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Banking: Bonuses

Volume 723: debated on Tuesday 11 January 2011


My Lords, with the leave of the House, I will now repeat in the form of a Statement the response given by my right honourable friend the Chancellor of the Exchequer in another place. The Statement is as follows:

“Mr Speaker, we inherited from the previous Government a failed system of banking regulation and a situation where billions of pounds had been provided to bail out bankers with nothing demanded in return. It was a something-for-nothing deal that rightly left the British people seething with anger. Let me explain what we are doing to change this.

First, we are replacing the disastrous tripartite system for regulating banks established in 1997. Instead, our plan is to put the Bank of England clearly in charge. Secondly, we have created the Independent Commission on Banking to review the structure of the banking sector and address the issue of banks that are too big to fail—an issue that the previous Government’s failure to address brought this country’s economy to its knees. The commission will report this autumn. Thirdly, we have introduced a permanent levy on the banks in the face of opposition from the previous Government. This new banking tax started coming into effect last week and once fully operational will raise £2.5 billion each and every year—£8.8 billion over this Parliament. We are looking at the IMF’s proposed financial activities tax and we will work with international partners to secure agreement. Fourthly, we have demanded that the banks sign up to the code of practice on taxation. The previous Government created the code in a flourish of press releases, but we discovered that only four out of Britain’s 15 main banks had actually signed up to it. This coalition Government have made sure that every one of those 15 banks signs up. We are legislating in this year’s Finance Bill for tough anti-avoidance measures directed at some of the practices in the financial services sector that no one had previously attempted to stop.

Specifically on remuneration and bonuses, on 1 January this year we introduced the most stringent code of practice of any financial centre in the world. There will be for the first time a strict limit on the amount of bonus payable in upfront cash. There will be a requirement that 50 per cent of bonuses are paid in shares or other non-cash instruments, which bank employees will not be allowed to sell on for an appropriate period. Guaranteed bonuses will become the exception and not the rule. Crucially, the new bonus code has been significantly extended. It will cover payments and bonuses at 2,500 firms, while the code that we inherited covered pay and bonuses at only 25 individual financial firms.

When it comes to the Royal Bank of Scotland, I am having to deal with the thoroughly inadequate contract negotiated by the previous Cabinet, which this House is probably not aware puts no constraints at all on RBS’s bonuses this year. Indeed, it explicitly encourages it to pay bonuses in line with market rules. But despite this we have made it clear that RBS will have a smaller bonus pool than last year and should be a back-marker in the industry, instead of the front-runner that it once was.

In the coming weeks all the banks will be announcing their pay and bonuses for this year. I can confirm that we are now in discussion with the banks to see whether we can reach a new settlement where the banks pay smaller bonuses than they would otherwise have done, are more transparent about those that they do pay, make a greater contribution to local communities and the regional economy, treat customers fairly and, above all, lend materially and verifiably more than they were planning to the businesses of Britain, especially the small businesses, so that they can grow and create jobs this year. That is what a new settlement with the banks looks like—one where they lend to the British economy, contribute to the British Exchequer and provide jobs for the British people, where they are responsible on pay and bonuses and where Britain can be the world centre of a properly regulated and internationally competitive financial services industry. If the banks cannot commit to that, I have made it clear to them that nothing is off the table. I will keep Parliament informed of our discussions and, if the Opposition who created this banking mess have a better idea, let us hear it”.

My Lords, that concludes the Statement.

My Lords, I am most grateful to the noble Lord for repeating as a Statement the Chancellor’s reply to an Urgent Question asked by my right honourable friend Alan Johnson in another place, although it is notable that the Chancellor’s Answer had very little to do with the Question asked, which was about the Government’s view on the level of bonuses to be paid in the current round.

