date: 7 September 2012
embargo: 00:01 hours Saturday 8 September 2012
The TUC is set to call for a major shake-up of the UK banking sector at its Congress next week. The TUC General Council will put a statement to the Congress (full text below) that calls for a state investment bank, with consideration of a fully nationalised RBS as its launch pad; a real Green Investment bank with powers to borrow; greater diversity in the banking system, a crackdown on bonuses and treating high pay and bonuses as profits and thus subject to corporation tax.
TUC General Secretary Brendan Barber said: 'Banks caused the crash. Their problems are still driving the Eurozone crisis. They are still failing to provide the finance that Britain's productive sectors need.
'Yet the government is still tiptoeing round reform. Even the limited Vickers proposals are being watered down, and initiatives designed to kick-start lending or boost growth end up helping banks, rather than the real economy.
'That is why it is not just unions backing a radical shake-up. Proposals we make also find support among business leaders, consumer groups and even some ministers.'
General Council Statement to Congress on Banking Reform 2012
A banking and financial crisis that began in 2007 led to the largest global recession since the 1930s. It plunged the UK into an economic crisis from which it has still not recovered.
Four years on from the recession that began in the financial system, GDP is still well below peak, unemployment and under-employment have soared, living standards have been squeezed and the UK is faced with a budget deficit that is due in large part to excessive risk taking in our banks.
The economy remains fundamentally unbalanced with an over-dependence upon finance, huge regional inequalities, a low level of investment and the share of the economy going to wages depressed.
The banking system lies at the heart of both the crisis and the unbalancing of the UK economy, and its reform is a necessary step towards building a new economy where rewards are more equally shared, growth is more balanced and the UK is less marked by regional inequalities.
Banking policy - the major issues
The TUC believes that there are three major issues that public policy on banking must address: financial stability and avoiding a repeat of the crash of 2008; excessive remuneration in the sector; and the vital question of how banks can be made to support the real economy. A comprehensive banking policy could address all three challenges and support a move to a more stable economy where growth is more sustainable and less marked by inequality.
The long-running problems of the banking sector cannot be addressed by changes in taxation and regulation alone (although reforms to both are needed) but will require reform of the entire structure of banking in the UK. The current institutions, and their system of corporate governance, are simply not fit for purpose. Of the £1.3 trillion lent by the banking system to the UK economy between 1997 and 2007, around 85 per cent went to either financial companies or into the property market. If banks are to better support the real economy, lending needs to be better balanced.
A successful banking sector would help alleviate four challenges facing the UK economy: the low level of business investment; the lack of support to help SMEs grow; the sectoral and regional imbalances across the UK; and the need for greener, more environmentally sustainable growth. It would be marked by a focus on the building of long-term, real economy value rather than on short-term high risk/high reward speculative activity.
The Independent Commission on Banking
The TUC welcomed the establishment of the Independent Commission on Banking (ICB). However, it believes that the mandate given to the Commission was far too narrow. The inquiry focussed almost entirely on the question of how to make the banks safer and on some issues around competition in the sector - the larger questions identified above were excluded from its terms of reference.
The TUC believes that the ICB recommendations are, despite the limited mandate, a step in the right direction. They should be implemented, in full, without further delay. The TUC is very concerned that the government is already trying to water down the recommendations, for example by allowing complex investment banking products to be sold by 'retail' banks. Such moves also suggest that the proposed 'firewall' between retail and investment banks may not be strong enough, especially as it is likely that banks will be able to find ways to circumvent it with new products and services. It may be the case that only full separation will be able to truly ring-fence retail deposits and the payment system from speculative 'casino' banking.
The TUC is equally concerned that the ICB recommendations will not fundamentally alter the structure of the banking system in the UK. Given the above, the TUC calls for a broader mandate to be given a new independent commission enabling a more thorough inquiry into failings of the sector. Such a comprehensive inquiry should involve finance experts, trade unionists, mortgage holders, SMEs and other interested parties affected.
State Investment Bank
The current UK banks have failed to support long-term investment and failed to help enough SMEs to grow. Whilst both problems have become worse since the crash, these are long-term issues that predate 2008. The UK's level of investment has been lower than that of other major economies for several decades. The lack of growth capital for SMEs (the so-called 'Macmillan Gap') was first identified in 1931.
The TUC supports the creation of a State Investment Bank to address these issues. The UK is the only one of the G7 economies not to have a publically owned credit provider that supports the real economy.
Such a bank would issue bonds, guaranteed by the government, and offer long-term finance to infrastructure projects and SMEs. The mandate of such a bank could explicitly encourage both sectoral and regional rebalancing. Many successful examples of such banks can be found in other developed economies. As such a bank would have an explicit remit to support the real economy and could begin to address the issue of credit misallocation that characterised UK bank lending in the years before the crash.
