Banking Standards

Submission from TUC (S046)

Summary

 

· The TUC very much welcomes this opportunity to submit evidence to the Parliamentary Commission on Banking Standards.

 

· The TUC believes that a stable and profitable banking sector is an essential part of a productive and healthy UK economy.

 

· High professional standards are an important component of a successful banking sector, but achieving them will be contingent upon significant change in the structures, governance and regulation of the banking industry, not simply upon further accreditation and training.

 

· While the TUC welcomes the Commission’s investigations, we also believe that the problems with the UK's banking sector go beyond the areas the Commission is focusing on.

 

· We would like to see further investigation into how to rebalance the UK economy away from an overreliance upon the financial services sector, and how to ensure that the banking sector works to better support the real economy. This would include consideration of the need for the introduction of a British Investment Bank.

 

· The consequences of the recent financial crisis have been severe for households and businesses across the UK. We continue to face the worst economic crisis since the 1930s, our economy remains 4% below its pre-crisis peak and while 2.5 million people remain unemployed a further two million are either in involuntary part-time or temporary work. Our over reliance upon finance placed us at greater risk during the global recession, heightened regional inequalities and has squeezed growth in other sectors.

 

· Public trust in banking is low, as is public confidence in the ability of Government to secure improvements in banking culture and practice. This risks exacerbating a lack of faith in trust around wider banking products such as pensions, which could have serious long-term impacts for the UK's wider social and economic health if not addressed.

 

· Problems in banking culture can be traced back to wider problems in the UK's system of corporate governance. The TUC would like to see amendments to the Companies Act to make directors' primary duty the promotion of the long-term success of the company, rather than the prioritisation of shareholders' interests as at present.

 

· The TUC further believes that the Commission should consider the benefits that a two-tier board approach, as opposed to a unitary board system, could offer. A key attribute of two-tier boards is that employees and in some cases shareholders generally have either direct representation or nomination rights on boards. The interests of employees are well-correlated with the long-term interests of the bank, and the TUC believes that having employees represented on UK banks’ boards could help boards to prioritise the long-term interests of the bank in decision making, rather than being distracted by short-term financial engineering, as occurred in the run-up to the financial crisis.

 

· Corporate governance in the UK places shareholders in an overly privileged position. Particularly given the growing prevalence of short-term shareholding, and the growth in the proportions of shares owned by alternative asset managers, it is far from clear why companies should be required to prioritise the promotion of shareholder over other interests, or why shareholders should have the ultimate say over how companies should be run. The TUC believes that governance rights and responsibilities should be dependent upon holding shares in a company for a minimum of two years.

 

· Decision making in financial institutions could also be improved by better ensuring that those responsible for both executive and non-executive board functions have sufficient time to carry out their responsibilities effectively, and ensuring that there is greater diversity on boards. A first step towards this would be for all Non-Executive Director (NED) positions to be publicly advertised.

 

· The TUC believes that quarterly reporting is a symptom of short-termism, as well as exacerbating it. We believe that further consideration should therefore be given to the introduction of requirements for company reporting on long-term performance as well as to the removal of quarterly reporting requirements.

 

· It is vital that excessive levels of remuneration within the banking industry are addressed. Extremely high rewards continue to be paid to directors and senior executives, rewarding failures and incentivising the types of risk which led to the financial crisis. The TUC does not support the emphasis upon performance-related remuneration and bonuses. There is convincing evidence that performance-related pay does not achieve its stated aim, and we believe there should be a greater focus on annual salary payments. Where performance related deals continue to exist, we are supportive of calls that bonuses should be subject to 'claw-back' in the event of trades or deals turning bad.

 

· We would also like to see shareholders taking a much tougher approach to remuneration than they do at present. But on its own this is unlikely to be sufficient to bring about significant change. We therefore believe the banking workforce should be represented on remuneration committees as a means to bring a fresh perspective to discussions on pay setting and to curb directors' pay.

 

· We also support wider measures to curb remuneration, including ensuring that remuneration consultants only report to the remuneration committee (and not the executive directors) and requiring mandatory disclosure of the number of people within each firm whose total remuneration exceeds £1 million (preferably in pay bands).

 

· Further, we recommend that pay and bonuses above £250,000 per annum (around ten times the level of average pay in the UK) should be considered profit and therefore paid out from profits available for distribution rather than being accounted for as a general expense. This would mean that the available pool for such high rewards would be subject to corporation tax as part of the banks’ normal taxable profits, in recognition of the risk that short term risk taking and rewards have proven to have to wider economy.

 

· Although the problems in the finance sector were caused by those at the top of the industry, it is frontline banking staff who are paying the price through redundancies, restructuring and pay cuts. These staff are also affected by a sales driven culture which incentivises retail banking staff to sell unnecessary and risky products to SMEs and households, and which needs reform.

 

· The TUC has long held concerns about the impact of the tax deductibility of interest payments on corporate debt with evidence suggesting that this encourages highly-leveraged private equity buyouts by providing a very cheap means to borrow large sums of money. Amending the tax rules so that tax-deductibility on debt would not apply to debt used to buy up other companies is an approach that merits further investigation. We further believe that the Government should review the current arrangements for tax relief for work-related training, and would support greater priority being given to accredited training.

 

· The TUC welcomes the introduction of the Government’s new regulatory regime for the banking sector. We agree that the previous system of financial regulation had key weaknesses, and welcome the decision to provide the Bank of England with the responsibility, authority and tools to monitor the financial system as a whole. Matters concerning systemic risk should be monitored by regulators rather than shareholders.

 

· There is evidence that the lack of personal liability has encouraged excessive risk taking at financial institutions in the past. The TUC recommends that the Commission look into ways of either changing the ownership and control models of bank ownership or piercing the veil of shareholders of banks (increasing their personal liabilities for the banks’ practices) that benefit from the implicit guarantee of the taxpayer so that shareholders are required to bear a fair proportion of this risk.

 

· The TUC supports in principle the Government’s proposal to introduce a "rebuttable presumption" that the director of a failed bank is not suitable to be approved by the regulator to hold a position as a senior executive in a bank and also to introduce criminal sanctions for serious misconduct in the management of a bank. The TUC also endorses in principle the European Commission’s proposal to introduction a Regulation and a Directive with the cumulative effect of making manipulation of benchmarks, of the kind features in the recent LIBOR scandal, a criminal offence.

