Capping City bonuses misses the point - instead the government may need to attack the source of the problem and tax the millions of City transactions that bring in the money that funds the bonuses, according to Chairman of the Financial Services Authority (FSA) Adair Turner.
The man tagged as "Red Adair" when he headed the CBI told Prospect magazine (as reported in the Guardian, Times and other papers), that: "If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit". He described many of the City's activities as "socially useless".
He suggests first increasing capital requirements against trading activities (ie to create a buffer against losses made in risky transactions) and if that doesn't work: "I am happy to consider taxes on financial transactions." He describes such a tax as "a nice, sensible revenue source for funding global public goods."
According to the Guardian, Turner also helpfully reminds the government that it is in their power to take short-term action on bonuses at the banks where it has controlling stakes or is giving other support on behalf of the taxpayer.
The comments come after the FSA was criticised for publishing a weaker version of its Remuneration Code of Practice than initially proposed and a campaign launched by lefty pressure group Compass for a High Pay Commission backed by the TUC and numerous MPs which was immediately dismissed by the Chancellor.
A transaction tax would be a political decision rather than a matter for the regulator. But as Nils Pratley points out in the Guardian, even if the government supported such a tax it would need the co-operation of all major global financial services to prevent trading simply migrating to New York or Frankfurt.
Whether the comments are to be taken as a change of direction by the FSA - or as those of a man who often speaks his mind and is no stranger to "blue skies thinking" remains to be seen.
The latest round-up of finance sector pay on XpertHR [subscription required] found that pay deals have been hit substantially by the financial crisis, with one in four deals pay freezes and a drop in the value of performance-based awards, but only by 0.5% to a median 3.5% over the year to 31 May 2009.
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