Pub Companies
Chuka Umunna Excerpts(12 years ago)
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Paul Murphy
Indeed. In which case he would be opposed to the big energy companies, the shenanigans of the bankers and—I believe that he is—the way the pub companies operate, which is to the detriment of the small and medium-sized enterprises that are our pubs. I therefore think that he is on our side.
However, I know from my years in government that things can be delayed for other reasons, even if Ministers pretend that it is because the consultation exercise is too big to handle. I think that the Secretary of State is meeting opposition from Cabinet colleagues, maybe from the Treasury and maybe from the top. The consultation ended months ago and the timetable is now tight, and I do not believe for one second that the delay is being caused by anything other than Government disagreement, whoever it is from.
The longer the delay continues, the greater the damage to public houses in our communities. Some 26 pubs a week are closing. The pub companies themselves have caused thousands upon thousands to close. Some of those closed pubs have now been taken over by big companies and turned into shops—I think Tesco has taken over 130 in the past few months. When we bear in mind the importance of pubs to our communities, we realise that the longer the delay continues, the worse the situation will get.
The Secretary of State has the power to change that. He could persuade his colleagues—that is where the problem is coming from—on how to change those things. Unless he does so, all the promises that he was forced to make last year, which I believe he thinks are right, will come to nought.
Mr Chuka Umunna (Streatham) (Lab)
What puzzles the Opposition is the fact that the Secretary of State has accepted in principle the need for a legislative code, so I do not understand why he is unable to commit today to taking legislative action by at least the end of this Parliament, given that that is what he is consulting on. Does my right hon. Friend, like me, fail to understand why we are not seeing that commitment from the Secretary of State?
Paul Murphy
I repeat that I think the reason is that he is encountering opposition within the Government.
The Secretary of State is right that things have changed. Having been a Cabinet Minister for eight years and having dealt with all sorts of consultations, my experience is that we must of course take them seriously and look at the pros and cons, but he had already made up his mind, more or less, before the consultation was done. The consequence of all that is that he has to battle on. He has to get back into the Cabinet Committees and persuade his colleagues that this is important. Let us ensure that in the Queen’s Speech there is a proper Bill to put right what is clearly wrong.
Budget Resolutions and Economic Situation
Chuka Umunna Excerpts(12 years, 10 months ago)
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Vince Cable
I think the shadow Chancellor is digging himself into a certain amount of trouble. He refers to a document as fact, but it is actually a consultation document. Rather more sensibly, the shadow Business Secretary yesterday applauded the new housing initiatives. We will proceed with the consultation, and if the shadow Chancellor has any technical criticisms of the tenure arrangements, he can make them in the consultation process and we will listen constructively.
Mr Chuka Umunna (Streatham) (Lab)
With the greatest respect to the Business Secretary, he mentioned what I said yesterday, but I said that not knowing that people who want second homes can take advantage of the scheme. He did not know that either.
Vince Cable
The Opposition Front Bench is getting a little silly. Let us leave it to the consultation and see what comes out. I am sure that those imaginary horrors will not be realised.
The second criticism from the Opposition was about the level of borrowing. I was not clear whether the shadow Chancellor regards high levels of borrowing as a good or bad thing—a rather basic question. Is the Labour party in favour of more borrowing, or less? The Institute for Fiscal Studies made a thorough comparison between what is likely to happen under the Government’s fiscal plans and what would have happened under the so-called Darling plan. It was a bit perfunctory, but it gave us a framework and concluded that in 2016-17 the level of borrowing under the Labour trajectory would have been £76 billion, but £24 billion under the coalition’s policy. That is after the revisions that have taken place.
As someone brought up in the Keynesian tradition, I think it rather creditable that the Chancellor has responded to a slow-down in the economy by allowing counter-cyclical stabilisers to apply. I am amazed that those on the Opposition Front Bench find that a source of criticism, when it is good, common-sense, practical economics.
Vince Cable
Job creation in the north-east is growing more rapidly than it is in many other parts of the country. It is precisely because the north-east has a higher share of exports in its regional gross domestic product than any other region that it is benefiting from the shift that is now taking place to manufacturing.
Mr Umunna
The Secretary of State says that the Government have made a mistake with their capital spending cuts and that they are reversing them— presumably, he refers to the extra £3 billion. However, why are he and his colleagues reversing the mistake only from 2015, when the economy needs the support now?
Vince Cable
I answered the hon. Gentleman’s point in Business, Innovation and Skills questions. Some of the increases in capital spending have already taken place. There was a significant increase in the capital outlay on universities, which my colleague the Minister for Universities and Science is seeing through at the moment in the establishment of R and D centres. After the fiasco of further education college building under the previous Government, the current Government are, in a systematic way, restoring the infrastructure of the FE sector.
Business and the Economy
Chuka Umunna Excerpts(13 years, 9 months ago)
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Vince Cable
I agree with the hon. Gentleman that we want banks to lend to small businesses, and one of the sources of finance, as identified recently in the Breedon report, which my Department commissioned, is big companies at the top of supply chains financing their own suppliers. They should do more of that, and we have introduced a programme, with some Government funding, to enable that to happen on a much bigger scale.
Mr Chuka Umunna (Streatham) (Lab)
Project Merlin failed, and we were told that credit easing and the national loan guarantee scheme would resolve small businesses’ problems in accessing finance. What does it say about those schemes that, since they were introduced, Wonga has seen fit to enter the market for lending to small and medium-sized enterprises?
Vince Cable
Nobody ever argued that the credit easing scheme would solve the problem of small business lending. We argued that it would cheapen the cost, and that will happen. All the major banks are now engaged in arranging packages to enable those lower costs to be passed through. I think the hon. Gentleman will be pleasantly surprised by the take-up within a few months.
Mr Chuka Umunna (Streatham) (Lab)
Thank you, Mr Speaker. I shall try to achieve that aim.
In responding to Her Majesty’s Gracious Speech, let us first take stock of the state of our economy and British business. Following the 2008-09 financial crash, born in the banking sector, to which the Secretary of State has already referred, the economy went into recession, like many others around the world, but thanks to the action that Labour took in office, we prevented that recession from turning into a depression and got the economy growing again. In so doing, we ensured that the pain of recovery was shared fairly, so that those with the broadest shoulders bore the heaviest burden.
When the Conservatives and Liberal Democrats took office, unemployment was falling, the economy was growing and the recovery was settling in. Consequently, borrowing in the last year of the Labour Government was £20 billion lower than forecast, because our approach was working. Today, the UK economy has not grown since the Government’s spending review, unemployment has soared beyond 2.6 million and 50 businesses are going under every single day. As a result, we are now in a double-dip recession created by this Government, and what is more, they are borrowing £150 billion more than forecast to pay for their failures. And who is bearing the burden of their policies? While taking tax credits away from families who want to stay off benefit and in work, they have given a tax break of more than £40,000 to millionaires. So they are unfair and out of touch as well as incompetent.
At the ballot box a couple of weeks ago, the public made it clear what they thought of the policies of the two governing parties. This is what the Business Secretary said about that vote of no confidence a couple of days after his party’s drubbing:
“as a party we’ve got to maintain our identity, we’re going to work in the coalition but by the time we get to the election we’ll be an independent force with our own values competing independently and I think those are the elements that will form the basis of our recovery.”
For all the murmurings of discontent from the Secretary of State, for all the attempts at differentiation and threats to press the nuclear button, the simple fact is that he, the Chief Secretary to the Treasury, sitting next to him, and their Liberal Democrat colleagues have all facilitated and voted for the things that their Government are doing but which are holding back our businesses and economy. They have waved through—more often than not, enthusiastically—all those things that the public made it clear they disliked a couple of weeks ago. For the avoidance of doubt, then, the Conservative’s out-of-touch and unfair economic policies are the Liberal Democrats’ unfair and out-of-touch economic policies; and the Prime Minister and the Chancellor’s incompetence is the Liberal Democrats’ incompetence. No amount of differentiation or smoke and mirrors will change that now or by the general election.
Michael Fallon (Sevenoaks) (Con)
I thank the shadow Secretary of State for giving way so early in his speech. Does he not recall the Governor of the Bank of England describing the Government’s economic policy as a “perfectly sensible” “textbook response”? Why is the Governor wrong and he right?
Mr Umunna
In case the hon. Gentleman has not noticed, we are in a double-dip recession. That says something about his party’s policies, given that, as I have just said, it inherited an economy that was growing, unemployment that was falling and a recovery that was setting in.
Before the Queen’s Speech, there was, of course, the Budget. Let us remember what people said about it. The general secretary of the TUC said:
“We needed a Budget that looked to the future and made jobs - particularly for young people - the national priority… Instead we have got a Budget by the rich for the rich.”
The chief executive of the Forum of Private Business said:
“what small businesses and the economy need are confident strides forward now. Largely, that has not happened in this Budget.”
People were looking in the Queen’s Speech for signs that Ministers understood what people were telling them—to change course and to put in place policies that will deliver an economy that works for working people and businesses, and the building blocks upon which a new economy can be built.
Did the Queen’s Speech deliver the change that people and businesses signalled they wanted to see? There are things that we welcome, subject to the small print being worked through. I have given the Business Secretary credit for ensuring that the Government established the Independent Commission on Banking. We are playing our part, in a cross-party spirit as far as possible, to implement its recommendations, and will look at the detail when it is published. The Government, by their own admission, said that they were bequeathed one of the best competition regimes in the world by this party. The Business Secretary will need to demonstrate that the creation of the single competition and markets authority—which he has just spoken about—will improve on that legacy, not squander it.
Our 2010 manifesto included plans to create a supermarkets ombudsman to protect farmers and food suppliers from unfair and uncompetitive practices by major retailers. The Government are taking that forward through the grocery adjudicator, which the Secretary of State has mentioned. We will work to ensure that the grocery adjudicator is given powers to ensure fair access across the supply chain. In office we set up the primary authority scheme—which he also mentioned—to help reduce the local regulatory burden on firms. The enterprise Bill will extend that to include more businesses, which is welcome. The Secretary of State also referred to the changes to parental leave. Again, we will look at the details, but on the whole, that does not sound like a bad measure.
We were told that the enterprise Bill would contain measures on executive remuneration—something the Secretary of State has just repeated. In order to build a more productive and responsible capitalism, it is important to ensure that we bring an end to rewards for failure and the excessive pay we have seen, which is bad for our economy and our businesses. On both sides of the House we agree that change and reform must be led by shareholders and investors with Government support. In office, we were the ones who introduced the advisory shareholder votes on remuneration reports, which have been causing a lot of news recently.
Mr Redwood
What approach would the shadow Minister recommend to the remuneration of senior executives and directors in banks with state shareholdings?
Mr Umunna
I would say that their pay should be linked to performance against criteria and specified objectives. Our argument in relation to RBS is that the Government are the biggest shareholder. They have lectured others about the need for greater shareholder activism, but it would be good to see it from those on the Government Front Bench.
However, despite all the things I have welcomed, in sum, it is business as usual for this Government. This Queen’s Speech signals little change in approach. For the person looking for work, this Queen’s Speech offered no hope; for individuals, families and firms faced with increasing energy and water bills, and rising transport costs, it offered no hope; and for sound and successful small businesses struggling to get by in this recession of the Government’s making, it offered no hope. However, listening to the Business Secretary, one would think that the Queen’s Speech had been positively received. I do not know who he has been listening to, but this is what our business leaders have said about his Government’s Queen’s Speech. On Friday, Justin King, the CEO of Sainsbury’s and a member of the Prime Minister’s business advisory group, which is meeting as I speak, said:
“Consistency is what gives confidence. Unfortunately, what we have seen over the past couple of years is something that could not be described as a consistent pursuit of a clear policy”.
