Financial Services Bill — Report (2nd Day) (Continued)

Part of the debate – in the House of Lords at 9:00 pm on 12 November 2012.

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Photo of Baroness Kramer Baroness Kramer Liberal Democrat 9:00, 12 November 2012

My Lords, I speak in support of the noble Lord, Lord Flight. I appreciate that the Government have moved in a significant way in their Amendment 37. What they have put in place is a sort of passive language that the PRA will not stand in the way and be an obstacle to the competition objective of the FSA. I would, however, very much like the Government to look at this again and see if they can turn it into the active, preferably with the same language as they use for the FCA, so that the two are aligned. The underlying reason for this is very straightforward. The PRA is the body that issues bank licences and is therefore significantly in control of the process that leads to more or fewer banks in this country. Its history has been one of discouraging the appearance of new banks. One in the last 137 years is really not the kind of target or the rate at which we want to continue in the future in order to have a more competitive environment. We need to be aware that competition is one of the underpinnings of banking reform-not competition for its own sake but competition because it impacts on standards and because it impacts on the potential for banks that provide customer service. It impacts across a whole range of behaviours, all of which are deeply embedded in the banking reform that everyone in this House is seeking.

Rather than just speak on my own account, I can refer this House to others who have spent more time than I going in detail through these issues. Having looked through many of the issues, the Treasury Select Committee of the other place, in its Financial Services Bill Report of May 2012-so it is recent-concluded:

"It remains our view that competitive markets need both freedom to exit and freedom to enter. The Bill contains no proposal for specific objectives related to competition for the Prudential Regulation Authority. We recommend that the House of Lords consider amending the Bill to make competition an objective of the Prudential Regulation Authority".

So, that is a significant step on from the concession that the Government have made so far.

I believe that in this House many have a great deal of respect for Sir Donald Cruickshank and the work that he has done on competition. It is something of a scandal that a report produced more than a decade ago has seen so little action when evidently, in hindsight, it has been shown to have got to the heart of many of the issues. I quote from recent comments that Sir Donald has made to the Parliamentary Commission on Banking Standards:

"I can tell you that if the Financial Services Bill becomes an act in its present form, with that wording for the FCA relative to competition, it will have a minimal impact on the decisions of the FCA, because it is not a primary objective-it is qualified".

The fact that it is not a primary objective of the FCA adds to the argument for introducing language for the PRA; it is an alternative mechanism if the FCA language is to stand. Sir Donald went on to say:

"If a regulatory body that is overseeing the activities of a sector of the economy that is central to the operation of the state does not have a competition objective ... it is very likely that competition will be muted. Because it is then in the interests of both the regulated and the regulator to keep competition muted. It is easier for both parties ... It would be extraordinarily difficult for the PRA in this case, if it thought that its objectives might be better delivered via better competition in a particular sector of the economy, to act to achieve that".

His final comment was that,

"my preference would be to have both the PRA and the FCA with precisely the same competition objective and powers so that when they are asked to act together, they do so within the same framework vis-à-vis competition. Then, if there are real tensions between their other objectives, we have the FPC and the Bank itself moderating the answer".

Finally, there is news from the industry. Looking again at the banks that are not one of the big four-or the big five if you want to include Santander-I have just read an excellent piece written for the CSFI by Henry Angest and Atholl Turrell of the Arbuthnot Banking Group. It states:

"It is our contention that a competition policy which encouraged and facilitated the growth of more small banks could be hugely beneficial both to the economy and to the health and stability of the banking system ... If conditions were created which permitted such small banks to flourish, the result would be both a major enhancement of competition within the sector and improved access to lending for businesses and consumers, through the introduction of players who represent no systemic risk".

That is almost a selfless comment because it is by an entity that would be put under pressure by those newly arriving competitors.

So I ask the Government-while accepting that they may not do so today-to keep in mind that moving from a passive to an active at the PRA level could open up competition within the banking sector. The resistance that we have seen for over a hundred years suggests that there is very high resistance to a competitive environment, and this is an opportunity to change that.