that the scope of the new clause could have been enhanced and stated more pointedly. [ Interruption. ]

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

Order. There is a Division in the House, so we will suspend the Committee. I think it is in order for me, on behalf of you all, to wish the hon. Member for Carlisle much happiness for the future. [Hon. Members: “Hear, hear!]

Sitting suspended for Divisions in the House.

On resuming—

[Mr Jim Hoodin the Chair]

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

It is a pleasure to serve under your chairmanship this afternoon, Mr Hood. When Dr McCrea announced that there was a Division, he took the opportunity to offer good wishes on behalf of the Committee to the hon. Member for Carlisle. I am not sure that it was the best cue for such warm felicitations, but we all join in those good wishes to the hon. Gentleman.

I have tabled amendment (a) to new clause 11 not to challenge or diminish in any way the strength of the new clause or its merits as a necessary additional clause that amplifies the Bill’s provisions regarding future competition. Rather, amendment (a) aims to make the new clause more effective and more pointed in a couple of respects.

When looking at competition in core financial services, we must recognise that the market is different in different parts of the United Kingdom—certainly in Northern Ireland, which I represent. The banking market there has a different profile from that on the high streets of Great Britain. I want to ensure that any review that looks at issues of competition does not look just generically on a UK-wide basis, or mistakenly at just London and the south-east, but is able to look at issues that might arise in other markets.

I tabled my amendment so that reviews do not have to look at everything in every corner of the UK, but can look at any evidence of impaired access to competitive core services in identifiable regions of the UK. But it is not just a regional amendment, because it goes on to say,

“or for particular classes of consumers.”

As we know, in some instances core services are available on a relatively competitive basis to a large number of consumers, but are not readily accessible and competitively available to certain classes of consumers. Again, the amendment would allow a review to look at any evidence. That is not to say that the review has to exhaustively look at everything that is happening to every consumer or class of consumers, but it needs to be able to respond to any evidence of problems. The evidence could come from many quarters, including consumer interests. It could also come from Parliament, and many hon. Members—not just in this Committee, but elsewhere in the House—have raised such concerns in the past.

On the issue of competitiveness in the context of Northern Ireland, I do not wish to pre-empt new clause 22, but I am interested to hear what the hon. Member for Amber Valley will say when he speaks to his new clause. Does he wish to see the issue of excessive market power measured purely on a UK-wide basis, or can it be applied discreetly to particular sectors?

Banks can easily have excessive market dominance in Northern Ireland by controlling more than 20% of its market, but they will count as a fraction of market power in UK terms. We could have a situation where a bank in reality has market dominance in Northern Ireland, but does not count as dominant in the UK market. That is why there are issues about new clause 22. I appreciate and respect its spirit, and I would accept it, but I am not sure how it will work in practice. It might actually have contrary interpretations or applications for discrete regional markets.

We know that the Government are encouraging new players. New clause 11 indicates that part of the review will look at actions for helping new UK institutions to be competitive in the provision of core services. We know that there are some new players already. We have heard a lot about Metro bank, but the chances of Metro bank coming any time soon to a number of the constituencies represented in this Committee—I am not just talking about Northern Ireland constituencies—are not high.

In relation to the review power, I hope that we see the Bill improved at some stage—whether by new clause 11 or an amendment tabled at a later date that encompasses some of the issues that my amendment and new clause 22 highlight—to make clear provision about the competitiveness issue. The application of the competitiveness test should be articulate enough to take account of different classes of consumers and different regional realities.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

It is a pleasure to serve under your chairmanship, Mr Hood; it is a surprise that a substitute turned up during the Division.

I rise to speak to new clause 22, which was tabled in my name. I will prevent the Government Whip from having a heart attack on the Front Bench; I am not planning to press the new clause to a Division. I tabled it as a probing amendment to generate a debate. It would not be wise for a humble Back Bencher to write on the back of a fag packet something that could have far-reaching implications for the banking sector. We ought to legislate in a more considered manner. [Interruption.] The Minister is laughing; I am not sure whether that is because that is how some legislation gets drafted.

My reason for tabling the new clause is partly to address the issue of competition in the banking sector and partly to address some of the other objectives of this reform of banking regulations. According to my humble, non-specialist approach, we are trying to prevent another banking crisis, or reduce the likelihood of one as far as we can. We are trying to prevent the failure of one institution turning into a systemic crisis that takes down the whole banking sector—or perhaps the whole economy, as we nearly experienced. We are trying to get a better experience for the banks’ customers and to fix the moral hazard issue of banks thinking that they are too big to be allowed to fail.

