I beg to move,
That this House believes that Government reforms have failed to deliver a competitive banking system which serves the interests of consumers or the needs of businesses and the British economy; is concerned that customers have limited choice and low levels of trust and confidence in the banking market; is disappointed that recent legislation has fallen short of the recommendations of the Independent Commission on Banking which called for action to diversify the sector and ensure that major new banking service providers are created; believes that banker remuneration remains unacceptably high; regrets the fact that it has taken the EU to act to rein in excessive bonuses in Britain in the absence of domestic action, but believes that the Government as a majority shareholder in RBS should not approve any request to increase the cap; and calls on the Government to prevent a return to business-as-usual in the banking sector, which continues to require real reform and competition so that the UK can earn its way out of the cost of living crisis.
Mr Deputy Speaker—[Interruption.] My apologies, Mr Speaker; I correct my first sentence. I want to explain to the House that for many of our constituents—[Interruption]—including those of the hon. Member for New Forest East (Dr Lewis), January can often be a difficult month financially, with families facing higher fuel bills and receiving credit card statements for the often very expensive Christmas period. Not everyone has such reactions to the new year, however, because for many of the luckiest bankers working in the City, January and February is party time—bonus season—when their high salaries are often dwarfed by even higher windfalls, which are enough to make a lottery winner look on in envy.
Last week, the City recruitment company Astbury Marsden reported that bonuses for the most senior staff in banking and financial services may increase by as much as 44% in this bonus season, despite all Ministers’ talk about how such payouts have been scaled back. In 2012, the financial sector paid out an eye-watering £14 billion in bonuses to top staff. At least £1.7 billion of bonuses were held back until just after that fateful day last April when the Chancellor of the Exchequer cut the top rate of tax for the richest 1%, who are those with earnings of more than £150,000 per year. Incidentally, the postponed payouts cost the public purse at least £85 million in lost taxes.
What about the rainmakers, as they are sometimes called—the most senior traders or masters of the universe? The number of UK bankers who earn more than £800,000 rose by 11% to 2,714 last year, which is more than in the rest of Europe combined. For that set of senior bankers, the compensation—a word that the banking sector sometimes uses instead of the word pay that the rest of us use—rose from £1.1 million to more than £1.6 million in 2012. That does not look like an industry that is licking its wounds; it looks like business as usual.
The shadow Chief Secretary to the Treasury seems to have glossed over the fact that City bonuses tripled in the last five years of the Labour Government. I want to ask him a more general question. Given the catastrophic role that the banking industry played in the economic downturn, why are we having only a half day’s debate on this important subject and squeezing it together with another important debate on the national minimum wage? The Treasury Committee is also meeting this afternoon to talk about these issues with the Governor and one of the deputy governors of the Bank of England. The Committee’s members will therefore not be able to participate in this debate. I wonder whether that is a reflection of the fact that Labour is not taking this matter as seriously as it should.
I am not sure that the hon. Gentleman has alighted on the best criticism of the fact that we are having an Opposition debate today on the failures in the banking sector. He is a bit off message because he at least admits that it was the banks that got us into the economic catastrophe in the first place. That is slightly off the script that Ministers usually use.
Does my hon. Friend agree not only that this is a good day to have this debate, but that most of the people in Huddersfield, whom I represent, and in this country cannot understand the culture of bonuses for bankers? These people have failed us and have failed small businesses and start-ups, and yet they have a bonus culture that is unlike anything else in the country.
My hon. Friend is right to speak of the anger that his constituents feel. While many of his constituents and mine are struggling with the cost of living crisis, what has been the Chancellor’s response to the concerns about, and the evidence of, excessive pay? Does the Chancellor regret the millionaires’ tax cut or missing another year of the bankers’ bonus tax? Does he reflect on the outrage among the public, which my hon. Friend has expressed, who want leadership in tackling such brazen rewards? No; the response of the Chancellor of the Exchequer is to oppose even the most basic transparency, which would let shareholders know about bankers who are paid more than £1 million, and to oppose any action in the UK to tackle the excessive bonus culture.
The Chancellor’s response to public concern was to travel to Brussels in September last year to oppose Europe-wide moves to limit bonus payouts to no more than 100% of salary levels for those who are on £400,000 or more, unless there is approval from shareholders. The Chancellor continues to spend hundreds of thousands of pounds in legal fees to fight that new EU rule tooth and nail, even though it has only just come into force.
I do not know where the hon. Gentleman was at the beginning of my speech, but City analysts are predicting that the bonus round for 2013 will see an increase of 44%. I do not know whether he thinks that that is acceptable or whether many of his constituents are receiving increases in their pay of 44%, but I would bet that they are not.
Does the hon. Gentleman recognise that although bonuses may have been halved, in banks such as RBS, which is still making losses and denying the finance that is needed to businesses across the United Kingdom, bankers bonuses are still sometimes in excess of twice their salaries?
That is exactly the issue that we are debating.
For all the sophistry and smoke-and-mirrors attempts by Ministers, including the Prime Minister earlier today, to give the impression that they are taking action on bonuses, we know that they confront a key decision because of the new Europe-wide decision to limit bonuses. However they try to spin their way out of it, they will have to confront that decision. It is a matter of national embarrassment that UK policy on bankers bonuses was not led by the UK Treasury. Now that we have a bonus ratio in statute, albeit from the European Union, surely the Minister will not cast his shareholder vote, on behalf of the taxpayer, to allow state-owned banks to shell out bonuses that are above the level of their salaries.
It is deplorable that this debate has been scheduled during a Treasury Committee hearing. As a member of that Committee, I have seen over the past few months and years the attempts to clear up the appalling wreckage that was left in 2010. Is it not true that under the last Government, this country ran a budget deficit of 3% at the top of the economic cycle and that we had the highest levels in recorded history of personal and household debt?
There they go again, denying that the banks had any responsibility whatever for the global financial crisis. Obviously, it was Labour’s investment in schools and hospitals that caused the devastation in dozens of countries worldwide and recession across—[Interruption.]
Order. The hon. Member for Hereford and South Herefordshire (Jesse Norman) is usually the epitome of the cerebral philosopher; an air of calm usually exudes from his every orifice. He has become uncharacteristically over-excited. He must calm himself, consider the merits of yoga and listen to what the shadow Chief Secretary has to say.
I now have an image in my mind, Mr Speaker, but we will move on.
I want to pin down the position that the Prime Minister was trying to spin in Prime Minister’s questions. The market expectations are that the loss-making RBS will pay about £500 million in bonuses in 2013, despite the string of allegations about LIBOR fixing and the accusations that it forced viable businesses into default in a bid to seize their assets on the cheap. When life is getting harder for so many households and bank lending to businesses is falling, it cannot be right for the Chancellor to approve a doubling of the bank bonus cap when the taxpayer has a stake.
I will give way to my hon. Friend in a moment, but I want to finish this point.
The Prime Minister gave the clear impression at Prime Minister’s Question Time that he would veto higher pay and bonuses. Perhaps he was unintentionally misleading in the way that he made that point. He might want to come back to correct the record. Some of us think that he was conveniently looking at the total remuneration at RBS as a device to slip out of the question about how he will exercise the shareholder vote.
The House needs to know that RBS has reduced the number of bankers on its roll by about 2,000 in the past year. One would therefore expect its pay bill to fall, and so it should, but that does not get it out of answering the question about the individual senior bankers who are earning £400,000 or more. Will the shareholder, in this case the Chancellor of the Exchequer, give them permission not just to have bonuses of 100% of their salaries, but to bust through that and go to 200% of their salaries? That is a crucial test for the Chancellor. Whatever the sophistry and warm words we might get from the Prime Minister, they cannot wriggle out of confronting that decision.
Does my hon. Friend agree that this is a question of leadership? If leadership is not shown by the banking sector itself, it is for this House and this Government to show leadership. My constituents cannot understand why these people live in a stratosphere in which they are under no moral or financial obligation to behave properly. Let us show some leadership on this matter in today’s vote.
My hon. Friend will know that on 1 January the EU bankers bonus cap came in and it restricts the payment of bonuses to not more than the amount of a salary on a 1:1 ratio. Does it not tell the House all we need to know about this Government’s attitude towards bankers bonuses that their first action is to submit a legal challenge to the European Court of Justice against the EU cap?
One of the questions I have for the Minister is precisely about how much it is costing the taxpayer, in all those legal fees to hire barristers, to try to overturn the bankers bonus cap. I will be happy to give way to the Minister if he has an update for the House on whether the figure is £100,000, £200,000 or £300,000. How much is being spent on legal fees? The Minister’s eyes are not gazing across the Chamber at this point, so perhaps he will come back to that in his speech.
I wanted to quote for my hon. Friends something that the Chancellor said in August 2009, when he was in Opposition:
“It is totally unacceptable for bank bonuses to be paid on the back of taxpayer guarantees. It must stop.”
That is the position the public were led to believe the Chancellor would take when in office. Strangely, that does not seem to be the position he takes now.
Does my hon. Friend agree that it is very important indeed to establish the amount of money that is being paid to individuals, such as the £5.8 million in the year ending 2010 to the chief executive of RBS and the £5.8 million paid out by Lloyds? Will our constituents not recognise that the Conservative party is saying absolutely nothing about the level of those payments to individuals, and that it is defending them?
Government Members will have to confront this issue, because it is a decision they will to have to take. Those traders and executives were former colleagues of the Financial Secretary to the Treasury, who was one of the senior bankers at Deutsche bank. Perhaps he can tell us whether, when he was a banker before the election, his bonus was more or less than 100% of his salary. Perhaps he can fill us in with that bit of history.
In our motion, we have made the point about instructing United Kingdom Financial Investments Ltd and making sure that it acts accordingly and turns down this proposal if bonuses come to more than 100% of salaries. That is not fair. Most of the people watching this debate will think, “Well, it would be nice to get any bonus at all. The same amount as my pay? Crikey, that would be phenomenal, but twice the amount of pay is totally unacceptable.” The Chancellor and the Minister will have to confront the anger of the public on this issue if they fail this test.
I am not quite sure what planet the hon. Gentleman is living on, but we have been consistently tabling amendments to financial services legislation to encourage more competition and to have an inquiry into retail banking competition. At every stage, the Government have refused to go down that route.
The hon. Gentleman is probably aware that the respected Nobel prize winner Professor Joseph Stiglitz said in his book, “The Price of Inequality” that one of the ways forward is to
“curb the bonuses that encourage excessive risk-taking and short-sighted behaviour.”
The hon. Gentleman will see that we are back on that trajectory. We are heading for another crash and another period of excess in banking, as the monopolists’ rent-seeking behaviour continues in the City.
The hon. Gentleman makes a fair point. This morning the Chancellor gave his rationale for disagreeing with the European banker bonus cap. It is a shame that he did not take a lead in trying to construct something of his own to rein in this culture. After all, we would have had a repeat of the banker bonus tax. The Chancellor’s argument is, “Oh well, this is just going to move it all on to pay and on to ordinary salaries.” Surely one of the lessons of the banking crisis is that the excessive, short-termist risk and reward bonus culture was driving dysfunctional behaviour that got us into the mess in the first place. Frankly, I am sure those bankers will try to find all sorts of little dodges and weaves to get around the rules, but we have to make the system more transparent and we need to move towards a remuneration arrangement that is much more about sustainability, stability, professionalism and serving the customers. It would be foolish for the Government to try to sue Brussels on this point and hold out against public opinion, which has had enough of this excessive behaviour.
I wonder whether my hon. Friend can help the House. Have the Government ever given any indication on what they believe the upper limit should be on bankers’ pay?
I do not think they have, although I think before the general election the Prime Minister indicated that he did not want any taxpayer-owned banks to pay out bonuses of more than £2,000. We know what happened to that proposal.
The issue goes beyond anger about bank bonus season. Serious reforms to the banking culture and the role of banking in the economy are still required. Ministers still have not grasped the role that banks ought to be playing to repair our economy. They are still out of touch on the causes of three years of economic stagnation and the reforms to the banking sector that are still needed. How much more evidence do they need? Despite the billions of pounds needed to ensure that the cash machines kept working; despite the mis-selling and ripping off consumers; despite the money laundering and sanctions busting; despite banks peddling interest rate swaps to struggling small firms; despite multi-billion losses in the disastrous London Whale scandal—London Whale was the name given to a trader—and fines of more than £1 billion for Deutsche bank in the United States for mis-selling mortgage-backed securities; and despite the rigging of LIBOR and other benchmark indices, including investigations into attempts by up to 15 banks to manipulate a £5 trillion dollar a day foreign exchange market; despite all that the Government still do not have the stomach to do what it takes to clamp down on misconduct and to finish the job.
My hon. Friend mentions the LIBOR scandal and the mis-selling of products. May I put on record my thanks to the hon. Member for Aberconwy (Guto Bebb) for his work as chair of the all-party group on interest rate swap mis-selling?
On bonuses and reward, does my hon. Friend believe that perhaps what we should say to high earners is that there will be no more bonuses until they have sorted out the mess the Financial Conduct Authority is currently investigating, and until all the individuals and companies have had their cases considered fully and have been compensated for the mess the bankers made?
My hon. Friend puts his finger on the point, which is that most of our constituents would say that bonuses are supposed to be for good or excellent performance and not just part of the run-of-the-mill, ordinary pay they receive regardless of whether they do well, make losses or get involved in all sorts of problems and difficulties. That is part of the problem with the culture in the banking sector, with which, frankly, the legislation introduced by the Government has so far just not dealt with.
Perhaps the hon. Gentleman could update the House later on what cap on bonuses was set by the previous Prime Minister, or the one before that. Does he not accept that the past few years, as he has just demonstrated with his recitation of scandals, was a period of the most lax supervision? It was under the previous Government that the Bank of England allowed these dreadful evils to take place. That is why it has made such a difference introducing the new senior persons regime, the new authorised persons regime and all the other changes, as well as the new definition of competition in legislation.
