A new banking settlement

By Joe Cox / @CompassOffice

It’s boom time in the city: bank bonuses are up 40% despite the windfall tax and hedge funds are making their best returns in a decade. Yet it seems the boom ends at the gates of RBS. Yesterday they posted a £3.6bn loss at the same time as paying out £1.3bn bonuses.

Unsurprisingly the public are angry, worried and conflicted. They want their money back but they know that reckless short-term gambling from RBS could lead to another crisis. Our polling carried out by YouGov confirms this; 75% are worried that banks have not changed and are still not being properly regulated which could be bad for the economy.

That’s why Compass has put together a set of six policies that amount to a new banking settlement; a mixture of short, medium and long term measures that would help tackle excessive pay and bring the financial sector closer in line with the needs of the economy and society. These policies would help curb excessive pay, claw back money for the taxpayer and raise money for spending on socially useful projects.

The six policies are:

* Remuneration Caps – A cap across the whole of the UK banking sector would help prevent the movement of staff away from RBS to higher paying rivals that are less constrained by government pressure and public outrage. It would reduce the staff pay bill (by £512 million this year), saving the taxpayer money and shoring up the balance sheet.

* Extending the Bankers Windfall Tax to other institutions such as hedge funds (supported by 60% of those polled), which would further prevent staff from leaving RBS and seeking higher remuneration in other sectors. Hedge funds have benefited from the state bailout, so their omission from the windfall tax is difficult to justify.

* The separation of retail and investment banks, supported by 68% of those polled. This would stop the riskiest practices being undertaken with ordinary depositors’ money. It would also go some way to tackling the ‘too big to fail’ dilemma.

* Repeating the one-off windfall tax on bankers’ bonuses annually, supported by 59% of those polled. The one-off measure, although welcome, has not brought about a cultural change in the City. The short-termism encouraged through bonuses should be discouraged through permanent taxation.

* A financial transactions tax, supported by 51% of those polled. This would allow the wealth of the financial sector to raise money for socially useful causes.

* A High Pay Commission, supported by 65% of those polled. An open, balanced and thorough examination into pay and income at the top in order to find long term and tested solutions into how better to reduce excessive risk and excessive rewards.

So far, the government has stressed that “RBS is subject to the toughest restrictions on bonuses anywhere in the world.” Yet the financial sector is probably more fundamental to the UK’s economy than any other- therefore it should be regulated more stringently. A new banking settlement would be hugely popular. It is also the right thing to do.