19:36 - The House divided: - Ayes: 244 / Noes: 295 - Question accordingly negatived.
Mr Umunna
I am sure that many of those executives are watching the debate, and that they will pay attention to what my hon. Friend has said.
I will finish by returning to where I started. We are proud of our financial sector; it is an asset. We need it to help create the jobs and growth that are so lacking at present. All we ask is that it better serve the real economy in this endeavour—and that it does so more responsibly. With that in mind, I urge all Members to support our motion.
Mr Deputy Speaker (Mr Lindsay Hoyle)
Order. Before I call the Minister, let me say that we are going to introduce a time limit of eight minutes for Back Benchers.
Mr Hoban
May I thank the hon. Member for Streatham (Mr Umunna) for his remarks about my right hon. Friend the Secretary of State for Business, Innovation and Skills? I am sure that the whole House will identify with them.
I welcome the opportunity to debate business lending and the reform of the British banking system. As hon. Members are well aware, we face extremely tough economic circumstances as we weather the ongoing crisis in the eurozone and fix the underlying damage that the previous Government inflicted on the economy.
The UK banking sector in particular faces a long and difficult road to repair, unwinding the irresponsible and unsustainable excesses of the previous decade. In the aftermath of the worst financial crisis in almost a century, bank balance sheets are shrinking under market and regulatory pressure. It is absolutely right that we ensure that our banks build their capital and liquidity reserves in these turbulent times. It was because of that action that all our banks passed the European Banking Authority stress tests.
It is stability that we are safeguarding for the long term by discarding the shadow Chancellor’s discredited tripartite system and implementing the recommendations of the Vickers committee. It is this Government who are ensuring that we build a stable financial sector with the capacity and the market confidence to provide sustainable lending to our most innovative, ambitious and entrepreneurial private sector firms.
Sheila Gilmore (Edinburgh East) (Lab)
Given that the Minister feels that the industry is more stable, is he concerned to hear the chief executive of the National Australia bank, which owns the Clydesdale and Yorkshire banks, say today that the bank might have to consider selling, or at least restructuring, the business—partly because the UK Government’s austerity programme has contributed to the harsh business environment, which is why the bank is carrying out a review?
Mr Hoban
The reason we have to have the austerity programme in place is to tackle the mess left by the Labour party when it was in government.
As I was saying, we are seeking to reform the sector to ensure that it can lend to businesses in the long term, but we have also taken decisive action to stimulate credit in the short term. That is why the Government secured an agreement with the UK’s largest banks to provide £190 billion of new lending to business in 2011. By the third quarter of last year, those banks had loaned more than £157 billion to UK businesses, which is 11% above their implied target. That includes £56 billion of lending to small and medium-sized enterprises—10% higher than at the same point in 2010.
I noted that during the rather long speech of the shadow Business Secretary, he talked about lending but put forward no ideas about how Labour would tackle it, yet we in government have taken action to get the banks lending to businesses and to make sure that there is a supply of creditors to SMEs.
Mr Umunna
I am grateful to the Minister for giving way. I have to say that many of the organisations that represent our SMEs will listen with incredulity to the Minister’s suggestion that credit conditions are somehow all fine and that all is well. The fact is that, according to the Bank of England’s latest figures, we have seen a net contraction in lending to SMEs in nine of the last 12 months. It is clearly still a problem. In fairness, the Government announced that they were going to provide some credit easing—admittedly when the Chancellor said so in his speech to the Conservative party conference, although I never quite understood what he was talking about—but so far we have seen absolutely no action. When will this credit easing system come into effect?
Mr Hoban
I had hoped that the hon. Gentleman would come up with some ideas, yet he took a rather lengthy intervention to demonstrate that Labour has no ideas about what to do. Let me set out some of the structural measures we are taking to tackle the supply of debt and equity finance to businesses, and SMEs in particular. We are continuing the enterprise capital funds, and we are simplifying and refocusing the venture capital trusts and enterprise investment scheme to encourage more equity investment in start-ups.
