Banking

Sajid Javid Excerpts

Wednesday 15th January 2014 Commons Chamber

[The Financial Secretary to the Treasury (Sajid Javid)]

I thought that Labour Members had turned over a new leaf this year: they admitted that they got it wrong on immigration and they admitted that they got it wrong on education, so I hoped that the hon. Member for Nottingham East (Chris Leslie) would follow suit and admit that they also got it wrong on banking. I hoped he would admit that it was Labour’s changes to banking regulation that led to the world’s largest banking bail-out—changes that meant that when the alarm bells were ringing, no one was listening. The Bank of England was completely powerless to act. I hoped that the hon. Gentleman would also admit that City bonuses rocketed under Labour’s 13 years in office, while Labour Cabinet Ministers were telling the world that they were

“intensely relaxed about people getting filthy rich”

and they were handing out gongs to the likes of Fred Goodwin. City bonuses were surging to all-time highs, rising year after year, more than tripling over five years and peaking in 2008 at over £12 billion. Instead, this is a new year and the same old Labour.

[Michael Connarty]

rose—

[Sajid Javid]

I will give way to the hon. Gentleman; I might be about to hear an apology, so I will listen carefully.

[Michael Connarty]

I think anyone who reads the transcript deserves an apology from the Minister, who forgot to mention that the relaxation of banking controls started with Mrs Thatcher and the Conservative Government. He forgot to tell people on the record that when people like me on the Opposition Benches were urging constraint—I am an economist—the Minister’s right hon. and hon. Friends were calling for fewer controls and a lighter touch with the banks, as was the SNP in Scotland.

[Sajid Javid]

I think the hon. Gentleman has a challenged memory of events. I am sad to see that he had an opportunity to apologise, but did not take it.

Let us look at the facts. At the time of the changes Labour was making to the financial sector, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) warned the then Government in November 1997:

“The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”—[Official Report, 11 November 1997; Vol. 300, c. 732.]

Let me share another quote, in this case from the current shadow Chancellor from a speech he made as City Minister in 2006:

“Nothing should be done to put at risk a light-touch, risk-based regulatory regime.”

What we are hearing from Labour is the same old headline-chasing nonsense that we have come to expect and no answers at all to the problems they created.

I agree with the hon. Member for Nottingham East on one thing: public confidence in the banking system and in bankers is still low, just as—let us be honest—public confidence in the political system and the people in this Chamber is still low. That is precisely because, five years ago, partly as a result of the irresponsible decision of some bankers, but largely as a result of the policies of the then Labour Government, our country found itself in a huge mess. When trust is lost on that scale, it is not won back overnight.

[Steve Brine (Winchester) (Con)]

Perhaps the Minister can answer this question because the shadow Minister did not give way to me. The shadow Minister said that restricting the number of branches that banks can hold will not close branches, but of course it will. What does he think closing branches will do to people’s faith and belief in the banking sector. I have three branches of Barclays in my constituency—in Chandlers Ford, Alresford and Winchester—so if, God forbid, a Labour Government were ever elected, which one would they propose to close?

[Sajid Javid]

My hon. Friend highlights the fact that the Labour party has no ideas about how to increase competition in the banking sector, and any kind of approach that includes arbitrary quotas will clearly lead to the sort of problems that my hon. Friend outlines.

[Harriett Baldwin (West Worcestershire) (Con)]

It is reported today that the Opposition are proposing specific market shares on specific banks. Has that ever been tried in any other country?

[Sajid Javid]

My hon. Friend is right. It is reported that, this Friday, the Leader of the Opposition will make a speech on the economy and attempt to set out an economic policy. I am afraid that his last such speech did not go very well. From what we know about this proposal—very little at this stage—I am not aware of any country in the developed world that has a similar approach, with the possible exception of the former Soviet Union, which adopted a similar approach to its banking sector.

[Lyn Brown (West Ham) (Lab)]

I am glad we are discussing history, because I am aware of the hon. Gentleman’s own history as a banker. I wonder what his remuneration and bonuses were back in those days. Given his history and the fact that he should be saying sorry—I presume—will he tell us whether he believes that bankers deserve a bonus in excess of 100% of their salary. Does he think so and does the Chancellor think so?

[Sajid Javid]

The hon. Lady seems to suggest that it is best to have Ministers who have no experience or knowledge in the areas for which they are responsible. We saw that under the previous Government, and look what happened. To win back the confidence of the British people, we need a long-term economic plan for recovery.

[Chris Leslie]

I would not want the Minister unintentionally to miss answering the important question that my hon. Friend the Member for West Ham (Lyn Brown) asked. For the record, do the Government believe that the senior bankers at the Royal Bank of Scotland should or should not be allowed to pay bonuses of over 100% of pay?

[Sajid Javid]

I will come to that later in my speech when I will deal with some of the issues that the hon. Gentleman raised.