Is the noble Lord aware that the Government’s cut in taxation of the banks and the Chancellor’s rather obvious evasion of the substance of the Urgent Question will be received in the country with a mixture of despair and indignation, but not with any surprise? There will be despair because it was the reckless behaviour of the banks and others in the financial sector that imposed economic hardship, even misery, on millions of British people, particularly the most vulnerable. Does he agree with the Financial Services Authority that the bonus policies of the banks encouraged that reckless behaviour? Would he agree that the payment of large bonuses at this time is morally indefensible? Of course, there are lots of things in economic life that are morally indefensible, but the payment of large bonuses now is not just immoral but also against the national economic interest. That is why despair will be laced with indignation.

I believe that no one in Britain objects to the view that those who work hard and take risks with their own money deserve substantial rewards, but would the noble Lord agree that the profitability of the banks over the past year is due less to hard work and more to the financial support provided by the Government and to the low interest rate policies and other policies of the Bank of England? Is it not the case that the banks were reckless with our money, then we bailed them out and then they hoovered up the funds to pay themselves bonuses? Would the Minister agree with me that socially responsible banks will be using their profits to rebuild their balance sheets, strengthening their underlying finances, rather than frittering away our money in excessive bonuses?

Turning to the question of the taxation of bonuses, will the Minister tell the House whether the Government are considering following the practice in the United States, where remuneration in excess of $1 million is not allowable as an expense against corporation tax? The Chancellor asked for ideas and there is one. Members of the House will be aware that in the United States there is not a single non-dom, so will the Minister tell the House his estimate of the proportion of bonuses paid here to residents claiming non-dom status? What proportion of bonuses to non-doms is paid via non-UK jurisdictions? More generally, is the Minister able to tell the House what proportion of gross value added is paid in tax by the financial sector as compared to other major sectors of the economy?

Of course, once issues of taxation are raised, the bankers seek to hold the British people to ransom by claiming that they will simply leave these shores rather than pay their fair share. Will the Minister tell the House what proposals Her Majesty’s Government have made to the G7, the G20 or the European Union for a concerted international policy on financial sector remuneration?

The truly distressing factor about this Statement is that there is really nothing surprising in the Chancellor’s reply, other than his flagrant disregard of the heartfelt and legitimate concerns of the British people.

My Lords, I am disappointed in the response and the questions that we have just heard. My right honourable friend the Chancellor has made it clear that he is concentrating on what is really important: the big picture issue of getting rid of the former system of financial regulation, which was proven to have failed in the crisis. We are making fundamental changes to that. As I explained in repeating the Statement, there are ongoing discussions about what really matters, which is about treating customers fairly, making sure that lending is materially and verifiably more than the banks would otherwise be planning to lend and, in that context, ensuring that the banks pay smaller bonuses than they otherwise would have done. It is precisely the switch from bonuses towards lending, which the noble Lord, Lord Eatwell, is asking for, that we are concentrating on now.

In answer to the noble Lord’s questions about taxation, far from introducing any cut in tax on banks, we have introduced a permanent levy rather than a one-year levy—a levy that raises in each individual year more than the previous Government’s one-off bonus tax did. Even the previous Chancellor, Alistair Darling, admitted that that bonus tax failed to change bankers’ behaviour, whereas the bank levy that this Government have introduced reflects the relative risk in different banks’ balance sheets.

I am grateful to the noble Lord for rising to the challenge about the allowability of bankers’ bonuses or total remuneration against tax. It is an interesting suggestion. We look at the total package in the round and I am always grateful for interesting new ideas.

In respect of taxation of non-domiciled individuals, whether they are bankers or others, I remind the noble Lord that it was my right honourable friend who, when in opposition, first raised the question of non-domiciled individuals making a proper contribution to tax in this country. We have taken the lead on that.

The overall priority must be to make sure that the banks pay a fair share, as we believe they now will. At the same time, we recognise the need to keep a vibrant banking sector in this country and to keep the UK as a centre of global banking, with banks continuing to lend to all businesses, particularly the small and medium-sized businesses in this country. We will continue to work with our European partners to urge agreement, particularly on a disclosure regime by banding of remuneration. We will continue to work with our partners on consideration of a financial activities tax. The critical thing, as my right honourable friend set out today, is that the Government are working in a thoroughly practical, hands-on way to deliver results and, in particular, will continue to work with the banks to make sure that lending to the businesses of this country supports the recovery that this economy is on track for.

