Bankers’ Bonuses and the Banking Industry

Andrea Leadsom Excerpts

Wednesday 25th February 2015 Commons Chamber

[The Economic Secretary to the Treasury (Andrea Leadsom)]

I have to say that I am extremely disappointed by the remarks of the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson). I find it absolutely astonishing that Labour Members have the courage to raise the issue of bankers’ bonuses. Perhaps they have forgotten that it was under their light-touch regulatory regime that the worst excesses of the banking sector were allowed to flourish. I wonder whether she regrets the fact that the shadow Chancellor is not in the House today. Does she suspect that he regrets saying, as City Minister in June 2006, that

“nothing should be done to put at risk a light-touch, risk-based regulatory regime”?

Does she think that he regrets presiding over a system under which £66 billion was paid out in bonuses on his watch?

[Cathy Jamieson]

I wonder whether the Minister heard what I said when I was challenged about whether the shadow Chancellor ought to be in the Chamber. I noted that the Chancellor is not present, and I raised the question of what Conservative Members had done on light-touch regulation. Were they not arguing for it? Can she give me an example from that time when her party proposed something different?

[Andrea Leadsom]

That is just another typical Opposition ploy. At that point, the Conservative party was in opposition and the Labour party was in government. It is absolutely unconscionable for the Labour party to suggest that the Opposition of the day should have saved the Labour Government from their own excesses.

[Debbie Abrahams (Oldham East and Saddleworth) (Lab)]

Will the Minister give way?

[Charlie Elphicke]

Will the Minister give way?

[Andrea Leadsom]

I give way to my hon. Friend.

[Charlie Elphicke]

Does my hon. Friend not think that the last intervention is reminiscent of arsonists throwing rocks at the firefighters who have worked so hard to put out the fire the arsonists started?

[Andrea Leadsom]

My hon. Friend is quite right. It is extraordinary that Labour Members have the cheek to come to the House and suggest that Conservative Members are somehow responsible.

I want to draw to the House’s attention the very prescient quote from the former Prime Minister when, representing the previous Government, he addressed the City in his Mansion House speech in 2002:

“What you as the City of London have done for financial services, we as a Government aim to do for the economy as a whole.”

And didn’t they just? It is absolutely extraordinary that under the “intensely relaxed” Labour Administration, bankers were rewarded for taking excessive risk, and if they failed, were allowed to get away with it—heads they win, tails the taxpayer loses.

[Debbie Abrahams]

Will the Minister give way?

[Mr Stewart Jackson (Peterborough) (Con)]

Will the Minister give way?

[Andrea Leadsom]

I give way to my hon. Friend.

[Mr Jackson]

Is not this debate a displacement activity for a party that does not have any coherent narrative to deal with jobs, growth and the economy? Is it not reckless of Her Majesty’s Opposition to keep recycling the tax on bankers’ bonuses—10 times over—without ever having to account for where that money will actually go?

[Andrea Leadsom]

My hon. Friend is exactly right that the Opposition are simply trying to recycle something as a distraction. I am truly delighted that the motion gives me the opportunity to set out the wide-ranging measures that this Government have taken to sort out the appalling legacy of the Labour party on banks and remuneration. We have taken an extraordinarily wide-ranging set of measures to sort out a mess left, once again, by a Labour Government.

[Debbie Abrahams]

I am grateful to the hon. Lady for ultimately giving way. Will she remind the House how much more the Government are borrowing now compared with 2010?

[Andrea Leadsom]

The hon. Lady will know that the Government have taken steps to bring down significantly the amount we are borrowing each year to get our economy on the road to recovery after the disaster caused by the Labour party.

To return to the point of this debate, the real fact is that the public are absolutely right to be furious about the behaviour and misconduct of banks. It still feels as though there are fresh examples every day of the shameful practices that went on in the bad old days. The public will want to know what this Government have done to sort out the mess left by the previous Government.

I can tell the House that, under this Government, we have the toughest remuneration regime of any major financial centre in the world; we are making banks raise their standards, rebuild their reputation and get back to the job they used to do prudently and respectably for centuries; and we are making sure that we never go back to the bad old days of banking.

[Guy Opperman]

Will the Minister give way?

