THE Liberal Democrats have never held much sway in the City. Their traditional supporters prefer a sleepy, polite way of life – not the cut and thrust of the Square Mile. If the opinion polls are to be believed, however, Nick Clegg is set to play the role of kingmaker in a hung parliament after the next election. For the financial services industry, that could signal huge change; of the three main parties, his vision of post-recession Britain is the most radical.
“Our starting point is not anti-bank,” Clegg tells City A.M. as we sit down in his cramped but incredibly tidy office in the House of Commons. “I’m both familiar with and immensely impressed by the dynamism, energy and creativity of the City,” he adds, explaining that his older brother runs an Aim-listed wood company and describing himself as a supporter of liberal economics.
At first, Clegg’s lip service is convincing; confident, affable and highly charismatic, he has far more in common with the likes of Tony Blair and David Cameron than he has with Gordon Brown. Beneath the charm offensive, however, lies a set of radical policies that would transform the City beyond all recognition.
In his most wide-ranging interview on the subject to date, Clegg argues that bonuses for top bankers making strategic decisions should be banned outright, while their operating profits should be subject to a ten per cent levy (on top of regular taxes) until full re-privatisation.
If the Liberal Democrats get their way, such a day will be some way off. Clegg wants the state to hold on to its bank stakes for up to ten years, while easing capital requirements to boost lending. And all retail banks that operate on British shores – even those that haven’t taken state support – would be split from their investment banking operations, he says, endorsing what he calls a “Twenty First Century version of Glass Steagall”.
There would also be a massive overhaul of the tax system under a Lib Dem chancellor, Clegg says, announcing a 50 per cent rate of tax on capital gains on those earning £150,000 or more a year as part of plans to tax income and capital gains at the same rate.
Underpinning these pledges is an unshakeable belief that the world after Lehman Brothers has changed forever. “I am truly gob smacked that we are still having a debate about the tin-earred insensitivity of people in the financial sector,” Clegg says. “It’s analogous to the cloth-eared stubbornness of some MPs who didn’t realise that the world had changed the day this rotten system of expenses was exposed.”
Asked whether he wants to get rid of bank bonuses altogether, Clegg replies “yes” (although he later says he would limit such a ban to those making important strategic decisions). “My personal view has long been that almost any form of performance-related bonus for people who set the business strategy of banks, particularly ones in public ownership, is irrational.”
“I’ve got no problem at all paying them a lot of money – give them a big chauffeur-driven car, free membership of a golf club. People say the way to get around it is to pay bonuses in deferred stock, but I really wonder whether it gets rid of the basic problem, which is that you’re providing incentives to people that would influence their decisions.”
Clegg points to Sweden as a standard-bearer. Last year, it banned bonuses for executive board members at state-supported banks, although he says he would go further by extending the ban to investment bankers that influence strategy. Clegg’s definition of state-supported banks includes the whole sector, which he says has an implicit taxpayer guarantee because it knows it will always be bailed out in a crisis.
Banks that hope to avoid restrictions by becoming fully re-privatised will be waiting for many years – perhaps up to a decade. Clegg wants the government to hang onto its bank stakes in RBS, Lloyds and Northern Rock for much longer than any other political party, arguing that such a move would help boost lending.
“I unambiguously think it is better to retain a taxpayer stake in the banks for longer if in the short term it means that banks lend more money and spend less time hoarding capital to repair their balance sheets. Lending to small businesses has actually dropped very, very sharply indeed and the reason for that is these banks want to get out of public ownership as quickly as possible.” He claims that RBS and Lloyds have not met their current lending targets, which were agreed with the government.
In Clegg’s brave new world, the part-nationalised banking industry would be run by “activist” board members that represent the government, Clegg says, and forced to comply with harsher legally-binding, quantitative lending targets. Recently-introduced, much tougher capital requirements would be lifted, allowing the banks to turn the lending taps back on.
Banks that aren’t part state-owned, like HSBC, will be breathing a sigh of relief; even the Liberal Democrats wouldn’t try to impose such rules on private institutions. Still, Clegg’s unflinching support for a unilateral, British version of the Glass-Steagall Act that forced a separation of retail and investment banks would not be good news for any universal bank with UK operations.
“Take Barclays,” he explains. “It has a stated ambition to become the world’s largest universal bank. If Barclays succeeds in that ambition and things go belly-up, it is the British taxpayer that stands to foot the bill for liabilities that are worldwide in scope. I’m extremely uncomfortable with that.” Would the legislation apply to all banks with UK retail operations? “Yes.”
Elsewhere, Clegg’s most eye-catching pledge is to take a leaf out of former chancellor Lord (Nigel) Lawson’s book by taxing capital gains at the same rate as income, albeit with some exemptions for entrepreneurs. That would mean a 50p rate for gains for those on £150,000 a year (under Lawson, the top rate was 40 per cent; it is currently 18 per cent).
All of this wouldn’t matter a jot if the polls weren’t pointing to a hung parliament, and Clegg is notoriously tight-lipped on who he’d prop up in such an event. “Until the voters have dealt the cards to us, it’s fruitless for us to speculate.”
Still he pours cold water on Tory plans to start spending cuts early, and supports those economists who argue fiscal tightening needs to wait until the recovery is in full flow, a view generally seen as sympathetic to Labour. Asked if he would consider a Lib-Lab coalition even if Cameron wins more seats, he says “it’s not an arithmetical equation”.
Clegg ends by making it clear that he’s not ready to submit to either of the bigger parties just yet. “If the British people decide that neither deserves an outright majority, everyone will have to work out how to provide stable government. All we can do now is lay out our priorities: I’ve been clear, I don’t think Gordon Brown or David Cameron have.”
CV | NICK CLEGG
Marital Status: Married with three sons
Education: Studied social anthropology at Cambridge University and went on to do post-graduate degrees at the University of Minnesota and College of Europe in Bruges.
Career: 1994 European Commission; 1999 elected as Member of the European Parliament (MEP) for the West Midlands; 2004 stood down from MEP role and lectured part-time at both Sheffield and Cambridge Universities; 2005 elected as Member of Parliament (MP) for Sheffield Hallam; 2006 Shadow Home Secretary; 2007 elected leader of the LibDems.