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Inevitably, I suppose, we were bound to go over a certain amount of old ground, and I did not think that I could face this debate without some reference to Northern Rock and perhaps even to the Statement made earlier this week. Let me reiterate again—and I cannot say this much more strongly than I have sought to do in the past—Northern Rock was not bailed out. Northern Rock is in public ownership with the shareholders having lost very substantially. The shareholders are possibly bringing a case about the level of the shares and the compensation to which they are entitled. But, let us make no bones about it, there are losers in Northern Rock as far as concerns the shareholders. In addition, as was predicted—and this point does not get quite the same level of currency in the House in contributions from the other side—announcements are being made that Northern Rock will lose substantial numbers of staff as its business contracts. So several hundred people are going to pay the price of the failure of Northern Rock in circumstances where they may have the most marginal, if any, responsibility for the debacle which occurred.

Likewise I reiterate, as I sought to emphasise on Monday, the Bank of England is not bailing out banks; it is increasing the degree of liquidity in circumstances where we all recognise that limited liquidity is producing great strains on the financial system and would feed through to the real economy. But the whole concept underpinning Monday’s Statement is that the banks locate with the Bank of England securities that not only are appropriate and level to the resources made available to them but are of greater value than the money that becomes available to them. The idea that it is some kind of bail-out is a complete misconception.

The noble Lord, Lord Razzall, was concerned to emphasise that banks play a critical role in the economy and that we should take care about any possible onslaught on the principles on which they work. The noble Earl, Lord Caithness, sought to bring to the House’s attention the fact that I had taken an interest in the past in the other place with legislation I introduced concerned with client money and estate agents holding money for third parties. It is a very important consideration. I was very glad that although I could not, as a Back-Bencher, get that legislation through, it eventually became government legislation a few years afterwards. This concept is different. It is not about a third party’s money but the individual going to the bank and the bank having a special arrangement for the deposit which the individual makes.

Banks use resources made available to them through accounts for investment. They distribute capital across

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the economy and allow financial needs to be managed over time. Banks play a critical role. That is why we are all concerned. I am not talking just about legislators; every one of our fellow citizens is inevitably concerned when the banking system gets into the level of difficulty that has obtained over the past few months.

The Bill seeks to strengthen protection for the bank’s customers in one particular area, namely deposits. The proposal is that the bank should be required to provide a safe custody service for the money. That is entirely different from how banks operate when we deposit money or open current accounts with them. The new account would mean that the banks are not borrowing from the customers at all. They would hold the customer’s money on his or her behalf, and could not lend it to other customers. That is a massive inhibition on the centuries-old role of banks and the long period in which building societies have operated. If there were a high take-up of the proposed safety deposit current accounts by consumers, there would certainly be a significant impact on the cost of borrowing and therefore on the real economy.

Secondly, the new account which the noble Earl presents has the great virtue of absolute protection, but it is not a savings vehicle. Money has to be held in cash and will remain the property of the customer. Everyone will be able to follow the illustration of the noble Earl, Lord Ferrers, of the individual who goes along and demands there and then to see their money, and everyone of course can take out their money there and then, even though it is a deposit account. That would of course affect the flexibility with which banks operate with regard to resources, and the money would not grow. It would freeze at its current position. Although the House will recognise the Government's significant success over the past decade in managing and restraining inflation, inflation still erodes savings over time and this deposit account would be worthless the longer it was held in the bank.

The other aspect is that there is no reason why a bank should not offer this facility here and now. We do not need legislation to allow banks to provide a deposit facility. In fact banks offer safety deposit boxes. It is true that they charge for them, but that is the agreement between the customer and the bank. That guarantees what is in the box. The concept of the safety deposit box is that the bank does not know what is in it. It is merely a secure place in which things are lodged. I do not think that we need to prescribe anything in legislation in relation to that.

As the noble Baroness, Lady Noakes, emphasised, we need to take urgent steps to strengthen the banking system and to restore confidence in the light of developments over recent months. I am not sure that this Bill will make any contribution to that. However, as the noble Baroness indicated, it is important that the Government think very seriously indeed about, and produce proposals to deal with, the situation with which we are confronted.