[Mr Marcus Jones]

Will the Minister give way?

[Andrea Leadsom]

I will give way in a moment, but I want to be very clear at this point. In such debates, there is always a sense that somehow all bankers are terrible people. The truth is that the vast majority of the up to 2 million people employed in financial services do an honest day’s work and always have done. They would not seek to rip anybody off, or distort anything they do. They are honest, decent people. I want to pay tribute to the work of financial services not just in oiling the wheels of our economy, but in contributing so much to our economy as a whole. Notwithstanding the very real misconduct issues, which have disgusted all of us right across the country, it is true that only a small number of people are responsible for such wrongdoing. I will talk about what we have done to put that right after I have given way.

[Guy Opperman]

Will my hon. Friend also make the point that this Government have ensured that LIBOR funds, which were not previously given to good causes, have benefited air ambulances—my hon. Friends and I supported them at No. 11 Downing street last night—and 96 military charities? This Government have brought in a magnificent innovation that supports wonderful charities.

[Andrea Leadsom]

I am very grateful to my hon. Friend for raising that point. The Government are extremely proud that fines for misconduct go to good causes, unlike under the Labour party, when any fines for misconduct were passed straight back into the hands of the people who committed it. The LIBOR fines have gone to military charities and air ambulances, as he pointed out, and the fines for the appalling foreign exchange rigging will support the NHS and GP surgeries in particular.

[Helen Goodman (Bishop Auckland) (Lab)]

The hon. Lady is a well-informed Minister. Will she tell the House what she did in her years as a banker at BZW and Barclays and, latterly, as a head of corporate governance to lobby for tighter financial regulation?

[Andrea Leadsom]

I am very grateful to the hon. Lady for giving me the opportunity to say that for the last 10 years of my career at Invesco Perpetual, I was responsible for writing a quantitative bonus scheme that measured the performance of fund managers over three, five and 10 years according to the performance of the team, the business and the individual, which involved clawbacks, as appropriate. I started that work in 1999 and finished it in 2009, so I can say with confidence that I did my bit on remuneration.

What have the Government done that we are so proud of? First, we have brought down the quantum of bonuses. City bonuses are now a fifth of what they were under Labour. The banks that were bailed out by the taxpayer have been a key focus for the Government, so let me inform the House about what is happening with bonuses at RBS. We will ensure that the total bonus pool comes down again, both in total and per head. That will continue the reductions that made last year’s bonuses more than two-thirds lower than those in 2009. The bonus pool at the investment bank will come down too in total and per head. We are continuing to restrict cash bonuses to £2,000, and no executive director will receive a bonus.

Let me also tell the House what is happening at Lloyds. This week, we announced that we are getting back another half a billion pounds for taxpayers—money that they had to put in. We can do that because since the crisis Lloyds has gone from failure to being a strong, profitable bank that is helping to drive the UK recovery and is contributing £230 million a year through the bank levy. We will ensure that Lloyds sees its bonus pool reduce this year and we are continuing to restrict cash bonuses to £2,000.

Let us compare that with the Labour party, which presided over a system that paid Fred Goodwin a cash bonus of £2.9 million in 2007. It is now calling for a 10-year clawback on bonuses—once again asking us to clear up the mess that it left—and has spent its bank tax proposal 10 times over.

The Government have made the link between bonuses and performance crystal clear. Bankers should be in no doubt that their bonuses are at risk should misbehaviour occur. Under this Government, highly paid bankers and those who are liable for big decisions have their bonuses deferred over at least three years, and at least 60% must be deferred for senior managers. Bonuses are now clearly linked to the performance of banks, since 50% of any bonus must be paid in shares or similar instruments. Deferred bonuses can be subject to cancellation in the future. Since the start of this year, bonuses can be clawed back up to seven years after they are paid out when misconduct or serious performance issues come to light. Guaranteed bonuses, which were commonplace under the previous Government, are banned in all but the most exceptional circumstances.

We have taken the lead in ensuring that there is transparency in senior executives’ pay arrangements. We have ensured that all the top 15 banks have signed up to the strengthened code of practice, which is a notable improvement on the two that had signed up when Labour left office. Our reforms to company law mean that shareholders are guaranteed a binding vote on pay policy.

