Open Banking Building a transparent banking system

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1 Open Banking Building a transparent banking system Housing

2 Open Banking : Building a transparent banking system Labour s With Britain back in recession thanks to the Government s failed economic policies and some of the highest levels of youth unemployment on record there are many families in financial difficulty and concerns that businesses are not getting the support they need. It is clear that both urgent action to stimulate the economy now, and crucially, longer-term reforms to the banking system are required. It is fundamental to Britain s future economic interests that we have vibrant, global businesses in financial services based in the UK. 2 The banking system must meet the needs of the real economy. With year on year bank lending to businesses having dropped every month since May , improved access to capital is needed to help our most innovative start-ups expand, or medium-sized companies become bigger businesses. An estimated 370,000 small and medium-sized businesses needed access to finance in 2011 but could not get it from mainstream commercial institutions 2. One in five loan applications by small companies were rejected in 2010 compared with just 5.6 per cent in Indeed only half of small businesses that were young and fast growing had their loan requests fully met last year, compared with 90 per cent in Labour has been arguing for a more productive and responsible economy which is geared towards long-term investment. Access to lending for Britain s businesses is a major part of that. The latest revelations about the fixing of key interest rates by banks has highlighted further the market failures, lack of transparency and poor accountability in our financial services system. Labour s Shadow Treasury and BIS teams have already been looking at these issues. We have called for more competition in the industry through new challenger banks, and are also looking at the case for a British Investment Bank to lend to small businesses. Improved access to capital is needed to help our most innovative start-ups expand, or mediumsized companies become bigger businesses. In addition, we need a banking system which is trusted, accessible and meets the needs of customers. As Ed Miliband has previously said, we want a return to stewardship banking a system which serves every region, every sector, every business, and every family in this country. Labour s Open Banking

3 Labour s will explore how to ensure our banks are more open about what and where they are lending. To foster good banking practice, we need to help the public to understand better what they are getting from their banks, and encourage more transparency. This document looks at how knowing where bank lending is happening, or not happening, could help national, regional and local policymakers to better shape support to small and medium-sized businesses, and to tackle poverty and financial exclusion. It would also give those who want to invest their savings, borrow money and use other banks products, information which will better help them make financial decisions. We are also keen to look at how we could encourage much stronger joint working between mainstream banks and other parts of the financial services industry such as community banks 4 and credit unions. The lack of available information about what banks do Despite the myriad websites offering comparisons of bank products, the Centre for Responsible Credit has highlighted how in practice little data is released by banks about their lending at community level for either businesses or personal customers. 3 Data on lending to and deposits from small businesses and third sector organisations by postcode or neighbourhood level is not routinely available in the UK, even though much of this information is already held by the banks. Similarly details of basic bank accounts and current accounts, including free-touse ATM provision, levels of fees for unpaid direct debits, overdraft charges and credit card charges are not available in any sort of standardised format. Disclosure of such standardised data would foster competition by allowing real comparisons to be made between banks services. It would also reveal levels of access to financial services by businesses and individuals in particular communities. Greater transparency about bank practices from neighbourhood to neighbourhood would also inform the debate about where competition policy needs to go next. But it is also important that customers get stronger information and data about the fees and charges that they pay, or might pay, if they moved their accounts. Hidden charges and surprise penalties can cause great scepticism among customers, many of whom feel aggrieved that after years of loyalty to their bank there is no loyalty shown in return. We have already said that the Government should seriously consider adopting portable bank account numbers to make switching simpler. But for customers to know if a switch is sensible, they need clarity and access to the facts and charges associated with their existing bank relationships in the first place. Labour s Open Banking

4 The culture and governance of banks matter increasingly to the consumer. There is very little information disclosed by retail and investment banks about their internal compliance procedures and conflicts of interest policies. The inadequacy of many of these procedures and policies was revealed by the LIBOR and mis-selling scandals, all of which involved the abject failure of banks to manage internal conflicts of interest. Better management of conflicts of interest could be achieved by requiring banks to publish detailed reports in which they identify potential conflicts and explain how those conflicts are dealt with by their conflicts of interest policy. Public disclosure of these policies would bring greater accountability: the prospect of public scrutiny should in itself improve management of conflicts of interest, and policies that remain inadequate would be visible to policy makers, regulators and the general public. It is not just businesses who would benefit 4 It is not just small businesses who deserve greater information about what the banks are doing or not doing in their area. If the banks are not lending, if access to a bank s services is difficult, for example because of branch closures, or if overdraft charges are high, those with tight finances struggle even more. Lack of access to personal financial services like a bank account, an overdraft or a personal loan can make life harder and more expensive particularly if individuals turn to higher cost sources of finance like payday lenders. A recent report for the Department of Work and Pensions suggested 1.4 million people in the UK have no bank account 5. This group is largely made up of people on low incomes who risk paying more for utility bills because they use pricier key meters; it is more difficult for them to obtain rented accommodation (which is often paid through a standing order); and there is a basic threat to the security of their cash. The report also showed that seven million people in the UK have to pay a higher price for credit if they want to borrow money. People on low incomes are often forced to pay a high price for credit when they need to borrow a poverty premium. The banks tend not to want to lend to many on low incomes who as a result have to borrow from higher cost lenders using for example payday lenders, store cards, home credit and rent to buy products from retailers. Better management of conflicts of interest could be achieved by requiring banks to publish detailed reports Labour s Open Banking

