Labour rejects tax for banks

Alistair Darling, the Labour spokesman on the Treasury and economic affairs, has forcefully rejected any suggestion that his party planned to impose a windfall profits tax on the high-street banks if it won the next election.

"There are no proposals for a windfall tax," he said. "It is not up to the government to say that the banks can only make so much profit."

His comments were designed to quell a rising tide of panic in the City last week following comments by Gordon Brown, the shadow Chancellor, about Labour's plans for banking reform. On Thursday, Sir Nicholas Goodison, chairman of the TSB, said Mr Brown "showed a complete lack of understanding of the banking industry".

But Mr Darling, who is Labour's spokesman on the banking sector, said he recognised that over the last decade British banks had not been particularly profitable. They should not be penalised now just because they were enjoying a year of healthy profits -they are expected to report total profits of about £10bn for 1994.

The City's concern was stoked by the knowlege that Labour has said it would slap a windfall profits tax on utility companies. However, Mr Darling said that banks could not be compared with utilities, whose profits were artificially high because of the way they had been privatised by the Tories. Banks, in contrast, had been faced with particularly difficult trading conditions over the last few years, thanks to the recession.

The City was also up in arms over Labour's proposal for a new banking regulator. "If they are proposing a regulator who would have the power to put a cap on bank charges and the cost of small business loans, it will not work," one banking analyst said. "In that case, banks simply would not lend to small businesses."

But Mr Darling rejected the suggestion that Labour was planning to force banks to lend more to smaller companies against their will or at artificially low rates. "They are businesses and must be left to make their own commercial decisions," he said.

Labour plans to set up regional development funds to provide government funding for local business. Although banks will be invited to join in such lending projects, they will not be compelled to do so, he said.

The proposed new banking regulator would be "a cross between the Office of Fair Trading and a consumer watchdog". He or she would be required to take a view of what is "fair and reasonable" in banks' dealings with their customers.

"Our main cause for concern is at the consumer end of banking," Mr Darling said. "We accept that banks are businesses but, given the importance of banks to the community, it is important that the public is not exploited when competition does not work."

Banks did not compete the way businesses in other industries did. This meant that improvements in their services only happened through public pressure. The bank regulator, however, would oblige banks to improve in areas such as notifying customers when bank charges change - a common source of complaints about banks.

The regulator would also insist on all banks publishing their charges so that customers could easily compare them, and would insist on legally enforceable contracts between banks and their customers.

The regulator would therefore differ from the existing banking Ombudsman, who is a purely voluntary institution and only adjudicates on specific disputes.

Labour's proposals for banking reform should be seen in the wider context of an overhaul of the Financial Services Act, which would sweep away the self-regulatory structure and introduce a fully statutory system of regulation in the City.