I will go first. I am the executive director of Positive Money, a non-profit organisation that campaigns and researches on reform of the money and banking system to enable a fair, democratic and sustainable economy.
Q Thank you, Jesse and Fran, for your willingness to come before the Committee. One of the key elements in the legislation is the need to give our regulators significant delegated powers to implement and enact some of the technical standards. From your perspective, as civil society organisations influencing policy in financial services, how do you engage with the regulators and how do you find that process?
Shall I kick off? This is definitely one of the key issues in the Bill that I wanted to raise. Although I understand that the Bill is about regulation and tidying up a few things, it does set the framework and direction for future financial regulation. It is important to say at the outset that we are only 11 years on from a global financial crash that resulted from deep regulatory failures. Neither my organisation nor Jesse’s existed 10 years ago—they were formed since the crash. Without a number of amendments to the Bill, it could pave the way for a repeat of that failure.
To put it in context, I remind you that, according to the Bank of England’s chief economist, Andy Haldane, the banking cash cost Britain about £7.4 trillion and it would take the financial services sector’s tax contribution about 100 years to make up for that. It is a really important Bill that sets the direction, but accountability and transparency are severely lacking in its current form. The civil society sector is tiny, relative to the industry lobby. Although we have engaged in FCA and PRA consultations, the fact that we are onshoring so much legislation right now means that we need to think about the balance of input from the industry and civil society. It is worth noting that the EU, which obviously to date has been where the scrutiny for much of this legislation has been, funded civil society consumer, environmental and social groups in order to provide a balance to the industry lobby, because it recognised that this area is severely complex and critical.
The substantial transfer of power to the financial regulators—the Treasury, the FCA and the PRA—is concerning if there are not increases in parliamentary scrutiny and more detail about the accountability framework. I noted this morning that a number of amendments have been put forward, and I think a lot of them enhance accountability and require parliamentary scrutiny and reporting. I would really welcome that. I could list them—I have some of the numbers. An MP put forward a suggestion for a new specialist financial services Joint Committee between the Commons and the Lords, and that would be welcome, especially if it engaged with civil society.
From where we are starting, in its original form the Bill really is quite concerning in relation to accountability and transparency, but we would welcome all the amendments being put forward—and more—to improve those aspects.
Q Can I come back on that? Obviously, on
The Financial Services and Markets Act 2000, introduced under the previous Labour Government, was about setting an approach for how the regulators worked, looking at an outcome-based approach with the observation of technical standards. I note that you refer to the proposal about Parliament’s role. Are you really saying that you do not support that fundamental architecture? Given the complexity of the regulations and technical standards, do you think it is realistic for Parliament, in terms of capacity and expertise, to offer the sort of scrutiny that you think is lacking?
Fundamentally, we want robust frameworks that allow for input and do not just allow legislation, such as the capital regulation requirements, to be changed without scrutiny, because they have really significant consequences for the whole UK economy. That is why I started by laying out how critical the direction of financial services is.
It is worth saying that we are not out of the repercussions of 10 years ago, so we do not want in any way to go back to the days of regulation being done behind closed doors. I understand that there is a capacity issue, but is about having those opportunities for both Parliament and the wider public—civil society—to feed in.
It is also worth thinking about the regulators themselves. For example, one of the things that the new chief executive of the FCA has said is that they will also be liable for legal attacks on what they are having to implement, so putting all the onus on them is an issue. At the same time, we know that there has been an issue with the revolving door between our regulatory bodies—the Treasury, the FCA, the PRA and the Bank of England—and the industry.
There is a grave concern about this transfer of power. If capacity is an issue, Parliament surely wants to be looking at how to resource things better, in terms of more Clerks or staff, plus thinking about how the EU funded civil society, rather than saying, “Actually, no, it’s fine. We will just have reduced transparency and accountability.”
Q I just want to make the point that that is not what we are saying. There is a review looking at this holistically—for, I think, 12 weeks—to provide an opportunity to absorb those very relevant points, but I would be very happy now to hand over to Jesse to respond to the same questions.
Thank you. I think they are extremely important questions, and that is one reason why this Bill is so important as part of the other important consultations and discussions that you have mentioned—because we are now setting, if you like, the precedent for how we might deal with financial sector regulation in the new era, where the focus will be in London and not in Brussels. Actually, I worked for seven years in Brussels on related issues, so I have some experience from there to share.
