New Clause 9

Financial Services Bill – in a Public Bill Committee at 2:30 pm on 14 January 2010.

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Maintenance of competition

‘(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) In section 2(2) (the FSA’s regulatory objectives), add a new paragraph—

“(e) the maintenance of competition.”.

(3) In section 2(3), omit paragraphs (f) and (g).

(4) After section 2, add a new section—

“Maintenance of competition

(1) The maintenance of competition objective referred to in section 2(2)(e) is: regulating in a way which facilitates competition in financial services and markets in the United Kingdom between those who are subject to any form of regulation by the Authority or those in any category of authorised participants, and in a way which minimises the adverse effect on competition that may arise from anything done in the discharge of the Authority’s general functions.

(2) This section and section 2(2)(e) are without prejudice to the statutory powers of the Office of Fair Trading and the Competition Commission.”’.—(Mr. Tyrie.)

Brought up, and read the First time.

Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee), Chair, Tax Law Rewrite Bills (Joint Committee)

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

My new clause would add competition to the objectives of the FSA. This issue is crucial. Competition is what should lie at the heart of an attempt to regulate an industry—any industry—and it is deeply regrettable  that it does not do so in the Financial Services and Markets Act 2000. We must always remember that all regulation costs money. It raises prices for the consumer. In the end, the consumer always pays.

The present objectives already interact with one another. The clause will alter the interaction. Two fundamental issues, which I want to discuss this afternoon, flow from the FSA implementing its objectives. The first is conduct of business regulation. This is designed to stop the consumer being ripped off—it is as straightforward as that. An analogy can be drawn with a can of soup: regulation about a can of soup is designed to stop people, when buying a can of soup, finding themselves being poisoned by what is in it. Once the minimum standards have been met, competition can take place between cans of soup in supermarkets and elsewhere. That is what the consumer protection objective is designed to accomplish in a much more complicated area than the regulation of cans of soup.

The second area in which such interactions will take place as a consequence of what I am proposing here is the regulation of systemic risk, an issue that we discussed earlier—preventing contagion as a consequence of illiquidity or insolvency. That is the financial stability objective, which we will now have in the Bill—mercifully—but none the less 10 years too late.

I shall take each issue in turn, briefly—perhaps not so briefly. Let us look first at the conduct of business regulation side. As the Bill is drafted, the consumer must rely for his protection from ever-rising prices caused by regulation on the principles underlying the FSA’s objectives, to which the FSA need only “have regard”. There are a couple of important objectives in section 2(3) of the Act, the last being the principle in paragraph (g):

“In discharging its general functions the Authority must have regard to...the desirability of facilitating competition between those who are subject to any form of regulation by the Authority.”

Paragraph (d), which I might come back to in a moment, is also relevant and says that the FSA must also have regard to

“the desirability of facilitating innovation in connection with regulated activities”.

The reason I dwelt on that for some time is of course because a principle to which one has to have regard is very different for an institution and far less powerful than is an objective—central objectives that are laid out statutorily for the institution to accomplish. That is why in my view, right from the start, the Financial Services and Markets Act has been inadequate in that respect. When the Bill was put on the statute book, that was the view of the overwhelming majority of practitioners. If you ask them now, they shuffle their feet a little. Why? Because regulation is the best barrier to entry for competition. A firm could not wish for better than to have huge amounts of regulation to stop new entrants into the market.

Regulation, especially to protect consumers, is inevitably highly complex in such a field and only firms with big compliance departments can handle it properly. There are large economies of scale in regulation. The bigger the volume of deals, the cheaper per deal to regulate they will be for those firms. That should, in theory, lead to a drive for consolidation in the industries providing  financial services, to retail customers in particular, and, hey presto, in practice, if we look about, that is exactly what we have seen since the Act came into force.

Worse still, the regulator himself has an interest in encouraging the same consolidation. A small number of large firms is much easier to regulate and to keep an eye on than a large number of small firms. Regulators do not like taking risks. The most important risk that regulators take is being blamed, which is extremely damaging—better more regulation than blame falling on them. Of course, zero regulatory failure is completely unachievable. There was little crime in eastern Europe—except crime by the state—with no crime on the street and people able to leave their doors open in many countries, particularly in East Germany. However, the level of regulation to achieve that was extremely high, with 10 per cent. of the population being informants for the Stasi. We know that we can eliminate all regulatory risk and failure but only at a price, a huge price, for our consumers.

I have seen the effect in action. As a director and chairman of audit in a publicly quoted company in the financial services industry, I have seen the effect of regulation threatening to become a barrier to entry. I have seen how encouragement for rationalisation all too often can come from the regulator itself, more in its own interest than in that of the consumers. Far too little attention is paid to the barriers to entry for small firms that can be created by that consolidation, which, in turn, is driven by the regulation.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

I agree entirely with what the hon. Gentleman says. Is it not a matter not only of regulation, but of proportionate regulation? To encourage new entrants in, they ought not to be sometimes subjected to the sort of regulation that is required for a highly sophisticated, complex, huge operation. Proportionate regulation would recognises the relative size and allow entrants in at the bottom end in a much more reasonable way.

Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee), Chair, Tax Law Rewrite Bills (Joint Committee) 2:45, 14 January 2010

I absolutely agree with that but, best of all, is competition. It will always act as a counterweight to excessive regulation. Competition should, in principle, provide us with the optimum level of regulation. If we have no regulation, we will have no industry to regulate. The size of the industry will be very small. People do not want to deal in a jungle. They will move into a market where they can receive some protection. However, too much protection can have the deleterious effect, as I have described, of killing off activity. In between lies the optimum level of regulation, normally the level that provides for the maximum level of legally conducted business activity. That is not the level at which we will get zero regulatory risk and we will therefore always have regulatory failure. It is the pressure that builds up on any regulator to clamp down excessively that is the great danger in regulation and financial services.

Photo of Andrew Love Andrew Love Labour, Edmonton

Does the hon. Gentleman recognise any limitation on the role of competition, and an enhanced role for regulation? I take the example of home credit of which the Office of Fair Trading carried out a study. It wished to introduce greater competition into the marketplace, but found it difficult to find market participants who were willing to enter that market.  Therefore, there is a continuing role for regulation—I agree with the hon. Gentleman, at an optimum level—but we cannot always depend on competition.

Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee), Chair, Tax Law Rewrite Bills (Joint Committee)

I completely agree with the hon. Gentleman that a level of regulation is required to arrive at an optimum level of business activity and benefit to the consumer. I hope that I just said that, but if I did not, I confirm it now. Home credit is a fascinating case of a market distortion. We have both looked into it. It is difficult to see an easy method of eliminating it wholly. However, I will not be drawn down that road into such a specific and detailed example now, even though it is deeply relevant to the new clause.

I want to make one more general point about the importance of competition in assisting consumers. I did an economics degree of sorts and, on a good day—quietly, usually in a Committee Room upstairs where no one notices—I might even be prepared to admit it. I did at least learn a lesson of Schumpeter, whose contribution was decisive on the issue. He showed that the greatest source of competition generally comes not directly from price, but from the invention of new products or product improvement that displaces inferior products in the market on a dynamic and constantly evolving basis. That is as true in services as it is in goods. It is what he called the process of creative destruction, and it is what we must maintain in financial services. We need more of it there, but our central difficulty is that there is a strong case for saying that that Schumpeterian power of creative destruction has been compromised in some respects by a distorted regulatory regime.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

Does the hon. Gentleman consider the introduction of the innovative product of a 125 per cent. mortgage to be a good way of providing competition in the market?

Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee), Chair, Tax Law Rewrite Bills (Joint Committee)

The hon. Gentleman makes a very good point. If the consumer can be brought to understand clearly and transparently what he is really taking on, we must ultimately let the market decide the level of activity that will take place in that area. In the case of those mortgages, we know from survey evidence that people did not know what they were taking on. They were misinformed. That is the central weakness in what happened.

It is impossible to protect people entirely from mistakes that they themselves will make. However careful the preparation, there will always be people who do not take advantage of the information provided to them to make good decisions, just as there will be people who open a can of soup, pollute it with salmonella or something before they drink it, and then blame the producer of the soup.

I agree that producing 125 per cent. mortgages was highly irresponsible. They should have had powerful health warnings on them. There might have been a case for going further and curbing them—indeed, that is the road that we have gone down. There might have been a case for doing so much earlier than we did. However, we cannot live in a world where, every time a product is produced, we must rely on the FSA to put it through a detailed vetting system before it can be allowed on to the market as something that has been duly approved and sanitised. Such products are not like new pharmaceuticals. The level of innovation takes place at a much faster speed.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I have followed my hon. Friend’s argument. He talked about the creative destruction that emerges from new products appearing on the market. It is helpful for a consumer to be able to judge the characteristics of different products so that they can decide whether a new, innovative product is better than the old, stale product. Part of the challenge in financial services is that it can be difficult for consumers to see through the products and understand their characteristics. It is often hard to see the consequences of buying one product compared with another until many years have passed since the original decision to purchase was made. There are, therefore, challenges around simply relying on competition to generate the best deal for consumers.

Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee), Chair, Tax Law Rewrite Bills (Joint Committee)

I agree with every single word of that. The next paragraph of what I have in front of me alludes to that, as a qualification to my earlier remarks about the primacy of competition. I fully endorse what my hon. Friend has just said.

May I go back to the main theme, which is that we need to put competition up the scale of importance for the FSA? I referred to the number of people who have supported, and continue to support, that idea. I said a moment ago that practitioners liked the idea in theory, until they realised the benefits of the protection that comes with economies of scale and the growth of barriers to entry. However, other people who have looked at the issue have been very clearly in favour of adding competition as an objective.

Don Cruickshank, who did the original work at the time of the first Bill, said:

“Getting the regulator’s primary statutory duties right is essential...A competition objective that is weak relative to the regulator’s other objectives is unlikely to be delivered effectively”.

