UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 612 -x
House of commons
oral EVIDENCE
TAKEN BEFORE THE
Treasury Committee
Competition and choice in the banking sector
WEDNESDAY 2 February 2011
Mark Hoban
Evidence heard in Public Questions 1045 - 1160
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Oral Evidence
Taken before the Treasury Committee
on Wednesday 2 February 2011
Members present:
Mr Andrew Tyrie (Chair)
Michael Fallon
Andrea Leadsom
Mr Andrew Love
Mr George Mudie
Jesse Norman
Mr David Ruffley
John Thurso
Mr Chuka Umunna
________________
Examination of Witness
Witness: Mark Hoban MP, Financial Secretary to the Treasury, gave evidence.
Alison Cottrell, Director, Financial Services, was in attendance.
Q1045
Chair: Thank you very much for coming to see us this afternoon. You will have seen that we have collected quite a lot of evidence on this subject and related subjects, and your evidence will also be very important for our inquiry. As you know, we saw UKFI. Is the governance of UKFI being conducted at arm’s length from the Government?
Mark Hoban: In what respect?
Q1046
Chair: I am reading from the letter of engagement for the creation of UKFI: "The governance of UKFI will be consistent with the Government’s intention to manage its investments on a commercial and arm’s length basis and not intervene in day-to-day management decisions".
Mark Hoban: Yes, that is how the arrangement worked under the previous Government and works under this Government.
Q1047
Chair: When UKFI came to see us, they told us that the Treasury had been heavily involved in setting the terms of Mr Horta-Osorio’s pay and bonus. Is that consistent with arm’s length management?
Mark Hoban: We were aware of the terms of reference and the Chancellor is aware of the terms, but in terms of ministerial involvement that is as far as it goes, and I understand there was some discussion with officials.
Q1048
Chair: Are we talking here about a discussion with officials or are we talking about engagement in the setting of the terms of pay and bonuses of the new chief executive’s package?
Mark Hoban: Of course the pay and bonuses of the new chief executive is the responsibility of the board of Lloyds, as with other groups.
Q1049
Chair: I am not asking who was responsible for it; I am asking who was involved in the setting of those terms. Were you aware of the terms yourself before they were agreed?
Mark Hoban: We were aware of the terms.
Q1050
Chair: Were you personally aware of them?
Mark Hoban: Aware of them before they were agreed? Yes, we were aware of those terms before they were agreed, but UKFI, acting as the Government’s representative as a shareholder, clearly engaged with Lloyds Bank in the same way as other major shareholders would engage with PLCs prior to their appointment of a chief executive.
Q1051
Chair: What message was sent prior to the decision being taken from the Treasury to UKFI?
Mark Hoban: I think they knew that we were aware of the terms, and that was as far as it went.
Q1052
Chair: That was the message-"Thank you for making us aware"?
Mark Hoban:
Yes.
Chair: No other message. So when I asked UKFI, "I’m trying to get at whether the Chancellor was sending a message via Treasury officials to UKFI about this pay settlement" and the reply was, "Yes, there were messages", the message was just, "Thank you for making sure the piece of paper was delivered"?
Mark Hoban: I believe so, yes.
Q1053
Chair: When he said that the Chancellor was involved in consultations about pay, he was really describing a consultation about ensuring that a message arrived?
Mark Hoban: I think we were aware of the package that was being offered to Antonio Horta-Osorio, and that was appropriate.
Q1054
Chair: If I may say so, your replies don’t look very consistent with those from Mr Budenberg, either in tone or substance, and it strikes me that there might have been some compromising of the arm’s length nature of UKFI’s management.
Mark Hoban: I don’t feel, from my engagement with UKFI, that that was the case.
Q1055
Chair: I think it will be a matter of considerable concern if we discover that there has been a compromise of the arm’s length arrangements.
Mark Hoban: I think the arm’s length arrangements are very important because I think that the independence of Lloyds Bank and the interaction between Lloyds Bank and UKFI should be at arm’s length and I think that is one of the ways in which UKFI aims to protect and maintain taxpayer value in that institution.
Q1056
Chair: We also took evidence on possible divestments. To what extent is there a conflict between increasing competition and getting the highest possible price for the bank shares?
Mark Hoban: It is an interesting point and one that-we are yet to embark on that process. UKFI, as you are aware, advertised recently for advisers to assist on the disposal of Northern Rock, so we haven’t seen all the options yet. But we recognise the way in which we can use our stakes in banks to help facilitate a change in the market structure in the UK, and I think that we will wait and see what offers come forward for Northern Rock, but clearly where an offer could result in a significant enhancement of competition in the UK banking market, that would be of great interest to us.
Q1057
Chair: What is the priority for you: getting to a more competitive banking sector or getting the highest price?
Mark Hoban: I think there is a balance to be struck between the two.
Q1058
Chair: So we are going to sacrifice some cash in order to get some competition?
Mark Hoban: Yeah, I think we will wait and see.
Q1059
Chair: Was that a yes, by the way?
Mark Hoban: No, I think we will wait and see what the options are, because we may find that a new entrant is prepared to pay more to acquire the platform that Northern Rock offers than perhaps an established incumbent. I am not clear in my own mind yet what the trade-off will be, if there is a trade-off. I am looking forward to seeing where UKFI get to in this process.
Q1060
Chair: A moment ago I thought you said there was a trade-off and that we needed to strike a balance. Now in your evidence you just said you are not clear whether there is a trade-off.
Mark Hoban: There may be a trade-off, but until we see the offers I think it is rather difficult to know where to strike the balance. But I am keen to see more competition in the banking market-that is part of the Government’s policy-and clearly this could be a way of delivering that. What I am not clear about at the moment is whether we can expect someone who is a challenger to pay more or less than someone who is an incumbent.
Q1061
Chair: When I asked Mr Budenberg how he would assess where on that trade-off he should be, what criteria he should use, he said that he hadn’t given much thought to that but that he was going to put something down on paper and let us have a look. Are you going to engage in that process with him or is this going to be at arm’s length?
Mark Hoban: It is not a process I have discussed with Robin since he gave evidence to you last week, and I think we need to think very carefully about the extent to which we confine UKFI’s mandate on this issue, but I think it would be helpful for us all to see what he thinks the trade-offs may be through the sale process-if there are any trade-offs.
Q1062
Chair: As I’m sure you have seen from the evidence, obtaining and maintaining full competition in the banking sector is of considerable importance to this Committee, and it will be helpful if some thought can be given to this question since we may find ourselves in a position where divestments are taking place shortly.
Mark Hoban: I hope we are in that position, and it is certainly something that the Chancellor and I take very seriously and see as being very important in trying to learn the lessons from the financial crisis.
Q1063
Andrea Leadsom: Mark, I would like to just press a bit more about the issue of competition. Do you think that the Government has a role to play in competition policy vis-à-vis banking?
Mark Hoban: I think there is a broad role for Government to play in this and different players within this have a different remit. So, obviously the OFT and the Competition Commission have some formal responsibilities; the FSA currently is structured so that they have regard to objectives for competition in the way in which they supervise the sector.
There are measures that I am keen to see, which I think will help promote competition, and one of the things that I think we need to do is to empower consumers to ensure that they can make some good choices about which products to buy and be able to compare products. I think it is a role that the Treasury can help play. We are very supportive of the work that CFEB are doing.
To push it a little bit further, we also published a consultation document recently on simplified products, which again I think is another way of improving competition by enabling people to compare and shop around for something that is like for like. So I think Government does have a role to play in this.
Q1064
Andrea Leadsom: We have recently taken evidence from the OFT, and John Fingleton said he believes that the proposed new CPMA should have a specific competition objective, whereas in previous evidence you felt that a secondary objective-a sort of "have regards to"-was adequate. Do you still think that that is the case and why do you disagree with John Fingleton?
Mark Hoban: I think competition has an important role to play in financial markets and I think the regulator has a role to play in that. I think the discussion was about the sort of hierarchy of objectives, and I would rather not be drawn on that, as we are going to publish later this month a more detailed consultation document on regulatory reforms that will address this.
Perhaps I can just say as part of that, we are announcing today that Martin Wheatley, currently the Chairman of the Securities and Futures Commission in Hong Kong, is going to become the chief executive designate of the CPMA and join the FSA in September this year. One of things that he and I have talked about is the importance of good outcomes for consumers and I think competition will play a role in that. I think that is an issue that Martin will be very familiar with from his work in Hong Kong.