 

· Overall, wider corporate governance reform, legislative and regulatory reform are all required. Only a complete package of policy aimed at creating a banking system that takes a more long-term approach to servicing the real economy will have a chance of success.

 

· Only time will tell whether the new Financial Policy Committee (FPC), and the two new regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) will be effective, and it will be vital that in their early days of operation they are given both time to establish themselves and that on an ongoing basis all necessary resources are made available to them.

 

· The TUC has welcomed the ICB’s report as a good start to the process of addressing the fundamental problems facing the UK banking sector and believes it should be implemented in full, as quickly as possible. But we also believe that the mandate given to the ICB was limited and specific. the ICB did not examine four key issues facing the UK economy: the low level of fixed investment in the UK economy; limited access to credit for small and medium sized enterprises; ongoing sectoral imbalances with the UK economy; and unmet need for finance to enable green growth. Determining how banking reform can enable these wider challenges to be addressed will be key to our future economic success.

 

Introduction

1.1 The TUC very much welcomes this opportunity to submit evidence to the Parliamentary Commission on Banking Standards (the "Commission"). The TUC represents over six million workers in 54 unions, including approximately 200,000 workers in the banking sector. Our members are also consumers of financial services and, along with the entire UK population, are still living with the consequences of the 2007 credit crunch and ensuing financial crisis of 2008, created in part by the poor professional standards and culture of the UK banking sector.

1.2 The TUC believes that a stable and profitable UK banking sector is an essential part of a productive and healthy UK economy. To achieve this, the UK banking sector needs to foster a culture where decision-making is focused on strategies for long-term institutional success; where long-term and trusting relationships are developed with both the banking workforce and with wider stakeholders; where employees are encouraged to contribute ideas and to report problems without fear of reprisal; and where high standards of ethical behaviour are at the sector’s heart.

1.3 Professional standards are an important component of a desirable corporate culture within all businesses, but are particularly important in the banking sector because of the imbalance in information and knowledge between customers (from consumers to investment grade borrowers) and those within the industry. The complexity of financial services adds further weight to the case for high professional standards.

1.4 But the TUC does not feel that "professional standards" should be interpreted so narrowly as to refer only to the entry route and continuing professional development of those within the banking industry. It is also vital to look at the wider picture and examine the structures, governance and regulation of the industry, and the extent to which these have permitted lax professional standards to take hold. The TUC will address some of these concerns throughout our response.

1.5 More broadly, while the TUC welcomes the establishment of the Commission we are concerned that the focus of its enquiry is limited to the specific issue of the UK banking sector’s internal professional standards and culture, and to the corporate governance and regulatory levels which could facilitate change, rather than to the wider reforms which may be necessary to ensure the banking sector plays a productive role in the wider economy. In our view the scale of financial sector reform that is necessary is far larger than the terms of the Commission’s remit accept and a wider investigation is therefore necessary to examine and recommend improvements to the economic and social utility of the UK banking sector.

1.6 Specific attention should be paid to the fact that the sector constitutes a disproportionately large portion of the UK’s GDP, and to investigating ways of reforming banks and supporting growth in such a manner that the rate of growth in the real economy becomes faster than that of financial services, so as to address this imbalance. The more unbalanced an economy is the more vulnerable it is to economic shocks. The UK, by 2008, was too dependent on the financial sector both as a driver of growth and as a source of tax revenues. The growth of the sector was accompanied by rising household debt, leaving household balance sheets equally vulnerable. A more broadly based economy, with varied growth drivers, would have been better able to cope with a downturn.

1.7 The UK financial services sector has also caused wider problems. The geographical dominance of the City and Canary Wharf in the financial services sector has contributed to regional economic imbalances. Investment in the UK economy as a ratio of GDP remains low; small and medium sized enterprises continue to struggle to obtain the credit they need to operate and grow; and "green" investments remain under-capitalised. Put simply the banking sector is not working to support the real economy in the way that it needs to if we are to secure strong and sustainable future growth, and far more work needs to be done to determine how this can be changed and what role new institutions (including a British Investment Bank) could play in facilitating it. As part of this there is a need to examine overseas banking sectors, to assess the extent to which other countries have strong financial sectors that support their real economies much more effectively than is the case in the UK.

1.8 The TUC would also like to see further recognition of the important role that trade unions have the potential to play both in improving the stability and profitability of the UK banking sector and in helping to deliver the culture change that is now so evidently required in banking practice. Both through representing the workforce through existing structures, and through playing a more active part in corporate governance mechanisms (as we discuss below), unions have the potential to act as an important check to the cultures and practices that led us towards the biggest financial crash since the 1920s.

1.9 Finally, the TUC does not accept the argument that the increasingly global nature of the economy prevents the UK government or the UK banking industry from taking action to improve the sector’s culture and reputation. On the contrary, the UK banking sector remains a key global player and is in the enviable position of being able to lead by example. Given the severe question marks over the stability and security of the UK banking industry and the fact that many others around the world share those questions, it is imperative that the UK government leads with serious and substantial reforms to the UK banking industry to ensure its standing in this incredibly competitive global market is maintained.

To what extent are professional standards in UK banking absent or defective? How does this compare to … (b) other professions …?

1.10 The entry level qualifications and training required to enter into the UK banking sector are not as rigorous as those required to enter into other UK professions. Bankers, for example, do not require a license to practice in the same way as is the case in many other fields. Given the significant impacts that the activities of the banking sector have for the wider economy, and the failures in professional standards that contributed to the crash, the TUC believes that the case for the introduction of appropriate entry requirements and ongoing professional licensing within the industry should now be examined with urgency.

1.11 However, as stated above, it is also our strongly held view that limited training and a lack of professional accreditation are not the key driver of poor professional standards, which we feel are primarily a result of wider failures in the structures, governance and regulation of the banking industry.

1.12 What have been the consequences of the above for (a) consumers, both retail and wholesale, and (b) the economy as a whole?

1.13 What have been the consequences of any problems identified in question 1 for public trust in, and expectations of, the banking sector?

1.14 The TUC has long argued that the financial crisis was not just caused by errors of judgement taken by a few people investing in securitised US sub-prime mortgages. As this submission will go on to demonstrate, our view is that the crash resulted from a persistent focus on generating high levels of distributable profits from short-term risk taking – a strategy which has caused untold immediate damage to the real economy as well as exacerbating the UK’s long-run trend of low levels of investment compared to other developed nations.

