McDonnell must drive reform through the City of London – our money is at stake

The square mile is chipping in more than ever, City A.M. roared today. The tax take from the financial services sector hit a record £71.4bn in 2015/16, according to a new study.

All well and good. We always need a healthy and sustainable financial services sector – but particularly more so now, given the economic turbulence that will come when Britain finally withdraws from the EU. That economic shock has yet to arrive because so far we have simply talked about Brexit. Until we actually eject ourselves from the bloc, all bets are off.

Today’s report, published by the City of London Corporation with PwC, shows the scale of tax paid and jobs supported and the huge cumulative impact on Britain’s GDP.

It also prompts questions, however, about the unfinished job of reforming the banks, which benefited by around half a trillion pounds of taxpayer support following the financial crisis. It is reform that was often talked about by George Osborne during his time as chancellor but one of several big areas on which he failed to deliver.

So, as we approach 10 years since the onset of the credit crunch – as it was quaintly known before it became a full-scale financial crisis – it’s time to remember a few basics as Labour considers its demands for how the City, and the wider economy, can move on from the crash.

1. Put the economics before the politics. Osborne rarely did this because he was a strategist as much as a chancellor. In fact, for him, the political strategy was the economic strategy. He only wanted to talk about Gordon Brown and Labour spending, not real change.
2. You and me are all still on the hook for 72 per cent of RBS. Last month the Treasury said it would not sell our stake until it has first spun out the Williams & Glyn bank – but RBS said it is likely to miss the deadline of next year.
3. The last tranche of RBS shares to be sold went at a £1.07bn loss. Ian Gordon, an analyst at Investec, told the BBC: “The taxpayer is being short-changed”.
4. Lloyds, which is in much better shape, is still just under eight per cent state-owned. The sale of the final stake has been repeatedly postponed because of global market turmoil.
5. It is time to tackle tax avoidance. Osborne talked about this repeatedly but, of course, did not want to take on the City financiers who bankroll the Tory party. Yes, it would be absurd to smear all of one sector as tax avoiders – but it would also be ludicrous to pretend it is not still going on in some corners of the square mile. Bending the rules to avoid paying billions of pounds in tax is, as has often been said, morally repugnant. You know the reasons why, whether your view is based on ethics or public services – our taxes pay for the schools which educated City workers and for the roads and rail which bring them to their office each day.

So Labour needs a political and an economic strategy for banking reform, as I argued at a Consensus debate in parliament earlier this year.

We should re-ignite public anger over the failures of the banking system. Of course, to get a hearing, Labour must recognise the mistakes it made over regulation in office, as Ed Balls did in the last parliament.

But it must also point out that many of the reforms championed by Ed B and Ed M were mocked by the Tories before they were lifted by Theresa May’s administration.

And John McDonnell and the new City spokesman, Jonathan Reynolds, should remind the public of the sycophantic approach to banking of David Cameron and George Osborne, e.g. to limit bonuses in the state-owned banks to £10,000, or going to war with the EU to overturn the cap on bonuses (before backing down at the last minute), or the problems being stored up for the future, such as the £1 trillion or more of personal debt. This can help form the political strategy.

Labour’s economic strategy must be for the frontbench to come up with genuine reform proposals which can feel with some of the risk in the system.

I will not re-hash all of the ideas from the last parliament but having studied at great length the Banking Reform Bill – now an act – several reforms remain to be carried out:

1. Publication of pay ratios to show the difference in remuneration between the highest and lowest-paid members of staff.
2. The bringing-in tougher capital ratios for the biggest banks, which Osborne resisted in the last parliament.
3. Deliver full implementation of the proposals put forward by the cross-party Parliamentary Commission on Banking Standards, which includes legislating to create a backstop power for full separation of the retail and investment arms of systemically important banks, if ring-fencing does not work.

There are many other proposals to consider, from tougher rules on the risk-weighting of assets to imposing worker representation on bank boards – proposed by Miliband, adopted by May and then abandoned by May and Philip Hammond – but there is not time to consider them all.

So I will end where I began. The City contributes a huge amount to British life – but must up its game.

Labour must put banking reform back on the agenda and remind voters of the billions of pounds of public money still tied up in the banking system. At the end of the day there is no such thing as government money, only taxpayers’ money and, in the Tories, I don’t see a safe guardian of our money.

It’s time, once again, to hammer the Tories for their deliberate failure to deliver a fairer banking system.