Q1065
Andrea Leadsom: Would you say that you have a concern that regulation has always in the past trumped competition-perhaps issues around regulation have meant that the need for banks to have regard to proper competition, this issue of too big to fail, barriers to entry for new players? Has regulation played too big a part?
Mark Hoban: I think there is a tension that we see in financial services between the safety and soundness of the banking system, the prudential supervision, and competition. I think we need to get that balance right. It is important that regulators play their role in doing that.
Q1066
Andrea Leadsom: Do you think the balance is right now or do you think there is more that needs to be done?
Mark Hoban: I think that in the aftermath of the financial crisis clearly there has been a refocusing on prudential supervision. I think we would all accept that is an important aspect. I think we have now got to think about how you move away from that and make sure there is a role for competition innovation in financial markets. That is very important, I think, to delivering long term economic growth.
Q1067
Andrea Leadsom: Would you consider giving the CPMA a specific primary objective to promote competition?
Mark Hoban: I think you will see later this month what our proposals are on that.
Q1068
Andrea Leadsom: Okay. Just one last question. The consumer protection part of that title has been a cause of concern, and I know that the BBA have also shown some concern about the CPMA, and perhaps it should be the MCPA. Is that something that you might be considering as well? Specifically, due to the fact that consumer protection is something we have all had concerns about; being a consumer champion is not necessarily flowing in line with its role as a markets regulator.
Mark Hoban: I think as we set out in our high-level response to the responses received to the original consultation document, people shouldn’t see the CPMA as a consumer advocate. What we are looking for is good outcomes for consumers and that requires getting the balance right between the interests of consumers and the interests of businesses.
Q1069
Michael Fallon: Lord Turner in a recent speech spoke of a series of waves of major customer detriment over the last 20 years. Do you think that was, looking back now, a failure of competition or a failure of regulation?
Mark Hoban: I think that’s a good question, and I think that there are ways in which competition could deliver better outcomes for consumers. I firmly believe that one of the areas we need to focus much more attention on is improving outcomes, and one way I have always believed that you can improve outcomes is through enhanced competition.
It is about how you create the environment of financial markets that enable consumers to make better-informed choices about the products they buy. That is about switching, it is about the transparency of charges, about the ease of comparability-some of the principles that underpin the consultation document we published on simplified products. I think that competition is probably the best way of getting the right outcomes, but you do need a good regulatory framework within which that can operate.
Q1070
Michael Fallon: We have heard in evidence some pretty poor consumer outcomes in the retail banking sector. To what extent do you believe more effective competition there on its own would help solve those?
Mark Hoban: I think that if you look at the retail financial services sector and around some banking products you see some very competitive markets. I think we would argue that the mortgage market in the financial crisis is very competitive. There are very competitive markets around credit cards and personal loans; there are less competitive markets, frankly, around personal current accounts.
I think there are areas where we can learn lessons from financial markets about where competition works effectively and use those in areas where competition is less effective. I think, for example, some of the work the OFT has done with the banks on greater transparency around charging, the annual statement showing how much your charges have been, what your average credit balance has been and what your average debit balance is, is helpful in promoting an agenda around transparency. But I think there is more that can be done in those areas.
Q1071
Michael Fallon: Would that include reducing the bank’s influence over the money transmission system?
Mark Hoban: I know that you took evidence from Don Cruickshank, who spoke quite a lot about this-not just in his 2000 report, but also in his evidence session. The OFT looked at the money transmission system as part of its work on entries and exits to retail banking and didn’t see this as a significant barrier to entry. I noted that Vernon Hill, when he gave evidence to the Committee, also said it wasn’t for him a major barrier to the success of Metro Bank.
Q1072
Michael Fallon: We heard all that, but we want to know what you think.
Mark Hoban: I think that the environment around the regulation of payment systems has changed significantly since Don Cruickshank’s report in 2000. You have got a Payments Council; that was formed out of the work the OFT had done. You have got the Payment Services Directive, which enables non-bank players to enter into payment system work. I think we are moving to a much more transparent market. I don’t see at the moment there is an issue there, but that is largely based on the evidence and experience that others have highlighted, particularly in the run-up to this inquiry.
Q1073
Jesse Norman: Sir John Vickers is planning to publish his final report in September this year. Can I just ask what the timetable is for responding to his proposal?
Mark Hoban: We haven’t set a timetable yet to respond to his work, but we take Sir John’s work very seriously and set this up to look at some big issues around the structure of the banking sector. Clearly what he will say will be very important, but we need time to digest his remedies. I think we also recognise, of course, that Sir John’s work will come out around about the time when there is wider European international discussions about SIFIs and resolution mechanisms and things like that. So that will, in part, also drive our response to Sir John’s work.
Q1074
Jesse Norman: What will you do if he comes out with a suggestion or a set of suggestions that are unacceptable to the Government-you just don’t like them?
Mark Hoban: Let’s wait and see what he produces and then review that. I think it is important that Sir John is given the freedom to continue his deliberations and the freedom to come up with his own options. There will be plenty of people lobbying Sir John on the outcome. I don’t think the Government’s role is to do that.
Q1075
Jesse Norman: But the options available are that you could have another consultation, or presumably you could have a further period of reflection yourself, or, as a Government, you could come up with alternative proposals.
Mark Hoban: I think, Mr Norman, if we were looking for a long grass solution we perhaps would have thought of other ways instead of appointing a high powered commission under the chairmanship of Sir John Vickers.
Q1076
Jesse Norman: Right. But you could conceivably come up with other proposals; that would be an alternative?
Mark Hoban: We set this commission up with quite a tight timetable, with very high powered commissioners-people who are independently minded and will expect their work to be taken seriously and responded to promptly.
Q1077
Jesse Norman: Do you think there is a tension between the timetable you have adopted on the Vickers Commission and the rapid speed of the process of thinking about regulation that is going on otherwise?
Mark Hoban: I think that there are-
Q1078
Jesse Norman: Just to put it in context: say, for example, Sir John recommends something that meaningfully changes the kinds of players that are in the market. Would you then not have to think again about the kind of regulation you would be submitting them to?
Mark Hoban: I think there is a range of issues here. We have set out on a process to reform regulatory structure, but also within that structure there are a whole series of developments that are partly UK driven, partly global driven, partly European driven, which will have an impact on the structure of banking.
We have got Basel III-that will be going through the European Parliament and the European Council process in the latter half of this year. We have got a crisis resolution mechanism being debated at the moment in Europe. There are still ongoing debates about the FSB and about global SIFIs. So there is a lot of process around the rules, I think, of regulation rather than the structure. It is not within Sir John’s remit to make recommendations on the structure of regulation in the UK.
Q1079
Jesse Norman: Of course, some of the ideas that have been sketched and entertained, at least, range from, as it were, breaking up the banks along casino-versus-utility lines, requiring segregated capital for the investment of commercial banks, and separate subsidiarisation. Is work being done within the Treasury that can evaluate some of these things in order to give you a view on what you think of his recommendations when they do emerge?
Mark Hoban: We are working on a wide range of options, partly as our contribution to some of the global work that is going on at the moment. So, we are not letting the grass grow under our feet.
Q1080
Jesse Norman: Do you have a preference among those?
Mark Hoban: I think I would be accused, rightly, by you of trying to influence the independence of Sir John Vickers’s work, so I don’t have a preference I would share.
Q1081
Jesse Norman: Or if you do, not one that you can share?
Mark Hoban: I think it is right that Sir John gets on with this work.
Q1082
Chair: Just to be clear, did you say that it was not possible that any aspect of Sir John Vickers’s work and recommendations could have an impact on the structure of regulations?
Mark Hoban: I find it hard to see, given his pronouncements, just where that would impact on the structure.
Chair: I think that was a-
Mark Hoban: I think I was agreeing with my own statement earlier.
Chair: You were basically saying yes, which is not what a good number of others have suggested to us in evidence.
Q1083
Mr Umunna: Can you confirm that it is the Cabinet Committee on Banking that will look at the recommendations of the ICB and presumably come up with proposals for Cabinet?
Mark Hoban: Yes.
Q1084
Mr Umunna: Who sits on that Cabinet Committee?
