§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Pope.]
§ 10 pm
§ Dr. Vincent Cable (Twickenham)
I am delighted to introduce an Adjournment debate on a subject—the future of the banking industry and, in particular, the Government's response to the substantial tome produced by the regulator, Mr. Cruickshank—that, in its own way, is as important as that which we have just discussed.
There are two reasons to seek an Adjournment debate: one—the most common—is that Members are interested in matters affecting their constituencies and the other is to initiate a debate on an extended parliamentary question of the sort that causes irritation to the Chair if posed at Question Time. Essentially, I want to ask one question: what is the Government's response to the Cruickshank report and what do they propose to do?
I felt moved to initiate the debate for two reasons. The first is that the report has been published for some time—about 90 days, I think. The Minister gave a holding reply on 30 March and the Chancellor revealed in the Budget statement his important decision to consider the small business aspects of the Cruickshank report, but I understand that the basic findings have not yet been the subject of a Government announcement of any sort. The second is that, unusually, the report's author—a Government appointee—has taken the step of airing his frustration in public.
In an article in the Financial Times some weeks ago, Mr. Cruickshank remarked:References to legislation look distinctly watered down …He appeared before the Treasury Committee a few weeks later in a slightly more cheerful mood and suggested that he had had it from what he called the horse's mouth that the Government would proceed early to primary legislation. Unless I have missed something, the House has not been told that we are proceeding early to primary legislation. It would be useful to have clarification of what he meant and, indeed, of what the Government intend.
The report contains a lot of interesting technical detail, but it might be useful to summarise what, from a policy standpoint, are the central issues and what we must understand to understand where the Government are coming from. The banking industry is enormously important and the report's striking opening line tells us that the profits of the big three banks are each separately larger than the combined profits of all the big supermarkets. This is a big industry that makes a great deal of money and has an enormous impact on the efficiency of the economy as a whole. That was the report's starting point.
Out of that powerful analysis, Mr. Cruickshank produced several striking conclusions. First, the retail banking industry is unlike any other. It is a network, and one competing firm depends on its competitors to handle its products efficiently. In other words, the whole is a lot greater than the parts. The banking industry has a lot in common with the Post Office, the gas pipeline network and the electricity grid. Unlike retail stores, those are not typical industries and a special system in which to manage them is needed.
127 A traditional way to manage such industries is to rely on public ownership, which is still used for the Post Office, but that has never been used for the banks. The alternative is private ownership with a regulator. That model has been adopted for telecommunications—there are some similarities here—and for the gas pipeline and the electricity grid, but this country does not have such a system of regulation for banking. In a way, that is the crux of what Cruickshank says.
The second point, which derives from the first, is that there is no effective competition in banking. There is a lot of competition and there are lots of banks—indeed, a lot of internet banks are coming into the industry and they compete in a sense—but competition is not fully effective. The reason it is not fully effective is that although an internet bank, for example, can handle some transactions immediately, it still relies on the banking network to take the usual three or four days to clear transfers of money. In that sense, there is a limit on how much competition it is possible to have in the banking sector.
Because competition is not effective, what Cruickshank, in his most powerful and telling conclusion, deliberately calls "excess profits" are made. When challenged by the Treasury Committee to define what he meant by that phrase, he had a robust answer. He used, not a casual, flippant phrase, but a phrase with real meaning which came from his having carried out a clear analysis of the comparison between the performance of banks and their returns to shareholders and those of other companies quoted on the stock exchange. Over a 10-year period—a long period—the banks earned substantially higher returns than the stock market as a whole. I believe that the relative figures are 26 per cent. internal rate of return compared with 21 per cent.; there is certainly a substantial difference.
The banks' answers are several. First, they say that profits go up and down, and that they are cyclical—but Cruickshank's report shows that they are not cyclical; 10 years would be an extremely long cycle. Secondly, the banks say that, although they are making money, there is lots of competition. I have already answered that point: competition is constrained by the existence of a network.
The most crucial element in the banks' argument is that banking is just another business: the banks are doing their job and are responsible to their shareholders; if they earn a high rate of return, they are clearly exceptionally good at business. That being so, they ask why they are being criticised. The answer is that a bank is not just another business: not only is banking a network, but it has what Cruickshank describes as the old regulatory contract, whereby the banks enjoy several privileges that other companies do not have, the most powerful of which is the lender of last resort facility.
Unlike the Bank of Credit and Commerce International and many other companies, Barclays bank will never go bankrupt. It might not be written down formally, but the Minister knows and we all know that the Government would rescue Barclays—that is what the lender of last resort facility means. The shareholders will never be bankrupted because the profitability of the institution is underpinned by that guarantee. For that reason, it is not right to say that banking is a normal business that, because it happens to be well run, earns exceptionally high profits.