The hon. Gentleman and I differ in our analysis of what happened—I will explain why in a moment—and that says a lot about where we need to take policy. I do not believe that we have finished the job of banking reform, which seems to be the impression we are getting from the Government Front Bench. He and I might agree that more is needed—I will talk a bit about that in a moment—but stopping short of those reforms will not prevent another bank failure or protect the interests of normal customers and society so that they, not the high remuneration of those senior bankers, come first.
There is a touch of revisionism from Government Members, but perhaps that is a bit generous; their attempt to rewrite history is breathtaking. I have no doubt that when the Minister speaks my hon. Friends will hear a complacent desire just to move on from banking reform and a desperation to make party political points about the history of the banking crisis. They will try, with all their might, to pretend that it was Labour’s spending on schools and hospitals that caused a global recession in dozens of countries worldwide, but my hon. Friends will not hear from him about how the banks must still be made to pay for their egregious and scandalous abuses and over-leveraged trades in sub-prime mortgage securities.
All sense that the banks must be held accountable for the state we are in has been airbrushed from the Government’s narrative, because they want to blame their political opponents rather than upset their corporate friends. Perhaps the Minister likes to turn a blind eye, in the knowledge that it really was the banks that were responsible for the global financial crisis, or perhaps he has now genuinely convinced himself that it was primarily the fault of Governments and that the banks were only a little bit to blame. Either way, they have the wrong analysis, which explains why they have the wrong policies. By failing to tackle the root causes of recent economic devastation and the deficit that built up as a result, they are maintaining the risk that banks could once again turn to the taxpayer to bail them out, should they fail again. Never again must the taxpayer pick up the losses for the reckless behaviour of banks, and never again must our economy and public services be thrown into such turmoil because of the negligence and monumental greed of banking executives and traders.
I apologise for arriving late, Mr Speaker. I am sure my hon. Friend would agree that in the last Parliament the Conservative party, in opposition, only ever complained about red tape. Did he notice that for the first time today the Prime Minister talked about the recession not being the fault of the Labour party?
This is why this Government’s narrative is beginning to crumble around the edges. Most people realise that the banking sector was totally dysfunctional and causing great difficulties. Of course we need better policing throughout the international community and by the regulators, but if we are to rehabilitate the banking sector, we cannot shy away from the tough decisions needed to change its structures and behaviour. There are still too many areas in which the Government have left banking reform unfinished.
Returning to the point about complacency, did my hon. Friend see the briefing note from the British Bankers Association prior to this debate? It says that
“no other industry is subject to such influential pay supervision”.
I have never heard anything so ridiculous in my life. Does he agree that this “influential pay supervision” is patently failing in its job?
I have been listening intently to my hon. Friend’s delineation of the big ticket items where the banks have failed and where the Government appear not to criticise them, but on a more localised issue, Scottish constituents of mine have consistently been rack-rented and ruined by RBS, as the Tomlinson report said, yet these bankers complain in the local press in Scotland that their £4 million-worth of bonuses is less than the £6 million that HSBC bankers get—and these are people who consistently destroyed companies in Scotland. I hope the Minister will address the question of their faults and how they have acted since the crash.
Of course, we want to see rewards, bonuses and pay that reflect performance. That is my hon. Friend’s basic point. It is not asking for too much.
In too many areas, reform has been left unfinished. Four times the Government have rejected our proposals for bankers to face an independent licensing regime with an annual validation process for competence; they have delayed a decision on leveraging that could prevent excessive risk taking; and they have continued to resist a sector-wide back-stop power for the full separation of retail and investment banking, should the ring-fencing not work. Moreover, there is insufficient scope for proper scrutiny before the further sale of Treasury assets, and we know that the Government sold both Northern Rock and the first tranche of Lloyds shares at a loss. Despite month after month of persistently falling lending to small and medium-sized enterprises—a fall of £12 billion in the past year alone—the Government have had to throw out Project Merlin, ditch credit easing and reboot their funding for lending programme, but still to little effect. It is obvious that we need a serious British investment bank, supported by a network of regional banks and capitalised with revenues from the market value of 3G spectrum licences, yet here we are, in the fourth year of this Government, and their half-hearted attempt at a business bank is still not fully up and running.
The previous Government introduced a bankers bonus tax, which raised billions of pounds that helped improve our public services. Government Members need to wake up and realise that they need to repeat that strategy.
While we are on the subject of bank taxation and the levy, let us look at what the Government have done, because it has been such a colossal disappointment so far. The Prime Minister promised that his bank levy would raise £2.5 billion each year, but they have never been bothered about making the banks pay their fair share, because their hearts are not in it, so the bank levy has fallen short of that target year after year. It raised only £1.6 billion in 2011, and despite their subsequent promises, it then again raised only £1.6 billion in 2012, and they are expecting a further shortfall this and next financial year—the Minister could confirm this. In the past three years, the bank levy has raised £2.1 billion less than they promised. With £2 billion, we could kick-start the construction of 80,000 houses or employ more than 20,000 nurses—the same number the NHS is short of. It represents a serious and scandalous shortfall in tax collection.
I would like to make some progress.
Perhaps the most serious area of reform left untouched by the Government is the continued dominance of the big five banks, which gives customers limited choice and helps feed disillusionment and low trust. The Government have an action plan to deliver competition in the banking sector, but we cannot see it. We need more competition and banks that are hungry to serve the interests of consumers, businesses and the British economy, and a wholehearted shift in the number of market participants serving households and businesses, not a half-hearted tinkering around the edges.
It has been widely trailed today that a future Labour Government, if elected, would try to force banks to sell off branches. That will cause great concern, particularly in rural areas, because it is their branches that would be most likely to be disposed of. How would his proposals help create competition for our high street businesses?
This is not about shutting branches; it is about making a more competitive sector. Time after time, we have tabled amendments to financial services Bills calling for more competition in the banking sector. The Independent Commission on Banking, chaired by Sir John Vickers, called for action to diversify the banking sector, but the Treasury’s approach to divestments of branches from NatWest and Lloyds was not exactly a raging success. It would have been better if the Government had taken our advice and gone for a competition review of the retail sector and not just the business banking sector. They often say “We are looking at competition”, but it is usually only in business banking. They need a more comprehensive approach; the customer needs better service and competition to bring down fees and charges.
There is still no obligation on banks to provide a basic bank account for all customers, even though we know it helps people on low incomes to save money and plan their budgets. The jury is out on whether the seven-day current account switching service will be enough or whether steps should be taken towards full portability of bank accounts for customers. The Government could introduce a fiduciary duty of care, explicitly putting the best interests of customers first and foremost in the financial services sector.
Today, banks are an essential utility; they are supposed to be there to help customers, not to hinder the economy or act like untouchable vested interests. We need to clean up the behaviour of the banks and end the culture of excessive risk and reward. Those are the traits of the old economy; the new economy that we need demands a more modern banking sector—more competitive and diverse, accountable to its customers, supporting long-term investment at home and delivering the sustained growth that we need. That will be the task of the next Labour Government.
I thought that Labour Members had turned over a new leaf this year: they admitted that they got it wrong on immigration and they admitted that they got it wrong on education, so I hoped that the hon. Member for Nottingham East (Chris Leslie) would follow suit and admit that they also got it wrong on banking. I hoped he would admit that it was Labour’s changes to banking regulation that led to the world’s largest banking bail-out—changes that meant that when the alarm bells were ringing, no one was listening. The Bank of England was completely powerless to act. I hoped that the hon. Gentleman would also admit that City bonuses rocketed under Labour’s 13 years in office, while Labour Cabinet Ministers were telling the world that they were
“intensely relaxed about people getting filthy rich”
and they were handing out gongs to the likes of Fred Goodwin. City bonuses were surging to all-time highs, rising year after year, more than tripling over five years and peaking in 2008 at over £12 billion. Instead, this is a new year and the same old Labour.
I think anyone who reads the transcript deserves an apology from the Minister, who forgot to mention that the relaxation of banking controls started with Mrs Thatcher and the Conservative Government. He forgot to tell people on the record that when people like me on the Opposition Benches were urging constraint—I am an economist—the Minister’s right hon. and hon. Friends were calling for fewer controls and a lighter touch with the banks, as was the SNP in Scotland.
I think the hon. Gentleman has a challenged memory of events. I am sad to see that he had an opportunity to apologise, but did not take it.
Let us look at the facts. At the time of the changes Labour was making to the financial sector, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) warned the then Government in November 1997:
“The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”—[Official Report, 11 November 1997; Vol. 300, c. 732.]
Let me share another quote, in this case from the current shadow Chancellor from a speech he made as City Minister in 2006:
“Nothing should be done to put at risk a light-touch, risk-based regulatory regime.”
What we are hearing from Labour is the same old headline-chasing nonsense that we have come to expect and no answers at all to the problems they created.
I agree with the hon. Member for Nottingham East on one thing: public confidence in the banking system and in bankers is still low, just as—let us be honest—public confidence in the political system and the people in this Chamber is still low. That is precisely because, five years ago, partly as a result of the irresponsible decision of some bankers, but largely as a result of the policies of the then Labour Government, our country found itself in a huge mess. When trust is lost on that scale, it is not won back overnight.
Perhaps the Minister can answer this question because the shadow Minister did not give way to me. The shadow Minister said that restricting the number of branches that banks can hold will not close branches, but of course it will. What does he think closing branches will do to people’s faith and belief in the banking sector. I have three branches of Barclays in my constituency—in Chandlers Ford, Alresford and Winchester—so if, God forbid, a Labour Government were ever elected, which one would they propose to close?
My hon. Friend is right. It is reported that, this Friday, the Leader of the Opposition will make a speech on the economy and attempt to set out an economic policy. I am afraid that his last such speech did not go very well. From what we know about this proposal—very little at this stage—I am not aware of any country in the developed world that has a similar approach, with the possible exception of the former Soviet Union, which adopted a similar approach to its banking sector.
I am glad we are discussing history, because I am aware of the hon. Gentleman’s own history as a banker. I wonder what his remuneration and bonuses were back in those days. Given his history and the fact that he should be saying sorry—I presume—will he tell us whether he believes that bankers deserve a bonus in excess of 100% of their salary. Does he think so and does the Chancellor think so?
The hon. Lady seems to suggest that it is best to have Ministers who have no experience or knowledge in the areas for which they are responsible. We saw that under the previous Government, and look what happened. To win back the confidence of the British people, we need a long-term economic plan for recovery.
I would not want the Minister unintentionally to miss answering the important question that my hon. Friend the Member for West Ham (Lyn Brown) asked. For the record, do the Government believe that the senior bankers at the Royal Bank of Scotland should or should not be allowed to pay bonuses of over 100% of pay?
I will come to that later in my speech when I will deal with some of the issues that the hon. Gentleman raised.
Bringing back confidence to the economy will of course mean dealing with the banking sector to make it more stable, more resilient and more efficient. That is exactly what this Government have been doing for the last three years.
Does the Minister agree that, as with the debate on the bedroom tax before Christmas, this debate is really one about the symptoms of inequality in our society. Since the 1970s, we have seen 80% of the gains in productivity going to the top 1%—an inequality level roughly equivalent to that of the 1920s. Governments all over Europe and in the United States are not getting to grips with inequality and the hampering of life chances that it is causing. What does the Minister think should happen? The bankers should not receive the bonuses they are getting and people should not have their life chances halted by the bedroom tax. Are this Government going to do anything serious on this issue?
The hon. Gentleman will know that inequality surged under the previous Government and has come down under this Government. In fact, the rich pay a higher proportion of tax than they have ever paid, with the top 1% of earners paying almost 30% of income tax for the first time and the top 5% paying almost half of the total income tax take. The Government are proud of making sure that the rich make a fair contribution to public finances.
My hon. Friend is making an extremely powerful case, but may I remind him of the central fact of the past 15 years? The banks had the same level of leverage for 40 years, until 2007, after which it went up by two and a half times. It was that explosion of leverage, under Labour, that destroyed the banking system both in this country and internationally.
As always, my hon. Friend is spot on. Because of the changes that Labour made in the regulatory system, no one knew what was going on, and if they did, they were absolutely powerless to act, especially those in the Bank of England. That is the legacy of the last Government.
Let me now say something that the Labour party seems to be scared of saying. We need well-run successful banks in this country. We need the services that they provide. We need the loans that they give to small businesses, and the mortgages that they offer to home owners. We need the jobs that they produce—more than 450,000 throughout this country, and more than two thirds of those are outside London. We, as a Government, also need the huge taxes that the financial sector and its employees pay—some £60 billion last year—so that we can run our schools and hospitals.
Small businesses have been among the biggest victims of the financial crisis, because banks have stopped lending to them. I share some of the Minister’s scepticism about the advantages of shutting bank branches, which may indeed only harm banking and access to financial services in rural areas, but I nevertheless think that the Government could be doing a great deal more to ensure that the banks lend more to small businesses on fairer terms. What will the Minister do about that?
I agree with the hon. Lady that businesses rely on the banks for the lending that they need. The action that we have already taken through, for example, the funding for lending scheme has ensured that the banking sector has had more money at lower rates to on-lend to small businesses and, indeed, households. We also recently announced a consultation on collecting small and medium-sized enterprises credit lending data, which will help to spur further competition in that sector.
The Minister is endorsing a noble cause in recommending support for small business and for manufacturing in particular, but given that manufacturing accounts for 10% of the economy, why does only 2.6% of bank debt stock result from lending to it? Why does the Minister not do something about that?
Part of the answer might be that manufacturing was decimated under the last Government. Its share of the economy fell from about 17% to the 10% to which the hon. Gentleman referred, and, of course, lending fell with it. If the hon. Gentleman were honest and recognised the damage that his party did to the manufacturing sector, perhaps what he says would be taken more seriously.
