Our focus on Citizenship is not for the short term; in fact, it is how we expect to make our business sustainable over the long term. We recognise that the issues that will define our success are defined by society at large and evolve over time. We have to carefully monitor how those issues evolve throughout the year and be open about how we address them. This proactive external engagement is an important part of our strategy. In addition to the topics covered throughout the Report, we’ve set out below the issues we believe to be some of the most significant and challenging that we currently face as a global bank and corporate citizen. This includes our actions to improve our performance and be more transparent right now.
Regulators, the media and consumer groups continue to highlight concerns about the financial services industry’s track record on customer complaints. In 2011, this remained a particularly high-profile issue in the UK where the Financial Services Authority (FSA) and Financial Ombudsman Service (FOS) publish complaints data for the sector.
Concerns about sales practices relating to Payment Protection Insurance (PPI) were a key driver of UK complaint volumes across the banking sector in 2011.
What we are doing
We have taken what we believe to be a strategic approach to reducing complaints volumes – identifying root causes of complaints and fixing the underlying issue. In 2011, we made significant progress in improving our customer experience in areas of particular importance to our customers (as signalled by them directly and indirectly through complaints volumes) and reducing overall complaints. As a result of our efforts, our FSA-reportable Banking complaint volumes reduced 30%.
We still have much more to do, though, as complaint volumes remain too high. That is particularly the case with complaints related to PPI sales. To help manage these complaint volumes, during 2011, we committed to process all existing and new complaints from customers about our PPI policies, and we were the first bank to offer a ‘no quibble’ refund to customers who had PPI complaints put on hold during the judicial review.
PPI complaints will continue to account for a significant proportion of complaint volumes in 2012. In fact, we have experienced a material increase in complaint volumes in early 2012. We will continue to work hard to clear PPI complaints as quickly as possible, resolving all complaints in a transparent and efficient way.
2011 was a tough year for businesses in most of the markets in which we operate, particularly the UK, Europe and the US, with the faltering or nascent economic recovery in each affecting performance. In the UK in particular, companies continue to postpone investment decisions, especially given the challenging conditions in Europe. As a result, most are building significant cash buffers and using excess cash to pay down existing debt.
In response to these circumstances, the major UK banks agreed in early 2011 to work in partnership, through the so-called Project Merlin, to support the UK economic recovery by committing to make a certain volume of new lending capacity available to UK businesses, with a particular focus on small and medium-sized businesses. The Merlin banks collectively met their lending commitments to UK businesses generally, but narrowly missed their commitment to small and medium-sized businesses by just over £1bn (lending £74.9bn of the £76bn target).
What we are doing
In 2011, we delivered £45.0bn in gross new lending to UK businesses and households. We exceeded our contribution to the collective Merlin target by 13% overall, providing £14.7bn to SMEs. This was a key part of the support that we provided to UK businesses during 2011; our broader support included: helping 108,000 businesses to start up; growing our net lending to private non-financial businesses by 3% against an industry-wide decline of 5% (BoE / BBA data); and enabling the return to health of 1,900 businesses. Barclays averages more than 15,000 credit applications a month from businesses, over 90% of them from SMEs, and we will continue to support small businesses though a variety of initiatives during 2012.
Post the financial crisis, governments around the world are seeking to raise revenue, attract investment and foster growth. They are doing this, in part, by reforming their tax systems and strengthening anti-avoidance rules.
The negative impact of the financial crisis on bank profits has resulted in lower corporation tax payments from UK banks since 2007. Nevertheless, banks remain very significant contributors of tax revenues in the UK because of other taxes paid such as irrecoverable VAT and the one-off bank payroll tax of £3.5bn in 2010. And, from 2011, banks incur the annual cost of the UK bank levy, which is expected to raise about £2.5bn of tax annually from the 30 or 40 largest banks and building societies operating in the UK.
In 2010, the UK government encouraged banks to sign up to the voluntary Code of Practice on Taxation for Banks (the Code) in relation to their tax affairs and therefore to comply with the spirit, and not just the letter, of the law. The Code states that banks should work together with HM Revenue and Customs (HMRC) in an open and transparent way.
What we are doing
As a global bank, we are committed to contributing to the economies of all of the countries in which we operate through the payment of tax. Like other companies, Barclays has a fiduciary duty to its shareholders to manage its tax affairs responsibly and recognises that a balance is required between the needs of various different stakeholders in how we manage our tax affairs. Those stakeholders include our customers and clients, the communities we serve, our people, our shareholders and regulators.
We ensure that all transactions that we undertake are fully in accordance with relevant tax laws wherever we do business. In the UK, we have voluntarily adopted the Code to apply the spirit as well as the letter of the UK law in all of our tax dealings. We have robust and extensive governance processes in place, which have been reviewed in detail by HMRC, and we believe we operate on a uniquely transparent basis with HMRC. Nonetheless, we recognise that we need to reflect the changing approach to the taxation of corporates, particularly banks that are subject to the Code in the UK, in the way in which we manage our future tax affairs.
