The Economy

Lord McFall of Alcluith Excerpts

Thursday 28th April 2016 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, it is a pleasure to participate in the debate and to compliment and reflect on Lord Peston’s life. He was a very wise and charitable mentor to me. When I assumed the chairmanship of the Treasury Committee, he invited me to lunch. I remember his words very well. He said, “You’ll be faced by many eminent people whom you will question—economists and bankers. But keep in mind the phrase I’m telling you, that these individuals don’t know their A from their E”. For the sake of sensibilities, “E” stands for “elbow”. I was able to go back to Lord Peston a number of years later and say, “Maurice, you were spot on. How prescient you were”. I pay tribute to a wonderful man who enhanced the life of the country and this House.

The Minister mentioned financial services as one of the strong areas in building a stronger economy. I will focus on that today, and in particular on my membership of the Parliamentary Commission on Banking Standards and what I consider the unfinished business of changing the culture and practice in banking. I suggest that the Government have not taken steps to build a stronger economy. I, along with others, wish them to take these steps.

Last week, the New City Agenda think tank, which I founded with David Davis MP and the noble Lord, Lord Sharkey, came out with a report on the 10 top misconduct scandals in retail banking in the UK. We were very clear in saying that the profitability of UK banks was still imperilled by persistent misconduct, an aggressive sales-based culture and excessive remuneration. As a result of that, every citizen is poorer through our pension funds and our ownership of the bailed-out banks.

To date, since 2000, £53 billion in fines and redress has been paid by UK banks. Of that, £38 billion alone was for payment protection insurance and £5 billion for interest rate hedging products to small businesses. This equals four times the cost of staging the London Olympics—and, in a Scottish context, you would have been able to pay for the education budget in Scotland for the previous 10 years, and for the next 10 years give every working person in Scotland a £1,000 per year tax cut. That is an enormous sum which has gone out of the economy.

My question is: where have the shareholders been while this has been happening? At a time when the UK corporate governance framework has been called into question, with the BHS scandal this week, and with continuing bad practices in banks, shareholders should be leading the campaign for change in banking culture and in raising professional standards. They should be doing so by forcing senior executives to change unacceptable behaviour and business models. I say that from my experience on the Parliamentary Commission on Banking Standards. We met for two years and asked 10,000 questions. The main conclusion was that senior executives were not taking responsibility.

To change culture in banking you need individual buy-in. It cannot be franchised to outside bodies. It cannot be done by osmosis. I suggest that shareholders and UK Financial Investments—the taxpayer body for bailed-out banks—have been pusillanimous at best and negligent at worst. Why cannot UKFI, on behalf of the Government and taxpayers, take a lead in encouraging other shareholders to demand public and transparent assessments of the progress of each bank? Why can it not appoint an independent body to assess and report publicly? Why cannot UKFI and shareholders ensure that where senior executives preside over misconduct, they are held to account and a significant clawback of bonuses is demanded? That is not happening. Government, regulators and shareholders have taken their foot off the pedal.

After Christmas, the Financial Conduct Authority abandoned its cultural review and incorporated that activity into what it called “normal banking supervision”. What does that mean? It means that it is carried out behind closed doors, with no assessment of progress or publication of good and poor practice. This secretive approach damages the accountability of both banks and regulators. I shall illustrate why this is so damaging. Between 2010 and 2014, Lloyds Bank paid out more than £14 billion in retail banking misconduct costs. It paid out just £500,000 in dividends to shareholders but £2.1 billion in bonuses. RBS, another bailed-out bank, paid out £6.4 billion in misconduct costs, not one penny in dividends, and £3.8 billion in bonuses. Barclays could have trebled its dividend to shareholders if it had not had to pay £7.3 billion in misconduct costs.

I shall examine the bonus issue further. The Lloyds annual bonus pool, and the senior executives’ bonuses, are based on underlying pre-tax profits. Those profits were up 5% in 2015—but the post-tax profits, after misconduct costs, were down 36%. RBS paid out on long-term incentive plans linked to what it called “operating profit” costs, which excluded misconduct costs. Barclays paid its bonuses on “adjusted” profits before tax, excluding misconduct costs.

The pre-tax profits exclude misconduct costs and the extra tax demanded by the Government. So, eight years after the financial crisis, the bonuses are not paid on real profits and the senior executives do not contribute to the bad behaviour because they are paid excluding misconduct costs. That is the situation today.

Let us take the most egregious example of the payment protection insurance mis-selling: Lloyds Bank, which had to pay £14 billion. The noble Baroness, Lady Kramer, was with me for the session when the former chief executive of Lloyds came along and, when confronted with that £14 billion misconduct, said that Lloyds were on the side of the angels as far as PPI mis-selling went. How far can one get from reality? For presiding over the misconduct regarding how PPI complaints were dealt with, subsequent to selling it—which, by the way, cost Lloyds shareholders more than £1 billion—the Lloyds CEO lost £234,000 of bonuses. That translates to 0.73% of his accumulated remuneration of £33 million over the past five years. How do the FCA and PRA expect the threat of clawback to have a significant impact on management behaviour when the levels of clawback are so minuscule and derisory?

The Parliamentary Commission on Banking Standards called for a rethink of corporate governance and asked for the removal of shareholder primacy in respect of banks. In the light of BHS and others this week, I would suggest that we need a review of the Companies Act 2006. In the same week that Philip Green has taken ownership of a £100 million yacht—after milking BHS dry—11,000 workers in BHS stores have lost their jobs, with many suffering the loss of their pension and others supported by the taxpayer through the Pension Protection Fund.

The establishment of the Pension Protection Fund was not for the benefit of conmen. It was not for the benefit of people who inherited a surplus pension fund and then denuded it and took £500 million to £600 million out of the company. That is not how fair corporate governance should be practised in the United Kingdom and the Government need to do something about it. We are witnessing the extraction of maximum value from a company with no regard for anyone else with an interest: employees, the community or stakeholders. That is in need of urgent change.

I will focus a little more on Philip Green. The Parliamentary Commission on Banking Standards looked at the scandal of HBOS. If you go through the HBOS files, you will see that Philip Green was a recipient of largesse from HBOS. He received personal loans of well over £1 billion, so he was able to buy up companies, milk them and move on because we had a bank that was clueless about corporate governance. The link-up between good corporate governance in a company and how our banks behave is illustrated by this particular point. It really is beyond parody that, a couple of years ago, the Government asked Philip Green to review government spending and procurement. I hope that they lock away his conclusions.

My last point is on Credit Suisse—I know that the Minister will be interested in this. Last week it was reported that Credit Suisse was examining selling bonds that offload its risk from issues such as rogue trading and cybercrime. It will kick in if the losses are between $3.5 billion and $4.5 billion. That means that it is tolerating rogue trading and cybercrime—and it shows that very little has changed in the culture. What is the message there? It is that the crooks can survive, but as long as a bank offloads the risk of crooked activity to some other poor sap, that is fine. That should not be how our banks are behaving. I hope that the Minister communicates directly with the regulator on issues such as this to prevent this unacceptable practice.

So I am calling for renewed shareholder vigilance. I am calling for transparency and assessment of progress. I am calling for a proactive regulator so that we do change the culture. I am calling for a review of the Companies Act 2006. While the banks were ripping off customers, the shareholders were looking the other way. I want them to focus on the banks. Perhaps we can reduce this to one banking scandal: the customer has been at the bottom of the pile. If we view this through the other end of the telescope—the customer end—perhaps the country, the Government and the taxpayer will prosper from a stronger and more efficient economy.