Government warns banks over bonuses and dividend payouts



Tuesday 27 July 2010 


Vince Cable today issued a clear warning to the City that the government would be carefully scrutinising bonuses and dividend payouts, just days before the major high street banks begin publishing their latest profit figures.


The business secretary said banks should be “very, very self-conscious” about how they rewarded their employees and shareholders at a time when the government was concerned that a lack of funding for small businesses could abort Britain’s economic recovery. He also did not rule out a tax on bank profits.


The high street banks will next week report first-half figures that are forecast to reveal an estimated £5bn total bonus and pay pot for Barclays, HSBC and Royal Bank of Scotland – the three with investment banking arms. RBS is expected to turn in its first profit since its near-collapse in October 2008. Even so, today’s annual report from UK Financial Investments, which looks after the stakes in Lloyds and RBS, showed the taxpayer is sitting on an £8.7bn loss on its investments.


Cable spoke shortly after Mark Hoban, the City minister, set out the coalition’s plans to tear up Labour’s Financial Services Authority and caused controversy by promising further consultation on whether to take consumer credit regulation away from the Office of Fair Trading. Separate consultation will also be needed on creating an economic crime agency.


A new financial policy committee is to be created within the Bank of England.It will have 11 members and be responsible for financial stability, publishing its minutes and producing twice yearly reports.A former FSA official, David Kenmir, now a director at PricewaterhouseCoopers, said the government’s regulatory upheaval was “very high level”. He added: “Many questions continue to remain unanswered.” The Investment Management Association expressed concern about how products would be regulated and the fragmented approach to the new regime.


In the consultative green paper, Financing a Private Sector Recovery, Cable said the coalition was prepared to extend the lending targets inherited from Labour from state-supported banks to those that had not needed direct taxpayer support. He added that the agreements with Lloyds Banking Group and RBS to lend £94bn by next February would remain in force despite the pledge from the coalition government to use “net” targets rather than the “gross” ones currently used. These gross targets allow banks to ignore the huge volumes of loans being repaid.


Cable said it appeared to make little difference to a bank’s lending performance whether or not it was part-owned by the taxpayer. “I don’t want to focus too much on the state-owned banks. There is a danger of putting them at a disadvantage when in truth all banks are being supported by government liquidity arrangements. We are looking at the lending practices of all of them and not just these two (Lloyds and RBS). We want to see evidence of restraint in bonus payments and dividends.”


The green paper noted that the recent Financial Stability Review from the Bank of England had estimated that the banks could generate an extra £10bn of capital which in turn could sustain £50bn of new lending if they limited bonus payments to levels seen before the financial crisis and dividends were pegged at 2009 levels. “I am making it clear”, Cable said, “that the banks should be very, very self-conscious about bonuses and dividend payments. I also want to make them aware that the government is not devoid of sanctions it could bring to bear.”The green paper said there was a risk that banks were boosting their profits at the expense of their customers and that this “would be a cause for concern and a potential justification for government action”.


Cable said the banking commission headed by Sir John Vickers would “almost certainly” call for changes to the structure of the UK banking industry, either through more competition or breaking banks up.


Case study

Darren McGuff, a 27-year-old computing entrepreneur, was so dismayed at being turned down for a loan by his bank that he cut a deal with his grandparents to take his inheritance early.


“When I was starting up I went to my bank, Barclays, in March of last year and they said that they’d match any investment,” he says. “By May they’d had a complete change of heart. I considered other banks and asked a few questions but the feeling was that if Barclays said ‘no’ then they were going to say the same.”


That forced him to turn to his grandparents. “They were in a position to give me the money – but it was what I was looking at getting for my inheritance,” McGuff says. “I have been taken out of their will. The idea is to pay them back, but if it doesn’t work out then I just don’t get the money in the future.”Chase Computer Consultants was founded in May last year with £10,000. The business is now breaking even and growing every month.


“I could have got here significantly quicker with support from a bank, which would have given me the finance to do more marketing and gain a little bit more exposure for the business,” he says. “I’ve concentrated on the retail side of the business, which does repairs and upgrades, and the corporate part, setting up wireless systems, has been on hold.”


With this successful start under his belt, banks are now apparently becoming more interested in his firm. “I have been talking to Lloyds recently and at the moment we are going through different approaches,” he says. “The right questions are being answered. I’ve heard of a lot of local businessmen who have changed from Barclays to Lloyds for that reason.”



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