As shown in the tables below, in 2011, we paid £1.7bn of corporate income tax on our profits arising in all the countries in which we operate. We also paid other taxes of £1.6bn. This £3.3bn of taxes borne1 by Barclays, together with taxes collected2 on behalf of employees and customers of £3.1bn, totalled global tax payments of £6.4bn. These amounts do not include any additional tax that will arise as a result of the retrospective change in law announced on 27 February 2012 as a response to the voluntary disclosure we made to HMRC about the repurchase of some of our debt.
|Tax borne and tax collected by region||£m|
|Analysis of tax borne by Barclays||£m|
In both 2010 and 2011, our UK taxes borne were £1.4bn. In 2010, this made Barclays the third largest taxpayer in the Hundred Group (made up of the UK’s largest companies), based on taxes borne, in PwC’s most recent survey. The UK taxes borne in 2011 included corporation tax of £0.3bn plus bank levy of £0.2bn paid to HMRC.
Many commentators seek to compare the taxes paid in a year, in a specific geography, to the profit generated in that geography as a means to test if the tax paid is ‘fair’. This is not a straightforward exercise for two timing-related reasons. First, the corporate tax due on profits generated within a calendar year very often falls across multiple years, so the taxes paid in a year do not necessarily represent the taxes due on that year’s profits. Second, the tax payments in any given year will likely be influenced by the tax consequences of business activities, such as tax timing differences and offsets from losses carried forward from prior years. Like other banks, our recent corporation tax payments in the UK have been reduced by historic trading losses in our UK operations. These arose mainly since 2007, as a result of the financial crisis. They are available to carry forward against future taxable profits under UK tax law, even though Barclays was profitable at an overall level throughout the crisis.
Our UK corporation tax figure cannot be compared against our overall, global profit before tax in 2011, because a significant portion of that profit was earned via operations outside of the UK and is generally, therefore, not subject to tax in the UK. Outside the UK, our profits are taxed at the local corporate tax rate in the country in which the profits are earned.
However, we recognise that there is material interest, given the scale of our operations in the UK and the current environment, in comparing our UK corporate tax to a relevant profit figure3, which for 2011 was approximately £1bn.
Despite the fall in our UK corporation tax due to the financial crisis, total taxes borne by Barclays in the UK have increased every year since 2008. And in 2011, £1.5bn of taxes were collected on behalf of our staff (for example, PAYE) and customers (for example, withholding taxes), resulting in a total of £2.9bn in taxes borne and collected by Barclays and paid to HMRC.
We also make significant tax payments in developing countries which are often a major contributor to the overall tax revenue in these countries. For instance, in 2011, we paid corporate income tax of £0.6bn across our operations in Africa.
We operate in offshore financial centres, principally in the Isle of Man, Jersey and Guernsey, where our Wealth and Investment Management division is a long-term major local employer. The income from these Crown Dependencies represented only 1% of our total income in 2011.
We also have a number of companies in the Cayman Islands, and virtually all of the profits generated in these companies are subject to corporate tax at the UK corporate tax rate. The total amount of profit not taxed in the UK across all of these Cayman Island entities was less than £1m in each of 2010 and 2011. In 2011, we liquidated a significant number of our Cayman Island entities, reducing the total number by 25% to 134. We plan to make further reductions in 2012.
We understand that these centres remain a matter of particular interest for some of our stakeholders. While some stakeholders assert that these entities are used for purposes of tax avoidance, that is simply not the case. We use these entities for business purposes and the scope of the operations has been disclosed to HMRC and other relevant authorities.
The financial crisis highlighted the need for changes to the regulatory systems that govern how banks and other players in the financial services industry operate. We believe that banks must show – by their actions – that they understand the public’s concerns over the mistakes of the past, and recognise their obligation to behave prudently and comply with all applicable regulations. They must also participate positively in the reform process.
With collaboration at a global level through the G20 and the Financial Stability Board, the focus of reforms to date has been to ensure banks have more and better quality capital and liquidity. These reforms are captured in the so-called Basel III regime, which will be implemented in individual countries and regions around the world, although the pace and consistency of its implementation across markets remains a key concern for banks that, like Barclays, operate on an international basis. Separate, but related, changes are also proceeding at national levels. For example, the Dodd Frank Act (DFA) is concerned with the restructuring of financial services regulation in the US. In the UK, the Government has pursued reform to the structure of the industry in reaction to the crisis through the Independent Commission on Banking (ICB). The full recommendations of the ICB were published in September 2011, and the Government has committed to legislating for necessary changes before the end of this session of Parliament in 2015, with full implementation by 2019.
What we are doing
We support a robust regulatory environment and its role in contributing to a stable financial system, and we have provided extensive input to domestic and international regulators, especially to the US and UK authorities on DFA and ICB respectively, on this matter. Our view is that the new regulatory architecture should meet three objectives:
- Create a safer and more secure financial system, including ensuring that taxpayers are never again exposed to the risk that they were in the crisis.
- Better equip the banking industry to support the needs of the global economy.