I think I agree with the points that Fran has made about the fundamental importance of trying to find ways to support broader civil society engagement in these types of discussion. Perhaps it links to another important point on the Bill, which is that part of the issue will always be ensuring that the purpose of the regulations and the regulators includes social and environmental purpose, so that it is clear that that is an extremely relevant angle from which to discuss these things. One thing that definitely came out of my experience in Brussels was that the role of Parliament is very important, or can be very important, not just because it is important in itself, but because it does open a window for broader input and discussion.
I will explain one particular amendment or change we would welcome. As I understand it, the current Bill allows changes to capital requirements and other regulations under the affirmative procedure. That is obviously more welcome than the negative procedure, but it does not actually specify a role for specialised Committees, so finding a way in which specialised Committees in the House of Common or Lords, or both, could have input would be both a useful step and an entry point for a broader discussion for groups likes ours to help to support the new framework.
Could I say one other thing on a kind of related point? We recognise that it is important that different institutions have different regulatory frameworks and that this is not just about making every single type of institution abide by extremely stringent regulations. That sort of principle is involved in the Bill, and we would welcome that being extended to, for example, the nascent mutual banking movement. We know that the co-operative banking movement is struggling to get off the ground, because the regulations are not tailored to its particular circumstance. I would be willing to talk more about that. It is something that could perhaps also accompany this Bill as a commitment and that Government might like to think about.
I am very supportive of your observations there, and I look forward to further engagement on that. I think that, in fairness to other Members, I should now pull back and hand over to Pat.
Q Thanks to both of you. We had a bit of a discussion earlier about a suggested reform for preventing economic crime. We were saying that when we get into it, we are probably going to be told to wait for the Law Commission. I have a feeling that, on accountability, we are going to be told to wait for the future regulatory framework review to conclude, but I do want to ask you about this area and about the duties on regulators, and I would like to start with the latter.
The Bill, in schedules 2 and 3, sets out new accountability frameworks for the regulators. They are to abide by relevant international standards and to have regard to the relative standing of the UK as a place for internationally active investment firms to be based, or to other matters specified by the Treasury. I would like to ask whether you think it is appropriate for broader goals to be considered in that regulatory framework, and I am thinking particularly of environmental, social and governance goals. The UK wants to be a leader in that area. The Chancellor of the Exchequer set out an ambitious environmental agenda for our financial services industries in his statement about 10 days ago. Do you think that the Bill is an opportunity to put regulatory weight behind the ESG agenda?
That is a really great question. It is definitely something that stood out for me when I first read through the Bill. The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash in 2008.
As you mentioned, there is clearly cross-party agreement, and we have had announcements from the Government this week and last week on wanting to be a leader in green finance, especially ahead of COP26. There is also pretty much cross-party agreement on issues such as the banking sector severely under-serving small and medium-sized businesses. In his speech yesterday, Andy Haldane, the chief economist at the Bank of England, mentioned that the funding gap is £20 billion. We know there is cross-party agreement on wanting more of our productive and manufacturing sectors to grow, and we need to level up. Some Conservative MPs, such as Kevin Hollinrake and Danny Kruger, have done reports on that and on the need for a different banking system. We have to recognise that that will all require quite a significant shift in the direction of financial regulation, yet there is not anything in the Bill that suggests that such a shift in direction is something that the Treasury is interested in at the moment.
We would certainly support the hardwiring of ESG considerations into the regulation. I looked this morning at the proposed amendments, and we would be very supportive of amendments 20 and 24, which have regard to climate and net zero in terms of investment firms and CRR—that is on climate and environmental. There are some other amendments on social practice and corporate governance that are really important, and there are potentially bigger amendments that we could be thinking about, which would embed sustainability in the regulatory framework of our regulators, such as the FCA and the PRA. That would involve further amending the Financial Services and Markets Act, which I know is being amended already in the Bill, but we could add an environmental sustainability objective, for example, to the FCA’s or PRA’s objectives.
