My Lords, I am not sure that I agree entirely with what my noble friend Lord Phillips of Sudbury said about what happened 25 years ago in that the senior management of investment banks—merchant banks, as we called them then—did not enjoy variable remuneration. I worked for Kleinwort Benson for 23 years, and then for Fleming for four years, and more recently for the Japanese bank Mizuho for five years. To me, the culture of Kleinwort Benson was absolutely excellent, honourable and upright, even though it was doing investment banking.
There was a considerable cultural difference between the banking department and the bond trading department, but that reflected the environments in which the various
people were carrying out their activities. We should also remember that even the asset management business was not separated at all at that time, and there were obviously enormous conflicts between underwriting securities and buying those same securities for clients’ managed portfolios. Those conflicts were dealt with internally, because of the overall culture, which was excellent. That was one of the reasons why the City of London earned respect around the world, and other places have attempted to model their own financial centres on what they perceived to have been London’s strengths.
Notwithstanding the disasters that have befallen us, quite a lot of that regard and respect still obtains today around the world. I worry that we are going too far down the road of state interference in remuneration, which is properly the responsibility of management, who are accountable to shareholders. In a command economy that may be the normal thing to do, but I do not believe that if we go too far down that road it will lead to the establishment of the kind of culture that existed in the City of London for decades. That is tarnished and damaged—we all agree—but I believe that it should be restored.
I do not believe that the case is made that the state should interfere too much in the salaries of bankers, any more than it does in those of the senior management of utility companies, for example. I fear that if the state interferes too much in this area it will definitely lead to the best bankers in the generation now coming up going to work in other centres. Many noble Lords may say, “Good riddance. If they are so greedy, we don’t want them here”, but I do not believe that that is so. We must have a regime that can attract the very best bankers—and I mean the very best in terms of the most capable, but also those with excellent moral standards because that is absolutely necessary.
Over the past few years, the interference in setting the variable remuneration of controlled persons or senior managers in banks has led to a massive increase in fixed salaries in all banks, including small banks and Japanese banks which do not pay multimillion pound bonuses. The senior directors in Tokyo do not receive the kind of figures that shock ordinary hardworking people in this country. That is understandable because they do not accept that a banker is worth thousands of times more than a comparable engineer or anyone else. Inflation in salaries has occurred over the past three or four years because of the limited interference in variable remuneration that has already happened, and I am certain that if we go as far as this amendment would take us, that will lead to a great deal more inflation in the fixed salary element.
That is my advice, based on my experience of being a banker in a merchant bank. Fleming was an investment house that became a merchant bank, but it was not one of the original accepting houses. The Bank of England had an influence on the accepting houses, but they were rightly highly regarded. Of course there were slip-ups from time to time, and there always will be, but if we set up a framework that creates an environment where everything is tightly prescribed by the state, that will not encourage innovation or lead to the development of the right kind of responsible culture.