Margot James (Stourbridge) (Con)
The issue of lending to small and medium-sized businesses is much more complex than the hon. Member for Streatham (Mr Umunna) suggested. Some months ago I spent a day at Barclays SME sector lending centre in Birmingham. It is clear that many small businesses are focusing on paying down their existing debts, building up reserves, and using their existing overdraft facilities at around the 50% mark. Does my hon. Friend not agree that that is one of the causes of the problem?
Mr Hoban
Indeed. My hon. Friend has made an important point which should be noted by the Opposition. Net lending takes into account not just banks’ gross lending but decisions that businesses make to pay down their debt, and that is what we are seeing. We are seeing businesses deleverage in the same way as banks are deleveraging. I do not know whether the Labour party believes that banks should stop businesses paying down their debt in order to force up the net lending figures.
Mr Hoban
I have already been generous in giving way, and I will be generous again in a minute.
We will implement a new seed enterprise investment scheme to encourage investment in early-stage companies, with income tax relief and a capital gains tax holiday to kick-start the programme. We will ensure that our adventurous and ambitious small enterprises receive the support that they need to become the next world leaders.
Mr Hoban
Will hon. Members calm down for a minute, and allow me to deal with the point about credit easing?
I think that bank credit will remain the principal source of finance for businesses throughout the United Kingdom. That is why in our autumn statement we went further to ensure access to finance. Last year the Chancellor of the Exchequer announced two bold new credit-easing measures to provide up to £21 billion of new lending for UK businesses. Through the national loan guarantee scheme, we are allowing participating banks to raise up to £20 billion of funding with Government guarantees, lowering their cost of funding and enabling them to reduce lending rates to business by as much as 1%.
Derek Twigg
An increasing number of subcontractors in my constituency, especially in the construction industry, are having short-term cash problems, either because their contractors have gone out of business or because the contractors are deliberately not paying the subcontractors. However, when the subcontractors go to the banks for help, the banks say “We are not going to help you.” As a result, subcontracting businesses are going bust and people are being thrown out of work, although it would be possible for the banks to provide finance in the short term.
Mr Hoban
The hon. Gentleman should tell the businesses in his constituency to use the appeals mechanism that was introduced to enable businesses to challenge decisions by banks and ensure that they are reviewed. Since the introduction of that scheme, 40% of bank managers’ decisions have been overturned through the appeals process.
Mr George Mudie (Leeds East) (Lab)
When the Governor of the Bank of England appeared before the Treasury Select Committee, he deplored the banks’ refusal to meet the Merlin targets. Furthermore, he said that the Government had chosen the wrong targets, which allowed the banks to hide the fact that they were not lending properly to small businesses. Was he misleading the Committee?
Mr Hoban
I gave the hon. Gentleman the figures earlier. As I said, by the third quarter of last year banks had exceeded their Merlin targets for lending to businesses as a whole, and were about 10% ahead of their lending to SMEs in comparison with the same point last year.
Let me say a little more about the credit-easing measures that we are introducing. There will be a £1 billion business finance partnership to co-invest in funds that can lend directly to middle-sized businesses and further stimulate non-bank lending channels for SMEs. Those schemes capitalise on the Government’s commitment to tackling the deficit that the last Government left behind. Unlike the Opposition, we are determined to safeguard our economic stability and protect our credibility in the world market—credibility which has secured our triple A rating and kept our interest rates at record low levels, and which allows us to pursue innovative credit-easing measures to reduce costs for businesses and ensure that more money goes where it is needed.
Richard Fuller
In referring to the “non-bank” ways in which credit easing could be used, my hon. Friend has identified one of the best ways of establishing responsibility and reform in our banks: through the creation of powerful alternative mechanisms enabling our small and medium-sized businesses to raise finance.
Mr Hoban
My hon. Friend makes a very important point. For too long businesses have been dependent on banks for their finance. We need to broaden the range of sources of finance that is available to business. This model works well elsewhere in the world. There has clearly been a market failure here, and our business finance partnership is aimed at tackling that failure. There are people out there who are willing to bring forward ideas to enable more investment to go into small and medium-sized businesses.
Mr Michael McCann (East Kilbride, Strathaven and Lesmahagow) (Lab)
While we think about how to address these problems and encourage alternative forms of finance in the future, what will we do about the small businesses that are going bust now because they are not getting access to finance and do not have the time to go through what is a bureaucratic appeals process?
