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The BSA Team
Introduction
We welcome the opportunity to comment on the HMT consultation on restricting bank relief for banks’ compensation expenditure.
Much of the sector’s argument has already been provided by Nationwide, our largest member and one of the UK’s top three mortgage lenders and the second largest high street savings provider. We do not repeat the detail here.
We agree that banks should pay their fair share of taxation in future and that the Exchequer must be protected from banks’ past management failures. But we are concerned that these proposals do not meet these objectives. For one, compensation expenditure will be taxed twice: once on receipt of the income from the product sold and secondly on the disallowance of the return of the cost of the product. Such double taxation would be unique to the banking sector; other financial sectors such as pensions and payday loans have paid compensation but not been taxed twice.
The proposed measure could also hit building societies – mutuals that have not engaged in the levels and types of misconduct as banks. This is not right or fair. Building societies should be excluded from the scope of this measure.
We look forward to engaging further with HMT.
Scope
HMT proposes to apply this measure to regulated banking entities, using the definition in place for the bank loss-relief restriction. We are surprised, and disappointed, by the repeated use of this definition. Earlier this year, HMT recognised the difference between the two sectors in respect of the bank loss-relief restriction and introduced a £25 million allowance for affected building societies. So once again, banks and building societies are wrongly bracketed together even though they have different ethos, ownership and structures:
It is not just research that confirms building societies’ customer focus. The level of fines for misconduct levied by the Financial Conduct Authority (and its predecessor body, the Financial Services Authority) on the sector is negligible. They account for just 0.3% of all fines from 2010 to 2014.
And in May 2015, the Financial Ombudsman Service published its annual complaint statistics for 2014/ 2015. These headline figures help illustrate how compliant and customer-friendly the sector is:
We therefore propose that building societies are removed from this measure as they are not part of the problem that has led to a diminution of corporation tax receipts, or the cause of customer detriment in the same way as the high street banks have been.
Options
All three options present difficulties. But if the legislation were introduced, our slight preference for banks would be for option 2, to include in tax legislation an objective definition of non-deductible compensation. We agree with Nationwide that the key word in defining the disallowance should be misselling. Any definition should explicitly exclude system errors, administration errors and customer service issues.
Option 3 – a threshold - has its attractions though it would be difficult and costly to identify costs of small and ad hoc customer compensations. But we consider a threshold for all compensation payments would work only if it was set at a level that was not adjusted for a bank’s/ banking group’s size. Determining an adjustment would be problematic and potentially open to manipulation. An appropriate threshold would be in the region of £50 million. That would capture the serial, high street offenders while at the same time sending a warning to lesser offenders.
We welcome the opportunity to comment on the HMT consultation on restricting bank relief for banks’ compensation expenditure.
Much of the sector’s argument has already been provided by Nationwide, our largest member and one of the UK’s top three mortgage lenders and the second largest high street savings provider. We do not repeat the detail here.
We agree that banks should pay their fair share of taxation in future and that the Exchequer must be protected from banks’ past management failures. But we are concerned that these proposals do not meet these objectives. For one, compensation expenditure will be taxed twice: once on receipt of the income from the product sold and secondly on the disallowance of the return of the cost of the product. Such double taxation would be unique to the banking sector; other financial sectors such as pensions and payday loans have paid compensation but not been taxed twice.
The proposed measure could also hit building societies – mutuals that have not engaged in the levels and types of misconduct as banks. This is not right or fair. Building societies should be excluded from the scope of this measure.
We look forward to engaging further with HMT.
Scope
HMT proposes to apply this measure to regulated banking entities, using the definition in place for the bank loss-relief restriction. We are surprised, and disappointed, by the repeated use of this definition. Earlier this year, HMT recognised the difference between the two sectors in respect of the bank loss-relief restriction and introduced a £25 million allowance for affected building societies. So once again, banks and building societies are wrongly bracketed together even though they have different ethos, ownership and structures:
- building societies are not profit maximisers. They aim for profit sufficiency, growing profits to support their balance sheet size and to maintain capital ratios. Their duty is to their savings and borrowing members, not generating returns for equity shareholders.
- building societies consistently outscore banks on various measures of customer service. Independent research shows that customers of building societies think more highly of their provider than do customers of banks in terms of trustworthiness, fairness and whether they would recommend their provider to friends and family.
It is not just research that confirms building societies’ customer focus. The level of fines for misconduct levied by the Financial Conduct Authority (and its predecessor body, the Financial Services Authority) on the sector is negligible. They account for just 0.3% of all fines from 2010 to 2014.
And in May 2015, the Financial Ombudsman Service published its annual complaint statistics for 2014/ 2015. These headline figures help illustrate how compliant and customer-friendly the sector is:
- building societies’ share of total complaints is 3.5%.
- the sector’s uphold rate of 13% is the lowest of any financial services sector by a significant margin; banks - 61%, general insurers 48%, IFAs 39%, life assurers 28%.
We therefore propose that building societies are removed from this measure as they are not part of the problem that has led to a diminution of corporation tax receipts, or the cause of customer detriment in the same way as the high street banks have been.
Options
All three options present difficulties. But if the legislation were introduced, our slight preference for banks would be for option 2, to include in tax legislation an objective definition of non-deductible compensation. We agree with Nationwide that the key word in defining the disallowance should be misselling. Any definition should explicitly exclude system errors, administration errors and customer service issues.
Option 3 – a threshold - has its attractions though it would be difficult and costly to identify costs of small and ad hoc customer compensations. But we consider a threshold for all compensation payments would work only if it was set at a level that was not adjusted for a bank’s/ banking group’s size. Determining an adjustment would be problematic and potentially open to manipulation. An appropriate threshold would be in the region of £50 million. That would capture the serial, high street offenders while at the same time sending a warning to lesser offenders.