The question that we must try to answer is that if we think that the banks have been too big to fail and perhaps too big to bail, what is “too big” and what are we going to do about it? In itself, ring-fencing will not stop banks from being too big, although it will perhaps have certain key advantages in the other objectives that I will set out.

The shadow Minister asked where 20% came from. I would not protest that I am some kind of scientific economist who can come up with empirical data as to why 20% is the right answer, rather than 19.5% or 20.5%—I accept that his challenge on that is quite reasonable. It was an attempt to find a sensible market share, in which we allow banks to be big enough to have a decent market share so that they can reduce their unit costs without their being so big that they dominate a particular segment of the market and cannot be allowed to fail. If the Minister said that he would accept the principle but wanted 21%, I would not argue the point too far.

It is worth looking at where we got to with our banks over the past decade or so. At the start of the 20th century, the three largest UK banks accounted for only 7% of GDP; by the middle of the 20th century that was 27% of GDP; and by the end it was 75%. A huge concentration took place. In 2007, the assets of the three biggest banks alone added up to about 200% of GDP—that was huge. That was not just a UK phenomenon. In 1998, the five largest global banks accounted for 8% of total banking assets; by 2008, that had doubled to 16%. So we have seen the consolidation right across the world.

It is not a new problem that has been identified since the crash—the 2000 Cruickshank report into competition in the banking sector concluded that there were real problems across all the banking markets and that personal and business current accounts were too highly concentrated in UK retail banking. We have had that information—that we have a problem—around for 13 years now. The OFT  looked at it in the early years of this Parliament and it has been considered by the Vickers report. The Parliamentary Commission on Banking Standards is still to publish its view on competition, but I think we will hear some robust recommendations. I am not convinced that it will go quite as far as I have gone with a cap, but we need to get this issue right.

Things have clearly only been exacerbated by what has happened since the crash. We have had 14 separate mergers since April 2008. Between them, the five biggest banks now have 85% of personal current accounts, and the four biggest banks have 78% of the business market. We clearly have a problem. On Second Reading, the Minister posed the question:

“how can Britain be one of the world’s leading financial centres without exposing ordinary working people in this country to the terrible costs of banks failing?”—[Official Report, 11 March 2013; Vol. 560, c. 36.]

I pose the reply: one way is to stop the banks getting so big that they cause a disastrous failure. The Minister later went on to say that he strongly believed that

“the concentrated nature of the UK banking industry is unacceptable” and that he wanted

“to see far greater possibility, and indeed reality, of entry into the market”—[Official Report, 11 March 2013; Vol. 560, c. 46.]

by new entrants. Clearly, having some kind of cap on how big our banks can be would be one way of saying to new entrants, “Yes, we want you. Yes, the assistance is there, but you cannot be forced out again by enlarged players doing their various tricks to try to squeeze the market—there will always be a decent-sized market for smaller banks across these key sectors.”

I do not think that I got new clause 22 perfect, but I was trying to find a sensible theme for us to talk about, so I set the start date as 2020. It is not as if I was suggesting that on Royal Assent, all of a sudden Lloyds—I think it is the only banking group currently in excess of 20% in any of these sectors—would immediately have to dispense with part of its business. Ring-fencing is timed to come in towards the end of the decade, so it would make sense to bring in all these provisions at the same time.

I also tried to deal with what would happen if a bank dropped out of the market and we ended up with an unexpected concentration, or whether a bank that found out at the end of the year that it had crept over the 20% threshold would immediately be in some kind of penalty situation. I was allowing a year’s grace—a bank would have to breach for two years before any action was taken, so a bank that did that had time to take some remedial action.

The situation now is that, even after the forced divestment from RBS and Lloyds, Lloyds will still have 25% of the personal current account market and 21% of unsecured personal loans. In small business banking, Lloyds has 21%, RBS 24% and Barclays 18%. In some sectors there is too much power in the hands of too few banks.

It is worth considering in principle whether that situation is right for a sector so fundamental to the UK economy. Is it an exception in respect of which we should go for some strong market-controlling regulations, such as a cap? For most in my party, a market-size cap would be the last thing that we would want to do. However, this is probably one of the most important sectors for the UK economy. We are saying that we  want more competition. We are saying that banks can be so big that they present a danger to the whole economy of the country. Perhaps it would be right for Parliament to put a limit of 20% on how big those banks can be. In the context of my new clause, I would happily accept a slightly different number.

