Bankers’ bonuses are ‘the wrong target’, says Conservative MEP leader

Transcript

Bank bonus caps have been seen as completely arbitrary, with most banks more than capable of side-stepping further EU political pampering. World Finance speaks to Syed Kamall, leader of Britain’s Conservative MEPs, to discuss more.

World Finance: Syed, what will be the effects of the bonus cap on the UK banking system?
Syed Kamall: In an internationally competitive market, banks in Britain and the EU won’t be able to compete as well with banks outside the EU for the best talent.

But the other thing we’ve got to think about as well is that if you limit bonuses, what it means is that banks will respond by paying higher basic salaries. And that means there’ll be less alignment between pay and performance, which means that bankers will be paid well regardless of whether or not they perform well.

World Finance: Do you think this was politically motivated?
Syed Kamall: Oh, it was clearly politically motivated. I mean, after the crisis policy wonks, politicians, legislatures, were all looking for a response. They wanted to be seen to be doing something. And one way to be seen to be doing something was to bash the bankers.

[B]anks in Britain and the EU won’t be able to compete as well with banks outside the EU for the best talent

Now, there’s a lot of things wrong with banking; it has to be restructured, and I’ve been working with a number of my colleagues in Brussels on some of those issues. But actually, bankers’ bonuses is the wrong target.

World Finance: George Osborne has surprised everyone, saying he’ll now not fight this – why do you think he came to this decision, and is it the right one?
Syed Kamall: Well I think he had to make a political decision, and it’s quite clear that the politics of this… it’s very difficult politically to stand up for bankers.

But actually, the whole point about focusing on bankers’ bonuses shows that we’re missing the real picture. What we should be focusing on are issues such as: how do we prevent a failing bank from being bailed out with taxpayers’ money in the future? How do we make sure that directors of banks are liable for failure?

I have no objection if they are paid well if the banks perform well and the shareholders are happy with that. But people should not be paid well when they preside over failure.

And the third, and probably more technical point, is we’ve got to change accounting standards so banks can’t have these financial instruments on their balance sheets, and book the profits up front but not put aside enough money when they blow up, such as CDOs and CDSs.

World Finance: What do you think the effects of this will be within Europe?
Syed Kamall: For those banks that want to attract the best talent, the best experts in their particular field, it will be very difficult to attract them within the EU. If those individuals are motivated by money.

And that’s why you see a number of banking professionals moving outside the EU, to places like Singapore, Hong Kong and elsewhere.

World Finance: Will this make the industry less competitive?
Syed Kamall: In terms of the competition, it’ll be about the best experts in the world, in particular areas of finance. And it’ll be more difficult for banks within the EU to attract those people.

But you’ve got to remember that individual bankers are motivated by different things. So some of them may well say, ‘Well actually, I would rather have a higher salary, but I’d rather stay inside in Britain.’ Don’t forget London’s a very attractive destination for people. Lots of people like to come here; it’s a very diverse city. And they may decide that’s more important than a higher salary.

World Finance: Obviously this ruling is going to be popular with the public, but will it increase risks for banks?
Syed Kamall: Absolutely! I think we’ve got to look at the implications of this. One of the implications is higher basic salaries. The other is that actually, we’ve missed the real target. The real target of the financial crisis, and what we should really be looking at, are things such as: how do we make sure in future when a bank fails that it can be wound down in a responsible way, without customers having to queue outside banks to get access to their money. But also at the same time, making sure that taxpayers never have to bail out banks.

We should be looking at making sure that those at the top of banks are liable in case of failure. I don’t mind them reaping the rewards when their banks do well, but they should also take responsibility for when their banks perform badly.

[T]here’ll be less alignment between pay and performance, which means that bankers will be paid well regardless of whether or not they perform well

And the third thing we have to look at is the whole issue of accounting standards, and making sure that banks can’t put CDSs or CDOs or complex financial instruments on their balance sheets; book the rewards up front, book the profits up front, but not be prepared to pay out when they blow up.

World Finance: Don’t you think banker bashing has gone a bit far now?
Syed Kamall: Undoubtedly. And I don’t think we should be bashing bankers now. What we should be doing is changing the behaviour, and preparing the market, for failure.

So when banks fail, you have an orderly wind-down procedure, you make sure that those bits of the failed bank can be sold off or taken over by new competitors, or by rivals. You have to make sure that retail customers can still have access to their money during that transition period – either from taking their money out of the machines in the wall, or by making sure they can pay their bills – otherwise we’ll have civil unrest.

But it’s important that we have orderly wind-down procedures for banks.

World Finance: So how next are they going to put bankers in the gallows?
Syed Kamall: What’s been interesting is how they’ve been trying to expand the bonus cap to not only bankers. We’ve seen an attempt on asset managers that we fortunately managed to fight off in the European Parliament last year. It was a close vote by about seven; we won that.

And you’ll see in future financial legislation attempts to bring in caps on pay. And I think that’s where they will continue. And by doing that, we will miss the real target of the much more urgent reform we need, for making sure that when banks fail, taxpayers don’t have to foot the bill.