Banking StandardsWritten evidence from Burnley Savings and Loans

This submission to the Parliamentary Commission on Banking Standards is made on behalf of David Fishwick, CEO of Burnley Savings and Loans.

Summary

Moves to create more competition in banking by hiving off chunks of the big banks to other smaller banks is laudable but it doesn’t go far enough.

More effective competition will not simply evolve within the present regulatory framework. The regime is so tightly enforced and the bar to entry set so high that, in Britain, only one brand new high street bank licence (Metro) has been granted in the last 100 years.1

Budding mini-banks are effectively priced out of the market and the FSA’s present interpretation of European legislation means any new banks are likely to be as “corporate” as the others with profits for the shareholders being the main driving force.

We need proper competition and innovation that gives customers genuine choice and a better deal—not more of the same.

Now, while the big banks are being tamed, we should also be sowing the seeds for a new generation of banks—small, relatively easy to set up, community banks—potentially thousands of them. If successful, they could become the modest, safe, good value banks of the future, without excessive bonuses, without risk to the tax-payer and with customers’ savings guaranteed.

David has seen how small community banks in countries like the US and Germany are successful and even encouraged, which is in stark contrast to the situation in Britain. Yet Britain once had a vibrant and diverse banking landscape. If community banks with limited scope and risk were allowed and encouraged once again, we could have safer, simpler, better and more varied banking.

David Fishwick has first-hand experience of the difficulty of trying to set up such a bank. Nevertheless, his low-overhead venture has succeeded in giving 5% to savers, loans to those that could not get them from High Street banks and all its profits to charity. If he could inspire others to do something similar, we could have a small revolutionary change in banking that could bring genuine competition, choice and innovation to UK banking.

It would take a change of legislation and a significant change of heart by the regulators to help create that. If proposals for community banking were included in the Finance Bill, the future banking landscape could look a lot brighter than it does now and Britain could be a good deal richer in so many ways.

Evidence

1. David Fishwick isn’t a banker: he sells minibuses in Lancashire and he does it very well. A classic entrepreneur, he built his business from scratch and he’s now one of the biggest minibus suppliers in Europe. When in 2008 the banking crisis hit, it became clear to David that his hometown of Burnley was suffering badly from the credit crunch. Many of his customers could no longer get loans from the high street lenders and David realised that unless he stood in to help, his business would begin to suffer too. So he did something about it and lent the money himself. His firm continued to flourish and his customers’ businesses survived.

2. By 2010 the recession had deepened. The banks were still not lending and the whole area continued its decline. More businesses collapsed, properties remained empty; and unless someone stood in to help, things would not get better. So, he planned the next logical step: his own tiny, tiny bank based on a startlingly simple idea. He’d take deposits from those individuals who could spare the capital and give them a good return for doing so; he would then lend that money out to people and businesses that could make good use of it. The deliberately low overheads would ensure profit, which could be given away to good causes. The savings would be guaranteed by Mr Fishwick and be backed up by insurance. It was good old-fashioned banking that everyone gained from. No pressure to buy “products”, no credit scoring, no bonuses and no risk to the taxpayer.

3. David hired a firm of solicitors2 to apply for a banking licence based on this model but he was completely cold-shouldered by the FSA who refused to even meet him to discuss the proposition without seeing £10m from him first. He didn’t have £10 million to spare but he was determined to put money back into the local economy before it was too late. So David did it anyway. In 2011, he turned an empty flower shop into “Burnley Savings and Loans” (BSL) and worked outside the FSA’s regulations. It worked. People queued to put money into BSL and businesses were not only saved but they now flourish. And, after the first six months, BSL turned in enough profit to make five charities in his High Street very happy.3

4. The size of the Burnley operation is deliberately very small but scalable: at the moment only £100k is lent out every month and only £100k is taken in from savers. Savers receive 5% AER and the rate for borrowers varies, depending on risk. Although credit history is looked at in most cases, judgements are made individually by what is in effect a Bank Manager, not by a credit-scoring computer. Default rates are no worse than those of High Street banks.

