Banking

Tobias Ellwood Excerpts

Wednesday 15th January 2014 Commons Chamber

[Chris Leslie (Nottingham East) (Lab/Co-op)]

I beg to move,

That this House believes that Government reforms have failed to deliver a competitive banking system which serves the interests of consumers or the needs of businesses and the British economy; is concerned that customers have limited choice and low levels of trust and confidence in the banking market; is disappointed that recent legislation has fallen short of the recommendations of the Independent Commission on Banking which called for action to diversify the sector and ensure that major new banking service providers are created; believes that banker remuneration remains unacceptably high; regrets the fact that it has taken the EU to act to rein in excessive bonuses in Britain in the absence of domestic action, but believes that the Government as a majority shareholder in RBS should not approve any request to increase the cap; and calls on the Government to prevent a return to business-as-usual in the banking sector, which continues to require real reform and competition so that the UK can earn its way out of the cost of living crisis.

Mr Deputy Speaker—[Interruption.] My apologies, Mr Speaker; I correct my first sentence. I want to explain to the House that for many of our constituents—[Interruption]—including those of the hon. Member for New Forest East (Dr Lewis), January can often be a difficult month financially, with families facing higher fuel bills and receiving credit card statements for the often very expensive Christmas period. Not everyone has such reactions to the new year, however, because for many of the luckiest bankers working in the City, January and February is party time—bonus season—when their high salaries are often dwarfed by even higher windfalls, which are enough to make a lottery winner look on in envy.

Last week, the City recruitment company Astbury Marsden reported that bonuses for the most senior staff in banking and financial services may increase by as much as 44% in this bonus season, despite all Ministers’ talk about how such payouts have been scaled back. In 2012, the financial sector paid out an eye-watering £14 billion in bonuses to top staff. At least £1.7 billion of bonuses were held back until just after that fateful day last April when the Chancellor of the Exchequer cut the top rate of tax for the richest 1%, who are those with earnings of more than £150,000 per year. Incidentally, the postponed payouts cost the public purse at least £85 million in lost taxes.

What about the rainmakers, as they are sometimes called—the most senior traders or masters of the universe? The number of UK bankers who earn more than £800,000 rose by 11% to 2,714 last year, which is more than in the rest of Europe combined. For that set of senior bankers, the compensation—a word that the banking sector sometimes uses instead of the word pay that the rest of us use—rose from £1.1 million to more than £1.6 million in 2012. That does not look like an industry that is licking its wounds; it looks like business as usual.

[Mr Tobias Ellwood (Bournemouth East) (Con)]

The shadow Chief Secretary to the Treasury seems to have glossed over the fact that City bonuses tripled in the last five years of the Labour Government. I want to ask him a more general question. Given the catastrophic role that the banking industry played in the economic downturn, why are we having only a half day’s debate on this important subject and squeezing it together with another important debate on the national minimum wage? The Treasury Committee is also meeting this afternoon to talk about these issues with the Governor and one of the deputy governors of the Bank of England. The Committee’s members will therefore not be able to participate in this debate. I wonder whether that is a reflection of the fact that Labour is not taking this matter as seriously as it should.

[Chris Leslie]

I am not sure that the hon. Gentleman has alighted on the best criticism of the fact that we are having an Opposition debate today on the failures in the banking sector. He is a bit off message because he at least admits that it was the banks that got us into the economic catastrophe in the first place. That is slightly off the script that Ministers usually use.

--- Later in debate ---

[Mr Tobias Ellwood (Bournemouth East) (Con)]

It is a pleasure to follow the hon. Member for Denton and Reddish (Andrew Gwynne). I agree that this is a timely debate, but I repeat the concern that I expressed at the start of the debate that it clashes with a Treasury Committee hearing and that it is a shame that its members cannot be present. I plead with the Opposition Front-Bench team not to squeeze in important debates such as this with other subjects. I could not get in to speak in the food banks debate, because there were too many of us. None the less, I am pleased that I am on my feet today, debating this important matter.

Bournemouth East is renowned for being a wonderful seaside tourist resort. What is less well known is that it is also a thriving business community. Many financial services organisations choose to use this corner of Dorset to base not only significant operations, but their headquarters. They include the Nationwide building society, the Liverpool Victoria, Unisys UK, RIAS Insurance, Barclays and that giant US bank, JP Morgan. Whether such financial institutions are based in Bournemouth or London, they are a reminder of our success in attracting international firms to this country. Those firms could go anywhere in the world to do their business, but when they are based here they bring jobs, investment and prosperity.