He was supported in all that by the British Bankers Association, the Association of British Insurers, the National Consumer Council, the Treasury Committee, the Conservative party, the Liberal party—I think—and so on. They are the only bodies that I have taken the trouble to look up recently. A good number of them have carried on saying that sort of thing, to a greater or lesser degree. In the US, the Securities and Exchange Commission has a duty to consider whether any regulation or other action will promote competition, so the United States has exactly what I am asking for in its statute book.

The Government’s only substantive argument against the proposal over the years—I expect we will hear a variation of it from the Minister—is that it could lead the FSA into conflict with other parts of competition policy, in this case with the OFT. However, as I have repeatedly said, that need not be the case. My contention is not that the FSA should take on new powers to supervise competition, but that in the exercise of its powers it should not damage competition in the marketplace. The inclusion of a balancing objective, such as that in new clause 9, would not turn the FSA into another competition regulator. It would merely mean that, in carrying out its distinct remit, it should seek to facilitate competition.

New clause 9 should arm the OFT a little, not get in its way. One thing that it certainly cannot do is weaken it. To ensure that, I withdrew new clause 8—that may  have been noticed by Ministers—because I wanted to add a rider at the end of subsection (4) to make it clear that my proposed provisions are

“without prejudice to the statutory powers of the Office of Fair Trading and the Competition Commission.”

So this can only benefit rather than damage the OFT and competition more widely.

The fact that other regulators have competition as a central objective makes its omission from FSMA particularly curious. We now have an opportunity to put that right. My new clause would have three or four big effects. First, competition would act as a counterweight to the inevitable urge to over-regulate. It would be a counter-balancing force for the FSA to consider in discharging its statutory responsibilities. There is a provision in the Act for cost-benefit analysis, but it is well understood and agreed that doing that kind of analysis is complicated, extremely expensive and give, at best, patchy results. The analysis is an expensive surrogate for what should be included, namely the balance between competition and consumer protection, which should be built into the legislation’s objectives for the benefit of the consumer.

On the conduct of business side, when the FSA found that it did not have competition as an objective 10 years ago, even though it wanted it, it tried, to its credit, to make the best of it by ensuring that it did not regulate excessively. I will not go into detail about how it achieved that, but it did it through a number of interesting consultation documents during the first half of the last decade. They were not all perfect, but they largely addressed in an ad hoc way the issue that I am trying to address directly through new clause 9.

The problem for the FSA is that it remains vulnerable to public pressure. Such pressure on a particular case has a ratchet effect on regulation, which leads to an erosion of competition and leads eventually to higher prices, often without any benefit to the consumer. I hope that what I am proposing will address that.

The second effect, which I want to mention briefly, touching on something that I mentioned earlier, is that the measure will change the terms of trade between the OFT and the FSA, just a little. Again, to the credit of both institutions, they know that they have to work together, and at the moment they are co-operating extremely well, through early and direct engagement.

The two organisations have produced an interesting document on exactly that subject—a memorandum of understanding. I hope that the Committee will understand my scepticism about such documents. We have been there before, have we not, with the MOU on the tripartite committee? Relying upon what is effectively an informal document is not enough. We should go further, working out ourselves how they should co-operate. We should not have to rely on a memorandum of understanding, as it makes us very dependent on the quality and personal relationships of the people whom we are appointing at the top of those institutions.

We have had a first-rate group of people running the FSA from the beginning. That has not always been the view of the press, however, nor is it the prevailing mantra. None the less, I believe that we have been lucky in those who have been appointed to the FSA. I congratulate the Government on having made a big effort to get  good people to run it. I also congratulate the Government —I do not often do so—on their appointment of the current head of the OFT. We have very good people in place, and they are sensibly working closely together, but we should not be entirely dependent on that always being the case. We need something that has some statutory underpinning.

Of course, it should be borne in mind that the relationship between the FSA and the OFT already has a statutory basis, so the principle that legislation should act in this area has been conceded. Section 160 of the Financial Services and Markets Act 2000 gives the OFT the power to review the FSA rules for competition purposes. Sections 303 and 304 require the OFT to give the Treasury advice before bodies such as clearing houses can be approved by the FSA.

The OFT has also been given a specific statutory role to keep an eye on the competition aspects of access to payment services. So the principle is conceded; it is only a question of whether we make it a more broad-based power. New clause 9 would do exactly that. It would give wider effect to the responsibilities of the FSA in the field of competition, and it would give the FSA a wider interest in working closely with the OFT to ensure that it is accomplished.

I said that there were three or four effects. The third flows from the first two. The first was that it would act as a counterweight to the ratchet; the second was that it would strengthen the relationship with the OFT. The third effect would be that consumers will benefit. In the long run, I have no doubt that we would have nudged regulation in the direction of enabling more competition, better products, and hopefully lower costs than would otherwise be the case.

We must never forget that in creating these institutions we are creating big, powerful vested interests. Firms like certainty from the FSA; and, of course, they dislike competitors. If it could, the FSA would want to avoid any regulatory failure. There is always the risk that its efforts in that direction would be at the expense of the consumer. It is only by exercising considerable restraint that have we not found ourselves in that position. Under the new clause, there would be a counterweight, at least, a little more of one than we have had so far.

