My Lords, despite the upbeat opening speech of the noble Lord, Lord Deighton, the Government have thus far ducked the radical banking reform required, which the cross-party Parliamentary Commission on Banking Standards called for over the course of five detailed and compelling reports. Perhaps that should not surprise too many, because the Government have failed to stand up to the banks on key issues, including the safety of major institutions, boosting choice for consumers, increasing financial inclusion, the high-risk, high-bonus culture and stimulating economic growth—and at a time when public confidence in banking is at a low ebb.
People have lost confidence in the banking industry; recent research carried out by the Which? organisation shows that just 6% of consumers trust bankers to act in their best interests. However, we continue to hear of the “one rule for us and another rule for the rest of you” mentality that seems to characterise much of banking—or at least the investment banking part of it. Last year, 82% publicly-owned RBS paid £600 million in bonuses despite a £5.2 billion pre-tax loss, but a Downing Street spokesman said:
“I think you are seeing a responsibility and restraint”.
If that is a reflection of what the Prime Minister thinks, I suggest that he is seriously out of touch.
A month ago it was reported that bank bonuses had risen by 64% in a year. The average weekly bonus paid in April was 64% higher than for the same month in 2012 and at the highest level since at least 2000. That was, at least in part, evidence that the City was cashing in on the Government’s cut to the top rate of income tax, which came into force at the start of April. With the top rate cut from 50p to 45p, people who were able to delayed their bonuses until April and enjoyed a big tax cut as a result. Did someone say, “All in it together”? Hardly—that is a different world from that inhabited by the vast majority.
Last week we were informed by the European Banking Authority that more UK bankers were paid in excess of €1 million than in any other EU country in 2011. Not just more—2,436, to be precise, with the next
highest figure found in Germany, at a mere 170, or 7% of the UK figure. Perhaps unsurprisingly, of those 2,400, 74% work in investment banking. These figures illustrate the ongoing problem with huge salaries in banking at a time of austerity for most people. The issue is not simply the high levels of pay, but that bonuses are paid out without risks being understood and on the basis of projected results that often fall short of expectations. That, of course, is one of the reasons why the proposals of the PCBS on a remuneration code aimed at aligning risks with rewards is so important.
Yet the Government have determinedly resisted reforming pay by: performing a u-turn on plans for an annual binding company vote on future pay policy; blocking a requirement for staff representatives to sit on board remuneration committees; and fighting in the EU to defend high pay for bankers. Last month the Chancellor was left totally isolated by the 26 other EU Finance Ministers when he resisted setting a limit on bankers’ bonuses of a year’s salary, or two years if shareholders approved.
As many noble Lords have said, the Bill is more notable for what is missing than for what it contains. As it is merely enabling legislation the devil will, of course, be in the detail of the Government’s proposals for secondary legislation. The Bill was intended to implement the recommendations of the Independent Commission on Banking on structure, capital and loss absorbency, with certain exceptions, and the Parliamentary Commission on Banking Standards was established last year, after the Chancellor came under pressure to hold an inquiry into the industry after the LIBOR-rigging scandal. The commission was also asked to conduct pre-legislative scrutiny of the draft Bill, and this led, not surprisingly, to an expectation that the commission’s recommendations would be accepted by the Government. However, we now know that that is not the case.
The need for reform has long been clear, yet the banks have fought change. In January 2011 the then Barclays chief executive Bob Diamond told the Treasury Select Committee, barely two years after the crisis broke:
“There was a period of remorse and apology for banks. I think that period needs to be over”.
Few outside banking agreed with him, and those who took the opposite view were proved right when it emerged that the culpability of the banks, and the recklessness that led to the crisis, were just the tip of the iceberg.
Since then we have seen scandals such as the mis-selling of payment protection insurance, for which, as my noble friend Lord McFall said, banks have put aside some £17 billion to cover the costs of compensation. The final bill may reach as much as £30 billion. Then there were the shameful attempts to rig the LIBOR benchmark, for which US and UK regulators have so far fined the Royal Bank of Scotland, Barclays and Lloyds a total of £1.7 billion.
Unfortunately, the Bill has emerged in an inadequate form for dealing with the abuses that were—and, it has to be said, in some cases still are—rife within the investment banking sector. In the main, the Bill concerns ring-fencing—separating what the noble Lord, Lord Lawson, called high street banking from investment banking operations. What I believe was needed was a
reserve power for full separation of the two sectors. The Chancellor was not convinced, although he performed a partial climbdown when he agreed to powers to separate banks on a firm-by-firm basis. This is not sufficient. It is vital for the Treasury to have a backstop reserve power for the whole sector.
As my noble friend Lord Eatwell said, Labour amendments at Report stage in another place would have inserted a requirement for a thorough review, every two years, of the ring-fencing of retail banks, to augment the electrification of the ring-fence. For instance, a proper and independent review of the adequacy of ring-fencing every two years would surely be better than the Government’s reliance on the Prudential Regulation Authority. But that idea was rejected by the Government in another place.
Another Labour amendment proposed sector-wide powers for full separation of banking as a backstop if ring-fencing proved ineffective, based on proposals drafted by the PCBS. Certainly ring-fencing should be given a chance to succeed—but the Bill should contain a backstop of full separation if it is shown not to be working. The Government rejected that idea too, and their own suggestion again at Report stage in another place would take six years if ring-fencing failed. That is much too slow, and could never form an effective backstop power for galvanising and electrifying the ring-fence. Like all other noble Lords, I am sure, I was interested in the promise by the noble Lord, Lord Deighton, about what he termed the streamlining if this process; we wait with interest to see what the detail will reveal—but it is possible that even that may prove to be a backstop power in little more than name only. As I have said before, full separation is the necessary backstop power, as I fear that nothing less will suffice to incentivise the banks to comply with ring-fencing.