Mark Hoban: I think the information is in the public domain. I’m assuming that it is but I’m not entirely clear if it is in the public domain or whether it is appropriate for me to do that.
Q1085
Mr Umunna: I have looked at the list of people who are on it, but it is an old list. Can you confirm that Lord Green, the new Minister for Trade and Investment, sits on the committee?
Mark Hoban: I want to just check that. I don’t have an up-to-date list of members of the committee, and I’m sorry it is not cited on the protocol of announcing these things, but I will write to the Chairman and clarify the membership.
Q1086
Mr Umunna: I ask the question because a press release, which was put out by the Business Department, said that he was a member of this committee, but it didn’t marry up with other things.
I was just wondering whether you think it would be right and proper for Lord Green to sit on that committee, given his inherent conflict of interest. Perhaps if I just explain that. The ICB is obviously going to make some recommendations, which will have a major impact on the share value of the big banks. HSBC is one of those, and as such I would suggest that there is quite a big conflict of interest in him sitting and helping determine the Government’s response to that, given that the Government’s response can have a major impact on the share price of HSBC.
Mark Hoban: I am confident that all proper processes would have been pursued in relation to the appointment of Stephen Green to the Government.
Q1087
Mr Umunna: But usually the process is, where you have businessmen joining Government, their assets or their shares, or whatever they may be, are put in a blind trust and they are managed by somebody else. He, according to the HSBC annual report that was published in 2009, has over 1 million shares, which are due to vest this year, in HSBC.
Obviously, they are going to be majorly impacted upon by whatever response the Government comes up with to the ICB recommendations. Even if he didn’t necessarily, maybe he has divested himself of those shares-he worked at that bank for about 29 years, I think. I would suggest that he can’t necessarily come at this in an unbiased fashion. Would you agree?
Mark Hoban: First of all, I am not privy to Stephen Green’s financial affairs, and I am sure that in his appointment to Government all the proper processes would have been fulfilled. We all come to this debate with views about banking-whether you are a banker, whether you are a bank account customer, whether you have had a bad deal from a bank. I think one of the things the previous Government was very successful at was identifying people to join Government who had particular experience.
My own predecessor, Lord Myners, had extensive experience of business. I don’t think anyone suggested at the time that it would be inappropriate for him to use that experience in resolving matters around financial services, when he himself had been a former fund manager, been a director of the FTSE, the chairman of M&S, and other responsibilities, had worked for NatWest. So I think that it is an interesting precedent that the previous Government set in recruiting people with experience to work in areas that they were familiar with.
Q1088
Mr Umunna: I would suggest this is a fairly unique position, and I think that the commission being set up is a very good thing, but this is quite exceptional and what it comes out with will have a huge effect on the share value of a company that a Minister potentially has an interest in.
The chair of UKFI appeared in front of us last week and that was shortly after Sir John Vickers had given his speech. We saw that, the first working day after that speech, the share value of the financial institutions dropped by some £2 billion. The chair of UKFI confirmed that, obviously, whatever the ICB comes out with will have a major impact on the share value. He said that potentially, for example, there won’t be separation and you will see a diminution in the value of shares-certainly of some of the publicly owned banks across the sector. Don’t you think this is a very important issue?
Mark Hoban: I think that Stephen Green’s appointment, and the arrangements around his appointment and his financial interests, would have been dealt with in accordance with the usual procedures, as they are for all Ministers. It is not unusual for Ministers who have a particular interest or experience in an area to engage in debate. Lord Darzi was viewed to be a very effective Health Minister; at the same time, I think he maintained his practice in the NHS and I don’t think anyone levelled that criticism at him.
Q1089
Mr Umunna: Would you be prepared to make arrangements for the Cabinet Secretary and the Permanent Secretary of the Business Department to write to us to clarify the situation in relation to Lord Green, and him taking any part in the Cabinet Committee, which decides on the Government’s response to the Independent Commission on Banking?
Mark Hoban: I am sure that proper arrangements will be made.
Q1090
Mr Umunna: But would you be prepared to ask for them to write to us to confirm the arrangements?
Mark Hoban: I will raise that with the Cabinet Office, yes.
Q1091
Mr Umunna: Can I, moving on, ask a question about the actual terms of reference that the Government gave to the commission before it reported? The terms of reference say that the commission will have regard to the Government’s wider goals, financial stability and creating a diverse banking sector. It says, "There will be specific attention paid to a list of things, including the risks to the fiscal position of the Government". What exactly was meant by that?
Mark Hoban: I think that we have seen in recent times the way in which taxpayers’ money, for example, has been used to support the banking sector, and clearly in moving to a much more stable banking sector, it is important to minimise the risk to the fiscal position. That is a very good example of some of the meanings behind that phrase.
Q1092
Mr Umunna: One thing I suppose I had in mind is obviously when the Government realises its stakes in the publicly owned banks, that is going to raise a substantial amount of money. That could, whatever the proceeds are, impact on the fiscal position of the Government, if there, say, happens to be a hole in the finances and things don’t turn out to be as the Government hopes in relation to growth. Would that be something that the commission would have to take account of?
Mark Hoban: The commission can propose its recommendations. I think that one wouldn’t expect the commission to be thinking about the value of RBS and Lloyds in context of their recommendations.
Q1093
Mr Umunna: That is encouraging.
Finally, something else caught my eye in the issues paper that was issued by the commission that seemed to me to provide a massive get-out clause from radical change. This was paragraph 3.26 of the paper where it said that, "The commission has to have regard to the likely impact of the recommendations on the competitiveness of the wider UK economy", and it goes on to mention the attractiveness of the UK as a place in which to conduct business.
To me, that sounds a bit like a big get-out clause from any kind of radical change because, as has been mentioned by the Chair, there is a tension between the need for competition, the need to protect the taxpayer and also other considerations, and the OFT have talked about that as well. That clause to me would seem to give a massive get-out clause for the Government if any major radical proposals were put forward on separation, for example.
Mark Hoban: The terms of reference are set out for the benefit of the commission and for them to think about their recommendations in that context. It doesn’t frame the Government’s response to those recommendations.
Q1094
Mr Umunna: So we can’t expect to see the Government waving the flag of competitiveness and the UK going for a unilateral position on how it structures the industry and the rest of it in response?
Mark Hoban: No, what I am saying is the terms of reference are for the commission.
Q1095
Mr Umunna: My final question was just to follow up on some evidence we took yesterday from the CEOs of Nationwide and the Co-op Bank. I brought up the issue of the coalition document and the commitment to promote mutuals. The CEO of Nationwide said that he thought the pledge to promote mutuals was, at the moment, lacking in substance by the Government and that one way you could make that promise-or make good on that promise, I suppose-was by seriously considering the remutualisation of Northern Rock, which is something I am very much in favour of. Does the Government have a view on that at the moment and, if it doesn’t, is it open to that as an option?
Mark Hoban: Just to deal with the first point that Mr Beale raised yesterday. We have taken steps to strengthen the mutual sector. We are pushing forward the Legislative Reform Order on Credit Unions, something that fell into abeyance prior to the general election. We are looking at modernising legislation around building societies and introducing elements of the Bill that Malcolm Wicks promoted in the last Parliament around modernising the framework for co-operatives, and that applies to a wide range of financial mutuals.
Also we are working very closely with the sector as part of the debate on CRD4 on an appropriate capital instrument for building societies. That is something that I know Mr Beale is very keen on and it is something the sector is very keen on. What I hope is that if we are able to secure that, the sector will use that opportunity to add a further competitive spurt in the retail financial services sector.
On the point about Northern Rock, I think there is a sort of elegant circularity about this, a former building society being remutualised after its nationalisation, and my mind is not closed to that.
Mr Umunna: That is encouraging.
Mark Hoban: But I would just point out that the taxpayer has a £1.4 billion holding in that and I think that the taxpayer would expect some return on its investment. I am not clear how a large Government shareholding will become a mutual, and I am not sure you are really suggesting I should write off that investment.
Q1096
Mr Umunna: No, perhaps you should-I would invite you to look at the evidence that was given to us by, I think, Keith Morgan of UKFI who looks after Northern Rock. He said that there was definitely no problem with returning the stake or returning taxpayer money, but it could take some more time.
