New Clause 6 - Remuneration consultants

Financial Services (Banking Reform)Bill – in a Public Bill Committee am 11:00 am ar 16 Ebrill 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

‘The Secretary of State will by regulations provide for a requirement that the remuneration consultants advising on remuneration policy shall be appointed by the shareholders of a relevant financial institution.’.—(Cathy Jamieson.)

Brought up, and read the First time.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I beg to move, That the clause be read a Second time.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

With this it will be convenient to discuss the following:

New clause 7—Remuneration committee—

‘The Secretary of State will provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant financial institution.’.

New clause 10—Remuneration reform—

‘Within six months of Royal Assent of this Act the Chancellor of the Exchequer shall lay before Parliament proposals on reform of remuneration at UK financial institutions which shall include incentives to take account of the performance and stability of a UK financial institution over a five- to 10-year period.’.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I hope that we can make some progress on new clauses 6, 7 and 10. New clause 6 is about shareholder votes on the advisers to remuneration committees. It would allow bank shareholders to approve the appointment of the remuneration adviser. It is one of several new clauses that would take action on certain banks’ excessively risky remuneration practices, which incentivised the overexposure to risk that ultimately fell on the shoulders of the taxpayer. We have had a lot of debate and discussion about that, and I do not think we need to rehearse the details.

We believe that it is necessary to ensure that an independent voice is heard when bank remuneration committees discuss executive pay. The general public are interested in that. It would be preferable if the rights of shareholders and the owners of companies were formally asserted to ensure that remuneration consultants knew they were being commissioned by stakeholders with an interest in ensuring a proportionate approach to remuneration policy. To take one example, would the pay package of senior executives at Barclays have been different if the remuneration advisers had been appointed by the shareholders? The Minister might want to think about that.

Photo of Alok Sharma Alok Sharma Ceidwadwyr, Reading West

I understand what the hon. Lady is trying to achieve with the new clause, but I am not sure that it would achieve the results she wants if it came into place. She is suggesting that shareholders vote on a remuneration consultant at an annual general meeting, but she will be aware that many companies have a number of remuneration consultants taken on throughout the year for different purposes. How she is proposing that we get over that hurdle practically?

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I thank the hon. Gentleman for that intervention, and I am glad to hear that he perhaps has some sympathy with what we are trying to achieve. As always, I would be more than receptive to Government amendments or new clauses to take forward these issues. In the absence of that, it has fallen to us to get them on the agenda, imperfect as our wording sometimes is. That wording may not entirely meet the approval of Ministers and others.

I will develop some of my arguments in response to the hon. Member for Reading West. If we look back at the Barclays situation, the former chair of the Barclays remuneration committee, Alison Carnwath, told the  PCBS that she alone had objected to the package of up to £20 million awarded to the then chief executive, Bob Diamond, for 2011. He described the bank’s performance that year as “unacceptable”, but had ultimately been overruled by the remainder of the board.

When questions were being asked on this subject in the PCBS, Lord Lawson said, on 30 January:

“My knowledge of remuneration consultants, which is from a company not in the financial sphere, is that they are a profession that makes prostitution seem thoroughly respectable.”

Those are strong words indeed. He continued:

“When they are brought in, they know that if they recommend low pay they will not get a repeat performance, so in order to ply their trade, they pitch their recommendation as high as they possibly can.”

I see some hon. Members smiling. Whether that is due to the wording, or whether it is because they know it to be true, I do not know. [Hon. Members: “It is true.”] Indeed, they acknowledge it to be true. Lord Lawson continued:

“This is also convenient for the non-executives, who might otherwise feel awkward in awarding the executives these very high pay levels, because of the cover that it has been recommended by a remuneration consultant.”

Advisers will, from time to time, say things that please the person commissioning them. Where a company’s senior executives and managers commission independent external advice, the consultants providing that advice tend to have an eye to the future commissioning of advice and want to make recommendations that fall in line with the people commissioning them. It is therefore best to make fully transparent the appointment of remuneration advisers by allowing shareholders to vote on them. That is one of the proposals that we have made to try to concentrate the minds of advisers and the management team whose pay is under discussion.

The second issue in the new clauses relates to ordinary workers being on remuneration committees. People will be aware of the recommendation of the independent High Pay Commission, which wanted workers to be put on all remuneration committees. That was not taken forward by the Business Secretary, who said that

“we are stressing employee participation in remuneration discussions.”—[Official Report, 2 February 2012; Vol. 539, c. 982.]

That is quite different from having someone on the committee.

It is my understanding that back in September 2011, a Department for Business, Innovation and Skills discussion paper floated the idea that

“independent members or employee representatives on remuneration committees would provide a helpful, fresh perspective and encourage greater challenge”.