Furthermore, the Treasury needs to take powers to set the leverage ratio. At Report stage in another place Labour tabled an amendment to insert an overall leverage target for the UK’s financial system, including the activities of foreign international institutions. It stipulated that after every three-month period, the Financial Policy Committee of the Bank of England would notify HM Treasury of any instances in which the Committee had acted to regulate leverage in the financial system to an identified target in a manner consistent with maintaining adequate credit availability and growth in the economy. That amendment sought to take forward the view of the Independent Commission on Banking, which supported the use of leveraged ratios as a backstop. It also advocated a tapering of requirements when a bank crossed a certain threshold, by increasing the minimum leverage ratio from the Basel III 3% to over 4% on a sliding scale.
The Parliamentary Commission on Banking Standards said that it was,
“essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3% minimum required under Basel III. Not to do so would reduce the effectiveness of the leverage ratio as a counterweight to the weaknesses of risk weighting”.
The aim of the Labour amendment was that a target should be set for the financial system as a whole, with the regulators empowered to make more sophisticated
judgments about firm-by-firm leverage arrangements that could take account of institutions that were too significantly different from one another. The Government rejected that proposal too.
It is well known that the Chancellor has published an 80-page response to the PCBS’s final report, stating that the Government would implement its main recommendations, using the Bill as a vehicle. The commission’s chair, Andrew Tyrie MP, has commented that there is a marked difference between the Government’s initial welcome of proposals to give regulators the power to break up banks if they breached the division between retail and investment banking operations, and the actual amendments put before MPs in another place.
“It would barely give banks pause for thought”,
was Mr Tyrie’s assessment. In fact, he has been even more trenchant, opining that,
“the Government’s amendments would render the specific power of electrification virtually useless”.—[Official Report, Commons, 8/7/13; col. 75.]
Perhaps this has had some effect, as reflected in the words of the noble Lord, Lord Deighton.
Mr Tyrie maintained that standards in banking would improve only if the ring-fence was made more robust, with the additional power of electrification. The risk of the shock of separation would be an essential incentive to improve behaviour. He also said that it was “very disappointing” that the Government would not be giving regulators powers to call for the separation of retail and investment banks, and described their decision to ignore measures to clamp down on banks engaging in risky trading as “inexplicable”. He went on to say that the decision to ignore the proposals of the Parliamentary Commission on Banking Standards on proprietary trading was “very regrettable”.
“Why the Government has rejected these proposals—electrification and proprietary trading—is inexplicable”,
said Mr Tyrie, then adding,
“Nothing substantive has been forthcoming to justify the rejection”.
Perhaps the noble Lord, Lord Newby, will attempt to provide some justification for that this evening.
It should not be forgotten that Mr Tyrie is a Conservative MP—a man who has served on the Tory Front Bench as a shadow Financial Secretary to the Treasury. He is much respected across the party divide for his expertise in financial matters, and is a fitting successor to my noble friend Lord McFall as Chair of the Treasury Select Committee. Many people might wonder why the Government find themselves unable to accept in full the unanimous recommendations of the cross-party commission chaired by him. As the noble Lord, Lord Lawson, said in his interesting-as-ever speech, Mr Tyrie appears to be persona non grata in Government circles. Could that have anything to do with the fact that he was, in years gone by, the campaign manager for Kenneth Clarke in two party leadership elections? Surely not.
I shall now move on to the question of lending. I, like all noble Lords participating in this debate, have received some useful briefings from organisations with an interest in the Bill. One of these was the Federation
of Small Businesses, which called for an increase in the level of data that banks provide on regional lending, to give greater transparency on which areas are lending to which people, and which businesses. This would involve data—data, for example, on deposits, new net lending, products and basic demographics, to protect client confidentiality—being collected and published, on the principle that the more the data are available, the better we can target under-performing areas and groups.
That is an area in which I believe that the Bill might usefully be amended. Indeed, it links very much with the startling report in today’s financial media that bank lending to small businesses has fallen in 98 of the 120 main postcode areas of Britain. It seems that tomorrow will see the announcement of GDP growth of around 0.5% for the second quarter of the year, and that is to be very much welcomed. But it should and could have been higher, and have been achieved earlier, if the banks had properly played their part by lending to small businesses and would-be homeowners.
The figures published today demonstrate that small firms across Britain are still struggling to get access to the finance they need because the banks have cut back on lending to them in all but those 22 postcode districts. That shocking statistic confirms widespread fears that, despite various tranches of quantitative easing and encouragement from the Chancellor, lenders are failing to support a key potential area of economic growth. British Bankers Association data show that, on a regional level, lending has fallen in every area of Britain, in all nine regions of England as well as in Scotland and Wales. But the postcode breakdown was published only reluctantly by the banks, and it is understood that the Government have used the threat of legislation elsewhere to force the future publication of lending data across 10,000 postcodes by the end of the year. That information will include not only loans to small businesses but also mortgage offers to households and unsecured personal loans. That has the potential to be a very positive development, and it might still be worth using this Bill to enshrine such a policy in legislation.
After the global financial crisis and the banking scandals that followed, we need cultural change and radical reform to protect taxpayers, rebuild public confidence in the banks and ensure that, in future, they work to support the wider economy. I and my colleagues will use the Committee stage to seek to achieve at least a measure of success in that vein.
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