Bank of England and Financial Services Bill [HL] — House of Lords, 2015-11-11
Topic: Domestic Commerce
Michael Morris (Conservative, Centre-right): My Lords, I thank my noble friend for taking seriously the issue of diversity as it affects the mutual movement. I also thank him for the good working session that we had last week when I was able to highlight in a little more depth the problems that have arisen for the mutual movement and how, I hope, the proposed new clause seeks to provide the answers. I shall not repeat what I said on Second Reading but merely highlight the depth of the problem. I remind your Lordships that we are talking about the mutual movement—in other words, building societies, mutual insurers, friendly societies and credit unions I acknowledge that the present Government have made a welcome and broad commitment to diversity, which is greatly welcomed across the nation. This is not a party-political issue. That is self-evident from the fact that the Official Opposition have generously attached their name to my amendment, as have the Liberal Democrats. Both parties have a rich history in mutuality The issue, basically, is whether it is sufficient for the Prudential Regulation Authority to make a commitment in its annual remit letter. I do not deny that that is clearly helpful but enshrining it in legislation makes it totally emphatic to the Bank of England, including the PRA and the FCA, to consider diversity of provider. As well as helping competition, if executed, that would deliver a lasting commitment to the benefit of both the consumer and the wider economy I suspect the question that my noble friend is wrestling with is: is it really necessary? I would say yes because life is full of good intentions. However, in my 40-plus years as a representative of the people—25 years in your Lordships’ House—I like to see something in the Bill and not be dependent on good intentions. The reality is that the mutual financial institutions keep being forgotten about and left out. Frankly, that would not happen in Canada, Holland and certain other European countries where the mutual movement is that much stronger I gave two examples on Second Reading which helped to highlight the issue. I have now got three different examples. They are all short but at least they will re-emphasise the extent of the problem. Overall, there is still a problem in the mutual movement. The Building Societies Association commissioned a report on whether or not the movement was growing. Sectors of it are growing but other sectors are not. The report noted that one of the contributory factors for the areas that are not growing is the tendency for regulation to push for what I call uniformity and called at the time for a statutory corrective Both regulators can point out—I readily acknowledge this—that they have on occasions been proportionate and differentiated approaches in terms of need. However, there are also instances, which I will highlight in a minute, where this is not the case. It is important for regulators to get things right first time every time to support diversity. In the past, a one-size-fits-all approach to regulation, often designed for large companies with a plc ownership model, has given rise to problems for both smaller and customer-owned financial institutions. The impact can be magnified for organisations which belong to both categories, and that is not an issue we have discussed before. These issues do not occur just in the UK; they arise when one is dealing with the EU. I submit that adopting this proposed new clause, requiring the PRA and FCA to consider the size and ownership model during policy formulation, would be a first step towards stopping the channelling towards uniformity and would help to prevent some of the problems encountered by financial mutuals in recent years I shall give three short examples. First, in 2015 during the summer that has just gone, the PRA implemented the bank recovery and resolution directive, as it was charged to do. In the directive it is permitted to reduce the reporting requirements and frequency for smaller institutions. In practice, this would have allowed smaller institutions not to submit annual updates, but instead to do so every other year, saving significant resources. But the PRA decided not to allow this, in spite of the fact that it was spelled out in plain words in the directive. I do not think that that was a sensible decision on its part or a sensible analysis of that sector of the mutual movement Secondly, let us look at the credit unions. Again, in June this year the PRA proposed to reform the prudential regime for credit unions, and once more it is absolutely right that it should do that. The PRA proposed a substantial increase, however, in the capital requirements for large credit unions, taking them to a leverage ratio of 10%. By contrast, the leverage ratios expected to be applicable to banks range from 3% to 5%, depending on their systemic impact. Frankly, I find it difficult to see the justification for a large, established credit union to hold more than twice as much capital in relation to its assets as a bank. I hope that this issue will be amended so that the big credit unions can be brought in line with the banks. But had the PRA paid attention to the size diversity across the board from the start, I do not think that we would be in this situation today Lastly, I turn to mortgages, which are an absolutely key dimension of our society at the moment and something on which the whole of Parliament is regularly focused. In 2014, there was speculation about interest rate rises, as a result sparking a significant increase in consumers’ interest in taking out fixed-rate mortgages, which is sensible. Following the mortgage market review regulatory changes overseen by the FCA, the authority required lenders to provide full mortgage advice and test against affordability criteria. This involves stress testing against rising interest rates, with many consumers choosing a fixed-rate mortgage product The building societies themselves have a specialist sourcebook, issued by the PRA, which places restrictions on the proportion of fixed-rate mortgage lending that a number of societies can carry out. Some societies were close to reaching the limit of their permitted fixed-rate lending, meaning that they were likely to withdraw fixed-rate products from their portfolios. This combination of regulation by both the FCA and the PRA could still have a detrimental effect on the amount of lending that societies can advance. Building societies may need to advise customers to go elsewhere rather than expand their businesses, thereby concentrating consumer choice on fewer organisations, which will in fact reduce competition in the market. This is quite important when we think about who is providing mortgages today because, between 2012 and June this year, the building society movement provided £52 billion- worth of net new mortgage lending while the rest of the mortgage market produced a rather miserly £7 billion. Therefore, it can be seen how important it is that the building society movement is treated properly and with understanding To conclude, we are asking for an environment where all types of firms are able to operate on a fair basis, with regulations that are appropriate and proportionate to them, rather than one size fitting all. Enshrining this commitment in legislation will require regulators to give the diversity of financial provider due consideration, looking at the different business models and the sizes of the providers side by side. We believe that this will lead to a more appropriate and proportionate regulatory regime, which in turn will lead to a more competitive financial environment in the future. I beg to move.