1.15 The recession of 2008/09 and the subsequent double dip recession of 2011/12 comprise the UK's worst economic crisis since the 1930s. The depth of the initial recession and the weakness of the recovery are both unheard of since the 1870s. Four years on from the initial crash the UK economy is still 4% below its pre-crisis peak and, on current forecasts, it will not regain its pre-crisis level until 2015. In other words the financial crisis has effectively led to a lost decade of growth.

1.16 The implications for living standards and jobs have been severe. Although, by headline results, the labour market has performed relatively well (given the large fall in output) unemployment rose to levels not seen since the mid 1990s, long term unemployment has risen to twenty year highs and the UK is experiencing record high youth unemployment. In addition to the 2.5 million people currently unemployed, there are another two million either working part-time when they want a full time job or on a temporary contract when they want a permanent position.

1.17 The financial crisis has had a major impact on living standards. Real wages have been falling for two years and are expected to fall for at least another year. Median wage earners, those in the middle, are not expected to achieve their 2003 standard of living until sometime around 2015/16. Real household disposable income fell in 2009, 2010 and 2011. This is an unprecedented fall in living standards.

1.18 In addition the financial crisis, and the resulting tight credit conditions, have had a major adverse impact on business investment. Investment remains around 20% below its 2008 level which may well lead to slower growth in the medium term due to a smaller capital stock than would otherwise have been the case.

1.19 The TUC’s recent economic report (a copy of which is attached at Appendix 1) shows that the contribution of the financial sector to the UK economy rose rapidly in the 2000s and that the share of financial services in GDP is also higher in the UK than in many other major economies. If the UK had been less dependent on the financial, and related, sectors it would have been much better placed to weather the global crisis of 2008. Rather than the deficit leaping from 3% of GDP to around 12%, it would have grown more in line with that of other major economies (generally to around 5-6% of GDP). The recovery would also have been stronger as our economy would have been less reliant upon credit, and would have been broader based, facilitating faster expansion. Not only was the recession that began in Q1 of 2008 triggered as a direct result of the credit crunch, but the OBR has acknowledged that the primary reason why the UK’s fiscal deficit opened up so widely in 2008/09 was a rapid collapse in tax revenues from property and finance. The current squeeze on public finances can be traced directly back to our over dependence on financial services prior to the crash.

1.20 This imbalance causes a heightened risk to the UK economy due to a lack of diversification (as the credit crunch itself demonstrated). It has also led to regional inequality in the UK as the majority of the revenue that flows to and through the financial sector flows through institutions based not just in London, but in much smaller localities (namely the City and Canary Wharf). With the banking sector also consuming much of the UK’s skills and resources, this too leads to lower growth in other sectors negating the positive contribution that the banking sector makes to the real economy both in terms of revenue from taxation and in terms of the financial products and services it supplies.

1.21 The TUC believes that there is little doubt that public trust and expectations of the banking sector is at an all time low from the days when journalists lauded the integrity of Labour Party leader John Smith MP by comparing him to a Scottish banker; a comparison that would be deemed an insult not 20 years later.

· A survey [1] published by the consumer pressure group Which? on the fifth anniversary of the credit crunch shows that:

· 84% of people think that the banks have not done enough to prevent another credit crunch - an increase from 76% in September 2011;

· 71% think the banking culture hasn’t got any better since the start of the credit crunch;

· 50% think that the Government's handling of the banking industry has also got worse; and

· 80% think there is a deeper problem with the culture in banks than just a few individuals making bad decisions.

1.22 Recent research undertaken by GQRR [1] showed that 45 per cent of respondents believe "greed and recklessness amongst bankers on Wall Street and in London" is the factor most responsible for our deteriorating public finances, with 43 per cent blaming "the failure of governments to properly regulate banks and financial institutions". Public confidence appears to have been significantly affected by an accurate analysis of the role that the financial sector played in creating our current recession. But worryingly, public confidence in the ability of Government to implement measures to change the banking industry is also low, with the Which? survey showing that only 26% of respondents were confident that the Commission "will lead to positive improvements in UK banks".

1.23 The TUC is very concerned about this lack of public trust in and low expectations of the UK banking sector. Not only is finance the oil that greases the wheels of the real economy, it also provides the means for the public to provide security for their futures and to obtain the liquidity that they need to live a modern lifestyle. If public trust in the UK banking sector remains at a low, that lack of faith will pollute the trust around wider financial products including pensions, and this could have very serious and negative long term consequences for the UK’s social and economic health in the decades to come.

1.24 The TUC believes that whilst financial services must and will remain a key part of the UK economy, at present the UK is too dependent on the financial sector and that it is vital to secure stronger growth in other sectors in order to rebalance the UK economy and ensure long-term growth for the benefit of all. This is also a vital step if public trust is to be rebuilt: because the public view the UK banking sector as toxic, and have seen the significant risks such a large financial sector can bring. Rebalancing the economy so that the financial sector is not as dominant as is currently the case (therefore reducing the systemic risks such a position creates) is key to restoring trust in the UK banking sector.

What caused any problems in banking standards identified in question 1?

1.25 What can and should be done to address any weaknesses identified? To what extent are such weaknesses subject to remedial corporate, regulatory or legislative action, domestically or internationally?

Corporate Governance

1.26 The TUC believes that more regulation is not a substitute for effective corporate governance; the two should complement each other. Corporate governance is about ensuring appropriate structures, procedures, cultures, incentives and supervision to promote effective decision making. Regulation is about setting out legal minimum standards which are enforced by the state rather than by shareholders.

1.27 The TUC believes that the broad aims of corporate governance are consistent across all sectors including the banking sector. At the broadest level, corporate governance aims to provide:

· appropriate structures and procedures for effective board-level decision making that reflects directors’ legal duties under section 172 of the Companies Act (but see our suggestion for reform of this below); and

· a monitoring and supervisory function sufficient to ensure that decisions are questioned and challenged where appropriate.

Breaking these two broad aims down further, corporate governance should seek to achieve:

 

· effective long-term strategic leadership of the company;

· good succession planning;

· a corporate structure where stakeholder interests (including those of shareholders, employees, suppliers and local communities) and environmental impacts effectively taken into account in decision-making;

· positive, long-term stakeholder relationships based on trust;

· vigilant risk-management;

· an appropriate degree of transparency and integrity in reporting;

· board recruitment that is managed to ensure the board constitutes the range of skills, knowledge, experience and backgrounds necessary to facilitate an appropriate degree of challenge and input into decision-making and strategic direction;

· an effective remuneration policy.

