Bonus debate hides real dilemma
1 Dec 09
Arguing over City pay schemes is just a way to avoid having to answer tougher questions about the Government’s strategy for banking
by Robert Outram
This is the month when CA Magazine takes its annual look at Scotland’s corporate finance sector. Arguably, our Who’s Who could be called “Who’s Still Who in Corporate Finance”, after a difficult year in which corporate finance teams have been busier on restructuring, refinancing and generally helping distressed companies, than they have been on M&A work.
The participants at this year’s corporate finance round table (click here) agreed that dealflow has been affected, above all, by two factors: a lack of confidence and limited availability of bank finance.
There are some signs that the former is easing slightly. Economic signs are looking better. However, the question of bank credit remains difficult. In the UK, many overseas banks have withdrawn, and that creates a capacity problem for business lending. The leading domestic players argue that they are open for business. The reason they are failing to meet the Government’s targets for bank lending, they say, is that customers are reluctant to borrow.
Meanwhile, many business customers still complain of limited bank finance, onerous terms and overlong lead times for decisions on lending. So who’s right? Probably both sides. It is normal at this stage for businesses and households to seek to reduce their debt.
The dilemma for banks is that the only long-term solution to their present difficulties is to trade profitably and rebuild their balance sheets. That means taking some tough decisions and imposing terms that some customers may find painful.
How the Government uses its stake in the two part-nationalised banks is also problematic. Should it be encouraging the banks to return to healthy profits and well-capitalised balance sheets, so that the taxpayers can recoup their outlay as soon as possible? Or should RBS and Lloyds be used as instruments of public policy, to pump liquidity into the UK economy?
The debate is typified by the argument over loan facilities extended by RBS to US food giant Kraft, which is mounting a hostile takeover bid for Cadbury. An iconic UK company is under threat, but should RBS be following its legitimate commercial interests or acting as some kind of state agency to protect British interests and jobs?
It’s a difficult dilemma for the politicians, which is why it is much easier to focus on the issue of bankers’ bonuses. The Queen’s Speech last month promised legislation to allow the Financial Services Authority to strike out any pay schemes in banking that it deems will encourage risky trading. As widely predicted, the emphasis will be on long-term rewards, with senior banking staff rewarded on a three-year basis, not one year. The size of bonuses will not be capped, however.
Since Labour and the Conservatives have been involved in a war of words over who can get tougher on City bonuses, it seems clear that some kind of regulation is going to be in place no matter who wins next year’s general election. After the last 18 months, the British public are not going to stand for “business as usual” as far as the bonus culture is concerned.
The banking industry has accepted the need for reward on a long-term basis, but fears the consequences of a scheme that could end up heavy on red tape.
I’m not convinced that the mere fact of regulation is going to spark a mass exodus of banks from London, but it will be hugely important to ensure that the new system is based on clearly understood principles and avoids unnecessary bureaucracy. The UK is seen by the financial world as a good place to do business, and it would be damaging to the whole economy if that reputation was put at risk.