UK bank pay collusion would be least bad solution

By Hugo Dixon
November 15, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” Normally, Adam Smith’s dictum is a good guide to policy. But in the case of UK banks and their bonuses, it isn’t.

Clubbing together to keep bonuses down wouldn’t please competition purists. Depending on how such talks are orchestrated, it may even be illegal. One could imagine peculiarly tin-eared traders taking their employer to court for
unfairly conspiring to keep down their pay.

That said, the government is keen for bonuses to be restrained, so it is looking at whether there really is a problem. It has waived competition law in the past when it believed there was an overriding public interest — notoriously when it approved the takeover of HBOS by Lloyds TSB in the midst of the financial crisis.

The public interest today is to ensure that bankers are not seen to be making hay when the rest of society is suffering from the government’s savage cuts. Even the banking industry itself has an interest in curbing pay, as that might help limit the regulatory and political backlash. The snag is that it is hard for banks to take the initiative on their own, as they fear their best staff will be poached by rivals who do not take the same approach. Hence, the need to collude.

Competition purists might say that such collusion is still a bad idea. If the government thinks bankers are paid too much, it should take direct action to curb pay — for example by imposing another windfall tax on bonuses. But that solution would be even worse. The UK has just about been able to get away with its windfall tax on bonuses on the basis that it was a one-off. A repeat would seriously damage its reputation as a predictable home for financial services. If the banks do manage to make progress on a deal to curb pay, free marketeers should hold their noses and give their assent.

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