Mark Hoban: It could take some time. I think taxpayers have a limited degree of patience, but I did see Keith’s evidence and he reflects an important view. But when UKFI goes through the process of selling Northern Rock, clearly if there are good proposals on remutualisation or where there is interest-
Mr Umunna: They said you will determine that.
Mark Hoban: They have to come up with options; we decide.
Mr Umunna: You decide, yes.
Mark Hoban: We look forward to seeing whether there are any viable options out there.
Q1097
Mr Ruffley: Financial Secretary, you will be familiar with table 5.9 of the Bank of England’s last financial stability review. It has some interesting data relating to the argument that big banks are too big to fail, that successive Governments can’t afford to let big banks fail, and that because they guarantee them the subsidy in 2009, according to the Bank of England, was about £100 billion a year and in 2008 about £50 billion a year.
Those are Bank of England estimates. Do you think, in the light of that, that the "too big to fail" regime that this Government and previous Governments have operated enhances competition, decreases competition or doesn’t have any effect on competition at all?
Mark Hoban: I think there is an argument about the extent to which it undermines competition in the sense of whether there is an uneven playing field that that implicit support enables them to operate to the detriment of other players in the market. I think there is legitimate argument there.
I think one of the challenges that emerges from the financial crisis, and Northern Rock is a very good example of this, is that it was very difficult for there to be an orderly exit from the market of a failed financial institution. A lot of work is going on at the moment to look at ways in which there can be a more orderly wind-down of a failed financial institution. There is quite a big international debate about this. We supported in the previous Parliament the requirement to have living wills, recovery and resolution plans. They are all measures that are aimed at seeing how you can wind down a failing institution. In fact yesterday in a Standing Committee we debated rules that would facilitate the orderly winding down of an investment bank or investment firm. So there are a series of steps in place to try to tackle this.
There are other ways in which we are intervening to ensure financial stability: higher capital requirements through Basel III, increased liquidity requirements and a more intensive supervision approach. So I recognise the problem. I suppose in a way the work of Sir John Vickers will help assess some of the wider consequences of "too big to fail".
Q1098
Mr Ruffley: You said in your answer that there was a legitimate argument, there wasn’t a level playing field. Can I just clarify: do you think that that the "too big to fail" regime, as it currently exists-forget about the reforms that are in prospect-damages competition or doesn’t have any effect on competition in the British banking market? I don’t want you to go off on to international arenas. We are talking about competition domestically in British banking.
Mark Hoban: If I look across the banking sector, there are different levels of competition in different sectors, and I am not sure that the level of competition in some sectors is related to the debate about "too big to fail"; sometimes it is about the functioning of markets in particular segments. As I said earlier on, there has been a lot of competition in personal loans, mortgages, credit cards, but less competition in personal current accounts. I don’t think that lack of competition in personal current accounts is linked to "too big to fail".
Q1099
Mr Ruffley: So you would be happy with any new set of arrangements that allowed a British bank to fail?
Mark Hoban: I think there is a challenge about how we minimise the impact of a potential failure on the taxpayer, and that is why there are moves to increase the amount of capital. I think the way in which the goal of Basel III was articulated was that banks should hold sufficient capital to absorb losses of a scale experienced in the past financial crisis.
Q1100
Mr Ruffley: Without attributing any preference on your part or the Government’s part to the possible solutions for the "too big to fail" problem, could you just trot through the top five possible solutions to the problem I have outlined?
Mark Hoban: You can have global capital surcharges on SIFIs, which is one way of doing it; you could go through subsidiarisation; you could have a split between retail and wholesale banking; or you could decide to do what Paul Volcker suggested, which was split off proprietary trading, which is a variation on the theme of Glass-Steagall. I think I have got to four at that point.
Mr Ruffley: That will do; four out of five isn’t bad.
Q1101
Chair: Living wills.
Mark Hoban: Living wills. I am not sure that living wills are necessarily a response to Mr Ruffley’s question, but they are an important tool to be used.
Q1102
Mr Ruffley: I asked that for one reason. We are not going to press you on which is the favourite there, but I am just wondering. Whichever of those options or combination of those options the Government comes up with after this very welcome and very laudable investigation and work, what levers, what ability to enforce any of those options or mixes of options, does the Government have?
Mark Hoban: There is a range of options. So, for example, one of the debates that we will have perhaps later in this year at a European level is about capital surcharges for global SIFIs, for example, so there will be legislative option through CRD4. There will be routes like that that will create legislative options. Some of them could be through a legal change. So I think a range of implementation measures-and it will be split, I suspect, between ourselves and the regulator depending on the nature of those rules.
We haven’t looked at how you would implement these at this stage. In a way it’s a question that hasn’t arisen yet because we are awaiting Sir John’s recommendations. He might propose that there isn’t a route or this is the best legislative or regulatory route to achieve a particular outcome.
Q1103
Mr Ruffley: Subsidiarisation. Would that be something the banks would have to agree to, or could that be forced through by regulatory or legislative change?
Mark Hoban: It is not something I have looked at in any detail, so I don’t want to give an outcome, but I am sure there are a range of routes where this could be used.
Q1104
Mr Ruffley: I ask that because there is public disquiet, I think, about banking generally. There is this huge implicit subsidy, as the Bank of England has calculated, given by the British taxpayer to the big British banks. It is £100 billion a year in 2009 and £50 billion in 2008-Bank of England estimates, not some para-Marxist outfit making all this up.
I think the British taxpayer would want any reform of the banking system to be delivered with despatch and effectively, and I am just trying to understand whether any of the menu of options that you have outlined today-and we are all familiar with them-are all things that could be imposed by a Government on behalf of, frankly, the British people who do want change in this area, and to what extent the banks would have to come willingly and agree. Is that something you are concerned about?
Mark Hoban: Clearly, we need to find workable solutions to some of these issues, and we have also got to think about the practical implications. I think the other point I would make is that we need to balance off the costs and benefits of these measures as well and clearly think not only about the cost to the taxpayer potentially of implicit guarantees or what economic benefits or otherwise would emerge from these reforms. I think there are a range of factors we need to bear in mind in responding to Sir John’s recommendations.
Q1105
John Thurso: Can I just come back to three things you said in answer to Andrea Leadsom? One was that competition, as far as CPMA is concerned, will be a "have regard to" matter, which of course we all know is parliamentary shorthand for a polite nod. The second thing was you said that you want to empower consumers, which is a nice way of saying "buyer beware". The third thing was that we’re putting a Hong Kong banker in charge. Isn’t it game, set and match to the big banks?
Mark Hoban: What I said to Ms Leadsom was that you would have to wait until we produce the next consultation document later this month to see our further thinking on competition. So I don’t want to prejudge that.
In terms of empowering consumers, I think it goes beyond caveat emptor. I think that we need to be able to help consumers make better choices, and I think that there is a symmetry of knowledge between the consumer and the provider of financial services products, something that often we don’t do. It is something we don’t do very often. The person who perhaps is selling them or marketing to us knows more about how these products function than we do.
So I think we need to redress that balance, and that is why I am a very keen supporter of financial literacy, improving financial capability. That is why I think it is important there is much greater transparency around charges, and this is why I very much welcome the work that the OFT did about ISAs and making sure that people who held ISAs knew all the interest rates they were being paid on ISAs.
I think transparency helps empower consumers and being able to shop around. I think if you look at one of the most competitive markets in retail financial services, motor insurance, it is a very good example of how competition can work to the benefit of the consumer. Once you know what the product is you can compare from brand to brand, you can compare prices and compare service, and the consumer can make an informed choice. So I think empowering the consumer goes way beyond caveat emptor. It is giving them the tools to do the job properly.
Q1106
John Thurso: You can also, using your analogy, create a great market in little furry animals. If you take free-in-credit banking, which we have asked a lot of questions about, it is interesting that John Varley was recently quoted as believing it is a structure that has outlived its time. It has been impossible for us to get any of the big banks to tell us what it costs just to have a bank account. If the transparency that you want, and I agree with, was there, that would exist. Surely that is something that it should be a matter for at least the authorities, if not the Government, to be concerned about and helping to drive.