- Support international consistency of regulatory reform to allow international banks such as Barclays to operate on a level playing field globally.
Key regulatory issues:
- Basel III – The Basel Committee made wide-ranging proposals, which will be implemented in the European Union by the Capital Requirements Regulation and the Capital Requirements Directive (together, so-called CRD IV) including increasing the quality and quantity of capital required and more stringent treatment of risk-weighted assets than is required under the current regulatory regime. We maintain a strong dialogue with international regulators, including the Basel Committee and the Financial Stability Board. Since 2008, when regulators made it clear that there would be requirements for banks to hold more equity capital, we have moved swiftly and in scale to raise capital ahead of regulatory requirements. We worked to pre-empt the regulation and build rock-solid capital, funding and liquidity, a source of stability for our customers and clients. As at 31 December 2011, our core Tier 1 ratio remained robust at 11.0% and risk-weighted assets were managed tightly with significant reductions in credit market exposures and improved capital efficiency.
- ICB – The ICB produced its final report in September 2011, which included a wide range of recommendations related to the structure of UK banks and the level of capital they will be required to hold in the future. In December 2011, the UK Government agreed to implement the recommendations of the ICB, subject to further consultation. Until the UK Government has determined precisely how it intends to implement the ICB’s recommendations, we will not be able to estimate accurately the impact on Barclays from these reforms. We welcome the Government’s commitment to ensuring as much consistency as possible in the application of its capital-related recommendations to similar reforms under consideration by the European Commission. With respect to the ICB’s recommendation on so-called ring-fencing, we welcome the Government’s stated commitment to the ICB’s recommendation that there should be flexibility in implementing these reforms. Finally, we welcome the Government’s intention to implement the full reforms by 2019; this will provide adequate time to ensure the final legislation and rules are appropriately calibrated and articulated. Taken together, we expect these aspects of the reforms to mitigate many of the negative impacts on Barclays that they might otherwise create.
- Dodd-Frank Act (DFA) – The DFA was established to implement financial regulatory reform in response to the recent economic crisis. While further rule-writing related to the original legislation was completed during 2011, there remained significant outstanding rules yet to be finalised as of year end. Barclays continues to engage with the US authorities in the consultation and rule-writing processes. We have a centralised approach to monitoring this process, and to ensure compliance with the rules that are developed as a result.
As part of this proposed legislation, the so-called ‘Volcker Rule’ will, once effective, significantly restrict the ability of banks to make speculative investments. There is also a real potential for regulators to extend jurisdiction to non-US banks operating outside of the US, which in certain cases would supersede home country rules. For non-US banks, including Barclays, this most immediately applies to the impact of the Volcker rule on trading and market-making activities, and the imposition of US regulation on its derivatives and swaps business. Extensive US regulatory reach could broadly lead to limited access to capital, higher execution prices, greater volatility and increased systemic risk and subject non-US banks to duplicative and contradictory regulatory requirements from that of home country regulators. It is our view that where comparable home regulation exists, there should be home regulator deferral for all institutions and that US regulation should not apply to transactions executed by non-US banks in their operations outside of the US. At the end of 2011, we undertook significant work to feed back to the US Treasury and Federal Reserve from foreign governments who would be affected by the extra-territorial aspects of the Rule. Further details on this issue and the other regulatory developments that are relevant to Barclays can be found in the Supervision and Regulation Section of our Annual Report 2011.
Executive remuneration generally, and bank remuneration in particular, remains an important issue for our stakeholders. In the UK, this discussion is rooted in a much broader debate about executive remuneration. Because of the nature of what banks do, having the right people in the right roles has always been an important part of providing excellent customer and client service, creating intense competition to attract and retain the most talented people, particularly in those parts of the industry where people are highly skilled and, therefore, globally mobile.
What we are doing
We recognise entirely the strength of opinion associated with this issue, especially in the UK. We sought to reflect that in the decisions that we took in 2011 with respect to pay, balancing carefully the competing demands of our various stakeholders. Our policy has been and remains that we only pay for performance, not failure, and we are competitive in how we pay our people. We also need to reduce our operating costs to improve the return on equity we deliver for our shareholders, and remuneration has its part to play in that. On the other hand, higher capital requirements and a challenging economic environment mean that remuneration levels in the industry will have to adjust. That process will take time, we have taken important steps in the right direction in 2011, including significant reductions in performance-related pay across Barclays:
- Total incentive awards were down 26% compared with a 3% reduction in profit
- Bonuses for our executive directors and our eight highest-paid senior executive officers were down 48% versus 2010 on a ‘like-for-like’ basis (i.e. payments to individuals in service in both 2010 and 2011)
- Total incentive awards for the Investment Bank were down 35% on 2010, while profit before tax was down 32%.
We will continue to ensure that our remuneration policies and practices are aligned with the long-term interests of our shareholders. The Annual Report 2011 provides an overview of executive remuneration, details of the total incentive awards and the role of our Board Remuneration Committee in providing governance and strategic oversight of this issue.