Banking

Ed Balls Excerpts

Wednesday 9th February 2011 Commons Chamber

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

The near-collapse of the British banking system more than two years ago still generates today deep feelings of anger and cries for retribution. I understand that, for the link between risk and reward that underpins our free market was completely broken.

Bankers who had made the most catastrophic mistakes walked away with huge payouts and pensions. Those entrusted by us to regulate those bankers and run our economy washed their hands. Meanwhile the rest of the country is left paying every day for their failures. The new coalition Government must pick up the pieces. Let me set out how we will do that.

First, we will make sure that this never happens again. We are replacing entirely the tripartite system of regulation that was introduced by a previous Chancellor and his advisers in 1997, and which completely failed. Next week we will publish the detailed proposals to give the Bank of England responsibility for prudential regulation, and to create a new consumer protection and markets authority that will protect the interests of bank customers. We will then undertake pre-legislative scrutiny, as requested by the House, before introducing the Bill. I hope it will command support from both sides.

Later this year we will receive the interim and final reports of the Independent Banking Commission that this Government established, and which I asked Sir John Vickers to chair. Sir John and his fellow commissioners are asking the difficult questions that need to be asked about how we protect the British taxpayer from future bank failures so that never again is a bank too big to fail. We look forward to receiving their recommendations. I should make it very clear that nothing that I will say today about the settlement that we have reached with Britain’s banks, including references to a level playing field, in any way prejudges the outcome of the commission. That includes both the commission’s recommendations and the Government’s response.

The second task facing the Government is to make sure that we get the maximum sustainable tax revenues from the financial sector. Her Majesty’s Revenue and Customs confirms that the one-off bank payroll tax introduced in the dying months of the previous Government raised £2.3 billion net, but as my predecessor—the Chancellor who introduced the tax—has pointed out, it could not be repeated without massive tax avoidance. I agree with him and we will not repeat the bank payroll tax.

Instead, we have implemented a new and permanent bank levy, and that is why yesterday I announced an increase in that levy so that it raises £2.5 billion this year. This will bring the total raised by the new bank levy to £10 billion over the Parliament, and it means that in each and every year of this Government we will raise more in bank taxes than the previous Government raised in any single year. We have also required all the major banks operating in the UK to comply in spirit and by the letter with the code of practice on taxation. The code was announced with a fanfare by the previous Government, but I discovered that when they left office only two banks had signed up to it. Today all the major banks have signed.

The third task facing the new Government was to reach a new settlement with the banks so that they could contribute to Britain’s economic recovery. Some prominent people in the House were predicting just 24 hours ago that my tax announcement meant that our discussions with the banks on lending were falling apart. The House will be pleased to know that that prediction was completely wrong. This morning the heads of the major British banks—Barclays, RBS, Lloyds and HSBC—reached a new settlement with the Government. I want to thank John Varley, the former chief executive of Barclays, for the huge amount of time and personal commitment that he has given to this project.

The essentials of the new settlement are exactly as I set out last month, and I am today publishing an exchange of letters between John Varley and myself. The banks will lend more money, especially to small business; pay more taxes; pay less bonuses; be more transparent about the bonuses that they do pay; and make a greater contribution to our regional economy and society. In return the Government commit to the success of a strong, resilient, stable and globally competitive financial services sector in which UK banks can compete with the best banks in the world on a level playing field, and in which London is a world centre for finance. That is good for jobs and growth in our country.

Let me go through each part in detail, starting with pay and bonuses. Most of us find the levels of pay in financial services to be completely out of kilter with what the rest of society would regard as fair or reasonable. We are determined to bring responsibility and constraint, and make sure that pay is properly taxed. Four years ago, at the height of the banking boom, the City paid £11.5 billion in banking bonuses, most of which was in cash, most of which could not be recovered when the banks collapsed, and too much of which went untaxed. The new remuneration code introduced last month and the tax avoidance measures that we are taking will change that.