In other words, uncertainty—created by the Business Secretary’s Department and all across Whitehall—is reducing businesses’ confidence to invest for the long term. On Saturday, the director general of the British Chambers of Commerce said:
“there is a big black hole when it comes to aiding businesses to create enterprise, generate wealth and grow”.
Business people are clear: what they want is a Government who will step up and work in partnership with them to create the conditions for private sector growth. What they have got is a Government who step aside and leave business to struggle on alone.
What was the Government’s response to those comments by business people? Step forward the Foreign Secretary. Yesterday—in what the Business Secretary described as “commercial diplomacy”—he said:
“I think they should be getting on with the task of creating more of those jobs and more of those exports, rather than complaining about it. There’s only one growth strategy: work hard”.
What on earth does the Foreign Secretary think this country’s business owners do all day? His message is clear. He is saying that the fact the economy is not growing has nothing to do with the Government’s failed economic policies. He is saying that it is not growing because the people in all our businesses out there are not working hard enough. How out of touch can the Foreign Secretary be?
Mr Evennett
Does not the shadow Minister feel guilty that, under the last Labour Government, of whom he was a big supporter, there was high taxation, a great deal of regulation and red tape and a lack of a trained work force? The Labour Government never helped small and medium-sized businesses; nor did they allow reward for success.
Mr Umunna
I say to the hon. Gentleman that I am proud to be a shadow Minister for a party that saw 1.1 million new businesses created during its time in government. I am proud to be the shadow Business Secretary for a party under whose Government Britain was rated the best place for doing business in Europe and fourth best in the world. I must also remind him that the UK has fallen from fourth to seventh place on his watch.
Nicholas Soames (Mid Sussex) (Con)
Would the hon. Gentleman accept that the Foreign Secretary was saying that we have to do better with our exports? We have done much better this year, as the Secretary of State pointed out, through our commercial diplomacy, and the hon. Gentleman is wrong to sneer at that. It is a fact that we do not export nearly enough from this country, or nearly as much as we could.
Mr Umunna
If only the Foreign Secretary’s comments had been limited to those that I have just cited. There was more, however. Asked whether they amounted to a modern-day call to our people to get on their bikes, echoing the call from the noble Lord Tebbit back in the 1980s, the Foreign Secretary said:
“Well no, it’s more than that. It’s ‘get on a plane, go and sell things overseas’…It’s much more than getting on the bike. The bike didn’t go that far. ‘Get on the jet.’”
I know that senior members of this Government have a penchant for hanging out with people who own yachts and jets, but most business people in this country do not have those things or mix in such company. Chris Romer-Lee, the director and co-founder of an award-winning architecture practice here in London, said to me yesterday that his firm is working flat out and has been doing so through these bad economic times. He said that
“to suggest we could work harder is insulting.”
That is what a business person said to me yesterday.
Julian Smith
The legislation that we are discussing today deals with deregulation. Will the shadow Business Secretary tell us about his proposals to lift the burdens on British business?
Mr Sheerman
Before my hon. Friend leaves the pronouncements of the Foreign Secretary, I want to ask him whether he heard Lord Digby Jones speaking on Radio 4 this morning of the Government’s decision to “decimate” and “cut” UK Trade & Investment—the trade and investment arm of the Foreign Office. Is not that a reflection on the Foreign Secretary, who is not working very well or very hard himself?
Mr Umunna
I think that UKTI needs to do a hell of a lot better, as my hon. Friend suggests. Actually, I think that this Government need to work a hell of a lot harder before they start lecturing others. It is not that we disagree about the need to increase our exports, but let us take a step back. The Government’s economic policy is one of expansionary fiscal contraction. Their idea is to hack off parts of the public sector and take away things that the Government do, and they expect the private sector automatically to step in and fill the gap. I do not think that telling business people that they are whingeing and not working hard enough is a way to inspire them to do what the Government expect of them.
Ian Paisley (North Antrim) (DUP)
Was the hon. Gentleman as perturbed as I was, two weeks before the Gracious Speech, to hear another Cabinet Minister suggest that he wanted to put a certain industry out of business? That industry raises £12.5 billion a year for the Exchequer in customs and excise duty payments. Will the hon. Gentleman defend the tobacco industry, which employs 6,000 people in this country and generates millions of pounds in PAYE and revenue for the Government?
Mr Umunna
We want all those sectors that have a competitive edge to have a comparative advantage for this country, providing jobs and opportunities when more than 2.6 million people are out of work. We want to see those sectors thrive.
Given the recent omnishambles, one would have thought that Ministers might stop and think before attacking those to whom they look to grow our economy. Far from it, however, as so far we have mentioned only the Foreign Secretary. The Secretary of State for Communities and Local Government also waded in to the row, in typical diplomatic fashion, saying that he agreed with what the Foreign Secretary had said, while the Defence Secretary—it is a shame that he did not stay in his place after his statement—then accused businesses of being whingers. The problem is that Ministers seem to inhabit a different planet from the rest of us. It is not that our businesses are not working hard enough; it is that there is a lack of demand and weak confidence flowing from the Government’s mismanagement of the economy, which has helped to tip us into a double-dip recession.
Joseph Johnson (Orpington) (Con)
Does the hon. Gentleman recognise that UK gilt yields are at an historic low, and that we would be taking a tremendous risk with them if we moved away from an economic policy that no less a person than the Governor of the Bank of England has described as the “textbook response” to the situation this country faces?
Mr Umunna
That quote has already been used. I would say two things to that. The hon. Gentleman, who studies these matters keenly as a writer for The Financial Times, will know that Christine Lagarde, the head of the International Monetary Fund, has said that to have a credible fiscal policy, we need growth. The problem is that there has been no growth since the comprehensive spending review. Secondly, we have had historically low interest rates on our sovereign debt and, of course, we control our own monetary policy, which has helped matters.
Mr Umunna
I am not saying that the Governor of the Bank of England was wrong. What I am saying is that we need growth for a credible fiscal policy. Many, including Government Members, would not necessarily argue that the Governor has always been right, particularly during the 2008-09 crisis.
The people have spoken, our businesses have spoken, families up and down this country have spoken, but the Government do not want to listen, so they persist with the same failed economic strategy, the same failed approach, exemplified in their Finance Bill carried through from the last Session with its granny tax, caravan tax, pasty tax and tax break for millionaires.
What of measures to put in place the building blocks for our economy in the long term? Was any change signalled in this Queen’s Speech? The Business Secretary famously wrote to the Prime Minister and the Deputy Prime Minister about industrial policy, outlining his and their failures. He quite rightly argued in his letter for Government to adopt an industrial policy. He said he sensed that there was “something important missing” from what the Government were and are doing—and that was “a compelling vision” of where the country was headed beyond deficit reduction. He rightly said, too, that
“market forces are insufficient for creating the long term industrial capacities we need”
and that
“we should be willing to identify British success stories as identified through success in trade and explicitly get behind them at the highest political level.”
That is precisely what we did in government in respect of the automotive industry—and we are now reaping the rewards from that.
The problem for the Business Secretary is that the Chancellor and the Prime Minister do not buy into active government and industrial policy. To their names we can add that of the Foreign Secretary as another roadblock to the active Government and industrial policy that those who own and work in businesses want to see. What evidence is there in the Queen’s Speech that the Business Secretary has been able to exercise any influence over these roadblocks to bring about a change of approach? None whatsoever.
The Business Secretary’s letter identified our energy and low-carbon industries as an important sector. We are told—the Business Secretary mentioned it—that the enterprise and regulatory reform Bill will include provisions to set up the green investment bank, which is an essential component of an industrial policy for a low-carbon economy. According to conventional definitions, however, a bank is an entity that borrows and lends money. Given the absence of those capacities and capabilities, we are left not with a body that can be called a bank, but with a fund. That is the only proper name that we can give to this initiative. It is not planned to become a bank until 2016, and will do so then only if public sector net debt is falling as a percentage of GDP at that point, which is by no means certain.
Often cited by the Business Secretary as evidence of an industrial policy, or industrial strategy, is the regional growth fund, and that was exposed as a complete shambles by the independent National Audit Office on Friday. The Deputy Prime Minister and the Business Secretary have been going around the country boasting that the scheme will create half a million jobs. What did the National Audit Office tell us on Friday? Only 41,000 jobs will be created, and many of them would have been created in any event. The House will remember that the Government abolished the future jobs fund on the basis that it was too expensive. It was claimed that each job created from that fund cost £6,500. How much did the NAO tell us each of these jobs has cost us? Up to £200,000.
While I am at it, let me thank the Minister of State, Department for Business, Innovation and Skills, the hon. Member for Hertford and Stortford (Mr Prisk)—who has been chuntering from a sedentary position—for the letter that we all received from him inviting us to encourage businesses in our constituencies to bid for RGF money last week. In that letter, he said
“my officials are ready to help”
and
“there will be plenty of opportunities for bidders to meet the appraisal team to discuss their ideas before the bidding deadline”.
There is, of course, a small snag. The NAO told us that the fund started off with 12 economists seconded from other Departments to process these matters. They all returned to their home Departments before due diligence on the first round of bids began, and the fund had no dedicated administration budget. Let us hope that there are some officials left for us to see.
Tristram Hunt
When it comes to industrial policy, is my hon. Friend as worried as I am by the lack of a strategy for intensive energy users in the Government’s plan? There is nothing in the Queen’s Speech, or in the Budget, to protect our steel and ceramics industries, which are vital to a low-carbon future.
Mr Umunna
My hon. Friend is right. I know that his constituency contains some of those industries.
The Government refuse to heed the call of businesses to get our economy going, and they refuse to adopt the active industrial strategy that we need. Instead, we have a Chancellor who is seeking to play the same old Tory tunes and watering down employee rights as a substitute for a proper growth strategy, along with a Business Secretary who is at best seemingly powerless to stop the Treasury juggernaut, and at worst going along with its nonsense on employee rights. We do not yet know what form the changes to employment law contained in the enterprise and regulatory reform Bill will take. All that we have been told to date by the Business Secretary’s Department is that the Bill will
“Overhaul the employment tribunal system, and transform the dispute resolution landscape.”
The Business Secretary alluded to that earlier. However, reforming the employment tribunal rules of procedure is one thing; making it easier for companies to hire and fire their workers, as the Government have spun it in the media, is quite another.
In March, the Business Secretary told the House that we already had the most flexible labour market in Europe, a claim that he repeated today. He also said that ours was the second most flexible labour market in the OECD. However, in an opinion piece which appeared in The Telegraph on 7 May and which was referred to by the hon. Member for Stone (Mr Cash), there was the Business Secretary parroting his Tory masters’ line.
“Britain is no longer a lone voice in the push”
for an even more “flexible labour market”, he told us. He then proceeded to round on the working time directive, which he condemned for being “'wasteful”. What has happened in the interim? Why the change of tone? I think that the Business Secretary has been got at.
Let us consider what the working time directive does through the working time regulations that give it effect in UK law. It ensures that workers have at least 11 hours’ rest in any 24-hour period. It ensures that workers have one day off in any seven days. It guarantees four weeks’ paid leave a year, and the right to a rest break of at least 20 minutes during a working day of six hours or more. I know that Ministers do not think we are all working hard enough, but I did not envisage that they would seek to tamper with those basic rights to a modicum of time off and a rest.
Vince Cable
Is the hon. Gentleman not aware that the individual opt-out of which I was speaking was defended for over a decade by the last Labour Government?
Vince Cable
If the hon. Gentleman is following this matter closely, he will know that there has been a series of judgments by the European Court of Justice that, unless repealed, will add very considerably to the burdens faced by companies, and that that was fully recognised by his party when it was in office.