Those may be seen as wise words. We believe that one of the best ways to make more voices heard on pay is in votes, and despite the shareholder spring, the level of revolts remains pretty subdued. In 2011, the average level of dissent registered in all explicit votes on remuneration was 11.7%, which was up from 9.6% the previous year, but that was obviously well below the levels of 16% and 12.4% seen in 2002 and 2003 respectively. That is an interesting point.

In 2011, FTSE 100 chief executives were awarded average total remuneration of £4.8 million—a rise of 12%—representing just over 200 times the average total  private sector pay of just under £24,000. That is based on Office for National Statistics income data figures. In Germany, worker representation on remuneration committees is common in large companies. By law, in companies with more than 500 employees, one third of supervisory board members must be worker representatives and in companies with more than 2,000 employees, half the supervisory board members must be worker representatives. I wonder whether we could learn from the success of Germany’s economy and those practices, tying them into our values and how we want things to work. I do not believe that the City or our economy should have anything to fear from giving a voice to ordinary workers, on whom the success of a company ultimately depends, as they have to do the work and the job.

The third issue we wished to raise with the new clauses was about a report on reforming pay to reflect long-term performance. New clause 10 would mandate the Chancellor to bring forward proposals on reform of remuneration at banks so that they

“take account of the performance and stability…over a five-to 10-year period.”

In evidence to the Treasury Committee in January, Bank of England director, Andy Haldane, made points about reforming performance metrics against which salaries are based, suggesting that it was irresponsible to use metrics that failed to take account of risk. He also raised issues about the horizon over which performance is evaluated, suggesting that that needed to be reformed, and that clawback and deferral of three-to-five year periods was too short to capture a cycle in credit. It was suggested that that period needed to be longer.

Bankers can face clawback procedures on their bonuses. Last month, Lloyds Banking Group said that its remuneration committee had advised the board that it should claw back bonus awards made in 2010 to former executive directors, although it would be fair to say that the use of clawback procedures is still rare. Despite being accused by the US Senate of breaching safeguards that should have stopped the laundering of money from Mexico, Iran and Syria, HSBC actually clawed back less pay from senior staff during 2012 than in the previous year. It said it had retrieved $700,000 out of the $608 million of deferred pay still outstanding for 314 senior staff as of the end of December. That represented only 0.1%, and it was less than the $800,000 the bank clawed back in 2011.

The argument always appears to be that there need to be incentives if bankers are to do well, but they do not seem to have worked as incentives to avoid failure. I do not wish to suggest that I agree with everything the Under-Secretary of State for Skills, the hon. Member for West Suffolk (Matthew Hancock), said in his book “Masters of Nothing”, but let me quote one thing he said:

“Rewards for failure must be unravelled and managers given something to fear”.

I can see the Whip looking at me, and I am sure I am about to be called to account given the time, so let me make one last point. If banks were truly planning on a long-term basis, clawbacks would not be necessary. We should have a situation in which we can change not only the legal and regulatory structures but the culture.  Through the new clauses, we want to ensure that banks will think for themselves and consider how to make their performance sustainable.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury 11:15, 16 Ebrill 2013

It is proving to be an enlightening morning, although it is about to end. We have discovered that the hon. Lady is an avid student of the Prime Minister’s speeches from 2008, and we now understand that she has made a close study of the works of the Under-Secretary of State for Skills, my hon. Friend the Member for West Suffolk. It is good to hear what her reading matter is.

There is no doubt that the matters the hon. Lady raises regarding remuneration are important or that the problems and deficiencies of remuneration structures contributed to the financial crisis. The national lottery-style payouts that were made were too often made in response to short-term gains, and they were sometimes made before any actual gains were realised. Some of the bonuses were also awarded on the basis of one-way bets, the downside risk of which was covered by the taxpayer.

We should bear it in mind—the Committee has borne this in mind—that the source of all the money in the banking sector is ultimately ordinary working people: their pensions, their savings, their deposits, their loans, their mortgages and, sadly, in recent years, their taxes. We therefore have an interest in remuneration in the financial services sector, and it is important that it is carried out in a way that is consistent with, not injurious to, our constituents’ interests.

In what ways should we address the question of remuneration? First, we should, as far as possible, be vigorous, as the Government are, in promoting international good practice. There is clearly a risk of arbitrage, with companies locating in the most lax jurisdiction. Through the global Financial Stability Board, we look to promote rules that will apply across the world, and particularly in the G20, to make pay safer, more transparent and, in particular, recoverable in the event of failure or misconduct that subsequently comes to light.

Given the situation we inherited, it was important to enhance the role of shareholders. In our previous discussion, we talked about directors’ responsibilities, one of which is, of course, to shareholders. It is not clear that decision makers in banks have had it in mind that their responsibility is to their shareholders, including the pension funds that invest in them, which are the repositories of the future prosperity of ordinary working people.

Regulators must, of course, be constantly satisfied that the arrangements in place for remuneration pose no threat to the stability of the financial system. Remuneration must be in the company’s long-term interests, and no bonus scheme should be constructed that is to the detriment of the consumer.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.