Mr Hoban
The challenge is to ensure that banks are ready to lend and have the resources to do so. Project Merlin has delivered that. It is a more ambitious programme of ensuring the flow of credit to the economy than the previous Government tried or the current Opposition have even thought about.
The credit easing schemes we have proposed are supported by businesses throughout the country, as well as by the CBI, the British Chambers of Commerce and the Federation of Small Businesses. These schemes, coupled with our reforms to the financial sector, will ensure that the UK banking sector continues to provide the fuel for a private sector recovery.
After the excesses of the last decade, it is clear that we can build a sustainable financial sector and a sound economy only by reforming the regulation and structure of banks. Yesterday the House held the Second Reading debate on the Financial Services Bill, at which the shadow Chancellor, the right hon. Member for Morley and Outwood (Ed Balls), found himself in the awkward position of being forced to defend the failed tripartite system of regulation that he designed. He did not strike the same contrite note that the shadow Business Secretary has struck today. The Bill debated last night abandons the dysfunctional tripartite system and returns micro and macro-prudential regulation to the Bank of England, making the Bank the single point of accountability for financial stability. It also creates a new and strong conduct regulator to promote competition and protect consumers. Through these changes, along with the Basel reforms, living wills and new resolution regimes, and the reforms to the structure of banking from the Vickers report, we are remedying what the Chancellor called
“the biggest failure of economic management and banking regulation in our country’s history.”—[Official Report, 6 February 2012; Vol. 540, c. 43.]
That failure was, of course, presided over by the Labour party.
We need to build a foundation for the sustainable flow of lending to households and businesses across the country, and we must take a lead in building a financial sector that is based on the principles of responsibility, prudence and sustainability. In fulfilling that commitment, we must act on bank remuneration in order to tackle excessive and irresponsible levels of pay.
Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)
Yesterday, Ernst and Young said UK bank lending will shrink for the first time since 2009. It has predicted lending will shrink by 2.2%, with further shrinkage in 2013. Given that, does the Minister think Project Merlin has been a resounding success, or will he choose not to continue with it next year?
Mr Hoban
Project Merlin set lending targets for banks. At the point of the third quarter, the targets for lending to all business had been achieved and those for lending to small and medium-sized enterprises had just been missed. Project Merlin therefore has certainly achieved in respect of its goal of getting credit flowing to the economy. I agree that businesses face challenges in borrowing money. They need to have a viable plan, and we need to work more closely with businesses to ensure that the support is in place to enable them to make successful applications for bank funding.
Mark Field
We have a very large holding in RBS and we clearly will not be divesting ourselves of much of that holding for probably the next 10 years or so. What thought has the Minister given to using RBS, with its expertise and huge distribution network, as a mechanism for credit easing? I am sure that all Members hear from business people that these problems are not going to be solved unless we ensure that our SMEs have access to the capital that they so desperately need.
Mr Hoban
The national loan guarantee scheme will be open to all banks, including RBS, Lloyds, Barclays and HSBC, and we are currently taking that work forward.
Under the last Government, we witnessed the growth of the bonus culture, where bonuses could be paid in cash, in one year, and were never clawed back in the event of failure. We are changing that culture. Bonuses under the Financial Services Authority code are paid out over at least three years, in shares, not just cash, and failure can be punished by clawing back bonuses, and at both RBS and Lloyds cash bonuses will again be limited to £2,000.
Mr Hoban
Let me make some more progress.
Through the disclosure regime, we have provided more transparency than ever before, revealing the executive pay of the five highest-earning non-board executives for the Project Merlin banks last year. We are consulting this year on extending the requirement to cover eight executives at all banks operating in the UK, and UK banks now also have to disclose the aggregate pay of all their key risk-takers. These are some of the toughest rules in the world. It is because of our pressure and our leadership that the Commission’s capital requirements directive—CRD IV—contains proposals for additional regulations on remuneration disclosure which closely follow the recommendations of the Walker report.
Mr Tom Harris (Glasgow South) (Lab)
The Minister points out that the so-called “cash bonus system” emerged under the previous Government. Perhaps he can remind me, but I do not recall many Opposition day debates promoted by his party against the bonus culture. Did he personally, as a member of the shadow Treasury team at the time, mount any kind of opposition to or campaign against that bonus culture?