128 Banks should not be earning exceptionally high profits. That, Cruickshank's most powerful conclusion, is not derived from an ideological position—I suspect that Mr. Cruickshank is a great believer in free markets and approaches the issues from that end of the ideological spectrum. None the less, his conclusion on that point is definite and precise.
A third conclusion of Cruickshank relates to a more specific distortion—abuse, if you like—of the system, which is the payments system and the problem of automatic teller machines. The report contains an excellent analysis of the costs of ATM transactions. Cruickshank and banks such as Nationwide and the Co-operative bank which have opened their books have shown that the cost of an ATM transaction is about 32p or 35p; at the margin, that cost is even less and it is falling over time, yet, over the past year, leading players in the Link system have attempted to charge customers far more.
Events have moved on since Cruickshank published his report. Under pressure from public opinion, the banks have backed down to some extent. Customers are no longer faced with the alarming possibility of being charged £2.50 for a £10 transaction; the banks are talking about imposing only one charge, not two; and mainstream banks are saying that the charge would be about 50p, rather than £1. In that sense, the problem is receding, but an issue of principle remains, which is that there is absolutely no reason why banks should levy a charge at all. Their costs are covered through settlement transactions and derived through the pooling of costs. They do not need to charge the customers directly. The charging of customers entrenches the monopoly position of the biggest banks.
I hope that by 1 January next year, the position adopted by the Nationwide building society and the Co-operative bank will be copied by the rest, but if it is not, and if the banks are still insisting on making charges that are substantially in excess of their costs, it is essential that the Government—it is a matter for the Secretary of State for Trade and Industry, rather than for the Treasury—use the existing powers against what is essentially cartel behaviour. The Office of Fair Trading is already pointing to two sections of the Competition Act 1998 that could be used.
The final point in the analysis, before I deal with the conclusions, is that the Cruickshank report demonstrates how business consumers and personal consumers are disadvantaged by the way in which the banking system operates. In the case of business consumers, it is clear. Very high rates of return have been earned by a small bank. Four banks have an 80 per cent. market share for small business. The Government were right to move quickly to initiate a Competition Commission inquiry into that aspect of banking. I am pleased that that was done.
There are substantial implications for bank consumers generally. The argument is complex, but important. It is often pointed out that British banking is quite efficient; the Cruickshank report shows that. Cost are relatively low, and charges are not high by international standards. However, the consumer suffers in several respects from the operation of the network system and the monopoly power inherent in it.
For example, one of the consequences shown up particularly effectively by the Treasury Committee through its questioning was the slow rate at which 129 cheques are cleared. The three or four day clearance rate is very slow by international standards. It is not simply a matter of frustration on the part of consumers; there are hidden costs. If one is running an overdraft and one cannot clear it for several days, banks can earn substantial interest income through their overdraft charges. That is a major source of their profits, and it is maintained by the fact that the clearance system is inefficient and slow. The banks acknowledge it to be slow.
Similarly, the fact that the banks have such a grip on the market helps them through the linkage between current accounts and all sorts of other products. We know that there is a great deal of linkage, quite apart from the fact that British bank consumers seem to find it extraordinarily difficult to change banks. The statistic emerged a few weeks ago that people in this country were more reluctant to change their banks than to change their wives or husbands. People are fixed in their banking habits, which entrenches the power of the established market leaders.
In the remaining few minutes, I shall deal with the report's conclusions and ask the Minister how the Government intend to deal with them. The first and most important conclusion, to which we have not yet had a clear response, is that precisely because of the way in which the banking industry is structured—the network and the monopoly in it—there must be a regulator. Cruickshank calls it Paycom.
Various alternative ideas have been proposed. The British Bankers Association suggested that in order to reduce the number of regulators, the Bank of England should perform that task, but that is probably a return to the past. There is the question of how Paycom would fit in with the Financial Services Authority, which I know has been causing the Minister sleepless nights for the past year.
None the less, there is a clear recommendation that the network should be regulated. The Government's response to the question of who will regulate it will be the most important outcome of the debate. Cruickshank believes that the Government are committed to early primary legislation on the matter. I should be grateful to have that confirmed.
Secondly, on automatic teller machines, I hope that the Government will confirm that they are willing to use Competition Act authority. The Office of Fair Trading has pointed out clauses under which the banks can be referred, and I hope that they will be referred, to make it clear that such behaviour will not be tolerated.
Thirdly, one of Cruickshank's key recommendations was the clarification of the role of the various regulatory authorities. An issue in which the Minister has been heavily involved is defining the relationship of the FSA to banks. That only partly overlaps with the Cruickshank mandate, but it would be helpful to know the Minister's view of that, now that legislation has been enacted.
