Financial Services (Banking Reform)Bill

Public Bill Committee, 16 April 2013.

New Clause 2 - FSCS review of company savings schemes

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

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

William McCrea (DUP, South Antrim)

With this it will be convenient to discuss the following:

New clause 16—Review into extending the Financial Services Compensation Scheme to cover Small and Medium enterprises—

‘(1) The Treasury shall arrange for a review of the impact of extending the Financial Services Compensation Scheme to cover deposits of private non-financial corporations with an annual revenue of less than £20 million.

(2) The review must consider in particular—

(a) the impact on the Financial Services Compensation Scheme in the event of a bank’s insolvency,

(b) the impact on the British economy of extending the scheme,

(c) the impact of protecting different percentages of private non-financial corporations’ deposits.

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

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

(5) The Treasury shall lay a copy of the report before Parliament.

(6) If the review recommends further reviews the Treasury may arrange for the further reviews.’.

New clause 21—Financial services compensation scheme extension—

‘(1) Section 213 of FSMA 2000 (The compensation scheme) is amended as follows.

(2) In subsection (1A)—

(a) omit the “and” following paragraph (a),

(b) after paragraph (b) insert—

“and

(c) that where a relevant person operates under more than one brand, the compensation scheme applies to each brand as if each was a separate authorised person.”.

(3) In subsection 3—

(a) omit the “and” following paragraph (a),

(b) after that paragraph insert—

“(aa) to extend the limit of any compensation payable to persons making a claim in appropriate circumstances where the loss exceeds the limit that would otherwise apply as a result of a temporary high deposit, and”.’.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to be back here in Committee after Easter. I look forward to further consideration of the Bill today, and I am sure that we will make good progress.

The group of new clauses deals with some issues on which we feel we need further action to ensure that customers and consumers are protected. New clause 2 deals with protections for customers who buy vouchers. New clause 16 seeks a review into whether the Financial Services Compensation Scheme should do more to prop up small and medium-sized enterprises. New clause 21 deals with extending deposit insurance to cover accounts, the balances of which temporarily exceed £85,000. There are also issues regarding different banks having different brands in the banking family and ensuring that consumers receive more protection.

I will start with new clause 2. We know that the collapse of the Farepak scheme caused huge problems for many individuals and families. Many consumers believed that they were in a savings scheme and never questioned whether the funds that they put in were at risk. The money proved to be at risk and that caused real difficulty for people.

The reforms announced last year to enable the FSCS to protect Christmas clubs and other funds in some circumstances are helpful, particularly in cases where the financial institution holding the money fails, but the Christmas club provider continues to operate. All customer cash will now be kept in Financial Services Authority-authorised bank accounts. The reforms have taken place following talks with the Christmas Prepayment Association, the trade body that looks after that particular issue, and mean that up to £85,000 of an individual’s money will be protected by the FSCS if the bank or building society fails.

However, the reforms in themselves would not have saved the cash in Farepak, and they will not save cash held in another Christmas club should it fail in future. The new clause would require the head of the FSCS to publish a review of the current protections, to look at them right across the board, and potentially to consider reforms that would assist people who pay into customer savings schemes. We want the review to consider whether such payments should be regarded as preferential debts if a firm became insolvent.

I know that there are different views on that issue. Particularly, there have been concerns about whether, by making customers who pay into those schemes preferential creditors, a firm might not be able to make redundancy payments or deal with staff. I understand the concerns about that, but the new clause does not specify what ought to happen; it seeks a review and some work on such issues. It states that there ought to be a review to look at the matter in more detail.

The need for the new clause arises from the difficulties caused by several high-profile collapses in the aftermath of Farepak. We saw the situation with HMV, where gift cards and vouchers worth millions of pounds were initially declared worthless when the chain collapsed earlier this year. That caused a real problem, because it appeared that HMV had continued to sell gift tokens and cards after warning investors last December that it had a problem. The issue was raised by Richard Lloyd, the executive director of Which?, who described the situation as “outrageous”, and said:

“We want the rules on gift vouchers and insolvency to be reviewed to ensure consumers are adequately protected in cases like this.”

There was a lot of public pressure at the time, as a result of which the company ultimately decided to honour the vouchers.

I have already mentioned Farepak and I do not want to go into all the details, but it is worth recalling that its collapse left more than 100,000 people with total losses of some £57 million. In an inquiry into the Farepak case, a High Court judge criticised HBOS, which is now part of Lloyds, for taking a “hardball” attitude in dealing with the company. Of course, Lloyds ultimately contributed £8 million to the Farepak compensation fund, but I know from my constituents—many hon. Members will know this—that the compensation paid to people who were affected, many of whom were on low incomes, went nowhere near the losses that they suffered.

Sadly, several major high street names, including Comet, Jessops, HMV, Blockbuster and Habitat, have had problems or collapsed during the past two years. Which? looked into the situation, and I recall reading a post on its website by someone who had received Habitat vouchers as a wedding gift and was unable to redeem them. Such problems affect a wide range of customers: not only those who have paid into savings schemes, but those who have received gift vouchers, and both buyers and recipients of vouchers are left out of pocket. Those firms got into difficulties for different reasons, but the fact that the firms failed underlines the uncertainty faced by customers, who expect to be able to redeem the value of gift cards or savings schemes.

Many people involved in savings schemes were trying to do the right thing. They were trying to save in advance for Christmas or for other events rather than taking on debt and paying it off afterwards. We must take care to ensure that customers in similar situations can recover their money if businesses go bust and cannot honour their commitments. Such customers should not be left at the end of the queue if a firm goes under. Many individuals and families who were affected by Farepak and similar schemes felt that everyone was ahead of them in the queue to get some sort of justice, which is why we have tabled the new clause. We have chosen our language carefully to address the concerns that have been expressed. We are not being prescriptive or specifying exactly what should happen, but we are saying that the Government should consider treating people in such circumstances as preferred creditors. The new clause gives the Government the opportunity to take the matter away and look at it in more detail.

New clause 16 would require the Treasury to publish a review considering whether to extend depositor protection across all small and medium-sized enterprises. Under the current rules, the Financial Services Compensation Scheme generally protects the deposits and investment accounts of very small firms, although there is a cap on eligibility. A smaller company must meet two of the criteria set out in the Companies Act 2006, namely that the turnover must be

“not more than £6.5 million”,

the balance sheet total must be

“not more than £3.26 million”

and the total number of employees must be not more than 50. Anybody who has experience or awareness of the SME sector will know that those criteria are quite restrictive, and they render many SMEs ineligible.

We are trying to emphasise the need to protect the people who have been trying to do the right thing. The owner of a medium-sized business could lose the proceeds of a life’s work in the event of a collapse of an institution that held their assets. People who have worked for years in the small business sector are the backbone of many local communities and, indeed, our economy. It is of concern to us that if SMEs lose confidence in the ability of the bank to hold their money, that not only has a knock-on effect on their circumstances, but could cause further instability.

When the Prime Minister launched the Conservative small business plan in 2008, before he was Prime Minister, he made the point that he wanted to ensure that the Government would be completely on the side of small businesses, and not kick them when they were down. In the Conservative manifesto, before the 2010 general election, he stated:

“small businesses are especially important to the UK’s economic recovery and to tackling unemployment.”

I do not often find myself agreeing with the Prime Minister. It is perhaps a dangerous precedent, even at this point, to say that I agree with him, but it is absolutely the case that—

Chris Leslie (Labour, Nottingham East)

Not everyone in the Cabinet agrees with him.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend says that not everyone in the Cabinet agrees with him, but I would say that small businesses are especially important to the UK’s economic recovery, as the Prime Minister has said, and therefore we ought to do whatever we can to try to support small businesses and ensure that they are given the protection that they need. We have tabled the new clause because we want an improved deposit protection system that will help them. I look forward to hearing what the Minister has to say about that.

There are serious issues within the clauses that will need unpicking. I will briefly set them out. New clause 21 covers savings brands. Under the current rules, if someone has more than one deposit account, which may include a current account, a savings account, a cash ISA or a savings bond with the same authorised bank or building society, a total of £85,000 is protected under the Financial Services Compensation Scheme. If several brands share a deposit-taking licence, a consumer gets a total of only £85,000 of FSCS protection, even if they have savings with more than one of them.

Many customers taking out such products might not stop to consider which particular banks are all part of the same family. Indeed, I am grateful for the work done by Which?, because it has highlighted the dangers. It produced a very interesting graphic that showed the different brands that were linked to one another. There is a little quiz as well, so if people have not had the opportunity to test their knowledge of which brand belongs where, they can do that if they look on the Which? website. I think it is still there.

The new clause would extend the Financial Services Compensation Scheme limit to £85,000 for each brand, rather than for each bank. In the aftermath of the financial crisis, there are fewer banking groups and they are made up of a greater number of brands. Without going to that graphic on the Which? website, people will perhaps not be aware that the Bank of Scotland holds the banking licence for AA Financial Services, Aviva, Bank of Scotland, Birmingham Midshires, Halifax, Intelligent Finance, and Saga. Those pieces of information have been provided to us by Which?.

Consumers would be advised to spread their money across different financial services groups, but not all consumers will have thought it through or have had time to research who ultimately holds all the different banking licences for their account providers. Essentially, the new clause would provide more protection for consumers who hold several accounts across a banking group. We believe that that would boost consumer confidence and could help, in difficult circumstances, to prevent another run on a bank. Incidentally, research by Which? suggests that just 12% of people know how much of their money would be protected if their bank went under, so perhaps there is an educational issue and we should try to get more information out to consumers.

The new clause also deals with temporary high deposits. That is related to protecting SME accounts, but not exclusively so. The second part of the new clause seeks to address the risk posed to people who temporarily deposit a large amount of money in an account for transitional reasons. In our discussions in Committee, we have heard of scenarios in which that might happen, for example, on the day of house sale and purchase, or the sale of a private company. At that particular point, there may be an unusually high amount of deposit in an account.

The concern is that the high value of the account on one particular day could give a distorted impression of someone’s wealth. Because they would immediately be using that money to make a major purchase, such as a house, the money is not deposited there for the long term, and it would be extremely unfair if a lifetime of saving and investment in a house or business—we are talking about people who are trying to do the right thing: look after their finances and do as much as they possibly can to look after themselves and their families—was wiped out and a high balance lost because it happened to be held temporarily in an account on the day of a bank collapse.

We do not look for banks to collapse—far from it. We want to ensure that the financial sector is stable, which is why we tabled several other amendments, but this new clause would give some comfort to consumers. The change could work in the form of an agreement between the bank customer and bank manager; the customer could normally give notice of a large sum of money due to enter their account, particularly in circumstances such as a house purchase. Indeed, Paul Tucker, the Bank of England’s deputy governor who deals with financial stability, said:

“Of course, retail deposits—up to £85,000 in this country—will continue to be insured.”

This is his crucial point:

“And we probably also need measures—possibly segregated accounts—that can protect the temporary high balances that arise when, for example, a person sells a house or receives a legacy.”

He said that in February 2012.

I realise that there are several issues with this measure, some of which will require further work and a look at the technicalities of how it can be taken forward. However, we are trying to stress the important principle of protecting consumers. We want to ensure that those people who are trying to do the right thing by saving and managing their finances appropriately, or businesses that are trying to contribute to the country’s economy and growth, or people who, for whatever reason, have a high amount of money in their accounts on a temporary basis—for only a day or a couple of days—get the maximum protection.

I hope that the Minister will give us some assurance that he is prepared to hear what we say on the principles of this measure. He may have issues about how the new clauses are drafted and he may wish to consider them further, but I look forward to hearing what he has to say.

Greg Clark (Conservative, Tunbridge Wells)

It is very nice to be back in Committee. It has been an eventful Easter recess, not least for my hon. Friend the Member for Carlisle, who got married. I am sure that the Committee will want to congratulate him on that.

Chris Leslie (Labour, Nottingham East)

What a honeymoon!

Greg Clark (Conservative, Tunbridge Wells)

Indeed, I hope that this does not qualify as his honeymoon, and that he enjoyed a more companionable honeymoon with his wife.

It is a pleasure to respond to the new clauses tabled by the hon. Member for Kilmarnock and Loudoun. They concern an important part of the confidence that we all want to see in the financial services sector, which is underlined by the Financial Services Compensation Scheme. The events in Cyprus in recent weeks show the great importance of confidence. When confidence in savers’ protection is knocked, the consequential worry and the leakage of confidence in the whole system are great.

Let me deal with new clause 2 first. I have a great deal of sympathy with the motivation behind it. The hon. Lady is well known in this House as a powerful advocate of the interests of the victims of Farepak. Many of those victims are her constituents, but she has gone beyond that. As she said, the new clause is also relevant to consumers holding gift vouchers, especially in funds that have gone into receivership, and other schemes into which people paid money in advance.

Several measures, which I will talk about later, can be adopted. However, there is a particular difficulty with the new clause. It refers to the Financial Services Compensation Scheme, which is within the scope of the Bill. The difficulty is that pre-payment schemes and gift voucher schemes are not legally financial services, and are not regulated by the Financial Conduct Authority. They are, in effect, advance payments for goods and services. They are different from deposits, and are part of the framework of company law and the transactions associated with that. That fact is relevant for a number of reasons, most particularly because the FSCS can by law deal only with financial services that are regulated by the FCA and the Prudential Regulation Authority. Indeed, it would be against the law for it to deal with payments on account.

The relevant piece of law is section 213 of FSMA, which gives the FSCS jurisdiction over “relevant persons”, who are defined later in the section as “authorised persons” under the FSMA framework, or “appointed representatives”. That is the difficulty with the new clause, but I am sure that the hon. Lady anticipated that the drafting is less important than the point she seeks to get across. Given that it is in everyone’s interest to provide greater protection for people who, reasonably and in good faith, think that they are doing the right thing—as the hon. Lady said—by putting money aside for future expenditure that they expect to incur, it seems to us that they should enjoy a degree of confidence in those arrangements.

The new clause would cause the FSCS to instigate a review. I can tell her that the Government have instigated such a review through the Department for Business, Innovation and Skills Business, which is responsible for the non-financial services that savings schemes fall into. Discussions are taking place, as part of the review, with industry and consumer groups on establishing a code of practice, mutual industry support schemes and other initiatives. I am sure that my ministerial colleagues in BIS will be happy to report to the hon. Lady on the progress of that review, and there will be occasions elsewhere in the House for her to probe it further. I want to reassure her and make sure that she is aware that we are alive to this important matter. If the Bill is not quite the right vehicle for it, there are others that we will consider.

Let me move on to new clause 16. The rules governing deposit protection at the EU level are set out in the deposit guarantee scheme directive. That is why this country’s £85,000 limit for the Financial Services Compensation Scheme is the approximate equivalent of the €100,000 limit that applies in the directive. The definition of small and medium-sized enterprises that the hon. Lady referred to, which provides that SMEs should be treated as ordinary, personal depositors, mirrors the EU definition, just as the £85,000 domestic limit reflects the €100,000 limit, so there is consistency, which is required under the directive.

However, all the points that the hon. Lady makes are quite right and well made. Given her admiration for the Prime Minister’s determination to help small businesses, which is a delight to hear, I am sure that she will be pleased to learn that we expect to be able to go further than is currently possible in the FSCS. The EU directive is being renegotiated, and there is a proposal, supported by the UK, to extend to all non-financial businesses, regardless of their size, the protections of the deposit insurance scheme, up to the limit of £85,000. The process is well in train, and we are enthusiastically supportive of it, so I hope that the hon. Lady will draw comfort from that and find yet another reason to join in the praise of the Prime Minister’s sagacity and far-sightedness.

Turning to new clause 21, as I have just said, all member states’ deposit guarantee schemes must comply with the provisions set out at EU level in the deposit guarantee schemes directive. That sets out a maximum harmonised provision, which, as my hon. Friend the Member for North East Somerset will know through his experience of the European Scrutiny Committee, is a particular feature of European legislation. It means that we cannot go beyond that level—the £85,000 equivalent is the maximum that can be provided in the UK.

