The new rules, which critics are likely to suggest amount to a State-enforced “incomes policy” for banks, will be contained in the Financial Services Bill to be announced in the Queen’s Speech.
The bill will give the Financial Services Authority (FSA) the power to cancel bankers’ contracts to prevent them receiving payments that it believes would cause instability in the financial system.
The FSA could stop bankers receiving bonuses that it believes are too high, or cancel remuneration packages that it thinks reward undue risk-taking.
It is hard to see this proposal as anything other than political posturing given the forthcoming election. Are we to establish a new quango/ regulator “Ofpay”? What will be the cost of that? What access will individual bankers be allowed to their assessors? How can the state decide which bankers have performed socially-useful functions and made positive contributions to the long term good of the bank concerned? Working in a structured finance role in a dealing room environment is like being an MEP in the EU. You have to be part of a team. Management will only negotiate with voting blocs! One member of the team has to play the internal politics as in many other businesses, but this is of course an unproductive waste of time as far as shareholders are concerned. How much more unproductive time will be spent trotting off to Ofpay to explain your achievements?
The root of the problem is the unreliable nature of banks’ reported profits. If the p&l was a sound number, surely the state could rely on employers to reward? This news affirms my fear that the Government knows that the front-ending of prospective profits from derivatives trades and treating them as today’s “profit”, along with similar bank specific accounting wheezes, produce unreliable reported accounts. That is the mischief the legislators should be focussing on.
Get that right and wages will look after themselves.