We face the fact that the Competition Commission is reviewing the matter by 2015, but I am not sure that we want the Competition Commission to be driving the process. Perhaps, in the light of the crisis, it is for Parliament to say that we accept we need big banks because they can give the lowest cost and the best value, that we want strong banks, that we do not want a collection of 19th-century-style tiny banks in every town, and that we think 20% in each of the key core banking sectors is large enough to prevent risk and damage to the economy as a whole or to individual customers through poor, fraudulent or exploitative service.

The arguments on competition were well rehearsed by the shadow Minister so I do not need to go through them again. However, I thought we should have a debate on a specific proposal, rather than a request for yet another review. There have been so many requests for reviews in Committee, but I am not sure we have accepted any of them. I think it is better to discuss a suggestion about how to improve the situation.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Ceidwadwyr, North East Somerset 3:30, 16 Ebrill 2013

It is a pleasure to serve under your chairmanship, Mr Hood. I was forewarned by Dr McCrea that he was disappearing briefly, so I knew we were having the pleasure of your supervision.

I want to speak mainly in support of new clause 22 —at least in its stated purpose, according to my hon. Friend the Member for Amber Valley, of getting a discussion on this incredibly important aspect of banking. I am talking about the concept of too big to fail/bail, what Governments want to do and how they can best regulate to ensure the problem does not arise again.

There seem to be two choices in banking. One is a banking system that is so conservative, cautious and safe that it makes low returns, depositors get a poor deal, interest rates charged on borrowing are quite high and there is a fundamental inflexibility; it is rare for me to use the word “conservative” pejoratively and I will ensure that stays a rare occurrence. That creates a banking system that acts as a huge restraint on growth, allows us to be less competitive than our neighbours and does not enable new businesses to grow, old businesses to prosper or individuals improve their lives through mortgages and personal loans. That is one choice.

The other choice is what we reached in 2008: an incredibly competitive, energetic banking system with amazingly low margins on lending, so that deals could be done on mortgages of LIBOR minus. When interest rates fell to 0.5%, it was argued that people might actually pay negative interest rates on their mortgages, though most contracts had some small print to stop that happening. None the less, the model was fundamentally unsound, because it had become too aggressively competitive and uncontrolled.

In the Bill, we are trying to find a way of allowing a competitive, low-cost banking system that encourages enterprise without having one that is so over-regulated and stultified that we have no economic growth at all.  Competition and concentration are at the heart of the matter. A competitive and low-interest margin principle is probably the one that creates a better economy, but that, if there are only a small number of banks, is the one that is most structurally dangerous and leaves the taxpayer with the greatest risk of having to bail the banks out.

Competition is the one thing that can overcome that, because if there is sufficient diversity of banks, banks can be allowed to fail. Although the Bill is trying to make it hard for banks to fail, it ought not to make it impossible, because it is a key part of the system that people know that there is a risk in banking. Indeed, it is a good thing for depositors to know that the reason why they can get a higher interest in bank X than in bank Y is that bank X is less secure. That is why an £85,000 limit on deposit insurance is quite helpful, because that covers people who are unlikely or cannot be guaranteed to have such knowledge. If people have that knowledge, they can make intelligent investment decisions for themselves, but they must then be expected to take the loss if things go wrong. That cannot be done if a bank has 40% of a particular sector of the banking industry.

That is where the new clause of my hon. Friend the Member for Amber Valley is so helpful. We have actually concentrated far too much on deposits and far too little on loans. One of the major reasons for not wanting banks to fail is not only that depositors lose, but also that if a bank fails, the bank’s debtors’ loans fall due for immediate repayment. The receiver will go to the debtors and say, “You may have a 25-year mortgage, but we need to gather all the funds in today.” That, of course, is something that people find difficult to do. That is what causes the bankruptcies. It is not exclusively the loss of deposits; it is the loss of the credit facilities. The new clause goes through all of those. It would limit the provision of mortgage services, unsecured personal loans and current account overdrafts to 20% of market share. That would create a balance on both the credit side and the debit side, which gives an overall view of how competition should work. That would move towards a banking system that can be both highly competitive, but also not at risk of the Government having to bail it out, because the system would allow some banks to fail.