Mark Hoban: Yes, indeed. We have seen the OFT do some very good work on ISAs to improve transparency there. They have worked with the banks to have greater transparency on bank charges and making sure people are much more aware of the cost of their accounts. As we have touched on in this Committee, I think last time I gave evidence, things like the Retail Distribution Review highlights the cost of advice in a much clearer way than perhaps had been the case before. So I think we are making progress on the transparency debate. But I agree that there is more work we wish to do on this.
Q1107
John Thurso: Let me tell you why that, to me, is important. The one area we never talk about are the unbanked. This Committee did some very good work on that in the last Parliament and also on the financially excluded. If we don’t know what a basic bank account in the normal market, if I can put it like that, costs, and we don’t know how the banks view the basic bank account, as opposed to the standard one, how can we assist people who are unbanked, and therefore financially excluded, into the system? How can we look at their legitimate consumer needs?
Mark Hoban: I think that is a good point, and something that concerns me is the number of people who are unbanked. I think there are some very complex reasons why people don’t have bank accounts. Some very good work was done by the Financial Inclusion Taskforce that reported in, I think, December last year that suggested that many of those people who didn’t have bank accounts at the moment had had bank accounts, but had chosen for one reason or another not to have bank accounts. For a lot of people, bank accounts don’t go with the grain of how they want to run their lives; they are very concerned about the unexpected charges if they go overdrawn, for example, and want to have more control over their finances. I think why people don’t have bank accounts is a very complex area.
I think one of the things we have seen over the course of the last few years is a significant reduction in the number of people who don’t have accounts. But I agree that one of the challenges is to know how much you are paying for what it is. I was reminded earlier that when you are shopping around there are two costs: one is a search cost and one is a cost of switching. I think in bank accounts the perceived cost of switching is quite high, but the search cost is quite high too. You have got to spend a lot of time trying to work out the difference between the many different accounts that providers have. It is a very curious market; we have very few providers of personal current accounts, but they offer a lot of current accounts.
Q1108
John Thurso: What I would ask of Government is not to always think in terms of the informed, articulate, numerate consumer but be aware there are people who don’t trust banks who need to be thought of, and that if the competition authorities are not having a little bit more than "having regard to", that sector will always get left behind. So something needs to be done to bring them front and centre in the equation.
Mark Hoban: I think you make a very good point. When I started off in this role in opposition, I was talking to someone who was an expert in financial inclusion and they made the point to me that one of the problems was that middle class people design products for those who are less well-off and we should engage much more often with those who either use those services or don’t use those services, to design products that actually meet their needs. I think there is a lot of thought going into different ways of meeting their needs. eMoney is a growing example of that where Tesco pays temporary staff using eMoney cards and that gives people a lot of control over how they use their money.
One of the great fears is you are going to be stuck with an unexpected charge if your direct debit or standing order bounces. People want more control and we need to think about how we deliver that for that group of the population and to understand why it is they are unbanked and what we can do to tackle that.
Chair: That is very encouraging, what you have been saying. George Mudie.
Q1109
Mr
Mudie: It would be encouraging. Just on that last question, though, I would believe in your and the Government’s concern for less well-off people if you were not ending the Financial Inclusion Fund in March. I don’t know if you know about it, but 500 debt case workers will be unemployed at the end of March. In Leeds, we have 11 additional ones in the citizens advice bureaux who have handled 2,500 cases in the last year-serious bad debt problems, people sick, disabled, relationship breakdown and illness.
How can you expect us to accept you are worried about the less well-off and the financially excluded if you are prepared to do that at short notice? Are you going to blame the last Government for the mess?
Mark Hoban: The programme was due to wind up at the end of March, that was the plan that we inherited, and it is an area we are looking at. We are very conscious of the need to provide increased levels of advice. That is one of the reasons why we proposed a national money guidance service that CFEB are going to be operating, which is funded by the industry through a levy. I think that we need to ensure that there is better advice available and I am very mindful of the impact on debt advisers. That is something we are looking at very carefully.
Q1110
Mr
Mudie: You will also be aware, Mark, of the good work done by the Citizens Advice Bureau; it is a sound organisation. Until you have a scheme ready to slot in- this is two months away, these 500 people are going to be taken away, stranding thousands and thousands of people-is there not a case for keeping this on, however temporarily, until your new arrangements are-
Mark Hoban: It is something we are looking at; I can assure you of that.
Q1111
Mr
Mudie: Lovely. You saw the briefing from yesterday, the mutuals. I promised to ask you a couple of questions and they have supplied the questions. We will get them over very quickly, because I want to deal with just another matter. Would the Minister agree that measures that promote a level playing field for all financial service providers, regardless of ownership structure, could prove helpful? That is the first question.
Mark Hoban: Yes. It is a very straightforward question. When you’re thinking about mutuality, and I am keen to see a diversity of business models and ownership models, but at the end of the day what matters to me is does it deliver better outcomes for the consumer? I think the argument put to me by mutuals is that the fact that they don’t have to satisfy shareholders means they can offer a better deal for consumers. That is what I want to see from the mutual sector-that spur to competition and better consumer outcomes.
Q1112
Mr
Mudie: The way to give them the opportunity to give even more competition to the Barclays of this world is the second thing. To be fair to them, they were speaking highly of the efforts of the Government, because a few months ago they were seriously worried in terms of the capital instrument. They are simply saying that will you renew your efforts, particularly at EU level, to allow access to external core capital-I am reading this because I could certainly never do this on my own-through an instrument, which specifically includes a cap on dividend to third parties, so that the core essence of mutuality can be maintained. That is the key one, isn’t it? You are doing well now; are you going to continue?
Mark Hoban: I can tell you my officials know my interest in resolving this satisfactorily, and I do raise it regularly. But I would say this. We want to see financial institutions holding more loss absorbing capital to ensure the taxpayer doesn’t have to foot the bill for future failures, and that applies as much to mutuals as to any other financial institution.
Q1113
Mr
Mudie: No, but at the moment they are largely depending on profits from their incomings and that restricts them, and therefore they cannot provide the competition to the Barclays of this world that we would like them to. This would do it.
Mark Hoban: I agree, Mr Mudie, I think that is absolutely right, but I think we do need to make sure that they too hold loss absorbing capital-capital that can absorb risk if their business is unsuccessful. Taxpayers expect the same protection arising from building societies as they would from banks. I think we should be neutral on ownership, and that works both ways.
Q1114
Mr
Mudie: There is a third one. As you have spoken about that, they raised a very, very, very important matter about how the money for the FSA compensation scheme is raised and it is harmful to the mutuals. It was agreed when we set this up-we set up this hurriedly-that it would be reviewed. I heard in the last 24 hours the FSA are too busy with other things to review it, but this compensation scheme affects smaller companies and the mutuals, particularly mutuals, in a different and harmful way. They would like it reviewed. Will you agree to at least look at that and understand there is some concern?
Mark Hoban: I am well aware of the concerns, and it started to flow from the point at which the FSCS was used as a resolution tool during the financial crisis. A lot of the funding of transfers and balances was financed effectively through the FSCS and a levy on FSCS members who are deposit takers.
There are significant concerns raised by different subsectors within the FSCS about the funding mechanism. People say we shouldn’t be paying for the problems of other sectors, but a point comes when potentially it is your sector that is facing the loss and you may well be grateful for the support of others. I think this is a very difficult balance, but I understand the concerns. I have had letters from building societies about this, investment managers, IFAs, insurance intermediaries. All are uncomfortable that somebody needs to pick up the cost of failure. It is important, I think, for consumer confidence that the cost of this failure is picked up somewhere if someone goes insolvent. Someone needs to pay the bill.
Q1115
Mr
Mudie: To finish that off, do you think it is going to review in the near future?
Mark Hoban: My understanding was that the FSA was reviewing the funding and I haven’t heard that they-
Q1116
Mr
Mudie: Did you see the FSA’s increasing yearly charges announced yesterday? Are these fees-I think it is £50 million-agreed with Ministers? I have always got the impression the FSA have a blank cheque because it’s not coming from Government, it is coming from the practitioners, so they feel they can charge anything they like. This recent increase announced yesterday, was it cleared with Ministers?
Mark Hoban: No, it was not cleared with Ministers.
Q1117
Mr
Mudie: That is shocking, isn’t it?
Mark Hoban: Setting the levy is a matter for the FSA.
Mr
Mudie: Oh, no, no, no.