1.28 While these aims are consistent across sectors, their implementation will inevitably vary across different industries. In the context of systemically important financial institutions we recognise the critical importance of risk management and ensuring that risks to the organisation and its stakeholders (including investors) as well as risks to the wider economic system are managed effectively with a high degree of scrutiny.

1.29 We do not believe that the Independent Commission on Banking’s (ICB) report will necessarily have a direct impact on corporate governance in these institutions, as according to our understanding, the same board would still be responsible for the separate retail and investment parts of the bank.

1.30 But this does not mean that such changes are not necessary, and the TUC believes that corporate governance reform could act to significantly strengthen the governance of the UK banking sector.

1.31 Corporate governance systems also have potential to significantly impact upon banking cultures. The Companies Act 2006 codified some but not all of directors’ duties for the first time in the UK. In Section 172, directors are required to act in good faith ‘to promote the success of the company for the benefit of its members as a whole’, and in doing so are required to have regard to the long-term implications of decisions, employee interests, customer, supplier and community relationships and environmental impacts. Documentation from the Company Law Review, whose recommendations formed the basis of the Companies Act 2006, and Parliamentary exchanges that took place as the Bill passed through Parliament, both show that one aim of the new duties was to ensure that directors were encouraged to balance short-term aims with long-term strategies.

1.32 The thinking behind Section 172 of the Companies Act is that in the long-term the interests of shareholders and other stakeholder groups – and indeed, the company itself – will converge. Section 172 was designed to ensure that directors took what could be called the ‘high road’ to success, based on investing in R&D and training, developing long-term, committed relationships with employees, suppliers and customers and managing environmental impacts responsibly, rather than the ‘low-road’, based on low-skill, low wage employment, low investment levels and a short-term approach to financial returns. The idea that shareholder relationships will generally be long-term is critical to the basis of this analysis.

1.33 The changing nature of share ownership in the UK (as highlighted below) including the short term nature of such ownership, poses a significant challenge to the assumptions behind directors’ duties as set out in Section 172. In particular, growth of alternative asset managers and the increasing use of share trading as an investment strategy across all investor groups cuts right across the basis of Section 172 of the Companies Act, with major implications for corporate governance and company performance. Directors are required to ‘act fairly between the different members of the company’, but (again, as discussed below) it is not possible to do this if some shareholders have bet on the bank’s share price falling and will therefore benefit from the company doing badly.

1.34 Based on union experiences of representing the interests of employees employed by banks, the TUC does not believe that the new directors’ duties have had any significant impact on company prioritisation and decision making. This experience is backed up by research; a recent Association of Chartered Certificate Accountants (ACCA) study found that interviewees from the corporate sector believed that directors’ duties amounted to maximising share price in the short-term [1] . What directors’ duties require of directors in reality is almost irrelevant if this is how directors interpret them.

1.35 In our view section 172 should be amended to make directors’ primary duty the promotion of the long-term success of the company, rather than t shareholders’ interests as at present. Serving the interests of shareholders and the different stakeholder groups included in Section 172 should be secondary to this central aim. In so doing, they should be required to deliver sustainable returns to shareholders, promote the interests of employees, suppliers and customers, and have regard to community, environmental and reputational impacts. This would have the effect of rebalancing the interests of shareholders and others stakeholders, but all their interests would be secondary to those of long-term success of the company. This would be closer to the original intention of how the new directors’ duties set out in the Companies Act 2006 would operate. A possible formulation would be:

‘The directors of the company are required to act in good faith to promote the long-term success of the company, and in so doing, should have regard to the need to:

· deliver fair and sustainable returns to investors

· promote the interests of the company’s employees

· foster the company’s relationships with suppliers, customers, local communities and others, and

· take a responsible approach to the impact of the company’s operations on the environment.’

1.36 The TUC also believes that a two-tier board system, as opposed to a unitary board system, could offer important benefits, some of which are particularly relevant in the context of the financial sector. The separation of the executive and the supervisory functions in a two-tier board structure make the supervisory function much more explicit. It is also much harder for non-executives to be ‘out-gunned’ by the executives, because the executives are generally in a minority on the supervisory board (in the German system, for example, the only executive member of the supervisory board is the Chief Executive). Some may suggest that this separation of structures can slow down decision making, but we would argue that making the right decisions is much more important than making decisions quickly. If the decision-making process at RBS over buying ABM Amro could have been slowed down, it is highly likely that this disastrous purchase would not have gone ahead, and RBS would not have needed such high levels of Government support to avoid collapse.

1.37 A key attribute of two-tier boards is that employees and in some cases shareholders generally have either direct representation or nomination rights on boards. The interests of employees are well-correlated with the long-term interests of the bank, and the TUC believes that having employees represented on UK banks’ boards could help boards to prioritise the long-term interests of the bank in decision making, rather than being distracted by short-term financial engineering, as occurred in the run-up to the financial crisis. Employees also bring with them in-depth knowledge of how the bank operates in practice and are well-placed to contribute to the need to foster positive stakeholder relationships, as set out in section 172 of the Companies Act. The TUC believes that the Commission should consider the benefits that this approach could bring.

Shareholder primacy and short-term shareholding

 

1.38 Under the UK’s corporate governance system, shareholders have a privileged position. Shareholders are entitled to elect annually directors at company AGMs; vote on remuneration reports (although the vote is currently only ‘advisory’); vote on shareholder and other resolutions at AGMs; and convene Emergency General Meetings. Directors are required to serve shareholder interests (although please see our recommendations for reform in the paragraphs below).

1.39 This system is based on an assumption that there is a convergence of interests between shareholders and the company (and its other stakeholders). However, this convergence of interests only holds in practice if shareholders are committed to investing in the bank on a long-term basis and their prime financial interest in the company is the ability to receive dividend payments over time. If, however, an investor is a short-term share trader whose prime financial interest in the company is to sell their shares at a higher price than they bought them, their interest will be in short-term strategies to raise the share price, rather than long-term strategies to invest in organic growth. In this case, their interests will not coincide with those of company stakeholders such as customers, nor, very significantly, with those of the company itself. If the investor is shorting the stock, their interests will be diametrically opposed to those of the company and its other stakeholders, including long-term shareholders, as they will stand to gain if the bank’s share price falls.