Mr Umunna
So, in contrast to what seems to be in the Secretary of State’s Telegraph piece—I have a copy of it to hand—he has no problem with the working time regulations; instead, he simply has a problem with ECJ cases. [Interruption.] For the benefit of the record, the Secretary of State is saying he does not have a problem with the working time regulations. So why on earth is he publishing an article in The Telegraph saying
“the tide is turning against EU bureaucracy”
and
“Britain is no longer a lone voice in the push for deregulation”?
Who is that designed to please?
The reason we are in recession is not our employment law regime; it is this Government’s policies. [Interruption.] The Chief Secretary chunters from a sedentary position about the Labour Government. He has been in power for two years now. When he became Chief Secretary to the Treasury, he inherited a situation in which, as I said at the beginning of my speech, growth was rising, unemployment was falling and a recovery was setting in. Now, after two years at the Treasury, he is presiding over an economy that is in a double-dip recession. We will take no lectures from him.
The reason our economy has not grown is not our employment regime; it is this Government’s policies. The Secretary of State should be working to make it easier for firms to hire people—for example, by giving all micro-businesses who take on extra workers a national insurance break—not enabling firms to fire people as they want, with all the instability that that brings.
So there we have it: a Government who have tipped this country into a double-dip recession; a Government who will not listen, or take responsibility for the mess they have created; and a Government who tell our businesses and everyone else to work harder. Yet it is they who should change course and work a lot harder to provide the policies and leadership this country deserves and needs.
Danny Alexander
The hon. Lady has made an important point about the use of European regional development funding, which we have been considering in connection with the regional growth fund. I am afraid that I cannot give her an update on funds for the north-east, but I will ensure that the Minister responsible for such matters writes to her with one.
Mr Umunna
The facts that I gave earlier about the regional growth fund came straight out of the National Audit Office report. Am I right in saying that the Chief Secretary has denied that the report said that only about 41,000 jobs could be created under the scheme? Was I also wrong in stating that the report was very clear about the fact that, in some cases, the cost of each job would be up to £200,000?
Danny Alexander
If the hon. Gentleman will stop heckling from a sedentary position and listen to the answer for once, I will do my best to deal with his question.
In the individual case in which the £200,000 figure was given, it was given before the due diligence phase, as a Member whom I could not identify has just pointed out from a sedentary position. If the project reaches its final stages, it will involve a cost per job much closer to the average. The 41,000 figure was a mechanical estimate for which a model was used, whereas the 328,000 figure that I gave is based precisely on information provided by successful applicants on the number of jobs that will be created and safeguarded by the regional growth fund. I think that, rather than sneering at the fund, the hon. Gentleman should recognise the important contribution that it is making, and the important contribution to economic recovery that is being made by the private sector businesses that it is supporting.
Danny Alexander
I will give way once more, but then I must make some progress.
Danny Alexander
I do not have that information to hand. However, the point I made earlier, which he ignores, is that in many cases where the regional growth fund has been awarded, the private investment takes place well in advance of the public funds being needed. The measure he seeks to use of who has received public funds is therefore not necessarily the best measure of the investment that has taken place, quickly stimulated by the award of regional growth funds. If he looks around the country, he will see many examples of private sector businesses that have been awarded moneys from the regional growth fund and have started their investments well in advance of public funding arriving, because that is how their projects have been planned. If he were doing his job properly, he would understand that that is the way in which many businesses operate.
We have also heard a number of comments about the banking Bill. Indeed, strong support for that Bill was expressed on both sides of the House, and there was support, too, for the strong recommendations of the Independent Commission on Banking.
Banking (Responsibility and Reform)
Chuka Umunna Excerpts(14 years ago)
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Mr Chuka Umunna (Streatham) (Lab)
I beg to move,
That this House notes with concern that the recent Bank of England publication, Trends in Lending, shows that net lending to businesses has fallen in nine out of the last 12 months and by more than £10 billion in the last year; further notes that a Department for Business, Innovation and Skills report published on 2 February 2012 states that the stock of lending to small and medium-sized enterprises peaked in 2009 and in November 2011 declined by 6.1 per cent. compared to November 2010, whilst banks were frequently setting bonuses for their senior executives which were too large; believes that bank executive remuneration should be related to performance and that banks either directly or indirectly supported by the taxpayer must recognise that the taxpayer expects very large bonuses only to be paid to reflect genuine exceptional performance; notes with concern that the Government has not given due consideration to repeating the bankers’ bonus tax, in addition to the bank levy, to pay for 100,000 jobs for young people; calls on the Government to increase transparency, accountability and responsibility in the setting of pay in the banking sector, including through the immediate implementation of the Walker Review on corporate governance, and the placing of an employee representative on the remuneration committees of company boards; and further calls on the Government to reform the banking sector so that it better supports businesses and provides the credit they need to create jobs and growth.
I should like to take this opportunity to tell the House that I have been informed that the Business Secretary is not able to be here today because he is at a funeral. I am sure that the whole House will want to join me in wishing him well on this sad day.
The subject of the motion, responsibility and reform in the banking sector and in the wider economy, has been a matter of immense public interest of late and is one on which many Members have already spoken out. Let us be clear—I think I speak for most Members when I say this—that in speaking out on these issues hon. Members simply reflect the strong views expressed by our constituents on the subject.
The Labour party’s starting point is this: we are proud of our financial services centre, the City of London being arguably the world’s leading financial services centre. I, my hon. Friend the Member for Leeds West (Rachel Reeves), the shadow Chief Secretary to the Treasury, who will make the Opposition’s winding-up speech, and many other Members are, I know, proud to have spent time working in the City of London before being elected to this place.
The City helps to give the country a competitive edge, thanks to the talent that we have here, our time zone, our company law, our jurisdiction and the free flow of capital in London. The financial services sector as a whole employs more than 1 million people nationally and makes up 10% of our total national income, but no witness to recent history could claim with credibility that the sector has functioned as British businesses, our economy and our society as a whole would have wanted over the past few years.
Ultimately, the fault for that lies with a minority of those working in the sector, but as the party in government through much of that period we, along with others in power throughout the world, must, and we do, accept with humility that we should have better regulated the sector, because dysfunction in the banking sector here and globally led to the financial crisis of 2008-09, to the recession that followed and to its aftermath. That recession, the gestation of which is found in the banking sector, is something for which the British people are still paying.
Keith Vaz (Leicester East) (Lab)
My hon. Friend will be aware that the current structures were set up following the closure of the Bank of Credit and Commerce International 20 years ago. There remain within the Treasury the confidential parts of the Bingham report. Does he think that it is time that those confidential parts were published? That would give us a better understanding of exactly what went wrong in the biggest collapse of a bank in British history.
Mr Umunna
I agree with my right hon. Friend. I know that that is something for which he has campaigned for a long time.
We all know the facts. From the middle of 2007, the losses sustained on securities backed by sub-prime mortgage assets led to a credit crunch. That credit crunch came about due to a loss of counterparty confidence and uncertainty about which financial institutions held toxic assets. Depressed asset prices and increased losses led to serious solvency issues in major banks here and in the United States.
In the US, Bear Stearns had to be rescued by J. P. Morgan, Lehman Brothers collapsed, and AIG was nationalised in 2008 by that well known socialist, the 43rd President of the United States, George Bush. Here, Northern Rock had already been nationalised by the Labour Government by 2008. Later that year, we put in place a £500 billion package of measures designed to recapitalise the banks. That included the special liquidity scheme and inter-bank lending guarantees. The Labour Government took stakes in two of our biggest banks so that, by the end of 2009, the Government held a stake in Lloyds of just over 40% and a stake in RBS that increased to more than 80%.
For all the criticism that is often heaped on my right hon. Friends the Members for Edinburgh South West (Mr Darling) and for Kircaldidy—sorry, for Kirkcaldy and Cowdenbeath (Mr Brown)—by Government Members, I believe that we owe a debt of gratitude to them both for the decisive action that they took to save the system from itself, to secure people’s savings and to ensure that the people we represent could continue to withdraw money from cash machines in the wall. The Opposition are proud of what they achieved.
As the Independent Commission on Banking stated:
“without the intervention of national authorities around the world—requiring taxpayers to incur significant direct costs and larger contingent liabilities—the consequences of the crisis would have been immeasurably worse.”
It is for that reason that this House has every right to take an interest in remuneration and reform in the banking sector. After all, our banks still benefit from an implicit taxpayer subsidy if they fail.
Stephen Mosley (City of Chester) (Con)
The Financial Services Authority blamed political pressure for the failure of RBS. Is the hon. Gentleman saying that the FSA is wrong?
Mr Umunna
I do not believe that that is what the report on RBS said. I did concede earlier that the Opposition accept that, in office, we should have better regulated the sector. I also think that Government Members who urged us towards a light-touch regulatory regime should accept that they, too, were mistaken.
John Robertson (Glasgow North West) (Lab)
Does my hon. Friend agree with me and some of my constituents who have been in touch that the one thing that is lacking in the current crisis is leadership? That was not the case a few years ago when my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) led the way.
Mr Umunna
I agree with my hon. Friend and thank him for correcting my pronunciation of the constituency of my right hon. Friend the Member for Kirkcaldy and Cowdenbeath.
It is worth taking our minds back to the months leading up to April 2009, when the former Prime Minister went around the world galvanising support and encouraging people to attend the summit. It is worth noting that President Obama of the United States was not planning to attend the G20 conference in London, but in the end many people came here and the conference achieved great things and helped to secure the system. That was, indeed, leadership.
Mr Marcus Jones (Nuneaton) (Con)
The hon. Gentleman is telling the House about the record of the previous Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown). Does he think the previous Prime Minister showed good leadership by recommending Fred Goodwin for a knighthood and giving him a £700,000 pension?
Mr Umunna
We have said that, if we had known then what we know now, we would not have knighted Fred Goodwin. However, I say to the hon. Gentleman that the future of the banking sector is bigger than the individuals who have featured in the headlines of late. It is important that we debate what happens in the sector as a whole rather than focusing on Fred Goodwin and other individuals, important though it is to make points about them.
Mr Barry Sheerman (Huddersfield) (Lab/Co-op)
As we are examining history—some Government Members do not like to hear accurate history—I point out that Lord Burns was the Chairman and I was the deputy Chairman of the pre-legislative Joint Committee that considered the financial services Act. I remember that very clearly indeed, because it took us many months and was the first time there had been a joint Lords-Commons pre-legislative inquiry. The context was bitter resentment from the banks, which tried to water down the Bill, and no help from the people who led the Conservative party.
Mr Umunna
I presume that my hon. Friend is referring to the Joint Committee that considered the Financial Services and Markets Act 2000. The consensus at the time was shown in the approach instilled in the Act, and we are now revisiting the regulation of the sector.
The crash was global in nature, and the causes cited by the Independent Commission on Banking include declining underwriting standards, the mispricing of risk, a vast expansion of banks’ balance sheets and rapid growth in securitised assets—in short, gross irresponsibility. The commission also stated in its report that one problem was that some bank employees were remunerated
“on the basis of reported profits that were neither time-adjusted nor risk-adjusted, and led to employee incentives that were not always aligned with the long-term interests of the bank.”
The US financial crisis inquiry commission established by President Obama, which reported last year, went further, stating:
“Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences. Often, those systems encouraged the big bet—where the payoff on the upside could be huge and the downside limited.”
Debbie Abrahams (Oldham East and Saddleworth) (Lab)
Does my hon. Friend agree that we should not demonise one group in society, whether they be bankers or benefit claimants? This is about fairness. We know from recent evidence that fairer societies are better for everybody, improving life expectancy and increasing social mobility. We should use that evidence to inform policy that is principally about fairness.
Mr Jim Cunningham (Coventry South) (Lab)
The Conservatives always tried to rewrite history when they were in opposition, but the truth is coming out now. Even Polly Toynbee, who was the biggest critic of my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown), has now forgiven him and wishes he were back.