As setting up such a bank could take several years, the TUC would support the use of RBS as a quasi-state investment bank in the short run. Whilst this is not an ideal solution, as RBS still faces severe problems, it could be a way of supporting the economy more immediately. While the government already has effective control of RBS should it have the political will to exercise it, the buying out the remaining 15 per cent of RBS shares not held by the government would place RBS in full state control. The remit of the bank could then be changed from maximising short-term shareholder value (and consequently shrinking its balance sheet) to supporting long-term growth by putting its balance sheet to work backing UK companies with longer term finance.
In the event of full public ownership the terms and conditions, pay and employment of frontline staff could be better protected.
This would provide for the creation of a publicly owned banking service, democratically and accountably managed and playing a central role in building a sustainable economy; investing in transport, green industries, and housing; creating jobs; and assisting the recovery in the interests of working people.
Green Investment Bank
The TUC has welcomed the establishment of the Green Investment Bank; however, it is very concerned about the limits placed on the Bank's operations.
The case for a GIB, a state investment bank focused on the 'green economy', is compelling. There is an obvious market failure in the UK banking sector's reluctance to support green projects that must be addressed.
However, under the current proposals, the GIB will not in fact operate as a bank. As the GIB will be constrained for borrowing it will instead act as a fund with only a limited amount of cash to deploy.
The TUC believes that the GIB must be allowed to function as a bank as soon as it is operational, as it needs borrowing powers so that it can raise funds to support growth in the low-carbon sector.
The existence of the GIB does not prohibit the development of a wider state investment bank. The TUC believes that the GIB has scope to play an important role as a dedicated institution to help deliver the UK's low-carbon future.
However, should the Government establish a fully operational State Investment Bank there could be a case, some way in the future, for considering integration of such a bank with the GIB, particularly if a state investment bank was required to assume a green mandate, or adopt other means to support investment in a low carbon economy. But in the immediate term the TUC believe the focus has to be on lifting the GIB's funding restrictions to enable it to play a serious role in boosting low carbon growth.
The Government have tried to address some of the concerns around ensuring banks support the real economy through both the Funding for Lending Scheme (FLS) and its predecessor the National Loan Guarantees Scheme. The TUC welcomes any initiative that might increase lending to the real economy but has several concerns about the current scheme.
The design of FLS, as the Bank of England have argued in their most recent Inflation Report, means that it would be entirely possible that banks could take advantage of the cheap funding offered by the Government and could, rather than using it to lower the borrowing costs of consumers, simply use it to boost their own profits. While those that do not use it to grow their lending will have to pay more this will still be at less than the market price.
Another problem is that the blanket nature of the FLS makes it much harder for the government to ensure that the funds are going where they would be the most useful. At least one bank is, for example, already using the FLS to lower the cost of buy-to-let mortgages.
Using a State Investment Bank, rather than the current banking system to address the problems of SME access to finance and infrastructure financing, would avoid such drawbacks.
Too Big to Fail
The UK currently has one of the most concentrated banking sectors in the developed world. The 'big five' retail banks dominate the consumer and SME lending market.
The existence of such large banks leads to the 'Too Big to Fail' problem. Before the crash several UK banks had grown to such an extent that their failure would have had catastrophic consequences for the UK economy. The markets, sensing that such a bank would always be bailed out by the government, were prepared to lend to such banks at much lower interest rates than otherwise would have been the case. In effect larger banks enjoyed (and continue to enjoy) an implicit subsidy from the state. This subsidy could be worth up to £100bn a year in lower borrowing costs according to research from the Bank of England.
This would be less of a problem if the banks passed on the subsidy to borrowers, including productive businesses in vital need of capital, but there is no evidence that this occurred before the crash or afterwards. Instead the public subsidy has simply boosted profits and earnings for top bankers.
The TUC therefore believes that there is a need to ensure a greater diversity (including a greater role for mutuals and credit unions) in the banking sector thus reducing market control by the 'big five'. This would not only lead to immediate gains for consumers of banking services but would also reduce the implicit public subsidy and lead to less room for excessive pay in the sector. This could involve the introduction of a graduated banking levy which takes the existing balance sheet levy and makes it progressive, so that as balance sheets increase banks pay a greater amount. The justification for this would be that the larger the bank is the greater the implicit public subsidy it receives.
An alternative would be to require banks to sell off branches, however this would have to be done in consultation with unions whilst protecting jobs and existing terms and conditions and recognising that there is a need for far greater investment in retail banking to protect customer service levels.
There is a need to increase access to retail banking through additional local branches that can offer a proper service to communities. Regulating service provision and access, especially to rural communities, should be a goal of banking policy.
