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Adviser Fund Index

Conservative Shadow Chancellor George Osborne said last week he would call on the Treasury and the FSA to clamp down on bank bonus payments.

The cuts would be made a condition of financial institutions continuing to be covered under the Government’s asset protection and asset purchase schemes. In effect, the message was abide or be abandoned.

Alastair Campbell, former Labour head of communications, wrote a letter to the Financial Times, accusing Osborne of being “more interested in short-term political tactics than he is in long-term economic policy”. The main criticism of the proposals were that they threaten to create a two-tier banking structure, with taxpayer money ironically becoming a toxic asset on a bank’s balance sheet.

“The trouble is that when you get politics mixed up with investments you have reason to worry,” says Rowan head of research and Adviser Fund Index panellist Tim Cockerill. “It is a populist approach and I think it blurs discussion of broader issues about banking regulation.”

Osborne’s plan is to use the Government’s equity investment as leverage to force bailed-out institutions to fall into line but in doing so he threatens to make them look uncompetitive in the marketplace and unappealing to investors.

“It is reasonable that banks who accepted Government money should not be paying themselves large bonuses,” says Chartwell investment management researcher James Davies. “What is important is to clamp down on rewards given for taking on short-term risk and I do not see anything in these proposals to deal with that.”

The problem, it seems, is in the plan’s lack of scope. Osborne looks to be overreaching in his role as Shadow Chancellor but also under-reaching in his aim to reform remuneration models only in those institutions which are reliant on Government funding.

As Davies alludes to, the problem he is seeking to address is broader than simply the short-term matter of whether bankers will take home Christmas bonuses. As Campbell said the plan “was attacked not for being tough, but because it was not thought through”.

The banks themselves appear all too aware of the compromising position they find themselves in if they have accepted state support.
“Barclays was obviously very keen to avoid these problems,” says Davies. “They saw it coming and were more keen to take money from overseas sovereign wealth funds than from the Government.”

Cockerill says the most sensible thing for the Government is to retain its stakes in the banks until the effects of the crisis have abated. “I have been looking at Royal Bank of Scotland which has already come down quite a lot,” he says. “On a five-year basis, I cannot help but feel it is looking good value at the moment. Government support will eventually be withdrawn and RBS and Lloyds should ultimately come out of this stronger and in a dominant position.”

The next few years will require spending cuts and fiscal prudence. With polls putting the Tories well in the lead, Osborne might consider keeping his head below the parapet.


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