After months in which a series of government ministers of all parties have threatened a toughening in the stance over City bonuses, Downing Street says the government does not intend to intervene in the pay of the UK's top bankers
The government has got itself into a fine old mess on bankers' bonuses, writes Nils Pratley in the Guardian. The fault is entirely its own. The coalition agreement, published just eight months ago, declared that "detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector" would be brought forward. There was no commitment on timing but, come on, everybody knew the next bonus round would arrive in January 2011. The government should have defined "unacceptable" by now.
It's no use pleading, as the chancellor, George Osborne, does sometimes, that the bank levy, set to raise £1.25bn this year, is an adequate substitute. The coalition agreement was clear: the bank levy and the bonus proposals were separate items, and there was a pledge to implement both.
Nor is it any use David Cameron calling for Royal Bank of Scotland, 84%-owned by the taxpayer, to be "a back marker" on bonuses. RBS is bound to be at the back of the pack because its profits will be lower than those of other big UK banks: the prime minister is appealing for something he knows will happen anyway.
It is also disingenuous to point to the pan-European reform of bonus payments as evidence of change under this government. Reform to the structure of bonuses – limiting the proportion that can be paid up-front in cash – is welcome but the regulators had the matter in hand before last year's election. The coalition's use of the word "unacceptable" seemed to be directed at something else, like the size of bonus pools or the fact that most UK banks are still supping from the Bank of England's special liquidity scheme.
Now we know the reality. There will be no cap on bonus pools and even modest proposals to require greater disclosure of pay and bonuses have been dropped. We may still learn the rewards enjoyed by the top five earners in each institution (today's face-saving suggestion) but the banks have been victorious. The phrase "unacceptable bonuses" has disappeared from government rhetoric. Anything now goes, even though the Bank of England continues to warn that it is in banks' "collective interest" to retain more of their profits as protection against risks ahead.
This, of course, was always likely to be the outcome. Reform of the absurd system of rewards enjoyed by the financial elite would only be effective if it came from the boardrooms of the banks themselves. City shareholders – wedded to their own bonus systems – were always likely to prove too feeble to act as policemen on pay, or even to carve out a better deal for the investors whose money they manage.
We have heard fine words from the likes of Marcus Agius at Barclays about banks' responsibilities to society at a time of austerity but they arrive wrapped in threats about shifting activities overseas in order to remain "competitive". The UK banking industry's consistent message to government has been: sorry, guv, we'd love to help on bonuses but we can't.
The coalition government has had eight months to prepare its response to the banking industry's intransigence. The only honest response now would be to admit that its commitment to robust action was a sham.
Nils Pratley is the Guardian's financial editor