Terry Murden: Don’t bank on an end to bonus culture

PRIME Minister David Cameron used his New Year message partly to warn the country’s bankers that goodwill to all men does not extend to lavish bonuses.

It will make for another testing stand-off between the coalition and the bankers, who insist they’re due what has been promised. Lawyers have been drafted in by those bankers who continue to believe their annual bonus is an entitlement.

City bonuses are expected to total £4.2 billion, down almost 40 per cent on the £6.7bn paid out in 2010 but still seen as increasingly out of step with austerity Britain.

Sign up to our Opinion newsletter

Sign up to our Opinion newsletter

The strong-arm tactics being applied by Cameron, who is repeating a similar warning by his deputy Nick Clegg before Christmas, appear to be directed mainly at the 83 per cent taxpayer-owned Royal Bank of Scotland over which the government has most influence.

RBS is expected to pay out upwards of £400 million, a reduction on previous years, but still considered unjustifiable, not only because it had to be rescued by the taxpayer, but also because trading is yet to resume the upward curve promised by chief executive Stephen Hester. Third-quarter profits were wiped out as revenue at its investment banking division fell by 29 per cent. It has been calculated that for every £1 in sales generated, RBS spent 93p on staff costs. The bank’s shares were the fifth worst perfomer in the FTSE last year.

RBS says this year’s bonuses will be paid in performance-related shares. It has pledged to review its global banking and markets division and trim the investment bank operations by a third. But while this side of the business will shrink, RBS still wants to be involved, believing that to be a significant player it needs to offer the full range of services.

The government must therefore strike a balance between satisfying public demands for fair pay and ensuring the banks, and RBS in particular, remain competitive. It will also be mindful that the £4.2bn in bonuses generates about £2.5bn in taxes for the Treasury.

Bankers have a track record of getting most of what they want. Don’t bet too much against them emerging from this battle with more than Downing Street is demanding.

A new dawn for US economic recovery?

WHILE the black clouds continue to gather over Europe, where recession looks inevitable, there are tentative signs that the US economy is on the recovery trail.

False dawns apart, this has provided a New Year lift that will be welcomed by traders when they return to their desks today. Small firms are borrowing at a rate not seen for four years and they are paying their dues more quickly. It comes on the back of an eight-month high in the US consumer index published last week.

The uplift has led some to believe we could be seeing the start of a recovery, albeit a slow one, and certainly the current quarter growth figure should be positive.

Disquiet over Virgin birth on high street

ANOTHER milestone in the transition from crisis to recovery was marked at the weekend with the completion of Northern Rock’s sale to Virgin Money.

It marked the creation of Britain’s seventh biggest bank, a “new” entrant that will satisfy those demanding more competition.

Yet there remain questions around this transaction. Opponents believe the Rock was sold too cheaply by UK Financial Investments, which manages the stakes held in the banks on behalf of the taxpayer. There is also disquiet among those who saw the eventual sale of Northern Rock as an opportunity to rebuild a mutual bank, owned by its members.

Jayne-Anne Gadhia, chief executive of Virgin Money, believes the deal will be seen as good value and says she has no fears over an inquiry by the National Audit Office. Her boss Sir Richard Branson is not one to overpay for assets. Her task now is to prove that the government was not short-changed. The £747 million headline price will be closer to £1bn when certain criteria are met, but still shy of the £1.4bn spent by the government to keep it afloat in 2008.

As for Edinburgh, it is a partial victory. Virgin Money will be co-headquartered in the city and in London, though operational control will be based in Newcastle.