We need a more stable, resilient, efficient banking sector, and it is on that requirement that we have focused our reforms. As Members will know, back in June 2010 my right hon. Friend the Chancellor announced the establishment of an Independent Commission on Banking, chaired by Sir John Vickers, to explore how the sector should be reformed in the wake of the financial crisis. Last year the House passed the Financial Services (Banking Reform) Act 2013, which has enabled us to implement the commission’s recommendations. The changes will mean that banks must ring-fence the deposits of individuals and small businesses, so that everyday banking can be separated from volatile investment banking.
As all Members, and, indeed. all members of the public will know, the financial crisis saw taxpayers bailing out the banks that got into trouble, but we have taken steps to ensure that that will not be repeated. Our banking reform Act introduces a bail-in tool, as a result of which shareholders and creditors, not taxpayers, will be first in line to bear the costs of future bank failures.
That is exactly what we have not done. We have accepted the central recommendations of the Vickers commission.
We have not just been working to prevent a repeat of the crisis. Many Members on both sides of the House have been rightly appalled by the revelations of poor behaviour on the part of some in the industry, such as payment protection insurance, interest rate swap mis-selling, and LIBOR manipulation. Those practices were going on right under the noses of Labour Treasury Ministers, including the current shadow Chancellor, who did nothing at all to stop it.
My hon. Friend attended the local banking conference that I organised shortly before Christmas. Does he agree that “challenger banks” such as Aldermore, Virgin, Metro, and even the Bank of Salford—which is run by Labour and Unite, and is excellent—are a key element in the greater competition that we need in order to reinvent the banking market in this country?
My hon. Friend’s intervention gives me an opportunity to commend him for his initiative to promote regional banks. He is absolutely right in his assessment.
We also set up the Parliamentary Commission on Banking Standards, chaired by my hon. Friend the Member for Chichester (Mr Tyrie). As a result of the commission’s work, we amended the banking reform Act in order to implement its recommendations on holding bankers to account more effectively for poor behaviour. If a bank were in future to enter resolution because of reckless mismanagement, senior bankers could face a prison term of up to seven years.
The Minister has spoken in strong terms about the experience of the financial services. Does he accept that the unique way in which bonuses drive short-term risk taking led to the scandals that we witnessed, and, indeed, to the financial crisis? Does he really believe that the reward for short-term risk taking behaviour to meet bonus targets should be more than 100% of the reward that someone receives for doing his or her own job?
What I do accept is that badly structured and badly designed bonuses will lead to bad behaviour. I am sure that the hon. Lady herself accepts that if an arbitrary cap is imposed on bonuses and it leads to an increase in fixed pay but no overall fall in overall pay, the bad behaviour will actually worsen.
We are putting our house in order. We are learning from the huge mistakes of the last Government, and are ensuring that we create a country in which the public can trust that their money is secure and our banking sector can flourish.
My hon. Friend is making great progress in the debate. Will he also mention the fact that taxpayers are now benefiting from the fines that have been levied on the industry, and that the Chancellor has extended the arrangement to ensure that military charities and others benefit?
My hon. Friend mentioned the shadow Chancellor’s failure to tackle the abuses that were taking place in the banking system. Will he confirm that the shadow Chancellor encouraged the development of a less regulated environment, and that that contributed to the problems that we now face?
My right hon. Friend has made an important point. I have already quoted what the shadow Chancellor said in 2006, when he was the City Minister, but those were not just his views; they were also the views of his boss, the then Prime Minister, the man who did more damage to our financial sector than any other. This is what the last Labour Prime Minister said in his 2007 Mansion House speech:
“I congratulate you Lord Mayor and the City of London on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London.”
Shortly afterwards, he carried out the world’s largest banking bail-out.
The Minister is understandably making a case for the financial sector, as he also should for manufacturing and all other sectors. What my constituents fail to understand is why, when public and private sector employees over the last few years and now have accepted pay restraint and real-terms squeezes on their earnings, and we in this House, including Ministers, are facing public demands to accept pay restraint on our pay and conditions as well, top bankers are immune from those constraints.
I will come on to it. The hon. Gentleman raised the two issues of banking competition and remuneration and I want to cover them.
I was very pleased that the hon. Gentleman talked passionately about the importance of competition. It is a shame that the previous Government did absolutely nothing to encourage it for 13 years. It is worth reminding the Chamber that when the last Government took office there were at least 10 major UK banks, but over their 13 years of incompetence they continued to permit and manage banking takeovers which shrank the number of market players and left the big banks to dominate.
Greater competition in banking is good for people and businesses and the economy. That is why we are implementing the recommendations of the Independent Commission on Banking for improving competition; indeed, we are going further. We are addressing the issue of too big to fail through ring-fencing, meaning that big banks will no longer get a competitive advantage from this implicit guarantee. We have put competition at the heart of financial services regulation by giving the Financial Conduct Authority a formal competition objective as well as making provision for a secondary competition objective for the Prudential Regulation Authority. We are also making sure that the FCA has the right tools to get the job done on competition by giving it concurrent competition powers.
While competition dropped under Labour’s stewardship, it is increasing under ours. As we have heard, since the crisis Metro Bank, Virgin Money and the new TSB brand have entered the market. Indeed, RBS also announced recently that it has teamed up with investors, including the Church Commissioners, to launch a 300-branch challenger bank, Williams & Glyn’s, focused on small businesses.
In fact our financial regulators are currently in talks with 22 potential new bank applicants because of the steps we have taken to promote banking competition. On top of that we are creating a new payment systems regulator so that smaller banks and others can access the payment systems fairly and more transparently, and we have secured a seven-day current account switching service to make sure that people have the confidence to change accounts. There are further innovations coming on cheque imaging and mobile payments. This is a Government who are bringing competition back to banking.
On bankers’ pay, we understand the depth of public anger but we will not take any lectures from the Labour party. While bonuses continued to increase year after year on its watch, even after 2007, they are now down 85% from their peak in 2008. Since 2010 we have been leading the way on tackling unacceptable pay practices. First, we have introduced rules that require significant parts of bonuses to be deferred and paid in shares, which means there is now a much better alignment of pay with risk and performance. While we make sure that only good performance can be rewarded, we are also making sure that poor performance can be punished by introducing measures that mean firms have clawback policies to reduce or revoke pay retrospectively.
Those steps are having an impact. The 2012 bonus pools at almost all major banks have declined massively since this Government came to office. The truth is that while Labour talks about clamping down, this Government get on with the job.
If the public are watching this debate, they may well want to ask the question I shall ask now, and I hope we get an answer. Do the Government have a view on the maximum amount a banker should be given by way of either a salary or a bonus, and does the Minister agree with the bonuses currently being given out by Chase Manhattan bank?
My hon. Friend again rightly points out that the previous Government did nothing when bonuses were reaching a record high. Even after they had carried out the world’s largest bank bail-out, pumping in over £40 billion of taxpayers’ money, they still allowed bonuses the next year to reach an all-time peak of almost £12 billion. That is their legacy.
We now come to the point that the Minister has twice said he would address later on, so will he address it now? Will the Chancellor of the Exchequer be using his power as a shareholder in the Royal Bank of Scotland to allow its senior bankers to exceed the level of bonus beyond 100% of pay: yes or no?
That is exactly what I was coming on to next. It is important for taxpayers that any proposals by RBS are considered fully and properly. The Government have not yet received a proposal from RBS on bonuses; once we do, we shall be in a position to judge whether it represents value for taxpayers.
The Government do not support the EU cap on bonuses. The Government have fought against it and we are currently challenging it in court. The bonus cap creates perverse incentives by removing the link to performance. It is damaging to financial stability; it is opposed by the PRA and the Bank of England; and, indeed, the cross-party Parliamentary Commission on Banking Standards rejected crude bonus caps as unworkable.
Let me turn finally to the bank levy.
No, I have given way enough and others want to speak.
If we need an example of how little the Opposition understand the banking sector, we only have to look at their policies on the bank levy, a levy they turn to every time they want to fund a policy announcement. They seem to believe that the bank levy could raise enough money to pay for capital spending, a youth jobs guarantee, regional growth funding, housing, child care and community services. On top of that, they think they can cut the deficit with it, reverse VAT increases, reverse child benefit savings and reverse tax credit savings—in total over £30 billion of commitments. Only the economically illiterate would think that with £1 raised in tax, we could have £10 of spending power.
It is no wonder that Labour gave us the deepest recession in 100 years, the largest post-war budget deficit and the world’s largest banking bail-out. In short, whereas their old banking policy was to stick their heads in the sand, their new banking policy is to stick their heads in the clouds, so frankly I do not think they are in a position to tell this Government what to do. Instead we shall work to continue to make this sector more stable, more resilient and more efficient, and we shall continue to help our banks to help our country get back to our best. I urge the House to reject this motion.
Order. Before I call the next speaker, I should say that obviously a great many Members wish to contribute and there is limited time available. I am therefore imposing a limit of eight minutes on Back-Bench speeches. If a Member takes an intervention, the eight minutes is increased by one minute, of course, and I urge Members to take that into consideration when deciding how long to speak for; otherwise, I shall have to decide for them. I call Michael Connarty.
If I refuse to take interventions, it will not be because I do not think Members have a good contribution to make, but because I would like to limit the length of my speech. I recall often ending up with only four minutes to speak when the debate started off with an eight-minute limit.
The Minister did not focus on the motion, but I always look at the motion on the Order Paper rather than bring my prejudices with me and try to fit them around the debate. The motion says that, so far, Government reforms
“have failed to deliver a competitive banking system”.
I want to focus on what has happened since the crash, and on the behaviour of the banks that my constituency businesses have had to deal with, and ask why that should influence our decisions on bonus levels.
I welcome the EU regulation. I heard the right hon. Member for Wokingham (Mr Redwood) on the radio this morning saying that the European Scrutiny Committee, on which I am the longest-serving Labour member, unanimously supported the position on an individual veto for the UK on a number of items. In fact, he misquoted us. If he had looked at the policies in the document on the scrutiny of EU business in this House, he would have seen that paragraph 2.80 states that we supported the idea of a red card for items in the EU. That would mean that a majority of the EU countries would have to agree to send back a policy, such as the 100% bonus limit, to the EU in order to reject it. That is not the same as the UK having the right to mount an individual challenge to such a policy.
In the public’s mind, this debate focuses on whether the banks have changed their behaviour, whether they are better organised and are working better for our constituents, and whether the people who run them deserve to get larger amounts of money as a reward for what they have done in the interim. The reality is that RBS, the bank that took a £44.7 billion bail-out from the last Government, has again and again been awarded substantial bonuses for failing. It has not been performing well.
The Tomlinson report found that RBS had been involved in what can best be seen as malpractice in its relationship with the business community. Small businesses have account managers at the bank who suggest that they should take money from the bank. They are told that they will be looked after by their account manager. They are not told that, in the background, a group of people known as debt recovery executives are looking at those same deals and asking themselves how they can make that company go bust and get its assets. They are also thinking about how they can revalue those assets downwards so that the company will be found not to be solvent enough to pay its debts.
I have watched that happen to businesses in my constituency again and again. They were told that they were getting a good package and a good deal, only for someone to appear from another part of the bank to tell them that their assets had been revalued. Incidentally, the same valuers were used again and again by the bank to downgrade those companies’ asset values. The companies were then told that they were in trouble because they could not pay their debts, but that the bank would give them another loan, charged at an additional 10% interest over and above what had originally been agreed. I have watched company after company go to the wall on that basis.
RBS is in print as saying that its bankers deserve a £6 million bonus, rather than the £4 million that they would be limited to under the EU rules. Those bankers say that they could get £6 million if they went to work for HSBC—well, good riddance to them, if that is how they are going to run the banking system. We are failing the same people that we failed under the last Government. I make no apologies for the last Government. They took certain choices, and I criticised them for it. When I was at university, the banking system was a solid, solvent organisation. I had a very right-wing professor, Andrew Bain, who said that banks should have a low leverage point of about 12.5 times the level of its reserves. That all went to pot under the last Government, and I do not see why anyone who criticised the Government for that should apologise.
The pattern at RBS is being repeated at the Clydesdale bank. I have been with that bank since I was a student. Ballantine’s iron foundry had an order for £1 million of wrought iron work in this building. It had a full order book. Following an offer from an account manager, it transferred to the Clydesdale bank. The bank looked at the company’s £2 million of property assets and also judged its assets held in patents and rare mouldings to be worth £1 million. Further down the line, however, other people from the bank emerged to tell the company that its property had been revalued and was now worth only £500,000 and that its patents were worth nothing. The company had been in existence for 180 years, and its owner put £70,000 of his own personal cash into the company’s bank account to keep it moving and to prove to the bank that his business was viable in the long term. It was put into administration anyway, and it has now closed, with the loss of 70 jobs. I blame the Clydesdale bank for that.
This is the problem that I have: the Tomlinson report talked about RBS, but the problem is constantly occurring. Banks have the ability to write down their own debt by making good businesses go to the wall and selling off their assets to bring in money. They write off a debt and bring in assets at the same time. That has been going on since this Government came to power. It happened under the last Government as well, but we are talking about what this Government are doing.
Part of the motion that could hold out some hope for people is the proposal to
“ensure that major new banking service providers are created”.
The only way to achieve that is by splitting the big five banks. Their domestic banking businesses would need to form a whole new banking system, with the risk-takers and speculators going off into other banks. The idea of setting up little banks here and there will not work, although I must admit that I have taken advantage of the facility of moving all my accounts—including my MP’s office account—to the Trustee Savings bank, which has now been split off from Lloyds. The Airdrie Savings bank has also opened a new branch in the adjacent constituency of Falkirk, and a number of people are going to it because they want to be treated as customers. When they talk to their account manager, they do not want to feel that there is someone in the back room wondering, “How can I get money off this individual?” or “How can I trap this small business?”
It is important for people to have new banks. We are not talking about bank closures, despite the myths about that. We need to create a major new banking system by splitting the banks, and we need to encourage people to diversify and to leave a bank if it is not treating them well. We also need to ensure that people who get bonuses receive only the maximum allowed by the EU, and I hope that the Government fail in their challenge to that proposal in the European Court of Justice.
