I wish to speak substantially to new clause 14, which stands in the name of my hon. Friend the Member for South Northamptonshire (Andrea Leadsom). She has waged a Boadicea-like war to bring about account portability, and I have been happy to follow that banner—certainly over the past two years—when trying to increase competition. Between the two of us, my hon. Friend has led on account portability, while I have looked closely at barriers to entry and regulation.
I repeat my hon. Friend’s point about how the regulator has given way a bit on regulatory barriers to entry. Although I would not say it has moved substantially, it has made it easier for challenger banks to enter the marketplace. Two or three years ago, any potential challenger coming to the marketplace looked to spend between £300,000 and a potential £25 million just to get to the regulator’s front door and open a formal dialogue to get a banking licence. That is now changing, and the regulator has come up with a new process that makes it a great deal easier. None the less, smaller banks have certain problems due to ongoing expectations that give an advantage to the bigger banks. Those bigger banks have greater granularity with their account holders, and can therefore consider more sophisticated risk-weighting
models for their assets. Smaller banks do not have those IT advantages and the cost of their asset book rises with greater capital requirements, which is still a problem.
Before I get to the substantial points, when considering effective competition within the marketplace we must remember the importance of a well-educated consumer. I am pleased that the Government have already responded on that—yesterday the Secretary of State for Education announced the new curriculum, which includes financial literacy, and I pay tribute to his wisdom in realising that that is one of the greatest engines of social mobility. In any sophisticated society such as ours, it is important that those we are educating can deal with the most basic measure of the economy we live in—looking after their own money. That has been achieved through the hard work of organisations such as the Personal Finance Education Group and the all-party group on financial education for young people, and it is a very good thing.
Financial education, understanding and literacy are core to driving competition. It is no good giving people a multiple choice of banks they can use if they do not understand the products being presented. When considering standards within banks, it is important that the marketplace, as well as the regulator, holds those banks’ feet to the fire to ensure they are performing well, providing a good service and delivering trust, which is crucial to restoring a properly functioning banking market in the UK.
On account number portability, in September this year seven-day switching will start. The banks have come to us proudly and said that they have spent £700 million implementing that system, but in essence it is less a switching service and more a redirection service that lasts a year—more of the chewing gum and Sellotape we heard about earlier. The measure of success for the seven-day switching service is expected to be how many people switch, but I do not think it will pass that test because I do not expect many people to switch their accounts. It comes down to the fundamental problem that there are still barriers to entry for new entrants, which leaves a small number of banks in the marketplace. Most people cannot see the difference between one bank and another, and even if they can, they do not necessarily understand what it is. In their mind, the risk of an uncertain future with a different bank far outweighs the benefits of finding a better service and challenging the bank to be more efficient.
The proposals for account number portability in new clause 14, which the Government have already agreed is a good thing, are important and will make it simple for new banks to enter the marketplace and steal market share from existing banks. The provision has the advantage of being pro-competition—we have already heard strong discussions about that—and there are number of other important issues alongside that. First, in this world where we would like a lot more transparency, the new Financial Policy Committee is considering the state of the financial system. That will help it understand what is going on in terms of transparency, and bring the visible part of the system within the auspices of VocaLink. As a result, the FPC will be able to head off any disasters if it sees anything going on.
We also heard that resolution of failing banks is incredibly important. Part of the Bill’s raison d’être, and indeed that of all the work done by Vickers and
everyone who has worked on this since the crisis of 2007-08, is to try to ensure that people affected by failing banks do not lose their livelihood or face a financial crisis, so a simple resolution of a failing bank is incredibly important. Under the proposals, although an individual might see on television that there has been a run on their bank and that it is collapsing, the next morning they would simply wake up to discover that their bank account had automatically been transferred to another bank. The systems would continue to work, so their pay would be received on their behalf, their standing orders would still be paid and their house would not be repossessed because they had not paid their mortgage. More importantly, if they do not like the new bank they had been sent to, a couple of days later they could move to a better bank that they felt more comfortable with. Resolution is therefore incredibly important.
The other incredibly important point is that some banks have legacy IT systems that have been around for a huge number of years. Parts of these IT systems can date back to the punch cards of the 1950s and 1960s. In a recent conversation with someone who has done a certain amount of work in one of the larger state-owned banks, I happened to make a throwaway comment about the old IT systems. He responded, “Oh yeah, absolutely.” He explained that he had been looking at some of the software surrounding the small and medium-sized enterprise accounts and had noted that one of the software models had a converter sitting alongside it for converting pounds, shillings and pence into decimals. That must be at least 42 years old, as decimalisation was in 1971.
We know for a fact that there are a lot of old and incompatible systems being held together with string and chewing gum. Andy Haldane at the Bank of England has done a study and estimated that 80% of banks’ IT spend is on holding old systems together. If we take into account the fact that it is timely because at some point all the banks will need to update their systems, and if we consider resolution, transparency and competition, we will come up with a pretty convincing set of arguments that now is as good a time as any to introduce what will amount to fairly substantial IT investment, and there are a number of reasons that come together to make it worth while.
VocaLink, which runs a payments system, has already done a great deal of work on that. I have heard from a number of the larger banks that it could cost £10 billion, but they are dead against any sort of account number portability, so I suspect that it would be a lot cheaper. That is why it is incredibly important that the Government come forward as soon as possible to get the cost-benefit analysis on moving to full account number portability and, importantly, not be distracted by looking at the seven-day switching service in a year’s time.