Former chancellor Lord Nigel Lawson says it is “absurd” to believe free banking has led to misselling as he calls for the Bank of England to have a veto over banks’ sales incentive schemes.
In an interview with Money Marketing, the Conservative peer says misaligned bank sales incentives have led to misselling and bad lending which has characterised the banking system for the last 20 years.
His comments come as FCA chief executive Martin Wheatley revealed two more banks are in enforcement over sales incentives.
Lord Lawson, who was Margaret Thatcher’s reforming Chancellor from 1983 to 1989, said he did not predict the scale of misselling scandals that came following his time in office.
Since he left Government tens of billions of pounds worth of financial products have been missold, notably payment protection insurance, pensions and mortgage endowments.
Lord Lawson, who also sat on the parliamentary commission on banking standards and has been a vocal critic of UK banks, said the scandals occurred because of FSA failure and a “sad decline” moral and cultural standards.
The peer has called for the total separation of retail and investment banks, not just ring-fencing, and the break-up of the Royal Bank of Scotland as he backs a radical reform agenda further than Treasury plans.
The banking commission called for an overhaul of the remuneration code with far greater FCA scrutiny over schemes.
Lord Lawson says: “[Sales incentives] have indeed been a problem – which has led not only to misselling but also to bad lending, a major cause of the banking crisis from which we are slowly emerging, at considerable expense to the taxpayer and the economy in general.
“As the report of the PCBS makes clear, the supervisory and regulatory authorities, essentially the Bank of England, need to take an active role in approving or not approving the structure – much more important than the level – of bank remuneration.”
Speaking at a Treasury select committee hearing yesterday, FCA chief executive Martin Wheatley said two more banks are under enforcement investigation for sales incentives after Lloyds Banking Group was fined £28m last year.
Wheatley said sales staff could cause “serious harm” and that tackling sales incentives was one of the top priorities for the FCA.
Some have suggested misselling has been driven by free banking and the need to cross-sell in other areas. But Lord Lawson says it would be “wholly wrong” to restrict free banking in a free society.
He says: “The notion that ‘free’ banking has obliged the banks to engage in misselling of other products is absurd. And the idea that, if free banking were abolished no bank would seek to increase its profits improperly is naïve in the extreme.
“If the banks choose to abandon ‘free banking’ of their own accord, fine: but that is of course their business.”
Lord Lawson was one of the 20th Century’s most radical chancellors with huge deregulation of the City and taxes slashed under his watch, and had notorious battles with the financial services sector to open up markets.
He has taken a keen interest in the Pensions Bill and earlier this week warned a charge cap would be “all too easy” for funds to avoid as he called for full transparency of costs and charges.
The cap has been delayed by 12 months and Lord Lawson points to his own attempts to reform pensions tax relief being met by industry resistance.
He warns today’s pension reformers the industry lobby is one of “the most powerful in the land”.
He says: “There is a basis for a more widespread reform of the system but the pensions lobby is among the most powerful in the land. My memoirs explain both the reforms I introduced and what I would liked to have done. The system is still somewhat skewed in favour of higher earners, but not nearly as much as it was before my reforms.”
The Treasury and the Association of British Insurers have opened a debate on the future of tax relief as it comes under the political spotlight at the next election.