I have just said that the directive is being renegotiated. It is indeed contemplated in the text that is currently being negotiated that some aspects will be relaxed in future. The hon. Member for Kilmarnock and Loudoun quite rightly made two points about consumers who have deposits in different brands, albeit under the same banking licence. It should not be necessary for them to have to root through the small print to discover whether one particular brand of retail deposit taker is related to another. That should not be the responsibility of consumers. It is contemplated that in future the limit will be by brand. Indeed, on the point made by Paul Tucker about temporary large balances, again, it is contemplated that cover will be given.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is helpful to hear the Minister’s points. Will he give us an indication of the time scale on which it is likely that these matters will be dealt with?

Greg Clark (Conservative, Tunbridge Wells)

As ever with European debates and issues, it is difficult to give an exact timetable, but there seems to be fairly strong consensus around the provisions. Having been at the ECOFIN meeting in Dublin this weekend, I know that the Irish presidency is particularly keen to conclude many of these outstanding dossiers, especially where there is broad agreement. Although I cannot give the hon. Lady an exact time, there is certainly some momentum.

Given that the Bill has some way to go in this House and the other place before it receives Royal Assent, and that some of its provisions come in later than that, even if it were possible for the Bill to go beyond that level, which it is not, for the reasons I have said, I do not believe that that would offer any timing advantages over what is being pursued in Europe. However, as soon as we have authorisation under the deposit guarantee schemes directive, we will implement the provisions relating to the Prudential Regulation Authority, and we will certainly look to use any flexibility there. I hope I have been able to reassure the hon. Lady on those points, and that she will withdraw her new clause.

Yasmin Qureshi (Labour, Bolton South East)

It is a pleasure to serve under your chairmanship, Dr McCrea. I support this group of new clauses; in fact, I had prepared a long speech on the subject—I exaggerate—but in light of what the Minister has said, I will keep my comments brief. I welcome his comments and the intention that has been stated.

With regard to new clause 2, I want to emphasise the issue of vouchers; it is great that there is so much consensus on that issue, but it is important to emphasise that the consumers affected are ordinary people for whom £100, £200 or £300 is a lot of money. It would be great to see those people being protected, so I urge the Minister to make sure that, in whichever way possible, they become preferred creditors and are compensated; they should be at the front of the queue, not the back, when it comes to compensation.

On small and medium-sized enterprises, I would emphasise that, as everybody on the Committee knows, small businesses are the backbone of our economy. They employ about 14 million people, and it would be great if the European directive that is being renegotiated was changed so that many more firms could be protected. At the end of the day, although that would cost some extra money, it would save very many jobs and keep the economy going, and it would therefore be a good measure to have in place.

On new clause 21, it is important to remember that a lot of ordinary people do not realise the differences between brands. They may amass £10,000 in their current account and £15,000 in their individual savings account and so on, but at the end of the day, they will find that they will be compensated only for sums up to £85,000. We are talking about hard-earned money they have saved over many years. A lot of people do not quite appreciate the differences between brands and would find that they were not properly compensated. It is important that the provisions try to deal with the needs of ordinary consumers and small businesses with limited incomes. I urge that strong negotiations are carried out as soon as possible, so that the £85,000 is per brand, as opposed to the total amount that people can be compensated for.

Greg Clark (Conservative, Tunbridge Wells)

I am grateful for the hon. Lady’s points, which reinforce arguments that have been made very well this morning. In our deliberations, we ought to have small depositors particularly in mind; they have—often with some difficulty—scrimped together savings for the future, and do not have a buffer to fall back on if savings are lost. It is important that the arrangements we put in place pay particular heed to their needs. In terms of the pre-payment schemes, we will do that through the corporate legislation and the arrangements that can be entered into with companies. I strongly agree with her description of small businesses as the backbone of the economy; again, that is a phrase that my right hon. Friend the Prime Minister could use, and probably has done. We certainly have that issue in mind. On brands, small depositors ought to feel that arrangements that are put in place merit their confidence; there should be no messing around with those arrangements. The situation in Cyprus teaches us the very clear lesson that the spirit of commitments proposed and entered into should be honoured, as well as the letter.

The hon. Member for Kilmarnock and Loudoun asked about the publicity surrounding the protections that are available to try to make consumers aware of the £85,000 protection limit. The FSCS has a marketing campaign planned throughout the year, with branding in each bank branch, and on publications that banks issue, to reinforce this. In the light of what has been said in Committee about the importance of that, I am sure that FSCS staff, who I am certain will read this debate, will pay particular attention to the need to communicate that information.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the Minister and my hon. Friend the Member for Bolton South East for their contributions. People who read the Official Report will be interested to see exactly what is being supported here, and the arguments that we are trying to advance. The Minister said that he was in sympathy with the intent of new clause 2. In my opening contribution I recognised the technical issues around the clause, which is why, notwithstanding my instinctive desire to push things like this to a vote, I will not do so this morning. However, people out there in the real world, who are perhaps not au fait with the fine detail of the workings of the FSCS or why it is not the right body to do this, just want something to happen to ensure that the protection is there in future and that we avoid a repeat of past scenarios.

I am grateful to the Minister for highlighting that work is under way on this, that discussions are taking place with the industry, that there is talk about establishing a code of practice, and that we can receive further reports on progress in relation to that. If more detail were to emerge as the Bill progressed, that would be extremely helpful. People will not necessarily be thinking in advance of the technicalities—about whether something is a pre-purchase, advance payment or savings scheme. More information is needed in relation to that. They simply need to have confidence that whomever they trust with their money will be held to account if something goes wrong, and that they will not lose out when they put their money into schemes. I hear what the Minister says on that issue. Tempted though I am to show the strength of feeling that there is on the subject, I will not press the new clause to a Division.

I was interested to hear the Minister’s comments on new clause 16. He talked about the work done at EU level; it was fascinating to hear his enthusiastic support for that institution taking forward some of the protections that are needed.

Jacob Rees-Mogg (Conservative, North East Somerset)

I do not think that indicates enthusiastic support for that institution. Many people would prefer that we made the decisions in this House; then we might be able to make them today, rather than waiting for our European friends.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am glad I gave way to the hon. Gentleman. I could see him, earlier, itching to find a point to come in on. He makes a point, which is why I raised the issue of the time scale in which we can expect something to happen. It is important that the work that is under way does not disappear into the long grass. I am sure the Minister would not wish that to happen, either. I do not know whether he was enthusiastically supporting the institution or the work.

Greg Clark (Conservative, Tunbridge Wells)

May I clarify the point? What I said, perhaps with undue modesty, is that our proposal in the EU discussions is that the provisions be taken forward. It looks like the EU is seeing the light and following the UK’s suggestion. I am praising our contribution, rather than that of the institution.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the Minister for that clarity. I am sure that in future discussions and negotiations on the issue in that institution, the Minister will be keen to take the support of the Committee forward. We do not need to press the new clause to a vote for that. The view is that this action ought to be taken. I hope the Minister will do all he can to ensure that the matter is taken forward on a time scale that gives the maximum protections to those who need and deserve them.

On new clause 21, the Minister talked of the work going on at EU level. I was pleased to hear him say that individual consumers should not have to root through the small print to work out which banks are linked to which brand, and that it should be ensured that the bodies organise that level of detail. I also take on board what the Minister said about a marketing campaign for the FSCS about its responsibilities. It is important to stress that those protections need to be put in place quickly. I hope this will not disappear into the long grass. I am sure the Minister would not wish that, and will do all he can to ensure that the correct protections are put in place.

We will have further opportunities during the passage of the Bill to get updates on progress. If we do not feel that progress is quick enough, we can press the Minister on that point at various stages.

Mark Durkan (Social Democratic and Labour Party, Foyle)

The point that my hon. Friend just made is particularly important in the context of supermarkets advertising and selling their services as banks in their own name. However, they are fronting for other banks. That is why these points need to be clarified, so that people know where they stand in relation to the deposits they are paying, and what the direction is.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend makes a valuable point. As he said, more supermarkets and other organisations are offering ranges of financial products. People may not go through the fine print to discover which bank is linked to which supermarket or combination of organisations. It is important that the issue does not drift, and that there is continued pressure to ensure that consumers are given the protection they need. I hope the Minister will continue to press on that. With those assurances from the Minister, and assurances that there will be the opportunity to raise the issues later, if necessary, I beg to ask to leave to withdraw the motion.

New Clause 3 - Professional standards

“Section 65A

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

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

William McCrea (DUP, South Antrim)

With this it will be convenient to discuss new clause 4—Code of conduct —

‘After section 64(6) of FSMA 2000 insert—

“(6A) A code issued under subsection (2) shall—

(a) apply to all approved persons exercising controlled functions in the financial sector;

(b) specify a framework of certain permitted and prohibited actions with which approved persons must agree in writing to comply;

(c) mandate individual financial penalties, and the terms of temporary and permanent suspension of persons’ licence to operate, which can be issued by the appropriate regulator if it determines that an approved person has broken the code;

(d) specify the training, including both practical and ethical, which approved persons must undergo before practising controlled functions; and

(e) specify the additional training to be provided by institutions for their staff and set out the system by which institutions will monitor and enforce such a code.”.’.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We are making good progress this morning. We again want to raise important points of principle with these two new clauses. New clause 3 would introduce a licensing regime for all approved persons exercising control functions, to ensure that such persons have the adequate standards of competence and integrity. It is important for people in the real world to understand that we are trying to make reforms that complement the attempts to change the culture of the banking sector, to ensure that such problems are much less likely in the future, and that we are trying to do everything possible to prevent future banking malpractice of the type that sadly has been uncovered in recent years—whether it is LIBOR fixing or the banks’ mis-selling of financial products.

Essentially, the new clause is intended to ensure that a new licensing regime is put in place that would help to restore confidence in the banking system, not only for consumers but on a wider international level.

Alok Sharma (Conservative, Reading West)

The reason why we had severe problems in parts of the banking sector was not necessarily because of training, but because of a breakdown of culture and ethics. Under the former FSA people, there were approved persons. We could argue, of course, that the number of individuals involved should have been extended, but is the hon. Lady suggesting that we should have a large body that regulates every single individual who works in banking and the financial services sector?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

To be fair, the hon. Gentleman makes a valid point. Many people at the front line—I have spoken about this a number of times in discussions on the Financial Services Act 2012 and in the Chamber—were often the ones who were carrying out instructions and were put under pressure to do certain things to meet targets. We may discuss that further when we come to fiduciary duty and so on. However, the new clause is particularly about approved persons. It is not intended that everyone in the sector would be involved. We believe that that is important, because there are similar—not exactly the same, but similar—scenarios with other professionals who have responsibility, whether they are teachers, lawyers or medical health professionals. Such protections are in place because of the damage that may result without them, which is obvious. The problem is that the consequence of regulatory failure in the banking sector can be equally serious, not only for the health of the banks themselves but for the wider economy, and it can cause damage and problems for individuals.

It is true that controlled functions can now be carried out only by approved persons, and that a fit and proper test must be passed. However, given some scenarios that we have seen, I would argue that that has not been enough in itself. There is an argument that it is about culture and ethics, and that is important, but the protections that have been in place have not been enough to prevent the banks from being run like casinos in some instances.

Alok Sharma (Conservative, Reading West)

The hon. Lady rightly makes the point that high-level principles have been in place. The FSA’s principles—I assume that those are effectively being taken over by the FCA now—include “Integrity”, “Skill, care and diligence”, “Management and control” and “Financial prudence”. All those were already in place. What specifically is she suggesting should change in how approved persons are regulated? That goes back to the point about culture—perhaps we should be thinking about a bottom-up approach, with much more focus within firms, rather than an overarching solution such as she is proposing.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We are seeking to link the issue to the culture change that is necessary, but sometimes, in order to create a culture change in an institution or organisation, catalysts are required and checks and balances have to be put in place to ensure that behaviour changes and that people are not simply talking a good game. We have tabled the new clause because in 2012, the total paid out by the big five banks in compensation for mis-selling and regulatory fines was £19.8 billion, which illustrates the failings that have been allowed to happen under the existing approved persons scheme.

I applaud the banks that are attempting to change how they operate and their culture. There is, however, a concern, which is reflected in public opinion and the feeling that banks have not yet done enough to change the culture, that further problems could arise unless action is taken to ensure that those who are doing the right thing are supported and that their efforts are backed up. It would be better to take preventive action than to have to mop up after banks and reprimand them once the damage is done.

That is why we propose a more detailed licensing regime, setting standards that must be reached and with better enforcement using ongoing evaluation instead of relying on individuals to update relevant information. That would go some way towards rectifying the problem. The new clause represents an important step in the direction of better banking practice and regulation. It would be a licensing regime that would help to boost customer confidence as well as strengthen the regulatory framework, so that banking malpractice would be less likely in future.

Mark Durkan (Social Democratic and Labour Party, Foyle)

Does my hon. Friend believe that creating the sort of environment that the new clause proposes may also be more conducive to whistleblowing by staff of financial service institutions who are conscious of dubious practices and products?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Again, my hon. Friend makes an important point and I hope that we will be able to discuss whistleblowing more generally at a later point. Anything that can create a culture where people are able to see what is the right thing to do in protecting consumers’ money—banks have the moral and ethical responsibility to do that, and not simply to look at what is in their own narrow, short-term interests—would give some support and help to individuals looking to speak out if they felt that they were being asked to do things that put individuals, groups of customers or wider groups at risk.

Alok Sharma (Conservative, Reading West)

The hon. Lady is being generous with her time. Will she clarify something for me? She mentioned approved persons, but several of the individuals involved in the LIBOR manipulations were not approved persons. How far is she suggesting extending the definition?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the hon. Gentleman for that intervention. If he looks at the specifics of the new clause, he will see the changes that we seek to make to FSMA 2000 and the professional standards that must be met. I was about to discuss new clause 4, which complements new clause 3 and relates to the code of conduct requirement. It is important, because it would add to the requirements of the code of conduct that are already published under section 64(2) of FSMA. Those codes have to be issued when regulators have made statements of principle. Currently, the only requirement is that codes of conduct

“must be published…in the way…best calculated to bring it to the attention of the public.”

With new clause 4, we seek additional requirements aimed at ensuring that the codes of practice have the widest possible application and specify clearly what is required for compliance and the consequences of failure. Those detailed codes of conduct would be easier to comply with, because approved persons would know precisely what was required of them.

To return to the hon. Gentleman’s point, we are not seeking to extend the definition of “approved person” unnecessarily, but rather to provide added clout to ensure that people are clear about what is expected of them, that the code of conduct is understood externally, that breaches are easier to spot so that enforcement by regulators is improved, and that there are clear penalties for breaches of the code. All that should incentivise compliance.

A code of conduct was recommended by the Future of Banking Commission, which compiled its report in early 2010 and published it later. The commission had some illustrious members, and its report was clear when it stated:

“The Commission recommends the development of a ‘Good Financial Practice Code’. This code should have a similar status amongst the banking profession as similar codes of conduct have in the medical and other professions.”

The report went on to state:

“In addition to the development of a Good Financial Practice Code, the Commission recommends that bankers receive compulsory formal training”—

that links back to the comments of the hon. Member for Reading West—

“before they are able to fully practice in their profession. This should include training in the ethical behaviour expected of the members of their profession, including how to resolve conflicts of interest.

The Commission recommends that this Code should be devised and enforced by a new professional standards body along the lines of the General Medical Council, or the Legal Services Board.”

New clauses 3 and 4 represent an important pressure to raise regulatory standards and restore consumer confidence in our banking sector. I hope that the Minister, in the spirit in which he has dealt with things today, will listen to what we have said this morning and respond to our points. If he does not accept that the reforms are necessary, perhaps he could give us some information on an alternative way to deal with those points that would act as the catalyst necessary for further change.

Greg Clark (Conservative, Tunbridge Wells)

We have had many discussions to date in which the hon. Lady has been the agent, if we can think of it in those terms, of the Parliamentary Commission on Banking Standards by putting forward its recommendations to the Committee. In this case, she is trying to steal a march on the Parliamentary Commission, which is still inquiring into these things. We expect it to report next month, and I think all of us look forward with great interest to hear what it has to say.