5. As the FSA refused to discuss the idea of David getting a deposit taking (banking) licence, BSL presently operates a form of peer-to-peer lending scheme similar to companies like Zopa and Funding Circle. Unlike those models, however, BSL is not an Internet-based lender and it still seeks a full banking licence.

6. Although BSL (as it exists now) is unique in Britain, the spirit of small community-based banking that directly benefits the communities in which it is based is not new. Neither is the idea of simple straightforward banking. In the past a plethora of Savings Banks, Building Societies, Local Banks, and even a Municipal Bank, meant people had real choice and there was little chance of catastrophic failure.

7. Big is not better when it comes to banks. It’s dangerous, remote and inflexible. Other countries that did not allow big banks to swallow up almost all smaller institutions still have small, and intermediate size banks that are strictly controlled and limited and in many cases are set up specifically to benefit the communities that they are in. They are generally successful, safe and a force for good, not greed. It is perhaps no coincidence that some of these countries (eg US and Germany) were among the first to climb out of recession.

8. David has met people from several interesting and novel banking concepts while setting up his venture. In the UK he has met representatives from High Street banks, relatively new entrants like Handlesbanken from Sweden and in Scotland, the only remaining Savings Bank in Britain. In the US, a typical community banker in New Jersey showed David around his five branches. In Germany, he was introduced to the Sparkassen banks, and saw what is probably the smallest bank (with a banking licence) in Europe. These are all very different, but they all have several things in common: Bank managers, local control and benefit to the community in which they operate. Bangladesh’s Grameen Bank is another that David hopes to visit soon—a revolutionary model of micro banking that has had an astonishingly positive effect on society, not only in Bangladesh, but also in countries through the world—including the USA.

8.1.In the United States, 7,000 Community banks constitute 98% of all banks, including commercial banks, thrifts, stock and mutual savings institutions, with more than 50,000 locations throughout the United States. Assets may range from less than $10 million to over $10 billion. Community banks are the primary source of lending for small businesses and farms, funding nearly 60% of all small business lending under $1 million.4 David visited Bob O’Donnell, Chairman & Chief Exec of New Jersey Community Bank. He started the bank in 2008 and he said he “put the keys in the door of the bank the moment Wall Street collapsed.” Even in those difficult times, it’s been a success. The 5-year business plan for NJCB predicted that they would make money in their 36th month; they actually turned a profit in their 15th. He has turned down more loans than he has accepted, but he says this is the only way you can be sure you will make a profit and not fail. “What is the point of putting someone in more debt when they can’t afford to pay you in the first place? You are creating more problems for them if you give them a loan.”

8.2.In Germany earlier this year, David visited the Sparkassen in the town of Hann in North Rhine-Westphalia; one of over 420 Sparkassen (savings banks) in Germany. These public-owned citizens’ institutions boast a business philosophy orientated toward the common good.5 It’s the largest non-government financial supporter of culture and sports in Germany, and ranks amongst the most prominent sponsors of social projects as well as initiatives in science, research and education. It’s hugely successful too—with over 50 million customers in 15,441 different branch offices and during 2011 the Savings Banks accounted for more than 42% of all loans to enterprises and the self-employed and 42% of deposits.6 Perhaps the localised nature of the lending and the personalised nature of the decision-making processes in these banks is a key reason in Germany’s economic resilience, founded on local family-owned enterprises? Also in 2011, these Savings Banks made a total contribution of €504 million to charitable causes, art and culture, social projects, sports, education and the environment. In Bavaria, David visited Peter Broad in what is probably the smallest bank with a banking licence in Europe. The Raiffeisenbank Gammesfeld is still successfully and happily serving its village—as it has done since it was founded in 1890.