Bringing back confidence to the economy will of course mean dealing with the banking sector to make it more stable, more resilient and more efficient. That is exactly what this Government have been doing for the last three years.

[Mr MacNeil]

Does the Minister agree that, as with the debate on the bedroom tax before Christmas, this debate is really one about the symptoms of inequality in our society. Since the 1970s, we have seen 80% of the gains in productivity going to the top 1%—an inequality level roughly equivalent to that of the 1920s. Governments all over Europe and in the United States are not getting to grips with inequality and the hampering of life chances that it is causing. What does the Minister think should happen? The bankers should not receive the bonuses they are getting and people should not have their life chances halted by the bedroom tax. Are this Government going to do anything serious on this issue?

--- Later in debate ---

[Sajid Javid]

The hon. Gentleman will know that inequality surged under the previous Government and has come down under this Government. In fact, the rich pay a higher proportion of tax than they have ever paid, with the top 1% of earners paying almost 30% of income tax for the first time and the top 5% paying almost half of the total income tax take. The Government are proud of making sure that the rich make a fair contribution to public finances.

[Jesse Norman]

My hon. Friend is making an extremely powerful case, but may I remind him of the central fact of the past 15 years? The banks had the same level of leverage for 40 years, until 2007, after which it went up by two and a half times. It was that explosion of leverage, under Labour, that destroyed the banking system both in this country and internationally.

[Sajid Javid]

As always, my hon. Friend is spot on. Because of the changes that Labour made in the regulatory system, no one knew what was going on, and if they did, they were absolutely powerless to act, especially those in the Bank of England. That is the legacy of the last Government.

Let me now say something that the Labour party seems to be scared of saying. We need well-run successful banks in this country. We need the services that they provide. We need the loans that they give to small businesses, and the mortgages that they offer to home owners. We need the jobs that they produce—more than 450,000 throughout this country, and more than two thirds of those are outside London. We, as a Government, also need the huge taxes that the financial sector and its employees pay—some £60 billion last year—so that we can run our schools and hospitals.

[Dr Eilidh Whiteford (Banff and Buchan) (SNP)]

Small businesses have been among the biggest victims of the financial crisis, because banks have stopped lending to them. I share some of the Minister’s scepticism about the advantages of shutting bank branches, which may indeed only harm banking and access to financial services in rural areas, but I nevertheless think that the Government could be doing a great deal more to ensure that the banks lend more to small businesses on fairer terms. What will the Minister do about that?

[Sajid Javid]

I agree with the hon. Lady that businesses rely on the banks for the lending that they need. The action that we have already taken through, for example, the funding for lending scheme has ensured that the banking sector has had more money at lower rates to on-lend to small businesses and, indeed, households. We also recently announced a consultation on collecting small and medium-sized enterprises credit lending data, which will help to spur further competition in that sector.

[Ian Lucas]

The Minister is endorsing a noble cause in recommending support for small business and for manufacturing in particular, but given that manufacturing accounts for 10% of the economy, why does only 2.6% of bank debt stock result from lending to it? Why does the Minister not do something about that?

[Sajid Javid]

Part of the answer might be that manufacturing was decimated under the last Government. Its share of the economy fell from about 17% to the 10% to which the hon. Gentleman referred, and, of course, lending fell with it. If the hon. Gentleman were honest and recognised the damage that his party did to the manufacturing sector, perhaps what he says would be taken more seriously.

We need a more stable, resilient, efficient banking sector, and it is on that requirement that we have focused our reforms. As Members will know, back in June 2010 my right hon. Friend the Chancellor announced the establishment of an Independent Commission on Banking, chaired by Sir John Vickers, to explore how the sector should be reformed in the wake of the financial crisis. Last year the House passed the Financial Services (Banking Reform) Act 2013, which has enabled us to implement the commission’s recommendations. The changes will mean that banks must ring-fence the deposits of individuals and small businesses, so that everyday banking can be separated from volatile investment banking.

As all Members, and, indeed. all members of the public will know, the financial crisis saw taxpayers bailing out the banks that got into trouble, but we have taken steps to ensure that that will not be repeated. Our banking reform Act introduces a bail-in tool, as a result of which shareholders and creditors, not taxpayers, will be first in line to bear the costs of future bank failures.

[Chris Williamson]

I think that the Minister should admit that the Government have watered down the Vickers commission. Will he now come clean with the House, and tell us that that is what they have done?

[Sajid Javid]

That is exactly what we have not done. We have accepted the central recommendations of the Vickers commission.

We have not just been working to prevent a repeat of the crisis. Many Members on both sides of the House have been rightly appalled by the revelations of poor behaviour on the part of some in the industry, such as payment protection insurance, interest rate swap mis-selling, and LIBOR manipulation. Those practices were going on right under the noses of Labour Treasury Ministers, including the current shadow Chancellor, who did nothing at all to stop it.