It is fair to reflect that professional standards are by no means an incidental matter to the Parliamentary Commission. In fact, its terms of reference specifically state:

“The Commission was established by both houses of Parliament to consider and report on the professional standards and culture of the UK banking sector.”

Professional standards are absolutely core to its work, so the new clauses, which deal with that, are by no means inappropriate to the Bill, but the time for them is after we are informed by the august and considered views of the Parliamentary Commission, which was established to look into precisely these matters. We expect its report to be published before Report. That will give us all an opportunity to consider its recommendations and how to implement them through amendments to the Bill. My suspicion is that, based on its previous form, the Parliamentary Commission will leave us in no doubt as to how it would like us to reflect its recommendations. It would not surprise me if we saw suggested amendments later in the course of the Bill.

Among the recommendations that the Parliamentary Commission may make—I have no insight into its thinking—are a proposed code of conduct and a requirement to comply with it, along the lines of what is described in the new clauses. The British Bankers Association proposed in evidence to the Parliamentary Commission that there should be an industry-wide code of conduct more or less along those lines. The Parliamentary Commission will also address whether the problems that we have experienced in the financial services industry were principally about a failure to use the currently available powers—or their half-hearted use—and whether new powers are needed.

Although we will have plenty of opportunity to debate these matters in great detail within a few weeks, it is worth saying something about the current regime, to inform the Committee, as I am sure its members will wish to contribute to future debates. The current arrangement under FSMA is that individuals who perform controlled functions in a financial services firm require the regulator’s prior approval before taking up their appointment. That is quite an interesting and perhaps under-appreciated feature of the regime at the moment. The controlled functions relate both to positions of significant influence in financial services firms and to consumer dealing functions, for example the provision of advice.

A firm proposing to appoint a person to a controlled function has to submit in advance an application to the regulator. In some ways, interestingly, the powers currently provided are tighter than in professions where, typically, if people enjoy the approval of a professional body, they are free to practise anywhere, in any firm and in any role. That is not the case under FSMA. FSMA approval is for a specific appointment, individual, function and firm. The powers are quite well designed for what they purport to do. The question arises why they were not used more effectively, and no doubt the Parliamentary Commission is looking at that.

The regulator may not agree to approve a person unless it is satisfied that the individual is a fit and proper person to perform the function to which the application relates. The question of whether a person is fit and proper covers both their competence and integrity. FSMA specifically allows regulators to make rules providing for specific demonstrated training and competence requirements, which are reflected in the new clauses, and to require that any approved person must satisfy those conditions. So far, that requirement been mostly used for customer dealing functions. Hon. Members will know that in the retail distribution review, for example, there is a requirement on independent financial advisers to have gone through training before they can advise their clients. That relates to the current powers on training.

FSMA also allows regulators to issue statements of principle covering the conduct expected of approved persons. It is envisaged that the PRA and FCA will continue to do so. In fact, there are already statements of principles concerning the required standards of integrity that approved persons by the PRA or FCA will need to conform to. Those are binding on approved persons, not optional.

FSMA also provides for codes of practice to be established. They are non-binding and are meant to be descriptions of conduct that would or would not comply with the mandatory statements of principle. From 1 April, following amendments made in the Financial Services Act 2012, the regulators’ statements of principle can apply to the conduct of approved persons in any function that they undertake, rather than to the controlled function. A person needs to be licensed to perform a particular controlled function, but the requirements on their conduct and integrity can apply to all aspects of their work, whether or not they relate to the particular matter that is approved.

The approved persons regime includes disciplinary arrangements that are well known to the Committee. They include financial penalties, public censure and ultimately the withdrawal of approval, if a person is no longer considered fit and proper. Those sanctions are available for conduct that is in breach of a statement of principle, including in parts of the job that are not in a controlled function. We have in place a regime that is in effect a licensing system for individuals. It covers standards as well as technical aspects, with extensive sanctions that are potentially more intrusive than those in many professional bodies. For example, an accountant can practise anywhere without further authorisation for a proposed job.

The question that arises is: why did that not work? Why did the regime not work in the past? It may have exposed the need to make greater use of such powers, to be clearer about the standards expected, and to be more active in removing authorisation and imposing sanctions, which, I hope, is an area that the Parliamentary Commission will advise on. Indeed, it may be that more powers are needed. That is what the Tyrie Commission is considering in depth and extensively. When the Chancellor appeared before the Commission, he gave an undertaking to include in the Bill any recommendations needed to take forward what is required to improve culture and standards. We will therefore have an extended ability to consider such proposals.

I hope that the hon. Member for Kilmarnock and Loudoun will feel inclined to withdraw the new clause, in anticipation of a lot more debate to come on such matters.

Nick Smith (Labour, Blaenau Gwent)

The incoming Governor of the Bank of England, Mark Carney, has said that regulation alone cannot be sufficient, because “virtue cannot be regulated”. Five years since the beginning of the banking crisis, that statement feels all too true.

Two weeks ago, the Salz review blasted Barclays’ culture of greed, saying that bankers

“seemed to lose a sense of proportion and humility”

in the pursuit of bonuses. Just two days later, HBOS was slated by the Parliamentary Commission on Banking Standards for its

“incompetent and reckless board strategy”

and “toxic” mistakes. Meanwhile, Barclays announced £39.5 million of bonuses on Budget day but 3,700 job losses just four weeks ago.

For far too long, morality has been a relative term in an industry that gives vast rewards to the few at the expense of the many, whether that be the local teller who lost their job in the latest round of cuts, or the man on the street whose savings were put at risk in 2007. If Labour’s amendments to the Bill are taken seriously, there may finally be the chance to bring a little morality back into banking to protect the ordinary customer from the cowboy banker.

In 2012, the respected Professor John Kay produced an independent report on the need to change the culture of investment, which was endorsed by the Business Secretary. He called for a minimum standard of behaviour based on stewardship to ensure that investors act in the long-term and best interests of clients. Saying that the absence of trust in the current system was a

“product of the prevailing culture”,

Professor Kay wrote:

“This erosion is not a result of misplaced public perception, which can be addressed by a public relations campaign; it is based on observation of what has happened.”

Labour’s new clauses would help to shift power back to where it belongs, and begin to build the bridges broken by decades of the excess we have seen just a few miles up the road from here. Through new clauses 3 and 4—and 6 and 7, which we shall consider later—a bankers’ code of conduct could lead to bankers being struck off in the way that doctors are struck off; boards would be answerable to their everyday employees when bonuses are handed out; and shareholders would be able to judge whether executives deserve big pay-outs for poor performances. All those measures and more would go some way to restoring the confidence of the public in the institutions that take their money. Public confidence in Blaenau Gwent is at a very low ebb.

The Parliamentary Commission on Banking Standards concluded that there is a culture of culpable greed not far from here that is far removed from the interests of customers. The new clauses are a helpful way to ensure that banks are accountable to the people they serve.

Mark Durkan (Social Democratic and Labour Party, Foyle)

Like other Members I want to say that it is a pleasure to serve under your chairmanship, Dr McCrea.

I have considerable sympathy with the motivation behind both new clauses, but I am concerned that they may be disproportionate in the context of some financial sectors. New clause 3 would apply to all “regardless of financial sector” and new clause 4 says that the code would

“apply to all approved persons exercising controlled functions in the financial sector”.

The hon. Member for Kilmarnock and Loudoun referred to the Banking Commission, but it applies specifically to the banking industry. When we talk about everyone in the financial sector, we go beyond the banking industry as people understand it.

Dr McCrea, from your constituency experience you will have been familiar with the twilight zone that opened up in relation to the Presbyterian Mutual Society. Any regime introduced by the regulator that is designed to raise standards and ensure there is training, competence and understanding, should also ensure that professionals—the approved persons—have a clear understanding of the regulatory framework and standards. What was revealed in the context of the Presbyterian Mutual Society was that many people were operating under the misapprehension that what they were doing was entirely proper and was under proper regulatory oversight when it clearly was not. There was a failure on the part of the FSA not to intervene in relation to products that were under its regulatory remit. The Presbyterian Mutual Society was deemed not to be under its remit but many of the products that that institution misadventured into were.

Everyone pleaded ignorance afterwards, including the Northern Ireland Department that was assumed to be providing the regulatory oversight. The FSA did not know. The Presbyterian Mutual Society did not know. The Church did not know or understand. Clearly there is a real case for ensuring that when we say that there are standards that have to be upheld and met, we learn the lessons of previous failures. That can apply across financial sectors.

I notice that new clause 4 refers to a code—singular—and not codes. The Minister made the point that FSMA as it stands allows for codes. They do not necessarily have statutory weight themselves, but differential codes are permitted in the context of different parts of financial sectors.

An area that is close to my heart is the credit union movement. We have had problems because the credit union movement in Northern Ireland was not under FSA regulation. Thankfully, now it has been brought under it, not because there was any malpractice or problems in relation to the credit union movement in Northern Ireland, which is very strong and healthy and has a big membership and big savings base, but because by being outwith FSA regulation, credit union members were denied access to the FSCS. They were covered by their own bonds and arrangements through the Irish League of Credit Unions and other measures. Nevertheless, that created a difference that members would have been uncomfortable with.

However, as you will know, Dr McCrea, the credit union movement in Northern Ireland has been somewhat disconcerted by the fact that the FSA is applying standards that were developed in relation to the credit union movement in Britain, which is at a much lower base than in Northern Ireland. The movement is therefore somewhat uncomfortable because many strong, big and healthy credit unions in Northern Ireland will continue to invest in the sensible and responsible way that they do only if they become version 2 credit unions. Many credit unions in Northern Ireland are not particularly comfortable with the requirements—the regulatory hurdles and standards that they would face—of becoming version 2 bodies.

I would not want new clause 4 to end up making that process even more exacting. It would be disproportionate were a credit union, whether version 1 or version 2, to face a regime that was as exacting as and fully equivalent to what a bank has to face. That would be insensitive and counter-productive to encouraging the development of credit unions anywhere in the UK. I worry that a singular reference to a code and the mandatory aspects referred to in the various subsections of new clause 4 would create a situation that was not only more exacting for version 2 credit unions but equally exacting for version 1 credit unions, which would be disproportionate.

I am worried about the possible unintended consequences, because what motivated the FSA’s creation of the version 1 and version 2 regimes in Britain was the fact that it wanted to ensure that credit unions in Great Britain did not make investments until they reached a level of maturity and a certain level of savings and did not get involved with dubious or risky products. The credit union movement in Northern Ireland is mature and sizeable and has made sensible investments in several areas and wants to continue to do so in the interest of its members. A sensible way of allowing that would be to control the products that credit unions can invest in, rather than saying that they have to contort themselves into becoming version 2 bodies before they can do such things. Only allowing them to invest in certain approved products would be sensible, but the FSA, and now the FCA and PRA, have been unable to take up that sensible and practical point. I am a bit worried that were I to support new clause 4, I would be inviting more of that undiscriminating attitude from regulators.

Jacob Rees-Mogg (Conservative, North East Somerset)

May I say, Dr McCrea, what a pleasure it is to have you back in the Chair? We missed you at the last of the previous sittings of the Committee.

I speak only to remind hon. Members of my declaration of interest, as I am an authorised person under the FSA and now the FCA. As we may come to a vote, I felt that I should put that on the record.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I start by thanking the hon. Gentleman for putting his declaration of interest on the record, because I do indeed want to test the Committee’s views on new clause 3 and I will briefly explain why.

The Minister suggested that some amendments were somehow stealing a march on the Parliamentary Commission on Banking Standards rather than following on from it. He did, however, acknowledge that the issue at hand is by no means an incidental matter. He suggested that it would be best to await the outcome of further deliberations of the Banking Commission before deciding on how to proceed. I do not want to go back over previous parts of the debate—you would not allow me to do so in any event, Dr McCrea—other than to say that there were some expressions of concern at the outset of the proceedings in Committee that we were being asked to debate and discuss what was essentially the skeleton of the Bill, without a lot of the final detail that would arise as a result of the work of the Banking Commission.

In one way, I understand what the Minister is saying, but equally the timing of this Committee means that we have what we have in front of us and we have a responsibility to consider what we think should be in the Bill to improve it. That is notwithstanding some of the arguments that were made in support of earlier work by the Banking Commission, which has not yet found a lot of favour from the Government in votes.

I do not want to question the Minister’s intent on this issue. I am sure that he is doing what he is with the best of intentions—to ensure that due consideration will be given to the work of the Banking Commission. He mentioned that he was sure that the Banking Commission would leave us in no doubt as to what its views were, and I too am sure that that will be the case.

The Minister went on to give some technical detail, for which I am sure Committee members will be grateful; I am referring to hon. Members who perhaps have not followed all the technical detail in the way in which the Minister has. He described how the system works at the moment, but he went on to pose questions as to why it has not worked, and he talked about the possible need for greater use of powers, the possible need to be more active and whether further standards and powers were needed. I was grateful to him for the recognition that perhaps more needs to be done.

My hon. Friend the Member for Blaenau Gwent made a passionate contribution that reflected the concerns of his constituents, who once again are not yet persuaded—indeed, many people across the country are not yet persuaded—that the lessons have been learned from what went wrong in the banking sector and its culture, which did not put the interests of the consumers at the heart of the system. As the public see it, certain people at the top of the banking tree looked after their own interests before they looked after the interests of their customers, and they want something done about that.

My hon. Friend mentioned in particular HBOS and Barclays and the very real issue of bonuses. I do not want to continue the notion that this is all about bashing the banks, but we must ensure that the lessons that have to be learned lead to a change in culture. He made the point about the many ordinary front-line staff who lost their jobs as a result of decisions that were taken. It is important to remember that.

I understand the considerable expertise that my hon. Friend the Member for Foyle has in this whole area, particularly in relation to the credit union movement, and the work that he has done in that regard. I listened to him carefully, because I respect his views and opinions on these matters, having seen how he has contributed to previous Bills and his work in the Chamber on these issues. I assure him that, being involved with the credit union movement myself, I would not want to do anything that would put it at risk. I believe that support for the credit union movement is one way in which we can ensure that people have ownership of their financial institutions, whether that is at a localised level or on a larger scale, as in the case that he is aware of from his own area.

My hon. Friend raised real concerns about the situation that he and others have described over the years in relation to the Presbyterian Mutual Society and the problems that arose in that regard. Again, it is important that lessons are learned from that.

I said at the outset that I would want to test the opinion of the Committee on the new clause. I do not for a minute believe that Opposition Members will win the vote, but I think that it is important to test the principle behind the new clause, which is that we want to see as much as possible done to ensure that the people who carry out the controlled functions are fit and proper people. I do not believe that the existing system has worked in the way it should. We hope that pressing the new clause to a vote will send a message to those considering the work of the Banking Commission that we feel that further action is needed.

New Clause 5 - Duty of care

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

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

I hope that we can continue the good progress that we have made this morning. New clause 5 would introduce duties of care for ring-fenced bodies: a fiduciary duty in the carrying out of core services and a more general duty of care across the financial services sector. A fiduciary duty is characterised as a requirement to serve loyally in trust and in good faith.

As a bit of background to the new clause, a Which? survey in March suggested that banks’ safeguarding of customer interests remains inadequate. It found that banks are failing to give the right advice regarding, for example, transferring and managing cash ISAs. Which? placed around 180 calls to 15 leading banks and building societies to assess the quality of advice provided concerning the transfer of cash ISA savings, and it found that HSBC, Yorkshire Bank, RBS, First Direct and Barclays failed to give correct answers to three simple cash ISA questions in more than 50% of the calls.

In addition, according to a YouGov poll for TheSunday Times last year, almost two thirds of banking customers no longer trust their lender to look after their money. We have spoken this morning about public perceptions of the banking industry and its culture and the changes that need to be made. Of particular concern in the YouGov poll was the fact that almost half the respondents believed that some of the high street banks were dishonest, and 45% described them as incompetent. We do not want that situation to continue. Only 1% of respondents believed that senior executives of the biggest banks had improved their behaviour since the financial crisis began. It would be interesting to repeat that poll in future and see whether perceptions have changed.