More importantly, if the man or woman in the street who goes to work every day fails in their job, they get the sack. No one but a banker would ever be rewarded for failure, but we now have a culture in this country of rewarding failure. Surely that must be wrong.
Julian Smith (Skipton and Ripon) (Con)
Will the shadow Minister confirm that at that time he was an employment lawyer and was involved in structuring the compensation packages of investment houses? Does he have any regrets about how he behaved at the time?
Mr Umunna
I am glad that the hon. Gentleman brought up that point, because I anticipated it. First, I think it is good that Members of this House have experience in working for business. Secondly, my experience of advising different companies and financial institutions on such arrangements has convinced me that we must reform the way in which the system works—[Interruption.] I would also say to Ministers, who are crowing, that they might wish to reflect on the fact that my ultimate boss at the time when I was more deeply involved in drafting such arrangements was the senior partner of Herbert Smith, whom the Prime Minister ennobled in the first tranche of peers at the beginning of this Parliament—no doubt because of his services to the legal profession and the City of London.
As the Leader of the Opposition said last week, we are still dealing with the aftermath of the moment to which I have referred and the recession it caused. Many thousands of people lost their jobs and now face the biggest squeeze on their living standards in a generation. Thousands of robust, profitable businesses have struggled to access finance or have gone under. At this juncture, I want to tackle head on the accusation that to raise those issues and criticise the financial services sector is to be anti-business—some have even referred to it as indiscriminate business bashing. That is an utterly absurd notion given that among the most vociferous critics of our banks are the small and medium-sized businesses that make up the overwhelming majority of businesses in this country. The people making those outlandish claims of anti-business sentiment talk as though large financial institutions are the only businesses in this country. Yes, those institutions are an important part of our business community, but there is so much more to British business than big finance. Indeed, we need to rebalance our economy not to diminish our competitive edge in financial services but to grow other sectors so that we are not so reliant on that one sector.
Businesses in other sectors are struggling right now. The most recent Bank of England trends in lending show that net lending to businesses has fallen in nine out of the past 12 months and lending has fallen by more than £10 billion in the past year. A report published by the Department for Business, Innovation and Skills last week states that the stock of lending to small and medium-sized businesses declined by 6.1% in November 2011 compared with a year earlier.
It is not just that the banks are failing to get the money out of the door to successful, profitable businesses with robust business models. There has been a move away from relationship banking, where banks saw it as their duty to get to know and understand their business customers properly. Yesterday, I met a number of successful export businesses in the home counties—businesses that help us pay our way in the world. I was told by the overwhelming majority that when it came to getting help from their banks to export and expand, their banks simply did not want to know.
Some have suggested that that is all the result of increased capital requirements on the banks, but Robert Jenkins, a member of the Bank of England’s interim Financial Policy Committee, told the Treasury Committee last month:
“Making the banks safer through greater resilience in their balance sheets and more capital does not, in and of itself, prevent additional lending.”
Despite all that, people and businesses have had to watch as billions in bonuses have been paid to bankers since 2008-09. It is worth stating that we are not talking about the sums earned by the average bank employee—the cashier, say, in a local branch—but about the enormous sums paid to investment bankers and a select few senior executives in the sector. Those bonuses have continued to be paid as a matter of course, regardless of the fact that many of the institutions, all of which directly or indirectly benefited from the interventions of the Government over the past five years and continue to benefit from an implicit subsidy, have been making thousands redundant, have seen their share prices and profits falling and have been found guilty of mis-selling payment protection insurance on a grand scale. To add insult to injury, Robert Jenkins, commenting on bank balance sheets, told the Treasury Committee:
“Every £1 billion of less bonus would support £20 billion of additional small business lending.”
It is no wonder that Sir Philip Hampton, the chair of RBS, himself said last week:
“Pay has been high for too long, particularly in the banks, particularly in the investment banks".
Mrs Anne McGuire (Stirling) (Lab)
Does my hon. Friend also accept that lower-paid staff in banks often took much of their bonuses in the form of shares? Not only have they lost their jobs, many have lost out in their pension savings.
Mr Umunna
My right hon. Friend makes a good point. We should, of course, spare a thought for the employees whom she mentions.
It matters because, as the Governor of the Bank of England said last month, people have seen an extraordinary squeeze in their living standards, but the institutions and bankers at the centre of the crisis that created those problems are not only not suffering a gigantic squeeze on their living standards but continue to get very high remuneration, in part because the taxpayer has been forced to step in and bail them out.
Stephen Barclay (North East Cambridgeshire) (Con)
Can the hon. Gentleman explain why, under the regulatory structure introduced by his Government, banks were able to hire staff on guaranteed bonuses totally unconnected with future performance, and why not a single individual in any of the five largest banks was subject to a fine? The two largest fines imposed on Northern Rock executives were less than the bonuses that they had received the preceding year.
Mr Umunna
On guaranteed bonuses, there is an element of contract in that, in terms of the arrangements between individual banks—[Interruption.] Will the hon. Gentleman listen and let me finish the point? There is an element of contract that provides for a bonus, but also an element of discretion. The fact that large bonuses were being paid out regardless of performance is, of course, what people outside Parliament object to.
Julian Smith
In order to create a balanced view, will the shadow business Minister confirm the tens of billions of pounds paid from those bonuses in income taxes and other taxes, such as employment taxes, during the period he is discussing?
Mr Umunna
Ultimately, the taxpayer had to put about £1.2 trillion into the system to support it. Juxtaposing that with the amount paid in tax by the sector, I am not sure that it comes to the same sum. I get the point that the hon. Gentleman is making. I do not deny that the financial services sector has contributed in tax receipts, but that is not outweighed by what we have had to pay out to save it from itself.
The status quo will not do. Change is essential. In November last year, Bob Diamond, chief executive of Barclays, said in his BBC “Today” business lecture that
“the single most important thing for banks and for businesses now is to focus on helping to create jobs and economic growth; and being able to do that requires us—banks in particular—to rebuild the trust that has been decimated by events of the past three years; and that rebuilding trust requires banks to be better citizens.”
I agree with Mr Diamond, but actions matter far more than words to people and businesses.
At the Business Secretary’s instigation, the Government established the Independent Commission on Banking, for which he deserves credit. If its recommendations are implemented, they will help to deliver a banking system that supports our economy’s interests in the long term. However, a number of things must happen to address the issues in the short term, not least of which is the matter of remuneration, which can be corrosive of public trust in our banks.
First, greater transparency on pay in the banking sector is needed. A good place to start would be immediate implementation of the Walker review. In 2009, Sir David Walker recommended new rules on the disclosure of bankers’ remuneration within pay bands above £1 million. In government, we legislated for that fairly modest scheme to be put in place so that irresponsible remuneration practices could be identified and rooted out. So modest were the proposals that the now Business Secretary told the House at the time that Sir David had produced
“an embarrassing mouse of a report”.—[Official Report, 30 November 2009; Vol. 501, c. 900.]
In the June 2010 Budget, the Business Secretary and his coalition partners pledged to take forward these modest proposals, but in November 2010 the Chancellor suddenly declared that he would not countenance implementation unless he could secure international agreement for the measures. In giving evidence to the Treasury Select Committee in December 2010, however, RBS’s Stephen Hester indicated that unilateral adoption of the Walker review proposals would not put the UK financial services sector at a significant disadvantage. Given the modesty of the Walker review proposals, why on earth will the Government not implement them?
Secondly, to increase accountability, we have said that an ordinary worker should be placed on the company remuneration committees setting pay. I do not understand why the Government have been so resistant to this idea. The Business Secretary has said that he is very sympathetic to the idea but has raised practical objections on the basis that there are many FTSE companies whose employees are predominantly overseas. These practical obstacles can be overcome, however, not least through technologies such as telephone and video conferencing, which in this day and age are a common feature of board meetings.
Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)
Having a worker on the board is not just about accountability. Would it not also address the fact that remuneration committees tend to comprise people much like the people whose salaries and bonuses they are assessing? It is not surprising, therefore, that they decide in favour of higher bonuses and salaries. That is another reason a different voice is needed on the committees.
Mr Umunna
I agree with my hon. Friend. First, an employee understands what is going on in the business—perhaps, in some respects, better than a non-executive director—and, secondly, employees have a stake in the business, and if the business fails, they ultimately pay the price, as thousands of RBS employees going through the redundancy process are now realising.
Mr Sheerman
I am certainly not against this sensible proposal to put employees on boards, but as I understand the Walker review and its recommendations, it does not meet the situation now. Instead of innovations, we need something so dramatic that we change the culture in our banking system and its understanding of what is right and wrong, as was mentioned earlier. The culture is what matters, but I see nothing coming from the Government that will fundamentally change the culture that motivates the people working in the sector.
Mr Umunna
Thank you, Mr Deputy Speaker.
I thank my hon. Friend for his contribution. The Walker review proposals are the start, not the end, of the reform needed, but my hon. Friend makes a strong point about the culture in the financial services sector. On the proposal to have an employee on the remuneration committee, would not the RBS board be in a stronger position if it could say, on matters of pay, that an employee representative had been involved in the decision making?
Richard Fuller (Bedford) (Con)
I am listening with great interest to the hon. Gentleman’s extended exposition on the failings of the previous Labour Government. It is nice to see him joined by so many for such an extended mea culpa. [Hon. Members: “Where’s the question?”] My question is this: does he think that the objectives of a company executive should be to maximise shareholder value for his business, to do the Government’s bidding or to do the bidding of a broader range of interests?
Mr Umunna
The hon. Gentleman asks a good question. Ultimately, of course, a director’s duty is to shareholders, but I take issue with those who suggest that the Labour Government did not introduce reforms, because we did introduce reforms, one of which was the Companies Act 2006, which changed the nature of company law so that other stakeholder interests could be accounted for. In some respects, though, shareholder interests are not necessarily completely separate from those of wider society. My strong view is that business and society are mutually dependent, and that goes for our banks as well. Banks rely on society to provide talent, skills and custom, and we rely on banks not only to perform a social utility function for individuals and businesses, but to provide growth and jobs. How does that relate to the hon. Gentleman’s point about shareholder value? If a bank fails its customers—as happened, for example, in the payment protection insurance scandal—that has a knock-on impact on reputation, which can ultimately have a knock-on impact on profit, which is against the shareholder interest.
Mr Umunna
I will move on, so that I can finish and others can get in.
What else needs to happen? The banks are accountable to their shareholders, and the Government have told shareholders to be more active. A starting point should be for the Government to practise what they preach in relation to their shareholdings in the publicly owned banks, particularly in the setting of pay and bonuses. It seems that their default position at the moment is that they do not want to get involved unless forced to do so. That has to change. More responsibility is needed. The public rightly expect the culture of excessive bonuses to stop. That means that bank executive remuneration that is described as performance-related should be just that: related to performance. Very large bonuses should be paid only to reflect genuinely exceptional performance, if trust in the system is to be maintained. The public expect the same of other organisations enjoying taxpayer subsidies. Network Rail—part of an industry backed by a £4 billion taxpayer subsidy—is a good example. It was planning to push through a new bonus scheme under which senior managers were due to receive 60% of their salaries as a bonus every year, and a further 500% at the end of each five-year funding period. That kind of bonus culture is unacceptable to people and difficult to fathom. Again, the Government did little to stop that, but in the end the Network Rail board saw sense.
Mark Lazarowicz
My hon. Friend is being generous in giving way. When bonuses are paid for performance, is it not also important that they should be paid for performance that is related to the activities of the people receiving them? They should not be bonuses that could depend on factors that have nothing to do with the activities of the directors concerned, as would have been the case with Network Rail.
Mr Umunna
I will move on.
