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Banking: Bonuses

Volume 716: debated on Wednesday 27 January 2010


Moved By

To ask Her Majesty’s Government what steps they will take to ensure British and foreign-owned banks in the United Kingdom follow their guidance on curbing excessive bonuses.

Both domestically and internationally, the Government have led the field in reforming remuneration practices in the banking sector and have a structured reform agenda underway that will ensure bonuses are consistent with effective risk management.

My Lords, I thank the Minister and HMG for their commendable efforts to try to get a much more civilised regime here. We are now armed with a much more robust and alert FSA. We have the Walker proposals. We have the EU getting stuck in with its wider framework. We have Stephen Green of the HSBC and BBA with his interesting revelations on dodgy practices to have artificially structured bonuses. Then along comes Goldman Sachs with around 300 £1 million snouts in the trough—that is just the leading partners and leaves aside the traders and what they will get—completely undermining the official effort to get civilisation in this whole regime, and other bankers now, privately and with their cronies, the traders, once again quietly preparing to unleash excessive bonuses when the time comes—

This is a very important matter. I know the Tories have different views. It is a complete free-for-all. They do not mind at all. Can the Government at long last persuade the big institutions in this country really to insist on proper behaviour?

I am grateful to the noble Lord, Lord Dykes, for his pertinent and correct observations about many aspects of the culture of bonus payments in banks. I, too, was very struck by the comments of Stephen Green, the chairman of HSBC and the British Bankers’ Association. He described inflated and distorted structures of bonuses and argued for lower and more rationally calculated figures in the future. The Government’s perspective is that bonuses must, first, be a matter for the shareholders, subject to the banks being adequately capitalised. Secondly, the bonus system should not contribute to unmanageable risk. Then it falls to the shareholders. I am afraid that the shareholders, notwithstanding the comments from their trade associations, appear to have been less than fully engaged with that matter.

I intend to write to the chief investment officers of the major UK institutions in the next few days, asking them to share with me the actions they have taken to ensure that boards of directors are aware of their position on the payment of bonuses. It seems extraordinary that, over 10 years, an investor in UK banks will not have had a positive return at all. Clearly, the traders and senior executives of these banks have earned huge amounts. This is a distortion of the consequences of trade to the employees, away from the owners. The owners need to be more concerned and the pension funds need to ask their fund managers, “What are you doing to stop this process?”

My Lords, the Government propose a co-ordinated global solution to the banking crisis. Recently, President Obama announced his reforms in the United States. It is reported that the Shadow Chancellor, George Osborne, agrees with President Obama’s proposals for reform. Do the Government also agree with President Obama’s reforms and do they intend to implement them?

I always welcome the comments of the noble Lord, Lord Bilimoria, from the Cross Benches. I hesitate to correct him but last Thursday evening Mr George Osborne welcomed President Obama’s statement and by Friday morning he had decided that he no longer welcomed it. We must tune in regularly to our wirelesses to ensure that we are up to date with the Tory thinking on this and so many other matters.

There are aspects of the Obama proposals which clearly make a considerable degree of sense for the American situation with large investment banks. There are also concepts around the levy which are commendable and on which we and other G7 countries are working to ensure that in the future the banking system is more resilient and, if there is failure, that failure is borne by the shareholders, the subordinated creditors and the management of the banks. However, the Obama proposal is not necessary in this country; we have already taken the appropriate actions.

What discussions have taken place between the Obama Administration and the Government to ensure that there is an international response to the banking crisis?

Banking resilience, regulation and capitalisation are high on the agenda for the G20. We are in regular contact with G20 countries. I met officials from the Obama Administration on Monday to talk about this and other matters.

Does the noble Lord agree that some of the banks have their priorities totally wrong? They give management top priority, deal last with the customer and God help the shareholder in between.

The noble Lord says something very perceptive and correct. Last week I suggested in the House that banks which follow policies on bonuses that were perceived to be reckless would risk alienating their customers, who would choose to move their business. I urge UK banks, in particular, to be able to evidence that they have exercised real restraint and that bonuses reward smart decisions made by good people, with the overall prosperity of the franchise in mind, rather than rewarding reckless gambling or entirely fortuitous external circumstances.

My Lords, is the Minister confident that those banks in which the Government have a very large shareholding have entirely complied in their own decisions with what he has said to us?

The decisions about bonuses at Lloyds Banking Group and RBS have not been made but we have already been very clear that UK Financial Investments on behalf of the taxpayer will take a very active interest in this area. I am much encouraged by the comments of Mr Stephen Hester, who I think is doing a very good job at Royal Bank of Scotland, that he will not recommend or seek any bonus payments beyond those which he believes are absolutely necessary to protect the bank, and in so doing protect the value of the taxpayer’s investment in his bank.

The Minister has just said that the Government have already taken appropriate action in respect of the banks but yesterday, speaking to the Treasury Select Committee, the Governor of the Bank of England said:

“We cannot allow ourselves to be kept hostage to institutions that are so big”,

and he appeared to support the Obama proposals. Why do the Government think the governor is wrong?

The governor said many things yesterday with which we are in complete agreement and he is supporting the moves we are taking to improve the strengths of the banking system. There is no evidence that size in itself was the source of individual bank failures. Large banks failed, but so did small banks. We need to ensure that the totality of the banking system is strong and that will be addressed by higher capital, requirements for much higher levels of liquidity and the concept of living wills, which will require banks to put in place arrangements that will allow the failing part of a bank to be isolated and separated from the remainder of the bank without imposing consequential claim on the taxpayer. The taxpayer should never, ever again be expected to bail out the folly and mischief of bad decisions made by bankers.