If you cast your minds back to the pre coalition government era, you may have been an ardent follower of the exciting new sport of “banker bashing”. The rules of the game appeared to be quite simple; politicians queued up to lambast the banking sector for awarding “unacceptable” bonuses, and then promised to take urgent and decisive action. Spectators then waited for a retort from the British Bankers Association, or a representative from the City.
Glossy election manifestos were quick to promote their banker bashing credentials. Labour declared that “our financial institutions left to their own devices have undermined our economy”; the Conservative manifesto proposed to empower the Bank of England to “crack down on risky bonus arrangements”; and the Liberal Democrats even published a specific five point plan to tackle bankers’ bonuses.
The coalition document continued the banker bashing theme with a bold declaration that they would bring forward detailed proposals for robust action to tackle “unacceptable bonuses”. I am at a loss as to why this important issue – that was a central part of the debate prior to the general election – seems to have disappeared off the radar.
At Mansion House in September last year Lord Turner gave a candid speech in which he explained that British citizens will be burdened for many years with either higher taxes or cuts in public services, because of an economic crisis whose origins lay in the financial system, “a crisis cooked up in trading rooms”. Highlighting that many people earned annual bonuses equal to a lifetime’s earnings of some, he boldly called for radical change not just of regulation but also of the entire past philosophy of regulation.
Many expected the gauntlet of international reform to be picked up by the G20. The Summit Leaders statement at Pittsburgh, 3 days after Lord Turner’s speech, acknowledged that excessive compensation had encouraged excessive lending and called on firms to implement sound compensation practices immediately. They endorsed the implementation standards of the Financial Stability Board (“FSB”) which was given the arduous task of monitoring the implementation of compensation principles and standards.
Whilst this statement may have placated some at the time, many were disappointed by a letter from the FSB to the G20 summit in Toronto which explained that they are taking additional steps to support the development of sound industry practice standards with a follow up assessment of national implementation to take place in the second quarter of 2011.
In his TUC speech Mervyn King gave a frank review as to the causes of the financial crisis, and again acknowledged that excessive risks were taken by the bankers – by raising these issues was he calling for the financial services sector to enter into a period of quasi purgatory? Instead of leading to a new type of banker bashing Mr King’s recent openness and honesty at the TUC conference may, I suspect, lead towards reconciliation with the public.
I am optimistic that under the leadership of Hector Sants (who incidentally waived his bonus last year) the transition of power from the FSA to the Bank of England will provide an impetus for positive reform, also bringing an end to the much criticised tri-partite system. We need to usher in a new compensation regime with a structure that eschews risk; includes greater internal review safeguards; rewards staff responsibly (without strangling the golden goose that is our financial services industry); and includes restrained deferred compensation plans – before early precedents become the industry norm.
Next year seems to be the date in the diary for change. The European Parliament recently voted in favour of restrictions on bankers’ bonuses that will take effect in 2011. The rules will cap upfront cash bonuses at 30% of the total bonus.
It is plain as a pike staff that some banks will seek to increase the base salaries of their staff in an attempt to alleviate the effect of any new bonus cap, and to perhaps soften the effect on any forthcoming financial activity remuneration tax. Could this actually be embraced as part of a new regime? It might not be a popular view but perhaps paying the bankers (and I admit that the term needs to be defined) an increased base remuneration, instead of relying on the traditional bonus method, may possibly help to prevent the ‘brain drain’ from the City to New York, Hong Kong, Switzerland, or Singapore.
 Please follow this link for my column in the City AM newspaper on this issue: http://www.cityam.com/city-focus/new-banking-body-will-not-improve.