Given that market mechanisms since the crash have not operated to rein in excessive pay in the banking sector, the bank bonus tax, we have argued, should be repeated, on top of the bank levy, in recognition of the fact that the banking sector owes a responsibility to society in general. If the claim that we are all in it together is to mean anything, the reintroduction of that tax is a must. It would create 100,000 youth jobs and 25,000 affordable homes. It would do immeasurable good to the reputation of the sector and support jobs, growth and business in the UK economy.
Mr David Ruffley (Bury St Edmunds) (Con)
I agree with some of the things that the hon. Gentleman has said, but the last Labour Chancellor said that
“it will be a one-off thing because, frankly, the very people you are after here are very good at getting out of these things”.
Those were the words of the right hon. Member for Edinburgh South West (Mr Darling) in autumn 2010. What has changed since?
Jack Dromey (Birmingham, Erdington) (Lab)
With house building down, homelessness up and nearly 2 million people on waiting lists for council housing, does my hon. Friend agree with the unemployed building worker in Erdington who said to me that the time has come to tax the bankers, build homes, put people such as him back to work, and create apprenticeships and hope for our young people?
Mr Umunna
I want to make a little more progress.
We need a more diverse and competitive banking system that is rooted in our communities and that better serves the financing needs of our businesses, as the Federation of Small Businesses and other organisations have argued. We need better developed equity finance, too, which is why we are exploring the possibility of creating in the UK something akin to the US Government’s small business investment company programme. That programme financed the likes of Apple and Intel in their early stages. We are also considering plans to set up a British investment bank that could step in if the market failed to provide for our entrepreneurs.
Mark Field (Cities of London and Westminster) (Con)
We all appreciate that this banking crisis has gone on considerably longer than we envisaged. In 2008, we probably all thought that we would have divested ourselves of our huge stake in RBS and Lloyds Banking Group by now. I therefore fully support the idea of a structure for bonuses that would come into play only when we have divested ourselves of our stake in those two banks. However, I get the impression from all that the hon. Gentleman has said that he draws no distinction between those two banks, in which we have large holdings, and the rest of the banking sector. Am I correct in that assumption?
Mr Umunna
No; partly because, whether we like it or not, the way in which the public regard RBS and Lloyds is different from the way in which they regard, say, Barclays or other banking groups, simply because of the public stake in them. That is the issue that crept up on members of the RBS board over the past couple of weeks. For all that was said about the terms on which the different executives and employees were joining RBS, they were essentially joining an institution that the public have very much come to regard as a public entity.
Mark Field
Is the hon. Gentleman therefore working towards putting in place a policy that would be more onerous for RBS and Lloyds Banking Group, in which the public have a large stake, than for the rest of the banking system? Does he feel that that would be a sensible way to go forward?
Mr Umunna
That is not actually what we are arguing for. We have said, given that the Government have been lecturing shareholders on being more active in relation to their shareholdings, that the Government should of course take a more active approach to those banks in which we have a stake. As has been pointed out, however, the sector as a whole needs a change in its culture; that applies across the board.
Right now, we need the Government to make good on their promise to implement credit easing, to relieve the credit squeeze on businesses. That plan was announced to great fanfare more than four months ago, but nothing has happened. I am glad that the Financial Secretary to the Treasury, the hon. Member for Fareham (Mr Hoban) will be responding to this debate. Perhaps he can tell us what has become of the scheme. The lack of speed with which the Government have proceeded with it is in marked contrast to the actions of the German and US Governments, for example. In Germany, KFW doubled the amount of small business finance available very quickly over the past couple of years through its lending programmes.
Some people suggest that if we do all these things, wealthy bankers will simply move abroad. We are for ever being held to ransom by that threat. It is notable, however, that many of those who put that argument benefit from the status quo. They have been making the argument for a number of years, but they are still here. They tend to ignore the fact that it is the banks’ shareholders—not just politicians and society at large—who are calling for reform. Shareholders such as Jupiter, F&C Asset Management and Legal & General have all reportedly told the banks to be sensitive to the popular mood, and to moderate pay rises to match sharp falls in shareholder returns. The Association of British Insurers is reportedly meeting all the banks at the moment, including Barclays. Those people also ignore the fact that bankers and executives in other countries are being required to change their ways. For example, our banks’ US rivals are cutting bonuses by up to 30% at the moment.
Mr David Hamilton (Midlothian) (Lab)
Where would those chief executives go? In Europe, they would get a lot less, and in America some chief executives have gone to court and even to prison. Perhaps they want to stay where they are because they feel safe here.
Mr Umunna
I am sure that many of those executives are watching the debate, and that they will pay attention to what my hon. Friend has said.
I will finish by returning to where I started. We are proud of our financial sector; it is an asset. We need it to help create the jobs and growth that are so lacking at present. All we ask is that it better serve the real economy in this endeavour—and that it does so more responsibly. With that in mind, I urge all Members to support our motion.
Mr Hoban
The reason we have to have the austerity programme in place is to tackle the mess left by the Labour party when it was in government.
As I was saying, we are seeking to reform the sector to ensure that it can lend to businesses in the long term, but we have also taken decisive action to stimulate credit in the short term. That is why the Government secured an agreement with the UK’s largest banks to provide £190 billion of new lending to business in 2011. By the third quarter of last year, those banks had loaned more than £157 billion to UK businesses, which is 11% above their implied target. That includes £56 billion of lending to small and medium-sized enterprises—10% higher than at the same point in 2010.
I noted that during the rather long speech of the shadow Business Secretary, he talked about lending but put forward no ideas about how Labour would tackle it, yet we in government have taken action to get the banks lending to businesses and to make sure that there is a supply of creditors to SMEs.
Mr Umunna
I am grateful to the Minister for giving way. I have to say that many of the organisations that represent our SMEs will listen with incredulity to the Minister’s suggestion that credit conditions are somehow all fine and that all is well. The fact is that, according to the Bank of England’s latest figures, we have seen a net contraction in lending to SMEs in nine of the last 12 months. It is clearly still a problem. In fairness, the Government announced that they were going to provide some credit easing—admittedly when the Chancellor said so in his speech to the Conservative party conference, although I never quite understood what he was talking about—but so far we have seen absolutely no action. When will this credit easing system come into effect?
Mr Hoban
I had hoped that the hon. Gentleman would come up with some ideas, yet he took a rather lengthy intervention to demonstrate that Labour has no ideas about what to do. Let me set out some of the structural measures we are taking to tackle the supply of debt and equity finance to businesses, and SMEs in particular. We are continuing the enterprise capital funds, and we are simplifying and refocusing the venture capital trusts and enterprise investment scheme to encourage more equity investment in start-ups.
Mr Umunna
Will the Minister at least concede that this issue and the kind of perverse incentive structures we have heard about, with rewards for failure and excessive pay in the boardroom and the City, have grown over the past three decades under different Governments of different colours? Will he have the humility to accept that?
Stephen Williams
My hon. Friend makes an interesting philosophical point about the whole culture that we have perhaps all grown up in over the past 30 years. It would require more than an eight-minute speech in a three-hour debate to deal seriously with those issues, but I am trying to raise some of them. For instance, when considering how to respond to the outbreak of collective madness on the streets of some of our cities last summer, we should recognise that some of what he says is relevant to the feelings of dislocation and despair that some people felt, but it was also about out-of-control remuneration, lax regulation and complacent political oversight. Opposition Members do not like me saying this, but I say it every time and will say it again: a previous Labour Business Secretary, Peter Mandelson, said that new Labour was intensely relaxed about people getting filthy rich. Because of that, we saw the dislocation of director and shareholder interest.
Stephen Williams
No, because I have given way twice and I have a time limit, and the hon. Gentleman took rather a long time making his opening speech.
All of this happened under the previous Government, and the coalition Government are now having to clear up the mess. We have heard once again that all that is needed is the magic wand of the bankers bonus tax but, as my hon. Friend the Minister has pointed out, in every year of this Parliament, under the coalition Government, more money will be raised—£2.6 billion—from the permanent levy on the banks’ balance sheets. It is the behaviour of the banks, and their boards in particular, that needs to change, rather than necessarily the pay and remuneration of their employees, which I remind the House is now taxed at a higher rate than it was when Labour was in government.
The behaviour in the boardroom needs to change, especially in the remuneration committees. As I understand it, the Walker report, which is mentioned in the Opposition’s motion, simply recommended that remuneration of bank employees over £1 million should be disclosed in broad pay bands, which is hardly revolutionary.
The Merlin agreement, an interim measure while we await the implementation of more wide-ranging banking reforms, now states that a bank’s five highest-paid executives, as well as its chief executive and chairman, have to disclose their remuneration, so at least seven people each year now have to do so. That is the highest number in any global financial centre and more than in the United States, and, as the Minister pointed out, bonuses at the banks that are under effective state control, such as Lloyd’s Banking Group and the Royal Bank of Scotland, are limited to £2,000 in cash, with anything beyond that having to be offered on a deferred basis in shares.
My right hon. Friend the Business Secretary has responded to the High Pay Commission with a series of measures that were announced a couple of weeks ago, and central to those is changing the behaviour and composition of the remuneration committees, so that on the forward pay agreements that they recommend for approval they have binding votes: not the advisory votes that were in place under the Labour Government, but binding votes, so that shareholders really are empowered to make a difference and to instruct directors, who are supposed to have stewardship of their investments in those companies.
That will end the revolving door, whereby executives of one company become non-executives and sit on the remuneration committees of another, and whereby inevitably it is in everybody’s interests constantly to bid up pay in each quoted company. Indeed, they will also have to state how they have involved and consulted employees of what, in many cases, are global companies.
Labour, in its manifesto at the most recent general election, said—I had someone check this for me before the debate—that it would
“strengthen the 2006 Companies Act where necessary”.
I remember that legislation, which, along with the Crossrail Bill, was probably the least popular Standing Committee on which a Member could sit, because it was such a fat Bill and its proceedings went on for so long, but there was nothing in it proposing the regulation of corporate pay. Throughout the previous Government’s 13 years in office, they did little to act on that issue, and despite the huge legislative opportunity that they had in 2006 they did not seek to strengthen shareholder power.
The manifesto went on to state that Labour would strengthen the UK stewardship code for institutional investors so that they would have to declare how they vote on remuneration policies, which in turn should be approved by directors. It was silent on the interests of employees, and the shadow Business Secretary did not say much about that this afternoon, either. He certainly did not commit to having an employee on the board of every company.
It is the behaviour of the banks, not just their remuneration policy, that needs to change. One of the first acts of the coalition Government was to set up the Independent Commission on Banking. We have now had the Vickers report, but in our proceedings on the Financial Services Bill, which received its Second Reading last night, we went through all those issues, so I shall not go through them again today.
We also need a change of behaviour at company annual general meetings, whereby shareholders really engage with the power that they have over their companies. Recently I met the charitable group FairPensions, which is urging institutional investors, the pension fund managers who act on behalf of many of us, our constituents and local authorities, to use their power at company meetings in order to control executive pay and to act as responsible investors.
Some hon. Members may have noticed that I tabled early-day motion 2678 last week, supporting the Move Your Money UK campaign. Mr Speaker, you and I are of roughly the same political generation—although from different points on the spectrum. We would first have become involved in politics during the 1980s. So we would have been students at the time of the Boycott Barclays campaign, and indeed I had a Boycott Barclays poster up on my bedroom wall as a student. I suspect that you did not, Mr Speaker, but people of my generation will remember that the behaviour of consumers can make a real difference to the behaviour of companies, so I urge all hon. Members—I hope this is a cross-party issue—to support my early-day motion and to urge all our constituents as consumers to consider the behaviour of companies when they use their purchasing power as well as when they exercise their power as shareholders.
There has been systemic failure for quite some time, as the Opposition Front Bencher at least acknowledged. There was reckless behaviour by Mr Goodwin, but there was reckless behaviour also in the Cabinet room by the last Labour Government. The coalition Government are clearing up the mess. We are putting in place regulations and legislation to control pay policy, to introduce transparency into the implementation of that policy and to regulate the banks so that we have a sustainable financial services sector and sustainable banks, which are so essential to supporting the businesses that are required to grow our economy.
