Bank Bonuses

Alan Johnson Excerpts

Tuesday 11th January 2011 Commons Chamber

[Alan Johnson (Kingston upon Hull West and Hessle) (Lab)]

(Urgent Question): To ask the Chancellor of the Exchequer to make a statement on bankers’ bonuses.

[The Chancellor of the Exchequer (Mr George Osborne)]

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, and the British people and this Government will not accept extravagant bonuses this year without a change in behaviour. So this is what we are doing.

First, we are replacing the disastrous tripartite system for regulating banks that was 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. The previous Government’s failure to address that issue 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, or £8.8 billion over this Parliament. We are also looking at the International Monetary Fund’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—[Hon. Members: “Ooh!”] Well, the previous Government created the code, but we discovered that only four of the 15 major banks had signed up to it when we came into office. All 15 have now signed up to the code of practice. We are also legislating in this year’s Finance Bill for tough anti-avoidance measures directed at some of the practices in the financial 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. For the first time, there will be a strict limit on the amount of bonus payable in up-front cash. Also for the first time, there will be a requirement that 50% of bonuses be 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, as was the case under the previous Government, and crucially, the new bonus code has been significantly extended. It will cover payments and bonuses at 2,500 firms, whereas 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; the House might not be aware that it puts no constraints on RBS bonuses for this year. Indeed, the contract signed by the previous Government explicitly encourages RBS to pay bonuses at market rates. Despite this, we have made it clear to RBS that we will have a smaller bonus pool than last year and that it should be a back-marker in the industry, instead of the front-runner it once was.

In the coming weeks, all the banks will be announcing their pay and bonuses for this year. I confirm that we are in discussions with the banks to see if we can reach a new settlement, where the banks pay smaller bonuses than they would otherwise have done; are more transparent about those they do pay; make a greater contribution to local communities and regional economies; treat customers more fairly; and, above all, lend materially and verifiably more than they were planning to lend to the businesses of Britain, especially the small businesses, so that they can grow and create jobs this year.

This is what a new settlement with the banks should look like: they should lend to the British economy; contribute to the British Exchequer; provide jobs for British people; be responsible on pay and bonuses; and make sure that Britain is a 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.

[Alan Johnson]

We are here to hold the Government to account. I have with me the coalition agreement, and I believe that I can still sense the scent of the rose garden upon it. This is what it says in paragraph 1:

“We will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector”.

Where are those detailed proposals? When will we see them? Here is what the Chancellor said in his spending review statement in October:

“Fairness also means that, across the entire deficit reduction plan, those with the broadest shoulders will bear the greatest burden; those with the most should pay the most, and that includes our banks… Today we set out very clearly, for all to take note of, our objective in taxing the banking industry going forward… Our aim will be to extract the maximum sustainable tax revenues from financial services.”—[Official Report, 20 October 2010; Vol. 516, c. 951-956.]

But he has given the banks a tax cut from £3.5 billion to £1.2 billion and they will benefit more than any other sector from the cut in corporation tax. Cuts affecting children will contribute well over £5 billion and students will contribute £2.9 billion. Does the Chancellor think that children and students have the broadest shoulders? The man who said in opposition that no bonus should be higher than £2,000 will not even implement legislation forcing transparency about those receiving more than £1 million.

Where is the Deputy Prime Minister who, when not signing student pledges not to increase tuition fees or unveiling posters about VAT bombshells, was saying:

“Doesn't it make you angry that the banks have been allowed to ride roughshod over our economy, and are still handing out bonuses by the bucket load?”?

So in just seven months, the coalition goes from the scent of the rose garden to the stench of broken promises. The Chancellor who said, “We’re all in this together” bows to the rich and powerful while bearing down on everyone else. His sneering arrogance will not get him out of this one.