Today I can tell the House that the four major British banks have also agreed that total bonuses for their UK-based staff will be lower than last year and lower than they would have been without today’s settlement. The independent non-executive director who chairs each bank’s remuneration committee will have to confirm personally in writing to the Financial Services Authority that their pay deal conforms with today’s commitments. For the first time, the banks have agreed to seek explicit approval from their board’s remuneration committee for the pay of the 10 highest paid employees in each of their main business units. That did not happen in banks such as the Royal Bank of Scotland before the crisis, where the board was ignorant of what was going on.

We have also insisted that the banks be far more transparent about who and how they pay. From this year onwards, the four major banks have committed to disclose the pay details not just of their executive board members, but of the top five highest paid executives not on the board. This will mean that the salary details of at least seven executives at each bank will be published this year. That compares with five individuals in the United States of America and Hong Kong, and only board executives in Germany and Japan. By disclosing individual pay levels the settlement goes further than the Walker report recommended, on which we are seeking international agreement.

We will consult on whether to make it a mandatory requirement from 2012 on all large UK banks to publish the pay of the board plus the eight highest paid senior executive officers. That would mean that Britain had the toughest and most transparent pay regime of any major financial centre in the world.

Let me provide an update on the situation at the Royal Bank of Scotland and Lloyds. The previous Government signed an agreement with RBS that explicitly said that it would in 2010

“enable pay arrangements in line with the market”.

Despite that constraint, which we inherited from the previous Government, United Kingdom Financial Investments Ltd, the arm’s length body which manages the Government’s stake in those two banks, has agreed the following: for all staff at RBS and Lloyds, the maximum up-front cash bonuses will be limited to a maximum of £2,000 this year; all executive directors, including the chief executives, have agreed to receive this year’s bonuses entirely in the form of shares; and directors will have to wait until 2013 to convert these shares into cash.

As the Prime Minister made clear last month, the bonuses at RBS and Lloyds will in total be smaller than they were last year under the previous Government and so, crucially, will the compensation ratios be. They will backmarkers in the industry, instead of the front runners that they once were.

Let me turn from pay to the additional support that the British banks have committed today to provide to the regional economy. At the end of last year the industry pledged £1.5 billion to a new business growth fund, which will invest in the kinds of expanding small businesses that hold the key to Britain’s more balanced economic future. Today they commit to make an additional £1.2 billion contribution to society. The four major banks commit to an additional £l billion for the fund and an additional £200 million to capitalise the big society bank. The business growth fund contribution will be front-loaded over the next couple of years, so that more help can be given to businesses sooner. This money will be in addition to the lending commitments and additional to any funding already allocated from dormant bank accounts.

Finally, at the heart of today’s settlement is a commitment from the four major banks, as well as Santander, to make much more money available for lending to small and medium-sized business. Last year these banks lent £66 billion to such businesses. Today the banks commit to lend £76 billion this year. That is £10 billion more gross new lending to small and medium-sized businesses, a massive 15% increase, materially higher than they had been planning to lend this year and materially higher than anyone who has followed these discussions would have expected. It comes alongside a very welcome commitment from the banks greatly to improve their customer service to small businesses, with a free mentoring service, published lending principles, transparent appeals and improved access to trade finance. Overall, gross new lending to all businesses, large and small, will increase from £179 billion to £190 billion, and the banks will make a commitment to lend even more if demand materialises.

Absent this deal, the banks were actually expecting lending to fall this year. To ensure that progress against these lending commitments can be monitored, the Bank of England has agreed to collect the relevant data and publish them quarterly. To help to ensure that today’s agreement is honoured, for the first time the pay of the chief executives of each bank, as well as of the relevant business area leaders, will be linked to their performance against these SME lending targets. Of course, if the banks fail even then to live up to their promises, the Government reserve the right to return to the issue and take further measures, but I sincerely hope that will not be necessary.