Mark Hoban: But they do consult, Mr Mudie, with registered firms. I can’t comment about this year’s fee settlement, but I know last year, in between the consultation paper and the final decision, amendments were made to reflect some of the concerns expressed, particularly by smaller regulators.
Q1118
Mr
Mudie
: Can I just indicate my disagreement in terms of it being nothing to do with Government? They do treat it as a blank cheque and the effect of that, especially on smaller firms, is very, very dangerous.
The general principle takes me to the last matter, which is when the Chairman was speaking to you earlier about this business of the banks that UKFI look after and the answer is, "Well, we expect them to run on commercial and at arm’s length from Government". Can I just ask you about this, because this is what the ordinary person in the street cannot understand? With all that is hitting the ordinary person in the street, they look at Mr Diamond sitting where you are and he says on his bonuses and lending and the lot, "Nothing to do with Government. It is a matter for my shareholders and you should stay out and so should the regulator". That is what he said to us.
Here we have two banks at least in which you are the major shareholder. How do you explain to the ordinary man in the street that you are prepared not to give-you have a right to give, as the main shareholder, an expression of opinion about their conduct in key matters such as salaries, lending and transparency. Diamond said, "I would expect my shareholders"-he doesn’t pay any attention to them, but, "I expect that to come from my shareholders". Here we are the shareholders and we say, "Oh, we can’t do it". Tell the ordinary person in the street who is losing his job or his house because of the behaviour of these banks and their continuing arrogance that, despite you owning them, you won’t lift a finger to say, "I think you should behave in a different way".
Mark Hoban: You raised a point; let me just finish off the point you raised earlier on about the FSA and the fees. I think one of the important areas is that member firms feel they get value for money from the FSA, and I think one of the under-used provisions of the existing-
Q1119
Mr
Mudie: This is the FSA that let the country down by light regulation. Bloody hell.
Mark Hoban: You said it.
Mr Mudie: Wouldn’t have paid them in buttons.
Mark Hoban: I think one of the under-used elements of the Financial Services and Markets Act was the requirement to get the NAO to look at value for money in the FSA, and that is something that has been pointed out to me. It is something I am very concerned about to ensure we don’t repeat the same mistakes in the future around good value.
On the broader point, I think it is important that banks do rebuild confidence with the people in this country, taxpayers who have directly bailed them out-whether it is RBS or Lloyds, or whether it is more generally through the financial support that has been offered. I think the best way for them to do that is to take a more responsible attitude around remuneration, particularly for senior management, and also around lending. Those are a couple of the principles that underpin Project Merlin that are being discussed at the moment.
I think the other thing I would say, though, is that the easiest way for us to destroy shareholder and taxpayer value in RBS and Lloyds is for Government to feel it can micromanage individual decisions that they make about who they should lend to, whether it is business in my constituency or yours. I think that there needs to be a proper degree of engagement. I think there is a proper degree of engagement between UKFI as a shareholder and the-
Mr
Mudie: No, but okay.
Mark Hoban: One thing that struck me when I was reading the evidence that UKFI gave to you last week was that Robin had spent two days in a call centre listening to complaints made by customers. I don’t think there are very many shareholders who get that engaged in a business and hold them to account in that way. I think there is a good level of engagement there.
Q1120
Mr
Mudie: Last week, we saw UKFI and we raised the question of Lloyds and Lloyds said to us, "Commercial, commercial. Nothing to do with the Government-commercial". We were acting in the commercial interests of the British public as their shareholders. The Chairman pointed out that there is a commercial argument on the investment side where people are making huge profits for the bank and their performance deserves reward if you wish, even though we may say it’s excessive, but you can’t say that about a retail bank. Within a week, the Chairman was rewarded with Lloyds coughing up on transparency, what we asked. The commercial argument had been blown out of the water by the Chairman.
When you say "commercial shareholder value", there is more to life than that. In fact, that is what caused the problem, wasn’t it? HSBC said exactly that to us. "Why did you survive and the others went down, and had all this trouble?" "Because we were prepared to listen to our shareholders and even ignore them in terms of-" Why aren’t you as a major shareholder-by not saying anything, you are telling the British public that you are saying things but you won’t do anything to stop this bad practice.
Mark Hoban: I think it is right that UKFI engages with Lloyds and RBS, and again also with Northern Rock where there is a slightly different relationship, to discuss strategy and to monitor how they perform against that strategy. I think that is the right thing for them to do and I would expect them to have that active level of engagement. This shouldn’t be seen as some passive investment.
Q1121
Mr
Mudie: So you accept that there is a number of people-under 10-in Lloyds, a retail bank, earning more than the chief executive, and he is getting between £2 million and £3 million? In a retail bank that you own, you are prepared to pay people in a retail bank £2 million to £3 million-up to nine of them? It is not acceptable. It might be acceptable in an investment bank, you could argue it, but you can’t argue it in a retail bank.
Mark Hoban: With Lloyds, it doesn’t offer the full range of services that an RBS or a Barclays or an HSBC does, but it does recruit in a pool of talent. They do need to find the right people to do these jobs, and I think they have got to pay the right rate for that. But I do think that the banks should show restraint when it comes to bonuses, and I think that is an important feature of the discussions that are going on at the moment.
Q1122
Chair: Although you feel they should exercise restraint, the Treasury and the Chancellor did not express an opinion after UKFI had informed them of what they were intending to pay the new chief executive.
Mark Hoban: What I am talking about is-
Chair: That is what you said before.
Mark Hoban: No, I agree.
Q1123
Chair: You want them to express restraint, but you didn’t express an opinion when you had an opportunity to do so.
Mark Hoban: We are dealing with that at the moment across all the banks as part of Project Merlin.
Q1124
Mr Umunna: We listened to the evidence from the UKFI and their engagement with Project Merlin, and I have to say half the members of the Committee almost fell off our chairs when UKFI told us that they really hadn’t played any direct part at all in the Project Merlin negotiations. I found that quite extraordinary. Will you not instruct them to play a greater role in the Project Merlin negotiations, given that they are managing our shareholdings in some of the biggest banks to whom Project Merlin is highly relevant?
Mark Hoban: There is ongoing engagement between Government and the bank chief executives on Project Merlin, and I think that is the right level at which to have that discussion.
Q1125
Mr Umunna: Why do we bother having UKFI if they are not going to play any part in some-Project Merlin, one of the major parts of it is transparency, one of the major parts of it is remuneration, one of the major parts of it is lending, and yet the organisation that manages our shareholdings in some of the banks to whom all those issues apply, is just standing back and saying, "Oh, we’ll leave it to the Government and the executives". What is the point of this organisation if it is not going to play a role in Project Merlin in particular?
Mark Hoban: UKFI has a very clear mandate about its role. Its role is to act as the shareholder representative of the taxpayer in managing our interests in those institutions, and its role is to maximise taxpayer value and concentration around competition and financial stability. I think it is a very clear remit it has and exercises across the course of the year. I think this is a separate exercise to that.
Q1126
Mr Umunna: Given the remit you have just given, surely the remit requires input in Project Merlin. I mean, I don’t understand.
Mark Hoban: I do think the shareholders of Barclays would expect us to engage with them when it comes to Project Merlin. I think it is a very different-
Q1127
Mr Umunna: No, but I am talking about UKFI.
Mark Hoban: I think it is a very different process.
Q1128
Chair: It does look a bit odd that the Chancellor is not involving himself at all, so it appears-not even as far as expressing an opinion on the remuneration package for the new chief executive of Lloyds, while UKFI is not involved at all in Project Merlin. It does strike me as unusual.
Mark Hoban: I think it just recognises different responsibilities.
Q1129
Chair: On an earlier point that George Mudie raised-that we need to find ways of getting value for money from the levy for the FSA and the successor institution, the CPMA-would you be prepared to go away and have a hard think with officials about further ways of achieving that, beyond engagement with the NAO? This was an issue that exercised a number of us hugely at the time of the Financial Services and Markets Bill, and is still unfinished business in many of our views.
Mark Hoban: I think it is an important point, and it is something we need to think about very carefully. It is a topic that I-
Q1130
Chair: When drafting the Bill, a new Bill?
Mark Hoban: It is a topic-I don’t think it’s something we can leave until the new regulatory regime is in place. I do raise issues around value for money with the Chairman-
Q1131
Chair: We are going to have a new Bill, aren’t we? We are not going to try and do this with a succession of dog-eared amendments?