1.40 In addition, increasing proportions of shares are owned by alternative investment managers with short time horizons and investment practices based on share trading rather than long-term share ownership. While the proportion of shares owned by alternative investment managers across the stock market as a whole remains fairly low, the ability of alternative investment managers to buy and sell large numbers of shares in a particular company over a short period of time magnifies their influence in the market. In addition, seeking to increase the value of a portfolio by buying and selling shares at an advantageous time has also become an important part of portfolio management among traditional so-called ‘long-term’ institutional investors.

1.41 One of the key barriers to more effective engagement between investors and companies (be it banks and their shareholders or banks and the companies in which they hold/manage shares in) is the dispersion of shares. Share ownership patterns have changed rapidly over recent decades. In the 1960s, the majority of shares in UK companies were owned by individuals, many of whom took a reasonable level of interest in the companies whose shares they owned. By the 1980s, the majority of shares were owned by UK institutional investors such as pension funds and insurance companies. Today, this has changed again, and recent figures from the Investment Managers’ Association suggest that pension funds and insurance companies now hold around 13% of UK equities each, with an additional 14% held by other UK institutional investors [1] . ONS figures show that at the end of 2008, 41.5 per cent of UK-listed shares were owned by investors from outside the UK, and individuals held just over ten per cent, the lowest percentage since the survey started in 1963 [2] .

1.42 These changes have great significance for the quality of engagement between shareholders and companies (including banks). It will clearly be harder for overseas investors to develop the kind of engaged relationships with UK companies and banks that are envisaged by the UK’s corporate governance system. Language, culture, proximity and availability of information all make engagement much more straightforward within a national context in comparison with engaging with companies abroad. This is reflected in responses to the TUC’s Fund Manager Voting Survey: in the 2011 Survey, 21 respondents said they voted all their UK shares, while just ten voted all their overseas shares, although a further seven indicated that they voted the large majority, or a large proportion of their overseas holdings [1] . The UK’s corporate governance system was not designed on the basis that the largest single share ownership block would be investors from outside the UK.

1.43 In contrast to individuals who tend to own shares in a limited number of companies whose progress they follow closely, institutional investors generally own shares in hundreds or even thousands of companies. Just as an increasing proportion of UK shares are held by investors from outside the UK, an increasing proportion of equity holdings of UK institutional investors are global, rather than UK equities. The sheer number of companies whose shares they hold poses major practical challenges to the ability of institutional investors to carry out corporate governance effectively. If institutional investors are to engage effectively on an informed and consistent basis with all the companies whose shares they own, this would require a very significant deployment of resources, considerably above the levels that most currently devote to engagement.

1.44 As Sir David Walker pointed out in his report on UK bank governance, competition between institutional investors and the fact that the gains generated by effective engagement are enjoyed by investors, across the board rather than flowing directly to the investors who have carried out the engagement, further reduces the incentives for institutional investors to devote sufficient resources to enable them to engage effectively with all the companies whose shares they hold.

1.45 It should be remembered that one of the most significant errors in the run-up to the financial crisis – the RBS takeover of ABM Amro - was voted on by RBS shareholders and overwhelmingly approved. It is also the case that shareholders were generally supportive of the approach of RBS, HBOS and Northern Rock in the pre-financial crisis period, despite the major risks that each was running up. Indeed, Lloyds, which (until its takeover of HBOS) was less highly leveraged and less exposed to risky assets than some of the other banks, had come under pressure from some shareholders for not making sufficient use of leverage and being ‘boring’ in its approach. Shareholder involvement is not a panacea, and as John Kay’s recent Review into Equity Markets and Long-Term Decision Making has illustrated, shareholders can at times put pressure on boards to generate short-term results at the expense of strategies for long-term, sustainable success.

1.46 In this scenario, it is far from clear why it is shareholders whose interests companies should be required to promote, nor why it is shareholders who should have the ultimate say over how companies are run. In addition to our proposals to reform directors’ duties (set out at paragraphs below), the TUC believes that governance rights and responsibilities, including voting rights, should be restricted to long-term shareholders, and proposes that all voting rights in UK companies should be dependent on holding shares in the company for a minimum of two years. We believe that these reforms would greatly improve the quality of corporate governance of the banking and finance sectors.

1.47 The TUC further believes that excessive share trading activity is taking place at the expense of long-term investment gains and that addressing this issue will be key to improving UK investment rates and returns. As Dr Paul Woolley has argued, heavy trading has come at a high cost to long-term investors, and pension funds are having their assets exchanged and traded on average 25 times over their lifetime, even though in the long-term this drains pension funds of 30% of their value [1] . The TUC believes that the Government should initiate work on proposals to cap share turnover, looking at proposals to be adopted by pension funds and other long-term investors as well as the role that Government and regulators can play in encouraging long-term shareholding.

Non-Executive Directors

 

1.48 It has been recognised in the UK since the Cadbury Report of the 1990s that non-executive directors have an important monitoring function in relation to executive directors on UK boards. One of the factors that contributed to poor decision-making in financial companies in the run-up to the financial crisis was the domination of boards by powerful chief executives who were subject to insufficient challenge from other board members. In some cases, the chief executive had had considerable influence over nomination procedures, thus weakening the capacity of the board for effective challenge.

1.49 The TUC believes that it is essential that all those responsible for both executive and non-executive functions have sufficient time to carry out their responsibilities effectively. This principle must be given very careful consideration when determining the number of board roles that any one individual carries out.

1.50 In addition, the TUC believes that there is a strong case for greater diversity of board members. The tendency of banks to appoint non-executive directors (NEDs) who are executive directors of other companies or institutions within the banking sector means that board members are generally drawn from a very narrow pool of people with similar backgrounds and experience. This can contribute to the problem of ‘group think’ on boards.

1.51 The TUC strongly supports the appointment to banks’ boards of NEDs who are drawn from a wider range of backgrounds, and believes that this would make a valuable contribution to improving the effectiveness of boards. A first step towards this would be for all NED positions to be publicly advertised, rather than often using head-hunting firms as is currently the case. Drawing NEDs from a wider range of backgrounds would also help address the issue of whether executive directors have time to carry out additional non-executive director roles effectively.

