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Speech by the Financial Secretary to the Treasury.
[Check against delivery]
Mr Speaker, I welcome the opportunity to debate business lending and reform of the British banking system.
As Honourable Members are all aware, we face extremely tough economic circumstances as we weather the ongoing crisis in the Eurozone, and fix the underlying damage that the previous Government inflicted on the economy.
The UK banking sector in particular faces a long and difficult road to repair, unwinding the irresponsible and unsustainable excesses of the previous decade.
In the aftermath of the worst financial crisis in almost a century, bank balance sheets are shrinking under market and regulatory pressure.
It is absolutely right that we ensure that our banks build their capital and liquidity reserves in these turbulent times.
It is because of that action that all our banks passed the EBA stress tests.
It’s stability that we are safeguarding for the long term by discarding the Shadow Chancellor’s discredited tripartite system, and implementing the recommendations of the Vickers’ Committee.
It is this Government that is ensuring that we build a stable financial sector with the capacity and the market confidence to provide sustainable lending to our most innovative, ambitious and entrepreneurial private sector firms.
But we have also taken decisive action to stimulate credit in the short term.
Access to finance
It’s why this Government secured an agreement with the UK’s largest banks to provide £190bn of new lending to businesses in 2011.
By the third quarter of last year, those banks had loaned over £157bn to UK businesses.
That’s 11 per cent above their implied target.
And that includes £56bn of lending to SMEs, 10 per cent higher than the same point in 2010.
At the same time we are tackling some of the structural market failures that have stifled the supply of debt and equity finance to businesses, and SMEs in particular.
Continuing with the Enterprise Capital Fund.
Simplifying and refocusing the Venture Capital Trust and Enterprise Investment Scheme, to encourage more equity investment in start-ups.
Implementing a new Seed Enterprise Investment Scheme to encourage investment in early stage companies, with income tax relief and a capital gains tax holiday to kick start the programme.
We will ensure that our adventurous and ambitious small enterprises get the support they need to become the next world leaders.
Of course, bank credit will nonetheless remain the principal source of finance for businesses across the UK. This is why in our Autumn Statement we went even further to ensure access to finance.
Last year the Chancellor announced two new, bold credit easing measures to provide up to £21bn of new lending to UK businesses.
Through the National Loan Guarantee Scheme we are allowing participating banks to raise up to £20bn of funding with government guarantees, lowering their cost of funding, and enabling them to reduce lending rates to business by as much 1 per cent.
And it is bolstered by a £1bn Business Finance Partnership to co-invest in funds that can lend directly to mid-sized businesses and further stimulate non bank lending channels for SMEs.
These are schemes which capitalise on this Government’s commitment to tackle the deficit that the last Government left behind.
Unlike the Opposition we are determined to safeguard our economic stability, and protect our credibility in the world market.
Credibility that has secured our AAA rating, kept our interest rates at record lows, and allows us to pursue innovative credit easing measures to reduce costs for businesses and get money where it is needed.
They are schemes that are supported by businesses across the country, the CBI, the BCC and the FSB.
They are schemes that, coupled with our reforms to the financial sector, ensure that the UK banking sector continues to provide the fuel for a private sector recovery.
Stable, sustainable, responsible financial sector
After the excesses of the last decade, it is clear that we can only build a sustainable financial sector and a sound economy by reforming the regulation and structure of banks.
Yesterday the House held the second reading of the financial services bill, where the Shadow Chancellor found himself in the awkward position of being forced to defend the failed tripartite system of regulation that he designed.
This is a bill which abandons his dysfunctional tripartite system and returns micro and macro prudential regulation to the Bank of England, making the Bank the single point of accountability for financial stability.
And it creates a new and strong conduct regulator to promote competition and protect consumers.
Taken along with the Basel reforms, living wills and new resolution regimes, and the reforms to the structure of banking through the Vickers’ report, we are remedying what the Chancellor called “the biggest failure of economic management and banking regulation in our country’s history” presided over by the party opposite.
Building a foundation for the sustainable flow of lending to households and business across the country.
Taking the lead to build a financial sector built on principles of responsibility, prudence and sustainability.
And in that commitment, taking a lead on bank remuneration to tackle excessive and irresponsible levels of pay.
Under the last government, we saw the growth of the bonus culture, where bonuses could be paid in cash, in one year, and never clawed back in the event of failure.
We are changing that culture. Bonuses under the FSA code are paid out over at least 3 years in shares, not just cash, and failure can be punished by clawing back bonuses. And at both RBS and Lloyds cash bonuses will again be limited to £2000.