Mr Hoban
Clearly we had more power in opposition than we thought; we seem to be being blamed for the bonus culture and what was happening in the banks. As the hon. Gentleman will recognise, we have seen a bonus culture develop in this country and action needs to be taken. It is a bit rich for Labour Members to be criticising us, given that they were in government for the past 13 years and had the power to do something about the situation.
Chris Williamson
I am grateful to the Minister for giving way, at about the 35th time of asking. Will he now accept that it would be appropriate to repeat the bankers’ bonus tax and create 100,000 new jobs and 25,000 affordable homes, and give a boost to the construction industry, which is on its knees as a result of his Government’s policies?
Mr Hoban
I was going to discuss the bank payroll tax a little later, but let the hon. Gentleman just ponder for a while why the person who introduced that tax, the former Chancellor, described it as a “one-off” and something that was not workable because it did not change the behaviour. What we have done is introduce the bank levy, which the Labour party opposed when it was in government, and every year that is raising £2.5 billion more than the bank payroll tax raised in a single year. That is the product of well-thought-through taxation policy. We have gone ahead and imposed that bank levy, but the Labour party, when in government, opposed it.
Let me discuss the interaction of bank bonuses and capital. We agree with the interim Financial Policy Committee that capital levels, not bonus payments, have to be the priority. Banks must strengthen their balance sheets as a foundation for lending to families and businesses. That is why the FSA is rigorously scrutinising bank distribution plans, and it will not approve plans unless they are consistent with required capital levels, ensuring that banks maintain the capital they need in order to finance businesses. It is because of our leadership that bonus levels have already started to fall. According to the Centre for Economics and Business Research, City bonuses tripled under Labour, and when the shadow Chancellor was Minister for the City they were £11.6 billion. At the time, the shadow Business Secretary was carefully drafting the contracts to ensure that people could earn those bonuses. Last year, bonuses were almost half that figure, at £6.7 billion, and we fully expect them to fall further this time. Thanks to the action we have taken, bonus pools have come down and Labour’s cash bonus culture has been ended.
Mr Gareth Thomas (Harrow West) (Lab/Co-op)
The Minister may be aware that the number of bank branch closures is beginning to rise again, as is the number of branches with restricted opening hours. Will he tell the House what decisive action he has taken to reverse those trends?
Mr Hoban
The hon. Gentleman needs to reflect on what is happening in banking. I think his hon. Friend the hon. Member for Edinburgh East (Sheila Gilmore) even got as far, in last night’s debate on the Financial Services Bill, as suggesting that people should not use online banking so as to keep bank branches open. People are changing the way that they access banking and are thinking about whether they need to go into bank branches. We need to ensure that branches are there to meet needs where that is commercially viable, but there is no free lunch here. If the cost of maintaining branch networks continues to rise and insufficient numbers of people use them, the cost will be passed on to the customers who use the branches. The hon. Gentleman needs to think quite carefully about how many additional costs he wants to impose on bank customers in order to keep branch networks viable in that way.
Anas Sarwar (Glasgow Central) (Lab)
Is the Minister aware of today’s announcement by the Clydesdale bank about its restructuring programme, which it says is taking place as a result of the UK Government’s austerity Budget, which is causing difficulties for the bank and a difficult economic climate? It employs 2,000 people in my constituency. There are real concerns about job losses in Glasgow and about the closure of branches of that bank, which was going about its business in a meaningful way.
Mr Hoban
If the hon. Gentleman had been here a little earlier, he would have heard my reply to his hon. Friend the hon. Member for Edinburgh East, who asked about exactly the same problem. The reality is that there are issues facing banks in the UK, and Clydesdale needs to reflect that. The hon. Member for Edinburgh East also raised the issue of the austerity programme, but that is in place to tackle the problems the Labour Government left behind.
On corporate governance, the previous Government failed to tackle the bonus culture and failed fundamentally to reform corporate governance. The Business Secretary has announced a package of measures to tackle the disconnect between top pay and company performance. Shareholders need the information and powers to hold boards to account on pay. We will give them that and we expect them to use those powers. The Institute of Directors, the National Association of Pension Funds, the CBI and the Association of British Insurers all support the Government’s ambitions. As Otto Thoresen, the director general of the ABI, said when he wrote to bank chairmen last December,
“it can no longer be business as usual for this remuneration round”.