We are not stopping there. The Parliamentary Commission on Banking Standards, which was attended so ably by my hon. Friend the Member for Wyre Forest (Mark Garnier), made strong recommendations on bankers’ pay.

[David Mowat]

The Minister is right to say that the level of bonuses has reduced hugely in the past few years. However, does she agree that the real issue with banking is not the bonus level, but the level of absolute remuneration, which the Labour party’s policy does not address? Why does she think banks require so many people to earn more than £1 million a year, in a way that oil companies and pharmaceutical companies do not? The issue is the absolute level of remuneration.

[Andrea Leadsom]

Philosophically, I agree entirely with my hon. Friend. Many people across the country will agree that the absolute level of remuneration in financial services needs to be clearly justified. Although the Conservative party truly believes that wealth creation, which creates jobs, tax revenue for the Exchequer and growth for our economy, should be properly remunerated, we want to give as much power as possible to shareholders to ensure that they can take decisions that make it absolutely clear that remuneration should reflect the contribution of the individual, and not just some norm in the industry.

We have agreed with the recommendations of the Parliamentary Commission on Banking Standards and asked the financial services regulators to look into implementing them, in particular the extension of clawback to 10 years when an investigation into an individual is ongoing and the extension of deferral to seven years for senior managers, which is a significant increase from the current three years. The regulators are due to publish final rules in response to the consultation shortly. I am sure that hon. Members will agree that we want to keep our independent regulators independent, so that they act in the best interests of our economy and not in the interests of a political party.

[Mr Marcus Jones]

My hon. Friend has mentioned power for shareholders and political interference. Does she agree that it is not right for the Government to intervene in certain situations, such as in the financial crash, when the last Prime Minister effectively pushed Lloyds TSB and RBS into a shotgun marriage?

[Andrea Leadsom]

I agree with my hon. Friend in principle. We want to see the market working properly, shareholders taking the decisions on remuneration and businesses acting fairly in the interests of all their stakeholders. That is why we have been so determined to sort out transparency, fairness and the binding votes that boards have in regard to the actions of the banks.

Our desire to see a lack of political intervention is why we have opposed and continue to oppose the deeply flawed and politically motivated EU cap on bonuses. My right hon. Friend the Chancellor, the Governor of the Bank of England and the head of the Prudential Regulation Authority agree that it will not control bankers’ pay, but instead push up fixed pay, make it more difficult to claw back earnings when things go wrong, weaken financial stability and make it more likely that the taxpayer, rather than the banker, pays the cost of mistakes. We continue to believe that the cap is fundamentally flawed. Members will know that we have, however, withdrawn our legal challenge to the cap and are instead looking at how else we can build a system of pay in global banking that encourages responsibility, rather than undermines it.

[Helen Goodman]

Will the hon. Lady explain to the House and the country why it is wrong to cap bankers’ bonuses but right to cap nurses’ pay?

[Andrea Leadsom]

The point that we have made about the bankers bonus cap is that bankers will find other ways to remunerate themselves in fixed pay, rather than in variable pay. The hon. Lady smiles, but she perhaps fails to understand that the whole point of the regime we have put in place is to ensure that bankers are accountable. The way for them to be accountable is through variable pay, which is performance related, unlike fixed pay. The problem with the cap on bonuses is that it will put up fixed pay.

[Helen Goodman]

rose—

[Andrea Leadsom]

I will not take another intervention on that point because I have explained it twice and would like to move on.

The cap remains fundamentally flawed, so we are looking at other ways to ensure that there is accountability. We do, however, fear that fixed pay is going up and there is some evidence of that. Last November, the Chancellor wrote to the Governor of the Bank of England to ask him to encourage this work in his role as chairman of the Financial Stability Board. Such methods at a global level might include standards that ensure that non-bonus or fixed pay is also put at risk, maximising clawback or paying senior staff in performance-related bonds. Any such solution must be international in nature to be effective. That is why we are pushing the Financial Stability Board, which is uniquely well placed, to pursue these issues with urgency.

