Finance (No. 4) Bill

Debate between Mark Hoban and Adrian Bailey

Wednesday 18th April 2012 Commons Chamber

[Mr Bailey]

I believe that the right hon. Gentleman introduced a paper on reducing regulation which subsequently disappeared and sank without trace in the light of the financial crisis.

In conclusion, we can argue about the behavioural changes but one thing that is absolutely certain is that the bank bonus tax raised a lot of money, that it was consistent with the principles of responsible capitalism and that it may well have affected the behaviour of bankers in the long-term if they had known that the tax would be in place as long as their behaviour justified it. The fact that the Government have removed it has meant that the bonus culture has continued. There is still a sense of unfairness and outrage within the community at large that they will have to pay for the excesses of the banking community and that the Government are not prepared to do anything about it. Even at this late stage, if the Government believe that we are all in it together, that is one thing they could do that would both benefit the Treasury and demonstrate their commitment to that principle.

[Mr Hoban]

This has been a useful debate and the clause and schedule that we are debating legislate for a change in the rate of the bank levy, increasing the full rate to 0.088% from January 2012 and making a further increase to 0.105 % from 1 January 2013. The rate changes are intended to ensure that the levy will raise the £2.5 billion a year that we said that it would and ensure that the additional corporation tax rates do not benefit the banks, a point that the hon. Member for Pontypridd (Owen Smith) did not seem to recognise.

The amendment looks remarkably familiar, as it was proposed last year, and it is good to see it being given another outing this year, but in the shadow spokesman’s 43-minute speech we heard remarkably little about it. We saw him dig himself out of a few holes of his own making, but we did not hear anything about whom it was targeting, what measures would be taken into account or, indeed, how much it would raise.

I say that because I have been going through some transcripts of radio interviews, and so far the Opposition have claimed that their measure would be used to finance £29.6 billion of additional spending or taxation. That is 10 times the amount the bank payroll tax raised when the Labour party was in government, but that is not just protestation on my part. The Leader of the Opposition, when quizzed by Jeremy Vine on 6 January 2011 about how the Labour party would pay for its VAT rise reversal, replied:

“I said for example we should have a higher bank levy.”

He was asked in a Fresh Ideas question and answer session—we have not heard many fresh ideas in today’s debate—on 25 March 2011 about how to cut the deficit, and he said that there should be “another bankers’ bonus tax”.

That is not a concoction; those are the words of the hon. Gentleman’s party leader, and I am afraid to say that the starting bid is £29.6 billion—[Interruption.] The hon. Gentleman should not question people’s arithmetic when his own was earlier found to be flawed. He should be very careful what he says. I suggested to him last night that he should have spent more time on his speech and less time in the Members’ Dining Room, but he ignored that advice. He should have followed it, shouldn’t he, really?

So we do not know how much the Opposition’s proposal would raise or at whom it would be targeted, and there is a stark difference between it and the levy that we introduced when we came into office. The bank levy is a tax on the balance sheets of banks, banking groups and building societies, and it complements wider regulatory reforms aimed at improving financial stability, including higher capital and liquidity standards. The levy ensures that the banking sector makes a fair and substantial contribution, reflecting the risks that it poses to the financial system and to the wider economy. The levy is also intended to encourage banks to move away from risky funding models.

From the outset, the Government have clearly stated that they intend the levy to raise at least £2.5 billion each year. That is an appropriate contribution, which was set with consideration to the wider environment, and it reflects the international programme of regulatory reform, the global economic conditions and the need to maintain the competitiveness of the UK financial sector.

The forecasts produced by the Office for Budget Responsibility implied that, if we did not adjust the rate, receipts for future years would fall short of the expected £2.5 billion. We will undertake a full assessment, before next year’s operational review of the bank levy, of the reasons why there is a shortfall, but fragility in the eurozone will inevitably have had a greater than the previously expected impact on last year’s balance sheets. The rate increase introduced in the clause puts us back on track to ensure that from 2013 and in future years the levy will raise at least £2.5 billion.

The target yield was set out in this Government's first Budget, when we also announced our intention to make significant cuts to the main rate of corporation tax. We were clear at the time, as we are now, that the bank levy yield far outweighs the benefit that banks receive from the corporation tax change. Other sectors, including manufacturing, will benefit from the reduction in corporation tax, but the banks will not benefit because the bank levy rate increase will offset it.

Since our first Budget, we have gone further: we have announced additional reductions in the main rate of corporation tax, so that it now stands at 24%; and we will continue with the two further cuts planned next year and the year after. As a consequence, Britain will have a 22% rate of corporation tax—the lowest in the G7. To offset the benefits to the banking sector, and to maintain the same incentives on the banks to move to less risky funding, the increase in the levy rate in this clause takes into account additional cuts in corporation tax.

The Opposition’s amendment seeks to reintroduce the bank payroll tax, and, as I said earlier, this is not the first time that we have heard it suggested. The House disagreed with it last year, and now, as then, the Government believe that such a tax would be counter-productive and unnecessary. The tax was introduced in the last Parliament as a one-off interim measure ahead of changes in remuneration practices from corporate governance and regulatory reforms. As the previous Chancellor clearly stated, it could not be repeated. The net yield of this one-off tax, accounting for the impact that it would have on income tax and national insurance contribution receipts, was £2.3 billion—less than our annual target for the permanent bank levy. The previous Government told us that they would apply the bank bonus tax only until changes in remuneration practices were put in place.

