'Bank bosses don't like paying huge bonuses either'

The City's best-kept secret is out: bank chiefs don't like paying sky-high bonuses to their bankers any more than the public does.

And it's a secret which Sir Nigel Rudd is prepared to blow to explain why the banks have paid out so much in the past and why the days of big cash bonuses are over. "Believe me, most bank chiefs really don't want to pay out so much money to their top talent – it's money which should be going back into the business and to the shareholders. But rewards have been so high, partly because we feared losing top talent but also because the banking industry doesn't function quite like other industries where competition brings down salaries."

Sir Nigel should know; he was on the board of Barclays for 13 years, deputy chairman for six of them and was there during the financial crash which saw more than a £1trn pumped into the system to support Britain's banks. But even he and fellow bankers still don't quite understand why banking hasn't been subject to the same competitive pressures or stresses as most other industries have.

"There are curiosities within banking which have meant the pay bears no relationship to other professions with similar high levels of skill. Why is this? Why doesn't the law of competition work? If you have got traders earning £2m a year and there are 50 potential candidates lined up who want his job and would be prepared to take £500,000 for the job, why doesn't that salary come down?"

Sitting in the quiet comfort of one of the meetings rooms at Barclays Wealth Management's Brook Street offices next door to Claridge's, Sir Nigel tries to answer his own question by going back to before Big Bang in the 1980s.

"Most merchant banks and brokers were partnerships, with the partners sharing the profit and putting money back into the business, meaning the owners and employers were one and the same. More importantly, they took the risk personally – committing their own personal wealth to each transaction they made. After Big Bang, those partnerships were bought by big institutions and the risk transferred to the new owners," he says. "The wonderful trick that was now played by the banks was that they continued to be paid as if they still owned the business and were still taking the risks. But this shouldn't matter – to the public or anyone else – as any overpayment is a charge against the profits and it's the owners – the shareholders. They are the ones who should complain, but they didn't, until recently."

But then, when the financial system came close to destruction, the government stepped in to underwrite that risk. That changed everything, says Sir Nigel. "Now all bets are off. It's one of the first rules I learnt in economics – banking systems carry systemic risk and have to be supported by government." He warns, though, that banks, whether the public or politicians like it or not, will continue to pay the top guys a lot. There is some consolation – more regulation and taxation will squeeze banks' profitability so the days of large cash bonuses are over for good. "Bankers must learn that it is unacceptable to be paid so much without accepting personal risk."

This doesn't explain why the takeover and corporate advisory bankers still get paid a fortune – like the bankers who creamed off hundreds of millions of pounds in fees from advising on recent bids such as Kraft's takeover of Cadbury or the Prudential's attempted bid for AIG's Asian business. Sir Nigel has an answer for this too, and it's the best explanation I've heard so far.

"If I am Kraft, and I'm planning a bid for Cadbury, the first call to be made is to my banker, asking him to come up with the strategy and the numbers, and then I'll ask what the fee is and maybe negotiate a bit. What I can't do is phone a couple of other banks like Goldman Sachs or JP Morgan and ask for competing prices because then everyone on the street will know that I'm about to bid. So you can't go out and barter. So, yes, the big banks do operate a quasi monopoly but it's a tricky one to break. We don't have the answer."

Nor were bonuses to blame for the crash, he says. But he does blame the banks for being allowed to build up huge leverage, partly because they succumbed to pressure from fund managers who put far too much pressure on management to achieve higher and higher short-term performance. "It all went crazy –the spiral got out of control."

However, splitting banks misses the point, and he hopes that the new commission investigating our banking structure will come to the same conclusion. "It's naive and simplistic in today's complex world to think that breaking up the banks will solve the problem; the answer is better regulation, better capitalisation and, most of all, better management. The banks that went bust – Northern Rock, Lehman and so on – were all monolines and collapsed because the businesses were fundamentally flawed." Regulators, especially those at the Financial Services Authority, he says, must take responsibility for not spotting either Northern Rock – relying on short-term money – and for not stopping Royal Bank of Scotland from buying ABN Amro. "We could all see it happening, so why didn't they?"

Hold on, didn't Barclays also try to buy ABN, dropping the bid only because it failed to get support? Sir Nigel is quick to add that Barclays, had it gone through with the ABN bid, was going to pay with shares via a rights issue, thus not busting the balance sheet. "I'm not being smart after the event but you can't compare the two, and I'm surprised the FSA didn't intervene at RBS as all the signs were there. The FSA turned regulation into a box-ticking science but in fact it's an art. Hopefully it will improve when it moves to the Bank of England."

Despite the roller-coaster ride and Barclays' own rescue operation bringing in Gulf investors, Sir Nigel loved his time at the bank which he calls a "great British institution" and one "we should be proud of and stop knocking" - and he's still outraged by press reports that a bust up between him and chief executive John Varley, was the reason he left: " Claptrap."

