Banking

Lord McFall of Alcluith Excerpts

Wednesday 9th February 2011 Lords Chamber

[Lord Sassoon]

I am grateful to my noble friend Lord Higgins for pointing out that at the heart of the failure of the system and the mess that this Government have had to pick up and sort out was the failure of the tripartite system of regulation, which of course we are sweeping away. Seeing the noble Lord, Lord McFall of Alcluith, opposite reminds me that he very perceptively characterised it as a Rolls-Royce system when it sat on the shelf but an old banger when it got on the ground. I wish that I had his turn of phrase, but the tripartite system was indeed at the heart of it.

As to bonuses and their linkage to performance, that is absolutely at the heart of what the Government have agreed with the banks today. I think that the critical new element is the linkage between the performance of the banks on meeting SME lending targets and the pay of the chief executive and the other senior executives who are directly responsible for that line of business. Therefore, it is a crucial point. It is well made by my noble friend and it is at the heart of this agreement.

[Lord McFall of Alcluith]

I refer the House to the Register of Lords’ Interests, as I have an interest in this area. Does the Minister not agree that there is still too much wriggle room on the issue of transparency for the banks and that one of the big issues in this crisis was the mispricing of risk? Therefore, the more people whose salaries are known—particularly, for example, traders, although I do not know whether that is taken into consideration here—the better in terms of aligning the risk. When we talk about bankers’ bonuses and anger, the Governor of the Bank of England had it right when he appeared before the Treasury Select Committee a few years ago and said that the incentive structure in banking was distorted. Do the Government not agree that we need to tackle that issue to ensure that we restore trust and confidence in the banking sector?

[Lord Sassoon]

Indeed, I completely agree with the noble Lord, Lord McFall. With regard to the Merlin agreement, the fact that the five highest-paid senior executive officers now come within the remuneration disclosure is very important. As the noble Lord will know, senior executive officers typically encompass not only those responsible for managing the key divisions but also people such as the chief financial officer and the chief risk officer, who are at the heart of controlling risk in the system. Therefore, I think that the noble Lord’s point is very well made and, as I said, the Government will consult on this issue in the forthcoming year.