It is an extremely interesting approach that is a market solution rather than an automatically regulator-led solution. One might call it a market-plus solution. It is a market solution with an overlay put in place by Parliament, rather than thinking that the detailed nitty-gritty of regulation will stop things from ever going wrong. I argued earlier in Committee that if the regulation is made too prescriptive, clever people simply finds ways around it, thinking that meeting the letter of the regulation is enough. Something that is competitive-based could be a significant part of the answer to the problem that we had in 2008. I know that my hon. Friend is not going to push the matter to a Division, but it is a sensible issue to be raising in Committee.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

It is a pleasure to be serving under your chairmanship again, Mr Hood. This has been an excellent debate and I am grateful for the fine speeches made in it. The hon. Member for Nottingham East posed the Committee a quiz and asked how many members have been with the same bank since their teenage years. I have to report that my hon. Friend the Member for  Chelsea and Fulham told me that he has been with Lloyds since 1982, from the age of 16, and that he chose Lloyds because he won £3 in a quiz when it was offering that to students. It is that level of financial acumen that makes him a fine Treasury Whip and, no doubt, a future Treasury Minister. We are grateful to have him here today.

Competition is immensely important, and I agree with everything that has been said: over and above what we do in regulation, we should look for competition to be the primary means by which we safeguard the interests of consumers, whether they be depositors, borrowers or those who conduct their transaction of services through banks. There is too little competition in the banking sector at the moment. There was too little before the financial crisis, and, as a result of the consolidation that was necessitated by that crisis, there is even less now. That situation is not in any way tolerable. There have been marginal improvements in recent years: shortly after the financial crisis the four biggest banks had a 77% share of the current account market, which is now down to 75%; in 2010 the four biggest banks had 85% of business current accounts. That situation is nowhere near competitive enough and has to be a temporary state of affairs. That is why, in the Financial Services Act 2012, we have given the Financial Conduct Authority for the first time an explicit competition objective, to promote

“effective competition in the interests of consumers.”

The PRA must in its actions have regard to

“the need to minimise any adverse effect on competition”.

To my mind those measures are long overdue. Our regulatory institutions and, to be frank—turning away from my officials—the Treasury have been insufficiently seized of the importance of competition in financial services in helping consumers to secure the best outcomes. We have a great financial services industry, which has been one of our strengths; one would hope and expect that, in the field of personal financial services, it would be a sector teeming with innovation for consumers—that we would be the country foremost in the world to benefit from the latest technology and thinking. However, I regret to say that I do not think that is the experience. Let us take payment systems and transactions as an example: while in countries in Africa people can make payments using mobile phone technology, in this country most people’s experience of cashless payments in a retail setting until very recently has been through the Oyster card set up by Transport for London—a bus company being more innovative in financial services for its consumers than our banking industry has been.

Photo of Stephen Williams Stephen Williams Democratiaid Rhyddfrydol, Bristol West

I would like to mention an innovation in Bristol, where the Bristol pound, a denomination of the pound sterling, has been launched, and people can use texts to pay in a large variety of independent retailers in Bristol.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

I welcome that innovation, and I would like to see more of it. If we are to have, as I very much hope we will, a strong and vibrant financial services sector, it should be the equivalent for financial services of silicon valley in the United States for technology—that is to say, the place that is the cradle of innovation to the benefit of all consumers. The matter that has been raised in this group of new clauses is an important one.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I do not think that I will get an answer to this, but I will try. The Minister said that four banks having 75% of the current account market and 85% of the small business banking market is too high, so what does he think that should come down to? What would be a success for the regulator in, say, 2020—what should those levels be by then?

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

My hon. Friend raises a fair point. I am not going to give him a straight answer, because I do not think that there is a target, but it would be very much lower than the current levels. As I shall come on to say when I talk about the new clause in his name, it is for the regulatory authorities to take a view on this matter, as they do on many other sectors. Concentration in industries is a primary variable that is looked at by good and vigorous competition regulators to see what is acceptable.

In terms of recent developments, there is some good news: there has been a marginal reduction in concentration in the last couple of years. Colleagues in the Committee will be aware and will have welcomed the announcement by the Post Office last week that it intends to offer current accounts in every one of its 11,500 branches throughout the UK by 2014. That will see the Post Office become one of the largest providers of financial services on the high street, which is very much a step in the right direction.

The Independent Commission on Banking looked at competition and made certain recommendations. They identified several problems. First, there is the competitive advantage of large banks by being perceived as being too big to fail, which relates to the point made by my hon. Friends the Members for Amber Valley and for North East Somerset that there is a link between the size of banks and the implicit subsidy that comes from their ability to take on activities that smaller banks could not take on, owing to their confident predictions that they would not be left to fail in the event that their calculations and ventures did not succeed. Through this Bill, and through other measures, we will put in place ring-fencing, bail-in and insured depositor preference, which will protect those who cannot be expected to exercise the necessary degree of financial due diligence on the resilience of banks. Putting those measures in place will reduce the implicit guarantee that has been available to some large banks.