They have been touched upon today, but I shall draw out a little more what the effects would be in practice. Let us take a lively, specific case—bank charges, which have been discussed. Until recently, they have been self-regulated under the banking standards code, but we all know that that has not worked very well, and we have just heard from members of the Committee some descriptions of how it has not been working well. The FSA tells us, and I believe it, that it will now be more assertive in this area. It has limited power to deal with complaints, and I hope it will be more responsive to those complaints, but, of course, most bank charges relate to overdrafts—a form of consumer credit that is self-regulated under the Consumer Credit Act 2006, rather than FSMA.

The new clause would not provide a direct regulatory solution to those problems of bank charges. That said, the operation of the non-borrowing aspects of current accounts and complaint handling by banks in relation to overdrafts is subject to FSA oversight and acquiring the competition objectives would be a powerful spur to the FSA to work closely with the Office of Fair Trading to address those problems.

A solution to much of the abuse in relation to bank charges is probably available, at least in principle. I believe that transparency would do a lot of the heavy lifting, but so far none of the existing regulators has been able to force the banks to provide it. As the hon. Member for South-East Cornwall said a moment ago, those reams of terms and conditions often make things even more opaque and difficult for consumers, rather than simpler.

In an intervention on the hon. Gentleman, I mentioned a proposal, which I published some time ago through the Centre for Policy Studies, that bank charges should be identified on regular statements as the difference between base rates and the interest being earned by the consumer on that account, and that that should score as a charge. If that proposal were implemented, the consumer would see very clearly that there is no such thing as free banking. The market for short rates is heavily distorted at the moment and the proposal would not work so effectively in this extremely unusual climate, but it would most of the time.

Why have those regulators been unable to provide any real pressure on transparency? Because so much of what is required in bank regulation falls between the cracks of various legislation. I am not suggesting that what I am proposing today will fill every crack, but I do suggest that a competition objective on the FSA would give it the incentive to engage directly and thoroughly with the OFT to try to address and solve the problem.

I ought to say a little about the other main aspect of the interaction of the objectives that I discussed at the start of my speech. I said that there were two main areas: systemic risk and conduct of business regulation. I have been discussing conduct of business regulation. Now I want to say a few words about the systemic risk aspects.

A central issue since the Government’s HBOS intervention is the creation and establishment of a powerful precedent whereby the financial stability objective —it is now in the Bill—could trump the competition objective, or indeed any of the other objectives. I should refer for now to the competition principles, because there will not be a competition objective until the Government accept my measure, which I am sure they will eventually.

The interesting aspect of this is that, when one thinks it through carefully, one has to agree that, in extreme circumstances, one must accept that there should be such an override. There must be circumstances in which the systemic risk is so fundamental that all other objectives become secondary, but we should not forget, when we allow that to take place, that the consumer will always pay for any loss of competition as a result, and he needs to be given protection from exploitation down the line by others. In the HBOS example, exploitation can all too easily occur as a consequence of Government action—indeed, effectively by the Government—albeit, quite reasonably, during their efforts to address a systemic problem.

Let me discuss the HBOS case. HBOS was going bust and the Government were extremely worried about the implications of its failure for the financial system as a whole. The Prime Minister sidled up to Sir Victor Blank and said, “Would you please take HBOS off our hands?” I was not there but I can confidently assert that that must have been the sub-text. Secondly, he would have said, “If you do this, you will be doing a great public  service.” Eric Daniels, who gave evidence to the Treasury Committee earlier this week, effectively confirmed that, when he said that the deal was partly motivated by public interest, which I find quite astonishing. I would certainly find that astonishing if I were a Lloyds shareholder.

The third thing that the Prime Minister might have said, but probably hinted, was, “You can buy it on the cheap and, if it turns out that the true value is negative—because you have picked up so much in toxic assets that the positive value of some of the assets is outweighed by the rubbish that has now ended up on your balance sheet—don’t worry too much, Sir Victor. We have a solution. The Government will give you a waiver to the provisions of competition law, enabling you to acquire disproportionately large stakes in several markets.” The implication, of course, was that Lloyds shareholders would have an opportunity to recoup losses by benefiting from the diminished competition for some of their key products in several markets. Among those, post the merger, are building society loans and retail bank accounts. That is exactly where we are now. Indeed, the merger gives the new bank between 30 and 40 per cent. of market share in certain areas, which I have absolutely no doubt the OFT would more than raise an eyebrow about.

The implications of this deal in the long run for competition in the financial sector are extremely worrying. The Government have now used their override, somewhat like the override provided to the Treasury in the legislation creating the independent Bank of England. Once one has fired the shot, one has changed things quite a bit. In the case of the interest rate override, one would have changed things fundamentally and destroyed the Bank of England—it is a nuclear weapon. In this case, it may be just short of a nuclear weapon but it is still very powerful. Whatever the Government’s protestations to the contrary, the effectiveness of competition policy and the OFT has been, at least for a time, prejudiced by the HBOS-Lloyds competition waiver.