A more important issue is the role of the competition authorities in bank mergers. As I understand its conclusions, the Cruickshank report states that all prospective bank mergers should be stopped by referral to the Competition Commission. I may have misunderstood that conclusion, but that appears to be its substance. At least one merger is currently going through. It would be useful to know how the Government intend to deal with it. Surely new mergers between the big players can be stopped until a proper system of regulation is introduced.
130 A little anomaly exists. The hon. Member for Newport, West (Mr. Flynn) has been involved in financial legislation for many years, and will know about it. The House of Commons has a slightly odd feature; it has to approve bank mergers. Some of us have been involved in fun and games and have tried to act as a brake on them. It would be useful to ascertain the Government's view of the use of that residual power of the House of Commons in the framework that we are considering.
My final point refers to the most striking headline of the Cruickshank report—the £3 billion to £5 billion excess profits. What will happen to them before the new regulatory system is in place? Do we accept them as part of nature, or should the Government do something about them? There are a couple of options, which are not in the Cruickshank report, that the Government should explore.
One option is to say to the banks, which are not in a competitive market in the normal sense, "You're running excess profits as a result of an abnormal position in the market. We think that you have social obligations to maintain a proper branch network, and to bring advantage to disadvantaged consumers. That's part of package and goes with continuing to enjoy regulatory privilege."
Another option is for the Government to decide that they do not want to confuse the banks' objectives with social obligations, but that for a year or two, until the new regulatory system is in place, it would be appropriate to have a levy, and to subtract some of the value for the benefit of the community at large. That is a radical conclusion, which is not in the report. However, it tackles a question that arises from the report: what do the Government do about so much excess profit?
§ The Economic Secretary to the Treasury (Miss Melanie Johnson)
I congratulate the hon. Member for Twickenham (Dr. Cable) on securing the debate. I welcome the opportunity to set out the considerable progress that the Government have made in implementing the Cruickshank report on competition in United Kingdom banking. I also welcome the other two hon. Members who are present—my hon. Friend the Member for Newport, West (Mr. Flynn) and the hon. Member for Northavon (Mr. Webb). We do not always have others with us in Adjournment debates, and I am pleased that this debate has attracted a wider audience.
The Government welcome the Cruickshank report and its conclusions. We are committed to acting on the recommendations to improve competition in the industry and services to consumers. The report contains numerous recommendations-55 in total. The Government have made several announcements of their implementation of the most important ones. For example, on the day of the report's publication, we announced that we would refer the supply of banking services to small businesses to the Competition Commission. On the following day, my right hon. Friend the Chancellor announced in the Budget that the Government would legislate to open access to the payment systems, and that the Financial Services Authority had been asked to report to him in three months on the way in which it intends to respond to the recommendations. Since then, we have actively followed up those and other recommendations. We hope to publish a formal response to the report shortly. The hon. Member for Twickenham was keen to know the timetable for that.
131 It may be helpful if I set out in a little more detail the Government's progress on dealing with the various recommendations in the report, and outline the next steps forward.
On money transmission, we have announced that we will legislate to open access to payment systems and to oversee access charges. The Cruickshank report highlighted several examples of consumers, retailers and businesses failing to get a good deal from their banks. The Government are determined to tackle those competition concerns.
In some parts of the industry, the mere publication of the report has produced a welcome change in behaviour. The hon. Member for Twickenham attributed that change to consumer pressure, but I believe that it is due to a mixture of public and Government pressure.
For example, Link has decided to open up its automatic teller machine network to non-bank ATM providers. Such providers are interested in providing not just ATMs in more diverse locations, but innovative services beyond merely handing out cash. That is a welcome development. As for the important issue of charging for ATM withdrawals, Link has banned double charging—the charging of both a surcharge by the ATM owner and a so-called disloyalty fee by the consumer's own bank. It has also reformed its wholesale charging structures.
Moreover, we are seeing the development of competition in regard to cash machine charges. Some banks have already announced that they will impose no direct charges, while others have announced moves undercutting the proposed charges of their competitors. The Government welcome such competition, believing that it is the key to giving consumers effective choice and innovative services at a fair price.
Other parts of the industry have been slower to respond to the report. The Government have challenged the banks to improve transparency of charging, to base charges on economic costs, and to open up money transmission systems. We hope that they will make progress on their own, but in the meantime, the Government have had discussions with the Office of Fair Trading about what measures can be taken under existing legislation. The OFT is bound to investigate the Link and MasterCard schemes in the United Kingdom following formal notifications under the provisions of the Competition Act; it is also considering what action, if any, it may take in relation to the other payment schemes. Authorities elsewhere in the world are examining the issues in their own jurisdictions. For example, the United States Department of Justice began a court case against MasterCard and Visa last week, and similar issues are being examined by the European Commission.