Margot James (Stourbridge) (Con)
In opening the debate, the shadow Business Secretary stressed the importance of a strong financial sector and called for a new culture, given the high pay and excessive bonuses that we have seen. Many of us on the Government Benches agreed with what he said in that direction and with the overall tone that he struck. He was asked how much money had been given away in bonuses under the last Government. According to my figures, £66 billion was paid out in bank bonuses under the last Government. Much of that was encouraged by the last Government, for the massive tax revenues that it generated, with more than 50% coming back to the Exchequer.
Much has been made of the linkage between businesses and bank lending, but I would dispute that. We need to see much more lending to small businesses, but, as I explained in an intervention, the reason for the current lending issues is not just that the banks will not lend. Opposition Members do businesses a disservice by continuing to promulgate the myth that banks will not lend, because one reason that businesses are reluctant to approach banks is that they think they will be rejected. We must not engage in too much rhetoric, accusing the banks of not lending, when RBS, for example, grants 85% of the loan applications that it receives from small and medium-sized enterprises.
Mr Umunna
First, I accept that the reason there is not as much lending to SMEs as one would expect is not just because of the banks, but because of people’s confidence in the economy—one might argue that the Government’s policies have had an effect on that. Secondly, I pointedly made it clear in my speech that it is not just a question of the banks not getting the money out of the door to robust, profitable businesses; rather, it is a question of their relationship with their business customers in this day and age. Often, people are put on the phone to some person in a regional office who knows nothing about their business and is therefore not in a position to assess the risk properly.
Margot James
First, on the causes of why businesses are not seeking loans to invest, that has much more to do with the eurozone crisis and the global economy in general. For any company seeking to export, there is a general nervousness across the world—not just in the west, but in China and the far east. Secondly, I agree with the hon. Gentleman about banks losing a lot of skills over the past 10 to 20 years in managing their business customers, but I see signs of change. I visited Barclays in Birmingham a couple of months ago, and I sensed the real commitment, along with an upgrading of skills, that that bank—to name one—is making to its business customers.
The Minister of State, Department for Business, Innovation and Skills (Mr Mark Prisk)
We have heard 11 interesting contributions from Back Benchers, although I cannot say that the last contribution was either interesting or, indeed, informed. I should begin by drawing the House’s attention to my entry in the Register of Members’ Financial Interests.
I have to say that the last contribution was in sharp contrast to the more emollient tones of the shadow Secretary of State, the hon. Member for Streatham (Mr Umunna), who actually admitted—I think for the first time from the Dispatch Box—that Labour got it wrong on this issue when it was in government. What is not clear, however, is whether he cleared those remarks with the shadow Chancellor. It seemed that this set of remarks was new to a number of faces on the Back Benches.
We heard very good contributions from my hon. Friends the Members for Halesowen and Rowley Regis (James Morris) and for Nuneaton (Mr Jones) and excellent contributions, too, from my hon. Friends the Members for Bedford (Richard Fuller) and for Stourbridge (Margot James). We heard an interesting contribution from the Chairman of the Select Committee, the hon. Member for West Bromwich West (Mr Bailey), who pointed out that it was my right hon. Friend the Member for Twickenham (Vince Cable)—[Interruption]—who, notwithstanding the shouting and screaming from Labour Members, highlighted the existence of real challenges and problems when his party was in opposition. I am sure that my right hon. Friend will be happy to acknowledge that.
Let me begin by making it clear that this Government have an absolute commitment to addressing excesses in the banking system that were allowed to go unchecked and unregulated for much of the 13 years before we came to office. It was a system in which light-touch regulation and record bonuses were encouraged by a Government who were keen to reap the rewards. Since coming to office, we, as a coalition Government, have made a return to responsible banking a key priority. We have taken concerted action to ensure that, in return for extensive taxpayer support, banks must once again live up to their obligations to support the wider United Kingdom economy.
That is why, as my hon. Friend the Financial Secretary to the Treasury pointed out, we are discarding the discredited tripartite system and implementing the recommendations of the Vickers commission. It is also why we are actively supporting the flow of lending to businesses, especially small businesses, so that they can gain access to the finance that they need if they are to invest and grow. We on these Benches passionately support the entrepreneurs and hard-working small business owners who create the wealth and jobs on which the rest of us rely.
There has been some discussion about the Merlin agreement this evening. Let us be clear about that. Under the terms of the agreement, the five major UK banks committed themselves to making £190 billion of new credit available last year. Of that new lending capacity, £76 billion was dedicated to small and medium-sized enterprises, which would be a 15% increase on the previous year. The latest figures, for the third quarter, show that the banks are broadly on track. At that point banks had lent more than £157 billion to UK businesses, 11% above their implied target, and three—Barclays, Santander and HSBC—have all made recent statements to the effect that they have met their Merlin targets. We await the final figures, but that is good news that we should bear in mind.
Moreover, a report from my Department, to which the motion refers, reveals—although I did not hear this from Labour Members—that three quarters of SME employers are being given the loan or overdraft they request. My hon. Friend the Member for Stourbridge rightly pointed out that it is wrong to suggest—as some Opposition Members do—that no small firm can obtain a loan.
Mr Prisk
I will not give way. The hon. Gentleman spoke for 45 minutes, which meant that Back Benchers did not have a chance to contribute to the debate.
I understand—we understand—that to the 25% of SME employers who do not obtain that loan or overdraft, the fact that 75% do will be no consolation. That is why the Chancellor is taking decisive action to provide some £21 billion, £20 billion of it under the national loan guarantee scheme, which will be available over two years and will allow banks to offer lower-cost lending to smaller businesses. [Interruption.] Notwithstanding the chuntering of Opposition Members, that scheme is supported by the Federation of Small Businesses, the British Chambers of Commerce and the CBI. The details will be made clear in the next few weeks.
Independent Banking Commission Report
Chuka Umunna Excerpts(14 years, 5 months ago)
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Mr Osborne
As I have said, the 2019 back-stop is the considered view of John Vickers and his commission. They have spent an enormous amount of time thinking about this, about trying to get the balance right between getting the rules in place, getting the rules right, and ensuring that they do not damage credit supply in the short term, about which many Members have asked. The report contains other milestones—some of the changes that he wants to see put into place by 2013, for example. John Vickers has done a good piece of work, and given a lot of thought to the issues, and I do not want to second-guess them just hours after he has published his report. We will produce a full, detailed response to the report by the end of the year.
Mr Chuka Umunna (Streatham) (Lab)
The Chancellor has referred to Project Merlin, which is generally regarded as a fairly ineffectual agreement, not least because, according to Bank of England figures, net lending to small and medium-sized enterprises has contracted month on month. Across the House, we can agree that it would be undesirable for politicians to seek directly to run the banks in which we have a public stake, but surely that should not preclude the Chancellor asking United Kingdom Financial Investments Ltd to ensure that the banks change the culture that they exercise towards SMEs. When was the Chancellor’s last discussion with UKFI about that?
Mr Osborne
I talk to UKFI all the time, and one of the things I talk about is ensuring that the banks in which we have a public ownership of shares are meeting their Merlin lending targets. I congratulate Lloyds, which has changed its operations and advertising campaigns and has tried to encourage small business lending. The hon. Gentleman talks about targets, but again there is complete amnesia about the fact that Labour were in government about 18 months ago. The Labour Government introduced net lending targets, which he wants us to introduce, abandoned them after 12 months, after those targets were completely missed, and then said in the House of Commons that they would introduce gross lending targets for two banks, RBS and Lloyds. We have not just stuck with the methodology that they developed, but have extended it to the entire banking system. Before they criticise those trying to clear up the mess, Labour should remember what they did in office.
Finance (No. 3) Bill
Chuka Umunna Excerpts(14 years, 7 months ago)
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Chris Leslie
We now come to our general debate on taxation in respect of the Finance Bill. Clearly, one of the major omissions from the Bill is a repeat of the bank payroll levy or bonus tax that the previous Labour Administration implemented in 2009. It is not only a matter of fairness that bankers should pay some of their substantial bonuses to support people far less fortunate than them and to rebuild public trust; it makes economic sense too. I hope that our amendment 13 will persuade the Government of the merits of a review of how the bank bonus arrangement could be incorporated into the bank levy. A fair tax on bank bonuses would help to get people off the dole and into work, and it is the best way to get the deficit down and stop Britain’s talent going to waste.
Youth unemployment rose sharply in the recession, as we know, but a year ago it was starting to fall steadily thanks in part to the youth jobs programme and the future jobs fund advocated by the previous Administration. One of the first things that the current Chancellor of the Exchequer did was to scrap that successful programme. Before the election the leader of the Liberal Democrats, now the Deputy Prime Minister, said:
“Parents used to worry about whether their children could get onto the housing ladder, now the concern has spread to whether they can even get a job…We must provide a lifeboat to this lost generation.”
Well, he and the Prime Minister have sunk that lifeboat.
In the 1980s, youth unemployment continued to rise for four years after the recession was over, and whole communities were scarred as a result. Many of the effects can still be seen and felt in places across the country. That is why we believe we need to act urgently to prevent disastrous mistakes from being repeated. There are now 31,000 more young people unemployed than there were last summer, and one in five 16 to 24-year-olds is now out of work. Although there has been a welcome fall in unemployment in the past two months, the claimant count is still rising, vacancies are down and job creation has slowed in the six months since the spending review. Unemployment is set to be 200,000 higher over the coming years than was expected just a few months ago, and the Office for Budget Responsibility keeps revising the figure upwards, just as it keeps revising the growth figures downwards.
We believe that a repeat of the bank bonus tax could be used to create more than 100,000 jobs, build 25,000 affordable homes, rescue construction apprenticeships and of course boost investment in businesses. Putting young people on the dole is not just a waste of talent but a waste of money, and failing to get Britain back to work fast enough is helping to push the benefits bill and welfare costs up by more than £12 billion, or more than £500 a household. It is not rocket science—more young people out of work means more money spent on benefits and less money coming in through tax receipts to pay down the deficit.
Considering how the future jobs fund and the bank bonus levy worked, we believe that sufficient revenue could be raised to invest the money in creating 90,000 good jobs to get young people into work and ensure that we do not make the mistakes of the past. It could also be used to build 25,000 homes to support people as they get back to work. Our plan could generate more than 20,000 jobs in that sector and save several times more jobs in the supply chain and as many as 1,500 construction apprenticeships. That would leave sufficient resources to boost the regional growth fund by £200 million, to support companies that want to start projects that will create more jobs, meaning more help for small businesses in regions up and down our country.
Our amendment is pretty straightforward and, I hope, fairly unobjectionable. It asks the Chancellor of the Exchequer to review the possibility of incorporating a bank payroll tax within the bank levy, and to publish within six months of the passing of the Finance Bill a report on how the additional revenue would be used.
Mr Chuka Umunna (Streatham) (Lab)
One of the objections that has been raised to reintroducing the bank bonus tax is that it would lead to a flight of talent abroad. We have often been told that a number of people would go from the City to Switzerland, for example. Has my hon. Friend noticed that in 2011, just under 400 of the 330,000 people working in banking and financial services in the City went to Switzerland, and that the year before the number going there fell by 7%?
Chris Leslie
An excellent statistic from my hon. Friend. We are often told that the reason we cannot take any action is that complex descriptor “regulatory arbitrage”. It is a term that belies what it actually means—people fleeing the country, usually because they want to pay lower taxes. Actually, there are good reasons for the financial services sector to stay and thrive in this country, and they are not just about tax and regulation. They are not always financial reasons. We have Greenwich mean time, and we have a great rule of law that can ensure that businesses succeed and thrive. I believe that that is ample for our financial services sector to be rejuvenated and sustainable. The talk of “regulatory arbitrage” is in many cases the last refuge of the scoundrel.
