Ever since Gordon Brown bailed out Britain’s banks in October 2008, the saga of bonuses has become one of the longest-running and most contentious in British public life.
Politicians have been scrabbling for ways to respond to public anger and persuade the bankers to show greater restraint over pay. Many bankers owe their continued livelihoods to state subsidies recently estimated to be worth £100 billion a year, but so far the politicians have taken little action against them.
Though Barclays, RBS and Lloyds bosses John Varley, Stephen Hester and Eric Daniels all forewent their bonuses this year, the same could not be said of their underlings. In February the Treasury’s UKFI arm, which owns 84% of RBS’s shares, granted the Edinburgh-based bank permission to hand £1.3bn in bonuses to investment banking staff. This was despite the fact that RBS lost £3.6bn in 2009 and £24.3bn in 2008.
Sir Philip Hampton, the bank’s chairman, insisted the payouts were the “minimum necessary to retain and motivate the staff crucial to the recovery of this bank”. Bank of Scotland owner Lloyds Banking Group, which is 41%-owned by UKFI but doesn’t do investment banking, reportedly paid out £200m.
Bonuses: Britain held to ransom by “pin-striped Scargills”
Bonuses played a prominent role in the General Election campaign. Each party strove to outdo the other with their toughness on fat cat greed. Vince Cable, now business secretary, memorably said that Britain should not let itself be held to ransom by “pin-striped Scargills threatening to blackmail us” during the Ask The Chancellors debate on March 29.
But since the Coalition took power in May, internal divisions have stood in the way of reform. Cable remains committed to a clampdown, but Prime Minister David Cameron and Chancellor George Osborne have friends in the City and are scared that an over-zealous crackdown on bankers’ pay might drive both banks and talent overseas.
It is true that HSBC and Standard Chartered have threatened to quit the country if the British Government is too heavy-handed – but this has been derided by the likes of EU markets commissioner Michel Barnier, who told the Treasury Select Committee earlier this month that it was “blackmail” that would not lead to a flight of talent.
The Coalition has nevertheless shied away from repeating a move along the lines of Labour’s one-off 50% supertax on bonuses of more than £25,000. Osborne instead announced a new £2.5bn-a-year levy on bank balance sheets.
But in September, in what was interpreted as a sign that the Cameron’s government has caved in to the bankers, Barclays appointed investment banking chief Bob Diamond as successor to chief executive John Varley. Diamond, seen as epitomising the “casino” banking that has imperilled the UK finances, received £21m in pay and bonuses in 2007.
Cable stepped up the rhetoric at the LibDem conference. “I make no apology for attacking spivs and gamblers who did more harm to the British economy than Bob Crow could achieve in his wildest Trotskyite fantasies, while paying themselves outrageous bonuses underwritten by the taxpayer,” he railed.
In the autumn he switched his focus to persuading banks to be more transparent over their remuneration, pushing for the recommendations of the Walker Review of Corporate Governance to be implemented. This said that banks should disclose how many of their executives earn more than £500,000 year. Just the numbers, not the names.
Once again, however, the plan was blocked by Osborne. This followed complaints from the bankers that it would place them at a competitive disadvantage to banks on the continent, since no other European countries had introduced such a measure. Osborne said it would be delayed until international agreement could be reached.
The result has been that the toughest measures on bankers’ pay are now coming from Brussels and not Westminster. In December the Committee of European Banking Supervisors (CEBS) produced mandatory guidelines saying that no more than 20% of bankers’ bonuses should be paid in cash, although the requirement can be “neutralised” for less risky firms and staff.
Cable has been getting increasingly frustrated. Last Sunday, he told Andrew Marr he intends to push through an extra tax crackdown on the banks, suggesting he would now be taking personal charge of the issue.
Yet, whatever the prospects of this before last week’s Telegraph sting, they will probably be weaker now. When last week Chancellor Osborne was asked by Labour MPs what he would do if the banks fail to respond to the public’s dislike of big bonuses or to demands that they step up lending to small businesses, he said: “What we’ve demonstrated in the last couple of weeks is we are prepared to increase the rate of the bank levy in order to sustain the revenue.”
This was dismissed by shadow chancellor and former home secretary Alan Johnson as “hot air”. More importantly, the bankers’ response to the levy has remained muted. If it was really going to hurt, they would have had a lot more to say about it by now.
This article was published in the Sunday Herald on 26 December 2010