It is a pleasure to follow the hon. Member for Linlithgow and East Falkirk (Michael Connarty). I, too, encourage many of my small businesses to look around and to act as customers. They do not have to stay with the bank they have been with since they were students.
I could not believe the bare-faced cheek of the Opposition motion on the Order Paper when I read it this morning. I am sure you felt the same, too, Madam Deputy Speaker, because you will recall—in your very impartial way—the state of the banking sector when this Government came to power. It is worth recalling the mess that we had to deal with when we took over. We had had the first run on a bank in this country for well over 100 years; we had had the biggest banking failure in the world; and we had had a decision, taken under conditions of panic by the former Chancellor and Prime Minister, effectively to nationalise large parts of the banking system. The Opposition motion should acknowledge that that was a deliberate decision. The natural course of events under capitalism would have been for those banks to fail, for all their employees to lose their jobs and for the branches in all our constituencies to close, followed by a restructuring process taking place outside state ownership. Instead, we have effectively perverted the course of capitalism, and that was a deliberate choice.
Will my hon. Friend remind the House who the architect of the Financial Services and Markets Act 2000 was? That Act set up the Financial Services Authority, the regulator that manifestly failed to regulate the banks properly, which allowed the collapse to happen. Will she also remind us who the City Minister was at the time of the banking collapse?
I think I am right in saying that the then City Minister is now the shadow Chancellor. My hon. Friend rightly reminds us that the regulatory architecture that allowed this disaster to occur was also set up by the previous Government. Having been regulated by that regulator for many years, I know how important it is that the regulation of banks has been returned to the Bank of England. That is important because the Bank of England sees the canary in the coal mine when banks have problems with day-to-day liquidity. The Bank of England was able to see such problems in the run-up to the crash, whereas the Financial Services Authority, in its lofty headquarters in Canary Wharf, was at one remove from that, and there was no ability to join up the reaction. My hon. Friend makes an incredibly important point.
At the start of this Parliament, our Government inherited, in effect, a state-owned oligopoly in the banking system, and that is not a good place to be if we want to achieve a competitive and healthy banking system. The Government have embarked on a long-term economic plan to reform the banking system and make it more responsive to the needs of businesses and consumers up and down the land. That cannot be done overnight—it takes time. Step No. 1 was to reform the system of financial regulation. That was an extremely thorough and elaborate process, involving many people from within this House and the other place, and as of last year we had the final enactment and implementation. So we have taken some difficult and long-term decisions to reform the regulatory architecture in a way that will make it impossible for this sort of crisis to occur in the future.
Secondly, we have established a long-term economic plan for people and for businesses in this country. We have reformed the way in which the economy is working: we have lowered the cost of mortgages for home owners; we have lowered the cost of government for council tax payers; and we have lowered the cost of fuel over and above what the Opposition planned, so that people who drive to work do not have to pay that extra £11 in tax that had been planned for them.
Thirdly, I come to the final piece of this journey in passing on to future generations a banking sector that is, once again, fit for purpose: addressing this problem of the state-owned oligopoly. We cannot restructure the failed banks effectively within the Government’s ownership, and the best way to say that we have closed this terrible chapter that we inherited in the banking system will be by privatising the banks that are publicly owned and returning them to the private sector. We have started on that with the sale of the first tranche of Lloyds shares. I sincerely hope that the Minister will be able to reassure us that it is the Government’s plan to return Lloyds shares to the private sector.
I also argue that it is in the best interests of the economy and the country that we move now to return RBS, whose share price is still well below that paid by the former Prime Minister for its shares, to the private sector, even if that means recognising and crystallising a loss which is the price we pay for Labour’s banking failure. At the moment we are in the worst of all possible worlds: we have a system where we need to allow new entrants to come into the space, but a large semi-state-owned dinosaur is taking up a lot of market share. It would be better for that to be restructured effectively within the private sector.
My argument today is that the Government need to get out of the banking business as quickly as possible. It is not the role of government to be setting the compensation of every banker in this country. The Government must set the framework and the regulation, but this level of micromanagement is a function—a symptom—of the terrible inheritance that we received. By getting out, we must recognise that we will reform the banking sector for our children and our grandchildren. It will mean that those banks will then restructure within the private sector, and the socialists will never be able to get their hands back on running a large sector of our economy.
I am grateful to be called in this debate, Madam Deputy Speaker, and to follow the hon. Member for West Worcestershire (Harriett Baldwin). I do not necessarily share her views or her assessment, but she made an illuminating contribution. Given today’s news about RBS, this is a pertinent and timely debate for the Opposition Front-Bench team to have called, and we must take the opportunity to debunk some myths that have been allowed to penetrate into the debate so far.
First, we must point out the fact that the banking crisis was global. The Minister gave a history lecture, but perhaps conveniently the chapter he missed was the one on Lehman Brothers’ collapse in New York in September 2008, which triggered a tidal wave of chaos across most major western economies. I would argue that the action taken by the previous Labour Government was necessary; we all remember the queues outside Northern Rock and the chaos that was created, and default would have been a disaster, for not only the British economy, but for the wider global economy. Confidence would have completely collapsed in the banking sector and we would have seen a run on all major high street banks. The alternatives to Labour’s action would have been disastrous and it is not worth contemplating them. The action was costly to the public purse, but nobody—none of my constituents or those of the hon. Member for West Worcestershire—lost their savings. That is an important fact to remember, as it shows precisely why the banks that think it is back to business as usual just do not get it.
It was not only this bonuses-as-usual mentality from the banks but some of the other structural weaknesses that remain within our banking system that allowed the LIBOR and Euribor rigging attempts for which RBS, Lloyds, Barclays and Deutsche bank were fined by the regulators, to take place. It is also the mis-selling of interest rate swaps and of payment protection insurance—
I will not give way because many hon. Members wish to contribute. Clearly, those structural weaknesses remain in the banking sector and the Government should be doing more to address them, both in the UK and globally. I would like the British Government to take a lead on addressing banking reform, not just in this country, but across Europe and across the globe.
The banks also have a social obligation to taxpayers. I said that the Labour Government’s action was costly to the public purse and important to secure people’s savings, but I do not believe, unlike the hon. Lady, that we perverted the course of capitalism, because the alternatives would have been disastrous. However, banks should be doing more to help the Government meet their social needs and the wider social needs of society—those for whom it does not feel as if the recession is yet over. That is why the proposal from my hon. Friend the Member for Nottingham East (Chris Leslie) to have the bankers bonus tax to fund a compulsory jobs guarantee is absolutely right and why I think he gets it. It is also right that the bank levy should also be increased, specifically to fund the expansion of free child care for three-year-olds and four-year-olds from 15 hours a week to 25. The Government try to make out that this is the same pot of money. We are talking about two very different socially responsible measures that will ensure that the banks start to repay what they owe to society
Finally, bank lending and access to bank services are important if the banks are to take on socially responsible roles in securing the recovery and helping local communities. Let me turn first to lending to small and medium-sized enterprises. I despair when companies come to see me as their Member of Parliament and set out perfectly viable business propositions to which, before the banking crisis, banks would have fallen over themselves to lend money, and yet they cannot even get a foot through the door. We must ensure that the Government’s attempts to get banks lending start to work, because it is just not happening at the moment. Indeed, the most recent data show a huge drop-off in bank lending to small businesses, which should cause some concern to the Treasury.
There are still too many communities without good access to banking services, and branches continue to close. That is a huge problem not just in rural communities, but in some of the most deprived urban communities. It is very much a social justice issue. People should have good access to banking services within their community. Perhaps there is a greater role in that regard for the Post Office. One scheme under the previous Labour Government was to increase the number of free cashpoints in our most deprived communities. It was outrageous that people in some of the poorest areas were charged to get cash out of machines. The previous Government were absolutely right to install 600 free cashpoints in such communities. However, some of those measures have stalled under this Government, and there is a lot more that we should be doing to ensure that the most deprived communities have proper access not just to free cashpoints but to a full range of banking services.
In conclusion, we need a vibrant and socially responsible banking sector, and to ensure that bad practices are ended. The Government must recognise that banks have an important role in our communities, offering services and lending to businesses, and they must face greater competition. The Government and the banks must recognise that it is far from business as usual. It is time for proper banking reform.
It is a pleasure to follow the hon. Member for Denton and Reddish (Andrew Gwynne). I agree that this is a timely debate, but I repeat the concern that I expressed at the start of the debate that it clashes with a Treasury Committee hearing and that it is a shame that its members cannot be present. I plead with the Opposition Front-Bench team not to squeeze in important debates such as this with other subjects. I could not get in to speak in the food banks debate, because there were too many of us. None the less, I am pleased that I am on my feet today, debating this important matter.
Bournemouth East is renowned for being a wonderful seaside tourist resort. What is less well known is that it is also a thriving business community. Many financial services organisations choose to use this corner of Dorset to base not only significant operations, but their headquarters. They include the Nationwide building society, the Liverpool Victoria, Unisys UK, RIAS Insurance, Barclays and that giant US bank, JP Morgan. Whether such financial institutions are based in Bournemouth or London, they are a reminder of our success in attracting international firms to this country. Those firms could go anywhere in the world to do their business, but when they are based here they bring jobs, investment and prosperity.
It is no fluke that so much of the financial services industry chooses to locate in the UK, making us the world’s leading centre of finance. The firms that invariably choose Britain in which to do their transactions cover a range of services, including insurance, accountancy, shipping, legal services, hedge funds, private equity, asset management or investment banking. Two hundred and fifty-one foreign banks are based in London. We are the leading global financial services centre, and the single most internationally focused financial marketplace in the world.
I am saddened to hear some of the comments from Opposition Members, from which I hope the Front-Bench team will distance themselves. They did a disservice to the banking industry when they mocked those MPs who had been bankers.
We have an unrivalled concentration of capital and capabilities as well as a regulatory system that is now effective, fair and indeed principled, which means that more overseas financial institutions and investors choose to do business in and with the UK than any other country. For example, there is a $1.9 trillion exchange turnover every single day in London. That is 37% of the global share. Around 600 foreign companies are listed on the London stock exchange, which is 18% of the global total. That shows why Britain is so important.
We may think that these big organisations are separate from us, but let us pause to think of some of the financial moments that we might experience in our lives. I am talking about buying a home with a mortgage, seeking a loan to start our own business, or starting our retirement and drawing our pension. On each of those occasions, we look to a financial system that we can trust. I urge Members to be careful when they call for increased levies against banks or random caps on bonuses from the banking sector. We should also be careful about making fun of those who served in that sector, and who now serve in this place.
Let me make it clear. People who work in all those banks and institutions in Bournemouth are not rolling in money; they are not millionaires. They are hard-working individuals who will not get the huge bonuses that have been spoken about in this place. In today’s global, technological, 24/7 economy, it is simple for a firm to relocate to another part of the world. That would mean losing UK jobs, taxes and, most importantly, influence over the regulations. It is important that we exert a modicum of control when we have this debate. We do not want the hysteria that we saw in the interventions at the beginning of this debate.
None the less, I do not dismiss the seismic failure and irresponsible behaviour of part of the banking industry. Indeed, it is the failure of our banking system that has caused the biggest economic downturn in this country. We saw banks lend funds that they did not have to people who could not afford them and in ways that they did not understand. The banking system failed because it was not properly regulated. First, the Bank of England was stripped of its responsibility for keeping the banking system safe. Secondly, the Financial Services Authority was focused only on compliance and individual rules and so missed the bigger picture. Finally, there was failure at the Treasury, where the banking division was run down. As a result, the total debt reached five times the size of the entire economy; 10% of the entire wealth of this country was lost and hundreds of thousands of people lost their jobs and livelihoods.
Labour tries to portray this situation as a global phenomenon—we have just heard that from the hon. Member for Denton and Reddish—and there is no doubt that there is a global context in which to place it, but it is no good blaming the US subprime market or Lehman Brothers. I note that in 2008, when Lehman Brothers collapsed and all these events were happening, banking bonuses were £11.5 billion. To place that in context, the figure now is £1.5 billion. The alarm bells were ringing at the time, but nothing was done.
Closer to home, away from Fannie Mae and Freddie Mac, Northern Rock was handing out 120% mortgages. That was a British issue. The Royal Bank of Scotland and its reckless purchase of ABN Amro after the credit markets had already seized up was also a British issue. We cannot blame any other part of the world for that. It has taken a new Government to reform the regulatory system from top to bottom and restore Britain’s reputation as a competent, global financial centre.
I know that other Members want to speak, so let me say in conclusion that the Government have acted to transform the banking industry through four key areas of reform. The first area is supervision. The Bank of England is back at the centre of the supervisory regime, with new powers to identify and address risks to ensure that banks do not threaten our economy in the future. The second area is structure, with new laws to separate the branch on the high street from the trading floor and therefore protect customers. The third area of reform deals with the cultural perspective by imposing higher standards of conduct on the banking industry and recognising the reckless misconduct that leads to bank failure. The final area is competition, which empowers customers and gives them the greatest choice. That should incentivise innovation and competition in the banking sector.
Our country paid a high price for what went wrong with the banking system. It has taken a new Government to restore order, confidence and control in a sector that is so vital for the rest of the economy.
It is a pleasure to follow the hon. Member for Bournemouth East (Mr Ellwood), although I am afraid that I shall disagree with a number of the things he said.
The public want a banking system in the UK that works for them. At the moment, they do not have that. As I mentioned earlier, figures from the Investors Chronicle suggest that even now bank lending is massively biased towards the financial sector and against the manufacturing industry. About 20% of the economy in my constituency is based on manufacturing, as is about 10% of our national economy, but only 2.6% of the stock of bank debt is spent on manufacturing. It is absolutely clear that the banking system in this country does not address the need for the creation of a competitive dynamic economy, not just in the south-east and in the square mile that is the City of London, for which Ministers often seem to speak, but in the rest of the country.