It is no fluke that so much of the financial services industry chooses to locate in the UK, making us the world’s leading centre of finance. The firms that invariably choose Britain in which to do their transactions cover a range of services, including insurance, accountancy, shipping, legal services, hedge funds, private equity, asset management or investment banking. Two hundred and fifty-one foreign banks are based in London. We are the leading global financial services centre, and the single most internationally focused financial marketplace in the world.

I am saddened to hear some of the comments from Opposition Members, from which I hope the Front-Bench team will distance themselves. They did a disservice to the banking industry when they mocked those MPs who had been bankers.

We have an unrivalled concentration of capital and capabilities as well as a regulatory system that is now effective, fair and indeed principled, which means that more overseas financial institutions and investors choose to do business in and with the UK than any other country. For example, there is a $1.9 trillion exchange turnover every single day in London. That is 37% of the global share. Around 600 foreign companies are listed on the London stock exchange, which is 18% of the global total. That shows why Britain is so important.

We may think that these big organisations are separate from us, but let us pause to think of some of the financial moments that we might experience in our lives. I am talking about buying a home with a mortgage, seeking a loan to start our own business, or starting our retirement and drawing our pension. On each of those occasions, we look to a financial system that we can trust. I urge Members to be careful when they call for increased levies against banks or random caps on bonuses from the banking sector. We should also be careful about making fun of those who served in that sector, and who now serve in this place.

Let me make it clear. People who work in all those banks and institutions in Bournemouth are not rolling in money; they are not millionaires. They are hard-working individuals who will not get the huge bonuses that have been spoken about in this place. In today’s global, technological, 24/7 economy, it is simple for a firm to relocate to another part of the world. That would mean losing UK jobs, taxes and, most importantly, influence over the regulations. It is important that we exert a modicum of control when we have this debate. We do not want the hysteria that we saw in the interventions at the beginning of this debate.

None the less, I do not dismiss the seismic failure and irresponsible behaviour of part of the banking industry. Indeed, it is the failure of our banking system that has caused the biggest economic downturn in this country. We saw banks lend funds that they did not have to people who could not afford them and in ways that they did not understand. The banking system failed because it was not properly regulated. First, the Bank of England was stripped of its responsibility for keeping the banking system safe. Secondly, the Financial Services Authority was focused only on compliance and individual rules and so missed the bigger picture. Finally, there was failure at the Treasury, where the banking division was run down. As a result, the total debt reached five times the size of the entire economy; 10% of the entire wealth of this country was lost and hundreds of thousands of people lost their jobs and livelihoods.

Labour tries to portray this situation as a global phenomenon—we have just heard that from the hon. Member for Denton and Reddish—and there is no doubt that there is a global context in which to place it, but it is no good blaming the US subprime market or Lehman Brothers. I note that in 2008, when Lehman Brothers collapsed and all these events were happening, banking bonuses were £11.5 billion. To place that in context, the figure now is £1.5 billion. The alarm bells were ringing at the time, but nothing was done.

Closer to home, away from Fannie Mae and Freddie Mac, Northern Rock was handing out 120% mortgages. That was a British issue. The Royal Bank of Scotland and its reckless purchase of ABN Amro after the credit markets had already seized up was also a British issue. We cannot blame any other part of the world for that. It has taken a new Government to reform the regulatory system from top to bottom and restore Britain’s reputation as a competent, global financial centre.

I know that other Members want to speak, so let me say in conclusion that the Government have acted to transform the banking industry through four key areas of reform. The first area is supervision. The Bank of England is back at the centre of the supervisory regime, with new powers to identify and address risks to ensure that banks do not threaten our economy in the future. The second area is structure, with new laws to separate the branch on the high street from the trading floor and therefore protect customers. The third area of reform deals with the cultural perspective by imposing higher standards of conduct on the banking industry and recognising the reckless misconduct that leads to bank failure. The final area is competition, which empowers customers and gives them the greatest choice. That should incentivise innovation and competition in the banking sector.

Our country paid a high price for what went wrong with the banking system. It has taken a new Government to restore order, confidence and control in a sector that is so vital for the rest of the economy.

--- Later in debate ---

[Sammy Wilson (East Antrim) (DUP)]

It is a joy to follow the hon. Member for Northampton South (Mr Binley), who has hit on a very important element of the debate: the role of banks in oiling the wheels of the economy to ensure that it is healthy and grows. Today’s debate is important, because despite the changes that the Government have made, the banks in the whole United Kingdom are clearly not fulfilling that function. Indeed, if anything, initiatives like funding for lending and the disappointment there, the return to the bonus culture and the inability of the banks to lend to small businesses all show that there is still a problem with the banking system.

