Banks tried to hide their bonuses, but now the game is up. What next?

Britain has always valued a sense of fair play. It is time to demand a fair banking system.

2011 was a year of constraint and contrition for the banking sector. Bonus pools were reduced, balance sheets slimmed down and high profile bankers heroically waived their bonuses.

Or so the banks' PR machines would have had us believe. Last Friday, as analysts trawled through Barclays and RBS's annual report and Lloyds' pay statement, a very different picture emerged from that painted by the banks.

Bob Diamond's pay packet for 2011 could be as much as £17.7 million. The head of state-backed RBS' investment banking division, John Hourican, was handed a package worth £7.4 million. And the Chief Executive of Lloyds netted £3.5 million. All in all Barclays, Lloyds and RBS paid out in excess of £90 million to top executives in 2011.

There is a clear injustice in a sector which is implicitly and explicitly subsidised by the taxpayer awarding itself bloated rewards at a time when the public are enduring austerity cuts, a squeeze on real incomes, and rising unemployment.

But the public outrage taps into something deeper. After all, the British sense of fair play has always been premised on there being haves and have-nots.

Public anger taps into the stark fact that the banking system is failing to fulfil some of its basic functions because the industry is grotesquely skewed towards socially unproductive activities that allow a small elite to extract vast wealth to the detriment of the many.

Despite a financial crisis, a £1.2 trillion bailout and ongoing public outcry, it can still seem like there is no viable alternative to business as usual. But it is worth reminding ourselves that this is not universal: the British banking system stands out from its US and European counterparts.

Firstly, the UK banking sector is one of the most concentrated in the world. In the retail sector six large national banks account for 92 per cent of personal current accounts, 85 per cent of mortgages, and 88 per cent of small business accounts .

Secondly, it is one of the least diverse in terms of the types and functions of financial providers. Whereas in the UK, the big four dominate the high street, in Germany a wide range of local and mutually owned banks have a 70 per cent share of the market for loans and deposits.

Thirdly, it is the largest in size relative to our economy. Assets of UK banks are almost six times GDP, compared to the US where they are roughly equal.

These features enabled the City to generate huge profits in the boom years, but they are also root causes of its inability to serve the needs of households and businesses.

The financial crisis exploded the myth that profits booked in the financial sector means wealth for the UK. Figures from the IMF show that despite the fact that, in relative terms, the UK banking sector is six times the size of its US equivalent, it generates the same amount of total tax revenue -- less than a paltry 2 per cent.

Now the long-term effects this British exceptionalism are clear for all to see. We have a banking system unable to allocate credit to viable businesses, provide bank accounts to low-income households, or even keep our money safe.

According to the New Economics Foundation, the UK lags other countries in achieving universal access to financial products and services, with 1.5m adults still lacking a current account. The branch network continues to shrink with a 44 per cent reduction since 1990 leaving more communities unbanked.

And Britain's small businesses struggle more than their European and American counterparts to access credit, with some 370,000 SMEs failing to secure loan finance from mainstream financial institutions in 2011 alone.

But what comes next?

Martin Kettle recently argued that the mood of the nation is to muddle along. The public just want to get back to normal with as little fuss as possible. Whilst it may be true that there is little appetite for a revolutionary overthrow of liberal capitalism, there is clear evidence that there is growing interest in a different way of doing things.

The alternative financial sector has flourished in the aftermath of the financial crisis -- filling the gaps where the big banks are simply unable to provide.

Households and businesses are becoming increasingly dependent on these alternatives. Unfortunately their rise is paralleled -- in fact dwarfed by the increase in doorstop and payday lenders which only goes to demonstrate the size of the unmet market demand.

These alternative institutions are still a tiny part of the financial ecosystem. But the sector is at a tipping point. It now needs to work together to create a narrative which takes it beyond a niche industry. It needs to the let the public know that there is alternative out there, and why its better for them.

That's why we have launched Move Your Money UK, a campaign encouraging people to move their money to ethical, local or mutual financial providers. There is appetite for change. We may not be in a revolutionary moment, but the public are no longer willing to accept business as usual from our banking sector and are looking for something better.

Louis Brooke is a co-founder of Move Your Money UK. Follow the campaign on Twitter @moveyourmoneyuk and Facebook.

Louis Brooke is a spokesperson for Move Your Money UK, a not for profit campaign group, promoting alternatives to the big banks. He is also communications manager for London Rebuilding Society, and co-founder and chairman of educational resource company now>press>play.

Photo: Getty
Show Hide image

Theresa May's U-Turn may have just traded one problem for another

The problems of the policy have been moved, not eradicated. 

That didn’t take long. Theresa May has U-Turned on her plan to make people personally liable for the costs of social care until they have just £100,000 worth of assets, including property, left.

As the average home is valued at £317,000, in practice, that meant that most property owners would have to remortgage their house in order to pay for the cost of their social care. That upwards of 75 per cent of baby boomers – the largest group in the UK, both in terms of raw numbers and their higher tendency to vote – own their homes made the proposal politically toxic.

(The political pain is more acute when you remember that, on the whole, the properties owned by the elderly are worth more than those owned by the young. Why? Because most first-time buyers purchase small flats and most retirees are in large family homes.)

The proposal would have meant that while people who in old age fall foul of long-term degenerative illnesses like Alzheimers would in practice face an inheritance tax threshold of £100,000, people who die suddenly would face one of £1m, ten times higher than that paid by those requiring longer-term care. Small wonder the proposal was swiftly dubbed a “dementia tax”.

The Conservatives are now proposing “an absolute limit on the amount people have to pay for their care costs”. The actual amount is TBD, and will be the subject of a consultation should the Tories win the election. May went further, laying out the following guarantees:

“We are proposing the right funding model for social care.  We will make sure nobody has to sell their family home to pay for care.  We will make sure there’s an absolute limit on what people need to pay. And you will never have to go below £100,000 of your savings, so you will always have something to pass on to your family.”

There are a couple of problems here. The proposed policy already had a cap of sorts –on the amount you were allowed to have left over from meeting your own care costs, ie, under £100,000. Although the system – effectively an inheritance tax by lottery – displeased practically everyone and spooked elderly voters, it was at least progressive, in that the lottery was paid by people with assets above £100,000.

Under the new proposal, the lottery remains in place – if you die quickly or don’t require expensive social care, you get to keep all your assets, large or small – but the losers are the poorest pensioners. (Put simply, if there is a cap on costs at £25,000, then people with assets below that in value will see them swallowed up, but people with assets above that value will have them protected.)  That is compounded still further if home-owners are allowed to retain their homes.

So it’s still a dementia tax – it’s just a regressive dementia tax.

It also means that the Conservatives have traded going into the election’s final weeks facing accusations that they will force people to sell their own homes for going into the election facing questions over what a “reasonable” cap on care costs is, and you don’t have to be very imaginative to see how that could cause them trouble.

They’ve U-Turned alright, but they may simply have swerved away from one collision into another.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

0800 7318496