As for United Kingdom legislation, my officials have already started work on firming up the Government's proposals. More than 40 organisations have been asked for their views on the report's recommendations to establish a licensing regime. Discussions have taken place with a wide range of market players, and more than 15 meetings have been held or are due to be held. That does not include separate discussions with the Bank of England, the Department of Trade and Industry, the Financial Services Authority and the OFT.
132 The Government recognise the complexity of the issues involved in legislating—there is a great deal of detail to be worked through—and are committed to widespread consultation on the details. The objective is to create a regulatory framework to foster competition which is sufficiently robust to tackle the competition concerns, but not so onerous that it stifles innovation or discourages companies from entering the market to provide payment services.
Commenting on the response to the final report, the hon. Gentleman suggested that the Government might have been seen as backtracking on their commitment to legislate. I assure him that that is not the case. As the hon. Gentleman said, in evidence on his report to the Select Committee on the Treasury, Don Cruickshank said that he was absolutely clear that the Chancellor had made it plain that he would legislate, and that consultation with the banks had already begun.
Let me deal with the recommendations affecting consumers and retail markets. The Government welcome all attempts to improve transparency, to increase the provision of information, and to ensure that consumers have effective avenues for redress. We strongly support the view expressed in the Cruickshank report that, if we are to promote competition, it is essential to educate consumers. Many of the issues involved are the FSA's responsibility, and it has been asked to report on how it intends to respond to the recommendations by the end of this month. We therefore look forward to receiving its response very shortly, and it is intended that that response be published alongside that of the Government.
The report also addressed the important issues of financial exclusion and the provision of basic bank accounts. In his Budget speech, the Chancellor challenged the banks and the Post Office to work together to offer basic banking services for all. Similarly, in April I issued a challenge to all the major banks to have basic accounts up and running by October. In a modern economy in which opportunity is open to all, it is not good enough if banks cannot respond effectively and meet that simple challenge.
I am glad to say that the signs are encouraging. At a recent hearing of the Treasury Committee, the chief executives of three of the high street banks said that they either already had such accounts in operation, or they would be introducing them later this year. Similarly, I understand that the Post Office is working up proposals in that area. We shall be interested to see those in due course.
In relation to small businesses, the report found a concentrated market in which a few players were earning supernormal profits. As I mentioned, those issues have been referred to the Competition Commission for investigation. It has been given 15 months to report on whether a monopoly exists and, if so, whether it operates against the public interest. The investigation is well under way. I understand, for example, that the former members of the banking review team, including Don Cruickshank, have given formal evidence to the inquiry. The Government look forward to receiving the commission's report on that important issue later next year.
The Cruickshank report looked not just at the supply of banking services to small businesses, but at the provision of equity. It contained a number of recommendations on debt 133 finance and venture capital, many of which were addressed in the Budget. The report also recommended that the Government should make further moves towards a low, simple, capital gains tax regime. In the Budget, we announced that we were cutting capital gains tax to encourage entrepreneurial investment, to reward risk-taking and to promote wider share ownership among employees.
The report contained a number of recommendations about increasing transparency in banking supervision, getting the institutional incentives right, delivering effective competition scrutiny and eliminating regulatory distortions. I know from his remarks that those issues are of considerable interest to the hon. Gentleman.
The Government have addressed many of those issues through the Financial Services and Markets Act 2000, which received Royal Assent last week. That is key legislation, which the Cruickshank report acknowledges has brought greater clarity to financial services by introducing a single regulator: the Financial Services Authority. The Act contains specific provisions on promoting consumer understanding and ensuring that the authority takes proper account of competition issues. The banking review was encouraged by the FSA's work to ensure a consistent risk-based approach across different regulated firms. As with the consumer recommendations, the Government hope to receive the FSA's response on the issues raised in the report shortly.
134 The hon. Gentleman raised a question about bank mergers. Last year, the Department of Trade and Industry issued a consultation paper. It is looking at the issue, particularly the test that should be used in assessing whether a merger should go ahead. That matter is receiving further attention by the Department of Trade and Industry.
On the next steps, the Government have already made considerable progress in implementing the Cruickshank report's recommendations. The report is very detailed; it runs to 334 pages, with seven chapters and nine detailed annexes. The issues are complex. It is important that the Government give all the recommendations proper consideration. Much work has been going on beneath the surface as officials and affected parties get to grips with all those issues.
In line with the recommendations in the report itself, the Government are keen to ensure that their proposals meet the principles of proportionality, non-discrimination, transparency, flexibility and accountability. We hope to make further announcements shortly. I hope that that reassures the hon. Gentleman that the Government are making every effort to respond to the competition problems identified in the Cruickshank report, and that progress is already being made on a number of issues identified in the report.
§ Question put and agreed to.
§ Adjourned accordingly at twenty-nine minutes past Ten o'clock.