The lack of transparency over pricing of banks’ products is another aspect that the ICB looked at. As we have said before, not every one of the ICB’s recommendations has found expression in the Bill, because there are other vehicles for them, but the Office of Fair Trading is working with the industry to trial giving consumers, for example, information on interest forgone in various products and transactions.

Another point that the Commission raised was the low incidence of account switching, as exemplified by my hon. Friend the Member for Amber Valley, and the need to introduce a new seven-day guaranteed switching service from later this year; the Government have made a commitment to go further if needs be.

My inclination, as I hope is discernible from my tone, is to go further still. That is why we have made a commitment to bring regulatory oversight to payment  systems. Those are currently controlled not just by banks, but by a small sub-set of the banks, so new entrants have to seek the permission of one of the incumbents to piggyback on their services to make use of the payment systems facilities.

It seems right that, just as in other areas where there is the potential for dominance, we bring in that oversight so that small insurgents are not discouraged or crushed should they have the temerity to try to upset the established ways of the incumbents. We will respond to the consultation published on this matter and, depending on the results of that, there will be the opportunity, if necessary, to make amendments to the Bill in due course.

The Financial Services Authority was asked, during the latter stages of its existence, to review the barriers to entry and the barriers to expansion for existing banks. Its report was published recently and it made some valuable changes that will certainly be welcomed by new banks; they allow for a more proportionate capital and liquidity requirement from the start. In particular, the capital that new banks will need to post will fall by up to 80% compared with the status quo and they will not face extra liquidity requirements simply because they are newly authorised, which reflects the fact that if a newly authorised institution starts small, the risks that that poses to the system are different from those of larger incumbents. There will be a faster authorisation process by both the FCA and PRA for new banks, with clear milestones, and the PRA will take a flexible approach to setting capital requirements for existing smaller banks if they can demonstrate that they can be resolved in an orderly fashion without causing harm to the wider financial system.

All of those measures go beyond what the Vickers Commission asked for on competition. So while I am immensely sympathetic to the review that the hon. Gentleman proposes in his new clause, with all of the measures in train a review of the competitive forces six months after Royal Assent seems a little too soon. We should certainly keep under very close review the competitive forces in the industry, not just the Treasury, but the competition authorities, which exist to have this oversight. It might be a little later than that.

I turn briefly to the amendment tabled by the hon. Member for Foyle. These matters are particularly relevant to the regions. As he said there can be an even greater concentration of incumbents there than the national average over the whole of the United Kingdom. Part of the solution is to make it easier to set up new banks, particularly in the regions. There seems to be no reason why we should have the preponderance of our banks as national institutions. In other jurisdictions there is a vigorous local market, based on the local knowledge that can come from people who are based in and serve a particular geographical area. That is much to be welcomed. The 80% reduction in capital requirements should help there.

There are other initiatives that will reinforce this. The hon. Gentleman stressed the importance of credit unions in Northern Ireland. He will be aware of the programme in which the Department for Work and Pensions is providing £38 million to encourage the expansion of credit unions. The regional growth fund is providing £60 million of funding for community development  finance institutions, competitors to banks in this regard. As we discussed, credit unions in Northern Ireland will now receive the protection of the FSCS for their deposits.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (International Development), Shadow SDLP Spokesperson (Work and Pensions), Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury) 3:45, 16 Ebrill 2013

Does the Minister recognise that in the context of Northern Ireland at the minute, people are worried that even the existing players will possibly have reduced capacity? Obviously there is the impact of the changes in respect of the Bank of Ireland. First Trust, which is the Northern Ireland brand of Allied Irish Banks, is up for sale. There are serious questions about Ulster bank, as a wholly owned subsidiary of RBS. If the new clause tabled by the hon. Member for Amber Valley were accepted I do not know whether RBS could keep itself right on the 20% in future if it simply sold Ulster Bank and got itself back under it again.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

I recognise that there are those problems. The competition authorities should have close regard to what happens in different markets of the United Kingdom. I must own up to having taken some years ago a diploma in European Community competition law, as it then was, and it was a fascinating area of study. It is clear that the definition of markets is not by default the national market but it accords to the practices of consumers. I am absolutely certain that the hon. Gentleman is right in thinking that the Province of Northern Ireland would be deemed to be a particular market in which the full rigour of competition law should apply.