In October last year, the Chancellor announced a review of the existing supervisory regime, including complex areas such as the legal framework for dealing with banks facing difficulties. As a result, a consultation document was published in January 2008, Financial

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Stability and Depositor Protection: Strengthening the Framework
. We allowed time for consultation on this framework document, which ended on Wednesday. That does not mean that the noble Earl, Lord Caithness, has not contributed something to that. I am not suggesting for one moment that he is out of time. The Government are ever open to representations from all quarters but particularly from parliamentarians and the noble Earl, Lord Caithness, is timely in his representation. But we need something more significant than this Bill. We intend to bring forward legislation later this year once we have evaluated the consultation and reached our conclusions. The document envisages action by the Financial Services Authority to make rule changes and by the Bank of England to address the key objectives of strengthening the financial system, reducing the likelihood of banks failing, reducing the impact of failing banks, designing effective compensation arrangements in which customers have confidence, strengthening the role of the Bank of England and improving co-ordination between the authorities charged with the supervision of the financial system. This work will bear fruit in a government Bill, which will come before this House not long from now, and in a range of other measures to restore confidence in the banking system and improve protection for customers. We have all learnt very sharp and important lessons from developments over the past few months. I emphasise that the Government are responsible for the British banking system but the House will recognise that the difficulties we face are reflected internationally across all the advanced economies and even beyond.

As I said at the beginning, this Bill looks modest in intent, but, if implemented, its impact would be explosive. I welcome the opportunity to debate it and I very much enjoyed the noble Earl’s opening speech but I am not sure that the Government will feel the greatest joy if this measure finally arrives on the statute book.

10.43 am

The Earl of Caithness: My Lords, I am grateful to all who have spoken. It is clear that the banking system has been shrouded in mystery for far too long and that it has some very serious structural faults which need addressing. Like the rest of the House, I thoroughly enjoyed what my noble friend Lord Ferrers said about the woman going into Barclays Bank. All I can say to my noble friend is that had she gone into Northern Rock in the middle of the crisis, it would have turned round to her and said, “No, you can’t have your £40,000 back because you’re an unsecured creditor”. That is the point of this Bill. Indeed, that is what Northern Rock did to people who tried to withdraw their money.

The noble Lord, Lord Razzall, rightly said that the current situation is beginning to lift the veil on the secrecy of banking and many of the problems. I am grateful to him for saying that the Bill addresses a fundamental point. It tries to do exactly that, but it is only a small point. However, I take issue with his remark that I am trying to change the banking system as it has existed for the last 500 or so years. I disagree because the banking system changed dramatically in

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1971 when the link with the gold standard changed. When President Nixon changed that, he changed, either deliberately or inadvertently, the whole way in which the banks operated. I go back to the figures that I mentioned earlier. The money supply in 1971—which is why I referred to that date—was £31 billion, but it has now shot up to £1,700 billion. That would not have happened under the old banking system. So it is really only in the last 30 or 40 years that the banking system has evolved into what we accept and take for granted today, which so many think should not be looked at with a severely critical eye.

I also take issue with the noble Lord’s remark that I am forcing a change in the way that we operate commercially and in how the banks operate. I am not forcing a change; I am merely offering choice to the depositor. If the depositor does not take up the option, that is fine, but at least there will be an option which there is not at the moment.

I am grateful to my noble friend Lady Noakes for her serious look at this. I say to her what I have just said to the noble Lord, Lord Razzall. She said that there is no clamour from the public for safety deposit accounts, as the Government now seem to be guaranteeing all deposits. I agree that there is no clamour, but the Government should not be guaranteeing all deposits. All I am asking is for the option to be offered and for the depositor to have choice.

I congratulate the Minister. There is no finer exponent of the straight dead bat on the government Front Bench. He is head and shoulders above the rest, whom he makes look like No. 8 big sloggers at the end. He is a fine talent. However, I disagree with him that it is the role of the banks to lend money. That was not their original role—which was to store and distribute money safely at the depositors’ request. They became lenders later and we have all got used to that. My little Bill tries to put back a little bit of the banks’ original role. I agree with him that the safety deposit account is not a savings account; it was not supposed to be. If somebody wants to save, there are other ways of doing so. I encourage and welcome the idea that we should increase our savings. All I am trying to do is give safety to unsecured creditors.

The Minister also said that there is no reason why the banks should not offer these accounts now. Of course, there is not in theory but, as he so rightly said in the first half of his speech, it is not in their interest to do so. It is in their interest to lend money, not to store it safely. I am grateful for what he said about the banking problems that we all face and about the consultation that has just taken place. He also said that something more substantial than this Bill is needed. I agree with him totally. A whole new approach to banking is needed if we are to retain confidence in the banking system and stop the very worrying trend of the increase in the money supply which the most reverend Primate the Archbishop of Canterbury will discuss in a moment in relation to debt. Debt is the huge concern behind all this and, given the uncontrolled money supply that we have had for the last 30 to 40 years, our children and

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grandchildren will face a potentially horrendous situation. I am grateful to all those who took part in the debate.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

Families: Economic Inequality

10.49 am

The Archbishop of Canterburyrose to call attention to the impact on the family of economic inequality, credit and indebtedness; and to move for Papers.

