Bill Jamieson: Miliband’s direct hit on Cameron

Ed Miliband has an unerring ability to hit David Cameron where it hurts. Picture: Getty
Ed Miliband has an unerring ability to hit David Cameron where it hurts. Picture: Getty
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Labour leader may be struggling in the polls, but his attack on bank bonuses puts PM on back foot, writes Bill Jamieson

HE MAY be the stuff of caricature with an abysmal poll rating, but Labour leader Ed Miliband has once more shown an unerring ability to hit Prime Minister David Cameron where it hurts.

Two months ago, it was his attack on the energy giants with their inflation-busting price increases. This week it is bankers’ bonuses. Royal Bank of Scotland has duly obliged to embarrass the government with a mooted proposal to pay bonuses above the average annual salary of its staff. A new European Union rule stipulates that bonuses of this size must be approved by shareholders. And since the government is an 80 per cent shareholder in RBS, Labour has tabled a Commons motion calling on the UK Financial Investments, the body that holds the shares, to veto it.

It will be incredible to many – though perhaps no surprise to those who followed the behaviour of bank managements in recent years – that five years on from the debacle that brought RBS, HBoS and Lloyds Bank to their knees – that bonuses of this magnitude should even be contemplated.

But the banks seem intent on sticking by the enduring wisdom of the Bourbons – they learnt nothing and forgot nothing. Bonuses played a significant role in blinding senior bankers to excessive risk. And some banks – RBS prominent among them – are in no state to shell out bonuses of this magnitude. There is no early prospect of an end to taxpayer support. It faces deep structural problems that will delay recovery for years. It has been heavily fined by regulators for mis-selling and breaches of corporate governance. And it is miles away from a resumption of dividend payments to shareholders.

That bumper bonuses are being considered – RBS says no decisions have been made but discussions have already been held with UKFI – beggars belief. It may argue that such payments are well down on what was previously being awarded, that barely 100 senior staff are involved. It may also insist – a somewhat hoary argument now – that it needs to pay such sums to prevent staff being lured by rival banks. On this argument, such payments are not “bonuses” in the conventional sense. They are more like retainers – money paid to keep staff at their posts. This does not, of course, inhibit the payment of large sums when senior personnel are “let go”: indeed, it works to inflame such payments.

The most that bank spokespeople can offer in support of the “talent drain” argument is “anecdotal evidence”. Surely after five years something more robust can be found to sustain this argument. Senior staff with families and roots in the UK are not always eager to up sticks and abandon London for a move to Hong Kong, Zurich or Singapore.

The argument is also hard to sustain, given the large number of investment banking jobs that have been shed in the past four years as banks such as RBS have retrenched. This would suggest there is a large talent pool of skilled investment bankers keen to get back in and on which the banks can draw.

In any event, the notion that the “bonus culture” has been tackled and that banks have learnt the errors of excess struggles for credibility as the annual bonus row ritual continues its baleful progression.

This year, however, it poses a difficult dilemma for Cameron, and on several fronts. Politically, he would be keen to avoid the Miliband charge that, as with energy bosses, he is on the side of “wrong people” when the household budgets of millions continue to be squeezed and that for most, wages continue to lag inflation.

Second, the Treasury has already launched a legal challenge arguing against the EU’s right to set any limits on banking bonuses at all, saying that such intervention could lead to an increase in base pay and undermine financial stability. This may buttress claims by the Conservative leadership, under growing pressure from the party’s Euro-sceptics, that it is fighting back against the tide of ever-increasing EU intervention – though this is arguably one example that would find considerable support among voters.

And third, it has, through UKFI, the means by which to veto this proposal. This is what Cameron said he would do yesterday were any definitive proposal presented. But a proposed cap on the totality of pay could still leave RBS with wriggle room to pay big bonuses while its overall bonus pool declines with the sharp reduction in the size of the bank’s investment banking operations.

The issue also presents difficulties for Labour. Its position is not without ambiguity. Alastair Darling, when chancellor, was anxious to stress that the government would not be an interventionist shareholder in the taxpayer-supported banks – that it would not be a back-seat driver.

At the same time, both parties have rhetorically encouraged the need for activist institutional shareholders to do battle in the name of corporate governance.

It is hard to square these two dynamics – promoting shareholder activism yet pledging to minimise government interference in commercial operations and avoid boardrooms being turned into political backgrounds. But given the continuing regulatory fines and penalties on the banks and the deeply entrenched nature of the bonus culture, the pendulum is swinging towards more robust intervention and activism.

In the past, institutional shareholders sought to exercise discreet, behind-the-scenes pressure on company boards and avoid public confrontation. There is a strong argument for such pressure to be brought to bear on large bonuses – not just the bonus pool overall – while RBS remains majority state-owned and a repayment of taxpayer support still well away. Should banks choose not to listen, the powerful veto of UKFI remains.

This, however, is by no means the end of Ed Miliband’s ambitions in the banking sphere. Tomorrow, he is set to give details of proposals to force the big high street banks to sell off branches. He wants to cap the size of the established banks and promote the growth of new banks that could challenge the “big five” – Royal Bank of Scotland, HSBC, Lloyds, Barclays, and Santander.

Closure of bank branches has become an increasingly contentious issue as millions have switched to online and mobile phone banking and branch business has sharply declined. In the words of banking analyst Ralph Silva: “What makes anybody believe that there’s a queue of people willing to buy these branches? New and smaller banks – they don’t want more branches, they want more apps.” Given the lack of appetite among new entrants to acquire branches, the perverse result could be less competition, not more.

When it comes to intervening to shape and control business activity, the instincts of politicians are rarely sound. It can result in consequences counter to the original intention. However, on bank bonuses, they have captured a powerful public mood. It is not David Cameron, but the banks themselves, that have presented Ed Miliband with the nearest thing to an open goal. And you don’t need to be Cristiano Ronaldo to score.