New clause 5 would insert into the law a concept that we believe would go a long way towards ensuring that consumers could have full confidence that their best interests were being served and that those selling financial services products were acting in both a prudent and ethical manner. We have discussed this morning whether that can be regulated and legislated for and how much of it is down to individuals acting in an ethical fashion. The new clause would require a ring-fenced body not to act in a way contrary to the customer’s interest while carrying out its core activities.

It can be argued that banks and financial institutions ought not to be acting contrary to their customers’ best interests, but when we look at what has actually happened and some of the inquiries undertaken, it is clear that, in some circumstances, the banks were doing that when carrying out their activities.

If such a duty were to be applied to banks generally, it could create problems in areas where banks have competing interests, or their customers have competing interests. However, we believe that, in the context of carrying out core services, it is right that customers should be able to rely on the banks to look after their best interests. The new clause would improve customer protection and boost consumer confidence in the banks.

The more general duty of care amounts to a duty to act reasonably when dealing with the customer, or in matters relating to its customers. People may argue, and hon. Members may suggest, that both of those represent a principle that is hard to disagree with: banks should treat customers fairly. They may also argue that similar duties already exist in common law.

I suggest, however, that those duties have developed in a piecemeal way, and creating a general duty would get rid of any uncertainty over whether a duty will be found to exist by a court. There would then not be the scenario where the customer always has to go to court for clarification. Giving the duties some statutory basis would bring them within the remit of the regulators who cannot oversee the common law duties of care that currently apply to banks.

When a similar amendment was debated in the Financial Services Bill in 2012, the hon. Member for Solihull (Lorely Burt) commented that the duties should not be made too specific or people might be able to circumvent them. However, the duties imposed by this new clause would allow all relevant considerations to be taken into account by a court, while assuring customers that the banks had the legal obligation to act fairly.

Many Members and media commentators have expressed concerns about the mortgage and remortgage markets, where safer safeguards need to be pursued, particularly in relation to the best interests of clients. For example, mortgage customers on standard variable rates might be persuaded that remortgaging is their only option, but they could end up accruing significant costs such as surveying, legal fees and so on. Because those costs are added to the mortgage in many cases, the customer does not necessarily feel that they are being made to pay for a remortgaging product, yet it will hit them at some stage.

Mike Thornton (Liberal Democrat, Eastleigh)

I am not sure whether the hon. Lady is aware that the regulations currently mean that any kind of advice given for a remortgage must take concern of the difference between the existing product and the product being taken out.

My experience when I was an adviser was there were many people who I or my colleagues advised not to change their mortgages because, first, we were ethical—I think we were ethical. Secondly, the less ethical ones who would be tempted to do this—I accept that there are many of them—are unable to do so because the compliance regime would immediately reject that advice, the firm would be fined and, in my experience, the person giving that advice would be delicensed. Therefore, there are already adequate safeguards within the current legislation.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the hon. Gentleman for giving us the benefit of his experience. I used that one example that was brought to us. I am trying to ensure that there would be a wider fiduciary duty that would also ensure that the forest of paperwork that is sometimes supplied to consumers would be balanced by the need for clear and consistent information. I am sure that the hon. Gentleman would accept that in some instances it can be difficult for people to wade their way through all the paperwork and small print and make a decision about what is in their best interests.

Hon. Members will be aware that in July 2010 the US Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010, giving the Securities and Exchange Commission the authority to impose a fiduciary duty on brokers who give investment advice. A stronger duty of care would ensure that the industry had to take customers’ interests into account when designing products, and had to provide advice throughout the product life-cycle. That takes us back to my earlier point that this issue is not simply about selling products, but about the many stages during which people are advised about what is in their best interests.

We believe that several benefits would arise from placing such duties on ring-fenced bodies. Doing so would increase consumer protection and help to restore confidence in our banks. To return to another earlier point, it would raise standards of conduct in banks if they knew that they would be responsible for acting according to those duties. If the Minister does not feel that a fiduciary duty towards customers in the operation of core services and a duty of care towards customers across the financial services sector ought to be put in place, I would be interested to hear why; if he believes that legislation is not needed, I would be interested to hear what proposals he might have to ensure that those principles would be upheld.

Greg Clark (Conservative, Tunbridge Wells)

I am pleased to respond to the debate. I say to the hon. Lady that it is not that legislation is not needed on these matters; it is, however, important that when we legislate we are clear about the consequences of that legislation.

Let me deal with new clause 5. Proposed subsection (a) refers, as the hon. Lady said, to a fiduciary duty towards customers in the operation of core services. A fiduciary duty is a duty of trust in circumstances where one person is, in effect, acting on behalf of another—or, at least, in the other’s interests—and so needs to make sure that they follow faithfully the best interests of the party to whom they have a duty of care; in economics, we know the situation as the “principal-agent problem”. An example would be a director acting on behalf of shareholders: directors, in effect, are the trustees for the interests of shareholders, and hence, quite properly, have a fiduciary duty to keep that always in mind and not pursue their own private interests as directors over the interests of the shareholders whose interests they represent.

When it comes to deposits in a bank, however, the relationship is rather different. The bank is not acting on behalf of depositors; instead, the relationship is contractual. For example, in determining the interest paid on sums deposited in an account, if a bank were acting under a fiduciary duty to depositors—that is to say, it were to have in mind the interests only of the depositors—it would be constrained to pay them, as a fiduciary duty, the maximum available. That would be the bank’s responsibility. Instead, as it is engaged in a commercial transaction and is a competitive business that operates within a competitive environment, it pays the interest rate that allows it to have a competitive position in the market.

Although, on the face of it, the small change in the new clause seems rather innocuous, it would fundamentally confuse the basis on which banks operate. Of course we need to make sure that insured deposits, in particular, would be safely held, and this morning we have been debating the arrangements for that. The whole purpose of the Bill, in terms of ring-fencing arrangements, is to put in place particular requirements to ensure that deposits are safe and that the behaviour of the bank is sound. Such regulatory requirements are different from the fiduciary requirement that would oblige the bank to act, as it were, as a trustee for its customers.

Proposed subsection (b) refers in a different way to ring-fenced bodies having

“a duty of care towards its customers across the financial services sector.”

That is, at best, opaque, and, at worst, worryingly vague. First, it is not clear what a duty of care, especially to customers across the financial services sector, means. Can a bank be said to have customers across the financial services sector, presumably in other, competitor institutions? Since it refers to the financial services sector, does it mean that a bank has a duty of care not only towards its competitors’ customers, but to the customers of insurance companies?

It is important to be clear about what is required. The new clauses would make unclear many of the provisions that we are seeking to introduce. We can clarify existing contractual obligations, as we are through the insured deposits. We can clarify regulatory requirements, and the new ring-fencing requirements do precisely that.

A ring-fenced body must always be in a position to repay deposits when they fall due, but that is a contractual requirement. It must meet its obligations on ring-fencing and on conduct, so it is hard to see what a duty of care can add to that. All financial services businesses have contractual obligations to customers. Some of them already have fiduciary duties—for example, when acting as a trustee, an executor or an asset manager. Fiduciary duties are established for financial services institutions that operate in that way.

All financial services businesses, and indeed persons, including my hon. Friend the Member for North East Somerset, are subject to obligations under the regulatory regime that we have for the FCA. My colleagues in the Committee that considered the Financial Services Bill took great pains to specify, with some precision and in some detail, the purpose and the remit of the Financial Conduct Authority to advance consumer protection, integrity and competition. The PRA is to promote the safety and soundness of PRA-authorised persons.

The Bill would add to the specific objectives a continuity objective to require the regulators to make ring-fenced rules and for ring-fenced bodies to comply with them. Those are specific and focused requirements that are much better than general concepts that do not relate to the objectives of the regulatory bodies. The hon. Member for Kilmarnock and Loudoun said that such matters would be brought within the scope of the regulators, but they would not. The regulators have a strict scope to discharge the remit laid down in the Financial Services Act 2012, which will be amended by this Bill in terms of the continuity objective.

Imposing a duty of care to customers in other financial services bodies or a fiduciary duty for institutions that do not actually have fiduciary responsibilities would not give firms a clear view of what conduct is expected of them or provide any means of holding firms to account. Since the regulators are responsible for governing conduct, it would confuse matters and ultimately that would be to the disbenefit of consumers, rather than to their benefit.

Mark Durkan (Social Democratic and Labour Party, Foyle)

The Minister’s arguments differ from the previous Minister’s arguments on the Financial Services Bill when we were in Committee and in the Chamber. Whenever many of us tabled amendments to the Financial Services Bill on the fiduciary duty and duty of care, the two arguments from the Government were: first, it does not need to be in the Bill because it is a common law requirement and is binding anyway, so we would not achieve anything extra and it would be otiose; and, secondly, in the context of a Bill that provided for the new regulatory framework, we were providing a fiduciary duty that would almost be a giant, stalking duty affecting everybody in every section of financial services, so it would be an impossible duty to meet and would not be focused and measured in the way needed.

Proposed new clause 5 provides for the fiduciary duty to centre on ring-fenced bodies. The Minister has argued against other Opposition amendments on the basis that they widen the scope of the Bill beyond the guarantees and protections that people want in the concept of ring-fencing. The proposed new clause is focused in a way with which the Government should be comfortable. It applies the concept of a fiduciary duty in these new circumstances.

When we debated the Financial Services Bill in Committee, we did not know the revelations about the LIBOR scandal and other things. Many Members said that not only was the fiduciary duty in common law, but it was regularly and competently observed in the banks. The only problems were what happened on the speculative side, which were the result of Government policy and so on, but the conduct of banks and bankers showed that they had a healthy, daily regard to their duty of care to customers. We all know differently now, and we should all know differently now.

People expect a different duty of care from us as legislators in respect of such matters, so we need something like proposed new clause 5. I accept the Minister’s point about proposed new subsection (b) being somewhat unclear. It would need qualification in certain directions and specification. He asked who the customers across the financial services sector would be. As with my previous point, credit unions are often customers of banks and there will be others in the financial services sector, such as industrial and provident societies. It would not be inappropriate to say that there should be a duty of care to such customers.

I recognise the Minister’s statement that once we get down to insurance companies, agents and so on, there may be greater difficulties, so I accept his slight point about the measure of proposed new subsection (b), but I thoroughly disagree with his argument. It runs contrary to the arguments on the fiduciary duty made by the Government last year.

People want the Bill to be about Parliament setting clear standards and sending a clear signal in light of all that we know and all that has happened. Parliament refusing to put a fiduciary duty front and centre in relation to ring-fenced bodies sends seriously confused signals.

William McCrea (DUP, South Antrim)

Does the Minister want to respond before I call Cathy Jamieson?

Greg Clark (Conservative, Tunbridge Wells)

Thank you, Dr McCrea. I am happy to respond.

On the first point, I hope that the Committee can see that I take all the proposed clauses seriously. I think about them very clearly, and I hope rigorously, and come to a view, advised by my officials. I have given thought to the proposal and had discussions about it. My considered view is that such a change would confuse the situation. However well intentioned, it is imprecise. There is nothing between us at all on this—of course, we want consumers protected and ordinary people’s deposits, savings and access to finance guaranteed, as far as they can be. We are doing that, and must do it, by being precise and clear and by putting in place provisions that can be enforced, while being clear who can enforce them and the institutions responsible.

The two parts of the proposed new clause differ. First, there is a problem in placing a fiduciary duty on organisations that strictly do not do what a fiduciary duty means, which is to exercise on behalf of their depositors a kind of in loco parentis role, as described elsewhere. Secondly, there is the duty of care. The Bill will establish a ring-fencing system, establish proper standards of professional conduct, create measures to ensure that creditors other than depositors are bailed in to resolve failing banks, and clarify the regime through which failing banks are resolved without recourse to depositors’ or taxpayers’ funding. Those measures all express, in practical terms, the thought behind what is described in the new clause as a

“duty of care towards…customers across the financial services sector.”

The purport of the Bill is to do that. To distil the whole Bill down to a subsection that talks about a

“duty of care towards…customers across the financial services sector”,

in an attempt to simplify the Bill, would make it simplistic, and would be to the detriment of the objectives that we all have.

Mark Durkan (Social Democratic and Labour Party, Foyle)

The Minister will know that I have some difficulty in accepting the perfection of new clause 5(b). I return to the example of the Presbyterian Mutual Society in Northern Ireland. One thing that came out in evidence when the Treasury Committee and others examined that situation was that some banks, which were in a position to know something about the business of the Presbyterian Mutual Society, started to say to some of their customers, “You should be taking your money out of the Presbyterian Mutual Society and putting it into us, because it is not protected; and there are other things going on.” The banks used their intelligence and insight to create, in effect, a run on the Presbyterian Mutual Society. That was not to the benefit of the financial services sector in Northern Ireland, and it ended up costing the public purse money as well.

Greg Clark (Conservative, Tunbridge Wells)

I accept that we need to address circumstances like that. However, the hon. Gentleman will know that some of the changes we have made, such as the UK Financial Services Compensation Scheme, will address such situations in the future. However, such things are best addressed by the consideration of the regulators, using powers that follow from a clear remit. We should not leave it to obscure litigation which, if there were a duty of care or a fiduciary duty, could provide a get-out from the enforcement powers that are clearly vested in the institutions that enforce these matters.

I do not want to be, as a consequence of the passage of the Bill, there to be a degree of opacity in the regulators’ powers, so that they can be challenged by people who do not have our constituents’ best interests at heart. I do not want those people to be able to stay the hand of the regulators by getting them bogged down in the interpretation of something that is not absolutely clear. That is my point, and I advise the Committee to oppose the new clause.

I am not saying that the protection of consumers’ interests should not always be borne in mind, but the best way to secure that objective is to be clear about what our objectives are, to vest them in the regulatory authorities and to put in place measures that require regulators to implement the powers they have been given. That is better than introducing what has been imperfectly drafted here, which could provide a get-out from the regulatory arrangements that we are debating.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We have had an interesting series of exchanges on this issue. My hon. Friend the Member for Foyle is absolutely correct in his description of part of the debate that took place in a previous Committee on the Financial Services Bill. I think that at that time there was a slightly more sympathetic view on the issue of a fiduciary duty.

I was quite surprised to hear the Minister coming at things from a different angle. Although we have gone into some of the technical detail, the real issue for members of the public—the ordinary customers of the banks—is that they want to believe that banks are going to be acting in the best interests of customers. They want to have that confidence and to know that a regulatory regime is in place that will protect them. However, they also want some signal from the financial services sector and the banks themselves that things have changed. Without going back over previous debates, the protections that were in place were not enough. We have had a lot of discussion on that, but none the less, people’s view is that the culture has not yet moved far enough in the correct direction.

The Minister talked about potential conflicts between the interests of the shareholders and the interests of the customers, and the possibility of the new clause changing that contractual relationship. Again, to emphasise the point from the consumer’s perspective, when someone goes to the bank and enters into that contractual relationship, they do so in the hope and belief that the banks will also play their part in looking after their interests. With the various scandals and other things that have been referred to, somewhere along the line that part of the contractual relationship was forgotten or lost in the process. With the new clause, we were seeking to ensure that that whole issue was back on the agenda and that people could see that it was important. If the banks themselves will not willingly come to the table and make the necessary changes—I hope that they will—there has to be some way of ensuring in legislation that the consumer interest is looked after.

I hear and understand what both the Minister and my hon. Friend the Member for Foyle said in relation to the wording of the new clause. The Minister will be well aware that it is sometimes quite difficult to get the technicalities of these things correct, but I have no intention of trying to put in place something that would cause unintended consequences or lack of clarity. However, I hope that the Minister would accept that the new clause was tabled because of the principle of ensuring that customers are looked after and that the banks are clear about their responsibilities and remember the part of the contractual relationship with customers that is about looking after their money. That was where many people felt that they were particularly let down.

As I said in my opening remarks, we tried to pin down the responsibilities of banks on their core activities or services. I understand the comments that have been made, particularly on proposed new subsection (b) and whether its definitions would cause more concern or particular problems. Given that, I will not seek to press the new clause to a vote at this stage, because I understand the technical issues involved. However, I certainly want to give advance notice that we feel quite strongly about the principle of the fiduciary duty and will want to return to it at some stage, hopefully with a draft in a slightly different format, so that we can put it to the test. On that basis, I beg to ask leave to withdraw the motion.