The Government are letting the banks off the hook. They are taking a light-touch approach on taxing the banks by failing to repeat the banker bonus tax that the previous Labour Government levied, which brought in £3.5 billion.
Chris Leslie
I know that the Government have such a close relationship with the IMF that they take their policy lead from it on almost every issue, but I am sure that they can think for themselves on this issue. Given that there was discussion at the G20 about exploring many of those things, I would have thought that the Government ought to keep the issue on the table and under review because it has potential, as most hon. Members seem to recognise.
Chris Leslie
Indeed, and there are ways the bank levy could be improved. It might be appropriate at this point to refer to the Government amendments 32 to 50, which are technical amendments. It would be useful if the Minister said whether the bank levy’s yield will be affected by those technical changes. Generally speaking, although the bank levy is a fine idea in theory, the way the Government are implementing it in practice is inadequate. It has been designed around a fixed yield of £2.5 billion to £2.6 billion, but when the Treasury originally published its design for the bank levy last June the banks complained that it would cost them £3.9 billion. The Chancellor listened to their complaints and, as a result, watered down his original plans. Indeed, he gave the banks a £20 billion tax-free allowance before they start paying the bank levy, thus bringing the yield back down to £2.5 billion to £2.6 billion.
Mr Hoban
The Finance Bill introduces the bank levy, a permanent tax on banks’ balance sheets that will raise more than £2.5 billion each year. Amendment 13 seeks to reintroduce the one-off bank payroll tax introduced in the previous Parliament, but that would be unnecessary and counterproductive. Amendment 31 seeks to introduce a financial transaction tax, but such a tax would need to be applied globally to prevent the relocation of financial services.
The Government have already set out far-reaching plans for banking reform on regulation, lending, remuneration and tax. That includes the introduction of the bank levy. Both amendments would also place an obligation on the Government to produce a report on how any additional revenues from each tax could be spent and we have already heard many ideas during the debate.
Before I talk about the amendments in detail, we should remind ourselves of the significant contribution to the economy and public finances made by banks operating in the UK. Many hundreds of thousands of jobs across the whole United Kingdom—not just here in London—depend on Britain being a competitive place for financial services. It has been said:
“While the success of the financial sectors in New York and Tokyo has been built largely on supplying large domestic economies, with a smaller domestic economy the success of London has increasingly depended on its global role…The Government recognises that it must ensure that the UK’s tax regime remains competitive”.
The hon. Member for Nottingham East (Chris Leslie) described such an approach as the last refuge of the scoundrel, but the “scoundrel” who made that statement was not me, my right hon. Friend the Chancellor, or the Prime Minister; it was the right hon. Member for Morley and Outwood (Ed Balls), when he was the Treasury Minister responsible for financial services. It is clear that in a short space of time, the Labour party has decided it is no longer important to be globally competitive. That is yet another nail in the coffin of the economic credibility of that party, which voted this morning to scrap the deal obtained by the previous Prime Minister at the G20 summit to increase resources for the IMF.
The financial crisis demonstrated that fundamental reform was needed and that is what the Government are delivering. The Government firmly believe that banks should make a fair contribution to the public finances. In particular, banks should make an additional contribution in respect of the potential risks they pose to the UK financial system and wider economy. Last year, we announced a permanent levy on bank balance sheets, which was implemented from the beginning of this year.
Mr Hoban
Let me make my point and then perhaps the hon. Gentleman can explain the position of his party when it was in government.
In opposition, we made it clear that the UK should introduce, unilaterally if necessary, such a levy, but just weeks before the general election, the previous Government told us that a bank levy would have to be
“coordinated internationally to avoid jeopardising the UK’s competitiveness.”
Where we and our coalition partners have sought to lead international debate, Labour would hang back and let others make up their mind for them.
Mr Umunna
The Minister is extremely fond of harking back to what the previous Government did, but he is in government now and has failed so far to give a single convincing reason to support his position of not adding a bank bonus tax to the levy. Reuters is predicting profits this year of about £51 billion in the sector and there is still an implicit taxpayer subsidy of the sector, so in that context why is it so unreasonable to support the amendment? It simply asks for a review, which is a very reasonable suggestion.
Mr Hoban
The hon. Gentleman should be patient. I am just warming to my topic. I have much more to say about the bank levy and about amendment 31 on the Robin Hood tax. There is an issue about the need to reform the banking sector and the coalition Government decided to look at the structure of banking, which the previous Government failed to do. We want to tackle issues around the resolvability of banks and to look at how we can make the banking system much more stable. The measures we are taking forward will tackle some of the issues.
Mr Hoban
My hon. Friend points out some of the behavioural impacts of the tax. A Labour Member pointed out earlier the reduction in the proportion of remuneration from bonuses and the increased amount from salaries. That is the kind of behavioural change that happens. Those responses are important. Banks and bankers respond to such changes, but the world has moved on. Unlike when the payroll tax applied, the top rate of income tax is now 50p in the pound. The previous Government told us that they would apply the bonus tax only until changes in remuneration practices were in place, and this Government have taken firm action in that regard.
The Financial Services Authority revised remuneration code of practice sets out detailed rules for pay for firms in the financial services sector. The code ensures that bonuses paid to significant risk-takers are deferred over a number of years and are linked to the performance of the employee and the firm. In addition, significant portions of any bonus will be paid in shares or securities. Those revised rules came into force on 1 January 2011. Let us not forget that under the previous Government, bankers could walk away with the cash in their pocket as soon as the bonus was declared. The rules on bonuses have been toughened up: bonuses are deferred and are paid in shares. The previous Government let the bonus culture rip and taxpayers paid the consequences.
Mr Hoban
At times, I wonder what Opposition Members read; we were clear from the outset that we wanted to toughen up the rules on remuneration. [Interruption.] We were very clear about what we wanted to do. The Opposition should hang their heads in shame about the bonus culture they allowed to perpetuate when they were in government. I remind them that Labour gave Fred Goodwin a knighthood for his services to banking.
We do not need a bank payroll tax. We have demonstrated that the bank levy we have introduced will ensure that banks pay a fair share in relation to the risk they pose to the wider economy. The right actions have been taken.
Amendment 31 was tabled by the hon. Member for Hayes and Harlington (John McDonnell). He is right to highlight the importance of funding international development, on which there is cross-party consensus. The Government agree that we should move to ensure that 0.7% of gross national income should be for aid. The hon. Gentleman is also right to highlight the importance of achieving the millennium development goals. He mentioned talking about education in a school in his constituency. On Friday, I met a group of pupils from Portchester community school who were very much behind the “Send my sister to school” campaign. These are important issues, but we need some discussion about whether the financial transaction tax model offers a stable and efficient mechanism to raise revenue. Such taxes remain the subject of ongoing debate at international level, and the UK continues to take an active role in the discussions.
Oral Answers to Questions
Chuka Umunna Excerpts(14 years, 7 months ago)
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Justine Greening
My hon. Friend is right to refer to the importance of the aviation sector. As he will know, the consultation on reform of air passenger duty closed last Friday, and we have received a number of different representations from stakeholders. He will be aware that this is partly about looking at what we can do to support regional airports, but we certainly do not want to do that at the expense of our other key airports in the south-east.
Mr Chuka Umunna (Streatham) (Lab)
Several figures have been cited about the number of jobs created over the past 12 months. What percentage of those jobs were created before the spending review and are arguably attributable to the last Government, and what percentage have been created since?
Mr Osborne
I am happy to provide the hon. Gentleman with an exact breakdown based around the date of the spending review. What is clear, however, is that we said that we wanted the private sector to lead the recovery and that that was absolutely essential. That is the view of virtually every credible economist and business organisation in the country. He should be celebrating the fact that over 500,000 net new jobs have been created by the private sector in the past year.
Credit Rating Agencies
Chuka Umunna Excerpts(14 years, 9 months ago)
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Mr Chuka Umunna (Streatham) (Lab)
I thank you, Mr Deputy Speaker, and the House for giving me the opportunity to debate this very important issue today, but before I do so, I should like to say to my constituents that I have been a Member for a year this week, and I have loved every week. It has been a great pleasure to serve the people of my constituency, and I will continue to work my socks off for them so long as I have the privilege of sitting in the House.
This debate comes at a crucial moment. The world is seeking to address the failings of the financial system in the wake of the 2008 crash. Much of that work is being driven by the G20 and the Basel Committee on Banking Supervision. Of course, credit ratings are hardwired into the new rules that are being implemented now. The sovereign debt crisis that is occurring in the eurozone reminds us of the sheer power of credit rating agencies. Of course, a number of recent studies have posed serious questions about the operation of the credit rating agency market in the wake of the 2008 crash, and I wish to explore some of those issues in the short time available this afternoon.
I should add that the European Commission will shortly publish its proposals to improve the regulation of the agencies. I hope that this debate will perhaps not only inform the national debate on the issue but give us more clarity on the Government’s position. Just three firms—Moody’s, Standard & Poor’s, and Fitch—control some 95% of the credit rating market. They rate a range of debt instruments, and their ratings are embedded in investment plans, price triggers and the new capital requirements that are being implemented.
A downgrade by one of the big three agencies can make or break an entire economy, as recent events in the eurozone have shown. Just last month, Greece’s Prime Minister accused them of
“seeking to shape our destiny and determine the future of our children.”
Some people might say that that is unsurprising, given Greece’s position at the moment and the difficulties that it has faced, but Greece is not the only country that has complained. The US Assistant Treasury Secretary, Mary Miller, also weighed in last month following the downgrade by Standard & Poor’s of its outlook for US sovereign debt.
The credit rating agencies thus exercise huge power, despite the deep failings exposed during and after the financial crash. Investigations into the financial and economic crisis that have been conducted since then have shown that the agencies played a large part in causing and then exacerbating the financial crisis. The US Senate sub-committee on investigations last month reported that
“perhaps more than any other single event, the sudden mass downgrades of residential mortgage-backed securities and collateralized debt obligations were the trigger for the financial crisis.”
The report of the US Government’s financial crisis inquiry committee stated that
“the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown.”
Here, the Financial Services Authority in Lord Turner’s review of 2009 said much the same when it concluded that
“the credit ratings-based system played an important part in the origins of the crisis”.
These are not isolated claims. Studies published by the Financial Stability Board, the Bank of England and the European Commission’s de Larosière group reach a similar conclusion. The key points are these. In the years preceding the financial crisis, the credit rating agencies fuelled a dangerous liquidity boom by underestimating the credit default risks of sub-prime mortgages and complex structured products. When the bubble burst, sudden downgrades to the ratings embedded in the investment plans, mandates and capital reserve requirements automatically triggered a liquidity crisis which, in effect, made a bad situation much worse.
Multiple major studies have concluded that the big credit rating agencies were key contributors to a financial crash that cost this country well over £1 trillion. It is therefore incumbent on us to ensure that the flaws in the credit ratings business are dealt with as a matter of urgency. One such flaw, which must be addressed, is the fundamental conflict of interest that arises through the so-called issuer-pays model. Under this model the issuer of a security can shop around for a rating, creating a race to the bottom in the integrity of ratings. Competition for this lucrative business puts pressure on rating agency staff to downplay risk and to collude with issuers, particularly when rating elaborate packages of structured debt. The result, seen in the sudden mass downgrades at the start of the financial crisis, is a dangerous ratings inflation.
This process was a common observation of all the investigations that I mentioned. The de Larosière report, for example, said
“the conflicts of interest in CRAs made matters worse. The issuer-pays model, as it has developed, has had particularly damaging effects in the area of structured finance.”
