Mr.
Breed: 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. 2.45
pm
Mr.
Tyrie: 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.
Mr.
Love: 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.
Mr.
Tyrie: 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.
Mr.
Breed: 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?
Mr.
Tyrie: 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.
Mr.
Hoban: Will my hon. Friend give
way?
Mr.
Tyrie: Yes, at the risk of being
diverted.
Mr.
Hoban: 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.
Mr.
Tyrie: 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. 3
pm 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.
3.15
pm 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.
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