New Clause 6 - Remuneration consultants

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

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

William McCrea (DUP, South Antrim)

With this it will be convenient to discuss the following:

New clause 7—Remuneration committee—

‘The Secretary of State will provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant financial institution.’.

New clause 10—Remuneration reform—

‘Within six months of Royal Assent of this Act the Chancellor of the Exchequer shall lay before Parliament proposals on reform of remuneration at UK financial institutions which shall include incentives to take account of the performance and stability of a UK financial institution over a five- to 10-year period.’.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I hope that we can make some progress on new clauses 6, 7 and 10. New clause 6 is about shareholder votes on the advisers to remuneration committees. It would allow bank shareholders to approve the appointment of the remuneration adviser. It is one of several new clauses that would take action on certain banks’ excessively risky remuneration practices, which incentivised the overexposure to risk that ultimately fell on the shoulders of the taxpayer. We have had a lot of debate and discussion about that, and I do not think we need to rehearse the details.

We believe that it is necessary to ensure that an independent voice is heard when bank remuneration committees discuss executive pay. The general public are interested in that. It would be preferable if the rights of shareholders and the owners of companies were formally asserted to ensure that remuneration consultants knew they were being commissioned by stakeholders with an interest in ensuring a proportionate approach to remuneration policy. To take one example, would the pay package of senior executives at Barclays have been different if the remuneration advisers had been appointed by the shareholders? The Minister might want to think about that.

Alok Sharma (Conservative, Reading West)

I understand what the hon. Lady is trying to achieve with the new clause, but I am not sure that it would achieve the results she wants if it came into place. She is suggesting that shareholders vote on a remuneration consultant at an annual general meeting, but she will be aware that many companies have a number of remuneration consultants taken on throughout the year for different purposes. How she is proposing that we get over that hurdle practically?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the hon. Gentleman for that intervention, and I am glad to hear that he perhaps has some sympathy with what we are trying to achieve. As always, I would be more than receptive to Government amendments or new clauses to take forward these issues. In the absence of that, it has fallen to us to get them on the agenda, imperfect as our wording sometimes is. That wording may not entirely meet the approval of Ministers and others.

I will develop some of my arguments in response to the hon. Member for Reading West. If we look back at the Barclays situation, the former chair of the Barclays remuneration committee, Alison Carnwath, told the PCBS that she alone had objected to the package of up to £20 million awarded to the then chief executive, Bob Diamond, for 2011. He described the bank’s performance that year as “unacceptable”, but had ultimately been overruled by the remainder of the board.

When questions were being asked on this subject in the PCBS, Lord Lawson said, on 30 January:

“My knowledge of remuneration consultants, which is from a company not in the financial sphere, is that they are a profession that makes prostitution seem thoroughly respectable.”

Those are strong words indeed. He continued:

“When they are brought in, they know that if they recommend low pay they will not get a repeat performance, so in order to ply their trade, they pitch their recommendation as high as they possibly can.”

I see some hon. Members smiling. Whether that is due to the wording, or whether it is because they know it to be true, I do not know. [Hon. Members: “It is true.”] Indeed, they acknowledge it to be true. Lord Lawson continued:

“This is also convenient for the non-executives, who might otherwise feel awkward in awarding the executives these very high pay levels, because of the cover that it has been recommended by a remuneration consultant.”

Advisers will, from time to time, say things that please the person commissioning them. Where a company’s senior executives and managers commission independent external advice, the consultants providing that advice tend to have an eye to the future commissioning of advice and want to make recommendations that fall in line with the people commissioning them. It is therefore best to make fully transparent the appointment of remuneration advisers by allowing shareholders to vote on them. That is one of the proposals that we have made to try to concentrate the minds of advisers and the management team whose pay is under discussion.

The second issue in the new clauses relates to ordinary workers being on remuneration committees. People will be aware of the recommendation of the independent High Pay Commission, which wanted workers to be put on all remuneration committees. That was not taken forward by the Business Secretary, who said that

“we are stressing employee participation in remuneration discussions.”—[Official Report, 2 February 2012; Vol. 539, c. 982.]

That is quite different from having someone on the committee.

It is my understanding that back in September 2011, a Department for Business, Innovation and Skills discussion paper floated the idea that

“independent members or employee representatives on remuneration committees would provide a helpful, fresh perspective and encourage greater challenge”.

Those may be seen as wise words. We believe that one of the best ways to make more voices heard on pay is in votes, and despite the shareholder spring, the level of revolts remains pretty subdued. In 2011, the average level of dissent registered in all explicit votes on remuneration was 11.7%, which was up from 9.6% the previous year, but that was obviously well below the levels of 16% and 12.4% seen in 2002 and 2003 respectively. That is an interesting point.

In 2011, FTSE 100 chief executives were awarded average total remuneration of £4.8 million—a rise of 12%—representing just over 200 times the average total private sector pay of just under £24,000. That is based on Office for National Statistics income data figures. In Germany, worker representation on remuneration committees is common in large companies. By law, in companies with more than 500 employees, one third of supervisory board members must be worker representatives and in companies with more than 2,000 employees, half the supervisory board members must be worker representatives. I wonder whether we could learn from the success of Germany’s economy and those practices, tying them into our values and how we want things to work. I do not believe that the City or our economy should have anything to fear from giving a voice to ordinary workers, on whom the success of a company ultimately depends, as they have to do the work and the job.

The third issue we wished to raise with the new clauses was about a report on reforming pay to reflect long-term performance. New clause 10 would mandate the Chancellor to bring forward proposals on reform of remuneration at banks so that they

“take account of the performance and stability…over a five-to 10-year period.”

In evidence to the Treasury Committee in January, Bank of England director, Andy Haldane, made points about reforming performance metrics against which salaries are based, suggesting that it was irresponsible to use metrics that failed to take account of risk. He also raised issues about the horizon over which performance is evaluated, suggesting that that needed to be reformed, and that clawback and deferral of three-to-five year periods was too short to capture a cycle in credit. It was suggested that that period needed to be longer.

Bankers can face clawback procedures on their bonuses. Last month, Lloyds Banking Group said that its remuneration committee had advised the board that it should claw back bonus awards made in 2010 to former executive directors, although it would be fair to say that the use of clawback procedures is still rare. Despite being accused by the US Senate of breaching safeguards that should have stopped the laundering of money from Mexico, Iran and Syria, HSBC actually clawed back less pay from senior staff during 2012 than in the previous year. It said it had retrieved $700,000 out of the $608 million of deferred pay still outstanding for 314 senior staff as of the end of December. That represented only 0.1%, and it was less than the $800,000 the bank clawed back in 2011.

The argument always appears to be that there need to be incentives if bankers are to do well, but they do not seem to have worked as incentives to avoid failure. I do not wish to suggest that I agree with everything the Under-Secretary of State for Skills, the hon. Member for West Suffolk (Matthew Hancock), said in his book “Masters of Nothing”, but let me quote one thing he said:

“Rewards for failure must be unravelled and managers given something to fear”.

I can see the Whip looking at me, and I am sure I am about to be called to account given the time, so let me make one last point. If banks were truly planning on a long-term basis, clawbacks would not be necessary. We should have a situation in which we can change not only the legal and regulatory structures but the culture. Through the new clauses, we want to ensure that banks will think for themselves and consider how to make their performance sustainable.

Greg Clark (Conservative, Tunbridge Wells)

It is proving to be an enlightening morning, although it is about to end. We have discovered that the hon. Lady is an avid student of the Prime Minister’s speeches from 2008, and we now understand that she has made a close study of the works of the Under-Secretary of State for Skills, my hon. Friend the Member for West Suffolk. It is good to hear what her reading matter is.

There is no doubt that the matters the hon. Lady raises regarding remuneration are important or that the problems and deficiencies of remuneration structures contributed to the financial crisis. The national lottery-style payouts that were made were too often made in response to short-term gains, and they were sometimes made before any actual gains were realised. Some of the bonuses were also awarded on the basis of one-way bets, the downside risk of which was covered by the taxpayer.

We should bear it in mind—the Committee has borne this in mind—that the source of all the money in the banking sector is ultimately ordinary working people: their pensions, their savings, their deposits, their loans, their mortgages and, sadly, in recent years, their taxes. We therefore have an interest in remuneration in the financial services sector, and it is important that it is carried out in a way that is consistent with, not injurious to, our constituents’ interests.

In what ways should we address the question of remuneration? First, we should, as far as possible, be vigorous, as the Government are, in promoting international good practice. There is clearly a risk of arbitrage, with companies locating in the most lax jurisdiction. Through the global Financial Stability Board, we look to promote rules that will apply across the world, and particularly in the G20, to make pay safer, more transparent and, in particular, recoverable in the event of failure or misconduct that subsequently comes to light.

Given the situation we inherited, it was important to enhance the role of shareholders. In our previous discussion, we talked about directors’ responsibilities, one of which is, of course, to shareholders. It is not clear that decision makers in banks have had it in mind that their responsibility is to their shareholders, including the pension funds that invest in them, which are the repositories of the future prosperity of ordinary working people.

Regulators must, of course, be constantly satisfied that the arrangements in place for remuneration pose no threat to the stability of the financial system. Remuneration must be in the company’s long-term interests, and no bonus scheme should be constructed that is to the detriment of the consumer.

William McCrea (DUP, South Antrim)

I remind the Committee that with this we are discussing the following:

New clause 7—Remuneration committee—

‘The Secretary of State will provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant financial institution.’.

New clause 10—Remuneration reform—

‘Within six months of Royal Assent of this Act the Chancellor of the Exchequer shall lay before Parliament proposals on reform of remuneration at UK financial institutions which shall include incentives to take account of the performance and stability of a UK financial institution over a five- to 10-year period.’.

Greg Clark (Conservative, Tunbridge Wells)

We were talking about remuneration and how it contributed to the financial crisis. We were also talking about some of the principles that we should apply in future to ensure that remuneration does not contribute to instability.

Under the Financial Service Authority’s remuneration code, being taken forward under the Financial Conduct Authority, between 40% and 60% of bonuses need to be deferred and at least 50% must be paid in shares or other long-term instruments. That means that the up-front cash element of bonuses is now limited to between 20% and 30%. Bonuses, in any event, are down by 80% since 2007. From 1 October this year, a binding shareholder vote will be required on executive pay. Since the financial crisis, we have put in place measures that make the United Kingdom one of the more rigorous regimes in the world regarding remuneration policy.

New clause 6 would require shareholders to vote on remuneration consultants appointed to advise board remuneration committees. The Government consulted on such a proposal last November, but it attracted little support from shareholders. The feedback from the consultation is that that would introduce bureaucratic requirements without any particularly valuable benefit.

Shareholders who responded to the consultation said that greater transparency is needed regarding the appointment of consultants to advise remuneration committees. We will therefore amend the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 to require future remuneration reports for quoted companies to state: whether anyone has provided advice to the remuneration committee; if so, who; whether that person or body has provided any other services to the company; who appointed the group or individual; how they were selected; the cost of that advice; and the basis of payment.

We will lay regulations in the coming months and ensure that the provisions come into effect from October 2013. They will go further than we have done and give shareholders more information than ever before, without micro-managing their responsibilities. That is in the context that from October, there will be a new vote on the proposal for remuneration anyway. Our plan is consistent with the outcome of the consultation, and I hope that the hon. Member for Kilmarnock and Loudoun will find that it meets the spirit behind new clause 6.

New clause 7 would require companies to have an employee representative on remuneration committees. It is important that such committees make their decisions based on a wide variety of information. Companies and shareholders may, if they want to, have an employee representative, but at the moment they are not compelled to.

Our approach is not in any way to resist the idea that the opinions and experience of employees should be made available to boards and remuneration committees in making their recommendations; it is based on transparency. I have said that we will table amendments to the 2008 regulations on disclosure. Some further changes that we will make include requiring companies to disclose whether and how they have sought employees’ views on pay and to publish that in directors’ remuneration reports. They must say how they have taken into account the pay of existing employees in making pay decisions.

New clause 10 would require the Government to introduce proposals for incentives to take into account performance and stability over a five to 10-year period. Again, I think all of us would recognise and reflect on the fact that some of the very short-term rewards and bonuses contributed to excessive risk-taking in the last financial crisis, and that was in the interests of neither shareholders nor taxpayers. The Financial Services Authority’s remuneration code as it was drafted, now being taken forward by the Financial Conduct Authority, reflects the global Financial Stability Board’s principles for sound compensation practices. This requires variable remuneration for risk-takers to be deferred for at least three to five years, and to be subject to a retention period on vesting.

The difficulty with new clause 10 is that the period of deferral should clearly reflect the type of business that is subject to these provisions. For example, some funds come into existence and are wound up, and their business is completed in less than five years. In those circumstances, the correct alignment of incentives would be with the life of those funds.

In the case of other organisations and individuals, such as the directors of banks—ring-fenced banks, in particular—it is appropriate to consider career deferrals of bonuses, to reflect the long-term financial stability objectives. Some firms have gone beyond the minimum specified in the remuneration code, reflecting the global Financial Stability Board’s principles. For example, HSBC has favoured deferral of bonuses until retirement in some cases. How the implementation of the code is being taken forward very much has this issue in mind. The minimum period is there to reflect the different circumstances, but already we see that people are making more informed choices as to how vesting takes place.

In the discussions that we have had around capital requirements directive IV in Europe, we have insisted that bail-inable debt should be part of variable pay. It seems to be a good and useful thing that if in future there is to be debt that can be bailed in, executives should be rewarded in that, so that their interests are again aligned with those of other stakeholders in the company. Of course, if the Parliamentary Commission on Banking Standards should come up with any further recommendations on pay, we will certainly consider them; we will have the opportunity to do so in this House and the other place.

I hope that the hon. Lady will feel that the additional measures that we are taking on remuneration address the substance of her concerns. At the moment, we have the most rigorous jurisdiction for pay in the world, but we want to go further and make it tougher. In particular, the implementation of both the code and CRD IV will give us the opportunity to keep this matter under review and to ensure that the problems of the past, when pay and remuneration structures actively contributed to financial instability, can never happen again.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

One of the things I have learned over my years in politics is that when there is a small victory over the Government, or a movement from them, it might be best to thank them for what they have done, make a quick point about where they have not gone far enough and then move on, lest I tempt the Minister to retreat in any way from what he has introduced, although I am sure that he would not.

My hon. Friend the Member for Nottingham East, who was not able to be with us for the full sitting of the Committee this morning and who would in other circumstances have been speaking about the new clauses, may well nudge me if I say too much and tempt fate in any way, because he has done a lot of the work in bringing this issue to a Committee, notwithstanding the fact that I have spoken about it this morning.

I want to make a couple of points briefly about new clause 6. We tabled it because we wanted to see greater transparency; we wanted to ensure that the shareholders were actively engaged. I heard what the Minister said about the consultation. I am pleased that, although he is not accepting the new clause, he will bring forward an amendment that will make a difference. I am sure that he listened to the consultation, in particular on issues about who was involved, what advice was given, who appointed them and so on.

We proposed new clause 7 because we believe it is important that employees should have the opportunity to be consulted and involved in the process. I would have liked to see the Minister go slightly further in ensuring that employees had representation on boards, but I am pleased to hear that he is at least not resistant to the idea. He seems to be open to the idea of employees’ opinions being taken on board. He referred to the importance of transparency and the opportunity to bring forward further changes that will require companies to state whether they have sought, and how they have sought, those views and to have that published. I would have liked to see more in that context, but I accept that movement has been indicated this afternoon.

New clause 10 addresses issues of short-termism. The Minister mentioned some difficulty with the technical aspects of the new clause’s potential to do what we hoped to see. I am interested to hear the Minister talk about the need on more occasions for a longer period of deferral depending on the type of business, and deferral of capture time. We would certainly not want a situation that precluded any of that happening if it were important.

