The ‘Project Merlin’ agreement reached yesterday between the government and the UK’s leading banks is to be cautiously welcomed as a necessary but insufficient step towards wholesale reform of the financial services sector. In particular, the SLF welcomes the 15% increase in funds available to small businesses and the small move towards greater transparency on executive remuneration – but the deal as a whole fails to tackle the fundamental failure of our financial system to serve the wider economy.
Although the government will point to an increase in overall lending targets, monitored by the Bank of England for delivery, once adjusted for inflation this increase is unlikely to prove sufficient to revive British business. In addition, the modest moves towards greater pay transparency fail to include non-executive traders, whose pay and bonuses often make them the highest-paid members of staff in some banks; when coupled with the payment of bonuses – albeit in deferred stock and not cash – to those in State-backed banks, the reforms to bankers’ pay don’t go nearly far enough.
Perhaps most important of all are the structural changes to the tax regime banks will be subjected to, including but not restricted to lower corporation tax and exempting revenue generated in other jurisdictions completely; despite the extra £800m in revenue brought in by extending the bank levy, it remains possible that banks will contribute less to the Treasury than in recent years, an unacceptable green light for the sector’s destabilising practices.
Business Secretary Vince Cable rightly argues that we should reserve judgement on the government’s policy on banking until Sir John Vickers’ banking commission reports later in the year – the danger is that in the meantime Merlin’s tinkering is passed off politically as genuine reform, undermining the need for the root-and-branch overhaul that is clearly required. In arguing for the continued need for real reform Vince has lost a valuable Parliamentary ally in Lord (Matthew) Oakshott, who felt he could no longer support the government’s approach to the banking sector.
We sincerely hope that Vince, and all Liberal Democrats, will lobby hard to implement Liberal Democrat policy; to separate high-risk ‘casino banking’ from service vital to the financial health of the nation and to pursue the break-up of nationalised banks into credit unions and mutuals. We call on Lib Dems to ensure that the political muscle of the City doesn’t capture government policy-making, which must always keep the interests of British business and citizens at its core.