Long-Term Reporting

 

1.52 Quarterly reporting is often said to promote short-term decision making of both company boards and investors. For example, Rathbone Unit Trust Management Income fund manager Carl Stick, commenting on the average holding period for stocks in the UK and US falling from 10 years in the 1940s to nine months in 2010, said "much of my industry is only interested in taking a bet on the next two quarters of news reporting [from companies], which is absolutely crazy. We are all turning to quarterly reporting, that is why the industry is so short term." [1]

1.53 The TUC is sympathetic to the argument that if information is being produced for investors on a quarterly basis it is hard to see how this can fail to encourage both boards and investors to focus on the short-term. However, the TUC believes that quarterly reporting is also a symptom of short-termism, as well as contributing to the problem. We believe that this is exacerbated by a lack of long-term information on company performance which could act to counter-balance the short-term information made available to investors. We would recommend that the Commission investigates the introduction of requirements for company reporting on long-term performance and recognises the importance of the Kay Review’s recent assessment that the obligation to produce quarterly reports may have an adverse effect on the behaviour of companies and shareholders.

1.54 There is considerable evidence that directors of publicly traded companies, including banks, do feel under pressure to maintain their company’s share price. This can lead them to undertake short-term strategies to boost their share price even when this will not be conducive to long-term company performance. For example, Andy Haldane in Patience and Finance argues that there is ‘strong evidence of high and sticky dividend payout ratios, almost irrespective of profits. Moreover, dividends appear to be becoming stickier over time.’ [1]

Remuneration

 

1.55 The TUC believes it is particularly important that excessive executive remuneration in the banking industry is addressed. While significant damage to the rest of the economy has been caused by mistakes made within this sector, extremely high levels of reward continue to be paid to directors and senior executives in the industry, rewarding failures and incentivising the types of risk which led to the financial crisis.

1.56 The compensation to revenue ratio for the banking sector is remarkably high with historically investment banks setting aside an eye watering 45-65% of their net revenue to pay staff long before the taxman and shareholders receive any revenue. Although there have been some lower examples in recent years payments for the highest paid individuals remain astronomical.

1.57 The TUC does not support the current emphasis on performance-related remuneration and bonuses. There is ample evidence that performance-related pay has not been effective in rewarding good performance, as noted by the BIS Discussion Paper on executive remuneration launched in September 2011. There is also convincing academic evidence that performance-related pay does not generate higher levels of motivation or performance [1] . We believe that there should be a greater focus on annual salary, with performance-related pay limited to a much smaller proportion of total remuneration than is currently the case [2] .

1.58 Where performance related pay/bonuses do exist, we are supportive of calls that bonus payments should be subject to ‘claw-back’ in the event of trades or deals turning bad. The current structure of much remuneration in the financial sector means that individuals face a different risk/reward trade-off from that of the institutions they work for. They are personally financially rewarded when a trade or deal works and face little or no personal financial liability if the trade/deal does wrong. This misalignment of incentives can lead to excessive risk taking. 

1.59 Some have argued that a stronger alignment of individual risk/reward trade-offs with institutional risk reward trade-offs would lead to banks and other financial institutions not taking ‘enough risks’ and ultimately to slower economic growth. This is unlikely to be the case, and in fact an argument can be made that if banks engaged in less high risk/high reward behaviour they would be able to deploy more of their balance sheet in ‘traditional’ activities (such as retail and commercial banking) which are often more supportive of sustained growth.

1.60 The TUC would like to see banking shareholders taking a much tougher approach to remuneration than they do at present and in particular making much greater use of their powers to reject remuneration reports; a copy of the TUC Response to the BIS Consultation on Executive Pay Shareholder Voting Rights is attached at Appendix 2. Investors have had an advisory vote on company remuneration reports since 2003. Between 2003 and the end of 2011, just 18 remuneration reports had been defeated at company AGMs out of the thousands of votes that have taken place over that time. While the recent increase of investor activism, particularly in the banking sector on remuneration, is both welcome and long overdue, it should be remembered that this year to date there have been just four remuneration report defeats. Whether what we are currently witnessing is a permanent trend towards greater shareholder activism on pay or just a blip is too early to say.

1.61 But, for the reasons we discuss in detail above, simply encouraging shareholders to take a more active approach to policing bankers’ remuneration will be insufficient to bring about significant change. The TUC therefore believes that more significant changes are needed to engage wider stakeholders in corporate governance and that as a start the banking workforce should be represented on remuneration committees, an approach we believe would bring significant benefits.

· Workers and their representatives would bring a fresh perspective and common sense approach to discussions on remuneration, in contrast to the current culture that presides on remuneration committees.

· The Government has acknowledged the importance of taking into account both company pay differentials and consulting with employees about directors’ pay. The best way to ensure that these issues are considered properly in decision making is for the workforce to be represented on remuneration committees.

· The interests of the workforce are inextricably linked to the long-term success of their bank; they are therefore well placed to contribute to discussions on an appropriate remuneration strategy to serve the long-term interests of the business.

· Including worker representatives on remuneration committees would engender a higher degree of buy-in from employees on pay arrangements at their bank. This should contribute to employee engagement, which is shown to be linked to higher business productivity and performance.

· Research has shown that workforce representation does help to curb directors’ remuneration. One study showed that, among the largest 600 European companies, the presence of board level worker representation is correlated with lower CEO pay and a lower probability of stock option plans. A second study showed that, within large German companies, stronger worker representation on the board led to lower CEO pay and less use of stock-based remuneration [1] .

· There is clear academic evidence that high wage disparities within companies harm productivity and company performance [2] . Combined with evidence (cited above) that workforce representation on remuneration committees is associated with lower rates of CEO pay, this makes a strong case for the inclusion of workforce representatives on remuneration committees.

1.62 For further information on our analysis on remuneration, a copy of the TUC paper "Worker Representation on Remuneration Committees: Why do we need it and how would it work in practice?" is attached at Appendix 3.

1.63 The TUC believes that remuneration consultants have played a significant role in designing increasingly complicated remuneration structures that have paid out excessive amounts for mediocre and at times poor performance. The TUC is very concerned about the conflicts of interests that are created when remuneration consultants are also carrying out other work banks, and believes that this should be prohibited. It is also important that remuneration consultants are appointed by and report to the remuneration committee only and not to the executive directors.

1.64 The TUC would also support mandatory disclosure of the number of people within each firm whose total remuneration exceeds £1 million, preferably in bands of £1 million to £2 million, £2 million to £3 million and so on.

Taxation of Bonuses

 

1.65 Given the significant risk that high levels of bonuses and their incentivisation of short term risk taking and rewards have proven to have to the economy, the TUC recommends that this risk should be internalised to the banking sector. The TUC therefore recommends that pay and bonuses above £250,000 per annum (around ten times the level of average pay in the UK) should be considered profit and therefore paid out from profits available for distribution rather than being accounted for as a general expense of the bank. This would mean that the available pool for such high rewards would be subject to corporation tax as part of the normal taxable profits of the bank.