My Lords, I thank the Minister for the Statement. I do not know whether he has read it lately, but I have here an excellent document, The Coalition: Our Programme for Government, in which Nick Clegg and David Cameron promised,

“radical plans to reform our broken banking system”.

Item 1 said on banking:

“We will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial sector … We want the banking system to serve business, not the other way round”.

There is not much sign in the briefing that has been coming from No. 10 and the Treasury that they are very aware of those commitments. Can the Minister assure us that he will draw those commitments to the attention of the people in the Treasury who are working on these schemes, because frankly the messages that are coming out are not right when we are trying to do a serious negotiation with the banks to improve their behaviour?

Specifically on the Royal Bank of Scotland, what possible justification is there for Mr Hester, who is one of the highest-paid public sector workers in the country, to get any bonus at all when his bank has missed its legally binding mortgage and business lending targets by a mile?

My Lords, I am always grateful to my noble friend Lord Oakeshott for reminding us of what is in the coalition agreement, which is always at the heart of what we do. I am sure that my colleagues in the Treasury will need absolutely no reminder of what the coalition agreement says in this area, because it is precisely because we are guided by the coalition agreement that we now have a package that, as I have explained, means that 2,500 banks as opposed to 25 are caught by the code. For all their talk, the previous Government had not actually brought in any new remuneration code. We now have one in place. We are continuing, as I said, to urge our European partners to work with us on a common set of banding disclosures. The current discussions are precisely to make sure that bonuses are lower than they would otherwise have been and that lending is higher.

In respect of the Royal Bank of Scotland, as I said in the Statement, we found ourselves having inherited a most extraordinary agreement negotiated by the previous Government that put absolutely no restrictions on RBS’s payments and bonuses this year. We want to see RBS now not as a front-runner, which seemed to be where it was encouraged to be under the previous Government’s agreement, but as a back-marker when it comes to its bonus payments for this year.

Does the noble Lord recall the words of Nick Clegg, who asked whether it did not make one angry that the banks were being allowed to ride roughshod over our economy and were still handing out bonuses by the bucketload? Is the Minister satisfied that that situation should continue and that he should issue sanctimonious and tired Statements to the House? Does he not feel ashamed of what is happening?

My Lords, I am sorry if I will become tediously repetitive, but if the questions cover points that I thought I had made clearly, I will have to make them again. We are taking far more practical and effective action than the previous Government did. We have extended very considerably the scope and form of the disclosures on bonuses that must be made. As to the quantum, I repeat to the noble Lord, Lord Clinton-Davis, that discussions led by my right honourable friend the Chancellor are ongoing, with the intention of making sure that bonuses are lower than otherwise they would have been and that lending to British businesses is materially and verifiably higher than it would have been. That is what we want in the context also of a vibrant and healthy banking system, which is good not only for this country but for the UK's global competitiveness.

My Lords, will my noble friend tell us whether bankers in New York and Frankfurt are being offered the same type of bonuses as bankers in London? Will he further tell us whether the American and German Governments take the same attitude to bonuses as this one?

My Lords, I am grateful to my noble friend Lord Ryder for enabling me to remind noble Lords that other Governments are increasingly following the lead of the UK and introducing variations on the measures that we have introduced for the taxation of banks. Since the announcement of our bank levy, Germany, France and other countries have followed with similar constructs. It is critical that we make sure that, while the UK regime is the toughest interpretation among global financial centres of what has been agreed internationally, we seek to work within the framework laid down by the Financial Stability Board and endorsed by G20 Ministers. Whether it is in relation to the US, other European countries or global financial centres, we will continue to work energetically with our partners to secure, as far as is possible, common standards in this area.

My Lords, in 2009 the Prime Minister said that no bonuses of more than £2,000 should be paid to bankers while banks were in receipt of government support. The coalition agreement talked about robust action and detailed programmes to handle unacceptable bonuses. On that we have heard nothing at all. When we proposed disclosures about remuneration under the Walker report, this was supported by both the Conservative and Liberal parties. The Government have done nothing to implement the Walker recommendations.

