Alf Young: Banks must be forced into change

Yet more scandal proves that this is a sector out of control and one which requires strong intervention, writes Alf Young

IT’S February and the latest bank reporting season is upon us. This October sees the fifth anniversary of the Brown government’s dramatic intervention to shore up tottering UK banks, in a credit crunch that left the two biggest Scottish banks, Royal Bank of Scotland and Bank of Scotland, effectively in public ownership with little sign of an early return to market ownership.

Nearly five years on, new scandals keep creeping out of even the most highly polished banking woodwork. The cost of the Libor-fixing fiasco, as far as RBS is concerned, has yet to be resolved. But this week the Financial Services Authority signalled that, on the back of the payment protection insurance scandal already costing UK banks billions in compensation, banks had been at it again – lucratively selling small businesses interest rate swaps many didn’t understand. Again compensation will have to be paid. New provisions, again potentially in the billions, loom.

And this week it emerged that Barclays, which only avoided taking the UK taxpayer-funded bailout money in 2008 by going cap-in-hand to Middle Eastern investors, notably an investment vehicle controlled by the prime minister of Qatar, may itself have secretly lent the billions that made the investment possible. If confirmed, failure to disclose that aspect of the deal would constitute another serious breach of banking regulations.

We know the Barclays deal has been under scrutiny by the FSA and the Serious Fraud Office since last summer. And prosecutors in Iceland have charged four individuals there over a similar deal the failed bank, Kaupthing, completed, before its collapse, with a member of the Qatari royal family. Whether there are charges in the Barclays case remains to be seen.

But this drip, drip, drip of scandal and allegation is doing nothing to restore public confidence in the ethics of 21st century banking. That persistent sense that something is rotten in the state of modern money-changing simply won’t go away. It will crystallise once more, over the next few weeks, in how banks have decided to reward senior staff for their efforts in 2012.

Yet again the focus will be on who’s getting what big bonuses and why. We have known since last July that the man who runs RBS, Stephen Hester, is waiving his 2012 bonus, estimated at up to £2.4 million, after a calamitous computer meltdown left customers cut off from their money for days on end.

But reports in the past few days suggest RBS will still shell out up to £300m in bonuses to staff in its investment banking division, despite even bigger Libor fines to the US and UK authorities.

There are reports of a £100m claw-back from earlier pay awards to demonstrate that accountability is alive and well in RBS, in the wake of the Libor rate-rigging. And the head of the investment division is expected to leave, but with a personal bonus pot of £4m or more intact. But another public outcry about unfettered banker greed looks inevitable.

Yesterday the new-broom chief executive at Barclays, Antony Jenkins, moved to pre-empt further speculation about what bonus he might be getting, after replacing Bob Diamond last August. Acknowledging “multiple issues of our own making besetting the bank” in the past year, Jenkins announced that he has told his board he won’t be accepting any bonus for 2012. He was reportedly in line for up to £2.75m.

“I think it is only right that I bear an appropriate degree of responsibility for these matters,” he said, “and I have concluded it would be wrong for me to receive a bonus for 2012 in these circumstances.”

Only two days before Jenkins revealed his decision, the chair of Barclays remuneration committee Sir John Sunderland, was involved in a heated exchange with the chair of the parliamentary commission on banking standards, Andrew Tyrie MP.

Sunderland refused to accept that the bonus award of £2.7m to Diamond in 2011 – an award Diamond himself later declined because of the Libor scandal – had been a “profound mistake”. Instead he praised the previous Barclays CEO as a leader of “great energy, enthusiasm and skill” who “deserved some recognition”. Sunderland’s predecessor in that role, Alison Carnwath, told the commission, at the very same hearing, she had argued that Diamond’s bonus that year should have been “zero” because returns to shareholders had been poor. But she was a lone voice and subsequently quit the board

If those who decide these things at the top of banks can come to such sharply contrasting conclusions on what rewards are justified and when, rows about how much senior bankers should be allowed to earn can only rumble on and on.

Real root and branch reform of banking culture looks to be years away. Public distaste can only fester. Fixing our broken banks is a mission making painfully slow progress.

We are not alone. Yesterday the Dutch government nationalised another of its four systemically important banks after a search for new private capital to offset hefty real estate losses, particularly in Spain, proved fruitless. SNS Reaal joins RBS’s nemesis, ABN Amro, in outright state control. Its board and senior directors have quit. There will be no bonuses, almost certainly wage cuts. Other Dutch banks will have to pay a one-off €1bn levy next year in an effort to restore the sector’s health.

We urgently need tangible progress on reform. It’s not enough to single out a few scapegoats. Fining former HBOS corporate director Peter Cummings £500,000 and stripping Fred Goodwin of his knighthood will come to be seen as mere tokenism if that greater challenge is ducked. But such is the scale of that challenge that such tokenism can prove quite tempting.

In an earlier session of the parliamentary commission, Tyrie pursued Simon Thompson, chief executive of the Chartered Banker Institute (the trading name of the Chartered Institute of Bankers in Scotland) like a terrier over why it hadn’t so far seen fit to remove Goodwin from membership. But where would that take us? It certainly wouldn’t address the central issue – the rotten culture that has infected so much of mainstream banking and needs to change now.

Perhaps another member of the commission, Lord Lawson, a former chancellor said to have the ear of the present incumbent, George Osborne, has a better idea. He wants the coalition to take RBS into full public ownership, hive off the remaining bad bits of its lending book into a separate bad bank and turn the retail and SME core of RBS into a vehicle for lending again.

Cut the big bonuses, urges Lawson. And if star traders up sticks, so be it. They are easily replaced. If that’s what a former Tory chancellor, one of the main proponents of 1980s style privatisation, is now arguing, there may be some hope yet. Government may find the backbone to stand up to the banking lobby and force it to confront some uncomfortable truths. Banking ran out of control. Greed compromised judgment. If it won’t fix its own blighted ethics, it must be forced to change its ways.