It is worth noting that the UK’s financial institutions are among the worst culprits in Europe for fossil fuel financing. HSBC and Barclays alone have funnelled about £158 billion into fossil fuels since the signing of the Paris agreement. If the UK really wants to be a leader in green finance in a serious way, we need our regulators to be on board with that mission. Obviously, that starts with this piece of legislation and others. We would fully support the amendments to the Bill that have been put forward already, and we would potentially suggest further ones.
I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators. I do not think it would take a huge change, or huge amendments to the Bill, to set that precedent and really kick-start what I agree is a cross-party consensus that we need to deal with the climate crisis and the rising problems —inequalities caused by covid and so on—and that the financial system is central to that. How it is regulated determines a lot about how it will react to those points.
I can give some examples. Of course, it would be helpful if the Bill required the FCA to refer to the Climate Change Act when preparing secondary legislation. If you wanted to be more ambitious, it would obviously be helpful if capital requirements for investment firms introduced weightings on environmental, social and governance issues—for example, by penalising assets that have climate risks.
I know the Bill covers legislation on PRIIPs—packaged retail and insurance-based investment products—which is a huge, €10 trillion market in the EU. One specific example we have suggested is that, if we could improve the key information document that investors receive when they are looking at PRIIPs to include disclosure on environmental, social and governance issues, and ask the FCA to ensure that that happens, that would be an important signal.
I think that there are real opportunities here to change the nature of the discussion and set the UK as a leader in this area. We know that the direction of travel is towards much greater ESG integration across the financial sector. Investors are pushing for it. We do a lot of work with the big four banks in the UK, and many of them are pushing a purpose-driven agenda. It is the way that we are going, and I think about this as a real signal that the UK wants to be the leader in this field and takes it very seriously.
Q Thank you, both. The second thing that I want to ask you about is accountability. It is true that proper scrutiny of all this requires resources, but that is a question not just for Parliament but for the regulators, which are being given big additional tasks. You have indicated that you are in favour of a more active ongoing role for Parliament, and I would like to give you the chance to tell us a bit more about that. Obviously, the regulators have to have day-to-day freedom to apply regulation at the level of the individual firm, but you are absolutely right, Fran, that in the financial crisis capital was at the heart of this and how we regard that level of resilience for firms.
If we are giving the regulators these big new responsibilities, both at the prudential and the conduct level, how would a more active role for Parliament work? We have one Select Committee that is active in this area, which already has a really broad agenda of work—the Treasury Committee. We have members of it on this Bill Committee, and they all do a great job, but things are pretty thinly stretched. Could you tell us more about how you think Parliament could have a more active role after the onshoring of all this regulatory responsibility? Again, I will start with you, Fran.
I think we agree that this is the critical part of the Bill. That is why I mentioned the suggestion that has been put forward of a new potential Joint Committee between the Commons and the Lords. That would be absolutely right. The direction of the financial services sector is fundamental to the direction of the UK. We are really at a crossroads. We have been a large financial sector in the world, and generally the Treasury would say that it has prioritised the international competitiveness of our financial sector in the global market. It has held that in greater reverence than domestic competition that serves the needs of the people—your constituents, your businesses and the productive UK economy.
I think it is in Parliament’s interests to think about how we set up processes for greater scrutiny and about engaging civil society actors in that as well. I would have thought that quite a few people sitting within those regulatory bodies would welcome that. They are under immense stress from the last 10 years of post-crash change. As I mentioned, they are subject to legal challenge from the industry.
Although, ideally, there would be greater scrutiny in Parliament, and I think that a Joint Committee would be good, some of the amendments that have been tabled on specifics, such as an annual review of capital regulation requirements, are really great additions—I hope the amendment on that will go through.
I also think that we need to ensure that the regulators are given the right direction for financial services, which is why I would also welcome the amendment that was put to us about this Government’s strategy for financial services. As I said, we are at a kind of crossroads, and understanding what direction the Government want to take it in is critical for the regulators. I support a lot of the amendments that have been put forward. Setting up a new Select Committee or some kind of Joint Committee is also a strong proposal.
I think it is extremely important that there should be some Committee, whether it is a financial services Committee or some other way of doing it, that gives Parliament that role. That could be operationalised in a number of different ways, but it should be done in a way that makes sure that consideration is given to the way the Bill and, I presume, future legislation delegate a lot of power to the Treasury and the regulators to change, through secondary legislation, regulations that were previously agreed jointly between the European Parliament and the European Council. Some kind of check that that has been done in the correct way, and that it has been done with regard to the fundamental purposes of that legislation, is the role that the Committee would fulfil.