I want to deal with two aspects. First, the hon. Member for Northampton South said that he was disappointed with some of the comments about bonuses, and the Minister has tried to dismiss them by saying that they are only headline chasing nonsense. In an age of austerity, and given the political context in which we are debating the issue, this is not headline chasing nonsense and should not be lightly dismissed as such.

The vast majority of people cannot understand why a Government who are pursuing rigorously—and, I believe, with some justification—a pay policy that restricts public sector pay are at the same time giving priority to challenging an EU ruling on bankers’ pay. I do not mind EU rulings being challenged; I can think of many other EU rulings that I would like the Government to challenge. But let us face it: we are talking about a public sector organisation, so the Government are in effect challenging their own pay policy for some of the most well-off people in society through the courts. This is not headline-chasing nonsense, and it is difficult for the public to understand.

[Mr Ellwood]

I will keep my intervention short; I am conscious of Madam Deputy Speaker’s guidance. The concern is that if we introduce the EU rules, many organisations will choose to leave the EU and base themselves in Singapore, Hong Kong and other parts of the world. Although the spirit of the proposal makes sense, the real consequences are that it could damage financial investment in the EU.

[Sammy Wilson]

I could believe the hon. Gentleman if there was some evidence of that. Ministers have boasted today that they have cut bonuses by 60%, or whatever it is, over the last few years, but we have not seen a flight of capital from the UK or a flight of banking business to Singapore or elsewhere. They cannot argue that they are restricting the ability of banks to pay bonuses while claiming that if we do that the banks will leave the country. There has been no evidence that banks cannot recruit or retain people or get the best people, despite the fact that the Government have said that they have restricted bonuses. The question is often asked: what is an appropriate level of bonus? We have not had an answer.

We are talking about a state-run bank and we are not even considering senior executive posts. Cases cited today concern an individual with an increase on his basic salary of £1.7 million to £4.8 million, an increase of 133%. Is that enough? Another individual has a basic salary of £700,000, which after bonuses is £2.1 million, a 300% increase. Is that enough? Another individual has an increase from £775,000 to £3.3 million, an increase of 450%. Is that enough? The increases go right up to 600%. When do we stop? Surely the Government must have some view on this, but we have not heard it. That is why this debate on bonuses is important. We cannot have a state-run bank where bonuses of up to 600% are being given but the Government seem to have no view on it, whereas they do hold the view that public sector workers on £14,000 a year should not get a 1% increase. That is why it is important. It is not headline-chasing nonsense.

The second issue that I want to deal with is competition, which is particularly pertinent to Northern Ireland. As we are sitting here today, the Northern Ireland Affairs Committee is considering the banking structure in Northern Ireland where we have a particular problem because 67% of the market is served by banks such as Ulster bank, which is part of RBS, the Bank of Ireland and the First Trust bank, both of which had to be bailed out by the Irish Government. All those banks find that their lending ability is hugely impaired by the bad loans and the bad decisions that were made during the property boom in Northern Ireland, and now they are trying to consolidate their balance sheets. Lack of competition is one reason why from 2010 until now lending to businesses in Northern Ireland has fallen by 12.5%. During the last year, it fell by 5%, even at a time of growth when one would expect businesses to need to obtain further finance.

The Tomlinson report did not really cover Northern Ireland, but the excesses that it identified are to be found to an even greater degree there. Constituents regularly come to me about property loans and the first question I ask is whether they stopped paying the loans, but they were servicing their loans and paying the interest, and in some instances they were even paying down the capital, but their bank deliberately changed the rules and withdrew the facility, sometimes on a technicality, and sometimes on a technicality contrived by the banks. The loans were called in, and when the properties could not be sold, Ulster bank rode to the rescue and offered to put them on the West Register and buy them at a deflated price, even though there was an income stream and, had it waited long enough, the property market would have picked up some of the difference. The result is that many viable businesses have been sent to the wall by the actions of the banks seeking to repair their balance sheet at the expense of the real economy. The businesses then had to put people out of work because they were declared bankrupt. That is why there is a need to restructure the banking system.

If there is a need to restructure the banking system in Great Britain, there is an even greater need for competition in Northern Ireland. I look forward to hearing what the Minister and the Opposition spokesman have to say about what can be done in such cases, whether it is the kind of localism referred to by the hon. Member for Wrexham (Ian Lucas) or the introduction of a big new player that is not contaminated by the property loans of the past, splitting up some of the existing banks to ensure that that will happen. If we continue with the present banking structure, we will not find a way out of the current recession. That is why the need for increased competition referred to in the motion is as important as the need to restrict bonuses.