Carney criticises ‘crude’ cap
When questioned by MPs on the
Treasury committee about whether he agreed that a ‘crude’ cap limiting bonuses
to 100% of fixed salary (or 200% if shareholders approve) was not the best
way forward, Mark Carney, Governor of the Bank of England, responded ‘absolutely’.
Mark Carney’s message was simple
and clear, and came as an unwelcome interjection to the Labour party’s opposing
stance which developed later in the week.
RBS
Royal Bank of Scotland (RBS),
which is predominately state-owned, is, according to press reports, seeking to
invoke the EU rule that would allow it to pay bonuses up to double an employee’s
salary provided shareholder approval is obtained. Bank insiders expect other
major banks to follow suit.[1] So far, only Barclays has informed its staff
that it proposes to make such a request.[2]
Without this approval, bonuses are limited to 100% of fixed salary. In the case
of RBS, the main shareholder they would be requesting approval from is the UK
Treasury, which owns an 81% stake in the bank. RBS is yet to release any formal
statement on the matter.
Prime Minister’s Question Time
In response to the expectation
that RBS plans to submit a request to its shareholders, Labour called on the
government (as the majority shareholder in RBS) to reject any request to raise
the bonus cap to double an employee’s fixed salary. Labour leader Ed Miliband
focused his opposition on the cost of living crisis, together with the fact
that RBS continues to make heavy losses. At Prime Minister’s Question Time on 15
January 2014, David Cameron made it clear that any such request would be
rejected, stating, ‘if there are any proposals
to increase the overall pay—that is, the pay and bonus bill—at RBS, at the
investment bank, we will veto them. What a pity that the previous Government
never took an approach like that’.[3]
Banks to face ‘reckoning’
Prime Minister’s Question Time had not given Ed Miliband the
ideal platform from which to set out his proposals for significant reforms in
the banking sector. This came on 17
January 2014 in the form of a keynote speech at Senate House in London on banking
reform and a ‘One Nation Economy’.
Ed Miliband declared, ‘We need a reckoning with our banking
system not for retribution but for reform.’ Labour
proposes opening up the market to two new sizeable and competitive banks and introducing
a threshold for the market share any one bank can have of personal accounts and
small business lending. Banks which are
too big will be given four years to sell their excess branches.[4]
Simon Walker, of the Institute of Directors, has already claimed that
Labour’s plans ‘could be disastrous’, while Vince Cable, the Business
Secretary, said ‘arbitrary ceilings’ on banks’ market share were not ‘sensible’.[5]
Perhaps more constructively, an article featuring in the Financial Times
suggests that rather than selling off physical branches of banks (which are
already in decline), the key to increasing competition in the market will be to
relax regulations for start-up banks aiming to operate differently.[6]
In the aftermath of Ed Miliband’s speech, it appears that that the taxpayer
had already lost out as an estimated one billion pounds was wiped off the value
of shares in state-backed banks.[7]
Outlook
The timing of Miliband’s speech is no
coincidence – it is bonus season in the City, a time when the politics and
economics of pay come under sharp scrutiny. In a week that has
magnified how the bonus cap rules operate, it appears that the debate
surrounding bankers’ remuneration will continue to escalate over the coming
weeks, as will the political interest in the future of the banking sector as a whole.
