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‘(1) This section applies in respect of any institution (a “rescued bank”) taking part in the bank recapitalistion fund (“the fund”) announced by the Chancellor of the Exchequer on 8th October 2008.
(2) The Treasury must make regulations about the remuneration of senior staff of rescued banks.
(3) Regulations under subsection (2) must provide that—
(a) remuneration arrangements are such that senior staff are given no financial incentive to take unnecessary and excessive risks that threaten the value of the rescued bank;
(b) a rescued bank may recover from a senior member of staff any bonus or similar payment which is based on statements which are later shown to be materially inaccurate;
(c) a rescued bank may make no golden parachute payment to its senior staff.
(4) In this section “senior staff” and “golden parachute” have such meaning as shall be prescribed in regulations under subsection (2).
(5) Regulations under subsection (2) shall cease to apply to a rescued bank if, and only if, it ceases to take part in the fund.
(6) Regulations under this section—
(a) shall be made by statutory instrument, and
(b) shall be subject to annulment in pursuance of a resolution of either House of Parliament.’.— [Harry Cohen.]
Brought up, and read the First time.
Harry Cohen (Leyton and Wanstead) (Lab): I beg to move, That the clause be read a Second time.
Mr. Deputy Speaker (Sir Alan Haselhurst): With this it will be convenient to discuss new clause 2— Reversion of rescued former building societies to mutual status—
‘(1) This section applies in respect of any company to which subsections (2) and (3) apply (and which is referred to in this section as a “rescued former building society”).
(2) This subsection applies if—
(a) the assets and liabilities of a building society (within the meaning of section 119 of the Building Societies Act 1986 (“the 1986 Act”)) have been transferred to the company, and
(b) the company continues to trade under the name of that society (or under a similar name).
(3) This subsection applies if—
(a) an order under section 3 (transfer of securities issued by an authorised UK deposit-taker) or 6 (transfer of property, rights and liabilities of an authorised UK deposit-taker) of the Banking (Special Provisions) Act 2008 has been made in relation to the company, or
(b) the company has taken part in the bank recapitalisation fund announced by the Chancellor of the Exchequer on 8th October 2008, or
(c) the company is subject to any of the stabilisation options provided for in sections 10 to 12 of this Act.
(4) The Treasury must by regulations make provision enabling rescued former building societies to reconstitute themselves as building societies within the meaning of the 1986 Act.
(5) Regulations under subsection (4) may—
(a) disapply or modify the effect of a provision of an enactment, or
(b) disapply or modify the effect of a rule of law not set out in legislation.
(6) Regulations under subsection (4)—
(a) shall be made by statutory instrument, and
(b) shall be subject to annulment in pursuance of a resolution of either House of Parliament.’.
Harry Cohen: I thank Mr. Speaker for selecting this new clause.
A lot has happened in a short period in relation to the banks and the economy, and the situation has moved on rapidly. However, I do not want to fail to deal with the issue of excessive bonuses, which has rightly enraged the public—our constituents. The new clause addresses that. It refers to the Treasury making
“regulations on the remuneration of senior staff of rescued banks”
“senior staff are given no financial incentive to take unnecessary and excessive risks that threaten the value of the rescued bank”,
“a rescued bank may recover from a senior member of staff any bonus or similar payment which is based on statements which are later shown to be materially inaccurate”
“a rescued bank may make no golden parachute payment to its senior staff.”
That wording is not the whim of a left-wing Labour Back Bencher, nor is it anti-banker vindictiveness, although I feel a bit of that, as do my constituents. Its provisions were written into the $700 billion Paulson bail-out package by the US Congress, and this wording is the closest I can get to that. I thank the Library and the Public Bill Office staff for drafting it in that way. Congress has a Republican majority, but both Republicans and Democrats required those provisions to be included in any bail-out proposal.
The truth is that the level of bonuses has been an absolute scandal. It is totally unacceptable that there should be any bonuses if it is taxpayers’ money that saved the institution from failure. It is unbelievable that directors are paid for failure and for jeopardising the public interest, at a time when they are costing taxpayers a great deal of money, when they are jeopardising their customers’ livelihoods and those of countless businesses and individuals, and when they have got into a situation where the banks own a huge amount of toxic debt and effectively seize up. In those circumstances, bonuses should not be paid—in fact, they should be clawed back from the directors who got the bank into that situation. The new clause would require that no bonuses should be paid for risky activities and that we get some repayment where they have been paid on a false or inaccurate basis. That is what the US Congress said; that is what we should say as well.
The new clause applies to the rescued banks package, and I wanted to tie it to the US Congress provisions, but it should apply not only to the rescued banks but to all the banks. They are all part of the bail-out process. Even if they are not benefiting from the direct recapitalisation in terms of preference shares, other parts of the package referred to £200 billion being available in short-term loans from the Bank of England—that went up from £100 billion—and to £250 billion in loan guarantees being made available at commercial rates to encourage banks to lend to each other. Those are huge sums of public money that have gone to banks other than the rescued banks that we have taken preferential shares in, and they should also be subject to restraint and control over bonuses.
Mr. Peter Bone (Wellingborough) (Con): I can see the logic of the hon. Gentleman’s opening arguments, because it is normal, when one invests a lot of money in an organisation, to put terms and conditions on to it. I am rather surprised that that has not happened with the £37 billion that we pumped into three banks. I agree with him in that regard. However, he is stretching it a little to include other banks where direct investment has not occurred.
Harry Cohen: That is not in my amendment, because my amendment relates to rescued banks. However, we have still given money and support to those banks because they would have failed if there had not been some Government support, in other ways, through the Bank of England. I think that the measure should apply to other speculative financial vehicles such as hedge funds, but that is not in my amendment. It is quite wrong that their directors take vast sums in remuneration and bonuses, again for reckless policies, and walk away when they go broke. The FSA has a regulatory role to play, so what is it doing about that?
6.15 pm
I have looked at the past few months’ issues of the Labour Research Department’s Fact Service for examples of City bankers’ bonuses. If I had gone back a year, there would have been scores of them, but even in the past few months there have been some. A report on “City fat cats” in the 14 August issue said:
“The credit crunch does not seem to have affected the big hitters in the City all that much. The table across shows the
highest paid directors at 29 companies, who were each on over £1 million a year. The total pay bill for the 29 comes to a staggering £195.8 million—an average pay packet of £6.8 million.”
According to the table, one director at Barclays got £18,100,000, and someone at Barclays Global Investors got £1,102,000. A director at Goldman Sachs got £11,738,000, and someone at Citigroup, which has just been rescued by the US, got £2,426,000. At the top of the table, a director at Sloane Robinson LLP got a massive £51,411,000, and someone at Odey Asset Management got £27,937,000. One more that I have marked up is the £2,091,000 that went to a director at Financial Risk Management, which took great financial risks—we all know that—but it lost, so I do not think that sum is appropriate.
An article entitled, “Directors’ pay ratchets ever upwards”, in the 18 September issue of Fact Service said:
“Directors who served on the boards of the top-ranked FTSE 100 companies earned a combined package of £979.2 million last year. Their total salary packages grew by 5 per cent. compared with the previous year, according to the latest survey on executive pay by the Guardian newspaper and Reward Technology Forum. Four of the top 10 highest earners work in the banking or the financial services sector”.
“Barclays president Bob Diamond made a little over £18 million, though he collected another £14 million from a three-year performance plan shortly after the financial year end.”
Ms Diane Abbott (Hackney, North and Stoke Newington) (Lab): Even if hon. Members do not agree that bonuses are wrong in principle, they must surely agree that they are wrong in practice, because those bonuses were tied to the sale of products that we now find are worthless. Does my hon. Friend agree that unless something is done about the bonus regime in the City, people will continue to follow risky, short-term strategies to secure high bonuses at the expense of the long-term health of companies and the economy?
Harry Cohen: That is absolutely right. I agree that the bonus culture must be tackled effectively now. There is even a case for back-dating that approach in relation to directors who got us into this mess and made those worthless “investments”.
An article entitled, “Finance directors on over £1 million a year”, in the 10 October issue of Fact Service, reports:
“Some 49 out of the 92 finance directors of the FTSE 100 companies have now joined the millionaires’ club, up from 41 out of 96 last year...Some of the largest bonuses this year have been paid to financial directors in the banking and financial services sector.”
“there has of course been a meltdown with the government coming to the rescue of the finance sector. The rescue plan means an end to big bonuses based on easily met performance targets”.
But does it mean an end? That is the point of my amendment; I am saying that it should. The article goes on to say that
“to take part in the rescue plan, banks will have to sign an agreement on executive pay.”
Are we going to see those agreements? That is another question that needs to be asked.
On 6 November, the Fact Service reported, under the heading “City fat cats”:
“Some people in the City don’t have to worry about the London Living wage. The unnamed highest paid director at finance group Jupiter Asset Management had a good 2007 picking up £13.56 million in pay and bonuses, according to accounts filed at the company watchdog Companies House.”
That is wrong. Such payments are certainly wrong in this climate, and they must be brought to a halt.
That is Congress’s view, and it is my view. If the Minister does not want this provision, because he rejects the wording or wants some other formula involving the FSA or the need for agreements on executive pay and dividends, that will leave questions unanswered. How would such a scheme be implemented by the FSA? Would there be a policy of no bonuses? If bonuses are to be paid, on what basis would they be paid? Will there be any limits placed on them? What controls will be placed on them? What about those people who have already been paid on a false prospectus? Will there be any claw-back by the FSA in regard to the failed company directors who have got us into this mess? Will the provision apply to all banks, or just to those that have been rescued? Will it apply to speculative financial vehicles such as hedge funds? How will the FSA report? Will the agreements be published and placed in the public domain? I think that they should be.
Our constituents demand an absolute end to the bonus culture in the City. It has served this country badly and got us into a mess. It has put our people’s livelihoods and our country’s economy at great risk. The people who have taken their rewards should now pay the price.
Mr. Bone: It is a great pleasure to follow the hon. Member for Leyton and Wanstead (Harry Cohen). He made his case with typical honesty and straightforwardness and I have a lot of sympathy with his remarks.
I was in business before I came into the House and, at one time, we were expanding the company with an investment of £100,000 from the Treasury into preference shares. Under that agreement, there were strict restrictions on our emoluments while those preference shares were being held. Until we had repaid them, we had to comply with those conditions. That seemed absolutely fair to me. We were receiving an investment from the Government, and it would have been unwise and unfair for the directors of the company to settle their own salaries.
When looking at new clause 1, we need briefly to refer back to what has happened with the recapitalisation of the three banks, in which £37 billion of taxpayers’ money is being invested this month and next month. I have one of the offer documents here; this one happens to be the one that pertains to HBOS. It is quite extraordinary that it contains very limited discussion on bonuses. It states:
“For the company, no bonuses for 2008. If part of contractual arrangement, directors relinquish these voluntarily”.
That is the condition that applies to HBOS. The document goes on:
“For Lloyds TSB, no cash bonuses for 2008”.
That sounds quite good, but it goes on to say:
“If part of contractual arrangement, board directors relinquish these voluntarily. Instead, Lloyds TSB’s directors may receive their 2008 bonus entitlement in stock, subject to a restriction on sale until December 2009”.
So there is effectively no restriction whatever on the bonuses.
If this £37 billion of investment were such a superb deal for the taxpayer, I might have had some sympathy with the lack of a requirement to control directors’ salaries and emoluments. However, there will be no return to the taxpayer on that £37 billion for a minimum of five years. The Minister might want to pop up and say that the £9 billion of preference shares will mean a 12 per cent. return, but that is not true. They are non-cumulative preference shares, so that the directors of the company can waive that dividend every year until the preference shares are repaid. They cannot be repaid for five years, and I would argue that the directors have a duty to waive that dividend, because they have to look after the interests of the whole company.
Taxpayers have therefore invested £37 billion in banks with no return for five years, and we have not bothered to say anything about the bonuses or salaries of the directors. We cannot do anything about that in this Bill, but it is an issue that we should address. I sat in Committee for many an hour and we briefly discussed this issue, but it did not get the airing that it deserved. We hope that the special resolution mechanism will never be needed, but if it is, we have been lax in failing to control the salaries of directors who, after all, put the banks in that situation. I have much sympathy with the hon. Member for Leyton and Wanstead and what he is trying to achieve. As he rightly points out, we are copying what has happened in the US.
Unfortunately, the Government have spent £37 billion of our money with no real restrictions on the bonuses of directors. I notice that the Minister has not jumped up to contradict me.
Ian Pearson: I shall address the hon. Gentleman’s points in a few moments.
Mr. Bone: I am grateful for that assurance, but if he made his points now, I could contradict what he said. I urge the House to take this matter seriously. People are struggling. Constituents of mine are trying to secure an extension to their business loan of £10,000. They are being asked to pay a charge for that, and being charged higher interest. That is unacceptable when every person in this country, man, woman and child, has paid more than £600 each to the banks to recapitalise them. Such loans should be made easier. The businesses should not have to go through a lot of kerfuffle. I have been in business and I know what it is like to have to go and see the bank manager — [ Interruption. ] The Minister asks what this has to do with the new clause, but that is the problem with this Government. They do not recognise that these directors, who are on huge salaries, are not getting the money to the small businesses and, as a result, they are closing up and down the country every day. This is an opportunity for this House to say what we feel about directors’ emoluments, and I think that the hon. Member for Leyton and Wanstead made a very good case.
David Taylor (North-West Leicestershire) (Lab/Co-op): I speak in support of new clause 2, which I tabled, on the reversion of rescued former building societies to mutual status. It is supported by my hon. Friends the Members for West Bromwich, West (Mr. Bailey) and for Stroud (Mr. Drew).
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