Worse still, and this worries me a good deal—I do not think it is unique to Labour Ministers, although it may be the ideology, if there is one these days; the motivation of Labour Ministers tends to be stronger than Conservative ones in this field—once Ministers get an appetite for intervention, they tend to do more.

Only yesterday, Lord Mandelson took advantage of a meeting with institutional investors to meddle with the Kraft-Cadbury merger. What worries me is that those incidents are no longer isolated. In the Bradford & Bingley-Santander merger, a statutory instrument was used to disapply the merger control provisions of the Enterprise Act 2002 altogether. As it turned out, that did not make much difference because the merger met the EU merger regulations threshold and was therefore examined by the European Commission.

Another example is the stipulation by United Kingdom Financial Investments Ltd and the UK Government that any assets that may be sold by Lloyds and HBOS are not permitted to generate a post-acquisition combined market share with the purchaser of more than 15 per cent. Of course, the principle is right that those companies should not have a large market share, but I thought that that was what merger control policy had been put on to the statute book to address. That does not seem to be something that should be addressed, directly or indirectly, by the Government.

This is why a final reason for giving the FSA oversight of competition at the level of its objectives, which is the effect of new clause 9, is that it could help the OFT to handle Government intervention in the field. The OFT would work more closely with the FSA on the issue, and the effect on the regulatory structure would be such that, if the Government tried to intervene, they would face not one but two quite powerful institutions.

One of the better aspects of the Government’s new competition policy was that they said that they would completely depoliticise the issue. I would find it very concerning if, as a consequence of this crisis, we found the reassertion of a form of what used to be called an industrial policy in the financial services sector by the back door.

I recognise that the Government will not agree to my new clause now—I can tell that just by looking at the Minister, who is a happy man and is smiling amiably at me as I speak—but I ask him at least to agree to think about it carefully between now and the debate on Report for this reason: I have talked politics for the last few paragraphs, and the truth is that, one way or another, the Conservatives will give greater emphasis to competition when we reform financial regulation. According to the polls, that will occur in a few months. Perhaps those polls are wrong, and it may happen in a few years, but either way, it will definitely happen, and I am confident that competition will be given greater emphasis.

If the Minister is prepared to give some further thought to the new clause now, to consult the OFT, FSA and others and to return with a proposal on Report, he will do the right thing not only for the financial sector, but for the cause of working together and forming a consensus on such an important issue.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 3:15, 14 January 2010

I could not resist taking part, given the closing paragraphs of the thoughtful speech made by my hon. Friend the Member for Chichester. He is right to say that competition should play an increasingly important role in how we deal with the financial services sector. Competition in the banking sector has reduced during the past 18 months or so. My hon. Friend referred to the acquisition of HBOS by Lloyds, but overseas banks have left the banking market that had hitherto operated in the retail or commercial sectors. The number of building societies that operate in the UK has reduced because of a series of mergers or takeovers.

The reality is that there is an increased risk that consumers will have a poorer deal if there are fewer players in the market. We want consumers to have a better outcome. I am sure that hon. Members on both sides of the Committee recognise that regulation in itself is not sufficient to deliver the best outcome for consumers. A market can be well regulated, but if only one product is provided, the chances are that consumers will get a poorer deal, as a consequence of only one player being in the market.

We need to address some challenges in considering the role played by competition in financial services. I intervened on my hon. Friend and mentioned the complexity of the products in the financial services sector. That clearly has a bearing on how transparent choice is for consumers and whether they can assess which products offer good value for money.

There are areas where regulation has enhanced the ability for competition to take place. I shall give the Committee two examples. There is huge competition between insurers in the motor insurance market, partly because consumers can chose reasonably well between different products, given that the product specification at the heart of motor insurance is common to all products. When people decide whether to take out a Direct Line or a Privilege policy, they know that either third party, fire and theft or comprehensive cover will lie at the heart of the policy that they buy, and they are therefore better able to exercise choice.

One of the challenges in introducing competition into retail financial services is to ensure that consumers can make an informed choice. Our white paper on financial regulation suggested ways to increase competition in the marketplace—for example, by analysing the data that mortgage companies or banks provide on their charges and enabling those data to be used in a common framework to assess which is the best bank account or which is the best market. So we can take steps to improve competition.

Whether a market is well regulated has an impact on competition, too. The first debate that I took part in as a Front-Bench member of our Treasury team was on equity release products. The market had moved from one that was relatively lightly regulated to a more tightly regulated one. That transition in regulation introduced new competitors to the market, so there was greater innovation in products and more choice for consumers. The cost to the consumer of those products reduced, because more household names participated in that marketplace. Those people only entered the market because they felt that their reputation was not at risk, as the market was better regulated. So we need to consider some important dynamics in looking at the role that competition can play in improving outcomes for consumers.

Photo of Andrew Love Andrew Love Labour, Edmonton

I agree with quite a lot of the thrust of the hon. Gentleman’s argument, but parts of the marketplace resist easy solutions. Look at the banking charges for small businesses: in theory, there should be competition, yet report on report shows that they get a pretty raw deal from the banks. We seem unable to deal with that.