Across the board there is consensus that we need to tackle excessive pay and this Government are answering that, but it is not an easy task. Across the economy, and especially in the banking sector, the previous Government allowed an unjustifiable sense of bonus entitlement to grow, whether in the public or private sector. Under them, a bonus became a right, not a reward, and simply par for the course. After 13 years of Labour Government, we now have a substantial challenge ahead—dismantling the culture of excessive pay in the banking sector. We have already gone some way towards dismantling that culture, but we still have a long way to go.
Mr Umunna
Will the Minister at least concede that this issue and the kind of perverse incentive structures we have heard about, with rewards for failure and excessive pay in the boardroom and the City, have grown over the past three decades under different Governments of different colours? Will he have the humility to accept that?
Mr Gordon Marsden (Blackpool South) (Lab)
What were you saying about it at the time?
Mr Hoban
Well, one thing is for certain: I was not designing the contracts that gave the big payouts.
It is time that the banking sector demonstrated leadership, and the coming bonus round is another chance for it to demonstrate leadership on pay. As we empower shareholders to drive remuneration policy, the banking sector has to be at the vanguard of the debate on responsible executive pay.
Mark Field
The Minister is being admirably forward-looking in his speech by trying to present where we should go for the future rather than focusing too much on some of the battles of the past. One of the biggest concerns in this area is about institutional shareholders who have large stakes in FTSE 250 companies and in our banks. How are we going to embolden them to use the notional power they have as shareholders? Many of them have 5%, 6% or 7% shareholdings and could do something. What is going to ensure that there is a culture of change such that they become shareholder activists rather than shareholders who sit on their hands and their dividends year on year?
Mr Hoban
My hon. Friend raises an important point. The reforms outlined by my right hon. Friend the Business Secretary ensure that shareholders have the information they need to act. We are also giving them the power to vote and their votes will have a binding impact on future pay plans. The pervading culture today and the sense of concern in the wider economy mean that institutional shareholders need to play their part by looking after the interests of the people who invest in their funds—the people whose pensions are dependent on good returns from their investments. Those shareholders owe an obligation to their customers to exercise their rights to determine the pay policies of boards. We need to focus on that in coming years. My predecessor, Lord Myners, talked about it a great deal. Our reforms have provided the tools and we must ensure that we use them to hold institutional shareholders to account.
Mr Mudie
The problem for the public is that the Minister can lecture private shareholders in private banks to use their power to limit bonuses in their banks, but Ministers, who are the owners of RBS, have not intervened and used shareholder power to get good behaviour in the bank they own. Why?
Mr Hoban
We have been very clear as shareholders that we expect RBS to act as the back marker on bonuses. We have been keen to ensure that it restricts cash payments to only £2,000 a year. It is not just the Government who agree with that view. In an article about RBS, the right hon. Member for Edinburgh South West (Mr Darling) pointed out that the Government should not run RBS; they should not get involved in the day-to-day business of banks but should run them at arm’s length. That was a structure set up by the previous Government and I understand that the Leader of the Opposition supported it. [Interruption.] The shadow Business Secretary says that we should change it, but he should speak to his leader. The right hon. Member for Doncaster North (Edward Miliband) clearly endorses the structures set up by the previous Government. They should sort out their internal differences—it is not as though they are brothers.
I have spoken for quite some time and others want to speak, so I shall conclude. This Government have secured the stability of our economy by tackling the dreadful deficit left behind by our predecessors. This Government have secured the stability of our financial sector with tough regulatory reforms. This Government are supporting our entrepreneurs in rebalancing our economy, away from the unsustainable and wasteful spending under the previous Government. We are securing stable interest rates through our commitment to tackle the deficit. We are reducing the bureaucratic burden on businesses by slashing red tape and overhauling planning. We are unleashing private sector ambitions by cutting corporation tax to the lowest rate in the G7 and the fifth lowest rate in the G20. We are ensuring that our most ambitious and dynamic businesses have the finance they need to lead recovery in every part of our economy and our country.