Surface Ripples

Back From The Brink?

Just over a month ago, I commented on the latest proposals for the FSA to regulate top bankers' pay. The FSA now seems to be making a u-turn.

The Financial Times has announced that the FSA is backing away from specific recommendations on the structure of top bankers' pay as there is a concern that it will undermine the competitiveness of UK banks. In other words, they won't be able to hire the top talent necessary to manage banks out of the current crisis.

This was, perhaps, predictable in today's markets where labour can move freely, but also understandable when the political pressure was on to be seen to be "doing something" and knee-jerk reactions were all the fashion, depsite the fact that this might be counter-productive. Stephen Hester, the new head of RBS, has also had his say about making sure that capable people were retained recently when he spoke about the RBS results.

The Times of Friday 13th February 2009 announced that the FSA were paying bonuses and increasing salaries - we were told to make them competitive with the market - so why did it take them so long to realise that to limit top executive compensation in the financial services industry might also cause a problem? It is good to see that the FSA still want compensation to reflect risk, but to re-hash my previous point, they need to realise that the interests of banks' shareholders, employees and customers are difficult to manage at the best of times, let alone the worst. Less risk means lower revenues and therefore lower bonuses, taxes, sponsorship, investment in innovative products and processes, but perhaps also less potential for catastrophic and systemic failure. If other countries (the US and European Union are mentioned) do not impose the Draconian measures proposed by the UK, we clearly have an unlevel playing field.

Hector Sants - head of the FSA - proposes that higher salaries/bonuses should be controlled by "appropriate methods such as taxation". This implies that a banker who took less risk would be taxed at a higher rate on a bonus deservedly earned in the same way that a bonus earned through unjustified risk-taking. Where is the logic in that?

The long and short of it is that current public ire at high bonuses paid to top bankers (who are seen as the architects of the current financial crisis and whose banks have possibly also been bailed out by the taxpayer) is resulting in ill-thought out solutions to a very thorny problem. If this indeed the quality of leadership we can expect from the FSA, perhaps it is as well that the Bank of England takes it back under its wing.

Labels: Regulation

posted by William Martin @ 15:49