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Call the bankers' bluff

It's time for a new framework which ensures bonuses are linked to long-term performance, argues Vinc

The Treasury select committee’s show trial of errant bankers was welcome to many. The former Chairmen and Chief Executives of RBS and HBOS apologised for the part they played in their institutions’ downfall and were roundly condemned by the committee.

It wasn’t entirely clear whether they were apologising for incompetence or greed or both or for the failure of their institutions or themselves. But ‘sorry’ was the word of the day. I must confess that even I suggested (with tongue firmly in cheek) that they were lucky we didn’t have any guillotines in stock. It seems to be the banker hunting season.

But we must not let ourselves get carried away. We are justified, as savers and as taxpayers, in our anger towards these executives. But in the rush to vilify the bank chiefs, the so-called fat cats, we must not forget that ordinary bank employees have fallen victim to their mismanagement too.

Large numbers are now being sacked and without the generous pensions or payoffs to the top brass. Although many staff were involved in commission selling rather than traditional relationship banking, the majority of staff played no part in formulating their bank’s lending policies: they did not manage overleveraged investment portfolios or take disproportionate bonuses.

I have to say, nonetheless, that I disagree with David Cameron and others that all staff should be paid ‘some kind of’ bonus, up to £2000 each. Why? These are banks which failed. The taxpayer is paying. The remaining staff are lucky to be in work having been rescued by the government. The answer should be ‘no bonuses’.

Looking further ahead, my Liberal Democrat colleagues, and I have consistently called for proportionate levels of pay which reward genuine achievement but don’t encourage mindless risk-taking. Previous research by the IMF has shown that bonus arrangements have seriously destabilised banks by leading to excessive risk-taking and we must not now be seen to be rewarding those directly responsible for this failure.

UK Financial Investments, the Treasury’s representative on the board of semi-nationalised banks, has already begun to wield some influence by insisting that bonuses paid at RBS are at the ‘legal minimum’.

This is the maximum that should be conceded. Staff who wave their contracts should be invited to sue. It would be simply unacceptable for banks that have had to rely on taxpayer guarantees and funding to continue to pay such bonuses.

The government must go further and bring all banks into line on pay by creating a new framework which ensures bonuses are linked to long-term performance and payable in shares that are not redeemable within five years.

The bonus issue is an important one but the government, via the UKFI, also has other battles to fight.

They have shown with RBS that they can act and they must now use their influence as major shareholders to restore credit lines from RBS and the Lloyds group to sound businesses to separate out ‘good’ from ‘bad’ loans; to stop abuses like large scale tax avoidance; to restructure the banks to separate out the high risk investment banking operations from the high street utilities; and to prepare for eventual sell-off at a profit for the taxpayer. The bankers have apologised but we still need to sort out the mess they’ve made.