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Banking: Bonuses

Volume 721: debated on Monday 1 November 2010


Asked By

To ask Her Majesty’s Government what action they intend to take to discourage the payment of excessive bonuses to senior executives in United Kingdom banks.

My Lords, the Government have taken action to tackle unacceptable bonuses in the banking sector. The Financial Services Authority is updating the remuneration code, which will ensure that bonuses are deferred and aligned with the underlying risks, and significant portions of any bonus will be paid in shares or other securities. Employees in this industry will no longer receive all their bonuses in cash while leaving their shareholders, and potentially the taxpayer, exposed to the long-term consequences of the risks they take.

My Lords, the Minister said that the Government have taken action to deal with unacceptable bonuses. Can we therefore conclude that, as far as this Government are concerned, all future bonuses declared are deemed to be acceptable?

My Lords, what I said was that we have indeed taken action, including, among other things, requesting the Financial Services Authority to take certain factors into account in its consultation on the remuneration code. We have said that we will look at—and we are looking at—the costs and benefits of a financial activities tax, consistent with, among other things, not driving banks abroad. The banking sector remains an extremely important part of this country’s economy.

Does the Minister agree that, while undoubtedly a commendable degree of restraint has been shown by small businesses in the past year, the position of FTSE 100 company executives is very different, with, we now learn, a 55 per cent increase in bonuses last year? Will he consider, first, adopting the proposals in the Walker report on the buying out of bonuses, which is an increasing and troubling practice? Secondly, does he agree that we should consider taxing share-based bonuses, even if they are delayed for a couple of years, to be paid at the same rates that the rest of us are obliged to do?

My Lords, the Walker report, which was commissioned by the previous Government and reported in November 2009, made a number of important recommendations, some of which have already been incorporated by the Financial Reporting Council in its governance code. Sir David Walker made other recommendations on disclosure which remain to be considered. As for taxation, I have already said that we are considering the costs and benefits of a financial activities tax in relation to banks and remuneration. We are doing that by working with our international partners to make sure that, if we produce proposals along those lines, they are consistent with international practice and with keeping the banks operating in this country.

Even if the bankers say that they will leave the country if they are taxed more heavily, will the Minister assure us that that outcome might be a good thing rather than a bad one?

My Lords, lots of people threaten to do all sorts of things when they are in the middle of a negotiation. Whatever we continue to do to tackle unacceptable bonus structures in banks, we want to ensure that, among other things, they are incentivised to align their remuneration structures with the reduction of risks that bankers entail, and that we continue to have an important banking sector in this country.

My Lords, does my noble friend accept that one reason why there is so little finance for people to buy houses, and for small businesses, is that during the financial crisis many of the foreign banks took their money back to where they came from? They are not returning to London because they regard it as highly taxed, they regard certain members of the Government as extremely hostile to bankers, and they are worried about the degree of regulation. We must get these people back—contrary to what the noble Lord, Lord Dubs, said—because otherwise we will not have enough finance in this country to get the economy moving again.

I certainly agree with my noble friend that we need a vibrant banking market to underpin the economy’s recovery. The action that the Government have taken to make sure that interest rates remain low is absolutely critical. We welcome the first steps taken recently by the British Bankers’ Association task force, which made a range of proposals that go to the heart of tackling the need for a continued flow of credit to British business.

My Lords, would not the straight answer to the Question on the Order Paper have been to say that the Government do not have any plans whatever to deal with future bonuses?

My Lords, I have said that we have already taken action and are continuing to consider other possible actions in this area.

My Lords, I was intrigued by the Minister’s identification of remuneration with risk taking. Are not bonuses usually paid to bankers for taking risks with other people’s money?

My Lords, that is precisely why we want to make sure that there is a better alignment between the way that remuneration is paid and the mitigation of risk that should be there. It is precisely to get a better alignment with the risks that are incurred that we are supporting the measures that are being taken globally—limiting the amount of bonus taken up front in cash and deferring a significant proportion of bonuses in line with the proposals of the G20.

My noble friend is completely right that this problem arose under the watch of the last Administration, who implemented a one-off bonus tax that is now widely regarded to have been a failure—so we have to take the time to find a better way of dealing with this in the medium term.

In considering other possible action, as he mentioned, will the Minister have a look at the Private Member’s Bill which was promoted by my colleague the noble Lord, Lord Gavron, last year to try to get all companies, including banks, to put on the front page of their annual accounts the proportion of the highest paid compared with the lowest paid? A good deal of cross-party support was given to that and, while the Minister was not in the House at the time, would he go back and have a look at it again?

My Lords, I am always up for looking at good ideas; this sounds a bit extreme, but disclosure of remuneration for bankers is indeed unfinished business.