13th February 2009

Watching the detectives - Pink Panther 3

I am not sure any more who is supposed to do what, who takes responsibility, who investigates who, why, who takes the blame and who pays.

Last October, bank bosses were warned by the FSA over their ‘inconsistent’ pay structures and told they can expect a visit from the City regulator before Christmas, did this happen?????

In a letter to bank CEOs which set out new ‘Criteria for good and bad remuneration policies’ the FSA had “supposedly taken concrete action” against banks, following Prime Minister Gordon Brown's comments castigating bank bosses for taking big bonuses despite the state of their banks’ balance sheets.

This FSA initiative came as the government announced its plans to bail-out UK banks, which included the stipulation that no cash bonuses would be paid to board members in 2008.

In its letter the FSA said that it was possible that banks ‘frequently gave incentives to staff to pursue risky policies, undermining the impact of systems designed to control risk, to the detriment of shareholders and other stakeholders, including depositors, creditors and ultimately taxpayers’.

An example of bad practice given by the regulator was ‘Employee bonuses calculated solely on the basis of financial performance’.

I can only assume that this FSA action plan went nowhere as the latest confusion indicator is that the government has announced an independent review of bank bonuses and corporate culture. 

David Walker, the former chairman of Morgan Stanley, who has been tasked with this “Clouseau” role, will in fact be investigating his “own” and, will not only look at capping payments, but also claw-backs on payouts from previous years. I was not aware that bankers were paid on an “indemnity” bonus basis.

According to the Times today, “the chorus of scepticism that greeted Alistair Darling's appointment of Sir David Walker, the City grandee, to lead a government review into banks' corporate governance yesterday was deafening.

Not least after it emerged that Sir David will remain a senior adviser to Morgan Stanley.

Apart from a three-year period when he chaired the London Investment Bankers' Association, Sir David worked at Morgan Stanley between 1994 and 2006, and retired as chairman of the bank's European arm. The consultancy raises question marks over Sir David's independence and will add further fuel to yesterday's criticism of his appointment”.

The Times further pointed out that, “hiring Sir David to do a report like this is worse than simply hoofing the ball into the long grass. It is appointing the wrong man for the job. Sir David, best known in the City as the former chairman of Morgan Stanley International, is steeped in what might be called the bonus culture. It is like asking Pini Zahavi to investigate whether football clubs are paying too much in commission to players' agents.

In fact, it's worse. We do not even know the extent to which Sir David himself has benefited from the bonus culture. There are certainly no clues in the recent accounts of Morgan Stanley International. All these disclose, in this area, is that, in the year to the end of November 2007, the highest-paid director received $10 million and the board as a whole shared $85 million.

There is a wider question over Sir David's suitability for carrying out a review of this kind. Almost by definition, he is a fully paid-up supporter of the investment banking model, with all its use of financial products, such as derivatives and structured products, which are, by their nature, more risky than the traditional lending activities of commercial banks”.

The review will not be completed until the end of the year by which stage some banks will have already partially, if not totally paid out their 2009 rewards.

Surely such a review should be within the remit of the FSA in its normal role of ensuring that businesses are fit and proper, treating customers fairly, ensuring capital adequacy is sufficient and are generally conducting business within the rules.

If such a review is not within their remit, why not? Do we need another load of probably uncapped expense to do the job that the FSA is supposed to do and is paid to do? What will the outcome be? If such a review has no teeth, what is the point? Is it the case that the FSA only investigates soft and easy targets and is afraid to go near the “Opus Dei” style structure of investment banks?

If the FSA is not to investigate, what are they to do? Well that is simple; they can go for the easy target- you the small, directly regulated IFA who has no ability to fight back on your own.

Finally, The Times reports this week that “the bankers recruited by the Treasury to manage the Government’s �£37-billion stake in the high-street banks are themselves in line for bonuses. UK Financial Investments Ltd (UKFI), the Treasury-run body created by Alistair Darling to manage the state’s stake in the banks, is set to approve more than �£1-billion in bonuses for bankers bailed out by the taxpayer”.

There is no hope, will the last person to leave Canary Wharf please turn off the lights.

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Panacea Comment