In too many areas of British life, there has been a breakdown of trust. Banking is the biggest casualty. But the Banking Reform Bill, which received its third reading in the Commons this week, offers hope that trust can be regained by increasing the power and market knowledge of consumers.
Last year the consumer group Which? found that the public is “more disillusioned than ever” with banks. Eight in ten people, according to Which?, believe that banks have not done enough to change the banking industry to prevent another credit crunch and seven in ten say that the banking culture hasn’t got any better since 2007. The bail outs, and the PPI and Libor scandals have seen trust in banks decline to what the chief executive of Which? calls “an all-time low.”
This ongoing crisis of confidence – this trauma of trust – could damage wider belief in future prospects across the economy – not least in banking itself. Indeed, as reported in January, the number of frontline workers in the banking industry has already fallen to an eight-year low – that’s 20,000 jobs gone from a peak of 170,000 in mid-2007. It is for everyone’s sake, including their own, that banks and banking culture must be reformed. And reformed, not just bashed. No good will come from continually vilifying the whole of the financial services sector. A lot of good will come from opening it up to transparency and competition.
Clarity and certainty of the rules – and of the punishment for breaching the rules – will help rebuild confidence in banking practice and regulatory oversight. The Government’s new ring-fence between core retail deposits and other investment and wholesale activities is a necessary step towards changing the culture of the banking industry by simplifying, and thereby magnifying, the focus of the regulators charged with monitoring the activities of the financial services industry.
If the banks now see the Coalition’s measures as excessive – and their evidence at the Commission on Banking Reform’s hearings suggested they do – we must remind them that such measures are necessary because of their own excesses, which undermined public trust in a vitally important industry. As someone once said, it has been as though bad bankers – bad bankers, not all bankers – had been playing Russian roulette with someone else’s head. It had to stop.
A few years back, I led ASDA’s move into the financial services market. At that time, one of the key drivers for entering the market was the far higher level of trust associated with supermarket brands than with those of the high-street banks. Trusted retail brands which have entered or expanded in the sector have included Tesco, Sainsbury’s, Marks and Spencer, Co-operative and Virgin. We have also seen Metro Bank enter the market, adding to the dynamism of, and innovation in, the sector. Encouraging such new entrants is vital to increasing choice for consumers. But while barriers to entry are already low enough for established brands to enter the market – often in partnership with existing banks – the barriers to small, new banks and mutuals have been, and still are, too high.
We can’t end the reality of banks being “too big to fail” without addressing the problem of competitors being “too small to succeed” in their efforts to clamber over the existing barriers to entry. Already action is being taken to reduce the capital requirements on the newest banks. I welcome that. But another such hurdle is the all-too-limited ability of account holders to switch between competitor institutions, or join new ones without a great deal of hassle. We have made it simple to switch in telecommunications markets to increase competition and improve customer care, now we must make it more simple to switch in the banking market too.
Increasing the “portability” of accounts, including the portability of standing orders, direct debits and BACS payments would once have needed onerous regulation, carbon copies, paper files, postal deliveries and so on. But these days, with the huge technological advances of the last decade or more, there are fewer excuses for not opening up the payments system to the disinfectant of market competition. Why, as the Chancellor has noted, has it taken so long for the sector to move itself? It needn’t take so long to clear cheques, so why does it? It’s because financial services have for too long relied on and exploited consumer inertia. So, it’s good to see in its response to the Parliamentary Commission that the Treasury has committed to further investigate account portability.
Under usual market conditions, the ability to switch from a provider you don’t like or trust to one you do, gives confidence in the overall system of provision. But, these are not usual market conditions. A very few banks have a very large share of the market and we have a mountain to climb in restoring trust in the sector and in the market. It is right, then, to make it easier to sort out those banks which get into trouble and to insulate the key banking services on which typical individuals, families and SMEs depend. And for the boundaries to be trusted they must be clear to consumers and tight in securing continuity of core-services provision. The Banking Reform Bill is a big step in the right direction.