Recruitment and Retention

 

1.66 Across the UK, finance sector workers continue to fear for their jobs. Although the problems in the financial sector were caused by those at the top of the industry, it is frontline bank staff who are paying the price through redundancies, restructurings and pay cuts and freezes. This is leading to a decline in morale and hence service quality in the area of banking that most of the public interact with. Many thousands of jobs in financial services have been lost in the last four years.

1.67 It is also vital to remember that the vast majority of bank employees do not work in investment banking divisions, but in high street branch networks. And there is growing evidence here that staff are under increasing pressure. Just as performance related pay affects behaviour at the higher end of the banking pay scale, it also causes distortions at the bottom end. A sales driven culture with sales targets and performance related pay linked to indicators such as product sales incentivises retail banking staff to sell unnecessary and risky products to households and SMEs and needs significant reform.

1.68 An online survey on stress, carried out by Unite in March 2012 within a major UK bank received almost 8,000 responses in just one week. Results showed that 85% of respondents said that they felt stressed by their work; 77% said that they suffered from symptoms caused by stress including anxiety attacks and depression, 78% agreed or strongly agreed that they faced "unremitting pressures to perform well" and 56% agreed or strongly agreed that there was a failure by the bank to recognise their achievements. Respondents were also asked about their experiences of stress in relation to a number of issues. 74% agreed or strongly agreed that unrealistic targets were a cause of stress and 65% identified uncertainty about their future as causing stress. Stress and its effects are clearly an issue for employees in the banking sector and from other communications Unite has received this is reflected across other parts of the industry.

Tax Deductibility of Interest Payments on Corporate Debt

 

1.69 The TUC has long held concerns about the impact of the tax deductibility of interest payments on corporate debt with evidence suggesting that this encourages highly-leveraged private equity buyouts by providing a very cheap means to borrow large sums of money.

1.70 The financial crisis illustrated the fact that high levels of leverage create substantial risk throughout the economy, and especially within the financial sector. The number of voices drawing attention to the undesirable consequences of the tax deductibility of interest payments on corporate debt has increased considerably in the aftermath of the crisis. Both Nigel Lawson and Andy Haldane have called for reforms to address the anomalous tax treatment of debt and equity, with Haldane arguing either for a normal return on equity to be made tax deductible or the tax deductibility of debt to be withdrawn. [1]

1.71 We believe that there is a fundamental difference between debt used to fund organic growth through investment in research and development, innovation and training and debt used to buy up other companies. The TUC believes that reflecting this distinction in the tax rules so that tax-deductibility on debt would not apply to debt used to buy up other companies is an approach that merits further investigation. The size of debt relative to company turnover could be used as a possible proxy to distinguish between debt to fund organic growth and debt to fund takeovers.

Tax Deductibility for Training

 

1.72 The TUC is concerned about the quality of training in banks. The TUC has for some time called for companies to be required to set out a short summary of their training provision in their annual reports and for this to be more tightly linked to how tax relief on training is applied. The TUC believes that the Government should review the current arrangements for tax relief for work-related training, and would support greater priority being given to accredited training.

Regulatory Framework and Culture

 

1.73 The TUC welcomes the introduction of the Government’s new regulatory regime for the banking sector. We agree that the previous system of financial regulation had key weaknesses, and welcome the decision to provide the Bank of England with the responsibility, authority and tools to monitor the financial system as a whole.

1.74 The TUC believes that there is an important distinction between the role of shareholders and regulators in relation to systemically important financial institutions. We believe that matters concerning systemic risk should be monitored by regulators rather than shareholders. This is in part because we do not believe that shareholder oversight is sufficiently effective to take on this critical responsibility as illustrated above.

1.75 It is particularly important that systemic risk is addressed by regulatory requirements and that law enforcement agencies are responsible for the enforcement of measures in this area. It is not viable to leave the monitoring of systemic risk to individual financial institutions and their shareholders, as there may be times when the short-term interests of an individual financial organisation and the interests of the financial system as a whole diverge. In addition, it is essential that systemic risk is addressed on a systemic basis, by an organisation that is responsible for supervising the system as a whole. It is not realistic to leave this broader responsibility to shareholders of individual institutions, although clearly the latter should still seek to be vigilant against systemically-risky behaviour at individual organisations so far as is practicable.

Corporate and Criminal Legal Framework

 

1.76 There is evidence that the lack of personal liability has encouraged excessive risk taking at financial institutions in the past. The current Executive Director for Financial Stability at the bank of England has gone much further than the Chairman of the FSA and questioned the whole notion of limited liability in respect to banks [1] . In 2009 it was noted that Hoare’s Bank, which is still structured as a traditional partnership with the owners bearing the risk, had weathered the crisis (and previous crises) much better than limited liability banks [2] .

1.77 In particular, as has been demonstrated above with respect to Lloyds (see paragraph 4.10) the fact that increased gearing in turn increased the potential pool of assets from which profit and therefore dividends can be derived has led to shareholders criticising directors for not permitting riskier and riskier gearing. The downside for such shareholders is always limited to the amount of capital invested because of the corporate veil. However, because of the implicit guarantee provided by the taxpayer to the banking sector the wider public may be facing a higher risk.

1.78 The Bank of England [1] has already argued that this implicit guarantee gives the banks that benefit a competitive advantage over those that do not. It also of itself increases a bank’s incentive to take risk (thereby leading to a vicious circle of high gearing leading to growth leading to an implicit guarantee which in turn encourages further gearing increases) and also leads to the disproportionate growth of the finance sector compared to the other sectors of the real economy. The quantum of this implicit guarantee to the taxpayer is almost impossible to quantify with values being put at between £6 billion to over £100 billion.

1.79 The increases in equity capital held by banks required by Basel III [1] will not be sufficient to negate this risk. The TUC therefore recommends that the Commission look into ways of either changing the ownership and control models of bank ownership or piercing the veil of shareholders of banks (increasing their personal liabilities for the bank’s practices) that benefit from the implicit guarantee of the taxpayer so that shareholders are required to bear a fair proportion of this risk e.g. by requiring shareholder to be liable for an additional fixed level of reserve capital in the event of the bank’s stress or bankruptcy.