Through the disclosure regime we have provided more transparency than ever before…
Revealing executive pay of the five highest earning non-board executives for the Project Merlin banks last year…
… and consulting this year on extending the requirement to cover eight executives at all large banks operating in the UK.
And in addition to this, UK banks now also have to disclose the aggregate pay of all their key risk takers.
These are some of the toughest rules in the world.
And it’s because of our pressure and our leadership, that the Commission’s Capital Requirements Directive contains proposals for additional regulations on remuneration disclosure which closely follow the recommendations of the Walker report
Further, we agree with the interim Financial Policy Committee that capital levels, not bonus payments, have to be the priority. Banks must strengthen their balance sheets as a foundation for lending to families and businesses.
It’s why the FSA is rigorously scrutinising bank’s distribution plans. The FSA will not approve plans unless they are consistent with required capital levels, ensuring that banks maintain the capital they need in order to finance businesses.
And it’s because of our leadership that bonus levels have already started to fall.
According to the CEBR, city bonuses tripled under Labour, and when the Shadow Chancellor was City Minister, they were £11.6bn. Indeed even their own Shadow Business Secretary was employed drafting the bonus contracts as a City lawyer.
Last year bonuses were almost half that number at £6.7bn.
And we fully expect them to fall further this year.
Thanks to the action we have taken, bonus pools have come down, and Labour’s cash bonus culture has been ended.
Now let me address explicitly the issue [raised by the Member for Streatham] on RBS bonuses.
RBS investment banking bonuses are less than half what they were last year, and less than a third what they were the year before under Labour.
As a major shareholder the Government has made clear to the RBS board that RBS should be a backmarker when it comes to bonuses. Reflecting this, RBS bonuses are lower than other major investment banks.
But because of Labour’s failed system of regulation, every household in Britain has £2,500 invested in RBS, so we need ti to remain competitive if we are going to have any chance of getting our money back.
As the Member for Edinburgh South West himself has pointed out, you can’t just run a large investment bank like a government department. The Arms length arrangements that Labour put in place are designed to give us the best chance of getting taxpayers’ money back.
Not only did the last Government fail to tackle the bonus culture, in over a decade of power they also failed too to fundamentally reform corporate governance
The Secretary of State for Business has already announced a package of measures to tackle the disconnect between top pay and company performance.
Shareholders need the information and the powers to hold boards to account on pay. We will give them that and we expect shareholders to use those powers.
The Institute of Directors, the National Association of Pension Funds , the CBI and the ABI all support the Government’s ambitions. As Otto Thorensen, Director General of the ABI wrote to bank Chairs last December, “it can no longer be business as usual for this remuneration round”.
Across the board there is a consensus that we need to tackle excessive pay. It’s this Government that’s answering how.
It’s not an easy task. Across the economy, and in the banking sector especially, it was the previous Government that allowed an unjustifiable sense of bonus entitlement to grow, whether in the public sector or in the private sector.
Under the previous Government a bonus became a right not a reward
Under the previous Government, a bonus simply became par for the course.
After thirteen years of Labour Government, we have a substantial challenge to dismantle the culture of excessive pay in the banking sector.
We have already come some way to dismantling that culture, but we know that we still have a long way to go.
At the same time, it is essential that the banking sector itself demonstrates leadership.
The coming bonus round is another chance for the banking sector to demonstrate leadership on pay.
As we empower shareholders to drive remuneration policy, the banking sector has to be at the vanguard of the debate on responsible executive pay.
The Opposition clamours for a repeat of their bonus tax which according to the previous Chancellor who put it in in the first place, failed entirely to change behaviour over pay.
And as the former Chancellor said himself, we could not repeat it because “the very people you are after…are very good at getting out of these things and…will find all sorts of imaginative ways of avoiding it in the future”.
We are making sure that the sector makes it full and fair contribution to tackling the deficit, whilst reflecting the risk they pose to the economy through the bank levy.
A levy which is designed to yield at least £2.5bn per year…in place of the last Government’s one off, tokenistic, and ineffectual tax on bonuses. In other words we are raising more in every single year than Labour did in their one-off tax.
It is this Government that is securing the stability of our economy by tackling the dreadful deficit left by our predecessors.
It is this Government that is securing the stability of our financial sector with tough regulatory reforms.
And it is this Government that is supporting our entrepreneurs to rebalance our economy away from the unsustainable, , and wasteful spending under the previous Government.
Securing stable interest rates through our commitment to tackle the deficit.
Reducing the bureaucratic burden on businesses by slashing red tape and overhauling planning.
Unleashing private sector ambitions by cutting corporation tax to the lowest in the G7, and fifth lowest in the G20.
And ensuring that our most ambitious and dynamic businesses have the finance that they need to lead the recovery in every part of our economy and every part of our country.