Oral Answers to Questions

Debate between Mark Hoban and Adrian Bailey

Tuesday 6th September 2011 Commons Chamber

[Mr Hoban]

My hon. Friend is absolutely right. We need to reduce the burden of red tape to encourage small businesses to set up and to create more jobs. That is one reason why, for example, we introduced a moratorium exempting micro and start-up businesses from new domestic regulation for three years from 1 April 2011.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

A year ago the Chancellor claimed that 400,000 small business start-ups would be assisted by the national insurance holiday in the regions. To date the figure is, I believe, 5,000. Will the Chancellor undertake to bring a report before the House saying how many new jobs have been created by those 5,000 new start-ups and what the cost to the Exchequer has so far been per job?

[Mr Hoban]

The hon. Gentleman should be aware that HMRC is writing to all new businesses set up in the last 12 months to ensure that they are aware of the scheme and to encourage them to apply for it. It is important that they do so, but this is just one of a series of measures that we have taken to ensure that more new jobs are created in the private sector. I would have thought that the hon. Gentleman welcomed the fact that over the last year there have been 500,000 net new jobs created in the private sector.

Mortgage Regulation

Debate between Mark Hoban and Adrian Bailey

Monday 17th January 2011 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I congratulate my hon. Friend the Member for Poole (Mr Syms) on securing this debate on the important issue of the future regulation of the mortgage market. As he said, the FSA is conducting a wholesale review of mortgage regulation in the UK. He and I share the aims of that review. We want to see

“a mortgage market that is sustainable for all participants”

and

“a flexible market that works better for consumers”.

I think we should all be able to agree on those sensible aims.

It is vital to address those issues in the light of the failed regulation of the mortgage market before the financial crisis, when there was a huge expansion in the availability of credit and the number of lenders in the mortgage market. That led to a rapid increase in house prices without an accompanying increase in home ownership, and put more people at financial risk because of the greater debts that were taken on. My hon. Friend was absolutely right to highlight the current low levels of arrears and repossession, but that reflects the low interest rate environment, lower than expected unemployment and, as he pointed out, forbearance by lenders. We cannot be sure that the same conditions will occur in any future housing downturn.

There is a lot of concern about the mortgage market review, but there is also a lot of misinformation. I welcome this opportunity to set out clearly the FSA’s plans for the review. The FSA is conducting the review under the powers of the Financial Services and Markets Act 2000 to meet its statutory objectives, which include market confidence, financial stability and consumer protection. We must remember that Parliament set the framework for regulation, but that the FSA is operationally independent, although accountable to Parliament.

Mortgage lending plays a vital role in ensuring a stable and accessible housing market. As the Minister for Housing and Local Government has set out, it is the ambition of this Government to create a housing market with stable prices that does not exclude many from home ownership. Owning a home is an important ambition for many people in this country. It brings social benefits such as stronger and more committed communities. A flexible mortgage market is important for labour market mobility. Although the link between lending and building is complex, mortgages must be available to encourage the home building industry to provide the new homes that we need. Perhaps most importantly, an open mortgage market promotes fairness between generations and helps to smooth out the differences between the housing haves and the housing have-nots. It allows young people to buy their own homes, which in turn helps older people to trade down as they move into retirement.

However, increased lending can force up house prices beyond the reach of those who want to get on to or move up the housing ladder, putting home ownership further and further out of reach for many people. High prices can cause inequality, indebtedness and inertia, with young people having to take out bigger and bigger debts to buy their own homes or give up on the dream of home ownership.

It is therefore important to strike the right balance. A properly regulated mortgage market is needed to ensure that house prices remain affordable and that consumers are protected. It is worth remembering that consumer groups such as Which?, Citizens Advice and Shelter have warmly welcomed the mortgage market review. Those organisations highlight the number of people they see every day who struggle to make their mortgage payments.

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

Does the Minister agree that an important element of financial provision in the mortgage market is diversity? I would welcome his views on possible recommendations by the FSA review that might impact disproportionately on small building societies and restrict such a diverse flow of funds to the market.

[Mr Hoban]

I know that the hon. Gentleman is a keen supporter of financial mutuals. He will recognise that there was a commitment in the coalition agreement to diversity in the ownership of businesses in the financial services sector, and that we are taking action to support mutuals. A mutual should be as safe and sound as a big or small bank. The customers of mutuals deserve the same protection as customers of other financial institutions. I want to see a level playing field in the regulation of the financial services sector, not just the mortgage market.

The boom and subsequent crash in the mortgage market cast doubt on the prudential soundness of lenders, and on their ability to take on appropriate risk. There need to be adequate controls over lending to ensure that the requirements for the retention of capital are proportionate. Without reform of the rules on mortgage lending, banks would need to hold more capital, thus restricting their ability to lend. We do not want lenders to put their solvency at risk through aggressive lending. We are working internationally to agree a new framework of prudential regulation, and capital and liquidity requirements. It is important that all these regulatory reforms are seen as one wide-ranging package to strengthen the stability and sustainability of our financial system and our economy.

