The chief executive of Lloyds Banking Group has fired a warning shot at UK policymakers, saying measures such as a windfall tax on banks should be ruled out before what is expected to be a hard-fought election year.
With Labour largely silent on its plans for City regulation despite its current commanding lead in the polls, Charlie Nunn said City firms and investors alike were “looking for more certainty and clarity around the future”.
His comments appear to be a call for assurances that the UK will not follow some European governments, which have put new taxes on banks accused of reaping billions in extra profit from rising interest rates over the past year.
Nunn urged policymakers to keep their hands off profits, dividend payments to shareholders and the amount of interest paid to lenders that park cash at the Bank of England.
“With respect to financial services, the nervousness is the narrative around what we saw in Spain and Italy and Switzerland around windfall taxes, or reserve remuneration, or withholding dividends,” he told the FT’s global banking summit in London on Tuesday.
“The real desire that we would have – and that I know our shareholders would have – is just clarity that banks can continue to operate effectively in supporting their customers, and can continue to safely create returns for their shareholders,” he said.
Nunn’s comments came after Italy shocked markets by announcing a 40% windfall tax on banks in August, in a move that sent shares in local lenders plunging. It followed similar policies introduced in the Czech Republic, Lithuania and Spain, which have taken aim at banks profits that have soared in line with rising interest rates.
Higher rates have allowed lenders to increase the amount they charge borrowers for loans and mortgages, which have often risen faster than the returns offered to savers. Lenders have pocketed the difference, known as the net interest margin – which is a key measure of their profitability.
It has sparked criticism from UK MPs on the Treasury committee, who accused lenders in July of profiteering during the cost of living crisis. The committee reiterated its concerns last month, and criticised the largest UK banks for being too slow to reward savers after HSBC more than doubled its profits and handed out $3bn (£2.5bn) to shareholders.
The campaign group Positive Money has said that a UK windfall tax could have already raised £3.4bn from the UK operations of the country’s big four banks – Lloyds, NatWest, Barclays and HSBC – based on the profits earned in the first half of 2023 alone.
Debate has also swirled around the amount of interest that banks such as Lloyds earn for placing their cash at the central bank in the form of reserves.
Swiss policymakers took decisive action on the issue last month, announcing they would no longer make payouts to commercial lenders on the minimum sums they are meant to hold in reserves at the central bank in an effort to cut costs.
Nunn’s warnings, however, are likely to be closely followed by Labour and Tory politicians as they attempt to woo City firms and garner business support ahead of a likely election in 2024.
Nunn said policymakers needed to boost UK’s international credibility and attract investors who might otherwise be wary of betting on Britain, particularly in the wake of Liz Truss’s disastrous mini-budget last year.
“We just want a level playing field relative to other international markets and relative to the dynamics domestically,” he said.
He welcomed the Conservative government’s attempt to overhaul City regulations though a package of changes known as the Edinburgh Reforms, but he said the City needed to be able to rely on longer-term support.
“What we need to do is build momentum and support … through whatever the political cycle is, because directionally they are positive and supportive of investing more in the UK, using bank and insurance balance sheets more efficiently and supporting customers in a more proactive stance.
“And that, to me, is the most important thing that comes out of this next decade: that we give the big financial institutions in the UK the confidence to start innovating again on behalf of their customers.”