Friday 18 June 2010

Concealed conservatism as the Banking Commission goes back-to-basics

Guest post from Craig Berry: Consumers would lose out under the Banking Commission's 'safe haven' proposals, offering protection that few would need - and at a price which would deepen the financial exclusion divide between banking "haves" and "have nots".


New Labour’s approach to financial inclusion was wrong-headed in several key regards. They assumed too much about the capacity of people on low incomes to save regularly. They too often overlooked issues of unequal access to financial services, the problem of financial illiteracy, and the explosion in personal debt. And most of all, of course, they mistook a short-term boom for long-term stability, failing to recognise a dangerous imbalance between finance and the so-called ‘real economy’. Yet like so much of New Labour’s economic policy, while its head was in the clouds, its heart was at least in the right place.

Following the banking bailout, consumer affairs magazine Which? established the Future of Banking Commission, whose report was published this week. Led by Conservative MP David Davis, and featuring contributions from Labour MP John McFall, Vince Cable, and Bank of England chief Mervyn King, the Commission’s stated aim was to protect consumers. It chose to achieve this, however, by stabilising the banking system, rather than empowering ordinary people at the expense of financial institutions.

The Commission does offer a series of minor regulatory reforms – in the UK financial system, even the minor can seem miraculous – but its central proposal is the creation of ‘safe haven’ bank accounts. By depositing money in a bank account, we are effectively lending the bank our cash, which is why they pay us interest on our savings.

But deposits in safe haven accounts would be invested only in extremely safe (and low-yield) products like government bonds. As a result, these deposits would generate no or very little interest.

This implication is so toxic that it is not even highlighted in the report. The Commission presents its safe haven proposal as entirely pain-free. Clearly, the Commission’s aim of facilitating stability in the banking sector, to remove the prospect of another bailout at taxpayers’ expense, is entirely honourable. But the question is whether ordinary deposit-holders should be the ones to lose out.

Regular, ‘unsafe’ bank accounts will inevitably offer bigger returns – for those more able to take risks with their savings – because banks will in general have more freedom to make high-risk, high-yield investments with these deposits.

But very little is made in the report of the fact that virtually all bank accounts already have a £50k deposit guarantee. Incredibly, the Commission offers to extend the operation of the guarantee to provide additional protection to those with more risk-intense accounts.

This raises serious questions about who these proposals are designed for. Ordinary customers already have a deposit guarantee far above what most people are able to save in a bank account. Despite this, their access to interest on their savings is to be greatly reduced, while the £50k guarantee is strengthened for those who choose to take greater risks.

For what it’s worth, the safe haven accounts get a 100% guarantee they will almost certainly never need. It would only be called upon in circumstances in which the government could not service its debt. How much a deposit guarantee would be worth in those circumstances is anybody’s guess.

Davis’ proposal simply oozes conservatism. It seeks to protect ordinary people by excluding them from institutions accessible only to the affluent. Rather than deal with the fundamentals of the failed financial system, the emphasis is instead on excluding people from its most lucrative features, recreating a dividing line between the ‘have-nots’ and the ‘have-lots’ that New Labour’s financial inclusion agenda had sought to rub out.

It is not yet clear, of course, whether Cameron and Osborne will accept the proposals – there remains the echo of Blairism in the new conservatism – but I wouldn’t bet my life savings against it.

Craig Berry is a former policy advisor on older people and state pensions at HM Treasury. He has published in several leading journals, including The Political Quarterly and New Political Economy, and his book 'Globalisation and Ideology in Britain' will be published by Manchester University Press in 2010.

1 comment:

Cantab83 said...

Do these proposals really represent anything different from those that currently exist?

Most banks and building societies already provide savings accounts where the interest rate increases for larger deposits, particularly those in excess of the deposit guarantee limit. As far as I can see all that these new accounts will do is try and ensure that each bank's capital reserves are increased from their current inadequate levels.

The real inequality in banking in the future will be between those customers that the banks view as being profitable, and those that aren't. The latter will generally be the low paid and the poor, and they will be denied access to many or all bank services. In a century where access to electronic money and credit will become increasingly important, this could potentially create a new underclass. We are already seeing a move in this direction as banks attempt to induce more and more of their customers to pay a fee for the privilege of having an account.