If the Minister has not listened entirely to everything we have said during the debate, he seems to have listened further to us and partly to others on these critical clauses. I welcome that fact, although he has not gone as far as we would have liked. I am sure there will be opportunities for further debate. However, at this time I beg to ask leave to withdraw the motion.

New Clause 8 - Financial Crime Unit

Chris Leslie (Labour, Nottingham East)

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

It is a pleasure to join you, Dr McCrea, in this Committee. The proposed new clause seeks to instruct the Secretary of State by order to create a new financial crime unit as part of the Serious Fraud Office, which is currently tasked with dealing with what is called in shorthand “white-collar crime”; that includes financial fraud and corporate fraud more broadly.

The reason for tabling the new clause is obvious. Andrew Bailey, the new chief executive of the Prudential Regulation Authority, was reported in the papers today as saying that it was “odd” that nobody had been locked up as a result of the banking crisis of several years ago. The flaw in the system is obvious. We do not have strong enough investigatory and prosecuting capability to ensure that, where we do have laws to capture serious or systemic misbehaviour, prosecutions are properly brought to fruition.

It is not just a question of the law not being tight enough or not sufficiently well defined. It is important to recognise that when it comes to this sort of offence, pinning down responsibility and making sure that we gather the evidence of causation to the level of proof beyond reasonable doubt is a very difficult task, especially when the investigators are hampered by a lack of resources.

The new clause would create a new unit in the SFO. We have to increase the resources available for tackling financial fraud. As financial products become ever more complex, the new clause would enable the building of expertise in an area where the financial incentives for criminal activity are absolutely enormous but prosecutors and investigators do not have the same level of capacity for capturing exactly what is going on. The total fines that Barclays paid for the LIBOR scandal, although small for Barclays, could pay for the entire budget of the Serious Fraud Office for 10 years; that is the extent of what is happening. The Minister should consider using some of the proceeds of penalties paid to the FCA to help rejuvenate the SFO.

Hon. Members may well have spotted during the spending review announced by the Chancellor back in 2010 that, sadly, the SFO appears to be pencilled in to lose 25% of its budget over the spending review period. Things are going to get tougher for the SFO. In fact, many hon. Members will remember that the Home Secretary originally had plans to abolish the SFO altogether, but was eventually forced to perform a U-turn on those proposals. Now that we know that the SFO is here to stay, let us ensure that we can build it up and enhance it, giving it the powers and resources that it needs. It would be more than self-sustaining if it were able to identify fraud and yield fines income at a level even higher than that which is already, sadly, flowing through.

Fraud is estimated to cost Britain around £73 billion a year, according to the National Fraud Authority. It is a significant area of criminality, but we are not properly equipped to deal with it. LIBOR showed that misconduct in financial services can have ramifications for traders, the industry, shareholders, the reputation of the City, and the criminal law. It is already a criminal offence to attempt to fix LIBOR, but the Government, and the SFO in particular, have struggled to go after those responsible. It is vital that the SFO has the resources necessary to tackle that scandal and any future ones. Our new clause would give Parliament the chance to discuss the creation of a new division in the SFO, sending a firm message to those who might be tempted to engage in criminal conduct in financial services.

Greg Clark (Conservative, Tunbridge Wells)

It is nice to welcome the shadow Minister back to his role, although it is fair to point out that it is usually when the hon. Member for Kilmarnock and Loudoun speaks that I am able to make some progress on agreeing with the Opposition, so he may want to reflect on his attendance.

The whole Committee recognises the importance of tackling financial crime through the criminal law as well as through the regulatory sanctions we discussed previously. It is a stark fact but, following the financial crisis, there were fewer convictions for fraud and forgery in 2009 than there were in 1999. That may be for a number of reasons, but I suspect that it is not because the incidence of those crimes was lower. There is a common concern that the system needs to be more effective in pursuing those people who take advantage of others in the financial system and, indeed, of taxpayers.

New clause 8 would establish a new unit in the Serious Fraud Office, which would be concerned with financial crime. However, much of the SFO's work is on financial crime: fraud tends to be, of its essence, financial for the most part. So to create a further subdivision of a unit that is dedicated pretty much to financial crime is not the best way structurally to deal with the problem, although I accept that the new clause has given us the opportunity to debate these matters.

The other aspect of the new clause concerns the financing of the SFO. Its financing is unconstrained in that if an investigation needs to command more resources, an application can be made to the Treasury to provide for funding from the special reserve. I cannot imagine circumstances in which the determination to undertake an important fraud inquiry would not achieve a satisfactory result. There have been problems with the SFO, to which the hon. Gentleman alluded, but this is a time in its life when changes have been made and are bedding in. From last April, the SFO has had a new director and has brought in a new structure. It is fair to say that the principal problems with the SFO that led to the Home Secretary considering its future were not about resourcing, but about its operational and organisational effectiveness.

New arrangements are in place and we need to keep them under review because the SFO needs to improve. In particular, the Attorney-General will legislate to give Her Majesty’s Crown Prosecution Service inspectorate the power to inspect the SFO, so there will be an independent ability to assess its future performance. Given all that, now is not the time to tinker further with the SFO by creating a unit within it that would cover the dominant part of the function in the first place.

It is also worth recording that the new national crime agency, which is responsible for directing the national response to economic and financial crime, is due to be established under the Crime and Courts Bill, which is currently before Parliament. I think it comes back to the Commons for debate on 23 April. That would establish an economic crime command with a clear remit to reduce the threat from economic and financial crimes, and co-ordinate the work of the SFO with individual police forces and the regulators, including the FCA and the PRA.

All those bodies have been actively engaged in establishing this command during the past months. Subject to Royal Assent being granted, we expect it to be fully operational by the end of the year, and the new national crime agency will be under the supervision and control of an experienced chief constable. The hon. Gentleman spoke about the need to make sure that the measures that we have in place at the moment to deter and punish financial crime are used rigorously in future. Those arrangements are being strengthened. I therefore hope that he will withdraw his new clause.

Chris Leslie (Labour, Nottingham East)

It is certainly true that we tabled the new clause to spark a debate about the adequacy of the SFO and its capability of grappling with what has been an enormous problem in recent years. Members of all parties will recognise that the prosecuting and investigating authorities really struggle to play catch-up with the intricacy and ingenuity of financial crime. These are not the sort of crimes where it is easy for an officer of the law to spot that a crime has been committed. These crimes are often hidden in electronic data, with vast amounts of insider knowledge squirreled away far from the public’s gaze. That can often have a massive effect on the well-being not just of the companies affected, but downstream on our constituents and society as a whole, so it is important that we get a grip on the SFO's capability of dealing with financial crime.

I accept the Minister’s point that there is a debate to be had on whether the right approach would be specifically to have a new subdivision in the SFO in this way, but some sort of dedicated resource that is earmarked for financial services crime, as opposed to corporate crime or fraud more broadly, would be worth while, not least because it could attract more support from the Treasury and across Whitehall in general. Such support has been missing from a lot of the SFO's work in recent years, and considering the public’s interest in seeing prosecutions brought to fruition, we know that the SFO found itself in great difficulties when pursuing some of the Icelandic issues. They were never really brought to fruition and many local authorities and others went through serious financial difficulties as a result. We have to raise the profile of this issue, and one way of doing that would be through a financial crime unit.

I am happy to take away the new clause at this stage, notwithstanding the fact that we want to see more action on the matter. However, the Minister indicated that he is looking at the SFO's ability to call on the special reserve, which was interesting, and I would like to look at that in more detail. I do not have enough granular detail about what has been happening over the most recent years, particularly the level of prosecutions in financial services in which the SFO has been engaged, and it would be worth while seeing some of those data, and data on the level of performance. Perhaps the national crime agency, in its relationship with the SFO, could provide an opportunity to take stock of how well the SFO is doing.

We need more action; things are not good enough as they stand. We made our point as forcefully as we could and we encourage the Minister to take this issue away. We will doubtless want to return to it in future, but I beg to ask leave to withdraw the motion.

New Clause 9 - Protection for whistleblowers

Chris Leslie (Labour, Nottingham East)

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

The notion that individuals who spot offences, or potential criminal offences, in the course of their normal employment, should bring them to the notice of the relevant authorities is not new, but it has not been happening as it should in respect of financial services. Sometimes, employees can feel too intimidated to tell the relevant authorities that they think that something is seriously amiss. That is why, in the Employment Rights Act 1996, criteria were set out that gave some protection from unfair dismissal to employees who feel that an offence is likely to be committed. That is the notion of protected disclosures: the ability of those employees to disclose that misconduct has occurred, is occurring, or could occur.

Currently, under the Employment Rights Act, there is a list that says that if, for example, somebody feels that their health and safety is in danger, they can report that to the relevant authorities and be protected from unfair dismissal. Similarly, damage to the environment—or any criminal offence, for that matter—is subject to protected disclosure if a company is not obeying the law and somebody is covering that up. At present, however, the list does not include those regulatory breaches set out in the Financial Services Act 2012 or the Financial Services and Markets Act 2000. That is why the new clause would insert a specific reference to breaches of those provisions as protected disclosures for the purposes of avoiding unfair dismissal. It is a fairly obvious point. We believe that individuals who might blow the whistle on malpractice should be given immunity. For the new banking system to work well and to be policed effectively, there must be protection for staff who believe that wrongdoing exists in their organisation.

New clause 9 would give us another tool with which to change the culture of the financial services sector. A bank employee might wrestle with their conscience before deciding to break ranks, and if an honest trader suspects wrongdoing and is considering informing the authorities, protections must be in place to mitigate their fear of losing their job, their salary, their employability and their friends and colleagues. We have learned from past experience, including cases such as that of Paul Moore, a high-profile whistleblower who was head of group regulatory risk at HBOS until 2004. He argued that there needs to be stronger protections in this vein. If we are going to reassure people who have similar information that they will be able to continue in their employment after blowing the whistle, we have to take such a step to encourage them to emerge.

There is an argument for asking why new clause 9 does not include references to the Bank of England Act 1998 and other legal provisions. I accept that we must ensure that the full range of financial regulation is covered if a change such as we propose is made to the Employment Rights Act 1996, but the new clause is an important marker from our point of view. We think that the Parliamentary Commission on Banking Standards should look at protection for whistleblowers, and we encourage it to do so in advance of its final report, which I think is due in May.

The Parliamentary Commission was set up in the wake of the LIBOR scandal, which particularly illustrated the importance of making it easier to report wrongdoing. Various news reports and speculation ahead of the findings of the investigations into LIBOR suggested that there was probably something amiss in LIBOR trading, but nobody came forward with evidence to blow the whistle. We have to shift the balance, because wrongdoing is often not simply a case of one or two rogue traders or individuals. Dozens and dozens of individuals in the banks know when something is not right, and we must ensure that we give them the strength and courage to come forward and report possible crimes and breaches of the regulations. That is why we have tabled the proposal to extend immunity for whistleblowers in financial services.

Greg Clark (Conservative, Tunbridge Wells)

As the hon. Gentleman says, new clause 9 is designed to ensure that whistleblowers in financial services benefit from the protections in employment law from which whistleblowers in general benefit. Whistleblowing is an important way of uncovering potential abuse that might have consequences for savers, depositors and taxpayers throughout the financial system. Martin Wheatley, the chief executive officer designate of the FCA, told the Parliamentary Commission that the FCA’s predecessor, the FSA, received

“3,000 to 4,000 whistleblowing alerts a year. For us, they are a very valuable source of intelligence.”

That amounts to between 12 and 16 whistleblowing calls every working day, so considerable use is already made of whistleblowing intelligence. Not all of it is actionable; Martin Wheatley told the Commission:

“About 12% of what comes in as whistleblowing alerts is what we would call actionable intelligence”.

It is important now and will be important in the future that we ensure that those who engage in whistleblowing do not suffer detriment as a result. Therefore, it is perfectly reasonable for the hon. Gentleman to raise this issue via the new clause, but I hope that he will feel reassured that all the provisions in it already exist in legislation—in particular, in two sections of the Employment Rights Act 1996. Any disclosures concerning potential criminal offences having been committed are covered by section 43B(1)(a) of the 1996 Act. Given that the Financial Services Act 2012 introduced a new criminal offence relating to benchmark manipulation, that will be covered by the protection for whistleblowers. The other relevant section of the 1996 Act is 43B(1)(b), which provides that disclosures about potential regulatory breaches are also covered by the immunities that Act gives.

Therefore, the proposals in the new clause are covered in existing legislation. However, it is my view that we should not be complacent and it may indeed be desirable to go further in this Bill or in the future. In, I think, Treasury questions or perhaps even the Second Reading debate, the possibility was raised of our considering a whistleblower incentive scheme, similar to that introduced in the US recently by the Securities and Exchange Commission whereby whistleblowers can receive a proportion of any enforcement penalties. I undertook to consider that suggestion, and obviously, any such suggestion raises other issues. In the UK, we have always been very cautious about the use of paid informants, so we need to consider it carefully. I mention that only to point out, as the hon. Gentleman did, that the Parliamentary Commission is considering the matter. I think that hon. Members on both sides of the Committee look forward to hearing its views. We will consider whether further measures on whistleblowing in the financial services arena are needed in the light of its report. I therefore hope that this debate has given the Committee an opportunity to consider the matter for now and to be assured of the Government’s absolute intention both to protect the existing provisions to safeguard the interests of whistleblowers, and to consider what might be necessary to enhance them further.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister for his observations on the current level of whistleblowing practices of which the Financial Services Authority, now the Financial Conduct Authority, is aware. Of course, the real question is the conversion rate—the conversion of what comes through the door as anonymous tip-offs, for example, into hard evidence and people being willing to be witnesses in cases of prosecution. That is where much of the attrition probably takes place. We have just had a debate about the Serious Fraud Office. The point about ensuring that there is hard evidence is one we need to galvanise and support.

It was very helpful that the Minister indicated implicitly that he would be willing to think a lot further about this area. I hear what he says on the question of whether these issues are covered in the legislation as set out, although my view is that it would do no harm to set out explicitly in the Bill that there are particular protections for particular groups of employees where there is a special public interest in these matters.

Also very interesting is the question whether whistleblowers should have a positive incentive—a percentage of any enforcement penalty. There is the question whether paid informants’ evidence is biased as a result. That is not necessarily a problem, but of course it does take the law into a different area, beyond financial services. I would be interested in our thinking further about this issue and reviewing what the options are. We have to catch up with this situation far more effectively and shift the balance. This is all part of changing the culture, so I am glad the Minister has indicated he has an open mind on these issues. For those reasons, I am happy at this stage to beg to ask leave to withdraw the motion.

New Clause 11 - Review into competitiveness

Chris Leslie (Labour, Nottingham East)

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

William McCrea (DUP, South Antrim)

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.

Chris Leslie (Labour, Nottingham East)

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.

Mark Durkan (Social Democratic and Labour Party, Foyle)

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. ]

William McCrea (DUP, South Antrim)

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!]

Mark Durkan (Social Democratic and Labour Party, Foyle)

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.

Nigel Mills (Conservative, 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.

Jacob Rees-Mogg (Conservative, North East Somerset)

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.

Greg Clark (Conservative, Tunbridge Wells)

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.

Stephen Williams (Liberal Democrat, 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.

Greg Clark (Conservative, Tunbridge Wells)

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.

Nigel Mills (Conservative, 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?

Greg Clark (Conservative, Tunbridge Wells)

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.

Mark Durkan (Social Democratic and Labour Party, Foyle)

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.

Greg Clark (Conservative, Tunbridge Wells)

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.

Jacob Rees-Mogg (Conservative, 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?

Greg Clark (Conservative, Tunbridge Wells)

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.

Chris Leslie (Labour, Nottingham East)

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.

New Clause 12 - Bank account portability

Chris Leslie (Labour, Nottingham East)

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

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss the following: New clause 13—Financial inclusion—

‘(1) In the Financial Services Act 2012 section 6 which inserts section 1B into FSMA 2000 after subsection (5)(b) insert—

“(c) the ease with which consumers can have access to financial services and products which are affordable and appropriate to their needs.”.’.