The anger at the terrible mistakes of the banking industry and the failure of those who regulated it will long remain, and rightly so, but let us as a country confront this hard truth: anger and retribution will not bring one percentage point of economic growth or create one single new job. The anger will remain, and I understand that, and we must never make the same mistakes again, but Britain needs to move from retribution to recovery. Today we get the banks to commit, with more lending—£10 billion more for small businesses— for our regional economies and society, £10 billion more in bank taxes, lower bonuses and the most transparent pay regime in the world. In return, let us build a banking industry that creates jobs for hundreds of thousands of our citizens and that competes in the world. Above all, let us ensure that the economic catastrophe that befell this country can never be repeated. That is how this new Government will clean up the mistakes of the previous Government. I commend this statement to the House.

[Ed Balls (Morley and Outwood) (Lab/Co-op)]

Given that this statement was not on the Order Paper, I thank the Chancellor for the eight minutes’ advance notice he gave me of it. Yesterday, he confirmed in his “Today” programme mini-Budget that he is cutting taxes for the banks this year, compared to last year. [Interruption.] Today we find out what the Chancellor has got in return from the banks, after weeks and months of negotiations with the UK banking industry, culminating in the complete shambles of the past 24 hours, and the result is: precious little. From a Chancellor who talked so tough in opposition and who even yesterday continued to promise much, this is a pitiful outcome and an embarrassing climbdown. [Interruption.]

[Mr Speaker]

Order. Earlier I made it clear that heckling and abuse of the Prime Minister when he was answering questions should not take place and that his answers would be heard. I say to hon. Members who are now heckling the shadow Chancellor, stop it. It is a disgrace. The public loathe it. Do not imagine for one moment that while screaming abuse you have the slightest prospect of being invited to ask a question. Behave and get the message.

[Ed Balls]

Thank you, Mr Speaker. They tend to heckle when they are worried.

A “damp squib” is defined in the dictionary as something potentially explosive but that fails to perform because it has got wet. That is this Chancellor all over. This negotiation has turned from Project Merlin into “The Wizard of Oz”: the curtain has been pulled back and there is nothing there. Of the leading players on the Government Front Bench, who is the one without courage, who is the one without a brain and who is the one without a heart?

Let us review what the Chancellor has achieved. On lending, he claims to have secured an agreement with the banks to lend £190 billion this year, but financial experts are clear that the deal he has announced is vague, toothless and unenforceable and not a proper substitute for proper competition. How will he be able to measure in detail whether the deal is delivered? Can he tell us the detail of how it will be enforced? Is there a sanction if the lending does not materialise? Was not a senior banker right when he told the Daily Mail on Monday that this lending agreement is “meaningless”? Is not the Financial Times right to say today:

“With much noisy showmanship, the Conservative-Liberal Democrat coalition is puffing demands that are little more than cosmetic”?

Is not that the truth?

On pay transparency, again we have a damp squib. The Chancellor claims that we will now have the most open regime in the world, but what does it actually add up to? The answer is transparency for pay and remuneration of only the seven most senior bank executives, whose anonymity is still fully protected. The Government are demanding that local authorities publish the salaries of anyone in local government earning more than £58,200, but he is allowing a taxpayer-owned bank and publically quoted companies in the financial sector to continue to pay staff millions of pounds in pay and bonuses with no transparency at all.

Why is the Chancellor not activating the legislation that we put on the statute book that would require the publication of the remuneration of any individual paid more than £1 million? It is there on the statute book and ready to go, so why not just sign the order and get on with it? Why has he failed so abjectly to make any progress in international negotiations with European and global Governments on transparency? There has been no progress because there is no sign that he has even tried.

On bonuses, I am afraid that the country will conclude that the Chancellor has thrown in the towel in the face of extensive lobbying by people with whom he and his Conservative colleagues have just become too close and too cosy. Does he remember what the Prime Minister said just two years ago—when Leader of the Opposition—when attacking the previous Government? He said:

“Because of this dithering we could see bonuses paid out for a second year to executives in taxpayer owned banks, which is unacceptable.”

After months of dithering from this Chancellor, what will we see over the next fortnight? We will see exactly that: bonuses running into millions of pounds, in cash and shares, paid to executives in taxpayer-owned banks. What he should be doing today is announcing proper reform of corporate governance and taking up our proposal to repeat last year’s £3.5 billion bank bonus tax, in addition to his levy, and use the money to support jobs and growth to kick-start his stalled recovery.