Obviously it would need more resources, which is a key lesson from the European experience. You are right to say that it is not an easy thing to do, nor is it something that can be done in addition to what is already being done by the Treasury Committee, for example. Resources is a key point.
The second key point, of course, is that such a Committee, and potentially the Bill and some of the amendments that have been referenced, can allow the regulators to report and explain more clearly why they are making certain changes, so that is a useful transparency and information point. The third point is that, without such parliamentary oversight, it becomes extremely difficult for civil society organisations such as ours, which are trying to ensure that the voice of the environment and social issues are raised in financial sector regulation, to be heard as effectively as other voices that are trying to influence that regulation. So it helps to create a better balance of lobbying, if you like, or of advocacy in this area.
Q I would like to thank Finance Innovation Lab for the briefing, which was really quite interesting and a different approach. Pat has hoovered up some of the questions that I was going to ask, but is there anything else in particular that you would like to see in the Bill?
One of the main issues that we would have loved to have seen in the Bill—I recognise that it would be outside the scope to introduce it now—is a proportionate regulatory regime for mutual banks. One thing that is important, or one problem that is very evident in the UK financial sector, is its lack of diversity of institutions. Across Europe, co-operative banks have an average of more than 25% of assets, and in the UK they were not even legal until 2014. The mutual banking movement is now trying to establish that vital part of the system that would help to improve services for customers, improve competitiveness and bring important countercyclical and social and environmental benefits. That would have been nice, given that the Bill recognises that there is a need for a different regime for investment firms from banks, for example. There is a huge unmet need for a more proportionate regime for those institutions. That would be my wish list of what might have been in the Bill. Perhaps as part of the Bill discussions, we might get a commitment to consult on such a proportionate regime.
Of course, the other point to make here—to repeat some of the points we have made about social and environmental purpose and accountability—is that the main issues with the Bill are the things that are missing that could make it much more ambitious and set a much better precedent for financial sector regulation going forward.
Finally, one issue that is worrying to us is the danger of a return to framing the purpose of financial regulation as being about the competitiveness of the UK financial sector globally. That appears in a few places in the Government’s explanatory notes to the Bill. The key point is to make a distinction between competition, which is good, and competitiveness, which can be dangerous when applied as a principle for regulation. Framing regulation within that competitiveness framework is widely recognised as one of the main contributors to the global financial crisis. It was easy to make the case for relaxing regulation to make any particular financial sector more competitive compared with others, when actually I think what we want to establish, through the Bill and other actions, is that the UK financial sector will seek to set high standards and to be the leader in that, not to introduce a competitiveness framing that raises the risk of standards being lowered.
I can build on that. I agree with a lot of what Jesse has said. For us, the overarching areas are accountability and seeing more that it in the Bill, the environmental, social and governance aspects, and the purpose. On that last point, while we understand the Bill is onshoring and tidying up, as I have said before, it sets the direction, and that strategy for the financial services sector has not been laid out by the Government. I think that is key because, as Jesse has mentioned, it is concerning to see competition and competitiveness in there—in the run-up to the crash, that was shorthand for deregulation—at the same time as handing a lot of power to regulators. Again, it is worth noting that the FCA chief executive said himself that they would prefer high standards to the idea of competition, so there is support for that. Making the direction clear is critical.
On a few specifics that have been left out, over the last few years Positive Money has been working on things such as access to cash and the need to protect people’s right of payment in different ways—I noted that there were a few questions on that—and thinking about financial inclusion. Thinking more about the financial services’ role in the wider UK economy is absolutely critical at this time, and there is not too much in the Bill in terms of the direction of that.
I welcome the Help-to-Save scheme, but again, I point to the wider issue—it is the focus of what Positive Money does—of how the financial services sector contributed to the global crash, which has undermined a lot of our economy in terms of people being able to meet living standards, pay bills and so on. Critically, we have to understand that where the money goes from financial services really determines that shape of the UK economy. If most of the money goes into property and financial markets, which it does, and we have four big banks occupying pretty much the whole market in the UK, as Jesse mentioned, we have an economy that has an oversized finance sector and property bubbles, and we have less money going into creating jobs, supporting small and medium-sized businesses and getting into people’s wages. We have a crisis of living standards in this country, as well as a household debt crisis. I am not a debt specialist, but I welcome some of the changes put forward for breathing space and debt repayments.