5 The example of Thamesmead and Abbey Wood in South East London is illustrative. Despite the efforts of local MP Teresa Pearce and the Thamesmead Trust, there is no bank branch in an area serving 55,000 people. The nearest bank is minutes away by public transport. The lack of access to financial services means many in the area use expensive and high interest payday lenders. Why more open banks would help community banks and credit unions Although Ministers in the UK are opposed to such transparency 6, the need for more openness about what banks do has long been accepted in the United States, where the financial services community as a matter of routine now disclose what they lend, where they lend, and to whom, albeit in anonymised form. This has helped alternative financial institutions such as credit unions and community banks emerge in the places where traditional bank lending has been weaker. 5 Banking Transparency in the US In the United States the 1975 Home Mortgage Disclosure Act has helped reveal whether financial institutions are serving the housing needs of all communities. It has assisted local and national government in distributing public sector investment and attracting private sector investment to areas where it is needed. Similar information has become available since the 1970s about business lending but the recent Dodd-Frank Act modernises the requirements on banks to disclose their levels of lending to small and medium sized businesses. Further legislation has required US banks to lend to all communities or risk not securing a banking licence and has allowed regulators to rate banks performance in this area. Banks in the US, including most who are also active in the UK, have dedicated teams who publish the data and work with community banks, credit unions, charity banks etc to ensure all areas where they operate have access to financial services. Other countries such as South Africa have similar legislation and others are planning to introduce such requirements. Labour s Open Banking

6 Under the last Labour government credit unions and community banks expanded fast but remain relatively small compared to other countries 7. So we will explore how to increase awareness of the credit unions services and remove a perceived stigma, where too many incorrectly perceive that credit unions are only used by the least well off in society or those expecting to face financial difficulty We want to encourage much stronger partnerships between our mainstream banks and community banks, local charities, credit unions and social enterprises to support people who struggle to access credit. Finally, we will examine with the financial services industry, community finance organisations and others how to achieve the release of information from the banking industry that would help to support local economic growth and avoid financial exclusion. 6 Banking remains one of Britain s world class industries Britain s major banks are global leaders and a vital source of domestic jobs and tax revenues. Greater openness will be part of the solution for reconnecting capital to place for rebuilding the relationship between banks and their customers whose savings and investments help to provide the capital for lenders to do business around the world. The banks are not always wrong to reject applications for loans. For some people and some businesses, some loans will not be appropriate. But there are too many tales of reasonable applications being turned down, of staff in remote locations rejecting applications and bank branches that used to provide serious advice being closed or no longer offering face-to-face personal and business advice. Consistent disclosure by the banks of anonymised data on what they lend, to whom and where; and stronger incentives to work in all communities including with community banks etc. will help banks become more accountable to the communities they serve. Over time it will help government, banks themselves, community banks and the third sector plug the gaps in the market for access to financial services. It is right that a banking sector which has benefitted from around 1 trillion of capital and guarantees is forced to provide greater transparency. Labour s policy review will look at how best to achieve that. Labour s Open Banking

7 NOTES 1. Bank of England, Trends in Lending, 23 April Federation of Small Businesses, Survey of members, October 2011(analysed by Community Finance Development Association) 3. A study by the Office for National Statistics and Eurostat: Daily Telegraph, 28 October 2011, telegraph.co.uk/finance/businessclub/ /uk-firmsface-one-of-europes-highest-rejection-rates.html 4. Community Banks are also known as Community Development Finance Institutions 5. Department for Work and Pensions, Credit Union Expansion Project, Project Steering Committee, Feasibility Study Report, May 2012, dwp.gov.uk/docs/creditunion-feasibility-study-report.pdf 6. Mr Thomas: I thank the Minister for giving way again on the issue of transparency. Why have the Government not included in their proposals for banking reform the idea that there should be a requirement on banks to disclose what they lend and where they lend on a postcode basis, to help us understand where the Thamesmeads, the north Harrows and the other unbanked areas in the UK are, so that we can better direct resources and new challenger banks to those areas? Mr Gauke: Indeed, that issue was raised by the hon. Members for Islwyn and for Erith and Thamesmead during the debate. I say to the hon. Gentleman that data releases by postcode by each bank for all customers would be a very considerable undertaking for banks. It would also create a significant regulatory burden, and let us not forget that considerable regulatory burdens can prove to be a barrier to entry. At a time when we want to ensure that there is more competition, we must bear that in mind. It is also worth pointing out that there are legitimate differences between different areas for lending figures, including differences in credit risk. One would not expect there to be similar lending figures across the country. I caution against a reaction that would mean the imposition of a further regulatory burden. Hansard, 12 July 2012, Column WH 7 7. The 40 community banks in the UK were lending 77m in 2011, up from 1m in 2004, and they have proved their efficiency at getting capital investment to small businesses. However, a recent survey of some US community banks found that there was $24.2 billion available for loans to businesses. The success of US community banks shows the large potential for growth in the UK community bank sector. Similarly, while credit unions have expanded fast in the UK, membership and therefore lending is still relatively low compared to the US where the biggest credit union Navy Federal has $50 billion in assets and 4 million members of the US armed forces. In the US, revealing areas or groups of people without access to financial services has actually helped identify new market opportunities for alternative banks. Further sources: The Centre for Responsible Credit (UK), Community Development Finance Association (UK) and Opportunity Finance Network (US) Labour s Open Banking