The Minister asked for ideas. I will give him four. First, shareholders should be given a clear fiduciary responsibility, for which they can be held accountable under law, to take appropriate action to oversee the companies in which they have invested their clients’ money. Secondly, banks should not be able to offset the past losses against current corporation tax liabilities while they are in receipt of central government support, which most of our major banks still are through the special liquidity scheme and the credit guarantee scheme, as a consequence of which very few will pay any corporation tax for the foreseeable future.

Thirdly, there should be a charge for the capital that banks effectively enjoy through the state guarantee. The Bank of England has estimated that this is worth £100 billion. A fair charge for that would be of the order of £12 billion to £15 billion—the annual charge for risk for capital, which the Minister will understand—rather than the derisory £2.5 billion pounds which ultimately, but not initially, will be raised under the Government's bank levy proposal. That is a considerably smaller amount than was raised under the bank payroll tax.

Finally, if the Minister finds the RBS employment agreement with Mr Hester unacceptable, he can terminate it and replace it with a new one. Will he do so, because the people of this country will not accept a situation in which in excess of 5,000 people working in British banking will receive total remuneration in excess of £1 million per annum? This is totally unacceptable and we are entitled to a decent answer from the Minister to these questions on bonuses, rather than the blather that we have heard about other matters.

My Lords, I am not going to stand here and listen to the ridiculous tirade from the noble Lord, Lord Myners. If he had all these brilliant ideas, why did he not implement a single one of them when he was in office? It ill behoves him to come here with this litany of ideas, which may or may not be good but are given to me not in the spirit of co-operation but as a lecture telling me what we are not doing. I could repeat—but it would bore noble Lords interminably—the Statement of my right honourable friend, which gave a great list of things that we are doing and have done. The Government of the noble Lord, Lord Myners, left only 25 banks with any sort of disclosure requirements. We have extended that figure to 2,500. His Government managed to get a paltry four banks signed up to the much lauded taxation agreement. We now have the top 15 banks signed up. I could go on. It is no good the noble Lord giving me a lecture about what we should do. He had years to deal with the matter and completely failed. We are getting on in a very practical way to make sure that the banking industry and regulatory system is fixed.

My Lords, is my noble friend aware that the Government are absolutely right to get rid of the failed tripartite agreement that caused many of the problems that we now face? Does he agree that we are making some progress in reducing cash payments, deferred bonuses and so on? However, I have some difficulty with his argument that bonuses are all right so long as the banks lend more. That seems to be a non sequitur, except in the sense that if we agree to the bonuses, the banks may lend more. However, they ought to be doing that anyway. The two issues are not connected except in the sense of, “We will be soft on you if you do what we want”. That is not the right approach.

As far as concerns RBS and the other banks that have been bailed out by the Government, I understand my noble friend's point about the agreement made by the previous Government. However, given the extent of participation in those banks, ought there not to be clear representation on behalf of taxpayers and the Government on the boards of the banks so that those directors could take appropriate action—because at the end of the day it is the board that decides these matters—with regard to bonuses?

I am grateful to my noble friend Lord Higgins for recognising the progress that we are making on reform of the regulatory structures, and in relation to bonuses. We are absolutely not going soft on the banks, which is why, as we speak, discussions are ongoing to make sure that bonuses this year are lower than otherwise they would have been, and, in parallel with that, that banks will lend in a verifiable way more than they would have lent. We are not back-pedalling on any of this and are continuing to work actively with the banks.

As far as concerns the management of RBS and Lloyds, the basic construct put in place by the previous Government ensured that the banks would be managed on an arm’s-length basis without the Government directing their day-to-day operations. That is the broad principle to which we are sticking. Nevertheless, it is important that the Government, as a significant shareholder in RBS and Lloyds, make their views very clear on all matters including bonuses.

