Banking (Responsibility and Reform)

Julian Smith Excerpts

Tuesday 7th February 2012 Commons Chamber

[Mr Umunna]

I agree with my hon. Friend and I shall come to that precise point shortly.

[Julian Smith (Skipton and Ripon) (Con)]

Will the shadow Minister confirm that at that time he was an employment lawyer and was involved in structuring the compensation packages of investment houses? Does he have any regrets about how he behaved at the time?

[Mr Umunna]

I am glad that the hon. Gentleman brought up that point, because I anticipated it. First, I think it is good that Members of this House have experience in working for business. Secondly, my experience of advising different companies and financial institutions on such arrangements has convinced me that we must reform the way in which the system works—[Interruption.] I would also say to Ministers, who are crowing, that they might wish to reflect on the fact that my ultimate boss at the time when I was more deeply involved in drafting such arrangements was the senior partner of Herbert Smith, whom the Prime Minister ennobled in the first tranche of peers at the beginning of this Parliament—no doubt because of his services to the legal profession and the City of London.

As the Leader of the Opposition said last week, we are still dealing with the aftermath of the moment to which I have referred and the recession it caused. Many thousands of people lost their jobs and now face the biggest squeeze on their living standards in a generation. Thousands of robust, profitable businesses have struggled to access finance or have gone under. At this juncture, I want to tackle head on the accusation that to raise those issues and criticise the financial services sector is to be anti-business—some have even referred to it as indiscriminate business bashing. That is an utterly absurd notion given that among the most vociferous critics of our banks are the small and medium-sized businesses that make up the overwhelming majority of businesses in this country. The people making those outlandish claims of anti-business sentiment talk as though large financial institutions are the only businesses in this country. Yes, those institutions are an important part of our business community, but there is so much more to British business than big finance. Indeed, we need to rebalance our economy not to diminish our competitive edge in financial services but to grow other sectors so that we are not so reliant on that one sector.

Businesses in other sectors are struggling right now. The most recent Bank of England trends in lending show that net lending to businesses has fallen in nine out of the past 12 months and lending has fallen by more than £10 billion in the past year. A report published by the Department for Business, Innovation and Skills last week states that the stock of lending to small and medium-sized businesses declined by 6.1% in November 2011 compared with a year earlier.

It is not just that the banks are failing to get the money out of the door to successful, profitable businesses with robust business models. There has been a move away from relationship banking, where banks saw it as their duty to get to know and understand their business customers properly. Yesterday, I met a number of successful export businesses in the home counties—businesses that help us pay our way in the world. I was told by the overwhelming majority that when it came to getting help from their banks to export and expand, their banks simply did not want to know.

Some have suggested that that is all the result of increased capital requirements on the banks, but Robert Jenkins, a member of the Bank of England’s interim Financial Policy Committee, told the Treasury Committee last month:

“Making the banks safer through greater resilience in their balance sheets and more capital does not, in and of itself, prevent additional lending.”

Despite all that, people and businesses have had to watch as billions in bonuses have been paid to bankers since 2008-09. It is worth stating that we are not talking about the sums earned by the average bank employee—the cashier, say, in a local branch—but about the enormous sums paid to investment bankers and a select few senior executives in the sector. Those bonuses have continued to be paid as a matter of course, regardless of the fact that many of the institutions, all of which directly or indirectly benefited from the interventions of the Government over the past five years and continue to benefit from an implicit subsidy, have been making thousands redundant, have seen their share prices and profits falling and have been found guilty of mis-selling payment protection insurance on a grand scale. To add insult to injury, Robert Jenkins, commenting on bank balance sheets, told the Treasury Committee:

“Every £1 billion of less bonus would support £20 billion of additional small business lending.”

It is no wonder that Sir Philip Hampton, the chair of RBS, himself said last week:

“Pay has been high for too long, particularly in the banks, particularly in the investment banks".

--- Later in debate ---

[Mr Umunna]

On guaranteed bonuses, there is an element of contract in that, in terms of the arrangements between individual banks—[Interruption.] Will the hon. Gentleman listen and let me finish the point? There is an element of contract that provides for a bonus, but also an element of discretion. The fact that large bonuses were being paid out regardless of performance is, of course, what people outside Parliament object to.

[Julian Smith]

In order to create a balanced view, will the shadow business Minister confirm the tens of billions of pounds paid from those bonuses in income taxes and other taxes, such as employment taxes, during the period he is discussing?

[Mr Umunna]

Ultimately, the taxpayer had to put about £1.2 trillion into the system to support it. Juxtaposing that with the amount paid in tax by the sector, I am not sure that it comes to the same sum. I get the point that the hon. Gentleman is making. I do not deny that the financial services sector has contributed in tax receipts, but that is not outweighed by what we have had to pay out to save it from itself.

The status quo will not do. Change is essential. In November last year, Bob Diamond, chief executive of Barclays, said in his BBC “Today” business lecture that

“the single most important thing for banks and for businesses now is to focus on helping to create jobs and economic growth; and being able to do that requires us—banks in particular—to rebuild the trust that has been decimated by events of the past three years; and that rebuilding trust requires banks to be better citizens.”

I agree with Mr Diamond, but actions matter far more than words to people and businesses.

At the Business Secretary’s instigation, the Government established the Independent Commission on Banking, for which he deserves credit. If its recommendations are implemented, they will help to deliver a banking system that supports our economy’s interests in the long term. However, a number of things must happen to address the issues in the short term, not least of which is the matter of remuneration, which can be corrosive of public trust in our banks.

First, greater transparency on pay in the banking sector is needed. A good place to start would be immediate implementation of the Walker review. In 2009, Sir David Walker recommended new rules on the disclosure of bankers’ remuneration within pay bands above £1 million. In government, we legislated for that fairly modest scheme to be put in place so that irresponsible remuneration practices could be identified and rooted out. So modest were the proposals that the now Business Secretary told the House at the time that Sir David had produced

“an embarrassing mouse of a report”.—[Official Report, 30 November 2009; Vol. 501, c. 900.]

In the June 2010 Budget, the Business Secretary and his coalition partners pledged to take forward these modest proposals, but in November 2010 the Chancellor suddenly declared that he would not countenance implementation unless he could secure international agreement for the measures. In giving evidence to the Treasury Select Committee in December 2010, however, RBS’s Stephen Hester indicated that unilateral adoption of the Walker review proposals would not put the UK financial services sector at a significant disadvantage. Given the modesty of the Walker review proposals, why on earth will the Government not implement them?

Secondly, to increase accountability, we have said that an ordinary worker should be placed on the company remuneration committees setting pay. I do not understand why the Government have been so resistant to this idea. The Business Secretary has said that he is very sympathetic to the idea but has raised practical objections on the basis that there are many FTSE companies whose employees are predominantly overseas. These practical obstacles can be overcome, however, not least through technologies such as telephone and video conferencing, which in this day and age are a common feature of board meetings.