My Lords, I agree that this has been an interesting debate. I start by thanking the right reverend Prelate the Bishop of Birmingham for his supportive remarks. He referred to the way in which companies print mission statements, values et cetera—what the most reverend Primate the Archbishop of Canterbury referred to as doing the three Ps, or, “Print, pin up and pray”. We have to move beyond that and make these things a reality.
First, I will respond to various speakers. The noble Lord, Lord Phillips, made two comments. One was to ask about all the other people in the City. The remuneration code which exists—I declare an interest as a director of an insurance company—still applies
and will apply. The issue here is whether a kind of upper tier is to be created that relates specifically to banks. I believe there is a case for that. He also asked why anybody needs variable remuneration. A number of noble Lords have given the answer to that. One is that in builds in fixed costs. In the case of banks, why do you defer? One reason is because, particularly given the way that they are accounted for, profits which look okay today vanish tomorrow—they are ephemeral. You suddenly find that a series of trades that you had valued at a certain level just disappears. You wait and see until the profits are actually made and then you can pay it out. The argument has also been made that this would tend to raise base pay. A degree of variable pay is actually a beneficial part of the system, although it needs to be controlled.
The noble Viscount, Lord Trenchard, asked about leaving the responsibility to shareholders. If shareholders own only 3% of the business, are they really going to be a sufficiently powerful force, particularly when their investment is highly geared? They share the same incentive as the managers. The managers are, in a sense, over-incentivised and the shareholders are the same. The other thing that has come out is that there are strong externalities working in this world. The failure of a bank, and particularly the banking system, has the ability to create havoc over a wide area. The impetus and responsibility on the state to see that the banks provide a continuous service means that other people have a locus in this. You cannot simply allow banks to be run with the entire remuneration system being put into the hand of one set of stakeholders, such as the shareholders.
As for inflation over the past two or three years, my reading is that bank pay has probably plateaued in that period. Most inflation came in the decade before that, when there was precious little intervention from either the state or investors. The noble Lord, Lord Higgins, said that my support for variable pay was based on giving it to them so that you can then claw it back, but the deferral is really there because you want to make sure that these profits have actually been delivered and the benefits then shared with the bank, in terms of its capital, and through dividends. I absolutely agree that many banks are too big to manage. At the moment, a lot of them are shedding activity, although we will have to wait and see whether they are going fast or far enough.
The Minister’s response was pretty much as I expected but there was also quite a lot of “wait and see”. There will be new proposals but what is not clear is how far the Government have really taken onboard that there is a case for going further with banks than with other financial institutions. This crisis owed nothing to the rest of the City; if anything, the rest of the City were victims of it. We were arguing that provisions for longer deferral were more appropriate for banks than generally.
It is partly a question of knowledge; I do not know that people really understand what the remuneration code is. Between now and Report it would be quite good if the PRA or the Treasury could circulate to us what this code now looks like, which propositions are currently being consulted on and which decisions, if any, have not yet been put into effect. We will then be
better able to judge whether we think this is going to be adequate, otherwise it really is a case of “Trust us, we’ll get round to it”. But this crisis is six years on. Time is moving on, so simply saying “We will get some further proposals next year” is not enough. A better job needs to be done in informing people of what is currently being considered. They will then be in a better position to make a judgment on whether that is good enough or whether we need to go further. Preferably, to pick up the point that the noble Lord, Lord Lawson, made, if there was quite a lot more time between now and Report we would be able to look at that to get a better understanding of what is in the pipeline.
The final question was about pensions. If you say, “What is in someone’s pension fund is inviolable”, you create an absolute incentive for people to stack money in there. This is about not their contributions but the discretionary payments that the company has decided to put in. Perhaps it has put another £1 million into someone’s pension fund. If that is done on a contractual basis, by saying, “Here is the regular contribution we make to your pension fund and here is the addition that we are making. You should be aware that that bit could be clawed back”, then I do not really accept the argument that says, “It’s your money now—it’s absolutely yours forever and we can never touch it”. You need to set up the basis on which deferred pay is offered in a way that makes it possible to claw it back.
We have seen in two cases, RBS and HBOS, that pensions were a crucial issue. In both cases, by a kind of popular pressure, concessions were made but it should not really need to depend on that. We should not simply accept the story that nothing more can be done. However, there is work needed to understand what the PRA and the Treasury have in mind. That would put us in a better place to take the discussion further between now and Report. On that basis, I beg leave to withdraw the amendment.