Mark Hoban: We will have a proper legislative process to set up the new body.
Q1132
Chair: Was that a yes or a no?
Mark Hoban: We will have proper legislative process; there will be a new Bill.
Q1133
Chair: There will be a new Bill?
Mark Hoban: I mean, unless you have got any interesting ways about how we might amend FISMA by an SI, but I don’t think we can.
Chair:
We are going to write it again.
Mark Hoban: There will be a new Bill to set up the new regulatory regime. It has always been our case that that is the case, that that will be the process. There is nothing new.
Chair: We are not going to try and-
Mark Hoban: I think, Mr Chairman, we have always been very clear.
Chair: Just as long as we are really clear on it.
Mark Hoban: We have been very clear since June last year that there will be a new Bill to set up these bodies.
Q1134
Mr Love: I want to come back to the comments raised earlier in relation to the Government’s proposals to promote the mutual sector. Specifically in relation to the new Bill, if there is to be a new Financial Services and Markets Bill, will you give the new regulator an objective to promote diversity in financial services, as a way of addressing some of the concerns that I will come on to?
Mark Hoban: I think that we had this conversation the last time I gave evidence to the Committee, and we will be touching on it in the report. I will go back to what I said earlier on. My priority is better outcomes for consumers, so in a way I am blind to or neutral about the method of ownership, but I recognise we need to support mutuals. I think we can talk about consumer protection, we can talk about financial stability; I am not sure how that is consistent necessarily with having a specific duty around diversity. I would not want consumer outcomes or financial stability compromised by pressure on the delivery of diversity, and I am not sure our constituents would either.
Q1135
Mr Love: Let me raise two of the concerns that exist that relate to this issue, one mentioned by Mr Mudie a few moments ago. Don’t you find it rather surprising that low-risk organisations should find themselves paying more into a deposit protection scheme than high-risk organisations? That is the net effect of what has happened to the building societies.
Mark Hoban: I don’t particularly want to get into a debate about the categorisation by risk but, of course, Mr Love, you will remember too the great consolidation that has gone on in the mutual sector, around building societies during the crisis. One of the interventions the previous Government had to make was around the Dunfermline Building Society. So I am just very wary of making some statements about the level of risk associated with particular institutions.
There are other institutions that didn’t generate any financial loss, who are also picking up a higher bill as a consequence of the financial crisis and paying levies into the FSCS. The levy is based on deposit-taking level and deposits that you take, and consumers get a certain degree of protection as a consequence of that. I am just very wary about this. It is very easy to say, "My sector shouldn’t get hit now for the levy because it’s somebody else’s problem". The time may come when it is members of that sector who have to pick up all the bill and they would be grateful for some of the cross-subsidisation that is on offer through the FSCS.
I think it is a very seductive argument and I understand exactly the pressures that building societies are under on this, but they are not alone in facing this issue. Someone somewhere has to pick up the bill for compensation when an institution becomes insolvent, and it shouldn’t necessarily be the taxpayer.
Q1136
Mr Love: I accept entirely that there were some building societies that did things that perhaps were unwise in retrospect. The question I am raising is why was it not critical to the decisions that the FSA took that their established view of risk should not be the way in which they decided how much the deposit-taking institution had to pay towards compensation.
Mark Hoban: The compensation scheme is on a flat-rate basis. There is a debate about whether you should move to a prepaid scheme and whether that levy should be risk weighted, but the scheme we have at the moment is ex post funding, and that is on a flat rate.
Q1137
Mr Love: Let me just say that there are concerns expressed in relation to that. Let me go on to mention mutual insurers. I’m not sure if you are aware of the debate around the closure of with-profit funds and the likely disappearance of the mutual aspect of those insurers. Doesn’t that raise a concern with you that perhaps the regulator isn’t recognising the essential difference between the mutual sector and the rest of the financial services sector?
Mark Hoban: I am aware of that debate. It has been quite a long running debate between mutual insurers and the FSA. There is an issue about where the capital comes from to support mutual insurers. Historically, they relied on money that built up in with-profit funds to provide that capital. If you look at an insurer like the Prudential and Aviva where that fund belongs to with-profits policyholders, it has been a process of reattribution and looking at that fund where some money has gone to with-profits holders.
I think it is a very complex issue that I have raised with the FSA. I have had a conversation with the chief executive about this, and I am concerned about how we are going to find capital for mutual insurers. It does beg the question of whether we have a new mutual insurer. Where does the capital come from to start off a greenfield operation for mutual insurers? I think, again, that it is another one of these areas where we have to think very carefully about how we find capital for financial mutuals. I think it is a very important issue to try to resolve.
Q1138
Mr Love: I take that point and there are different views about the basis on which you can raise capital as a mutual organisation and whether that will prejudice the very mutuality that you are trying to protect. What I wanted to do was to raise two very prominent concerns that exist, and ask the question-and I think you have tried to answer it as best you can-about whether there should be some distinct recognition within the regulator of the special attributes of a mutual being different from that of the rest of the sector. We will come back to this, I can absolutely assure you.
Let me go on. You are the Minister responsible for bank lending. We talked earlier about whether others should be involved in the Merlin process. Are you involved in the Merlin process as the Minster with that responsibility?
Mark Hoban: There is engagement between the Government and the banks on this at various levels.
Q1139
Mr Love: Even though you are responsible for bank lending and the Government is very prominent in its concerns that the level of lending continues to go down, you are not taking any direct involvement in that whatever?
Mark Hoban: I didn’t say that. I said there is discussion at various levels in Government about Project Merlin, both at ministerial and official level.
Q1140
Mr Love: There is a report in the Financial Times today saying that the Government is looking for a 10% increase in bank lending to small businesses. Do you recognise that?
Mark Hoban: I am always intrigued by articles I read in the Financial Times and their origin. I am not going to comment on it. The Chancellor will make a statement in due course.
Q1141
Mr Love: The Chancellor will make a statement in due course?
Mark Hoban: Yes.
Q1142
Mr Love: There is considerable concern out there in the small business sector. We had it reflected in the submission by your own institute, the chartered accountants, saying that the trust that had previously existed between small businesses and the banks has almost entirely dissipated. Are you concerned about that?
Mark Hoban: Absolutely. I think it is a big issue. I think it is not just between banks and business; I think it is banks and the wider community. I think that we need to look at ways of restoring that. I think one of the ways of doing that is a much greater degree of transparency, and that is why we shouldn’t look at Project Merlin in isolation.
The BBA, under the leadership of John Varley, had a taskforce, which reported last year, which set out some measures in which we can improve the transparency of the relationship between banks and their customers, particularly around business lending. For example, they committed to a quarterly survey to look at the attitude of customers to banks around business lending, the availability of finance and also regional lending data as well. I think that will help. Once trust breaks down, the best way to try and resolve it is greater transparency, and I think those surveys will help. Clearly, the banks are committed to the Business Growth Fund, which will help provide equity investment to businesses, a modern day 3I. I think it is a very important contribution to achieving a much greater diversity of sources of finance.
But the banks do need to do work and I think the commitments in the BBA taskforce will help them improve that transparency. They are welcome and should be seen alongside, I think, lending commitments that are made as a consequence of Project Merlin.
Q1143
Mr Love: Are you optimistic that Project Merlin will deliver the objectives of the Government?
Mark Hoban: We will wait and see what the Chancellor reports.
Q1144
Mr Love: The SME financial sector is dominated by four banks; I am sure you are very well aware it is 80% or so of the marketplace. Does that concern you at all? Do you think that that doesn’t promote competition and therefore the willingness of banks to lend to small businesses?
Mark Hoban: Certainly, I think more players in the market will help, as long as people perceive that they are getting a good deal and are able to switch. I think there is a lot of concern, and Don Cruickshank’s original report was about lending to businesses. It is important, I think, to see more competition in the marketplace. I think it is also important that we see greater flexibility and sources of finance for SMEs, that they become-there is more access to equity or direct access to debt markets for SMEs in a way there isn’t at the moment. I do think we need to see that diversity in sources of funding.