The US Senate report concurred, saying:
“The conflict of interest inherent in an issuer-pay setup is clear: rating agencies are incentivized to offer the highest ratings, as opposed to offering the most accurate ratings, in order to attract business.”
These findings are supported by evidence from within the rating agencies themselves. In internal correspondence published by US congressional investigations, staff joked that a deal
“could be structured by cows and we would rate it”,
and discussed “adjusting”, “spinning” and “massaging” ratings methodologies in order to preserve market share. I have read many of the documents and e-mails myself.
A 2008 survey of finance professionals by the CFA—chartered financial analyst—Institute found that 11% of respondents had witnessed agencies altering ratings under pressure or influence from outside parties, so any serious regulation of the system needs to target the inherent conflict of interest in the issuer-pays system.
This brings me to the recent moves by the European Commission. Recent EU legislation has taken some important steps in the right direction. It makes it mandatory for all credit rating agencies operating in the EU to register with the new European Securities and Markets Authority, which will monitor their methods and potential conflicts of interest. It also gives that authority powers to investigate agencies and, in the event of infractions, suspend agencies’ licences. For me, the question is: does this do enough? I am not sure that it does, because it does not fundamentally challenge the issuer-pays model that has been shown to incentivise ratings inflation.
I mentioned earlier that the European Commission is due to publish a series of new proposals, and the options that it floated in its consultation in November, which finished in January, included the creation of a European credit rating agency, support for investor-owned agencies, an independent clearing board to allocate ratings business, a network of small and medium agencies, and an obligation on institutional investors to obtain their own rating before purchasing a product. The Commission has said that it is about to table new legislation in this area. Does that accord with the Treasury’s understanding? I would be grateful if the Minister could tell me when that legislation is expected to be published.
The UK’s tripartite authorities produced a response to the Commission’s options in January 2011, which largely rejected the suggestions that had been placed on the table, placing great confidence in the pre-existing EU regime. Their response also called for a “more narrowly focused” approach to further reform. Most contentiously, their response said that there was
“no hard evidence that conflicts of interest in the ‘issuer-pays’ model lead to ratings inflation”.
It has to be said that that is very difficult to reconcile with the findings of the various investigations into the role of the issuer-pays model in the causes of the financial crisis, which I have just mentioned. I ask those interested in this to read the reports that I have mentioned and decide whether the tripartite response is appropriate.
It is clear to me that tackling the conflicts of interest is central to reforming the system. I know that Treasury Ministers, perhaps the Chief Secretary to the Treasury excepted, have not historically been the biggest fans of the EU, but I urge the Government to be bold and adopt an open-minded approach to the Commission’s proposals when they come out.
As the Financial Times has pointed out, a publicly owned but independent credit rating agency
“would go some way to mitigate”
the risks of the issuer-pays system. A variation on that idea, a European credit rating foundation funded by the financial industry, recently received the backing of the European Parliament’s Economic and Monetary Affairs Committee, which has called on the Commission to conduct a
“detailed impact and viability assessment”.
In the US, the Senate has already approved an amendment establishing a clearing body for credit ratings.
Finally, I draw the attention of the House to the Bank of England’s financial stability paper of March 2011, which explored the feasibility of moving from an issuer-pays to an investor-pays model. That concluded that, despite the obstacles, the challenges to such a radical change
“may…not be insurmountable”.
Ministers, particularly from the Treasury, with whom I tend to have much discussion on the Treasury Committee, of which I am a member, enjoy reminding me that much of what I have just mentioned happened on the watch of the last Labour Government, and I have admitted and said many times in the House that we did not get the regulation of banks completely right on our watch, although I do not remember there being a huge clamour for a massive clampdown from the Opposition at the time. What people out in the real world want to know from the Minister this afternoon is not how awful he thinks my lot were, but what the Government will do.
The 1997 Asian crash and the 2001 Enron collapse both exposed flaws in the way the agencies operate, yet their power remained unchecked and their failings went unaddressed then. We are all well aware of what followed in 2008, and we cannot afford a repeat of that mistake in 2011 and beyond. The status quo is not an option. Ultimately, the pensions, savings, jobs, homes and livelihoods of our constituents depend on a credit rating system built on integrity and accuracy. We owe it to them to ensure that that is precisely what the system is.
The Exchequer Secretary to the Treasury (Mr David Gauke)
May I first congratulate the hon. Member for Streatham (Mr Umunna) on securing the debate in this, the anniversary week of his election to Parliament? I am pleased to have the opportunity to explain and discuss the Government’s policy on credit rating agencies—an issue that has generated a fair amount of interest, including outside the United Kingdom. It might be helpful if I start by outlining the Government’s current position and set out the steps that have been taken here and in Europe to address the shortcomings in this area, but before doing so I would like to make two observations.
First, the financial crisis has clearly highlighted the fact that reform of CRAs is essential, as the hon. Gentleman has argued, both in the way they are supervised and regulated and in the way they conduct themselves and explain their decisions to the market. That has already led to significant regulatory changes. CRAs must now register to be recognised in the EU and comply with rigorous procedures and controls in using their ratings. The European Commission has identified further measures to address over-reliance on CRA ratings and to improve competition and CRA accountability.
However, although reform is necessary, CRAs play an essential role in international markets. They provide the market with a neutral assessment of credit worthiness, a service that is valued by investors and crucial to the functioning of the international financial system. Reform should therefore aim to improve ratings quality and the way ratings information is used by investors, but it should not unduly undermine what is an essential service to international capital markets.
Recent market events have highlighted concerns about the role of CRAs, which is why we fully support international efforts to improve their regulation, to introduce greater transparency and competition and to reduce reliance on credit ratings, while acknowledging the complexity of the issues and the important role played by CRAs. The UK authorities have been, and will continue to be, active in both the EU and the G20 processes, including discussions on possible further measures that the Commission is considering in this area.
With regard to what has been achieved to date, the hon. Gentleman is obviously aware that the first European credit rating agency regulation—CRA1—came into force in December 2009. It ensures that CRAs demonstrate that they manage potential conflicts of interest adequately and improve processes relating to the issuing and monitoring of ratings. It requires more robust internal control functions, greater transparency of methodologies and processes, due diligence procedures and the disclosure of performance. It provides a minimum standard of CRAs' systems and controls, ensuring that ratings in the EU are of a high quality.
As the hon. Gentleman will also be aware, that regulation has recently been amended to place rating agencies under European supervision. To be recognised for regulatory purposes, CRAs must go through a registration process, ensuring that they meet the standards of the new CRA regulation. From June, the newly established European Securities and Markets Authority will have the power to ensure that CRAs comply with the regulation. Other jurisdictions, including the US, are adopting similar regimes to ensure a consistent international standard. Those requirements of the European legislation apply to all asset classes and are aimed, in particular, at addressing the problems associated with structured products, an area where, as demonstrated during the crisis, CRAs have evidently failed to provide reliable ratings in some countries. CRAs are also banned from providing advisory services and are required to demonstrate that they have sufficiently analysed the underlying data in producing ratings for structured products. Overall, we consider that those measures will help to improve the quality and reliability of ratings.
Mr Umunna
I have a further point and a question about what the Minister has just said. I should have mentioned that I have met the senior management of the rating agencies, both here and in New York, and it is fair to say that they do not necessarily welcome such massive reliance being placed on them; they did not necessarily ask for responsibility on such a scale. What have the Government been doing at G20 level about these issues?
On a subsidiary point, the Financial Stability Board will obviously take an interest in this issue. Will the Minister tell me, or write to me to let me know, the members of the Financial Stability Board’s council? I understand that Lord Turner is a member, but it is a bit of a shadowy organisation and there have been some questions, not necessarily about its integrity, but about who is involved, because obviously it has a role to play in this area, too.
Mr Gauke
I will certainly write to the hon. Gentleman in response to that query.
The UK Government have been very much engaged at G20 level and at a European level on the issue. In the context of European engagement, the next stage, which the hon. Gentleman mentioned in his speech, is the further work that remains to be done. The European Commission released a consultation document in November 2010 on additional measures that might be adopted on credit ratings. The main proposals related to reducing over-reliance on ratings and the additional measures related to increasing regulation on sovereign ratings; enhancing competition, such as establishing a public CRA, as the hon. Gentleman suggested; potentially increasing CRAs’ exposure to civil liability; and addressing the conflicts embedded in the “issuer pays” business model.
The Government, together with the Bank of England and the FSA, have published a joint response to that consultation, setting out in detail our view of the Commission’s proposals, and I am very happy to provide the hon. Gentleman with a copy. In summary, we support measures to reduce reliance on CRA ratings—a point that he made in his intervention when he said that many of the problems relate to the level of reliance on such ratings. We also support measures to increase transparency and disclosure, and to stimulate competition by lowering barriers to entry. We believe, however, that measures to impose civil liability or to establish a public CRA to issue ratings, particularly sovereign ratings, would be counter-productive and lead to unintended consequences.
The hon. Gentleman raised the issue of a public CRA, but the potential conflicts of interests in any such arrangement—particularly in the context of sovereign debt—would undermine credibility. Alternatively, although I am not sure whether the two arguments are mutually exclusive, there is the danger that a public body would crowd out other credit rating agencies and reduce competition, and neither of us would be keen to welcome that. To answer the hon. Gentleman’s question, however, the Commission will publish its legislative proposals in September.
The recent sovereign debt crises have raised concerns about the role of CRAs in sovereign borrowing. The Government believe that, above all, it is crucial to ensure the impartiality of all ratings, including sovereign ratings, and that means improving transparency by CRAs to facilitate investor understanding, rather than regulating sovereign ratings in a way that compromises their credibility.
Internationally, there has also been a welcome initiative with the Financial Stability Board, considering measures to reduce the over-reliance on CRA ratings. That initiative is investigating what alternatives to CRA ratings can be used in regulatory requirements, in investor mandates and contracts and in central bank operations. Ways to encourage due diligence by market participants themselves are also being explored.
As I said earlier, the Government fully recognise the concern about CRAs. The coalition Government saw from the financial crisis that greater regulation was required to ensure high-quality ratings and a more judgment-based use of ratings by the market. The current sovereign debt crisis further highlights the need for CRAs to communicate consistently and effectively their analysis to the market, and for investors to understand what ratings represent.
That is why the coalition Government are supporting a reform package in Europe which focuses on the root cause of the problems associated with CRAs, while being cognisant of and safeguarding the essential role that CRAs play in the international financial system. We believe that, in addition to the substantial progress already made by CRA1 and CRA2, further reducing mechanistic reliance on CRAs, increasing transparency and reducing barriers to entrant CRAs would be effective ways of achieving that goal.
Question put and agreed to.
Oral Answers to Questions
Chuka Umunna Excerpts(14 years, 9 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Mr Osborne
It is incredibly important to try to increase the number of women who set up their own businesses. The Government have undertaken a number of specific initiatives, driven from No. 10 Downing street, and I will ensure that my hon. Friend is closely involved in them.
Mr Chuka Umunna (Streatham) (Lab)
Yesterday, in a welcome move, the British banking industry abandoned its legal fight with the Financial Services Authority over the mis-selling of payment protection insurance. Does the Chancellor agree that this scandal, as a result of which millions of people in this country were fleeced by the banking sector on a large scale, was an absolute disgrace and that the banks involved should settle the claims that arise, immediately and without further delay?
Finance (No. 3) Bill
Chuka Umunna Excerpts(14 years, 9 months ago)
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Mr Chuka Umunna (Streatham) (Lab)
Has my hon. Friend noticed the projections for the increase in household debt under this Government? The Office for Budget Responsibility is projecting that it will increase by more than £500 billion this year and over the next five years, and it is also saying that the reason for this is not only inflation but the comprehensive spending review and the Budget.
The Chairman
Order. We must keep questions to the subject of the amendment that we are dealing with.