The most reverend Primate said: My Lords, I declare an interest as president of the Children’s Society, the Church Urban Fund and the Family Welfare Association and as vice-president of Barnardo’s. Thanks to the discussions so ably initiated by the noble Earl, your Lordships will need no reminding from me of the present crisis around credit in our economy and in the global economy. Daily headlines highlight the effects of the credit crunch on average incomes and home prices. What they do not always underline is the disproportionate effects on those in our society who are already most disadvantaged, particularly vulnerable families.

Even before the current crisis, the situation was disturbing enough. The estimate that almost one-third of children in the United Kingdom are living in poverty is a statistic that needs to be shouted from the housetops. We can applaud the declared aim of the Government, stated in 1999, to halve child poverty by 2010, but we must recognise that this goal is, sadly, unlikely to be attained on present showing. So serious is this prospect that over 45 major NGOs are later this year launching a national campaign called Get Fair, which is aimed at once again galvanising the commitment to end child poverty by 2020, the date which was originally set, and at tackling the negative and unjust image of people living in poverty that prevails in a worryingly large percentage of the population.

One of the matters that I wish to underline in this debate is that, because of the variety of problems around debt and credit, children in poverty are caught in a particularly toxic version of the poverty trap. Families with children face heavier pressures in regard to basic expenditure, pressures that push their outgoings beyond their weekly income levels. This is not to do with the purchase of luxuries; it is to do with school uniforms, adequate diet and heating in the home, access to routine leisure activities and so on. How much does it cost to travel to the nearest swimming pool? Never mind the extra expectations around Christmas and birthdays.

A 2007 report commissioned by Barnardo’s quoted a mother who was facing a choice in the winter between putting the fire on and using the cooker to prepare a meal. Incidentally, households using pre-payment meters are generally reckoned to be fuel-poor; that is, with over 10 per cent of household income going on fuel. The expense of that system is so much greater than payment of fuel bills by direct debit, which is of course impossible if you have no reliable credit arrangements. The Government’s

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pledge to tackle fuel poverty in the recent Budget is a welcome if overdue recognition of the scale of this problem.

The results of living in such a trap are long-term. The Children’s Society’s Good Childhood inquiry, of which I have the honour to be patron, has tabulated evidence of the outcomes of child poverty in adolescence and early adulthood, including a lower likelihood of planning to marry and a belief that health is a matter of luck, both of which are unhappy auguries for the stability and welfare of the next generation. But the more immediate consequence of such situations is that such families are far more likely to resort to borrowing and to what might be called panic borrowing; that is, resorting to whatever means of credit they can discover by word of mouth or by advertisement. If they borrow from doorstep lenders, even relatively reputable companies—there are plenty of others—will impose interest levels whose impact is crippling. The cycle of financial deprivation and anxiety is continued, and the vulnerability of children in such a family situation is intensified.

It is not surprising that, to use figures extrapolated from a Bank of England report on financial pressures a few years ago and circulated by Church Action on Poverty, households with an income of less than £12,000 per annum have unsecured debts corresponding to an average 36 per cent of that income. The figure for households with over £50,000 income per annum is a little over 12 per cent. Those percentages, which are from a few years ago, have increased dramatically for low-income families, more than doubling for the lowest sector.

Apart from the bare fact of chronic financial insecurity, the effect in terms of mental health is increasingly serious. There is still a stigma attached to unsecured debt, and being caught in the spiral of indebtedness produces depression and demoralisation, and stress on relationships and on consistent and responsible parenting, with an intensified risk of so many of those things which we currently spend millions of pounds attempting to eradicate, such as teenage pregnancy, underachievement in schools and a lack of motivation in relation to work and self-care. The marriage guidance organisation Relate notes that money worries are one of the primary factors in relationship breakdown, and Christians Against Poverty reports that one in three of its clients has considered suicide before approaching it for help. The impact of debt is enormous in these respects, and we badly need more joined-up thinking that can factor into our response to debt an awareness of costs to the NHS, to education services and to overall productivity.

