Wednesday 29 April 2009

McFall - "bankers pay must reflect the wealth they create"

Guest post by John McFall

The Oxford English Dictionary defines a bank as “an organisation offering financial services, especially the safekeeping of customers’ money until required and making loans at interest.” But banks have not lived up to this definition. They have taken risks with customers’ money, and often they have lost the bet.

They will need to work hard to regain the public’s trust.

Society relies on financial services. As recently as the 1970s, it was common for a person not to use any financial products at all – not even a bank account. But nowadays, people who are excluded from these basic financial services can find it difficult to hold down a job or organise their money.

Our prosperity relies on financial services, too. Banks pump financial blood around the economic body. They allow people and businesses to make investments and manage their cash flow. A failure in the banking system creates a thrombosis – putting the economy, and our jobs, at risk.

Trust is at the centre of this industry. More than any other type of business, banks rely on public confidence to keep going. When trust is lost, banks break down, as savers, investors and financial markets all become unwilling to hand over their cash. Only by maintaining trust can we avoid that thrombosis.

But that trust has to be earned, of course. Bankers will need to demonstrate that they know what they are doing, and stop trading in products they don’t understand. They must also show that their pay realistically reflects the wealth they create, both for the bank and the wider economy. And they will need to address the disconnect between the earnings of bank bosses and ‘front line’ employees.

But the public sector also needs to act. It is clear now that financial markets are not self-correcting – so to have confidence in them, we must also have confidence in the regulators. The FSA’s recent change of direction is welcome. It will now need to step up to the mark and curtail practices that could lead to future crises.

There are still some bankers who expect to go back to ‘business as usual’ as soon as the crisis is over. If we are to regain the bond of trust between the banks and the public, then we must not allow that to be the case.

John McFall is the chairman of the Treasury select committee and a speaker at the Fabian event tonight Trust in the City.

No comments: