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Mr. Darling: I agree with the point that my hon. Friend makes. It is important that local bank managers understand the businesses and the affairs of the people with whom they deal. At times they can appear remote, which is something that I have raised with the banks on many occasions. I am not sure that we can go back to the age when there was a Captain Mainwaring behind every bank counter, but perhaps that is something that one or two banks might want to reflect on.
T7. [297079] Mr. Mark Harper (Forest of Dean) (Con): The Chancellor will be aware of the terms of the deal that has been hammered out between the Treasury and Lloyds Banking Group, which fortunately will safeguard for the moment the future of the Cheltenham & Gloucester branch in my constituency, and the 1,200 jobs in Gloucester. I understand that the terms of that deal have to be finalised by the college of Commissioners in the European Union. Can the Chancellor confirm that that will be done by the end of this year?
Mr. Darling: I certainly hope so, because the present college of Commissioners comes to the end of its term of office this year. We reached an agreement with Commissioner Neelie Kroes at the weekend, and she speaks for the Commission. As I shall explain when I get to the statement, the detail needs to be sorted out, but we have an agreement that is in the best interests of the whole banking sector. I shall return to that shortly.
Mr. Ian Davidson (Glasgow, South-West) (Lab/Co-op): Does the Chancellor agree that the Government were right to reject any advice to join the euro? Given that, does he agree that this is not the time for those who promised a referendum on the Lisbon treaty to go floppy?
Mr. Darling: Our position on the euro has not changed, just as I know my hon. Friend's position on the euro has not changed. But he is right. The Opposition ought to reflect on the fact that they are becoming more and more out of touch with what is happening in relation to Europe. As for their central promise to the electorate on a referendum, that appears to have been junked.
T10. [297082] Richard Ottaway (Croydon, South) (Con): Is the Chancellor aware of the remarks of Lord Myners last night, who said that 70 per cent. of all share transactions are computer-generated in trades lasting only microseconds? Does he have any plans to review the way shares are bought and sold?
Mr. Darling: If that needs to be looked at, we will do that. Before I come to any conclusion, I should like to see what the noble Lord actually said.
Mr. Gordon Prentice (Pendle) (Lab): Should all Members of Parliament say whether they are resident in the United Kingdom for tax purposes?
Mr. Darling: I should have thought that that would be a precondition for getting elected.
Justine Greening (Putney) (Con): Last week the Financial Services Authority fined GMAC-RFC for its unfair treatment of 46,000 mortgage customers. The fine was £61 per customer. Is that enough?
Mr. Darling: There may well be a case for reviewing the fines available to the FSA. I am not familiar with the particular case. I will arrange for Lord Myners to write or I will write to the hon. Lady myself, once I have had an opportunity to study what she has said.
Fiona Mactaggart (Slough) (Lab): Today's changes in the housing benefit and council tax benefit rules will put into the hands of families with children whose child benefit is being disregarded about £20 a week per family. What else can the Department do to help to tackle child poverty in advance of the pre-Budget report?
Mr. Byrne: As I said in response to an earlier question, the key route out of poverty remains connecting people with the opportunity to work. That is why, as my hon. Friend knows, we have been so determined to take steps to help make sure that people are kept close to the labour market. That is why we have put more than £1 billion into the working neighbourhoods fund, in order to help provide jobs where unemployment is high. It is also why the future jobs fund is so important. It creates more jobs, again targeted on those areas where unemployment is high. That, on top of our determination to see the tax credit system stay in place and on top of changes to the social fund, is making a real difference to those who are finding it toughest in this recession.
Sir Nicholas Winterton (Macclesfield) (Con): Are the Government concerned about the miserable return that savers, many of them elderly and relying on their savings, get for the investments that they have in banks and building societies, which scarcely covers inflation and the tax that they may have to pay?
The Economic Secretary to the Treasury (Ian Pearson): As the hon. Gentleman will be aware, despite the fact that we have historically low interest rates, rates in the market are in some cases significantly in excess of that. He will also be aware, particularly with regard to pensioners, of the changes that we announced to the ISA regime, which mean that people aged 50 and over can get tax-free savings on their investments. I hope he would welcome that.
Gordon Banks (Ochil and South Perthshire) (Lab): Predictions today from the EU suggest that the UK economy will grow at a greater rate than many European economies. Does my right hon. Friend believe that that is an acknowledgement that the policies that the Government have followed during the recession and beyond it are and will be the right ones?
Mr. Darling: I will set out in the pre-Budget report my assessment of where we are in relation to future growth. But, as I said earlier, there is clear evidence now that, right across the world, Europe included, supporting our economies was the right thing to do-particularly to try to keep unemployment as low as possible.
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD):
As the Chancellor says, it is vital to support our economy at this time. He will know just how difficult an environment it is west of Shetland when it comes to encouraging investment in oil and gas. At this crucial time for our national energy resources, will he look
further at extending the field allowance to try to encourage the investment decisions that, crucially, need to be made soon west of Shetland?
Mr. Darling: I am very much aware of that issue, and as the hon. Gentleman may know I met representatives of the oil industry in Aberdeen about three weeks ago, when we discussed the prospects not just west of Shetland but in the North sea generally. I am anxious to ensure that we do everything we can to encourage the extraction of oil and gas, which is important to us in terms of security of supply. I am aware of the particular problems in relation to the conditions west of Shetland, and we shall continue to see what we can do to try to resolve that problem.
Mr. John Redwood (Wokingham) (Con): Is there any prudential limit to how much the Government can and should borrow?
Mr. Darling:
My answer is the same as when the right hon. Gentleman asked the question last time. It is right that borrowing should rise as a correct measure to deal with the current downturn, but of course as the recovery becomes established we need to take steps to ensure that
we can reduce our borrowing. At the Budget, I set out proposals to cut our deficit by half over a four-year period, but, to have cut borrowing now, and public expenditure dramatically now, would have tipped us into a deeper and more prolonged recession. That would have been more expensive and damaging, and it would have taken us longer to get out of the problem.
Greg Mulholland (Leeds, North-West) (LD): I do not know how many pubs the Chancellor is now barred from as a result of his ill-judged and damaging rise in beer duty, but will he consider the effect of the VAT increase when it returns to 17.5 per cent. in January? In the light of that, will he reconsider the beer duty rises from next April? CAMRA reckons that, combined, they will put another 5p on the price of pint of beer, damaging community pubs.
Mr. Timms: We are concerned about what happens on the night of 31 December. I said in May that businesses that are open across midnight, such as pubs and clubs, will be able to continue charging VAT at the lower rate. I can confirm today that they will be able to do so until 6 am on the morning of 1 January 2010. That will be very welcome news to institutions such as those about which the hon. Gentleman is concerned.
Banking Reform
3.32 pm
The Chancellor of the Exchequer (Mr. Alistair Darling): With permission, Mr Speaker, I should like to make a statement on the banks in which the Government have shareholdings. This morning the Treasury, Lloyds Banking Group and the Royal Bank of Scotland issued market notices in the usual way.
In October last year, I set out a range of measures designed to prevent the collapse of the banking sector. Those measures are working, and countries across the world took very similar steps over the following weeks. But the uncertainty in global financial markets had a very serious impact on confidence, resulting in a world recession. That in turn worsened the outlook for our economy, leading to higher losses for UK banks.
It was clear that further action was needed to strengthen the banks, and in January we announced an asset protection scheme to prevent a further shock to confidence, and to ensure that lending could continue. We continued to support the economy through fiscal and monetary policy, and we co-ordinated a global policy response at the G20 London summit in April. Those measures are working, too: fears of a global depression have receded and market confidence has started to return. As a result, we are now able to achieve our objectives on financial stability and banking reform at a lower overall cost to the taxpayer.
The asset protection scheme that I announced in January has played a vital role in supporting confidence in financial markets. Let me remind the House of the key features that I set out back then. The scheme provided insurance against losses arising on a pool of bank assets, and in return the banks paid a fee in the form of shares. The effect of the scheme is to strengthen the capital position of any bank taking part in it, but that of course carries a risk of exposure for the taxpayer. The scheme was open to all major UK banks, but in the event, improved market conditions meant that only two banks decided to participate.
Since then, further improvement in market conditions means that Lloyds has been able to develop a better plan. It now does not need to participate in the scheme, which will significantly reduce the cost and exposure for the taxpayer.
I will now explain in detail our proposals to restructure the banks better and also to make them stronger. Turning first to Lloyds, following the recapitalisation last October, the Government owned 43 per cent. of the bank. In March we reached an agreement in principle with Lloyds on its participation in the asset protection scheme. This would, through the fee, have increased its capital by over £15 billion, increasing the cost to Government, with our stake in Lloyds rising to 62 per cent. We agreed then in principle to insure £260 billion of assets, giving us a very large contingent liability. But now that market conditions have improved, we have agreed a better proposal for Lloyds, to bring in substantial private capital and reduce taxpayer exposure.
So Lloyds has announced today that it will raise £21 billion in the open market. This capital raising is fully underwritten by commercial banks. As a shareholder, the Government have the option to take up part of the newly issued equity. If we did not do so, the value of the
existing taxpayer shareholding would be diminished. To protect the value of our shares, we have therefore decided to take up our share of this new capital, investing £5.7 billion net of an underwriting fee. By raising capital in the markets, Lloyds will begin its transition from state support to private finance, and no longer need the insurance of the asset protection scheme. Because Lloyds has benefited from the existence of that scheme since March, it has agreed to pay the Treasury a fee of £2.5 billion and to reimburse our costs. Today's decisions make Lloyds a stronger bank and provide better value for the taxpayer, ending the exposure of the taxpayer through the insurance scheme, with a substantial fee in return for the insurance provided to date, and a substantial capital contribution from the private sector, while maintaining our shareholding at 43 per cent.
I now turn to the Royal Bank of Scotland. It is a bigger bank than Lloyds, with a more complex balance sheet and a greater exposure to losses, mainly due to its purchase of the Dutch investment bank ABN Amro. Under February's agreement in principle, the Government said that they would insure £325 billion of assets through the asset protection scheme, as well as providing an additional capital injection of £13 billion, a second tranche of capital amounting to £6 billion, and a further £6.5 billion-worth of capital support through additional shares issued to pay the fee. Together, this would have increased RBS's capital by £25.5 billion, taking the Government stake to 84 per cent.
Before we could reach a binding agreement, we needed to carry out due diligence on the assets and to ensure that the final terms were consistent with the then emerging European Commission guidelines. The restructuring guidelines were published in July, following extensive work with the UK and other countries. We have also now completed, with the Financial Services Authority, due diligence work on the RBS balance sheet. As a result, we are making a number of changes to the terms of the scheme, which will improve incentives and share risks better with the private sector.
Although market conditions have improved, RBS still needs to do more to be able to stand on its own feet. So we will continue with our plan to invest £25.5 billion of capital in RBS-but there are three key changes. First, there will be a £43 billion reduction in the pool of assets covered by the insurance scheme, which reduces the Government's contingent liability. Secondly, the first loss on these assets-payable by RBS-will be increased from £42 billion to £60 billion, which further protects the taxpayer. Thirdly, in return, RBS will pay an annual fee of £700 million for each of the next three years, and £500 million per year thereafter, which gives it an incentive to leave the scheme as conditions improve. When it does leave the asset protection scheme, it must have paid a minimum fee of £2.5 billion, or 10 per cent. of the actual capital relief received.
To reflect the increase in the first loss, amounting to £18 billion more payable by RBS, we will no longer require RBS to give up its tax losses, which it estimates at between £9 billion and £11 billion. In the unlikely event of a severe downturn, it may be necessary to provide up to £8 billion contingent capital, but this will be triggered only if there is severe stress, taking its core capital ratio down to 5 per cent. Again, in return for that, RBS will pay an annual fee of £320 million for as long as the contingent capital is available.
In the case of RBS, the overall level of Government support will remain broadly the same as I announced in February, but this revised deal is better structured, with better risk sharing and greater incentives to exit. There is a higher first loss payable by RBS-£60 billion, up from £42 billion. There are better incentives, with a fee of £700 million for three years and £500 million thereafter, and fewer assets to be insured-£282 billion instead of £325 billion. I will provide the House with full details of the operation of the scheme when the final agreement is signed and approved by the Commission.
As part of these restructured deals, we are also pushing forward reform at the banks, with improved lending and remuneration policies. Both Lloyds and RBS will be in a stronger position to continue lending. Lloyds will increase lending capacity this year and next, with an additional £11 billion for businesses and £3 billion for home buyers in each year. RBS will continue to meet its lending commitments of £25 billion this year and next, as I indicated earlier this year. Both will publish customer charters on good practice, particularly on small and medium-sized enterprise lending, increasing transparency and improving loan conditions for business customers.
On pay, all major retail and investment banks in the UK need to meet the G20 principles and Financial Services Authority rules, so that bonuses are transparent, variable and with no multi-year guarantees. Between 40 and 60 per cent. must be deferred over a number of years, not paid out immediately, and they must be subject to clawback to ensure that pay is aligned with long-term performance. However, we have agreed with RBS and Lloyds that they will go further than that. For this year, there will be no discretionary cash bonuses, except for staff earning less than £39,000 a year. The executive boards of both banks will have their bonuses deferred in full until 2012. That goes much further than the G20 agreement, and further than any other banks in the world.
I will continue to strengthen the supervisory regime, building on the proposals that I set out in July, by adopting the recommendations of the Walker review on corporate governance for banks, reforming the mortgage markets and legislating to make banks put in place "living wills", as well as providing enhanced powers and objectives for the FSA, to strengthen regulation further.
I believe that those steps are better for the taxpayer, better for the banks and better for the economy. As a result, the likely cost to the taxpayer and the risks faced by the public finances have reduced markedly. The total assets protected have been reduced by more than £300 billion, there is more private sector investment and the fees received are better structured. I expect, subject to wider factors, to revise downwards the provision for financial sector interventions in the pre-Budget report.
As I said in my statement in July, our second objective is to encourage greater banking competition in the high street and for small and medium-sized businesses. Since the financial turmoil started in 2007, the banking industry has become more concentrated in most advanced economies. Over the course of this year, we have been working with the Commission to agree on how to restructure the banks while meeting state aid rules.
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