The government has the power to do exactly what it says it can’t, and stop Stephen Hester, the director of the failed RBS bank, getting a million pound bonus.
Oh dear, it’s the time of the year when executives of failing state-funded banks award themselves massive bonuses and the government’s only response is to say: ‘sorry guv, nothing we can do’.
Despite the fact that Britain’s biggest banks have seen their share-prices fall in 2011, and are hugely exposed to sovereign debt in Greece, Ireland and Italy, the annual bonus pot is set to be around £7 billion.
But we shouldn’t fall for the weasel words of Cameron and Osborne when they claim they are powerless to prevent Stephen Hester’s bonus.
In fact, EU legislation drafted in 2010 by Labour MEP Arlene McCarthy explicitly gives governments across the EU the power to ban bonuses to banks bailed-out by the state.
The purpose of the directive was bring the bonus culture of the financial sector back to reality, with limits on cash payments and rules that bonuses should be in shares or contingent capital so that executives would be rewarded for the long-term stability of their institution.
Here are the relevant sections of the third capital requirements directive:
Recital (12) CRD III Regarding entities that benefit from exceptional government intervention, priority should be given to building up their capital base and providing for recovery of taxpayer assistance. Any variable remuneration payments should reflect those priorities.
Annex V, Section 11 Directive 2006/48/EC, point 23 (k) in the case of credit institutions that benefit from exceptional government intervention:
(i) variable remuneration is strictly limited as a percentage of net revenue where it is inconsistent with the maintenance of a sound capital base and timely exit from government support;
(ii) the relevant competent authorities require credit institutions to restructure remuneration in a manner aligned with sound risk management and long-term growth, including, where appropriate, establishing limits to the remuneration of the persons who effectively direct the business of the credit institution within the meaning of Article 11(1);
(iii) no variable remuneration is paid to the persons who effectively direct the business of the credit institution within the meaning of Article 11(1) unless justified;
EU wide guidance on the implementation of these rules, overseen by the European banking authority makes clear:
The competent authority could also require the institution not to award any variable remuneration as long as the government support is not yet paid back, or until a recovery plan for the institution is implemented/accomplished.
In other words, governments have the power to intervene on any bonus to a state-backed bank. Indeed, banks should build up their capital base and pay back the taxpayer before awarding themselves bonuses.
McCarthy, who is launching an inquiry on the implementation of the rules, said:
“The 2011 remuneration rules that the coalition signed up to and should have implemented, clearly give the government, as the major shareholder in RBS, the power to ban bonuses for directors of bailed out banks.
She added that:
“If they weren’t prepared to ban bonuses, the government should have applied the remuneration rules which stipulate that 60 per cent of bonuses must be deferred and paid in instalments for at least three years.”
The hard economic facts are that, in 2011, the RBS share-price fell by over 40 per cent, costing taxpayers, who still own 81 per cent of the bank, around £23 billion.
Meanwhile, RBS has continued to make massive job cuts, having just announced last week that 3,500 more jobs would go.
Last, but not least, RBS has missed the government’s lending targets for British businesses. In other words, there are no grounds for Hester, or any of RBS’s executives, to be awarded six or seven-figure bonus packages. Ed Miliband and the Labour party agree. Even London Mayor Boris Johnson has described the payment as “utterly bewildering” adding that RBS should be “run on public sector lines”.
While City fat-cats may argue that big bonuses are needed to attract the best executives, the concept of a bonus is that it is awarded according to merit. And the coalition, which signed up to the EU law on bank bonuses, has the power to stop the payments for Hester and others. It’s time they had the guts to use it.
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• All in it together? RBS fat cat “in line for £7m payout”. Seven. Million – Shamik Das, January 27th 2012
• Cable fails to provide a stick or carrot in the fight against obscene pay – Duncan Exley, January 24th 2012
• Three things Cameron should do if he’s serious about high pay – Duncan Exley, January 9th 2012
• How bankers’ bonuses are contributing to the new credit crunch – Cormac Hollingsworth, December 6th 2011
• All in it together, eh Gideon? FTSE fat cats see pay rocket 50 per cent – Shamik Das, October 28th 2011