[Guy Opperman]

My hon. Friend attended the local banking conference that I organised shortly before Christmas. Does he agree that “challenger banks” such as Aldermore, Virgin, Metro, and even the Bank of Salford—which is run by Labour and Unite, and is excellent—are a key element in the greater competition that we need in order to reinvent the banking market in this country?

[Sajid Javid]

My hon. Friend’s intervention gives me an opportunity to commend him for his initiative to promote regional banks. He is absolutely right in his assessment.

We also set up the Parliamentary Commission on Banking Standards, chaired by my hon. Friend the Member for Chichester (Mr Tyrie). As a result of the commission’s work, we amended the banking reform Act in order to implement its recommendations on holding bankers to account more effectively for poor behaviour. If a bank were in future to enter resolution because of reckless mismanagement, senior bankers could face a prison term of up to seven years.

[Chi Onwurah (Newcastle upon Tyne Central) (Lab)]

The Minister has spoken in strong terms about the experience of the financial services. Does he accept that the unique way in which bonuses drive short-term risk taking led to the scandals that we witnessed, and, indeed, to the financial crisis? Does he really believe that the reward for short-term risk taking behaviour to meet bonus targets should be more than 100% of the reward that someone receives for doing his or her own job?

[Sajid Javid]

What I do accept is that badly structured and badly designed bonuses will lead to bad behaviour. I am sure that the hon. Lady herself accepts that if an arbitrary cap is imposed on bonuses and it leads to an increase in fixed pay but no overall fall in overall pay, the bad behaviour will actually worsen.

We are putting our house in order. We are learning from the huge mistakes of the last Government, and are ensuring that we create a country in which the public can trust that their money is secure and our banking sector can flourish.

[Dr Coffey]

My hon. Friend is making great progress in the debate. Will he also mention the fact that taxpayers are now benefiting from the fines that have been levied on the industry, and that the Chancellor has extended the arrangement to ensure that military charities and others benefit?

[Sajid Javid]

I am glad that my hon. Friend has referred to that. It was the right thing to do, and it demonstrates that we can take some of the money that is coming from the banking sector and use it for good causes.

[Sir Andrew Stunell (Hazel Grove) (LD)]

My hon. Friend mentioned the shadow Chancellor’s failure to tackle the abuses that were taking place in the banking system. Will he confirm that the shadow Chancellor encouraged the development of a less regulated environment, and that that contributed to the problems that we now face?

[Sajid Javid]

My right hon. Friend has made an important point. I have already quoted what the shadow Chancellor said in 2006, when he was the City Minister, but those were not just his views; they were also the views of his boss, the then Prime Minister, the man who did more damage to our financial sector than any other. This is what the last Labour Prime Minister said in his 2007 Mansion House speech:

“I congratulate you Lord Mayor and the City of London on these remarkable achievements, an era that history will record as the beginning of a new golden age for the City of London.”

Shortly afterwards, he carried out the world’s largest banking bail-out.

[Kwasi Kwarteng]

Will the Minister share with the House his thoughts about which member of the last Government recommended that Fred Goodwin should receive a knighthood as an honour from the Government?

[Sajid Javid]

I have to tell my hon. Friend that I am not sure who it was, but I know that the knighthood was widely supported by members of the then Government, which shows what their priorities were.

[Jesse Norman]

Was it not the previous Prime Minister who said, “We will do for Great Britain what we have done for the City of London”, and is it not a disaster that he said and did that?

[Sajid Javid]

Again, my hon. Friend makes an excellent point.

[Huw Irranca-Davies]

The Minister is understandably making a case for the financial sector, as he also should for manufacturing and all other sectors. What my constituents fail to understand is why, when public and private sector employees over the last few years and now have accepted pay restraint and real-terms squeezes on their earnings, and we in this House, including Ministers, are facing public demands to accept pay restraint on our pay and conditions as well, top bankers are immune from those constraints.

[Sajid Javid]

I will come on to that topic shortly and share with the hon. Gentleman some numbers that show what has happened to the pay of top bankers.

[Chris Leslie]

Do it now.

[Sajid Javid]

I will come on to it. The hon. Gentleman raised the two issues of banking competition and remuneration and I want to cover them.

I was very pleased that the hon. Gentleman talked passionately about the importance of competition. It is a shame that the previous Government did absolutely nothing to encourage it for 13 years. It is worth reminding the Chamber that when the last Government took office there were at least 10 major UK banks, but over their 13 years of incompetence they continued to permit and manage banking takeovers which shrank the number of market players and left the big banks to dominate.