New clause 15—Basic bank account guarantee—

‘(1) All UK institutions providing the regulated activity of accepting deposits must—

(a) make a “basic bank account” available to all who request it, and

(b) offer a “basic bank account” to people denied access to a current account due to a poor credit score.

(2) The requirements in subsection (1) do not apply to people with a record of fraud.

(3) In this section “basic bank account” means a current account which—

(a) provides customers with a debit or ATM card,

(b) does not have an overdraft function,

(c) does not pay interest on deposits, and

(d) does not incur periodic fees.’.

Chris Leslie (Labour, Nottingham East)

These new clauses raise a number of issues that again largely flow from the debate we had about competition. They focus on the customer experience in banking and the degree to which there is flexibility and convenience for customers as well as accessibility to basic banking services.

New clause 12 would lead to a report being laid before Parliament that properly dug into the adequacy of current account redirection services and whether legislative options were necessary for mandating the provision of a proper current account redirection service by ring-fenced banks. The Minister has highlighted the moves by the Payments Council to introduce the new current account switching service by September. The service is intended to give customers the ability to switch accounts in seven working days, which is a step in the right direction, but I am not yet convinced that that will be adequate.

The critical point is not just about coaxing a customer into believing that a switch of current account will not lose their direct debits and standing orders. People have lots of outgoings in their current accounts and many of them are wary of something being lost in the transfer from one bank to another. Technology these days should prevent any such thing from happening. The crucial point relates to income payments into a current account and the sheer hassle and inconvenience for the customer of having to give a new sort code and account number to their employer so that their salary can be redirected.

The Payments Council and the British Bankers Association say they will apply the new switching service to payments into an account, as well as to outgoings from it, but only for a limited number of months, so the question of bank account number portability comes to the fore. If our mobile phone is stolen or whatever, we can retain the same mobile phone number, and that is incredibly important to the functioning of that market. Having that telephone number is essential, and there are, similarly, good arguments for saying that an account number and sort code are central to people’s sense of ownership of their current account and their trust in it. For example, they may have a great aunt who deposits £5 in it every Christmas as a present. Similarly, they may not want to tell their employer the new details. If we are to make it easy for people to switch account, we must ensure that they do not have to go over a whole series of administrative hurdles to give everybody their new details.

I welcome the fact that there is some movement in the new switching service towards payments into accounts, but that redirection will operate for only 13 months from the date when the customer switches. That is something, but it does not go as far as I would like, and a review needs to be carried out. Some Members are very keen on account number portability, and that cuts across both sides of the House. Account number portability is so simple and has such appeal that I can see it eventually coming to pass. The Government need to give an indication that they will keep it on the agenda.

The Vickers Commission highlighted that, on average, customers move current accounts every 26 years, so there are clearly significant impediments to doing so. However, some banks and consumer groups are starting to talk much more about account portability. The consumer group Which? has called for a proper cost-benefit analysis. Virgin Money’s chief executive has said that it is pushing for portable account numbers. There is therefore a sense that the mood is changing among specialists in the area, so I hope the Minister will look positively on new clause 12.

New clauses 13 and 15 relate to the accessibility of banking services. New clause 13 would compel the Financial Conduct Authority to have regard to access to affordable and simple financial services. It would amend the list of general duties in the Financial Services Act 2012. In parallel, new clause 15 would compel high street deposit takers to offer a basic bank account to all people who request one, with the exception of those with a conviction for fraud. A basic bank account is defined as one that comes with a debit or ATM card, but not with an overdraft facility, so I am talking about a simple, basic account, not a line of credit. With the advent of universal credit, such banking services will be especially important, and perhaps the Minister can tell us whether the Department for Work and Pensions has shown any interest in this issue. These days, it is a necessity for people to have such banking services.

Both new clauses aim to tackle financial exclusion, particularly where poor or disadvantaged communities cannot access bank account facilities or simple products in the way that many other parts of the country can. It is not as easy as saying, “Let competition sort all these things out,” because certain margins and rates of return will not be as high on such basic services, so there needs to be a social requirement. The universal service obligation is an important principle, and the former financial inclusion taskforce at the Treasury did prioritise these issues, but things have slipped back badly, particularly given the chipping away at the LINK ATM cash machine network, with some of the main banks starting to withdraw support for it. The Minister must firmly draw a line in the sand and state that basic bank account services should be available for poor or disadvantaged communities.

Greg Clark (Conservative, Tunbridge Wells)

As we have discussed, access and competition are both important, as are switching and portability. Switching is necessary—it was recommended by the Vickers Commission—but it is not sufficient, which is why we propose to go beyond what the Vickers Commission recommended and bring payment systems within regulation. The switching service will begin in September, and the Payments Council is minded to run a substantial promotional campaign to bring to the attention of people who might benefit—including my hon. Friend the Member for Chelsea and Fulham—the fact that they can switch bank accounts. We look to the industry to make people aware of how straightforward and simple the process should be. From September, 99% of personal current accounts will be covered by the switching regime, and we will monitor its impact.

There is a strong case for account portability, and one feature of our proposals for a payments regulator is that such a regulator will have the power to require full account portability. We expect the payments regulator to be up and running by late 2014, and it will be in a position to carry out the type of review that is proposed as soon as is expedient. Subject to the consultation, the payments regulator will be well placed to conduct and enact decisions at more or less the time outlined in the new clause. I hope and expect that, in practice, we will be able to go beyond what the new clause would require by setting up a regulatory power to enforce the provisions rather than simply to review them.

New clause 15 concerns basic bank accounts. Access to financial services is crucial, as the hon. Member for Nottingham East says, and having a bank account is increasingly essential to modern life. It is important for everyone to be able to manage their money securely, confidently and effectively. The new clause is intended to guarantee access to basic bank accounts in statute, but the major UK banks have, in fact, voluntarily agreed to offer such accounts.

The number of adults who do not have access to a bank account has fallen from 3.6 million in 2002-03 to 1.5 million. That is still 1.5 million too many, but basic bank accounts are now available to everyone apart from those people with whom, as the hon. Gentleman recognised, there are more difficulties—those who have a record of fraud or money laundering. Only one bank offers basic bank accounts to undischarged bankrupts, but the Insolvency Service will propose legislation to address that and to widen availability in that area. We agree strongly with the aim behind the new clause, but when we have such comprehensive coverage that mirrors the proposals in the new clause, we do not need to legislate so much as to drive take-up.

New clause 13 would insert a new “have regard” provision by requiring the Financial Conduct Authority to have regard to

“the ease with which consumers can have access to financial services and products which are affordable and appropriate to their needs.”

In the debates on the Financial Services Act 2012, we agreed to provide the FCA with a requirement to have regard to access to advance its objective of

“promoting effecting competition in the interests of consumers.”

In particular, the FCA

“may have regard to the ease with which consumers who may wish to use those services, including in areas of social and economic deprivation, can access them.”

That was included to put it beyond doubt that we expect the FCA to play a role in promoting access and inclusion specifically in deprived communities.

The language in the new clause and the 2012 Act is very similar. That reflects the fact that the intention is the same. The only difference is that the “have regard” provision in the Act is in the context of promoting effective competition in the interests of meeting consumers’ needs. That is an important distinction. We should not expect the regulator to direct pricing or whether a bank operates in a particular geographical area, for example. I do not think the regulator can order a bank to operate in a particular area. Its function is to ensure that the market serves these areas, not to direct individual commercial firms to do so. Where creating the right competitive environment does not deliver—this refers back to our previous discussions—it is for the Government to step in, not the regulator. The means through which that can happen is support for credit unions, for example, and the provision of bank accounts to support the universal credit. Again, the intention behind the new clause is very much shared, but I do not think its provisions are the best way of addressing the matter. I hope that the Committee has been able to take a clear view of the Government’s intention on these important matters.

Chris Leslie (Labour, Nottingham East)

The Minister has been very helpful in setting out the Government’s policy on these issues. He understands that many of our constituents find it difficult to access basic banking facilities. The figure of 1.5 million people struggling to get basic bank account services is quite shocking, particularly given the imminent changes to social security and universal credit.

I am not quite sure that I share the Minister’s emphasis on the role and duties of the Financial Conduct Authority. It should not just be a market arbiter. It should be a consumer champion. We are looking to the FCA to take a much more proactive role, particularly by standing up for customers who are not able to vocalise or bang the table in the way that others can. That means ensuring that there is a basic utility service for all parts of the country.

We feel strongly about these issues. They go hand in hand with the downstream issues of competition and customers’ ability to choose, vote with their feet and have a better choice of current accounts. I am glad to hear that the Treasury believes there is a strong case for account portability. I look forward to the outcome of the discussions and reviews the Minister has set in train with the changes to the payment account and the payment system more broadly. It is important to emphasise that the regulator should play a role in many of these matters, particularly affordable and accessible financial services. It is useful to have had the opportunity to put those points on the record. I beg to ask leave to withdraw the clause.

New Clause 14 - Publication of trends in bank lending

Chris Leslie (Labour, Nottingham East)

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

In the United States there has been quite a significant debate in recent years about what are often called lending deserts, those parts of their country where access to credit and other banking services was less available than in other parts of the country. It is an even more acute problem in this country. It is not just an issue for personal current accounts; small businesses wishing to access banking services often feel as though their location could inhibit their access to certain services. They could feel indirectly discriminated against because of postcodes or geography—the part of the country in which they are located.

New clause 14 would ensure that, in the Financial Services and Markets Act, we provided a power for the Financial Conduct Authority to

“collate and publish anonymised consumer and business lending data disaggregated by UK financial institution and presented on a postcode-level basis.”

The new clause would give transparency and information, so we can hold the banking sector to account much more. We want to see greater granular detail, breaking down the patterns of banking activity in different parts of the country.

During the progress of the Financial Services Bill through the House of Lords, a cross-party alliance of peers—including Lord Sharkey, Baroness Kramer, Baroness Hayter, the now Archbishop of Canterbury and others—backed an amendment that called for the FCA to

“require each holder of a banking licence to publish relevant data each quarter, by post code, including the total amount of lending to small and medium sized enterprises.”

In response, Lord Newby confirmed that the Government would pursue that aim through an industry-led initiative backed up by the threat of legislation in the current Bill. He said:

“we will work with industry to collate and publish lending data that is disaggregated by institution and presented on a postcode-level basis. The Government will take this forward as an urgent and pressing matter. In reiterating our commitment to make progress in this area, I confirm that should our negotiations with industry fail to deliver—I sincerely hope that that does not happen—the Government will introduce amendments to the Banking Reform Bill along the lines proposed in the amendment”.—[Official Report, House of Lords, 12 November 2012; Vol. 740, c. 1359-1360.]

That was back in November. I asked the Minister in a written question in February whether the Government had made any progress on this issue, as we are now in Committee and there is an opportunity for the Minister to consider fulfilling the commitment that the Government made in the other place. The Minister reiterated that the Government were still trying

“to secure a commitment from the banks that they will publish postcode level data by institution.”—[Official Report, 28 February 2013; Vol. 559, c. 655W.]

He also confirmed that the amendment option still existed.

I would like the Minister to update us on what is happening on this issue. It is important that we see what is happening inside the sector. We are not looking for personal information or for breaches of data protection; we are asking for anonymised patterns of lending activity. If we are going to talk about how the banking sector is serving our communities we have to have that basic level of information, so that we can see whether we need a regional banking sector or other forms of intervention—there has been talk of investment banks and various other measures. If we are going to get that policy right, having a better and more detailed impression of what is happening in the market is essential.

Greg Clark (Conservative, Tunbridge Wells)

The hon. Member for Nottingham East is right that this matter is important. As he alluded to, during the passage of the Financial Services Bill through the House of Lords an amendment was tabled to the effect that

“the Financial Conduct Authority must require each holder of a banking licence to publish relevant data on a quarterly basis by post code, including the total amount of lending to small and medium sized enterprises.”

The amendment was withdrawn because the Government committed to work with the industry to get it to make a voluntary commitment to publication. In giving that commitment on 12 November last year, Lord Newby confirmed that the Government would amend this Bill to require the publication of those data if agreement was not reached.

Since then, the Treasury, the Financial Conduct Authority and representatives of the banks have been in discussions, in particular with the Information Commissioner’s Office and the Office of Fair Trading, to agree a scheme through which the data could be disclosed. That needs to be done properly and in a considered way, because there are risks here; the hon. Gentleman would be the first to criticise the Government if, inadvertently, personal and sensitive information about the financial affairs of individuals reached the public domain because this matter was addressed in a way that was less than fully thought through. To give an illustration of the case in point, postcode data are clearly the means that is envisaged, but certain postcodes—not even those at the lowest level—are capable of identifying individuals. There are areas in which there are very few properties—perhaps only one property—and the effect of disclosing the lending information by postcode would be to reveal to the public a particular person’s indebtedness. That is clearly incompatible with many aspects of the banks’ obligations, some of which are policed by the Information Commissioner’s Office. So the work is painstaking. The reason why we have not tabled an amendment at this stage is because we expect to be able to conclude such an agreement. The goodwill has continued; it is the technical aspects that would prevent any such unintended consequences that are being discussed.

We want to go further than the commitment that was given in the House of Lords. We want to see, for example, consumer and mortgage lending, as well as small and medium-sized enterprises, covered. The ability of individuals to obtain credit is an important matter, and we should make this measure as comprehensive as possible. We intend to keep our commitment, and we are confident that we will be able to keep it. I can confirm to the Committee that even though we expect agreement, if necessary—and we do not think it will be necessary—we will table amendments to the Bill when it reaches the House of Lords if, as is not expected, agreement falls away. I will, of course, update the House as soon as an agreement is reached, and make it available for scrutiny by hon. Members. One way or another, the commitment that was made seriously under the terms of the amendment will be kept by the Government in the months ahead.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister for that update. He will have to forgive us for pushing and prodding in a slightly formal way by tabling a new clause in this manner. But he would not expect anything less from us, given the importance of this issue as a prerequisite to learning and thinking through where policy reform should go in the future.

I do not think that the risks of postcode data are insurmountable. We have called specifically for anonymised disaggregation, and I am sure that we can find a way to do that in a way that is less likely to jeopardise such disclosures. However, I accept that that is an important point of detail, and it is important that we get the technical level right. I am glad to hear that the Government are still making progress. It would have been helpful if the Minister had set out some sort of time scale for concluding this issue. If by Report we still have no further news, that would be pretty bad given that this started back in November. By then it would be reasonable to expect a conclusion to the issue, but that is just my feeling about the progress of this issue. I am grateful to the Minister for reiterating the Government’s support for this issue; I just do not want to see it fall behind and go on to the back burner. Given the Minister’s commitment and his assurances, I beg to ask leave to withdraw the motion.

New Clause 18 - Mutual societies

Chris Leslie (Labour, Nottingham East)

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

The coalition agreement, that wonderful document—[Interruption.] I say that in a sarcastic way, just for the record—that certain members of the Committee will remember with great fondness, although most of us will not, made a promise that the Government would

“bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.”

It is the fact that, three years on from the coalition agreement, we are still waiting for action to promote mutuality that has caused us to table this new clause. It would simply insert into the 2012 Act a requirement that regulators and the Government should make

“provision for the increased diversity of the financial services sector and promotion of mutual societies, including arrangements to measure the number of members of mutual societies”—

in other words, whether more people are working with co-operatives or building societies, or less—

“and the market share for mutual societies as a proportion of the UK financial services sector.”

Building societies form a vital part of the British financial services sector, with mutual lenders and depositors currently having total assets of around £375 billion. Together, with their subsidiaries, they hold residential mortgages of £245 billion. They hold more than £250 billion of retail deposits, which accounts for more than a fifth of such deposits in the UK, and employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

In the past, both sides of the Committee have expressed, at one level or another, agreement that there should be a greater role for mutuals in the financial services sector; indeed the Deputy Prime Minister himself—for it was he—has repeatedly extolled the virtues of models of shared ownership and the “John Lewis economy” at various times. Mutuals have consistently achieved higher levels of customer satisfaction than other financial services providers, as demonstrated in last year’s Which? consumer survey, in which five of the top ten financial brands in the UK are mutuals.