We need a banking sector that supports business and manufacturing across Britain. We have a Government who are committed to supporting a banking sector that represents only one part of the economy, the financial sector, and only one area of the country, the south-east of England. That goes back far beyond 2006—it goes back to the 1980s, when we had an economic sector that relied not just on banks but on organisations called building societies. Building societies were extremely dynamic funders of economic activity across the country and they were regional institutions.
When I became a solicitor in 1986, the main lender of mortgages was the Halifax building society. It is gone; it has disappeared. The Leeds Permanent building society was a major source of lending that contributed to the construction sector. I come from the north-east of England, and the hon. Member for Bournemouth East mentioned Northern Rock. When I was born, the Northern Rock building society was where my relatives put money into an account. It was a building society to support people in the north-east in building homes for their children, and it was destroyed by the demutualisation of the 1980s and 1990s.
The centralisation of the banking and building society economy happened as a consequence of the demutualisation and privatisations of the late 1980s. More and more financial power was concentrated in the City of London, away from local communities. Banking and building societies became completely divorced from the communities that they represented. As a consequence, we have the obscenity of bankers’ salaries being paid by such organisations. The chief executives of RBS, which has taken over the Halifax building society, and of the Lloyds Banking Group are paid £5.8 million a year with all the bonuses they receive. Those figures are from the end of 2010. Such salaries are out of step not only with the experience of the poorer people in our communities but with that of the middle classes. They are out of step with the people who become police officers or teachers for £20,000 a year, and with the local businesses that need investment.
The little businesses that need investment cannot access finance because the people who run the financial system in this country know that they can get faster, quicker and easier returns in the short term from the financial sector. As long as that remains the case and we have a centralised banking system, that will lead to a non-competitive economic system. We must remember that our Chancellor told us in 2010 that that economic system would clear the deficit by 2015. He has changed his mind since then; he has failed according to his own terms. He has redefined the rules of the game.
We need a complete change. We do not want to go back to 2006 or 2007; we need to go back to an economic system with devolved power and finance. We need a regional banking system based not on North Korea, but on Germany, where the Sparkassen system—[Interruption.] The hon. Member for Spelthorne (Kwasi Kwarteng), who is a banker, probably does not know anything about the Sparkassen system, because it supports manufacturing industry. If he learns anything from this debate, it should be that the important point is that banks under that system are geographically restricted, which means that they must invest in their local community. Germans choose to invest in Sparkassen—20% of people in each region invest in their Sparkassen, which then invests in its local economy to provide jobs for young people. It is not divorced from business and it creates work for young people.
We must shift power away from those people in the City who pay themselves £5.8 million a year and back to local communities, which will then invest local money in local institutions. That was what the Northern Rock building society was like before Mrs Thatcher got her hands on it. Such organisations would invest in local communities, providing jobs in construction and houses for local people. It is as simple as that.
Part of the problem with the banking industry is that far too many people in it are too clever by half. They think that because they understand what a derivative is, they can tell the whole of the rest of the world how to run the economy. We must go back to the principle that was successful during the industrial revolution, when local banks supported local investment. We must go back to building societies, which even the Business Secretary has said were an important driver of the economy in the 1930s. Unfortunately, we have a Government who are not creating extra competition in the banking sector. They are going back to where we were before the crash happened and, because of that, they are going to fail.
I congratulate the hon. Member for Wrexham (Ian Lucas) on a thoughtful speech. At least it ranged wider than the speech of the shadow Chief Secretary, for whom I have great respect but who surprised me by concentrating quite so much on bonuses, when this whole matter is of much wider import, quite frankly. Indeed, bonuses are an infinitesimal part of our banks’ throughput and lending power, which is what I want to concentrate on. I welcome this debate and the thought that a successful banking sector is critical to our future policy.
We can argue about the reasons for the financial crash—I am sure we shall do so for the next 10 years—but there is no doubt that it undermined the fundamentals of our economy. I praise the Government and welcome their attempt to rebalance our economy by strengthening the contribution of other sectors and of regions beyond the City of London. I believe that the Government are trying to do that, and the hon. Member for Wrexham spoke about it.
It is easy to resort to banker bashing—I have done my fair share of it in the Chamber over the past three years—but we must not forget that banks play a fundamental role in our economy. We need to avoid the traps created by simple solutions and, indeed, sometimes by European interference. I am fearful of the transactions tax, which will harm the City enormously, and I hope that hon. Members on both sides of the House will fight hard to ensure that it does not hit us in the way that a number of people in Europe hope that it will.
Banks are needed first and foremost to maintain the supply of credit to enable the economy to flourish. The financial crash restricted the supply of credit to the economy, in terms of mortgage approvals and business lending. I recognise the fact that, following the excessive use of collateralised debt obligations, banks needed to improve their balance sheets to lessen the risk of a further crash, but the consequence of the response to the crash has had an impact on the wider economy and our path to recovery.
There are welcome signs that the general economy is recovering and that our macro-economic situation is improving. Business and consumer confidence is returning, which is critical. Growth is gaining momentum, and the labour market is improving. Mortgage lending has increased by more than a third during the past year. We have witnessed the fastest growth in demand for mortgages for more than six years, but bank lending to businesses is not so promising.
Despite the general surge in lending, the finance available to businesses from banks has been disappointing. The funding for lending scheme has made only a marginal difference to lending to businesses. In November last year, we saw the biggest drop in business lending for more than two years—more than five times the average monthly drop. I accept that the fall is effected disproportionately by a fall in lending to large businesses, but it reveals a worrying approach to business lending, despite the general optimism in other parts of the economy.
I therefore want to focus on one area for the remainder of my remarks. I recognise the importance of small businesses to the growth of jobs and to the well-being of our nation. Small businesses are crucial to our future prosperity, and the financing of those enterprises is a major issue that we need to get right. They employ more than 14 million people and generate more than £1,500 billion for our economy. Problems with access to finance are indicative of broader difficulties in the economy and have serious consequences, as I know from the businesses in my constituency.
Some people argue that there is no problem with bank lending to small businesses and that the present issue is one of a lack of demand. Perhaps some small businesses are not seeking credit to invest and have constraints on their ambitions to grow. Perhaps a number of small businesses have generated cash surpluses that are available for investment, as confidence continues to grow stronger. The Treasury estimates that amount of money at more than £500 billion.
The funding for lending scheme has, however, failed to meet the aspirations that we were promised it would instigate. I welcome the decision of the Governor of the Bank of England to make business lending the sole beneficiary of the scheme, rather than using it for all loans. Plainly, he feels that more needs to be done in this area, but the position seems fairly clear: funding for lending has made a difference for individuals, but not for small businesses. The Federation of Small Business has argued that many small businesses have been affected by a lack of access to financial support during the recovery and have relied on non-bank lenders to keep them afloat, and that simply is not good enough.
I agree with the Government that business investment needs to increase. The Treasury estimates that a 10% increase in business investment in 2012 would have stimulated gross domestic product by a further £12 billion —almost one percentage point in 2012, when I was calling for more lending. Cash balances in the non-financial sector have grown by £104 billion above the pre-crisis level. Work is needed to translate improved business confidence into investment. Indeed, business investment is more than 25% below its pre-crisis peak. That is not a salutary figure, when we rely on small and medium-sized business to provide the growth and to generate the wealth that we need.
Much needs to be done, especially when we recognise our poor productivity figures. One of the great issues over the next five years will be to increase productivity in our businesses. There is an environment of relatively stable prices and improving confidence, but we need to encourage business to invest for growth. Investment for growth means more jobs, high productivity and improved living standards, so small businesses must have priority. The banks have failed to give them that priority, and I call on the Government to do more to ensure that they get it.
It is a joy to follow the hon. Member for Northampton South (Mr Binley), who has hit on a very important element of the debate: the role of banks in oiling the wheels of the economy to ensure that it is healthy and grows. Today’s debate is important, because despite the changes that the Government have made, the banks in the whole United Kingdom are clearly not fulfilling that function. Indeed, if anything, initiatives like funding for lending and the disappointment there, the return to the bonus culture and the inability of the banks to lend to small businesses all show that there is still a problem with the banking system.
I want to deal with two aspects. First, the hon. Member for Northampton South said that he was disappointed with some of the comments about bonuses, and the Minister has tried to dismiss them by saying that they are only headline chasing nonsense. In an age of austerity, and given the political context in which we are debating the issue, this is not headline chasing nonsense and should not be lightly dismissed as such.
The vast majority of people cannot understand why a Government who are pursuing rigorously—and, I believe, with some justification—a pay policy that restricts public sector pay are at the same time giving priority to challenging an EU ruling on bankers’ pay. I do not mind EU rulings being challenged; I can think of many other EU rulings that I would like the Government to challenge. But let us face it: we are talking about a public sector organisation, so the Government are in effect challenging their own pay policy for some of the most well-off people in society through the courts. This is not headline-chasing nonsense, and it is difficult for the public to understand.
I will keep my intervention short; I am conscious of Madam Deputy Speaker’s guidance. The concern is that if we introduce the EU rules, many organisations will choose to leave the EU and base themselves in Singapore, Hong Kong and other parts of the world. Although the spirit of the proposal makes sense, the real consequences are that it could damage financial investment in the EU.
I could believe the hon. Gentleman if there was some evidence of that. Ministers have boasted today that they have cut bonuses by 60%, or whatever it is, over the last few years, but we have not seen a flight of capital from the UK or a flight of banking business to Singapore or elsewhere. They cannot argue that they are restricting the ability of banks to pay bonuses while claiming that if we do that the banks will leave the country. There has been no evidence that banks cannot recruit or retain people or get the best people, despite the fact that the Government have said that they have restricted bonuses. The question is often asked: what is an appropriate level of bonus? We have not had an answer.
We are talking about a state-run bank and we are not even considering senior executive posts. Cases cited today concern an individual with an increase on his basic salary of £1.7 million to £4.8 million, an increase of 133%. Is that enough? Another individual has a basic salary of £700,000, which after bonuses is £2.1 million, a 300% increase. Is that enough? Another individual has an increase from £775,000 to £3.3 million, an increase of 450%. Is that enough? The increases go right up to 600%. When do we stop? Surely the Government must have some view on this, but we have not heard it. That is why this debate on bonuses is important. We cannot have a state-run bank where bonuses of up to 600% are being given but the Government seem to have no view on it, whereas they do hold the view that public sector workers on £14,000 a year should not get a 1% increase. That is why it is important. It is not headline-chasing nonsense.
The second issue that I want to deal with is competition, which is particularly pertinent to Northern Ireland. As we are sitting here today, the Northern Ireland Affairs Committee is considering the banking structure in Northern Ireland where we have a particular problem because 67% of the market is served by banks such as Ulster bank, which is part of RBS, the Bank of Ireland and the First Trust bank, both of which had to be bailed out by the Irish Government. All those banks find that their lending ability is hugely impaired by the bad loans and the bad decisions that were made during the property boom in Northern Ireland, and now they are trying to consolidate their balance sheets. Lack of competition is one reason why from 2010 until now lending to businesses in Northern Ireland has fallen by 12.5%. During the last year, it fell by 5%, even at a time of growth when one would expect businesses to need to obtain further finance.
The Tomlinson report did not really cover Northern Ireland, but the excesses that it identified are to be found to an even greater degree there. Constituents regularly come to me about property loans and the first question I ask is whether they stopped paying the loans, but they were servicing their loans and paying the interest, and in some instances they were even paying down the capital, but their bank deliberately changed the rules and withdrew the facility, sometimes on a technicality, and sometimes on a technicality contrived by the banks. The loans were called in, and when the properties could not be sold, Ulster bank rode to the rescue and offered to put them on the West Register and buy them at a deflated price, even though there was an income stream and, had it waited long enough, the property market would have picked up some of the difference. The result is that many viable businesses have been sent to the wall by the actions of the banks seeking to repair their balance sheet at the expense of the real economy. The businesses then had to put people out of work because they were declared bankrupt. That is why there is a need to restructure the banking system.
If there is a need to restructure the banking system in Great Britain, there is an even greater need for competition in Northern Ireland. I look forward to hearing what the Minister and the Opposition spokesman have to say about what can be done in such cases, whether it is the kind of localism referred to by the hon. Member for Wrexham (Ian Lucas) or the introduction of a big new player that is not contaminated by the property loans of the past, splitting up some of the existing banks to ensure that that will happen. If we continue with the present banking structure, we will not find a way out of the current recession. That is why the need for increased competition referred to in the motion is as important as the need to restrict bonuses.
I naturally share many of the concerns expressed today, but a common theme seems to be emerging from these Opposition day debates about business and financial issues, whether they be on energy, gambling or banking. The Labour party makes a mess of things in government, realises there is a problem when it is in opposition and then proposes the wrong solutions, although they help it with its headline writing.
Let us look at some of the issues, the first of which is competition. I checked this morning and right now 55 different companies are offering current accounts; there are even 11 different types of account. It is now so competitive that many banks are paying people to have current accounts. Therefore there is a real question as to how restricted the competition is. A quarter of people already do not bank with the big four, and TSB has just been demerged to form a new high street bank. But high street banks are only part of the story. It is not in the motion, but we see from the press that the Labour party will try to force banks to demerge their branches. In fact, a lot of banking is not done that way at all. I have not had a bricks and mortar branch, for business or personal reasons, since 1989, when I took out the First Direct telephone banking service. How would that proposal work anyway? A banking analyst speaking to the BBC today asked:
“What makes anybody believe that there’s a queue of people willing to buy these branches? New and smaller banks—they don’t want more branches, they want more apps.”
There is an important point that we need to recognise about technology, which leads to the concerns expressed by some Members about what will happen to rural banking systems. Clearly, not everybody has access to apps and the internet. I assure the hon. Member for Denton and Reddish (Andrew Gwynne) that the scheme for cash machines in deprived areas is still in operation, as I know from my constituency.