Criminal Sanctions

 

1.80 The TUC supports in principle the Government’s proposal to introduce a "rebuttable presumption" that the director of a failed bank is not suitable to be approved by the regulator to hold a position as a senior executive in a bank and also to introduce criminal sanctions for serious misconduct in the management of a bank.

1.81 The TUC also endorses in principle the European Commission’s proposal to introduction a Regulation and a Directive with the cumulative effect of making manipulation of benchmarks, of the kind features in the recent LIBOR scandal, a criminal offence.

Are the changes already proposed by (a) the Government, (b) regulators and (c) the industry sufficient?

1.82 Overall, the TUC believes that that wider corporate governance reform, legislative and regulatory reform are all required. Only a complete package of policy aimed at creating a banking system that takes a more long-term approach to servicing the real economy will have a chance of success. Piecemeal reforms, especially if watered down will be unlikely to succeed. As argued above, whilst the international context matters, this should not be used as an excuse for not taking tough action domestically.

1.83 Only time will tell whether the new Financial Policy Committee (FPC), and the two new regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) will be effective, and it will be vital that in their early days of operation they are given both time to establish themselves and that on an ongoing basis all necessary resources are made available to them. In particular managing the transition from the Financial Services Authority (FSA) to the new regulators will be complex, and it will be imperative that a prolonged transition does not lead to reductions in regulatory capacity.

1.84 These new institutions will have an important role to play in determining the appropriate regulatory regime for the different swaps, derivatives, pension funds, bonds and other complex instruments available on the markets. While some financial products do not pose much of a systemic threat, ambiguity remains over how dangerous some products might be. It will be vital to its success that this new regulatory infrastructure is able to better identify where these challenges may lie, and act to prevent the proliferation of financial products that could undermine the wider stability of the banking system.

1.85 It is not the TUC’s view that this change in regulation will be detrimental to the industry. An example of heavy product regulation in a successful UK industry is that of the regulation of pharmaceuticals. Not only does the pharmaceutical product itself have to undergo rigorous regulatory approval before it can be offered to the public, but approval is also required with respect to who prescribes it or sells it and of course to whom. Notwithstanding this regulation, the pharmaceutical industry in the UK is the envy of the world.

1.86 The TUC has also welcomed the Independent Commission on Banking’s (ICB’s) report as a good start to the process of addressing the fundamental problems facing the UK banking sector and believes it should be implemented in full, as quickly as possible. Similarly the TUC believes that even after the Commission reports, there will still be further work to do on examining the questions of what needs to be changed in the UK banking sector so that it fulfils its social utility in full.

1.87 But we also believe that wider change is still required within the banking sector, and that the mandate given to the ICB was limited and specific. As a result its proposals focused on financial stability and did not fully consider how banks could better support business and how credit flows could be unlocked and boosted. In particular, the ICB did not examine four key issues facing the UK economy: the low level of fixed investment in the UK economy; limited access to credit for small and medium sized enterprises; ongoing sectoral imbalances with the UK economy; and unmet need for finance to enable green growth. A copy of the TUC discussion paper "Banking After Vickers" which addresses this lack of mandate can be found attached at Appendix 4.

Appendices (available upon request)

Appendix 1: TUC Economic Report

 

Appendix 2: TUC Response to the BIS Consultation on Executive Pay Shareholder Voting Rights

Appendix 3: TUC paper "Worker Representation on Remuneration Committees: Why do we need it and how would it work in practice?"

Appendix 4: TUC discussion paper "Banking After Vickers"


3 September 2012


[1] http://www.which.co.uk/news/2012/08/banks-fail-to-learn-lessons---new-which-survey-292882/

[1] http://gqrr.com/index.php?ID=2779 .

[1] David Collison et al, Shareholder Primacy in UK Corporate Law: An Exploration of the Rationale and Evidence, ACCA Research Report 125, 2011

[1] IMA, Asset Management in the UK 2009 – 2010, July 2010

[2] Available at http://www.statistics.gov.uk/cci/nugget.asp?id=107

[1] TUC Fund Manager Voting Survey 2011

[1] The Future of Finance: the LSE Report, Paul Woolley, Sept 2010

[1] Investment Week, February 2010

[1] http://www.bankofengland.co.uk/publications/Documents/speeches/2010/speech445.pdf

[1] See, for example, The False Promise of Pay for Performance: Embracing a Positive Model of the Company Executive, James McConvill, 2005; The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home, Dan Ariely, 2010; Not Just for the Money: Economic Theory of Motivation, Bruno Frey, 1997; The Hidden Costs of Reward: New Perspectives on the Psychology of Human Motivation, Mark R. Lepper & David Greene, 1979

[2] For more discussion on this, please see TUC, Treasury Committee Inquiry into corporate governance in systemically important financial institutions, November 2011(a copy of which is attached as Appendix 2 ).

[1] Board Level Employee Representation, Executive Remuneration And Firm Performance In Large European Companies, Sigurt Vitols, March 2010; and Arbeitspapier 163, Beteiligung der Arbeitnehmervertreter in Aufsichtsratsausschüssen, Auswirkungen auf Unternehmensperformanz und Vorstandsvergütung, Studie im Auftrag der Hans-Böckler-Stiftung, Sigurt Vitols 2008; both available from the TUC

[2] See, for example, Pedro Martins, Dispersion in Wage Premiums and Firm Performance, Centre for Globalisation Research Working Paper No. 8 April 2008; Olubunmi Faleye, Ebru Reis, Anand Venkateswaran, The Effect of Executive-Employee Pay Disparity on Labor Productivity, EFMA, Jan 2010; and Douglas M. Cowherd and David I. Levine, Product Quality and Pay Equity Between Lower-Level Employees and Top Management: An Investigation of Distributive Justice Theory, Administrative Science Quarterly, Vol. 37, No. 2, Special Issue: Process and Outcome: Perspectives on the Distribution of Rewards in Organizations June 1992

[1] http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech525.pdf

[1] 11 Andrew Haldane, ‘The Doom Loop’, LRB, February 2012. http://www.lrb.co.uk/v34/n04/andrew-haldane/the-doom-loop

[2] South Sea Bubble Survivor Says Dismantle RBS, Lloyds, Bloomberg, March 2009. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aANXHOD12Q2A&refer=news

[1] “The implicit subsidy of banks”, Bank of England Financial Stability Paper No. 15 – May 2012 http://www.bankofengland.co.uk/publications/Documents/fsr/fs_paper15.pdf

[1] Duncan/Nicola - Insert reference to Government response to Vickers?

Prepared 22nd September 2012