Does the hon. Gentleman not think that in many ways, he and I are talking a similar language? I have listened to the contributions made on the new clause, and although the question of the Lloyds takeover of HBOS was raised, no one suggested that, in the circumstances, they would have opposed it. Is it not the case that UK Financial Investments and the Government have been vocal in suggesting that when the Government divest themselves of some of the banks and other organisations taken over during that period, they will ensure that competition is to the fore in the decisions that are made?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman raises two important questions. On bank charges and whether small businesses are getting a fair deal, one challenge is to do with people’s ability to switch provider. If it is difficult to switch, the product provider has the opportunity to extract higher charges. I know that the OFT is considering the challenge of how to make it easier for people to switch providers. We may change telephone providers every year, and those who supply our gas, or we might  alter our insurance every year to get a better deal, but people are very resistant to changing the people who hold their bank accounts.

If we can improve switching, we will ensure a better deal, and there will be more competition in the marketplace because that would encourage innovation. A new entrant to the banking market who thinks that people are loth to change providers will question the merit or value of entering that market. People tend to enter the market where it is relatively easy to do so, and where the barriers for entry are low, as in the case of the mortgage or credit card market. People are prepared to shop around for those things, but they are not prepared to shop around as much for bank accounts.

On the restructuring of the banking sector, it amused me to hear the hon. Gentleman say that we are all talking the same language. When we suggested last year that the Government should use their stake in RBS, Lloyds and Northern Rock to facilitate a restructuring of the banking market to increase competition, the Financial Secretary to the Treasury criticised our proposals. The only reason why the Government support the measures now is that the European Commission requires them, as a condition of state aid rules, to ensure that Lloyds and RBS divest themselves of part of their activities. Although I welcome the Government’s conversion, it has not necessarily been a willing one. Competition has an important role, and there is interaction to be had with regulation.

My hon. Friend the Member for Chichester also discussed the role that competition plays as regards systemic risk. One challenge when it comes to financial stability is that in order to encourage competition in a market, it is good to have new entrants. He mentioned the barrier erected around a heavily regulated market by the fact that any new entrant must deal with the cost of compliance, but even getting authorisation to enter the market can act as a barrier. We are rightly placing great emphasis on financial stability, and that might create a situation in which the barriers to entry are increased further; we need to think about that carefully.

The hon. Member for Edmonton discussed the credit market, which has one predominant supplier. If the barriers to entry are low, the fact that there is only one supplier does not necessarily mean that consumers will get a bad deal, because if there are additional profits to be creamed off, it is possible to enter the market. However, in the situation with the Provident, quite a lot of infrastructure will need to be recreated, so the barriers to entry in that sector are high. We need to think about them and about the interaction between financial stability and encouraging innovation and competition.

My hon. Friend the Member for Chichester was right that putting the objective in the Bill would create a tension. We have had a debate about where the financial stability objective appeared in the hierarchy. Did it have equal rank with the others, or did it have primacy over the others? We reached a point where each objective balanced against the others. If we were to make competition an objective for the FSA or a successor body, that would increase the emphasis on competition in the balance that determines how the regulator fulfils its duties. That is a factor if we believe that the objectives are important and affect how the regulator conducts its activities.

We have had a helpful debate. I am pleased that my hon. Friend tabled the new clause. It has given the Committee plenty of food for thought and has clearly  identified the importance of competition in demonstrating consumers’ right to get a good deal. We will have to consider, in the context of FSMA and any subsequent regulatory reform, how to make sure that competition is given the right standing, so that we can ensure a better deal for consumers.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 3:30, 14 January 2010

As is usually the case when he is not playing party politics, the hon. Member for Chichester made a thoughtful contribution on new clause 9 and on the idea that maintaining competition should be a statutory objective for the Financial Services Authority. I think that the arguments are finely balanced, when it comes to whether maintaining competition should be a statutory objective, or whether the FSA should have regard to it.

The Government believe strongly that competition is important for economic efficiency in general and in creating efficient and responsive financial markets. To that extent, I do not think that there is any difference between any of us. We all accept the importance of competition. In my judgment, the balance of the argument would fall slightly in favour of including competition as a statutory objective of the FSA, but that is not the Government’s current view.

I would like to explain why the Government believe that new clause 9 should not be in the Bill. Before I do that, I will comment briefly on the other points that the hon. Gentleman raised. He talked about the fact that a small number of large firms are easier to regulate than a large number of small firms. That might be the case, but it does not prevent the regulator from performing its current role in an effective way. I do not think that regulators set out to increase barriers to entry for new firms, and the hon. Gentleman will be aware of recent developments with new entrants into financial markets. Although we should always be on our guard against regulatory creep, or regulators acting too comfortably, it is the responsibility of other bodies to hold regulators to account and ensure that they perform their jobs effectively.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I will give way in a moment, but I want to pursue my line of thinking. It is not necessarily the case that a small number of large firms is likely to produce a less competitive market than a large number of small firms. That was hinted at by the hon. Member for Fareham when he suggested that fewer participants are likely to lessen people’s chances of having a good deal. It is important in competition policy to look at the dynamics of markets, and there can be very competitive markets with a small number of entrants, or uncompetitive markets with a large number of small entrants. It is up to competition authorities to address that as part of their regulatory activity. I happily give way to the hon. Gentleman on a point of fact.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Let me move on to explain why the Government are not persuaded that new clause 9 should stand part of the Bill. My personal view is that if the new clause was allowed, I am not sure that it would have a major practical effect, for some of the reasons that the Government have.