We know that everything in the banking sector is far from rosy. Many hon. Members have spoken about business lending, and I am particularly concerned about the manufacturing industry, which is important in my area. The banks are lurching from one scandal to the next: payment protection insurance, LIBOR, foreign exchange fixing and interest rate swaps. A business in my constituency, Python Properties, specialises in refurbishing iconic commercial buildings, which it has done in South Bank, also in my constituency. It now has tenants waiting for the next floor of a building that it has been refurbishing, but it does not have the cash to do the work, because HSBC is still holding out on paying it compensation for an interest rate swap. I hope Ministers will urge the banks to get on and pay out money for those swap arrangements.
The Government have done good work in tightening up on tax avoidance—it is still far too high, but was rife before this Government took office—to the point where HSBC and Barclays have now effectively disbanded their tax avoidance advice teams. We are seeing some progress, but there is a lot more to do. The culture of the banking industry is still not what it ought to be.
The Government have been taking action, of course, partly through frustration, by setting up new banks. The Business Secretary says that he is the first person to set up new state banks since Victorian times, as the green investment bank and the business bank are now operational, but let us not forget the Financial Services (Banking Reform) Act 2013, the Financial Services Act 2012 and, as I have mentioned, the agreement on tax avoidance. There is also now a permanent bank levy, as well as inquiries into LIBOR and the banking inquiry itself.
Bonuses are now more directly linked to performance in what are, after all, commercial businesses. I know that the Business Secretary is taking steps on executive pay, for example by giving shareholders binding votes on a company’s pay policy. The Government cannot run away from their responsibilities for RBS or Lloyds, as many Members have said, because they are a major shareholder in those organisations. They have a role in the decision-making process under the new rules. As the Minister said, the Business Secretary is taking steps on executive pay, unlike his predecessor, the one who said that he was
“intensely relaxed about people getting filthy rich”.
Under the previous Government, capital gains were taxed at 18%, but this Government have increased the rate to 28%. People were allowed to put up to £250,000 a year into pension schemes and still get full tax relief on it, but that figure has now been reduced to £40,000. The higher income tax rate was 40% for the whole period that the previous Government were in office except the last month, and it is 5% lower now. As Members have said, we should take no lessons from the previous Government on that.
However, setting up a bank is still not as easy as it could be. It is a shame that the hon. Member for Wrexham (Ian Lucas) is no longer in his place, because I was very taken with his speech. As a north-east MP, I vividly remember what happened with Northern Rock, and not just the things he spoke about, but the loss of the Northern Rock Foundation, which put a lot of profit back into the local community. We need a greater emphasis on regional banking. It is not as easy as it should be to set up a regional bank. I hope that Ministers will talk to Dave, who runs Burnley Savings and Loans—known as the “Bank of Dave”—who I think would like to do more but feels constrained.
I am following closely what my hon. Friend is saying about regional banks. In America there are thousands upon thousands of community banks. Would he like to see a development towards community banks, which are even more local than regional banks?
My hon. Friend makes an important point. Not only should we see that trend here, but the Government should encourage it. To that end, I hope that Ministers will meet a consortium of people from the north-east who are busy trying to set up a north-east bank.
Setting up banks needs to be made easier. The uncertainty that some of the Opposition’s proposals create for what are, after all, commercial organisations is extremely unhelpful. They are now talking about imposing market shares on commercial operations in the banking sector, making them get rid of parts of their operation and dictating how much they can pay their staff. That is a dangerous precedent, because ultimately we have to ensure that competition deals with those things. That is why I welcome the steps that the Government are taking.
The Government have a permanent bank levy. I am surprised that the Opposition want to reduce bank bonuses further, because taxing bank bonuses seems to be the main source of finance for most of what they want to do. It reminds me of a story I used to read to my children, “The Magic Porridge Pot”—it never stops producing porridge.
Today the shadow Chief Minister could not bring himself to apologise for what happened under the previous Government. We have had apologies from the Leader of the Opposition, the shadow Chancellor and the former Prime Minister. History has taught us that we should never allow the Labour party to be in charge of the economy again and that we should continue with the further steps that are needed to improve our banking sector.
Like other hon. Members, I want to speak about some of my constituents’ experiences with the banks, particularly in relation to small business lending. The banks’ behaviour changed overnight when the global financial crisis hit, as a number of businesses in my constituency have made clear to me. They had been repaying loans for years and had never missed a payment, but suddenly the banks called in the loans—the hon. Member for East Antrim (Sammy Wilson) made this same point—and many good businesses went to the wall as a result. That is something I experienced, although our business did not fail, but only because we were able to bail ourselves out by using personal savings.
The problem today is that the banks are still not lending to small businesses. Most of the 4.7 million small business—those with fewer than 10 members of staff—that I meet are unable to borrow money from the banks. They will not lend to them, whether they are the high-tech growth businesses trying to develop the products we need to develop our export industry or the mainstays of our communities—the service firms that support local communities up and down the country. The banks are not lending, whether the companies have a good track record or a good business plan. It seems that the only firms that the banks are lending to—and even here we are seeing some problems—are the larger ones, the medium-sized companies that have significant assets against which they can borrow. I am afraid that the cost of living crisis, which is hitting many ordinary people in this country, is also hitting those who own or run small firms. It is just as bad for small businesses as it is for everybody else. The banks have a crucial role in turning that cost of living crisis around.
My hon. Friend the Member for Wrexham (Ian Lucas) mentioned the German system and how he would like to introduce something similar here, and I agree. Having met representatives of the Sparkassen, I must say that they have a lot to teach us. They know their customers, are based in the regions where they lend, understand the local economy and can lend only in that area. We could also learn something about bonus culture from the German system, because its regional banks’ remuneration is linked to the financial success of the economic area in which they lend. It is not something that we could introduce here directly, but we could certainly learn something about having a bonus culture that is manageable, proportionate, fair and based on success, and the right kind of success, rather than how much the banks lend. The banks in Germany are set up to produce jobs and growth and the banking system is designed to support small businesses.
One of the interesting things I learnt from the Sparkassen is that rather than us having to become better Germans, we should look at who created the German regional banking system—it was this country, after the second world war. We based it on the old stable and steady lending criteria that we used to have in the old regional banks. We developed the system in Germany using this country’s experience and expertise. It is something that I am afraid we moved away from after the big bang of the late ’80s.
We can learn from Germany, but there are good examples in this country too, such as the Merseyside Special Investment Fund. It provides equity and loan finance to small businesses in Merseyside, and it has been one of the few sources of such support to businesses since the financial crisis. Some of its customers switched to it having been turned down for loans by their banks. People who were unable to borrow from the banks have succeeded with MSIF. Indeed, local bank staff across Merseyside sometimes refer customers to MSIF because their own computer says no, so even they understand the problem. It is important to distinguish between banking executives and those who get large bonuses and the ordinary bank staff who do a great job up and down the country, day in, day out, in serving their customers in the retail sector—personal and business customers.
We can learn a lot from MSIF about how to lend. It does not just lend money but gives advice and management support. It understands the local economy and aims to support jobs and growth. It is not a bank, but it performs many of the functions of banks and is filling the gaps left by the banks. It shows what can be done in this country in just the way that the Sparkassen do in Germany. Those are two examples that we can learn from in supporting small businesses. Our proposal for regional banks has much in common with the German model and with what is going on in Merseyside.
I completely agree with my hon. Friend the Member for Denton and Reddish (Andrew Gwynne) about social responsibility. Within a few yards of my constituency office, we face the closure of one branch of a bank. He mentioned the role of post offices. I agree, too, that we should see post offices as another valuable element in our banking system, but unfortunately we also face a post office closure not far from my office. Perhaps Ministers in different Departments—those responsible for post offices and those responsible for banking matters—need to talk to each other, and of course to the banks as well.
Labour Members have the right ideas about regional banks and about how we could ensure that there is the lending to small businesses that is needed. There must be a change in the banks’ approach if we are to see the recovery and the investment in business that will lead to the exports that this country desperately needs to move forward in the short term and the long term. The banking system is crucial in this. Our proposed measures show the way forward. I hope the Government will pay attention to them and take the action that is needed, and not just carry on as they have during the past three years.
I am pleased to follow the hon. Member for Sefton Central (Bill Esterson), who gave a very measured account of some of the challenges facing the banking sector.
It is absolutely right that we in this House should be talking about small businesses and the challenges they face in trying to get credit and loans. I represent a borough that is almost exclusively dependent on small businesses from an economic point of view. Obviously we have Heathrow airport, but small businesses are the predominant employers. Banks today are perhaps more reluctant to lend to small businesses than they were 10 years ago. Small businesses that need to have loans approved are much more likely to feel confident in a less centralised structure. They are happier dealing with loan officers they have known for a long time and if they have good local relationships. That gives them a lot more confidence than some of the computerised and centralised forms of banking that we have seen. In Spelthorne, lots of small businesses use export finance. Because of the proximity of the airport, they are reliant on foreign trade to do their business. Credit lines are very important for those sorts of businesses.
I suggest—perhaps this will find less agreement around the House—that the bankers’ job is very difficult, because policy makers are saying, “We want your bank to lend more money”, at a time when capital requirements are higher. It does not take a very sophisticated appreciation of finance—I was about to say that it does not take the brains of an archbishop, which is very relevant in a debate on finance—to realise that it is very difficult for a bank to extend its balance sheet while increasing its capital. If we look at it as a pantomime horse, the two ends of the horse are pulling in different directions in being asked to raise capital and to lend money at the same time. That is a difficult balancing act.
I want to talk about the general condition of the sector as it has developed over the past 10 or 15 years. As my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) said, banks’ leverage ratios were remarkably stable from the end of the second world war and going into the 1950s, right up until 2000. It was only after the turn of the century that we saw the almost frenzied credit expansion that made us so vulnerable in the final denouement when Lehman Brothers collapsed and the crash happened. Labour Members have suggested that many causes of the financial crisis extend back to the 1980s, with big bang and all the rest of it. In terms of leverage ratios, though, the serious risk in the system developed relatively recently, for lots of different reasons. Labour Members would suggest that a culture of deregulation brought in by Margaret Thatcher was responsible for some of the recklessness in the system, whereas Government Members would suggest that it was due to some of the reforms in 1997, particularly with regard to the Bank of England’s supervisory role.
At that time there was a great deal of complacency, on both sides of the House, about the sustainability of this model. As has been repeated many times, we were in an era when Cabinet Ministers were
“intensely relaxed about people getting filthy rich”.
That sentiment was not exclusive to Labour Front Benchers. The political establishment were quite content to see vast bonuses and big salaries extended across the City of London, for the simple reason that the tax revenues coming into the Government from the City were extremely useful at that time. Even though we were running deficits when the country was growing, we were using a lot of those tax revenues for Government spending. There was a symbiosis in which we were all somehow complicit. I find it interesting that Labour Members suggest we cap bonuses, because they will remember that, during the times of plenty, it was taxes on bonuses that gave such vast sums to the Exchequer, which it used—more than used, because it had to borrow—to spend on public administration.
It does not make any sense for people in the House of Commons to engage in banker-bashing when a lot of the prosperity in the constituencies we represent has been fuelled by this country’s success in financial services. If we look across the range of financial services in banking, insurance, actuaries and accounting, we will see that all those professional bodies were largely encouraged and developed on these islands. Britain has always been—certainly for 300 or 400 years—at the centre of innovation in the financial industry. We cannot simply turn our back on that or suggest that we should penalise and punish. That is not how we have developed or how we will get future prosperity.
Although I absolutely share some of the concerns expressed by Opposition Members during this very reasonable debate—it has been much less political than one might have anticipated—I must say, once again, that finance is something in which we are world beaters and we should not be ashamed of it. We should not be embarrassed about it; we should encourage it. Yes, we should have more regulation and a stable regulatory environment—which, I hasten to add, was not implemented over the past 15 years—but at the same time we must not forget that a lot of the prosperity and tax revenues that accrue to the Government derive from the continuing success of the City of London, as has been the case for many centuries.
This has been a timely debate and I say that advisedly, having listened to the complacent, provocative and characteristically tribalistic knockabout from the Financial Secretary, which seemed to me to be almost totally devoid of any new, serious content.
The record of the banks over the past five years has been so riddled with abuse of power, criminal malfeasance, reckless speculation, pervasive mis-selling of financial products, facilitation of contrived tax avoidance on an industrial scale, the rigging of the LIBOR and Euribor interest rate benchmarks, a growing and dangerous development of a shadow banking system, and continued dalliance with the exotic financial derivatives which precipitated the worldwide crash of 2008-9 in the first place that, when combined with the fact that there has been very little fundamental reform so far, there must be a serious risk of another financial cataclysm in the foreseeable future.
The central fact about banking power in Britain today is that 85% of the public’s money in the retail market is controlled by just five big banks, which can—and do—use that money without any accountability to the public interest. The total gross spending of the banking sector reached £7 trillion—five times GDP—in mid-2011. Although it has somewhat reduced today, it still exceeds total Government spending by a factor of almost 10:1. That means that this tiny banking clique commands more spending power to control the UK economy than the entire machinery of Government.
How does it use that power? The most striking fact about the British economy over the past five years—we all know this—is that the banks’ lending to industry has largely been negative for most of that time, while at the same time the banks have continued with their indulgence in property, overseas speculation, tax avoidance and risky derivatives. In the light of that, it surely is the case that the power of this dominant clique of the top UK banks, which has been so badly misused against the public interest, has to be broken up.
I have no time to give way.
By being too big to fail, the banks exacerbate moral hazard, because the knowledge of the explicit taxpayer guarantee encourages excessive risk taking and recklessness. They have failed in their pre-eminent duty to keep adequate funding flowing to UK business, and through their size and weight they choke off competition and new entrants to the market. Initially, that should be brought about by a clean break between retail and investment banking. The Vickers alternative of Chinese walls—separating the two functions within a single, still-integrated structure—is flawed owing to the fact that the City will in no time circumvent it through regulatory arbitrage.
