Just as politicians were very slow to grasp the public reaction to duck islands, moats and house ‘flipping’, the financial community has been extraordinarily obtuse in failing to appreciate why the public is angry about bankers. Without the taxpayer, many bankers would be without a job let alone the huge bonuses that they are enjoying. It could be argued that pay for top footballers is similarly disproportionate but Chelsea and Manchester City do not depend on British taxpayer guarantees. And we know both from experience and economic research that remuneration structures in banking have given incentives to excessive risk taking leading to financial collapse.
What should be done? We can’t do much about Goldman Sachs beyond noting that it was rescued by the American taxpayer a few months ago and is growing fat on the semi-monopoly in investment banking following the collapse it helped to create. But the British authorities can and should do something about financial institutions which are their responsibility. The principles were clearly set out in Lord Turner’s excellent report in March. The problem is that we are getting a lot of talk and no action.
Remuneration policy of regulated financial institutions must be approved by the FSA as a check to ensure that short term risks are not being incentivised that may affect long term stability. The FSA should make publicly available the outcome of assessments made of banks’ remuneration policy and the action taken. Increasing capital requirements could be one tool to enforce this but a fine would send a more powerful message and would provide greater transparency. It should start with the big institutions which incubate systemic risk, not the small fry.
The issue of remuneration in relation to the nationalised or semi-nationalised banks should be more straightforward. The UKFI has direct responsibility and it should exercise it whilst showing an understanding of the need for qualified staff as well as restraint. Despite all of its protestations its role seems largely passive.
Transparency is a minimum requirement. We have argued for highly paid staff, not just Directors, in regulated institutions with a compensation package - say - in excess of the Prime Minister’s £200,000 to publish details of their remuneration. They would also have to confirm that they are normally resident and domiciled in the UK for tax purposes. I see that the Walker Report is adopting a very similar approach to ours, but it is too timid. A voluntary code is pointless. Unless disclosure is mandatory it won’t happen. And we will be back to where we started.
Ultimately, however, regulators can’t and shouldn’t try to manipulate pay like 1970s incomes policy. Progressive taxation has to address the issue of fairness in rewards. The government’s flag waving approach to top tax rates is not a serious approach to this problem. As long as there are huge disparities between top tax rates in earned income and capital gains any half competent tax accountant will arrange for big bonuses to pay 18% on stock rather than 40% or 50% tax on income. Leading tax firms are already drawing up plans to facilitate large scale tax avoidance. We have made it clear that we support a return to the policy of the last Conservative government of taxing income and capital gains at the same rate.
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