8.3.In Scotand, he saw the first and last savings bank in Britain. The first7 is now a museum but it was here that the idea of socially responsible banking was born. The last and the only Savings bank to avoid being swallowed up by the TSB is still alive and well serving 60,000 customers in Airdrie and the small towns nearby. Founded in 1835 in part of a hat shop, there are no shareholders but a board of trustees. It too is successful but modest. It opened its eight branch last year in Falkirk—the first outside Lanarkshire.

9. Small banks are popular. The struggle to create Burnley Savings and Loans as a small but effective alternative to the big High Street banks was documented by Channel 4’s “Bank of Dave” series earlier this year. The response to the series was overwhelming and the company already has a two-year waiting list to put money in and a waiting list for loans. Clearly there could be more “banks” like Dave’s providing they were safe and beneficial. Even the FSA had to admit that the venture was “commendable”.

Proposals

10. Many things need to change:

10.1.The present regulatory culture needs to change from one of prevention to one of encouragement, with appropriate safeguards.

10.2.We need more competition in banking. Moves to create that by hiving off chunks of the big banks to other smaller banks is a good idea but it doesn’t go far enough, and can hurt the global reach of major banks. There is still no real competition for ideas, and different banking models that can drive change. There is simply insufficient stratification and diversity in the banking market. Real competition will simply not evolve in the present regulatory climate: the regulatory approach has to change and become more open-minded (and principles- and proportionality-based).

10.3.The capitalisation requirements should be much closer to those actually required by the EU. At present, the EU require €5 million (£4 million) to be set aside. The FSA in practice ask for £10 million “just to be safe”, because their view is that something which is only £4 million in size does not have enough capital to be able to support infrastructure suitable to a full blown bank. In order to operate at all, the level of critical mass required to operate as a bank at £4m implies in fact investment of £10 million. In practice, it is possible—as has been demonstrated by “Bank of Dave” and similar peer-to-peer type projects—to navigate around the need for a “banking licence” (a Part IV permission under FSMA 2000), taking the smaller operations outside the ambit of FSA control, and thus, bizarrely, into unregulated territory. This capital requirement is therefore yet another restriction that effectively prevents novel alternative small banks from forming.

10.4.The authorisation process should be more encouraging. At present, it takes too long, costs too much and it requires would-be banks to make huge investments in staff and IT before they have any idea if they are likely to be allowed to open.

10.5.The regulators (and the regulations) should be more open-minded to innovative models of banking. It is unlikely that if any of the hugely positive models above (See “evidence”) would be approved if they applied for a licence now. What would be approved is more of the same sort of banks that got us in trouble in the first place.

10.6.We need to create a new class/type of bank: Smaller, with capital requirements that are proportionate to the size of the operation. These community banks could remain small or be starter banks for full-scale banks. They could be quite novel, providing real alternative ideas and competition. David has very low overheads, for example, which enables him to be very competitive. They may fail; if they do, they would not be bailed out. Only the savers’ money need be safeguarded and not necessarily by government guarantee—again, David has his own guarantee, backed up by insurance.

10.7.The Bank’s “consumers” need to become “customers” again. Bank customers don’t consume anything and they should not be (mis-)sold “products”. Banking is actually quite simple.

11. The response to the banking crisis in Britain has so far been focused in one direction: making sure that the circumstances that brought about the crash of 2008 cannot happen again. This is perfectly understandable but all the re-arranging of the deckchairs will make no difference in the long-term unless we realise the fundamental problems that have crept into banking in Britain. Banking can be moral and banks can create wealth. That wealth should, however, be in the hands of the people who put the money in the bank, the people that run businesses, people that live in the communities where the bank exists. The wealth should not just be trousered by the banks and the bankers themselves. It’s surely immoral.

12. We need to sow the seeds for the future. There are great entrepreneurs, local councils, charities and others out there that could provide banking in a small, low-overhead way. Not Credit Unions, not Building Societies, but small versions of the real thing: Community Banks. These could deliver real competition and, if they then meet the requirements, grow up into fully-fledged banks with real benefits—not only to their customers, but also to the community that they serve and by providing a real alternative to the banking landscape as a whole.

31 October 2012