The Correspondence & Enquiry Unit HM Treasury 1 Horse Guards Road London SW1A 2HQ

City Future, Policy Committee policy@city-future.co.uk

19th February 2013 Dear Chancellor, HM Treasury Budget Representation 1. Background/Introduction City Future (city-future.co.uk) was founded in 2007 by its patrons, Sir John Major and Lord Risby, with the aim of reaching out to young conservative minded professionals working in the City of London. We represent around five hundred young City professionals from finance, consulting and legal backgrounds. This letter has been prepared by City Futures Policy Committee. We welcome the opportunity to submit a budget representation in advance of the 2013 Budget Day. The views expressed herein are our own and do not necessarily represent those of our employers. 2. Concerns In addition to the detrimental impact to the economy, the global financial crisis left a scar on the image of banking. Furthermore damage has been done by recent scandals relating to LIBOR and the misselling of PPI and swaps. These scars have tarnished the reputation of the financial services and made banker bashing popular amongst society and politicians manifesting in protests, increased regulation and a general dislike for the industry. We are concerned by this as increased regulation to satisfy voter disdain for bankers chokes the industry's ability to generate growth for the UK. In addition as banks try to repair their image it diverts attention away from their core activity of providing credit to fuel expansion of the economy. Given the finance sectors great contribution to the nations GDP and the sectors unique ability to invest in the expansion of other sectors to increase the productive capacity of the UK we believe it is important to repair this broken image to avoid a situation whereby financial services are irrevocably over-regulated to placate popular disdain towards bankers.

There have been several attempts by the industry to change the image of banking. On the whole these have not been successful. Whilst it is imperative that banks change their own culture and their relationship with the public, the government can play a role to assist in this process. 3. Aims/Proposals We propose that the Government use the revenue raised from the bank levy to explicitly fund the Communities and Local Government Capital Expenditure budget (CLG-capex). The bank levy raised 1.8bn in 2011-12. The bank levy was introduced to ensure the banking sector makes a fair contribution to reducing the deficit and recognises the increased risk that banks pose to the financial system and the wider economy. The government targets that the Bank levy will raise 2.5bn. This revenue is roughly equal to the 2.2bn capital expenditure limit placed on the Communities and Local Government (CLG) budget in 2013/141. The Bank levy could be explicitly assigned to fund the CLG-capex budget. By assigning a use for the bank levy to an item of expenditure that is seen as beneficial to society the government can help to improve the image of banking. We have selected the CLG-capex budget because spending in this area will penetrate society and have the most impact on the widest section on society. In addition spending under this item will increase the productive capacity of the UK. Surplus funds can be used by the Exchequer to finance general spending. Should it so be desired, small plaques could be used on projects/buildings paid for via the CLGcapex budget further highlighting that these were funded by the Bank levy. This proposal is similar to the way in which 35m of the fines that were levied on banks by the FSA were used to support Britains armed forces community2. Should the Chancellor wish the arrangement could be extended to allow additional contributions above and beyond what is required. In this way banks can make additional contributions to fund the budget for CLG-capex further improving their image to society and raising additional funds for the Chancellor. Banks may find it desirable to over-contribute to make a positive contribution to society in much the same way that Barclays sponsored the TFL bike hire scheme3.

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Page 55, http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf http://www.hm-treasury.gov.uk/press_90_12.htm 3 http://www.barclays.co.uk/Sponsorship/Cycling/P1242594861114

Likely effectiveness and value for money

Once the link between banking and communities is made more explicit the damaged reputation can begin to be repaired. For little or no cost this is an effective way of making the banking sector a part of society. Explicitly assigning the Bank levy to the CLGcapex budget can create shared value. Harvard Business Review reports how capitalism is under siege and that companies and governments will recognise the need to create shared value in society4. This highlights that banks may not minimise their levy contributions to maximise profitability but rather be prepared to sacrifice profitability to demonstrate shared value with society because of the associated benefits. The basic proposal will have little or no revenue implications versus the existing rules. Revenue from the Bank levy will be explicitly allocated to the CLG-capex budget. Surplus revenue will be allocated and spent at the discretion of the Exchequer. For each additional 1m contribution above and beyond what is required this will reduce corporation tax after April 1st 20135 for the Exchequer by 230k but the net impact will be an increase in revenue of 770k.

Revenue implications for the Exchequer

Wider macroeconomic implications (for economic stability and growth)

The benefit of restoring trust between society and banks will help to support the role of banking in the UK economy. A relationship between banks and society built on a stable foundation will reduce the need for politicians to attack banks with regulation to satisfy voters. Reduced additional regulatory burden will help banks to focus on their core role of creating credit and supporting growth. The benefit of explicitly assigning the Bank levy to the CLGcapex budget will accrue to the banking sector in the form of helping the sector to rebuild trust and repair its tarnished image. The basic proposal would incur minimal distributional impacts beyond those already in place for the collection and distribution of the Bank levy. Additional contributions above and beyond what was required would see a reallocation of money away from the banking sector to be allocated to spending in another sector as the Exchequer sees fit.

Sectoral impacts

Distributional impacts

4 5

http://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/1 http://www.hmrc.gov.uk/rates/corp.htm

Administrative and compliance costs and issues Legislative and operational requirements. Environmental impact.

We envisage minimal administrative and compliance costs beyond those already in place for the collection and distribution of the Bank levy. We envisage minimal legislative legislative and operational requirements beyond those already in place for the collection and distribution of the Bank levy. We do not envisage any direct environmental impacts.

4. Conclusion The government can play a role in assisting the banking industry in repairing its relationship with society by explicitly assigning revenue from the Bank levy to the CLG-capex capex budget. Restoring trust can enable banks to focus on providing credit to enable the economy to grow. Restoring trust may also provide the certainty for banks from a regulatory perspective that successive governments will not introduce additional regulation purely to satisfy voters. Allowing additional contributions above and beyond wh what at is required could also play a part in reducing the deficit. We hope that our budget representation is helpful and we would be happy to discuss further. Yours faithfully,

Daniel Yates, CFA Chair Policy Committee, City Future

Sean Garman, ACCA Co-Chairman, City Future

Andrew White Member Policy Committee, City Future