Again, we need not only to look at fixing some of the symptoms, but to think about the cause. I sound a bit like a broken record, but this is why, unless we get a grip on the direction of the financial services sector that we want—whether we want financial services to serve the UK domestic economy and not just international financial markets—I do not see us really stemming the problems with problem debt, limited savings and incredibly low savings across low-income households in the short, medium and long term.
Q Lastly, Jesse, I think the phrase you coined, accountability deficit, is quite useful. Can I ask a wee bit more about the risks that moving everything over to the regulators might have?
Before I turn to the risks, I want to recognise that it is not the case that more regulation is better or that regulators should not have leeway to design proportionate regimes. That is absolutely not the case, and we need to recognise that. However, I think there are risks involved in turning over quite so much authority to regulators as the Bill proposes. As we mentioned, it will allow them to make changes to important regulations with limited parliamentary oversight. Secondary legislation will become one of the main ways in which regulations are changed.
The risks come from different angles. The obvious risk—we have seen this in the past in the run-up to the global financial crisis—is that there is a potential problem of regulatory capture, where the regulators become very close to the people they are regulating, who have regular discussions and meetings with them. The more those decisions take place behind closed doors, the greater that risk becomes.
From our perspective, another big risk is that you miss out on the opportunities to have a broader section of voices contribute to framing regulatory changes, from the kind of organisations that Fran mentioned, which represent the people who are the most badly affected by problems in the financial sector—those with problem debt or who are highly financially vulnerable—to those who think about the environmental impacts of the different regulations. The other risk is that we will not be able to reflect some of the most important impacts that changes in regulation will have.
I will make one final point. It is extremely important for Members to think about how they can actively encourage participation and engagement in those discussions by more of the groups that represent those affected by the financial system. This is in no way a criticism of the Treasury, which I know has a lot on its plate now, but there was an important consultation we noted over the summer that had a one-month consultation window during August, which basically made it impossible for groups that are not directly involved in that particular issue to think about the implications and whether they should contribute. Having requirements to consult in a certain way that allows more groups to participate would be useful.
I found your comments really insightful. I have several questions, but first I want to go back to your comment about how the Bill does not mention any environmental priorities. You have come with several recommendations, and you said that you have seen the amendments, particularly amendments 20 and 24, which you support.Q
I want to clarify something you mentioned, which is that there should be an element of penalising large organisations for not carrying out environmental risk assessments. As we know, there are large organisations and companies such as Barclays that do that. I wanted to hear from you about how those penalties would be carried out. Are they financial ones? The concern that I have is that big companies would be able to afford to pay financial penalties, so is that really a great incentive or way of holding them to account?
This idea is really in the capital requirements regulation, the idea being that financial institutions and banks lending towards high-carbon sectors would have to hold much more capital against that loan. I agree with the concern that they would maybe go ahead and do it anyway, but I think this is an important mechanism for pricing in climate risk, which has taken off in the past couple of years. There is obviously a recognition from the Financial Policy Committee of the Bank of England that climate risk is a huge risk to financial stability—both transition risk and physical risk—so we need to think about that.
Implementing a penalising factor requiring them to hold higher capital should have an important effect. We have seen a similar thing already done in the housing system, which has not completely solved the problem because it is systemic, but it is an important step forward in regulation and really signals to the market that the regulators do want to keep control of the situation. It is not going to solve everything—it is not going to completely stop lending into the fossil fuel industry—but it is quite an important step forward.
The key here is that there should also be a mechanism for scrutinising the CRR that we are onshoring. At the moment, it seems to say, “We are not going to say what we are going to do. We are going to let the financial regulators decide what it is,” which is very dangerous. As Pat McFadden pointed out, it was capital and the lack of banks needing to hold it that resulted in the crash, and it will be the lack of banks needing to hold capital against fossil fuel lending that will keep that carbon bubble, if you like, being pumped up. I am keen to continue the conversation about wider regulation and other things that need to be done alongside that in order to ensure a transition out of fossil fuels, and towards a green economy.