Problems in banking culture can be traced back to wider problems in the UK's system of corporate governance. In the run-up to the crash the sector was marked by excessive short-termism, poor risk control and a misalignment in incentives between the managers of major banks and the interest of the wider economy.
As a first step towards promoting a longer-term corporate focus 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. Consideration should also be given to the introduction of requirements for company reporting on long-term performance as well as to the removal of quarterly reporting requirements.
Decision making in financial institutions could be further 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.
In the banking sector too much decision making power has been exercised by top management with a large share of the profits flowing to the highest paid staff rather than the rest of the workforce or shareholders.
The TUC has long argued that Britain's current model of shareholder primacy leads to a short-term focus by business, lower investment and less favourable long-term results. 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 therefore believes that governance rights and responsibilities should be dependent upon holding shares in a company for a minimum of two years.
In our view the involvement of wider stakeholders, including the workforce, is also necessary to combating short-termism. This would include recognising the need for corporate governance reforms in areas including board structures and directors duties. As an initial step worker representatives should have guaranteed places on remuneration committees. And more broadly, the UK's corporate governance framework could recognise that a two-tier board system, as opposed to a unitary board system, could offer important benefits including additional capacity to monitor risk, which is particularly relevant in the context of the financial sector.
The TUC does not support the current acceptance of performance-related remuneration and bonuses as an inevitable part of the UK banking system. The culture of feeling entitled to a bonus in financial services needs to be stopped. There is ample evidence that performance-related pay has not been effective in rewarding good performance. There is also convincing academic evidence that performance-related pay does not generate higher levels of motivation or better outcomes - on the contrary it can contribute to excessive risk taking. Banking remuneration needs to move away from this damaging model of distributing rewards, but where bonuses do exist, they should be subject to 'claw-back' if trades or deals turn bad.
We would also like to see shareholders taking a far tougher approach to pay than they do at present (especially on the issue of bonuses), 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 limit 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).
Just as performance related pay affects behaviour at the higher end of the banking pay scale, it also causes distortions at the bottom. 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 products to households and SMEs, and also needs significant reform.
As well as worker representation on remuneration committees, we need additional reforms to control excessive pay in the financial sector. The TUC believes that the risks excessive bonus payments incentivise bankers to take should be better borne by the banking sector. In our view pay and bonuses above £250,000 per annum (ten times the level of average pay in the UK) should be considered profit and 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.
The TUC has also 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 also supports the introduction of a Financial Transactions Tax, which would ensure the city pays its fair share for the financial crash, generating revenues now and in the future which could transform public finances and help drive growth and social justice.
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. However we remain concerned that under the new regulatory regime there will still be too much emphasis on 'light touch regulation'. Financial regulators, and related organisations such as the Serious Fraud Office, need the resources, powers and independence to prevent scandals such as LIBOR rigging and to investigate and punish those found to have broken the law.
There is also evidence that a lack of personal liability has encouraged excessive risk taking at financial institutions in the past. The TUC believes that where banks benefit from the implicit guarantee of the taxpayer now is the time to look at increasing shareholders' and top management's personal liabilities for banks' practices so that they 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 featured in the recent LIBOR scandal, a criminal offence.
Diversity of Banking Models
The TUC would like to see a more diverse banking system in the UK. More mutually owned banks, for example, would help address some of the issues around short-termism and corporate governance problems. In some countries the existence of regionally focused banks has helped to address regional inequalities.
A diverse banking system with many more players focused on different geographies, different sectors and different types of banking would be more supportive of the real economy, less at risk from the failure of any one institution and probably marked by less excessive remuneration.
This could involve the Government providing initial capitalisation to a network of publically owned small regional development banks, which could draw on intelligence from local business people and trade unions. Should a state investment bank be established, it could also lend, in the same way as Germany's KfW, directly to regional banks.
The TUC also supports the establishment of more credit unions and believes wider action is also needed to address the disadvantages that mutuals face when seeking to establish banking services.
The banking system in the UK is not working and a watered down version of the ICB report combined with the Funding for Lending Scheme will not be enough to fix it. The TUC believes we need more fundamental reforms to how the financial system is structured, how corporate governance functions, to the type of banking institutions we have and to the variety of business models under which they operate. Only then can we begin to address the questions of how banks can support the real economy, how they can be made safer and how we can deal with excessive pay-outs to top staff.
NOTES TO EDITORS:
- All TUC press releases can be found at www.tuc.org.uk
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- Congress 2012 will be held at the Brighton Centre from Sunday 9 September to Wednesday 12 September 2012. The deadline for free media passes was noon on Wednesday 29 August. Credentials can still be applied for by completing the online form www.tuc.org.uk/mediacredentials but will now cost £50.
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