Some of your Lordships may not be familiar—indeed I hope that most noble Lords will not be directly familiar—with the world of doorstep credit, in which charges of something in the region of 1,000 per cent are not unknown. The rapidly expanding system of payday lending, where a customer in employment is encouraged to write a cheque, or more often a number of cheques, post-dated to the next payday and is given a cash advance on a certain proportion—perhaps 7 or 8 per cent of the sum, the remainder being treated as a fee—traps the borrower in a spiral of debt as the

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arrangement is rolled over into a new phase if there are problems with repayment. The initial debt remains, augmented by soaring charges and the mortgaging of all income for long periods ahead. For those without bank accounts in the first place, the pressure of informal credit arrangements is still harsher. It is not surprising that loan companies are reporting massive profits at the moment.

What needs to be done? The Church of England’s campaign, Matter of Life and Debt, which was launched at the beginning of this year, has offered what has been widely recognised as a sane and practical set of guidelines for church members and the wider public about avoiding the worst traps of the present situation. But if we ask what needs to change, there are some obvious proposals to consider. The campaigning association Debt on our Doorstep, led by Church Action on Poverty, is pressing for tighter regulation of the lending market, with a proper investigation of payday lending, which I have just described, and a cap on charges. The consumer credit legislation of 2005 built helpfully on the last review of practice in this area by the DTI and other agencies, but shied away from a ceiling on interest.

While there is some debate about the effects of capping interest rates in the world of home credit, with some arguing that it could encourage unofficial practice that is even worse than that which now prevails, there is growing agreement that a situation in which charges can legally be as high as they are in the world of doorstep lending is indefensible. It sends the message that borrowing is a business in which you can only be a long-term loser, and so gives a further turn to the despair and low self-esteem that afflicts those caught up in the debt spiral. If the historic sin of usury still has any meaning in the world of smoke and mirrors that our modern credit economy seems to have become, it is surely in this context. At the very least, sharper regulation of the terms and methods of advertising for doorstep credit, which at present is often deliberately unclear about charges and rates of repayment, would bring some checks on what is increasingly and rightly seen as an open scandal.

As I noted earlier, all this has been true for some years. In a period of economic turndown, it is likely to be far worse, hence the urgency that I underline today. A precarious economic situation does not impact equally on rich and poor; if banks are forced to become more restrictive about where and with whom they operate, it is those whose access to credit is already limited who will feel it most sharply. Within that group, I have argued, it is those who have least control over the circumstances in which they live who will suffer most—children and vulnerable family units without secure income, particularly households in which lone women have the pivotal financial responsibility.

There is a twofold ethical concern to hold in mind as we consider what should be recommended to meet this challenge. Undoubtedly, Christian morality mandates the defence of the vulnerable. That is central to any society that claims any residual loyalty to our traditional ethic, but Christian morality is also about the equipping of people for the exercise of their human dignity as citizens both of their own societies

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and of the City of God—St Paul in Second Thessalonians famously commends not only generosity to the poorest, but responsibility on the part of those who can work to do so and to support themselves and their families. Giving to others is part of a process that enables those others to grow in their own dignity and to become givers in their turn. In other words, there is no question of Christian ethics idealising a state of dependency. In the time left to me, I should like to outline two areas in which more could be done to support this positive goal of drawing people out of dependency.

The first is a matter flagged by many commentators. Young people who have grown up in a context where debt is seen as a routine thing—a perspective which student loans have reinforced—are likely to be very ill prepared indeed to tackle the challenges of family budgeting or even personal budgeting as adults in a climate where economic fluctuations make their reliance on credit a highly risky affair. In other words, there is an urgent case for more support for financial education in schools and FE institutions. Young people are vulnerable to considerable pressure—sometimes, in the recent past, from banks themselves—to embark on risky and costly ventures into borrowing. They need skills in assessing risks, in interpreting borrowing conditions and in factoring into their decisions some better awareness of the uncertainties of the whole system. This needs to start early. The present situation is not good. It is estimated by Credit Action that less than 5 per cent of secondary schools in this country give anything like adequate priority to education in money management as part of their citizenship and PHSE curriculum.

Furthermore, as the commission chaired by my fellow townsman, the noble Lord, Lord Griffiths of Fforestfach, argued three years ago in a very significant document entitled What Price Credit?, lenders need to take more active responsibility for educating borrowers. The proposal in that commission’s report that lenders should routinely “audit” letters and information materials sent out in their name, using the independent resources of a recognised debt advice charity, to ensure that they are,

deserves strong support and further development.


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