Yes. I think it is another extremely important question, and it is an extremely important way to think about the impact of regulation, as being about what kind of incentives it places on different actors to behave differently.
With regard to climate, there are three key points. One is about disclosure: that is why, for example, we made the recommendation on the PRIIPs point that the key information document should have better disclosure on environmental and social governance issues. That creates an incentive between the sellers of those products and the investors buying them, and we know there is strong demand in the investment industry to know much more about those issues and try to redirect their investment towards greener ends. That is important. Disclosure is obviously also important in terms of civil society and the public understanding what different institutions are doing, and also the Government.
The second point on incentives is the point that Fran has made, which I would fully support. Finding ways to disincentivise or penalise fossil fuel investments in particular is extremely important. The scientific research shows us that if we exploit only those oil and gas reserves that are already being exploited, we will still go above the dangerous 1.5° threshold, without even taking coal into account. There really is not any room for further investment in fossil fuels, so it would be an important signal to think about how we fundamentally disincentivise that by introducing penalties for that within the capital requirements of organisations.
The third point is that this is a newish area for regulators. Although we have been thinking about it for a long time and many regulators have been discussing it, it is not like all the answers are known. We had a report a couple of years ago called “The Regulatory Compass”, which explored what it would look like if regulators put a social and environmental purpose at the heart of what they do. There is a lot to do, and a lot of thinking to do there. The first step is, through Bills such as this, giving regulators the responsibility to think about that. I think that is extremely important.
Those are the three main things. The fourth incentive point is that regulation does not solve everything, as Fran said. It is important not to try to solve all problems through this lens, but to think about all the other things that we should be doing—investing in the green future and so on—if we are to solve the climate crisis.
Q The Bill mentions a statutory debt repayment plan; I want to get your thoughts on that. Are there elements that you are concerned about? Do you think it goes far enough, and if not, can you make some recommendations? Can I go with Jesse first?
Similarly, a point that StepChange brought up that it is critical to keep in mind when looking at this kind of regulation is how we look at debtors and the stress and strain that they are under. We need to ensure that their needs are prioritised above those of creditors.
Earlier I made a macroeconomic point about financial services: unless we get our financial services sector better aligned with the needs of the people, small businesses and different parts of the economy in this country, household debt will keep rising. Obviously, we also need good direction from the Government’s fiscal spending plan. The direction of financial services and the direction of Government spending are critical in tackling household debt. If we do not look at some of those underlying systemic causes, we will keep kicking the can down the road, in terms of household debt being a problem. Although changes such as breathing space are welcome, they do not tackle the underlying causes and the need to get the number of people in problem debt down.
Q I want to follow up on a couple of things. First and foremost, Jesse, you were talking about the co-operative banking sector, what we could do, and what would be within the scope of the Bill, given that co-operative and mutual banking would be covered by the Prudential Regulation Authority. Obviously, there are a number of requirements on co-operative banking that we could consider superfluous now that we have this legislation. I am thinking in particular about section 67 of the Co-operative and Community Benefit Societies Act 2014, which has some unnecessary constraints, given the capital structure it requires. Do you agree that it would be helpful in creating a level playing field, and ensuring that co-op banks and mutuals could compete, to recognise that as the Bill provides prudential regulation that covers those banks, those earlier provisions are superfluous?
Yes, I think that is very sensible. The main point I would make is that those institutions are very different from other types of financial institution, and need a proportionate regulatory regime. The point that you raised is important. They frequently raise the idea of establishing a network of 18 regional banks on the model of the German Sparkasse system. For that to work, they would need to centralise IT and other services so they do not have to replicate those across the different institutions. As they have, embedded in the network idea, an agreement that they will not compete with each other, they can fall foul of competition regulations, so those would need to be considered.
Those are some of many examples that show you need a different regime for these types of institutions. On following a model like the Sparkasse system, in Germany those regional institutions are jointly responsible for each other, so that creates a very powerful incentive for them to be prudent and responsible lenders. If that internal incentive is already there, you should consider which other regulations are not so necessary for those institutions because, by their nature, they are highly prudent lenders.
