Bonds that will pay out only if they behave might make for better bankers

Outlook

You have to hand it to Mark Carney.

The Governor of the Bank of England hates Europe’s bonus cap on bankers, and so do most of his colleagues – and with good reason. As the Bank warned when it was introduced, basic salaries have soared to compensate for the enforced reduction in bonus pools. That means less money is available to be clawed back if bankers do bad things.

Fortunately, instead of simply complaining about what is an inflexible and stupid piece of legislation (although he has done plenty of that), Mr Carney and chums have come up with what might at least serve as a partial solution to its unintended, but malign, consequences.

They want to put bankers’ basic pay at risk just like a bonus. The Americans, perhaps surprisingly, have come up with a good way of doing this, and it’s increasingly gaining traction. It works like this: you pay the salary in bonds, which can’t be cashed in for a number of years. If, during the deferral period, the bank gets into trouble, the bond goes into default and the money is surrendered.

Clever, you might think, and it is. It’s quite clear that fines are failing to have much impact on the bad behaviour that is rife in the industry. Some of it was going on even as banks were being slapped for wrongdoing in other parts of their offices, even on other parts of the trading floor.

Is it all that surprising? Who cares when it’s the shareholders that pick up the tab?

A banker bond containing a pool of at risk money that is only released if the holder behaves might make them care. Include the executives, as well as risk-taking traders, and you can be sure that the occupants of the boardroom will take a very close interest in the activities of those working a few floors below them.

Which prompts the question: why stop at banking? We have seen misdeeds, negligence and, yes, potentially catastrophic collapses across financial services. Insurers, asset managers, brokers, even exchanges; they’ve all been involved. Spend five minutes rooting around on a regulator’s website and you will find swathes of ugly looking “decision notices” applying to the lot of them.

Moreover, it may be in one of these sectors, specifically asset management, where the next crisis is brewing.

In the speech in which Mr Carney proposed putting bankers’ basic pay at risk, he also highlighted some disturbing trends. One is a build-up of debt in long dated bonds, held by funds whose investors have become accustomed to the rapid release of their money when it is required. What would happen if an economic shock stopped them getting at that money?

This is just one of the dangers on the watchlists of central banks.

Of course, fund managers, insurers and the rest aren’t caught by the bonus cap. But nor are they captured by some of the more sensible reforms to the regulations of the banking sector. If we’re (rightly) going to force bankers to take responsibility for their actions, shouldn’t we at least be discussing applying the same sort of sanctions to those working in other sectors – sectors that clearly have the capacity to spread poison throughout the financial system if their employees fail to live up to their responsibilities?

Don’t play the victim, Mr Lyons. Serco is a mess

Banking isn’t the only business whose leaders have an aversion to taking responsibility for their failings. Take government contracting – another sector about which the phrase “too big to fail” has been used.

You might point out here that the chairman of one of the more important members of that sector, Alastair Lyons, quit yesterday, saying that while colleagues had asked him to stick around, “the initial findings of the Strategy and Balance Sheet Review point to strategic and operational mis-steps at Serco for which, as chairman of the board since 2010, I take ultimate responsibility”.

That might appear to contradict my opening statement. But there’s a sting in the tail. It came from Serco chief executive Rupert Soames who pompously declared: “I want to put on record the fact that he [Lyons] has done an outstanding job stewarding the company through the travails of the last 12 months. Nobody could have worked harder or done more to get us to the point where we can now concentrate on building a solid future for Serco.”

Presumably Mr Soames was one of the colleagues who asked Mr Lyons to stick around.

Incredibly, despite the company’s descent into shambles on his watch, Mr Lyons, with the help of Mr Soames, almost appears to be attempting to portray himself as the victim. Or least as if his resignation is some sort of noble gesture.

It isn’t. Serco is a mess. Just last week there was more bad news on this year’s and next year’s earnings. There have been scandals – the electronic tagging of phantom prisoners springs to mind – and huge write-downs, even a ban from bidding for certain government work (albeit a brief one).

Mr Lyons is a chartered accountant who has held a string of senior roles at big companies. Had he, perhaps, kept a rather closer eye on the operations of the business he was employed to steward at an earlier stage, it might not have suffered such travails. And had he really wanted to take responsibility for those travails a simple sorry would have sufficed in his resignation statement. But we didn’t get that.

Did I forget to mention the industry in which Mr Lyons previously held so many executive roles? I take full responsibility for that oversight and I’m very sorry. It was in banking.