My Lords, it would help if we had some honesty in dealing with some of these issues. The Statement says that the previous Government’s failure to address them brought this country’s economy to its knees. Presumably the previous Labour Government were responsible for the banking failure in the USA, Portugal, Greece, Ireland, Spain and other parts of the world. This is a worldwide problem that is not solely related to the previous Government.

To come back to the Statement, the Chancellor said, and the Minister concluded with it, that, “if the Opposition that created this banking mess has a better idea, let us hear it”. My noble friend Lord Myners asked four questions and we await answers to them.

My Lords, all I can say is that I will listen to any ideas. I did not hear the question at the end of the four ideas put forward but I am willing to listen to all ideas from noble Lords on a whole range of topics. I am always listening but I am puzzled that when the noble Lord had so much time in government to put those ideas into operation he did not think that they were so good at the time.

At the Treasury Select Committee this morning Bob Diamond is reported to have said that Barclays is in the position that it is not too big to fail. Does the Minister agree with that statement and, if so, does that mean that if any big bank in distress comes to the Government in future the taxpayer will not be on the hook?

I am grateful to the noble Lord, Lord McFall of Alcluith, for reminding us that there are other challenges as well as bankers’ bonuses to be resolved. The too-big-to-fail one is absolutely at the heart of strands of ongoing work. I did not have the opportunity to listen to the whole of what Mr Diamond said to the Treasury Select Committee but I certainly believe that whether it is in the work of the Independent Commission on Banking or in the discussions that are going on in international fora, the question of how to resolve bank failures is one to which we need to continue to give considerable priority. We are reminded that the question of the structure of banking is multifaceted and we should not focus exclusively on one aspect of it.

Will the Minister tell the House by how much the banks will benefit from the pending reduction in corporation tax?

My Lords, clearly it depends on the level of profits they make as to how much they will benefit from the reduction in the rate of corporation tax. We look at the total package of taxation on banks, as we do for the rest of industry. We believe that by introducing in particular the levy on banks, they will be paying a fair share to the Exchequer. We need to take account of the remuneration taxes, continue to consider the costs and benefits and talk to our partners about a financial activity tax, but we must take the whole of the taxation burden on the banks in the round.

My Lords, does my noble friend not think it strange that the party opposite seeks to evade any responsibility for the situation in which we now find ourselves? Having created the situation in which the taxpayer has ended up as a very large shareholder in a number of UK banks, is it not now most important that those banks return to profitability so that the share price and the performance of the banks will enable the taxpayer to earn a profit on the investment? To do that, do the banks not need to be properly staffed and remunerated? Will not our proposal enable us to do something to mitigate the disastrous economic incompetence of the previous Government?

I am grateful to my noble friend Lord Hodgson and agree with his analysis. We need a successful and vibrant banking system in this country. We need healthy banks across the system, but it is particularly important for the taxpayer that the health of RBS and Lloyds is restored so that they can get a decent return in due course from its interest in those banks.

Indeed, bonuses based on a number of forms can be remunerative. It is now a fundamental part of the package agreed by G20 Ministers, incorporated in the European capital requirements directive in force from 1 January in the UK, that a significant part of bonuses now has to be paid in a non-cash form and cannot be cashed in for a considerable period. Absolutely, that needs to be part of the structure.

My Lords, the Independent this morning has some devastating quotes in recent months from the Prime Minister, my right honourable friend the Deputy Prime Minister, the Chancellor and the Business Secretary that can only be taken by ordinary people to mean that large, multimillion pound bonuses would be stopped by the Government. That is the only reasonable interpretation to put on them. Would it be sensible, if senior members of this Government cannot deliver such things, for them not to give the impression that they are going to do so? That is simply a propaganda own goal. Would the Minister also comment on the view from a former Business Secretary that the rich have suffered enough?

My Lords, I am conscious of the time. All I can say is that my right honourable friend the Chancellor has made it completely clear what we are doing today, which is a considerable package of things, one element of which is to talk actively to the banks with the aim of ensuring that the bonuses they will pay this year will be lower than they would otherwise have paid.