Jill Treanor,  Tuesday 5 October 2010

 

• Banks plan to pay £7bn in bonuses this year, thinktank predicts

• Bonus payouts will yield £4.1bn in taxes for the Treasury

 

Regulation rather than self-imposed restraint is the only way to reduce City bonuses, the chairman of Royal Bank of Scotland conceded yesterday amid forecasts that financial firms were preparing to pay out £7bn in bonuses this year.

 

As Sir Philip Hampton, the RBS chairman, admitted the bank was paying people who were not “worth it”, a senior Bank of England official suggested bonuses could be paid in a way that ensures bankers lose out when their firms collapse.At a high level summit to consider how “values and trust” could be restored in the City, the BoE deputy governor Paul Tucker highlighted the potential of a radical way to pay bonuses in a bank’s debt rather than its shares or cash.

 

Tucker told the City audience that there had been a “failure of the rules of the game and a failure of capitalism”.RBS was forced pay its 2008 bonuses in subordinated debt after it was rescued by the taxpayer but has warned that it has lost key staff as a result of the restrictions placed on it. Hampton – who previously revealed that the loss-making bank had paid more than 100 bankers more than £1m – repeated yesterday that the bank had lost people who “are worth a lot of money”.

 

But he also admitted that the bank was “paying a lot of people who aren’t worth it” and concluded that the way to solve the bonus conundrum in the City was through regulation.“My own view is it can probably only be decisively solved through regulation,” Hampton said as he highlighted changes that had been made to the structure of bonus deals to avoid rewards for failure.

 

Financial Services Authority chief executive Hector Sants described bonuses as the “lightning rod” of the public’s lack of trust in bankers. “I believe that unless bankers demonstrate sensitivity and exercise restraint trust will not be restored.”He encouraged firms to look at “behavioural characteristics” in determining bonuses and for boards to “show leadership”.“I would encourage boards to have a structured process for reviewing their firm’s culture, identifying its drivers, and the behaviours and outcomes it delivers,” said Sants.

 

The FSA has stepped up its assessments of whether individuals are suitable to hold top positions in banks, and yesterday Sants went further by saying the FSA could also judge their “integrity”. “It would be possible for the FSA to place greater emphasis on this characteristic [integrity] as part of the authorisation process.”The debate, convened by the Lord Mayor Nick Anstee, came amid fresh controversy ahead of the 2010 bonus round. Goldman Sachs has paid mid-year bonuses to 80 key staff after capping their pay at £1m last year while the thinktank the Centre for Economics and Business Research (CEBR) predicts that £7bn in bonuses would be paid out this year.

 

The thinktank said this was down on last year’s £7.3bn but still back to the levels of 2004 – before the credit crunch and subsequent recession. Of the £7bn, some £4.1bn will go to the government in taxes, it said – a prediction that will be welcomed by Anstee, who argued that bonuses bring in more tax than if banks bolstered profits instead, since as corporation tax – currently 28% – is lower than income tax, national insurance contributions and other taxes such as VAT combined.

 

Marcus Agius, chairman of Barclays, was the first to acknowledge that banks’ reputations would not be repaired until the issue of pay was tackled. The “public mood is one of anger”, he said, claiming the City had become a “scapegoat” for that sentiment. Although he stressed the need for contrition.“There are still many people who are convinced that bankers just don’t get it. Difficult though it may be, we must prostrate ourselves in the face of public sentiment and continue to do so until there is genuine belief that we regret what has happened and the part we played in it”.

 

The Guardian