By Gonzalo Vina
May 15 (Bloomberg) -- British bankers are guilty of self- pity and Treasury minister Paul Myners displayed naivete over the pension awarded to the former chief executive officer of Royal Bank of Scotland Group Plc, a panel of lawmakers said.
Feeble oversight by regulators allowed executives at RBS and Lloyds Banking Group Plc to bring the banking system close to collapse in October, Parliament’s Treasury Committee said today in a report that calls for sweeping changes to the way financial firms compensate workers.
“Bonus-driven remuneration led to a lethal combination of reckless and excessive risk-taking,” said John McFall, a lawmaker from the ruling Labour Party who leads the committee. “The design of bonus schemes was not aligned with the interests of shareholders and the long-term sustainability of the banks.”
The report is aimed at influencing Prime Minister Gordon Brown and officials at the Financial Services Authority and Bank of England as they tighten up bank regulation to prevent a repeat of the crisis that froze credit markets and plunged the economy into its worst recession since World War II.
The Treasury Committee, drawn from each of the three main political parties, took aim at the culture in the City of London that allowed bankers to award Fred Goodwin, the then chief executive of RBS, a 3 million-pound ($4.5 million) payout as taxpayers took on liabilities of 1.4 trillion pounds for bailing out the banking system. It will next turn its fire on regulators in a report due by July.
Lawmakers expressed frustration that bankers testifying to the panel “betrayed a degree of self-pity, portraying themselves as the unlucky victims of external circumstances,” according to a statement accompanying the 120-page report.
Insufficient Priority
FSA Chairman Adair Turner in March proposed an overhaul of the regulatory system and changes to bonus payments. The Treasury Committee said the FSA hasn’t given bonuses “sufficient priority” and called for rules forcing banks to disclose such payments below board level, for remuneration committees to be more open and for a code of ethics for pay consultants.
Turner has said that the last 12 years of “light touch” regulation under Labour helped trigger the financial crisis. The FSA said bonuses should not be a high multiple of salary and should be based on profit, not revenue, of a bank.
Chancellor of the Exchequer Alistair Darling is studying proposals to overhaul supervision and will put out his recommendations by the time Parliament begins its summer recess on July 21.
‘Naivete’
The Treasury Committee said Myners didn’t do enough to limit payouts to Goodwin, noting that he could have asked for the executive to be fired instead of merely telling the RBS board that it should not “reward failure.”
Myners has said he didn’t know Goodwin’s payout could have been withheld. The government had no legal right to intervene in the negotiations between the RBS board and Goodwin about the terms of his departure, a Treasury official said in response to the report.
The report pointed to Myners’s “City background” and his “naivete as to the public perception of these matters” for placing too much trust in the former RBS board.
“We were given two accounts of what happened, and we just didn’t trust Myners,” said Michael Fallon, a Conservative lawmaker who serves on the committee. John Thurso, a Liberal Democrat, said that Goodwin “didn’t come out of this covered in any glory.”
As for the executives at RBS and HBOS Plc, the bank absorbed by Lloyds in a government-brokered deal, lawmakers said their apologies had a “polished and practiced air,” betraying an air of “self pity.”
Management Failure
The government, which also nationalized Northern Rock Plc and Bradford & Bingley Plc last year, boosted its share in RBS to as much as 84 percent and has 43 percent of Lloyds. Bankers deserve “a large share of the blame” for the crisis, the panel said.
“The charge of management failure is impossible to resist,” McFall said. “The banks that have failed did so because those leading and managing them failed.”
Non-executive directors were also to blame for their lack of oversight. Many of them lacked the right skills and were spread too thinly by taking on too many jobs. Committee members urged banks to look to a “broader talent pool,” cap the number of posts any one director can hold and communicate better with shareholders.
Shareholders should take a more active role in scrutinizing their investments to prevent banks from operating “outside the bounds of accountability,” the committee said. Auditors should be banned from doing non-audit work for banks and the FSA needs to improve the clarity of financial reports, it said.
The British Bankers’ Association urged the authorities to show restraint when drawing up new rules for the industry.
“Other countries are watching us, and none uses quite such pejorative language in its scrutiny of financial institutions,” Chief Executive Angela Knight said in a statement. “Our financial services sector is a significant employer which pays significant taxes: we do not want to lose it to a competitor.”