I have told the Chancellor that I will support him on long-term banking reform, enforceable lending agreements and proper statutory action on transparency and pay. Our economy badly needs a reformed, transformed, vibrant and globally competitive financial services industry for the future. He is right that hundreds of thousands of jobs depend upon it. However, this is not an agreement to secure the long-term future of our economy, but a short-term and shabby political deal. There have been talks that dragged on for weeks, a mini-Budget on the “Today” programme, crisis conference calls with the banks yesterday afternoon, a hasty compromise cooked up overnight and a Chancellor finally coming to the House with little to offer in return for his tax cuts for the banks.

I have to say that this is a Chancellor who, as the former CBI head has said, puts politics before economics. He talked tough in opposition, but in government he looks increasingly out of his depth and out of touch. We have rising VAT, rising fuel prices, rising unemployment and deep spending cuts hitting living standards of families, and yet his first priority is a tax cut for the banks. Millions of families up and down the country will now be asking, whose side is this Government on?

[Mr Osborne]

Well, that has to be one of the feeblest replies to a statement that I have heard. The only person who seems to be out of his depth at the moment, rather surprisingly, is the shadow Chancellor. There was one thing missing from that rant: an apology. He was the City Minister. I will move on to all the things that we need to do to regulate the City, but I will first remind him that he stood at this Dispatch Box for two years as City Minister and could have done any of the things that were either in my statement or in his reply, but he did not. The truth is that he is man with a past, and we will not let him forget it—even if he does. I took the opportunity to look at his website on which he lists all his achievements in politics, but he does not mention the fact that he was City Minister. He does not mention the fact that he invented the system of City regulation that failed so spectacularly. He might have forgotten what he did not do in government; we will not.

Let me deal specifically with some of the right hon. Gentleman’s questions. He asks how the lending targets will be monitored. I told him in the statement that the Bank of England is going to monitor them. [Interruption.] “How are they going to be enforced?”, Opposition Members cry. The chief executive’s pay will be linked to the targets, and I made it very clear in the statement that, of course, if the deal is not met we will return to the issue.

The right hon. Gentleman talks about transparency. In 13 years, the previous Government never implemented transparency in the City of London. Some £11.5 billion of bonuses were paid in the year in which he was the City Minister, but we are introducing the most transparent regime of any major financial centre in the world.

The right hon. Gentleman continues deliberately—because I know he must know the numbers—to get the sums wrong on the bank payroll tax and bank levy. Her Majesty’s Revenue and Customs confirmed that there is a £2.3 billion net receipt from the bank payroll tax, and that is spelled out in the March 2010 Budget book, which the Labour Government published. We are raising £2.5 billion every year from a bank levy that he opposes— right?—unless he has changed his mind on that. [Interruption.] He now supports it. Well, that is good news.

Perhaps, then, the right hon. Gentleman will listen to the right hon. Member for Edinburgh South West (Mr Darling). The right hon. Member for Morley and Outwood (Ed Balls) quoted quite a lot from the newspapers in his reply. Well, this is from The Daily Telegraph: “Bankers’ bonus tax failed, admits Alistair Darling,” who said:

“I think it will be a one-off thing because, frankly, the very people you are after here are very good at getting out of these things and...will find all sorts of imaginative ways of avoiding it in the future.”

That is from the then Chancellor who actually introduced the tax on which the right hon. Gentleman now pins his entire economic prospects.

Let me end by saying this: the right hon. Gentleman calls for things that he simply did not do in government. On pay and bonuses, he says control them in the nationalised banks; he did not do that last year when he was in the Cabinet, and he did not do it at all when he was in the Treasury. He calls for transparency; he did not introduce it when he was in the Cabinet or in the Treasury. He talks about reforming the banking system; he is the person who designed the banking regulatory system that failed, but he does not admit it. He talks about the bank levy; he wrote 11 Budgets and never put one in. And on lending, he tried as a member of the Government to secure lending agreements throughout the banks, and he completely failed. The truth is this: he is a man running away from his past, with no plan for the future.