There is no feasible way the banking industry will – or probably should – be legally curbed in how much it pays its staff. During the financial crash, politicians and the press universally condemned million-pound salaries and multimillion bonuses. The banks took not a shred of notice, even when pocketing billions in taxpayers’ cash.
They rather bleated at how misunderstood they were. Nor will today’s suggestion from David Cameron’s former adviser Steve Hilton, that state-owned bank staff be paid no more than civil servants, alter things.
Some of banking is, as the banks pointed out, an international business with an international market for its skills. It is like football. A fast-witted team can, as outlined in Michael Lewis’s Flash Boys, make fortunes for themselves and a few others. Any trading house that slashed its pay would simply lose its most lucrative staff.
To all this there is a simple answer. The vast incomes from trading in the market place are derived from exploiting short-term monopolies on information. The regulation of financial trading – such as the Libor and other obscure scandals – remains the unfinished business of the crash. The way to curb such markets is not by leaving them alone, but by regulation. If financial traders want to go offshore, they can and will. They perform no service to the British state and Britain can withstand the loss of their residual taxes.
But the bulk of bank activity is domestic merchant banking and commercial. The US is speeding ahead with bank break-up and fraud enforcement faster than Britain. The reason is – as Hilton rightly observes – that British policy is dominated by those same banks. By the time of the crash half the income of big merchant banks and accountancy firms was coming from government contracts, from a virtual City oligopoly.
If the government really wants to curb outrageous pay it could simply deny privatisation, consultancy and asset disposal contracts to any firms it deems to be paying outrageous remuneration. The answer lies in ever more open competition. Banks that are too big to fail are also probably too big to survive true competition. That competition must be enforced.
An old saying is that no one ever lost money dealing with Her Majesty’s government. Merchant banking, accountancy and other banking functions are needed, but their skills are overrated and certainly overpaid. As was seen during the privatisation of Royal Mail, a millionaire adviser is often no more reliable than a junior accountant.
The government should refuse to take advice from firms it deems to be paying exorbitant salaries. It should open up the market in financial advice, and it should force down salaries by refusing to do business with those who pay them.
