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John McFall has pursued banking chiefs, but MPs are now more unpopular

A REAL measure of how the controversy of MPs’ expenses has undermined the apparatus of Parliament could be heard in the hoots of derision that greeted the Treasury Select Committee’s publication of its third and final report into the financial crisis last week.

Clearly Fred the Shred and his fellow comfortable retirees have been toppled from the top of the pantheon of latter day bogeymen by Darling the Dodge, Smith the Second Home, Hogg the Moat and Martin the Immovable (well, almost). Despite damning conclusions that spared no one, including their own kind in City Minister Lord Myners, the usually-well respected members were almost drowned out in a chorus of pot-kettle-black.

It will be for others to restore confidence in Westminster. But it must be frustrating for anyone who genuinely wishes reform of the financial sector that the conduct of astronomically-remunerated bank chiefs has been pushed down the agenda by an issue which, while pertinent to the future functioning of our democracy, must be seen next to the near-crashing of our economy.

While public opinion buzzes with calls for criminal investigation into his fellow MPs, it must be doubly galling for the Treasury Select Committee’s able chairman John McFall to watch his quarries – whom he has harried swiftly and diligently while discharging his responsibilities as a public advocate – disappear unnoticed through an angry crowd that has instead turned upon the pursuers.

The report, entitled Banking Crisis: reforming corporate governance and pay in the City, focused its criticisms in three principal areas: remuneration of banking staff and bonus culture; corporate governance; and the Government’s handling of Sir Fred Goodwin’s pension payout.

The committee thought darkly of the attitude of senior executives, dismissing the apologies given by Sir Fred, his RBS chairman Sir Tom McKillop, and former HBOS bosses Andy Hornby and Lord Stevenson for their “polished and practised air”, concluding that “these witnesses betrayed a degree of self-pity, portraying themselves as the unlucky victims of external circumstances”.

It also found that “discriminating between the personal blame that should attach to bank executives, and that appertaining to the force of global circumstances is difficult. Yet it is self-evident that some banks have weathered the storm better than others; and some have not required taxpayer assistance to navigate through the credit crunch. These facts alone make the charge of management failure impossible to resist. Banks have failed because those leading and managing them failed.”

Examining the issue of Sir Fred’s £703,000-a-year pension, the report concluded: “It would have been far better if Lord Myners had given a stronger, clearer direction of Government requirements for a bank in receipt of public funds and had assured himself by demanding to be kept informed of the detailed negotiations that were taking place. The Committee is further not convinced that Lord Myners was right to take on trust RBS’s suggestion that there was no option but to treat Sir Fred as leaving at the employer’s request. It would, in the Committee’s view, have been open to Lord Myners to insist that Sir Fred should have been dismissed.”

However, with 22 conclusions and recommendations, the report’s main focus is on remuneration. McFall said: “Bonus-driven remuneration structures led to a lethal combination of reckless and excessive risk-taking. 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. Our report outlines clear failings in the remuneration committees within the banking sector, with non-executive directors all too willing to sanction the ratcheting up of senior managers’ pay, whilst setting relatively undemanding performance targets.”

This last conclusion is unlikely to chime with ex-RBS staff, and herein lies the chicken-and-egg conundrum at the heart of the financial crisis. Bonuses are there to incentivise staff, but there has come report upon report from former workers at the bank and elsewhere, most notably Northern Rock, that the master’s whip was never far from their backs.

In an “almost insane” drive to find new customers, clients and markets, as one RBS trader put it, staff were eventually driven down the credit ratings into sub-prime, and from there on into the credit crunch and unmeasured toxic debt. If you’d spent time with small business owners back around 2006, many of them would have got around to bemoaning the change in approach among bank managers, who were often compared to salesmen first and foremost.

As yet, this aspect of practice has yet to be given time for public debate. While no one would preclude the high street banks from making a profit (particularly if they owe considerable amounts back to the taxpayer), there is an abiding belief that many will simply return to their old ways once the spotlight moves on. This is doubly worrying, as few people will have cleared their debts from the last spending spree. Yet, recent research shows that people on salaries of under £10,000 a year can apply for two thirds of all credit cards in circulation.

The Treasury Select Committee’s report found that “much criticism has been levelled at the city culture which encouraged excessive risk taking. The banks’ boards must also take their responsibility for failing in their duty to establish a culture within their institutions which supported both innovation and risk management.” The last boom was funded on credit – in effect, money that isn’t there – and consumer borrowing continues to fall. But unless banks are compelled to make transparent their sales ethics and are made to understand that the pool of customers is that much smaller, they risk repeating the mistakes of the past in record time.