Bankers – Osborne’s Statement

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Check out Uncle George’s Banking pitch to the Commons this week :

Mr Speaker, I would like to make a statement. The near-collapse of the British banking system more than two years ago still generates today deep feelings of anger and cries for retribution.

I completely understand that.
For the link between risk and reward that underpins our free market was completely broken. Bankers who had made the most catastrophic mistakes walked away with huge payouts and pensions. Those entrusted by us to regulate those bankers and run our economy washed their hands. Meanwhile the rest of the country is left paying every day for their failures. The government has to pick up the pieces. Let me set out how we will do that.

First, we will make sure we learn every lesson that needs to be learnt – so that this never happens again. We are entirely replacing the tripartite system of regulation that was introduced in 1997, and completely failed. Next week we will publish the detailed proposals to give the Bank of England responsibility for prudential regulation, and to create a new Consumer Protection and Markets Authority that will protect the interests of bank customers.

We will then undertake pre-legislative scrutiny, as requested by this House, before introducing the Bill. I hope it will command support from all sides.

Later this year we will also receive the interim and final reports of the Independent Banking Commission that this Government established, and which I asked Sir John Vickers to chair. Sir John and his fellow Commissioners are asking the difficult questions that need to be asked, about how we protect the British taxpayer from future bank failures so that never again is a bank too big to fail, and we look forward to receiving their recommendations.

I should make it very clear that nothing I will say today about the settlement we have reached with Britain’s banks, including references to a level playing field, in any way pre-judges the outcome of the Commission. That includes both the Commission’s recommendations and the Government’s response. The second task facing this Government is to make sure that we get the maximum sustainable tax revenues from the financial sector.

HM Revenue and Customs confirms that the one-off bank payroll tax introduced in the dying months of the previous government raised £2.3billion net, but as my predecessor as Chancellor has pointed out, it could not be repeated without massive tax avoidance. I agree with him and we will not repeat the bank payroll tax. Instead we have implemented a new and permanent bank levy and that is why yesterday I announced an increase in that levy so it raises £2.5billion this year.

This will bring the total raised by the new bank levy to £10billion over the Parliament. And it means that in each and every year of this Government we will raise more in bank taxes than the previous government raised in any year. We have also required all the major banks operating in the UK comply in spirit and by the letter with the Code of Practice on taxation.

This Code was announced with a fanfare but I discovered that only two banks had signed up to it. Today all the major banks have signed. The third task facing the new Government was to reach a new settlement with the banks so that they contribute to Britain’s economic recovery.

Mr Speaker, some prominent people in this House were predicting just twenty four hours ago that my tax announcement meant that our discussions with the banks on lending were falling apart. The House will be pleased to know this prediction was wrong. This morning the heads of the major British banks – Barclays, RBS, Lloyds and HSBC – reached a new settlement with the British Government. I want to thank John Varley, the former chief executive of Barclays, for the huge amount of time and personal commitment he has given to this project. The essentials of this new settlement are exactly as I set out last month, and I am today publishing an exchange of letters between John Varley and myself.

The banks will:

  • lend more money, especially to small business;
  • pay more taxes;
  • pay less bonuses;
  • be more transparent about the bonuses they do pay;
  • and make a greater contribution to our regional economy and society.

In return the Government commits to the success of a strong, resilient, stable and globally competitive financial services sector in which UK banks can compete with the best banks in the world on a level playing field – and in which London is a world centre for finance. That is good for jobs and growth in our country.  Let me go through each part in detail.  Starting with pay and bonuses.

Most of us of find the levels of pay in financial services to be completely out of kilter with what the rest of society would regard as fair or reasonable. We are determined to bring responsibility and constraint – and make sure that pay is properly taxed.  Four years ago, at the height of the banking boom, the City paid £11.5 billion in banking bonuses – most of which was in cash, most of which could not be recovered when the banks collapsed, and too much of which went untaxed. The new remuneration code introduced last month and the tax avoidance measures we are taking will change that. Today I can tell the House that the four major British banks have also agreed that total bonuses for their UK-based staff will be lower than last year – and lower than they would have been without today’s settlement. The independent non-executive director that chairs each bank’s Remuneration Committee will have to confirm personally in writing to the FSA that their pay accord conforms with today’s commitments. And for the first time, the banks have agreed to seek explicit approval from their board’s remuneration committee for the pay of the ten highest paid employees in each of their main business units. This did not happen in banks like RBS before the crisis, where the board was ignorant of what was going on.

