Mr.
Hoban: 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.
Mr.
Love: 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?
Mr.
Hoban: 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. 3.30
pm
Ian
Pearson: 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.
Mr.
Tyrie: Will the Minister give way on a point of
fact?
Ian
Pearson: 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.
Ian
Pearson: 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.
Mr.
Tyrie: 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.
Rob
Marris: I do not wish to move new clauses 10
to 16, Mr. Gale.
Ordered,
That certain
written evidence already reported to the House be appended to the
proceedings of the Committee.—(Ian
Pearson.)
| 