[James Morris (Halesowen and Rowley Regis) (Con)]

I welcome all the action that the Government have taken to clamp down on excessive banking bonuses, but it is not the case that, as my hon. Friend said earlier, more than 2 million people are employed in the financial services industry in Britain, and not all of them are millionaires? It is important that we take into account the fact that there are people in the banking sector on relatively low pay. Not every banker is earning £1 million or more a year.

[Andrea Leadsom]

I am glad that my hon. Friend has raised that point, and I am happy to reiterate my remark that the financial services sector employs up to 2 million in this country, most of them outside the City and many of them doing regular jobs in banks and call centres, or even in places such as a new dealing room that has been set up outside Birmingham, which I recently had the pleasure of visiting. All those people are as mortified as the rest of us at the behaviour of a few, so it is always important to remember that we are talking about the behaviour of a few, not of the many.

The third thing that the Government have done is to improve the accountability of bankers. I hope hon. Members will agree that the vast majority of people in the financial sector are decent people who have played by the rules and just want to get on with providing a valued and trusted service to their customers. We must have high standards in banking, because that is what will help the UK to continue to thrive as a leading and trusted financial centre. The sector remains a huge asset to the British economy, contributing almost an eighth of the total tax receipts and giving us a trade surplus of £16 billion last year.

Banking oils the wheels of the economy, helps our businesses grow, fosters investment and boosts aspiration. When bankers get it right, it is a driver of this country’s growth. When they get it wrong, the damage is consequentially enormous, because it threatens the livelihood of millions of people in this country, as we saw during the financial crisis.

The public will want to know that this Government have made reckless misconduct leading to bank failure a criminal offence, and overseen banks being fined heavily for their worst excesses. There have been £450 million of fines for the disgraceful rigging of LIBOR and £1.1 billion of fines for the manipulation of foreign exchange rates—disgusting and unacceptable behaviour. I know that all Members will be reassured to know that the Serious Fraud Office has opened investigations into a number of individuals in relation to the manipulation of LIBOR and forex. Of course, many firms have sacked and dismissed staff found guilty as part of their own internal investigations.

[Richard Fuller]

My hon. Friend is now stressing one point that the everyday people feel is most important about the reform of our banking system—that when bankers do wrong, they should face criminal prosecution and the prospect of jail. Is she satisfied that we now have the right measures in place—measures that the last Government did not put in place—and will she assure the House that she will ensure that the Government use all their powers to enforce the regulations as far as possible?

[Andrea Leadsom]

That is an important point. This Government have taken every step we can think of to ensure accountability, prevent future wrongdoing and improve standards in banking. We are always open to new suggestions, but it is our genuine belief that we have fundamentally changed the underlying systems that banks work with. I can certainly reassure my hon. Friend that when I speak to the chief executives of banks, as I do regularly, they assure me that they, too, take the matter extremely seriously and have put in place checks so that they can indentify wrongdoing and punish the offenders under their own steam, as hon. Members will have seen in the press today.

[Helen Goodman]

Will the Minister give way?

[Andrea Leadsom]

I will not give way again; I am just coming to the end of my speech, and I want to give other Members the chance to contribute.

Fourthly, in our efforts to rebuild this vital industry, we have put in place the regulatory reforms necessary to improve bankers’ conduct and make banks serve their clients better, whether they are small and medium-sized enterprises or members of the public. We have legislated for a new senior managers and certification regime, to strengthen the accountability of senior management and raise the standards of individual conduct. We also launched an enforcement review, which recommended improvements to how regulators make decisions relating to enforcement.

We have promoted choice and competition in the retail banking sector, putting it at the heart of our regulatory system. By making it easier for customers to switch banks we are incentivising banks to look after their customers better, and by opening the door for new and smaller banks to compete with the established names we are ensuring that the entire sector ups its game, not least in helping our small and medium-sized businesses grow and expand. That is good for the customer, good for the sector and good for the wider economy.

Reforming remuneration for bankers has been a major priority for this Government. We are sorting out the mess left by the Labour party. It is not a pleasant spectacle when you lend someone your car, and they crash it and then criticise you for not repairing it quickly enough. I totally reject the proposals for changes that the hon. Member for Kilmarnock and Loudoun made. This Government are doing the work needed to ensure that the UK’s financial services are fit for the 21st century and that we put the bad old days of banking behind us.