Bankers' bonuses: Bad policy

Defend a banker anyone? Shall we forget the misdemeanours of the past few years and let them get on with it as they did previously? Was mis-selling, rate-fixing and wholesale impunity just a minor aberration?

Perhaps I am being flippant, but really is it time to move on with how we treat our financial services sector?

There is anger and deserved contempt for the profession, and to some extent, deservedly so. The actions of several banks, both retail and investment, brought the global economy to its knees in 2008. Many of the banks were over-leveraged with billions of pounds worth of sub-prime and toxic assets on their balance sheets. At the same time, whilst a huge bubble was growing in the US housing market, bright minds were being recruited by the world’s biggest financial institutions and being remunerated with six-figure salaries and generous bonuses. Yet, this was not a revolution in creating wealth. It was entirely artificial and five years later, we the aftermath is still affecting the economy.

Small and medium sized enterprises are suffocating from a lack of credit within the system. Banks are being asked to meet lending targets, yet at the same time having to slim-line their balance sheet and maintain a higher capital ratio too. In 2008, banks weren’t able to function as banks because they lacked liquidity, now they are unable to lend because they need to hold on to their money.

This is where the problem lies; mainly in culture and language. Banks are perceived to conduits of free-market capitalism, unregulated machines that stuff money into the pockets of the rich. This is a ridiculous argument, yet it is frequently echoed by lazy politicians and journalists. The financial services industry contributes more than ten percent of the UK’s national GDP and employs well over a million people. Even after the crash.

Whilst regulation may be required, it is important to stress that more regulation is not the answer, simply good regulation.

EU regulation is an attack on the UK

The EU’s decision to introduce a Financial Transaction Tax as well as a cap on bankers’ bonuses is exactly not that: it is bad regulation. Whilst the City of London, the UK’s financial heart, has remained staunchly pro-EU, it has remained silent over these proposals. Make no mistake, when these were put forward, EU politicians were simply testing the water to see how keen people were for such measures, more will follow. This is simply an attack on Britain’s financial heart and the fact that the UK was the only country to oppose the measure for capping bonuses demonstrate that we are simply on our own.

It is also another example of the undemocratic nature of the EU. 26 nations, unelected by the British people, are forcing regulations on us that we simply did not vote for. This is before we question whether it will work or not. A similar financial tax introduced in Sweden in the 1980s simply forced all Swedish bond traders to move to London overnight. Who is not to say that the same will happen again this time? People argue that people would be unwilling to move away from London and the huge markets it serves, but why would an industry want to remain somewhere when the regulation is simply punishing and burdensome?

Bankers’ bonuses will drive up salaries, which are far more difficult to claw back than bonuses. In the event of another crisis, it will simply entail banks firing more people than addressing remuneration. In effect, they will be more unstable. Let’s not forget that banks are simply too clever, if there is a way of getting around it, they will do. People always tend to forget that these costs ultimately will be passed on to consumers i.e. you and I.

This is simply a bad policy.

What is most important that a British politician recognises this. For too long there has been no political capital in defending bankers. If this does become UK law, then MPs should realise that this is bad politics and not only will it cost growth, but cost jobs too. If a referendum does eventually happen, then people may realise that unnecessary rules and regulations from Europe are having a detrimental effect on the UK economy. The only way to avoid it, may be leaving.

Bankers' Bonuses: A sensible policy.

The question surrounding bankers’ bonuses continues to dominate political debates. Fred Goodwin, the disgraced former Chief Executive of the Royal Bank of Scotland (RBS), joined an unflattering list of people, including Zimbabwean tyrant Robert Mugabe, to have their Knighthoods stripped. His successor, Stephen Hester, also succumb to growing public and political pressure by waiving his annual bonus.

Goodwin, who oversaw the flawed takeover of the Dutch bank ABN Amro, was made to resign after the UK government were forced to rescue RBS with a bailout package worth in the region of £45 billion. In 2009, RBS went on to report the biggest loss in UK corporate history totalling £24 billion. Goodwin, meanwhile, left with a pension pot worth in the region of £703,000 a year. Hester his replacement, by all accounts a good manager, has had to oversee massive changes in the organisation and deal with plenty of criticism as he has put to task. The UK government still owns 81 per cent of RBS shares.

Bankers are still not popular in the UK after the financial crisis in 2008, and despite the curbs on pay and apologies from bosses, financial regulation and policy is still an affliction on government policy, particularly bonuses. As the public sector endures a pay freeze and high inflation, it would be difficult for a government to be seen endorsing bonuses to a bank which is owned by the public.

Last year, the Chief Executive of Barclays Bob Diamond, once called the ‘unacceptable face of banking’ by the former Labour Business Secretary Peter Mandelson, told members of the House of Commons Treasury Committee that the period of remorse and apology for banks needed to end. Diamond, who received a £6.5 million bonus in 2010, believed the language being used on British financial institutions was unfair and could have an adverse impact on future regulation. The Barclays chief, aware of the public mood, introduced a new ethics code for misbehaving or ostentatious bankers.

Bob Diamond

The government has been unable to counter the venomous attacks from the media and its ability to generate campaigns. The Daily Mail’s front page targeted ‘Sir Fred’ day after day and then subsequently Hester. The Transport Secretary Justine Greening was forced to be seen to prevent Network Rail chiefs from taking their annual bonuses too.

Perhaps this is where the Conservative party is getting into trouble. It is too keen to submit in what is developing into a shotgun democracy. It wants to protect the City but it doesn’t want to be seen as protective of bankers. The Labour Party, who can still form no sensible policy or opinion of their own, continues to flip flop on the spur of public opinion. They are more content on trying to target left-leaning Liberal Democrats and splitting the coalition. Their agenda is fast becoming one of envy and class, yet the Tories retreat from any form of debate. Most people agree that it was correct to strip Goodwin of his Knighthood, but the hysteria is spiralling out of control.

This is fast damaging London’s reputation. The RBS Chairman Sir Philip Hampton said that bankers’ pay is something that needs reforming but it would require an overview of how we want to the City to work. If the 50p higher rate of tax on highest earners remains in place until the next election, London and the UK could potentially become an economically and politically ugly place to do business. It is a question that government must answer sensibly and putting business and jobs first. Otherwise, bonus season will become a never ending carousel for government.