Beyond that initial break, I believe there are strong grounds for further disbandment, which several of my hon. Friends have mentioned, in order to pave the way for what Britain really needs at this time, which is regional banks such as the Sparkassen banks in the German Mittelstand and specialist banks concentrating on infrastructure development, the knowledge and information industries, investment for a low-carbon economy, small businesses and so on.
The fact is that the finance sector is always the most dangerous component in a capitalist economy, particularly in the deregulated version imposed in the 1980s, and it is surely clear that nothing like enough has yet been done to give assurances to the economy and to taxpayers that we are now protected against the depredations of the finance sector.
The truth is that the big banks knowingly gamed the system for so long in order to expand their balance sheets ever faster and with ever lower capital ratios, based on the bogus claim that their lending was then less risky. They even deliberately invented the colossal credit default swaps market as an asset class in order to enable the hedge funds to speculate against collateralised debt obligations, and they gained regulators and investors alike, using their vast lobbying power to create the relaxed regulatory environment which, of course, is at the root of all of this.
That lobbying power—probably the most formidable in Britain—is still being used ferociously to chip away at any, or every, new proposed regulation at both domestic and EU levels. As a result, capital ratios are still too low; the proposal to raise them is wrongly being delayed until 2018-19 to fit in with Basel III; the use of offshoring and tax havens has hardly been reduced at all; lending to UK industry remains deplorably low; the shadow banking system has not been effectively tackled; and managerial oversight will not be enforced until the Tyrie commission proposal, which is a good one, to hold individual directors and executives to account by disqualification or a custodial sentence is implemented.
My last point concerns the control of the money supply. The banks have, in effect, seized control of the money supply. They have become major generators of unsustainable asset bubbles, which is a source of great instability to the economy and of enormous cost to the taxpayer. They control 97% of domestic credit creation and have used their virtual monopoly over it to feed successive property booms and speculative foreign ventures while allocating—this is the key point—just 8% of the nation’s resources to UK productive investment in the form of manufacturing, communications and distribution.
The case for bringing back control of the money supply to public hands—as was always the case in this country until the 1980s—is crucial, partly to prevent the skewed allocation of national funding excessively towards mortgaged property; partly to rebalance the economy from finance to manufacturing when our balance of payments on traded goods is currently running at a deficit of more than £100 billion every year, which is frankly unsustainable; and partly to channel a huge amount more of our resources into real, productive investment, without which Britain will never recover its global competitive position.
The banks have massively let down this country and they continue to do so. The extensive restructuring of the financial sector is critical for the future of this country, and that requires far deeper reform than the present Government are trying to get away with.
Greater competition, the desire for local banks and the Labour policy to close regional voluntaries are the issues of this debate. I have held two local banking conferences over the past six months—one in Gateshead on 6 June and the other in London in December—and they were attended by in excess of 350 people from various organisations, banks, accountancy firms and start-ups. It was very striking that, contrary to what the right hon. Member for Oldham West and Royton (Mr Meacher) has recounted, there was a tremendous desire for a large number of new banks, and that is in fact the reality.
I have met the likes of Metro, Aldermore, Handelsbanken, obviously Virgin, Cambridge and Counties—it was set up out of a local authority pension fund—and the Hampshire bank. A fantastic bank has been put forward by the Unite union, on behalf of Labour, in Salford, and it is doing wonderful work. I have met Alex, who is the linchpin of that. He is a fantastic lad, who is doing great stuff to try to transform how that local community bank provides services to the local community of Salford.
I therefore disagree with the doom and gloom approach about there being no competition or new entrants. Certainly, when I meet those from the Financial Services Authority and the Prudential Regulation Authority, including Sam Woods and all the individuals involved with the regulators, they tell me that they have had in excess of 25 separate pre-applications that they are now considering.
On 23 April 2012, when we debated local banks and the need for greater competition—this is my seventh speech on local banking in the House in the past three and a half years—the Labour party chose to vote to delete clause 5 of the Financial Services Bill, which was designed to create greater ease for new entrants to enter the market and related to how far competition can encourage innovation. I welcome the fact that the Opposition seem to have changed their policy and would now like more competition, but the proof of the pudding is always in the eating, is it not?
An announcement has been briefed to Nick Robinson of the BBC that the Labour party, if it gets into government, will ultimately close regional and local branches. As my hon. Friend the Member for Winchester (Steve Brine) made clear when he questioned the shadow chief Secretary, the hon. Member for Nottingham East (Chris Leslie), that would have a massive impact on our local communities.
I am certainly trying to have more bank branches opened in my area. I am negotiating with my credit union to see how far it can do that. Similarly, I am trying to create new banks in the north-east. As my hon. Friend the Member for Redcar (Ian Swales) has made clear, there is great scope for new entrants to do so. The very fact that the big five are so complacent and have had so many problems, gives new entrants an opportunity, which is certainly being exploited by all those we have spoken about today.
In that context, I want briefly to touch on two matters—credit unions and the Church, neither of which have been discussed. It would be a failure of this debate if it did not deal with both of them. All of us should support our credit unions. I am certainly wholeheartedly behind the Northumberland credit union. We must acknowledge that even though this Government have done more to give credit unions greater clout, power and ability to lend, credit unions are still incapable of filling the banking void and overcoming the current difficulties.
The only way forward is the creation of local community banks built on a credit union. I can give the House at least three examples. I have already mentioned the bank in Salford, which is the former Salford credit union. The Glasgow credit union is probably the biggest and most successful in the country: it is effectively a bank in all but name. Finally, I have the Prince Bishops community bank in Durham, which is the former Stanley credit union. All are very successful and have great potential. We need to follow such examples.
To touch briefly on the Church, I welcome the fact that Justin Welby is the new Archbishop of Canterbury. It is savage irony that 500 years have had to pass for us to have the new type of God’s banker, who is encouraging the Church to become involved in banking. It can only be good if the clergy move from being reactive to poverty and social deprivation—to their great credit, they are amazingly good at reacting in that way—to being proactive.
I suggest that the Church has a role, acting with their credit unions and local community banks, effectively to become the offshoots and outlets of those community banks. After all, all the vicars that we, as constituency MPs, know and deal with know which people are in great social deprivation, going to the food bank or having problems with high-cost credit and need debt advice. There is massive scope for the Church to take a greater role by dovetailing churches with credit unions and community banks. I welcome the fact that the Church has chosen to buy branches of Williams and Glyn’s bank, and is setting something up so that we can go forward. If we can do that and become more proactive in our local communities, a huge amount can be done.
In seven days’ time, I will meet my Northumberland credit union in Hexham to discuss how we can promote the idea of taking the credit union, building it up and creating a larger bank to make the situation so much better. If we do that, we will have in our regions and communities a bank that we can trust, with a proper brand name and identity, and one that is part of the community, rather than something based in London or Frankfurt and completely divorced from that community. That is the problem that we all face and have identified and, to their great credit, that is the problem that the Government have made great efforts to address.
In the interests of brevity, I will draw to a close, but I very much urge all parties to make sure that they get behind local community banks. We have not always done so, but we should do so in the future.
I am sorry that the hon. Member for Spelthorne (Kwasi Kwarteng) appears to be leaving his place, as I want briefly to say that I am worried about what he said. He seems not to have heard the message from the public that they are still dissatisfied with our banking industry. I do not think that our financial services industry should be about wealth accumulation; it is there as a supporting act to this country’s industry for wealth creation. I hope that he might consider his remarks in that light. I thank him for pausing to hear what I have said.
I want to speak about two matters—first, about co-operation versus competition in regulation, and secondly, about rebalancing our economy. I thought that those would be cross-party matters, but having heard what some Government Members have said so far, I am no longer sure.
On global co-operation in the regulation of financial services, we in this House must recognise that we are part of an international global marketplace. That has been pointed out by British citizens since Adam Smith sat on the promenade at Kirkcaldy and watched ships going in and out of the port. As a Merseyside Member of Parliament who sees very large ships coming in and out along our River Mersey, I am also acutely aware of that point.
Fundamentally, in the face of a global international marketplace—financial services are undoubtedly such a marketplace—we have two choices. We can either work with our partners to regulate the industry, given the risk that it might pose to all our economies, or we can take part in a global race to the bottom and allow global corporations to play one Government off against another. The bank bonus cap introduced by the EU is a classic example of that dilemma.
I argue that there are strong moral reasons to be internationalist, but there are clearly economic reasons too. This is a classic economic prisoner’s dilemma: we either work together and everybody benefits, or we work against others and in the end we work against our own interest. The G20 resolved in 2009 to introduce new global rules on supervision. Since then, the UK has acted unilaterally and has blocked global co-operation. If we do not co-operate, we are doomed to compete against our own interests in the long term.
I do not think that the British people are supportive of a Chancellor who has rushed to defend bankers bonuses that can be several times the size of an annual salary. The high level of variability in remuneration is leading us into the kind of cycle that we were in before. I am worried that we are dooming ourselves to make the mistakes of the past. I therefore ask the Minister to say what intention the UK has to work with its partners across the world to realise the promises that were made in 2009.
I agree completely on the need for global co-operation, as do the Government. That is why the Basel agreements are being implemented in the UK, with everything that that involves. However, there is a distinction between global co-operation and European co-operation. Why does the hon. Lady think that we should not follow global rules on bankers bonuses, which the Government would be much happier to do if they existed, rather than European rules?
We seem to be hearing that argument more and more from the Tory party. I am sorry to hear it from the hon. Gentleman, who has previously spoken sensibly about working with our European partners. It is as if Europe is the great problem and that Britain can be part of a world that does not involve Europe. However, Europe is one of the world’s biggest trading blocs, along with the United States, so if we are not influencing Europe, where should we be influencing?
The second question that Ministers need to answer is where is their plan for rebalancing the economy. Given the way in which they have acted in relation to the City, coupled with the way in which they have acted in relation to the housing market, I suspect that we are getting the same old story from the Tory party. I would happily have debated the points that were made by the hon. Member for Spelthorne about 1986 and the influence that that moment had on our economy. However, I ask the Minister what the Government’s plan is for the City. Do they just want to reflate it all over again? Are we back to Tory economics as usual—the so-called FIRE economy of finance, insurance and real estate—leaving us open to the same worries that we faced in the past? Let the City of London rip and never mind the risk to the rest of the country!
The way to deal with the risks that we face is to consider proposals for proper regulation, such as establishing a full reserve power to split banks into retail and investment arms if necessary. We need to keep our eye on the ring fence, as was suggested by the Independent Commission on Banking. There should be a review of the ring fence to check that it is working and, if it is not, we should use the full reserve power for splitting the banks.
We must also not take our eye off the issue of remuneration. The regulator needs more powers to reform the rules if it is necessary. The British public are not comfortable with bank bonuses running away at two times people’s annual salaries. I would invite any Member of the House to talk to my constituents about how they feel about the incomes that are earned by people in the City of London. They do not feel that it is in the best interests of this country to have such a concentration of high earners. That creates risks for which they pay the price. The cuts that we have seen to local authorities have hurt communities up and down this country, but they were brought about by the actions of a very few people in the City of London.
If Ministers do not take rebalancing seriously, people in this country, and certainly those in Wirral and Merseyside, will not forgive them. If they are serious about rebalancing, I simply ask them to say what steps they will take to regulate the City properly. Will they explain to this House—I am not sure that they will, but I would like them to do so—how they think an ever-expanding City of London that imports ever more risk into this country is helpful to the ordinary businesses and companies that I represent in the Wirral?
The hon. Member for Redcar (Ian Swales) suggested that there was a pattern to these debates. The pattern I am increasingly seeing is rather like the schoolchild saying to the teacher, “I didn’t do my homework today because he didn’t do his homework yesterday.” The answer to virtually everything in the Financial Secretary’s opening speech seemed to be, “If Labour didn’t do it in 13 years, that lets us off the hook.” Regardless of whether his accusations about what the Labour Government did or did not do are accurate, for the Government to say, “Well, we don’t have to bother” is not the answer. There were other aspects of the Minister’s opening speech that I really have to pick up on for the record.
The Minister gave the impression that under the previous Labour Government income inequality mushroomed as never before. By saying something confidently enough, he hopes that nobody will ever question it, but what actually did happen? Using the Gini coefficient, the recognised measure, there was indeed an increase in inequality from 37 to 40 from 1997 to 2009. I am not happy about that—I would have preferred the Labour Government to have done more to close the inequality gap—but the real mushrooming of income inequality was from 1979 to 1997, when it sprang up from 26—a low number, which means there was less inequality—to 37. The Labour Government did not turn it around, despite several measures to help those at the lower income level—for example, addressing pensioner poverty, which most people recognise was done—but it is simply not correct to convey the impression that our record on inequality was particularly bad.
I represent a constituency in a city where the financial services industry is particularly important. In the last census, the industry accounted for 11% of all employment in the city. Many of my constituents work at some level in the financial services industry. I was talking to a constituent recently about the bonus culture. In his field of work, bonuses historically formed a substantial part of earnings. They were expected and taken for granted. However, they were deemed to be increasingly unfair to groups of employees who did not have the opportunity to earn them. After much negotiation, the solution was to modernise pay by ending the award of bonuses. My constituent lost £7,000 a year in that process, which was nearly a quarter of his previous annual earnings.
I am sure that everyone will have grasped that my constituent does not work in the financial services industry. He is not a banker; he is a joiner who works for the council’s building services department. A bonus that is paid every week or every year, with little or no reference to performance, was, it was argued in the negotiation process, a distortion of earnings. Why is that argument not applicable to the banking sector? My constituent claims that morale has been affected by the changes—turnover and sick leave have increased—but that made no difference to the view that was taken on the bonus culture.
Does it matter to a country if there are vast differences in income and inequality? I think it does matter. This is not simply the politics of envy. We risk increasing social disconnect in our society. People feel that nothing changes. As politicians, we spend a lot of time being angsting about why people engage less with politics and why, when we go to their doors, they say to us, “You’re all the same. Nothing ever changes. My life never changes. It’s not worth my while voting. Everything will just be the same. The rich will still be rich and I’ll still be the same as I am.” We worry about how we can do something about that.