We must not forget that competition is intended to benefit the users of financial services. For the FSA, competition should not be an end in itself, but rather a means to an end. Although we must strive to get markets working better, that is because competitive markets deliver economic efficiency, which benefits society by providing consumers with better goods and better services at better prices. That is the important point. In other words, competition policy is usually an excellent complement to consumer protection regulation. However, usually is not the same as always. Consequently, if it was the case that competition might not benefit the consumer for some reason, it would be wrong to prioritise its maintenance. One example of that is when an excessive proliferation of essentially similar products actually reduces the overall efficiency of a market. Who pays for that inefficiency? Normally the consumer.

As the hon. Member for Fareham said last week when we were discussing financial education, choice can be bewildering. If the effect of a plethora of choices is that the consumer gets so confused that they make expensive decisions or abandon the idea of taking up a useful product such as an insurance policy or a savings account, that is not the outcome that we would seek. Again, that raises interesting questions out of which some behavioural economists have made careers. That is something that we need to take account of as part of our practical policy making.

That does not mean that the Government are uninterested in competition in financial services—far from it. The FSA should definitely continue to minimise any adverse effects of its actions on competition, and it should remain mindful of the general desirability of facilitating competition. Those are its duties under section 2(3) of the Financial Services and Markets Act 2000, and they should remain in place, in addition to the FSA’s main objectives. The nature of the duty to be imposed on the FSA was considered carefully when the Act was introduced, as the hon. Member for Chichester knows, and placing such duties in the “have regard to” list under section 2(3) was the correct result, in the Government’s opinion.

The Government have a further argument against the new clause, namely that it is not necessary. As members of the Committee are no doubt aware, as mentioned in the text of the new clause, the UK has two separate competition authorities: the Office of Fair Trading and the Competition Commission. The competition regime is world-class and it is independently ranked as one of the top three globally. As for financial services specifically, the OFT already has a duty to keep the FSA’s regulations and practices under review on competition grounds, and may involve the Competition Commission. That can be found under sections 159 and 160 of FSMA.

Furthermore, to ensure that the FSA is fully involved in competition issues, it and the OFT are engaged in continuing dialogue. As the hon. Gentleman noted, last month they announced plans to strengthen co-operation on competition issues through the signing of a memorandum of understanding. It has also been agreed that the FSA’s annual report will in future incorporate a section on competition in the sector, in which it will set out relevant actions that it has taken. For those reasons, the Government believe that there is no need to extend the specific objective to the FSA.

In the Government’s view, the new clause would not be of benefit, given other parts of the existing statutory framework. I am sure that the hon. Member for Chichester agrees that the aim of competition is to gain better outcomes for consumers; it is not about having competition for competition’s sake. A strong competition regime is in place, which is applicable to financial services. I hope that I have outlined in sufficient detail the Government’s view of the work that is already in progress to strengthen further competition in UK financial services, and I hope that the hon. Gentleman will withdraw the motion.

Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee), Chair, Tax Law Rewrite Bills (Joint Committee)

I am grateful to the Minister for his reply, which, to say the least, was extremely frank and interesting. I am disappointed he thinks that I play party political games. I am not generally noted as one of the worst offenders, but in response to his admonishment, I shall try harder to do better in future.

I wish to refer to three things outlined by the hon. Gentleman, the first of which was fascinating and extremely refreshing in that he distinguished between his view and that of the Government. That is healthy. I was impressed by it. It is rare, and without going into a lengthy digression, that is because the media seize on any distinction of that type immediately to conclude that there are great divisions in the Government, as a result of which we often have the absurd position when, one minute, everyone believes one thing, and the following minute they all seem to believe something quite different—rather like ears twitching on a herd of deer. That is regrettable. It has occurred in the post-war period of British politics. It is relatively new and dates from the ’60s and ’70s. It is perfectly possible to have the doctrine of Cabinet responsibility without the identity of expression of view in between times.

My second point is that I was particularly pleased that the Minister personally favours inclusion of competition as an objective of the FSA. He joins what we could fairly safely call the majority party on that issue over the past decade, and I am glad to have him on the team.

The third major point that the Minister made, which I think was also very fair, was that he did not think that new clause 9 would make a great deal of difference. I do not know whether that is true, but the fact that he has given his personal view tells us that the measure is unlikely to do damage. Indeed, he did not allege that it would, even when he was expressing the Government’s view.

