Will banking be better in the Big Society?
The foreword to the Tories Big Society manifesto describes the banking sector as ‘overblown' and says we need a new economic model, so as I started reading the following 120 pages I was hopeful of finding evidence of real bank reform. Would I be disappointed?
There are certainly signs of progress against the Better Banking Coalition's proposals, on disclosure, tackling excessive charges for credit, encouraging financial inclusion and placing a social levy on banks. Their proposed Consumer Protection Agency will be given powers to curb excessive charges on store cards but their proposals only extend to store cards and I can't for the life of me understand why (philosophically or practically) they would stop short of extending this to all forms of extortionate lending? The apparent exclusion of doorstep lenders and payday lenders, who primarily serve poor households, seems at odds with the manifesto commitment to tackle inequality. Perhaps someone more knowledgeable than me can explain how this makes sense?
Their second plan is to establish a free national financial advice service although, as with most manifesto pledges, precisely what this means or how it would work is not clear. Financial literacy and financial capability is obviously important in order to address financial exclusion, but even having a degree in economics won't help you if the choice you have to make is between a doorstep lender charging 1,000% and an illegal loanshark to access credit. A welcome move in the fight against financial exclusion is that Post Office Card Account holders would benefit from discounts when paying by direct debit and people with unsecured debts of less than £25,000 would be protected from having to sell their homes if they got into difficulties.
Disclosure comes in the form of an obligation on credit card companies to provide clear and consistent information to consumers. This idea of ‘simplified transparency' (taken from Thaler and Sunstein's ‘Nudge' and a favourite among current policy-advisors) protects consumer interest, but it focuses solely on individuals at the expense of any corporate transparency. As such it would not help to identify where there is discrimination and market failure in financial service provision.
Progress on Better Banking's call for a tax on banks comes in the form of a new ‘social responsibility levy' which will be placed on the financial services sector. The Tories deserve credit for their proposals for two reasons. Firstly, for extending the scope of the levy beyond just the banks, unlike Labour whose own levy would cover only retail banks, never mind the wider financial services sector. And secondly, for saying they will implement the tax unilaterally if international agreement cannot be reached. There's no detail on what this would mean in the manifesto, but according to a BBC report this would tax banks ‘wholesale liabilities' (that is the amount of money they borrow from other financial institutions). The £1bn this is expected to raise would go on a tax break for lower-income married couples, funding the financial advice service and paying off the budget deficit.
A Conservative government would use its stakes in RBS, Lloyds Group and Northern Rock to increase competition in the banking sector. And when it comes to selling these shares, we will all be given the opportunity to buy a stake in these banks with a ‘people's bank bonus'. I don't know what happens to those who cannot afford to buy shares, but who contributed to the purchase of those banks through their taxes (and many poor people are in work and do pay taxes)? And even less certain is, if the sale is going to be good value for the taxpayer, are they actually going to be people who are keen to buy shares in these banks? It's surely something of a Catch-22 . . . if people want to buy them, then they must be a good deal for investors, in which case the implication is that they may have been sold too cheaply. Price them too high and no one will want to buy them. Economic theory would say that they would need to be priced at the equilibrium, but in practice that must be almost impossible? Perhaps that's one for the national financial advice service to ponder!
Overall then, there's some things to be pleased about and some steps in the right direction. However, the rhetoric on the need for bank reform and tackling inequality and discrimination and their Big Society plans isn't quite so prominent when it comes to their proposals for financial service reform.