I submit that one reason for that is that people see great unfairness and great inequality, and they would like something done about it. If we do not make some changes, we risk seeing the gap between average voters—or non-voters, as they are more likely to be—and the elite running the country get even bigger. Average voters feel that the elite have nothing to do with them.
There are other issues relating to banking. I am glad that the hon. Member for Hexham (Guy Opperman) spoke about banking for the less well-off. Increasingly, and for all sorts of reasons, we would like those who are less well-off to be banked. For example, those paying for energy bills through PayPoint usually end up paying an extra charge on top of their bill, so that the poorest people without bank accounts pay the most. We want people to be banked so that they can get employment—it is often a prerequisite because money needs to be paid into a bank account—and so that they can receive their benefits payments.
The previous Government took up the question of the unbanked, through the introduction of basic bank accounts and putting pressure on banks to do something about it. It was their intention to make it compulsory for banks to offer basic bank accounts, but the incoming coalition Government chose specifically not to go ahead with them, and now only one of the major banks offers basic banks accounts; all the others have stopped. This is important if people are to have the widest possible choice, and much as I support the credit unions in my area and much as I think they have a valuable role to play, they are in their present incarnation—and will remain so without a lot more investment—very far from being able to substitute for proper basic bank accounts and provide for the least well-off. Banks need to do something about that. It is another important aspect of what they should be doing for the country.
As many hon. Members have said, this has been an interesting debate. Surprisingly, some Members thought there had been a conspiracy to have this debate clash with the Treasury Select Committee, but that was perhaps a conspiracy theory too far, to coin a phrase.
It being the new year and the Financial Services (Banking Reform) Act having been passed, I had hoped we might be able to move on. I thought we might have been in a position to debate where to go next, but unfortunately, despite it being the new year, we did not hear anything new from the Minister, just the same tired old Tory lines, which was disappointing. The Minister boasts of his experience in the banking sector, so I had hoped he might have been able to throw some light on the debate, rather than simply trying to bolster his reputation as the Tories’ attack dog, which seems to be his role at the moment. Also, he seems to have a new middle name, because his response to every second question was, “I will come to that shortly”, but I am not sure he ever did. However, I am sure that we will hear more answers from him in due course.
We have heard some excellent contributions this afternoon from my hon. Friends the Members for Denton and Reddish (Andrew Gwynne), for Linlithgow and East Falkirk (Michael Connarty), for Wrexham (Ian Lucas) and for Sefton Central (Bill Esterson), my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) and my hon. Friends the Members for Wirral South (Alison McGovern) and for Edinburgh East (Sheila Gilmore). We also heard interesting contributions from the hon. Member for East Antrim (Sammy Wilson), who highlighted several issues about bonuses, and from the hon. Member for Northampton South (Mr Binley), who did not quite stick to the Government line all the way through when he raised issues to do with funding for lending.
We had hoped to raise the tone and tenor of the debate and move on from the banking reform Bill. I think we would all agree that we need our banks to work for the whole economy—for individuals, small businesses and the large business sector—if we are to earn our way out of the cost of living crisis. As I highlighted when we were debating the banking reform Bill, the danger is assuming that the job is done and that no further reform is necessary. Now that that Bill has been passed, our concern, which was reflected by many of my hon. Friends, is that the banks will simply slide back into previous practices or wish to go back to business as usual. [Interruption.] I see some Government Members agreeing with this. That is why we have concerns about bonuses.
As many hon. Members have said today, there is a question mark over how it can be justifiable, in a time of austerity, when everyone else is being asked to do their bit, for bankers to seek excessive bonuses of over 100% of their annual salaries. I know the Minister said that nothing has been put forward by RBS yet and that he would consider it when the time came—I suppose that will be “shortly”. Members of the public watching the debate and the media, hearing the news and looking at the newspapers want to see a signal that the Government believe, as the Opposition believe, that taking forward these excessive bonuses is not the correct approach.
The hon. Gentleman will know that Labour’s policy, which I am sure he will support, is to use the bankers bonus tax to fund a youth jobs guarantee. That would benefit Scotland, too, which I am sure he would approve of.
Our motion highlights the fact that we have not yet done enough to boost competition in the banking industry—by encouraging the challenger banks, for example. We have not looked at expanding the mutual sector either. Some hon. Members provided examples of new banks coming forward, but we should acknowledge that that has not yet challenged the main banking sector in the way that we would like.
We should recognise that public trust in the sector is still at a low level. I remain concerned that, during the course of the banking Bill, the Government rejected both the fully independent licensing system for bankers and the idea, raised again in today’s debate, of imposing a duty of care to customers and all those working in the banking sector—a fiduciary duty. Opposition Members have consistently argued that those two policies would help to reform banking to make it work in the interests of customers and the economy rather than of the bankers themselves. Despite the changes in the banking Bill, the original Vickers recommendations have been rather watered down, particularly in respect of competition.
A number of hon. Members discussed and provided examples of lower bank lending to business, with it falling far short of what we need to boost jobs and growth so that our economy can recover. It was mentioned that the Bank of England has reported a record £4.7 billion contraction in lending to business—the biggest drop in more than two years and nearly five times the recent average monthly decline of £1 billion. That follows the decreases in lending in the UK by 3% each year since the start of the financial crisis amidst the failure of the other schemes that the Government introduced such as Project Merlin and its business bank, which has not had the intended impact.
Little wonder, then, that the Government belatedly heeded Labour’s call to refocus on the funding for lending scheme—a point made by the hon. Member for Northampton South—and introduced change in an attempt to improve the supply of credit both to big business and to SMEs. Time after time, however, we have heard that small businesses in every constituency have been unable to access credit because of the lack of availability of loans and that the terms on which credit was offered often made it more difficult for them to take it. Many report that they simply do not ask for credit, believing either that they will not get it or that the terms will be prohibitive.
It was interesting to see a recent research report from the peer-to-business lending platform, rebuildingsociety.com, showing that SMEs have stated that more than 21% of SMEs continue to suffer those restrictions. That is why 1 million SMEs have seen the lending terms from their bank worsen over the past five years. It is all very well to say that the money is there, but the businesses are not applying for it and are not going to the banks to ask for it. The reality is that nearly half of those who responded in that particular survey have had their interest rate and their overdraft increase, while a third have had their lending facilities cut. More than one in 10 SMEs did not even approach their banks for a loan, because they believed that they would be unsuccessful.
We fear that things are sliding back to “business as usual”. We are concerned about the whole question of bankers’ bonuses and bankers’ pay. I know that during Prime Minister’s Question Time today the Prime Minister suggested that he did not want the overall cost to increase, but that failed to take account of the public’s concern about the fact that individuals in the banking sector who are already highly paid are able to receive bonuses amounting to twice their annual salaries.
Figures from the European Banking Authority, published at the end of 2013, reveal that the financial rewards handed to the City’s highest-paid bankers rose by a third last year, and that more than 2,000 bankers in the United Kingdom earned more than £1 million. That means that the UK contains 12 times as many high earners as any other country. Top bankers picked up bonuses averaging 3.7 times their basic salaries, a figure that has risen since 2011. The public want to know who is on their side rather than on the side of the bankers, so that they can be sure that that does not continue, which is why we initiated today’s debate.
My hon. Friend the Member for Nottingham East (Chris Leslie) pointed out that Labour had led calls for the Competition and Markets Authority to be forced to begin, immediately, a full market study of competition in the retail and SME banking sectors, and I hope that the Government will take that on board.
The public want to see a signal that the days of excessive bonuses are over, and they want to see it now. We do not believe that the present position is acceptable, but nothing that the Government have said today has sent that signal to the public. Perhaps the Exchequer Secretary is about to send it now.
This has been a thoughtful and interesting debate. I particularly thank my hon. Friends the Members for West Worcestershire (Harriett Baldwin), for Bournemouth East (Mr Ellwood), for Northampton South (Mr Binley), for Redcar (Ian Swales), for Spelthorne (Kwasi Kwarteng) and for Hexham (Guy Opperman), all of whom made excellent and intelligent speeches. I am not sure that I would use quite the same words to describe the speech made by the shadow Chief Secretary, the hon. Member for Nottingham East (Chris Leslie), but I hope that he will not take that personally. I have a lot of sympathy for him—after all, he spent a number of years making speeches in debates like this one, saying that we were going too far, too fast, and that a plan B was needed. We do not hear quite so much about that now.
We have heard a fair amount about the cost of living in recent months, but Labour party spin doctors have been briefing the press that they are about to bring that campaign to an end, so where does Labour go now? How does it fill the vacuum that exists where an economic policy should be? The answer is, “With a bit of banker-bashing.” I could say, “Same old Labour”, but in reality the rhetoric that we have heard today and during the current Parliament is not consistent with what the last Labour Government did.
When it comes to dealing with the risks and excesses of our financial system, Labour is in no position to criticise us. It is extraordinary that the people who crashed the car now wish to give us a lecture on road safety. They left us with a regulatory system that had failed catastrophically—a system that had failed to identify risks, or, when they were identified, failed to do anything about them—and, when the crisis came, it was not clear who was in charge. But who was the special adviser in the Treasury who was running the show when the tripartite regime was established? The shadow Chancellor. And who was the City Minister in the run-up to the crisis? Again, the shadow Chancellor.
It was this Government who produced the Financial Services (Banking Reform) Act 2013 and implemented the Vickers report, and this Government who established the Financial Policy Committee, involving the Bank of England once again and providing clear lines of responsibility. It is this Government who have ensured that we ring-fence deposits, separating them from volatile investment banking, and it is this Government who have introduced a bail-in power that protects taxpayers, to ensure that shareholders and creditors, not taxpayers, are first in line to pay for a bank failure. It was the last Government who presided over a system whereby individual bankers could not be held properly to account. Under our laws—laws passed by this Government—reckless management of a bank could result in seven years in prison. Under the last Government, it could result in a knighthood.
Don’t worry, I’m not after a knighthood. The Minister’s party colleague, the hon. Member for Northampton South (Mr Binley), made it clear that the funding for lending scheme has failed and that lending to small businesses has fallen. The Minister’s comments have been notable in their failure to mention what he is going to do about funding for small businesses. Will he tell us now?
Gross lending is up, but one thing that will not help small businesses is if our interest rates rise prematurely because we do not have credibility. We have given this country economic credibility and that has helped to keep interest rates lower for longer.
Our system ensures rigorous scrutiny before someone can have a serious position in a bank. Labour’s system could allow someone like Paul Flowers to become chairman of a bank. While fines went back into the banking system in the past, now they go to support military charities and others.
May I make the point that I did argue that business lending from the funding for lending scheme was very low indeed, and that is why Mark Carney took the action he did and why I want to see the Government make more sense of lending to small businesses, because that is where growth and well-being are going to come from?
No, I shall make some progress.
We did not hear anything about the bankers’ bonus tax from Labour today—at least we do not see much about it in its motion—although it is customary on these occasions for Labour to identify yet another spending programme to be funded by it. [Interruption.] I wonder whether there was no mention of it today because the Opposition are embarrassed by previous occasions when they have claimed that more would be paid—[Interruption.]
Thank you, Madam Deputy Speaker. I do not know whether the Opposition are embarrassed by previous occasions when they claimed more would be paid from a bankers’ bonus tax than was actually paid in bankers’ bonuses. Perhaps they have noticed that if they cap bonuses they will get less tax from them. They may want to revise their numbers on that.
It has to be pointed out that it has been estimated that City bonuses in 2012-13 were more than 85% lower than at their peak in 2007-08. I know there is genuine concern about bank bonuses encouraging short-term high-risk behaviour, but it is not just the amount that matters; it is also the structure of the bonuses. There is a difference between cash bonuses and bonuses paid in shares with the opportunity for clawback if there is bad behaviour or a need to rebuild regulatory capital. Under the PRA remuneration code, large parts of bonuses must be deferred and paid in shares, aligning the interests of the employee with the long-term interests of the bank. The implication of many of today’s comments is that there is a concern about total remuneration, yet the motion and everything we have heard from the Labour Front Bench is about only one part of remuneration: bonuses. The reality is that the European directive and the policy pursued by Labour will drive up salaries. It is not clear why the Opposition are interested in only one aspect of remuneration, and we have certainly not had an explanation of that. It is also worth pointing out that the Governor of the Bank of England was critical of a cap in his evidence to the Treasury Committee this afternoon.
I am pleased that Labour appears to support the virtues of competition, but that was not its record in government. There were 10 banks in 1997, but that figure reduced over the following 13 years. The Cruickshank report, produced in 2000, was supposed to encourage more competition, but it was blocked by the Treasury and nothing was done. Our record has involved a much greater focus on competition, and it is a primary objective of the Financial Conduct Authority and a secondary objective of the Prudential Regulation Authority. We have a payment systems regulator, which makes things easier for small businesses, and we have changed the application process to make it much more proportionate for new businesses. Furthermore, the regulators indicate that 22 new banks are interested in acquiring authorisation in the UK.
On empowering consumers, our new switching policy saw a 54% increase in switching in December, compared with the year before. We have heard Labour’s proposals for a quota system. We do not have the details, of course, but simply reducing the number of branches of one bank will not create huge new levels of competition. There are concerns about branches being lost under Labour’s proposals. Most significantly of all, the Governor of the Bank of England told the Treasury Select Committee this afternoon that that would not help with competition. One other person has been critical of that policy in the past. In April 2011, the shadow Chancellor said that
“there is no need to break up institutions”.
The last Labour Government’s record on the banking sector was lamentable. Their regulatory system failed, and their attempts to ensure that individuals were held to account also failed. They tried to ensure that bonuses did not create perverse incentives, but that failed. They tried to encourage more competition; that failed. They tried to protect taxpayers’ money, but that failed too. Their record is one of failure, and until they acknowledge that, there is no reason why the British people should take anything they say on this matter seriously again.