You took evidence from the new chief executive of Santander UK. I think they are working very hard to grow their SME lending sector and have quite ambitious plans. I think it is good to see new entrants coming into the market like that who can offer capacity. Of course, one of the things we have seen recently is there were a number of new entrants around during the heady days of the boom who have now rather withdrawn from the field hurt and that has restricted the supply of lending, but new entrants would be great. We need to see businesses being able to shop around, but we need to see new sources of finance out there as well to create a much more sustainable model of finance for business. It shouldn’t just all be about debt.
Q1145
Mr Love: One final question. You mentioned about raising equity and other sources. Of course, that is very prominent in the newspapers today that they are looking for additional sources from other banks to try and boost that ability. However, you would recognise that, even if you are successful in achieving that, that will still be a fairly marginal contribution to the overall financing of the small and medium-sized businesses.
Are you concerned that we need to do more in terms of the structure of the banking industry to widen participation in the marketplace to fund small businesses? What do you think we could do in the longer term-not the immediate priority, but in the longer term-that would help to make small business banking more competitive?
Mark Hoban: I would like to see more challenger banks. I would like to see more new entrants into the banking sector to offer better deals and different products to SMEs. I know you took evidence from the FSA on the authorisation process and I think they have done some work to make that smoother.
I do think that we need to look across a broader horizon about the ways of getting more finance into SMEs. I know that the European Commission published a consultation paper on their review of the MiFID, the Markets in Financial Instruments Directive. Quite a big chunk of that is around SME financing and how we can attract more equity into their businesses using exchanges. I think that is quite an important development too, but we do need to see a broader range of finance. That means more players in the lending market, but also, crucially, it means businesses not just being reliant on debt and looking for equity from business angels, VCs, direct access to capital markets. I think there is a big challenge there.
Q1146
Mr Love: Very quickly, there is some debate going on about whether the advantages of debt in terms of the taxation of companies in this country should be dealt with by trying to make an instrument available to equity that would similarly reduce the tax burden on companies. Is that something the Government is currently looking at? Without giving away the secrets of the Budget, is it something that you are currently looking at?
Mark Hoban: I think there are a large number of people who have put forward proposals to shift or to rebalance incentives around debt and equity.
Q1147
Andrea Leadsom: I just wanted to come back very quickly to the UKFI situation. When they came in it was rather astonishing because, as Chuka Umunna said, they did suggest that, "We are looking after the taxpayer’s interest but we are not doing anything for the taxpayer" because every time we asked them whether they were challenging on remuneration, whether they were taking advantage of the share price to sell a bit, the answer always came back, "No". We did ask, "Well, what did you do?" "Well, we focused on corporate governance." Having been in corporate governance for 10 years, that is precisely those things. That is what you do in corporate governance.
Just very specifically, I would be interested in your thoughts on one fact, which is that since the taxpayer is in at an average price of 74 pence per share in Lloyds, why didn’t UKFI sell any shares last September when the share price hit 80 pence? Their response was, "Well, it was only going to be a temporary price rise and we didn’t want people who bought them to then lose money subsequently". But I thought in my naivety that that was the point of markets. You sell high and bad luck if the person who bought it loses money on it. It did seem bizarre to me that presumably we are paying sensible sums of money to these people so what are they doing for us?
Mark Hoban: I saw the exchange about-
Q1148
Andrea Leadsom: Were you surprised? Did you laugh?
Mark Hoban: No, I didn’t because we own I think it is 44% of Lloyds Bank and to sell down that stake is going to be a significant challenge.
Q1149
Andrea Leadsom: But you can’t do it in a lump.
Mark Hoban: No, I agree and I think you need to do it in a measured way. I do wonder whether someone who bought at 80 pence would be prepared to buy again if they had lost money. I just think that they-
Q1150
Chair: Was the Treasury approached by UKFI to consider a sale at that time?
Mark Hoban: No, but I think one of the-
Q1151
Chair: Sorry, was that a yes or a no?
Mark Hoban: No.
Chair: So UKFI did not even bring forward a proposal?
Andrea Leadsom: Yes, because the share price could have gone to £2 from 80p.
Q1152
Chair: Sorry, I just want to be clear. Did UKFI bring forward a proposal to the Treasury at the time when a sale was possible and profit, at any time?
Mark Hoban: Not at that time, no.
Q1153
Chair: Have they at any time since then?
Mark Hoban: Not certainly since I have been a Minister. But they are aimed, Mr Tyrie, at trying to-it is a long-term plan; it is a big challenge to sell a stake of that size. I think that it is important in terms of looking at maximising shareholder/taxpayer value in the long term to get that process right.
Q1154
Andrea Leadsom: Yes, but if you ask anyone in the equity markets, they would say you sell bits here and there when you get the opportunity. You might have a programme sale in mind but at the same time you would seize opportunities in the market, and it seems that UKFI have been in place now for a couple of years and have not done that. They don’t seem to have a strategy to do that.
Mark Hoban: I think it is right to recognise that there is a degree of uncertainty around Lloyds as a consequence of the Independent Commission on Banking. I just think that it is important to get the structure and process right. It is, as you know from your experience, a challenge to sell a stake of this size and it has to be done as a very considered process. I am not sure that opportunistic sales of relatively small proportions are the right way to do that, but it is a matter-that is why we employ UKFI to advise us on these things.
Q1155
Chair: Minister, you will have heard quite a bit of interest this afternoon about the divestments and the relationship between those and competition and concern for the consumer. You do not have to give a definitive answer, but would you be prepared to consider, as has been put to us, a public interest test incorporating competition considerations for the divestment of Lloyds and Northern Rock? I am asking you if you would be prepared to consider it.
Mark Hoban: Well, I think we have been very clear that we are prepared to use the sale of our stakes in the banks that we own to facilitate competition. I think we have been very clear about that as Government policy.
Q1156
Chair: But would you be prepared to introduce a public interest test?
Mark Hoban: I think we are acting in the public interest in the way in which we realise our holdings in this and we have said consistently that competition is an important aspect. We have had this discussion about the disposal of Northern Rock and that trade-off, if there is a trade-off, between price and competition. I think that is evidence of our commitment to this process.
Q1157
John Thurso: A very quick question. It is of course right that UKFI act basically as an institutional shareholder. It is also right that the Government have a clear policy. One of the questions regarding both RBS and Lloyds Banking Group is that the European authorities require parts of them to be divested. Has the Government thought about whether it should be still the biggest shareholder in one and certainly the largest shareholder in the other during that process, so that they can have an influence on it, or would they like to leave that process entirely to the market and maybe even divest themselves of the stake ahead of that process?
Mark Hoban: In terms of disposals by RBS that were mandated as part of the State Aid regime, of course they have started to take place, and Santander have acquired a number of branches from-expressed in legal and technical terms, they are committed to buying a package of branches from RBS. The European Union placed the same requirement on Lloyds Bank. I think the intention is to sell 600 branches in the case of-
Q1158
John Thurso: My particular question is-
Mark Hoban: I think the deadline is later next year for the sale of those Lloyds Bank branches. We haven’t set out plans yet on whether we are going to be a shareholder at that point. But I would say this. The requirements of the State Aid divestment say that Lloyds can only sell those branches to businesses with a less important share of the personal current account market, which is less than 14%. So that divestment should, I think, help either bulk up someone that is an existing player or create the opportunity for a new entrant into the market.
Q1159
John Thurso: The Chairman’s question about the Government’s attitude to competition and so forth could be very different depending on what it is selling-whether it is selling something with those still in it and the divestment yet to come or with the divestment having already taken place.
Mark Hoban: I think clearly there is an impact on the share price of those divestments and the extent to which the market price will factor in whether those disposals have taken place or not. But the EU State Aid rules are very clear, as they are applied to Lloyds Bank, about who can buy those branches. I think it will be a helpful boost to competition. Interestingly, I think you had the chief executive of the Co-op in yesterday. I think the 600-branch network that Lloyds will sell is a larger branch network than the Co-op has currently, so this is potentially quite a transformative move.
Q1160
John Thurso: That is precisely my point. What I was asking was whether the Government are going to be proactively engaged in the transformation or a reactive shareholder in the-
Mark Hoban: I think the board of Lloyds Bank will be responsible for that sale process, but they know they need to meet the State Aid divestment rules.
Chair: Thank you very much for coming to give evidence today, Minister. It is an issue of huge public interest, as of course you are very well aware. We will be taking careful account of what you have said today as we draft our report.
Mark Hoban: Thank you.
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