Greater competition in banking is good for people and businesses and the economy. That is why we are implementing the recommendations of the Independent Commission on Banking for improving competition; indeed, we are going further. We are addressing the issue of too big to fail through ring-fencing, meaning that big banks will no longer get a competitive advantage from this implicit guarantee. We have put competition at the heart of financial services regulation by giving the Financial Conduct Authority a formal competition objective as well as making provision for a secondary competition objective for the Prudential Regulation Authority. We are also making sure that the FCA has the right tools to get the job done on competition by giving it concurrent competition powers.

While competition dropped under Labour’s stewardship, it is increasing under ours. As we have heard, since the crisis Metro Bank, Virgin Money and the new TSB brand have entered the market. Indeed, RBS also announced recently that it has teamed up with investors, including the Church Commissioners, to launch a 300-branch challenger bank, Williams & Glyn’s, focused on small businesses.

In fact our financial regulators are currently in talks with 22 potential new bank applicants because of the steps we have taken to promote banking competition. On top of that we are creating a new payment systems regulator so that smaller banks and others can access the payment systems fairly and more transparently, and we have secured a seven-day current account switching service to make sure that people have the confidence to change accounts. There are further innovations coming on cheque imaging and mobile payments. This is a Government who are bringing competition back to banking.

On bankers’ pay, we understand the depth of public anger but we will not take any lectures from the Labour party. While bonuses continued to increase year after year on its watch, even after 2007, they are now down 85% from their peak in 2008. Since 2010 we have been leading the way on tackling unacceptable pay practices. First, we have introduced rules that require significant parts of bonuses to be deferred and paid in shares, which means there is now a much better alignment of pay with risk and performance. While we make sure that only good performance can be rewarded, we are also making sure that poor performance can be punished by introducing measures that mean firms have clawback policies to reduce or revoke pay retrospectively.

Those steps are having an impact. The 2012 bonus pools at almost all major banks have declined massively since this Government came to office. The truth is that while Labour talks about clamping down, this Government get on with the job.

[Emily Thornberry]

If the public are watching this debate, they may well want to ask the question I shall ask now, and I hope we get an answer. Do the Government have a view on the maximum amount a banker should be given by way of either a salary or a bonus, and does the Minister agree with the bonuses currently being given out by Chase Manhattan bank?

[Sajid Javid]

First, I am not sure even whether the Opposition have a view on what the right level of bonuses is. Also, I am not sure about Chase Manhattan bank because it does not exist any more as far as I know.

[Kwasi Kwarteng]

Will my hon. Friend explain to the House what the last Government said about bonus levels, if they said anything about them, and the gratitude with which they spent bankers’ tax receipts?

[Sajid Javid]

My hon. Friend again rightly points out that the previous Government did nothing when bonuses were reaching a record high. Even after they had carried out the world’s largest bank bail-out, pumping in over £40 billion of taxpayers’ money, they still allowed bonuses the next year to reach an all-time peak of almost £12 billion. That is their legacy.

[Chris Leslie]

We now come to the point that the Minister has twice said he would address later on, so will he address it now? Will the Chancellor of the Exchequer be using his power as a shareholder in the Royal Bank of Scotland to allow its senior bankers to exceed the level of bonus beyond 100% of pay: yes or no?

[Sajid Javid]

That is exactly what I was coming on to next. It is important for taxpayers that any proposals by RBS are considered fully and properly. The Government have not yet received a proposal from RBS on bonuses; once we do, we shall be in a position to judge whether it represents value for taxpayers.

The Government do not support the EU cap on bonuses. The Government have fought against it and we are currently challenging it in court. The bonus cap creates perverse incentives by removing the link to performance. It is damaging to financial stability; it is opposed by the PRA and the Bank of England; and, indeed, the cross-party Parliamentary Commission on Banking Standards rejected crude bonus caps as unworkable.

Let me turn finally to the bank levy.

[Chris Williamson]

Will the Minister give way?

[Andrew Gwynne]

Will the Minister give way?

[Sajid Javid]

No, I have given way enough and others want to speak.

If we need an example of how little the Opposition understand the banking sector, we only have to look at their policies on the bank levy, a levy they turn to every time they want to fund a policy announcement. They seem to believe that the bank levy could raise enough money to pay for capital spending, a youth jobs guarantee, regional growth funding, housing, child care and community services. On top of that, they think they can cut the deficit with it, reverse VAT increases, reverse child benefit savings and reverse tax credit savings—in total over £30 billion of commitments. Only the economically illiterate would think that with £1 raised in tax, we could have £10 of spending power.

It is no wonder that Labour gave us the deepest recession in 100 years, the largest post-war budget deficit and the world’s largest banking bail-out. In short, whereas their old banking policy was to stick their heads in the sand, their new banking policy is to stick their heads in the clouds, so frankly I do not think they are in a position to tell this Government what to do. Instead we shall work to continue to make this sector more stable, more resilient and more efficient, and we shall continue to help our banks to help our country get back to our best. I urge the House to reject this motion.

[Several hon. Members]

rose—