It would be helpful if the Government would take this opportunity to live up to the pledge that they made when forming the coalition and state specifically what steps they are taking to promote mutuals. We have had a lot of words and general support, but we want to see specific hard measurements agreed to now so that we can track the progress of the coalition agreement three years on from its inception and see how they intend to fulfil that pledge by the time of their demise in 2015.

Greg Clark (Conservative, Tunbridge Wells)

Of course, the problem we have to address is the shrinkage in the number of mutuals that happened because of the financial crisis which has left us with rather fewer than we would have liked. The hon. Gentleman is right to refer to the coalition agreement as committing us to making it easier for mutuals to establish themselves and flourish. We certainly retain that commitment and actively pursue it.

In this Bill alone—we have mentioned this in earlier sittings—we exempt the building societies movement from the definition of ring-fenced bodies and we use the existing building societies legislation to bring them in line with the ring-fencing provisions. That measure was supported enthusiastically by the Building Societies Association as being most likely to respect their particular arrangements, rather than to seek to co-opt them into unfamiliar arrangements.

The Financial Services Act 2012, on which the hon. Gentleman participated, introduced a new requirement into FSMA for regulators to analyse the impact of any of their proposed rules on mutuals, which was an important new insertion. It also ensured that the Financial Services Compensation Scheme protection was extended to credit unions in Northern Ireland. As we have discussed, that has helped to address a particular problem that was there, and hopefully that will encourage confidence in that particular mutual sector.

The Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2011 was an important measure to reduce the burdens on establishing mutuals, which came into effect in January 2012. It allows, for example, credit unions to admit corporate bodies, such as charities and small businesses, into their midst, and it allows them to offer interest on deposits for the first time. That is important to allow them to be competitive with banks; something that we all want to see.

The Law Commission is drafting a co-operatives consolidation Bill, which the Treasury will introduce by the end of 2013. It will rationalise a dozen pieces of legislation that add up to the burden of establishing and running mutual organisations. Ed Mayo, the secretary-general of Co-operatives UK, has said that the Bill would make it easier and cheaper to establish co-operatives in this country. In this year’s Budget, the Chancellor said that we will consult on proposals to make it easier for industrial and provident societies to raise capital.

Regarding the alacrity with which we are discharging our commitments in the coalition agreement, I do not think we can be faulted at all for pursuing our commitments with vigour. The only source of regret is that it has been necessary to recover from the situation that we inherited, in which we lost some valuable mutual organisations.

Chris Leslie (Labour, Nottingham East)

It is interesting that the Minister feels that he is doing well on the issue. Will he at least report to the Committee what has happened regarding the market share of mutual societies as a proportion of UK financial services? It is a genuine question; I do not know the answer. Is there a way of keeping track?

Greg Clark (Conservative, Tunbridge Wells)

There is indeed. That is the import of the new clause, which would require information to be published to

“measure the number of members of mutual societies, and the market share for mutual societies as a proportion of the UK financial services sector.”

That is a perfectly reasonable question to ask.

The information requested by the new clause is already available in the public domain. For example, the first request is the number of members of mutual societies. There are 20 million such members. Regarding the market share as a proportion of the UK’s financial services sector, the mutual sector has a 17% share of residential mortgages, a 19% share of retail deposits, and a 31% share of individual savings accounts in the UK. That information is available online. The hon. Gentleman asked me about the change in recent years, and I am happy to write to him on that.

The information is available, and it is quite right that it should be. The sector is important, we want to see it grow and we are already able to monitor the extent to which it does. The debate has been an opportunity for us to discuss the importance of the sector. There is no need for a statutory provision for the information, because it is already provided and available to the public.

Chris Leslie (Labour, Nottingham East)

It is important to hold the coalition to account on their pledges. Promoting mutuality is certainly an important pledge. It is not good enough simply to fall back on the Law Commission’s Bill, which is an amalgamation of existing legislation into a single statute. It might make for simpler reading, but it would not necessarily alter the general direction of travel and lead to a renaissance of the mutual and co-operative sector in financial services.

Greg Clark (Conservative, Tunbridge Wells)

I think the hon. Gentleman is being a bit churlish. The secretary-general of Co-operatives UK has said that the Bill would make it easier and cheaper to establish co-operatives. That surely is a reliable indication that it would help.

Chris Leslie (Labour, Nottingham East)

It is certainly a worthwhile exercise, but I am not sure that it would necessarily change the general realities of the legislative framework in which mutuals operate. If there are nascent mutuals that have been burdened by the weight of the different statutes, and they would in future be able to read through them in a simpler way, that is certainly a good thing. However, I do not think that it is necessarily a big enough fig leaf to cover the Government’s blushes.

The Bill would be interesting, and the Government’s work on capital raising and capital adequacy is certainly more substantive. It is also important that we analyse the impact of regulatory changes on mutuals. Those are small steps. I am left wanting to see further action and more forceful steps. We will continue to call for that. However, given the Minister’s helpful commitment to write to me and the Committee on the direction of travel trends in market share, and the number of members of mutual societies, thereby giving some feedback in response to the new clause, for the time being, though we might want to come back to the matter, I beg to ask leave to withdraw the motion.

New Clause 20 - Annual assessment of developments in respect of risk-weighting

Chris Leslie (Labour, Nottingham East)

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

Jimmy Hood (Labour, Lanark and Hamilton East)

With this it will be convenient to discuss amendment 33, title, line 4 after ‘insolvency;’, insert

‘to make provision for reports relating to developments in respect of risk-weighting;’.

Chris Leslie (Labour, Nottingham East)

This may look like a complicated and technical issue on which to conclude our deliberations. However, the Committee will recognise that, once the technical jargon is cut through, it is quite straightforward. Risk-weighting is a device used in the capital adequacy regulations of banks, alongside the leverage ratio that we debated earlier. It is calculated by multiplying each type of asset class on a bank’s balance sheet—Government bonds, mortgages, derivatives and so on—by a risk weight. That could be 0% for assets considered very safe such as Government bonds across the OECD, and 100% for assets judged riskier, such as corporate loans. They are added up to form a risk-weighted aggregate.

Under the Basel III arrangement, banks will be required to have equity capital of at least 7% of risk-weighted assets by 2019, while risk weights have also been tightened. The Financial Stability Board of the Basel Committee made some suggestions and policy recommendations on that, particularly for globally significant financial institutions. The Vickers Commission said that the Basel Committee proposals did not go far enough for several reasons, including the fact that the backstop leverage ratio in the Basel proposals was too lax, and that it looked only at banks of global systemic importance, rather than national systemic importance. The Vickers Commission said that the international debate on loss absorbency was “unfinished business”.

Vickers recommended that ring-fenced banks with a ratio of risk-weighted assets to UK GDP of 3% or more should be required to have an equity-to-RWA ratio of at least 10%; and that ring-fenced banks should also have requirements placed on them.

The new clause would mandate the Bank of England to publish a report annually on the progress of risk-weighting banks and building societies. That is fairly straightforward. We cannot claim full responsibility for some of these matters. Indeed, the Parliamentary Commission on Banking Standards recommended certain aspects. However, we feel that this is an important set of proposals.

The provisions would bolster the risk-weighting process, which definitely needs improvement; several witnesses to the Parliamentary Commission explained that was essential. For example, Michael Cohrs of the Financial Policy Committee was firm in his description of some of the inadequacies of the system. The Parliamentary Commission concluded:

“Risk-weighting has, however, been unsatisfactory and arguably dangerous in practice. Banks were allowed to set their own risk-weights using their own models. Some of the weights were much too low. The zero or low weights attached to government securities have encouraged banks to acquire large amounts of what were in some cases very risky assets. Many governments have an incentive not to address this, because of their need to fund large deficits. Parliament needs to be assured that the work to improve risk-weighting is being given the highest priority. The Commission recommends that the new Bill require the Bank of England to provide an annual assessment to be laid before Parliament of progress of risk-weighting and that the assessment should examine in particular the possible operation of floors for risk-weights, and steps taken with regard to simplification of risk-weights and trading exposures.”

That is a very sensible process and an incredibly important part of making our banks safer. We are disappointed that the Government have rejected the Commission’s proposal for that annual assessment by the Bank of England of progress on improving the risk-weighting arrangements. It is not good enough just to leave the matter to the international bodies and to have that de minimis, lowest common denominator approach. Our system, as we discussed in the debate about leverage ratios, also needs properly to address risk-weighting. It is a loose end that needs tying up and properly sorting out. I commend the new clause and amendment 33 to the Committee.

Greg Clark (Conservative, Tunbridge Wells)

It is good to reach the final new clause and amendment on a note of relative consensus. Risk-weighting is important, and my hon. Friend the Member for North East Somerset made a notable speech on the subject earlier in our proceedings. The primary capital requirements under Basel III are based on banks’ risk-weighted assets. Those risk weights must therefore be reliable and credible. The Parliamentary Commission correctly noted that some risk weights performed badly in the last crisis. Extensive work is under way to review risk weights and has, to some extent, already been implemented. For example, the capital requirements directive III, which was implemented in 2011, significantly increased the risk weights that applied to complex securitisations. The Basel Committee and the European Banking Authority have begun separate reviews of risk weights and risk-weighting methods. The EBA expects to report by the end of 2013 and the Basel Committee by the end of 2014. [Interruption.]

Jimmy Hood (Labour, Lanark and Hamilton East)

Order. The Whips should know better than to have discussions in Committee.

Greg Clark (Conservative, Tunbridge Wells)

Thank you, Mr Hood. The Financial Policy Committee of the Bank of England recommended that the PRA ensure that banks take a prudent approach to the calculation of risk weights.

Two questions arise from new clause 20. First, who should conduct such reviews? Secondly, what should be the timing of the reviews? On the first, the Bank of England is specified as the body that would conduct such reviews of risk-weighting. That is certainly possible, but there is a question about whether it should be the FPC or the PRA. After all, the PRA has the ability to review and adjust risk weightings in relation to individual firms and the financial services sector more generally. On the second question about the timing of reviews, we would want to consider, given the international work being done to conclude at the end of this year and the next, to which the UK is a significant contributor, when might be the next time that such a review should take place and how frequently reviews should happen.

Notwithstanding the approach that we have hitherto taken, there is much merit in the new clause’s approach and we will consider it and report back at a later stage on what arrangements are best put in place to keep the important matter of risk-weighting under review.

Chris Leslie (Labour, Nottingham East)

That is a useful commitment from the Minister. The risk-weighting issue formed a central part of the thoughts of the Parliamentary Commission on Banking Standards. While the question is clearly technical, it all boils down to ensuring that our banks are safe, that we do not just leave it to them to self-regulate and that some firm, robust and rigorous regulation is put in place, which is why we tabled the new clause. We will want to pursue the issue and will certainly hold the Minister to account for his commitment on Report. I beg to ask leave to withdraw the motion.

Greg Clark (Conservative, Tunbridge Wells)

On a point of order, Mr Hood. May I make some concluding remarks, since we have reached the end of the Committee’s scrutiny?

First, I thank you for your ministrations in the Chair, and those of Mr Turner, who joined us for some of our deliberations. We have had the pleasure of Dr McCrea’s chairmanship during much of the Committee. He brought a degree of procedural precision exemplified in a magnificent speech that he made this afternoon, which has been praised as one of the finest he has ever made in Parliament, such was its attention to detail. Mr Bone, one of the original Chairs of the Committee, brought valuable experience of chairing other financial services Bills. He is a particular stickler, we noted, and procedure on the passing of notes attracted his attention, rather as the conference between Whips has attracted yours, Mr Hood. I do not know what we have done to deserve such strict Chairs, but we have enjoyed it.

This has been an exceptionally enjoyable Committee. We have made good progress, and considered in detail all the amendments and new clauses—in less time than was allocated, or than we expected we would need. We learned a lot on the way. We have discovered, as hon. Members may recall from an earlier sitting, that my hon. Friend the Member for North East Somerset is contemplating going on Twitter. It is perhaps even more surprising that he has an alter ego who tweets on his behalf. We are still unpersuaded that he can be imitated.

Furthermore, during the progress of the Bill, there has been a distinct mellowing on the part of my hon. Friend the Member for Amber Valley. Today he proposed a cap on the market share that the banks should have. Some might think that a pretty rigorous approach to financial regulation, but they should reflect on some of his earlier remarks. I seem to remember from a previous sitting that he is on the record as calling for the electrocution of bankers. We are grateful that he has mellowed.

I am delighted to see the hon. Member for Kilmarnock and Loudoun back in her place. Not only did she manage to extract commitments from me to consider carefully and positively some of her suggestions, but she achieved a record in persuading me to back one of the Opposition’s amendments. It is fair to point out that it consisted of a single word—but it was a very fine word indeed, and I am happy that I could back it.

The hon. Lady invited me—slightly mischievously, I think—to praise what she repeatedly referred to as “the institution”. Hon. Members will recall that she was referring to the EU this morning, but she thought that I was praising the institution, and was saying what a good one it is. With deference to my hon. Friend the Member for Carlisle, who has recently married, I will reflect only on Groucho Marx’s comment that marriage is a wonderful institution—but who the hell would want to live in an institution? I think that that applies to the institution that the hon. Lady mentioned.

The Committee has been enjoyable and has made good progress. We have had serious discussions and given the Bill good scrutiny. Amendments have been tabled from both sides, and at various times the Front Benchers were channelling the Parliamentary Commission on Banking Standards. From time to time the hon. Member for Nottingham East, and even the hon. Member for Kilmarnock and Loudoun, were the representatives on earth—or at least in Committee—of my hon. Friend the Member for Chichester. We are grateful for their work in informing our discussion.

Like you, Mr Hood, I thank the Committee Clerks for their good advice and patience throughout the Committee. I thank my changing retinue of officials, who have not been too furious or bundled me away when I have failed to follow their advice and substituted my own speaking notes for those that they urge on me, entitled “Resist.” I am afraid that I have resisted their advice to resist.

I would like to thank the Hansard reporters for their work in transcribing the debates, and the Doorkeepers, who have had an important role to play and have occasionally been indulgent. At a couple of points I think that the alacrity with which we have made progress through the Bill has caught short some members of the Committee, including my hon. Friend the Member for Reading West, who just managed to get through the door as it was closing. I think that the hon. Member for Telford had to apply for temporary membership of the Social Democratic and Labour party when he made the approach today.

It has been a great pleasure to participate in this Committee. I look forward to coming before the House on Report and Third Reading, and, once again, I am grateful to all Members for their contributions.

Chris Leslie (Labour, Nottingham East)

Further to that point of order, Mr Hood, with an eye on the time and not wanting to repeat the Minister’s speech, may I also thank all Members who have served on the Committee, particularly those on the Opposition Benches? It is not an easy task when one gets a note through saying, “Hey, come and join us on the Financial Services (Banking Reform) Bill for an inordinate period of time,” but they have been very assiduous in their contributions.

I echo the thanks to those who have chaired the Committee, including yourself, Mr Hood. I also think it appropriate for the Opposition to put on the record our thanks to the hon. Member for Chichester and the members of the Parliamentary Commission on Banking Standards, none of whom decided to serve on the Committee for the Bill to which they had given pre-legislative scrutiny. I hope we will have a chance to hear their direct input on the Floor of the House on Report.

The officials have clearly been working very hard, and I would also like to pay tribute to Treasury officials. Sometimes, the Opposition give the impression that we attack the Treasury, but I can assure them that our ire is reserved for the Ministers, not for them directly. I would also like to thank the Clerks and my own staff, Peter Edwards and Joe Atkinson, for their help in drafting as many amendments and speaking notes as we have required for the Committee.

I would obviously like to place on the record my thanks to both the Whips, to whom thanks should always be recorded, and in particular to my colleague the hon. Member for Kilmarnock and Loudoun. It was suggested earlier today that we could be regarded as the Torvill and Dean of the shadow Treasury team—I am quite happy with that Nottingham-oriented comparison, but this is not our “Bolero” in any way, shape or form. We will come back and no doubt work in close concert on future Finance Bills that are not a million miles away.

I would like to thank everybody involved with the Committee.