‘Bonuses triggered the financial crisis’
By Ian Dunt
Excessive bonuses triggered the financial crisis, and current attempts to regulate the financial sector will fail unless they take that into account, the Treasury committee has said.
In a forceful and provocative report, the committee of MPs raised concerns that the Financial Services Authority’s (FSA) Turner Review had downplayed the role of bonuses on creating the crisis.
“Bonus-driven remuneration structures led to a lethal combination of reckless and excessive risk-taking,” said committee chairman John McFall.
“The design of bonus schemes was not aligned with the interests of shareholders and the long-term sustainability of the banks and has proved to be fundamentally flawed.
“Non-executive directors [were] all too willing to sanction the ratcheting up of senior managers’ pay, whilst setting relatively undemanding performance targets,” he continued.
“Looking forward, we are also concerned that the FSA seems not to be taking tackling this issue seriously enough.”
Lord Myners, city minister, also received criticism, especially over RBS boss Sir Fred Goodwin’s £16.9 million pension payoff.
The report gives short shrift to the slew of apologies from banking bosses following the crisis, calling them “polished and practised”.
The apologies were made to the very same committee which compiled today’s report, leading Mr McFall to comment: “Prior to their public fall from grace, the former bankers from whom we extracted apologies were regarded as among the most able and competent leaders in British industry. This makes the charge of management failure impossible to resist.”
Liberal democrat treasury spokesman Vince Cable said greed and irresponsibility had brought the financial system to its knees.
“Many senior executives acted deeply irresponsibly with little scrutiny or oversight,” he said.
“There must be a radical change in both the culture and regulation of the banking system. Never again should greed be allowed to bring down economies.”
The system of non-executive directors – particularly popular among MPs – also comes in for flak, with the MPs noting that many non-execs combine several similar roles with senior full-time jobs.
“This simply cannot have given them the time to conduct proper oversight,” Mr McFall continued.
“Too often seemingly eminent and highly regarded individuals failed to act as an effective check on, and challenge to, executive managers, instead operating as members of a cozy club.
“Such incestuous and frankly ineffective behaviour must come to an end.”
In a separate section, the entire culture of auditing is brought under the spotlight, with MPs highlighting its inability to spot the crisis, and raising questions about auditor independence.
The report suggests a prohibition on audit firms conducting non-audit work for the same company.