My only regret is that the Minister did not pick up on the point that I made that we will have further change in this area anyway. I do not know if that change will come in a few months or in a few years, but it will definitely come. The Conservatives have worked very hard on this Bill and on the Act over the years. A great deal of work has been done by my party colleagues in the past decade to try to be as consensual as possible in this field. Indeed, that point was made about the original Bill, on which we laboured in this Committee Room or just next door for nearly two years.

I very much hope that as the Minister thinks this matter through, he will perhaps send back a message to say that we need to start doing some work on it internally, even if I cannot persuade him to come back on Report, because sooner or later this change will happen. In the meantime, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I do not wish to move new clauses 10 to 16, Mr. Gale.


That certain written evidence already reported to the House be appended to the proceedings of the Committee.—(Ian Pearson.)

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

On a point of order, Mr. Gale. I want to take this opportunity to thank you, Mr. Gale, and Mr. Benton for the very efficient way that you have chaired these proceedings, which has ensured that we have got this Bill through in the time allocated for it.

I also want to thank the usual channels, in this case my hon. Friend the Member for Leeds, East and the hon. Member for Rochford and Southend, East for their co-operation.

I thank the clerks, who have worked extremely hard on the Bill, and the Hansard reporters, who I hope have made some good sense of my mangled English during the course of these events. I also thank the Doorkeepers and the police for the work that they have done.

I also want to thank very much indeed my team, who have provided a level of scrutiny of the Bill and who have supported it. I believe that the Bill is a significant addition to legislation in an important sector and is to be greatly welcomed.

I thank the Opposition Front-Bench spokesmen for their contributions. I must say that it is a slight shame that we have not had the opportunity to hear the words of wisdom of the hon. Member for Twickenham, but the hon. Member for South-East Cornwall was a very capable deputy and played a full part in these proceedings, as did the hon. Member for Fareham, who was characteristically thoughtful and extremely thorough. I also felt that he was extremely even-handed in the way that he put representations to me from both industry and consumer groups, while appearing, on occasion, to agree with both sides.

Lastly, I thank my Bill team, who have been terrific throughout our deliberations. Without them, I would not have sounded nearly as sensible as hopefully I have done on occasions during the passage of the Bill. They have put in a lot of hours to ensure that we have got the Bill right.

I have listened carefully to all the points made during the debate. I have not felt able to support Opposition amendments, but I have in certain areas indicated that I will consider further the points that were made. If appropriate, we will come back to them on Report. With that, Mr. Gale, thank you again for your efficient chairing of proceedings.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 3:45, 14 January 2010

Further to that point of order, Mr. Gale. I would like to echo the Minister’s thanks to you and your co-chairman. On the Opposition Benches, we owe a debt of gratitude to the Clerks. We are not supported by a team of parliamentary draughtsman, so we accept their help in tweaking amendments to ensure that we get the wording right. I am very grateful for their patience in dealing with such matters.

I thank the Hansard reporters, the Doorkeepers and the police, as well as all those who contributed to the oral and written evidence sessions and who made representations to us all.

I am rather flattered by what the Minister said. I agreed with both sides on certain issues, so I am clearly developing the ability to speak with confidence about whatever I have to say. Nothing I say now sounds in any way probing, so that is good. That might be a skill I will need in future.

I am grateful to the members of the Committee who participated in the oral sessions and the scrutiny stage. One of the strengths of the Committee, as in other Committees on which the Minister and I have served, has been the experience of Back Benchers that has been brought to bear. My hon. Friend the Member for Chichester has the experience of debating not only FSMA but on the Treasury Committee. The hon. Members for Edmonton, for South Derbyshire and for South-East Cornwall have contributed their expertise. They are not the only people on the Committee who have helped to illuminate our proceedings.

We have had consensus and sharp disagreements, but throughout the process the Committee has been a good-natured one and certainly one that I have enjoyed participating in.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

Further to that point of order, Mr. Gale. I add my thanks to all those who have helped in this interesting debate. The Bill will be part of a suite of legislation that will be ongoing well beyond the end of this Parliament and on into the next. Those who will be charged with that responsibility will have to tackle some of the issues that we have tried to tackle, because they will come back. The fundamental issues are more difficult to tackle with the state of play at the moment in financial services and in the economy generally, but some important issues have been teased out on amendments.

My personal sadness is that this is my last Bill. As many hon. Members know, I shall be standing down after about 13 years. It has been an enjoyable last Bill. To all those who are going to carry on in the job, I wish them jolly good luck.

Photo of Roger Gale Roger Gale Conservative, North Thanet

I have listened intently to what the three hon. Gentlemen have said, and I am happy to say that none of that is in any way a point of order for the Chair. However, as we are out of order, I add my thanks and those of Mr. Benton to the Officers of the House, the Clerks, without whom we simply could not do our job. I am grateful to the Committee for its tolerance of the temperature in the various rooms that we have been in, and also for the manner in which it has battled its way through inclement conditions to complete the Bill. That, by the way, is a comment on the weather and not the contents of the Bill.

Bill, as amended, to be reported.

Committee rose.