We have also insisted that the banks be far more transparent about who and how they pay.  From this year onwards, the four major banks have committed to disclose the pay details not just of their executive board members, but also of the top five highest paid executives not on the board. This will mean that the salary details of at least seven executives at each bank will be published this year. That compares with five individuals in the US and Hong Kong, and only board executives in Germany and Japan.  And by disclosing individual pay levels it goes further than the Walker disclosure recommendations, which we are seeking international agreement on. And we will consult on whether to make it a mandatory requirement from 2012 on all large UK banks to publish the pay of both the board plus the eight highest paid senior executive officers.

This would mean Britain has the toughest and most transparent pay regime of any major financial centre in the world.
Mr Speaker, let me also provide an update on the situation at RBS and Lloyds.
In 2009 the government signed an agreement with RBS that explicitly said would “enable pay arrangements in line with the market” this year. Despite that constraint we have inherited, UKFI, the arm’s length body which manages the Government’s stake in these two banks, has agreed the following:

  • For all staff at RBS and Lloyds, the maximum upfront cash bonuses will be limited to a maximum of £2,000 this year;
  • All Executive Directors, including the Chief Executives, have agreed to receive this year’s bonuses entirely in the form of shares;
  • Directors will have to wait until 2013 to convert these shares into cash.

As the Prime Minister made clear last month, the bonuses at RBS and Lloyds will in total be smaller than they were last year – and so, crucially, will the compensation ratios. They will be backmarkers in the industry instead of the frontrunners they once were.

Let me turn from pay to the additional support the British banks have committed to provide to the regional economy.
At the end of last year the industry pledged £1.5 billion to a new Business Growth Fund, that will invest in the kinds of expanding small businesses that hold the key to Britain’s more balanced economic future. Today they commit to make an additional £1.2billion contribution to society. The four major banks commit to an additional £1billion for the Fund and an additional £200million to capitalise the Big Society Bank.

The Business Growth Fund contribution will be front-loaded over the next couple of years, so that more help can be given to businesses sooner. This money will be additional to the lending commitments and additional to any funding already allocated from dormant bank accounts. Finally, at the heart of today’s settlement is a commitment from the four major banks, as well as Santander, to make much more money available for lending to small and medium sized business. Last year these banks lent £66billion to such businesses. Today the banks commit to lend £76billion this year. £10 billion more gross new lending to small and medium businesses. That is a massive 15% increase, materially higher than they had been planning to lend this year and materially higher than anyone who followed these discussions would have expected. It comes alongside a very welcome commitment from the banks to improve greatly their customer service to small businesses, with a free mentoring service, published lending principles, transparent appeals and improved access to trade finance.

Overall gross new lending to all businesses, large and small, will increase from £179billion to £190billion – and they make a commitment to lend even more if demand materializes. Absent this accord, the banks were actually expecting lending to fall this year.  In order to ensure that progress against these lending commitments can be monitored, the Bank of England has agreed to collect the relevant data and publish it on a quarterly basis.

To help ensure today’s agreement is honoured, for the first time the pay of the Chief Executives of each bank, as well as the relevant business area leaders, will be linked to performance against the SME lending targets. Of course, if even then the banks fail to live up to their promises – then the Government reserves the right to return to the issue and take further measures. But I sincerely hope that is not necessary

Mr Speaker.  The anger at the terrible mistakes of the banking industry, and the failure of those who regulated it, will long remain – and rightly so.

But let us as a country confront this hard truth. Anger and retribution will not bring one percentage point of economic growth or create one single new job. The anger will remain. And we must never make the same mistakes again. But Britain needs to move from retribution to recovery.

Today we get the banks to commit, with:
More for lending – £10billion more for small businesses; More for our regional economies and society; £10billion more in taxes; And lower bonuses and the most transparent pay regime in the world. In return let us build a banking industry that creates jobs for hundreds of thousands of our citizens and competes in the world.

Above all let us make sure the economic catastrophe that befell this country can never be repeated.
That is how this Government will clean up the mistakes of the past.
And I commend this statement to the House.