I wish to give a few statistics about the mortgage market, to illustrate some of the challenges that we faced during the boom years. The volume of lending was fairly consistent from the early 1980s to the mid-1990s, at about £50 billion a year, but from the late 1990s there was a steady rise in lending, with the boom peaking at £360 billion a year in 2007. Many assume that the rapid expansion in mortgage lending during the boom allowed more people to become home owners, but the rate of owner-occupation actually fell between 2003 and 2008. That may reflect the fact that house prices grew very rapidly from the mid-1990s until 2008, matching the boom in lending, but for many, neither their income nor deposits grew at the same rate. The number of mortgages granted to first-time buyers decreased steadily over the period from 2000 to 2007.

After the boom, mortgage lending fell rapidly from mid-2007 through to 2009, and it remains below peak levels. That reduction reflects a reduction in both demand and supply. Banks now realise that they overstretched themselves and underpriced risk in the boom years, and are therefore increasing deposit requirements and tightening credit checks. On the demand side, household debt is historically high, so people are reluctant to borrow more and add to their debts. People are cautious about the economy and their jobs, and many expect house prices to fall this year.

We know that during the boom, a huge proportion of mortgage lending—about 40%—was for remortgaging. In 2007, of the £360 billion in gross mortgage lending, £150 billion was for remortgaging. Surveys suggest that about 60% of remortgages also entailed equity withdrawal. Although mortgage lending for house purchase has reduced to some extent since then, the 72% fall in remortgaging has made the most significant contribution to the fall in gross mortgage lending over recent years. With interest rates at historically low levels and house prices flat, there is little incentive for borrowers to release equity or switch their mortgage.

I acknowledge that the reduction in mortgage availability has hit everyone hard, particularly first-time buyers. The proportion of first-time buyers reliant on help from friends and family to put together a deposit has reached 85%, compared with 45% in 2006, which is not an equitable or sustainable state of affairs.

I turn to the details of the mortgage market review. In October 2009, the FSA published a discussion paper setting out its high-level objectives for the review. That has been followed by a number of discussion and consultation papers over the past year. In the course of the review, the FSA has produced a range of options and proposals for consultation and consideration, and it is considering the responses carefully and will publish further proposals later this year. Nothing is set in stone. The FSA has made it absolutely clear that it will assess fully the potential impact on the market before implementing any rule changes. Later this year, it intends to publish an impact assessment that will take into account the cumulative impact of all its final proposals.

The FSA is also committed to ensuring a smooth transitional period, to minimise the impact of changes and keep the mortgage and housing market stable. It has made it clear that it will not implement any rule changes until the market is back on a stronger footing. Its review process is an ongoing consultation, and it is important that all interested parties engage constructively in it. I encourage everyone with an interest in the debate to do so.

I shall respond to some of the points that my hon. Friend the Member for Poole made. Traditionally, self-certification was a route for the self-employed to take a mortgage, but that has been abused by people for whom the scheme was not designed. The FSA’s proposals would required greater disclosure by the self-employed. For example, a borrower could submit their tax returns to prove their historical income, giving lenders better information on potential borrowers and enabling them to assess risk, and therefore price, more accurately.

As I set out earlier, in the run-up to the crash many first-time buyers were frozen out of the market. My hon. Friend the Member for Nuneaton (Mr Jones) highlighted the fact that the low loan-to-value ratios that we see today act as a barrier to those who want to get on to the housing ladder. Those ratios are a response to the crisis, not the MMR. The MMR’s emphasis on affordability should help in the long run to create a stable market with stable house price growth, which will bring home ownership within the reach of many more people.

The MMR should have no impact on the shared equity sector, as there is no in-built prejudice against it, but again, borrowers will need to demonstrate that they can afford to pay both the mortgage and the rent.

My hon. Friend the Member for Poole also raised the issue of European proposals on mortgage lending. He is right to say that the Commission intends to publish proposals on responsible mortgage lending and borrowing in the coming months. The Treasury and the Financial Services Authority have held a number of discussions with the Commission on those proposals, and we expect them to be broadly consistent with the principles of mortgage regulation in the UK. However, the FSA has acknowledged that it will need to consider that European initiative as it refines its proposals. It will ensure that the timetable for refining the MMR is consistent with developments at European level.

It is clear that mortgage regulation failed by allowing an unsustainable boom in lending and increasing house prices, followed by the inevitable crash. We do not want to see that repeated. We have a clear objective to create a sustainable and accessible housing market that sees a gradual rise in prices in line with people’s salaries. The mortgage market is a key part of creating that, but unregulated lending will not help us to achieve that aim. The MMR is an essential step to ensure that both consumers and lenders are protected, but that will always be balanced with the need to ensure innovation and competition in the mortgage market. The FSA will take a proportionate and balanced approach in order to help to build a stable and sustainable mortgage market for the future.

Question put and agreed to.