My hon. Friend the Member for Amber Valley was very modest and self- deprecating when introducing his new clause, but what market shares are compatible with competition is a perfectly standard concern of regulators in the anti-trust field. It is for the competition authorities to review that and to look in particular at barriers to entry. Sometimes a high market share will be the result of the effectiveness and the pro-competitive aspect of the market: a particular player will be so successful that without there being any restraints, protections or barriers to entry, it manages to attract a lot of custom. That points to one of the problems with the approach in primary legislation that my hon. Friend recommends: it is double-edged. Banning people from opening accounts with a bank that is successful, because it has reached its maximum quota of accounts or loans, is difficult. The question requires a judgment that is forensic, that looks at the market dynamics, barriers to entry and competitive behaviour, and that takes into account capital requirements. Such processes must be conducted by the competition authorities that have been set up for that purpose. We should look to them to exercise those powers actively.

Photo of Jacob Rees-Mogg Jacob Rees-Mogg Ceidwadwyr, North East Somerset

Is there any remaining opportunity for the Government to look at the banks in which they are the major shareholder to see whether those banks can be broken back up into their constituent parts?

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

My hon. Friend knows well that our approach is as a shareholder in those banks. We have not nationalised them, so it is not within our disposal simply to change the arrangements without regard to the interests of other shareholders. We had a debate this morning on fiduciary duty. Banks have a fiduciary duty  to look after all shareholders. That proposal is much debated, but contemplating it requires certain preparatory steps, which the Bill does not provide.

Setting out starkly in primary legislation a market share cap may have systemic dangers. In the event of a bank reaching its market share limit without there being a buyer for the assets it has for its customers, there would be a question of what is done with that, and whether that bank is caused to fail or is banned from operating as a result.

A high level of concentration is certainly a prima facie case that the market is uncompetitive, but it is not proof positive of that. That is why supervision of the matter should be in the hands of the authorities. It is why we have charged the new regulators with explicit objectives regarding competition. During my tenure in this office, every conversation that I have had with regulators has been to emphasise how seriously I personally and the Government take their important competition duties. Existing competition law also applies. For example, it is an offence to abuse a dominant position in a market. Again, I would be keen for the authorities to enforce that.

I hope that the Committee will understand the strength of the Government’s commitment to ensure that the market returns to a more vigorous state of competition. I would want to see the reversal of the concentration that arose as a result of the financial crisis. All the points that have been made today reinforce the need for that, and it will continue to be at the top of my agenda in the discharge of my duties.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Let us hope that the new Financial Conduct Authority will exercise its powers to promote competitive markets forcefully and fully. It is an incredibly important aspect of banking reform. The debate that we have just had properly reflects the strength of feeling on both sides of the Committee about the need to restructure the way in which banking services are provided, particularly for consumers in the UK. The Minister was right to point out the paradox that, despite our leading position globally, we still have, to coin a phrase used by the hon. Member for North East Somerset, relatively conservative attitudes to banking and banking service provision.

The hon. Member for Amber Valley made a reasonable interjection on the desire to see proper diversity within the market. Although I asked about the 20% figure, he does not suggest a particularly unreasonable metric. Obviously there would be significant effects on the market of moving in that direction, and there could be some significant consequences depending on the time scales involved, but there are some strong arguments that we should move from having the big five banks to having at least seven main providers within the system. It was incredibly good to hear of the Post Office moving into the current account market last week. That is a sensible decision and it is a trusted brand. It will be well worth while, although I understand that it is being done with the Bank of Ireland in a supporting role. Setting that to one side, though, the Post Office should do well. It has a presence on the high street and should appeal to many customers.

It is a difficult decision, when tabling amendments, whether to pick a particular figure and go for it or suggest a review. We went for the latter, but we want to find an opportunity to keep the ball rolling on this issue. The Minister has said some encouraging and positive things in this debate, but we need firmer milestones along the way. I regret that he said that it will be too soon to have a review. If a review is not the right milestone, the Government should think seriously about what other milestones and stepping stones along the way might be good devices to concentrate minds. Through that we would see some progress in the right direction.

My hon. Friend the Member for Foyle was right to highlight the different patterns of banking market that can occur across the different regions and nations of the UK and the historical banking patterns that many customers will have. That is firmly part of the Opposition’s agenda in promoting banking reform. We want to keep the Government’s feet to the fire on this issue. Far more action is necessary to diversify the sector, and we will undoubtedly want to return to this issue, which is a central part of banking reform, at a later date, but given the hour, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.