Q I take your point that being concerned only with competitiveness is a very narrow view of what is good for the consumer. That piece of regulation does not prevent co-op banks from holding a banking licence, but it could be seen as preventing the competitiveness of co-op banks. If the Government are interested in co-operative banks and supporting their ability to compete, it would be a good thing to remove.
You and Fran talked powerfully about trying to ensure that this Bill has at its heart a positive approach to consumer regulation. Perhaps one of the things missing from it is consideration of its inevitable impact on consumers. Do you have a view about the benefits of reviewing how the Financial Conduct Authority has acted for consumers, and are there are areas where you think it could have gone further and been more proactive? The Bill gives the FCA new regulatory powers. I have an interest in high-cost credit. If we wanted the FCA to take a more proactive view in using these new regulatory powers for consumers, where would you want it to act?
That is a great question. To build on what Jesse said about mutuals and your wider point about consumer regulation, the issue with our financial services regulation is that all regulation tends to favour the status quo—the incumbents. That is where Parliament’s voice is so crucial, as is having more of a civil society voice than we had pre-crash. It might not be obvious how the FCA regulates a mutual bank. Without direction from Parliament that the regulator’s purpose is to look at diversifying the UK banking or financial services sector to include different ownership models, the FCA is not really in a position to understand fully or quickly, or move fast on how it can support the emergence of new banks.
On banks and consumers, since the crash, we have seen all these challenger banks coming in, but they are operating very much the same model of a shareholder bank, with short-term profits, and without any kind of wider thought for environmental or social mission-driven aims, or regional considerations. We have not really diversified the sector, and it will be very challenging for us to do so unless the regulators think differently. I think that Jesse and I agree that one of their goals should be to diversify the sector’s ownership models, in terms of mission, geographic location and so on. For consumers, and especially someone setting up a new local co-op or small business, that would be a lot better, particularly as we emerge from the pandemic wanting to build back better.
I definitely support a lot of your work on high-cost credit, but although there were some wins on payday loans and in other areas, that issue tended to be transferred to other areas, such as credit cards; some good proposals were put forward on how to regulate those. Obviously, we hope to see the FCA moving fast on trying to ensure that regulation is put forward as quickly as possible where there is a clear issue with extremely high interest rates on high-cost credit.
I repeat that we need to bring this back to the systemic problem of such a large sector of society being on low pay with high living costs. We need to think about the underlying macroeconomic issues, which are very relevant to the direction of financial services. If we are serious about taking things in a more positive direction as we emerge from the pandemic and Brexit, we need more voices for consumer rights in financial services, and for environmental and social considerations. That will be critical if we are to see a more positive direction from financial services, in terms of serving consumer needs.
Q Jesse, you may wish to answer this. Fran talked powerfully about mission. Our regulatory structure talks about consumer protection. In previous evidence sessions, we have talked about, and indeed the Bill contains provisions for, debt respite, which is very much about protecting consumers when things go wrong. Is there a case for being more proactive about the consumer experience, and perhaps charging our regulators with being more proactive on consumer detriment to try to prevent some of those problems? For example, we could look at what we could learn from capping high-cost credit, and extend that across the whole credit industry—or to sectors where there is no regulation, but we can see that consumer detriment is likely to occur from the model. We could move to a more proactive approach from the regulator, with horizon scanning for what might happen to consumers.
Absolutely; I agree. On consumers, to bring this back to high-cost credit—this links to the point about the purpose of regulation—regulators should always have at the front of their mind the impact on the most vulnerable people in society, and those who are in many ways excluded by the financial system. This is not just about consumers as a whole, although they are important; it should be about those consumers who will lose most if their needs are not taken into account.
One example that we have been discussing are the new regulations on open banking and open finance, which can lead to further exclusion of marginalised people, who might get their income, withdraw it as cash, and operate in the cash economy, or who often—this has been raised—get income from a lot of different sources, and in such small amounts that it is not recognised as income by the open banking system, as it is set up. Those are just small examples, but if the regulator is not thinking, “What is the impact on these people?”, they get missed. Unfortunately, in that example, it feels a bit like that discussion has been, “Well, if it works for 95% of consumers, then it is good.” If it does not work for 5%, that is probably the biggest impact that we should care about.