Even so, he seems happier making things again. As chairman of FTSE-listed Invensys, he's back with cutting-edge engineering; the former BTR-Seibe group designs, among other things, the sophisticated software systems for train signaling equipment and is working on new systems which will lead eventually to driverless trains. It's classic Rudd; pioneering technology, huge potential, lots of cash and a favourite takeover target or even predator; so watch this space. There's also masses to do at BAA, where he will stay on as chairman for another three years, and which is now in the process of modernising Heathrow's other terminals. On the Government's decision to turn down the third runway, he's polite at first, accepting the decision, but one look at Sir Nigel's expression and you're in no doubt that he thinks the politicians are nuts: "It's gone for a generation but I prophesise that in 10 years' time when Schiphol and Paris overtake Heathrow as a hub, they will come to regret it. Sadly, politicians do things for votes which even they know are wrong in the long-term interests of the public." Ouch.

Sir Nigel is known for speaking his mind. It's what makes him so special in the corporate world; what you see is what you get and he's forensic in his approach, calling auditors for due diligence before he takes on a new job, looking to see where the rubber skid marks are. It's why he's on every list for companies in trouble; Pilkington and Boots had the Rudd touch. "It's become a bit of cliché but I always say I earn my money as a chairman when times are bad or there's takeover bid and I always tell my chief executives: call me with bad news – the good can wait. I'm not one of those chairmen in the office all the time, but I'm always ready." He's appalled by the stewardship at BP, believing that the chairman is there to provide "air cover", another Ruddism, citing how Sir Michael Bishop of Bmi airline was one of the first people out on the runway after a crash in the 1980s as the way bosses should behave.

Improving Britain's manufacturing and, in the new jargon, rebalancing the economy is an ambition he has always worked hard to promote: "Governments can set the tone but they are hopelessly inept at backing winners or supporting lame ducks. What the private sector needs from government is the most competitive tax environment in which to prosper. George Osborne's Budget has made a start but there is much more to be done. We don't want a repeat of the 1980s when so many jobs were lost and people lost hope."

And if he were Prime Minister for a day? The first thing Sir Nigel would do to get private sector jobs going again would be to extend tax relief for entrepreneurs – and pension funds – investing in start-ups and small companies with the Enterprise Investment Scheme. "We still favour debt over equity in this country and I'm not sure why. Even the stock market doesn't provide capital properly any more – a listing is being used for people to make a quick buck. There are no incentives for anyone like me to invest in a portfolio of small companies and no easy routes to do so. That could change if we improved tax advantages by making equity cheaper," he says, adding that his son, Eddie, runs Longbow, a venture capital firm that invests in hi-tech companies.

And the second? "Throw as much investment into educating the bottom 50 per cent of the population – the top half can look after itself. Literacy and numeracy levels for the bottom of our society are scandalous for an industrial power like the UK. We've got to do more at the primary level. By having the best and most educated people that we can, you improve everyone's lives; you help the underclass and the working classes to move on and up; social mobility improves too. We also need really good vocational training – proper stuff – not just three-week courses. It's time we stopped funding students with two Ds and an E who want to study history of art. That's not what the taxpayer should be doing. We are also conning those students into thinking they will get a better job – they won't. What we need is more vocational skills."

Having the finest education and training possible is a blessing that Sir Nigel appreciates more than most; if I didn't know he was such a toughie, you can almost hear his voice crack when he talks about his old school. Bright for his years, he took O-levels a year early at Derby's Bemrose Grammar. He was due to continue into the sixth form when his parents – mainly his mother who feared university would turn him into a "communist" – decided that he should follow his brother and become articled to an accountancy firm. His headmaster visited his parents, telling them he was Oxbridge material and they were making a terrible error. But his mother won.

At 15 years and 11 months old, he left school and five years later became Britain's youngest ever chartered accountant, beginning his ascent into the business world by building up his first company, Williams Holdings, into one of our biggest industrial conglomerates. Sir Nigel, now chancellor of Loughborough University as well as governor of his old school, met up with the headmaster again a few years ago. The headmaster told him how delighted he was to have been proved wrong.

Sir Nigel

Sir Nigel is famously a people person, witnessed by the impressive loyalty of those close to him. His two secretaries and his chauffeur have been with him for a combined total of 88 years. Sue Dodd has been one of his secretaries for 30 years and and the late Muriel Davies was with him for 33. He's had the same driver, Kevin Mahoney, for 25 years.

With his wife, Lesley, (40 years) he has raised three children, Tim, Eddie and Jennifer, and they have five grandchildren.

A keen Derby County football fan since he was a boy, Sir Nigel has instructed his lawyer to shoot him if he ever invests in Derby or any other football club. He works out in the gym three times a week, skis and plays golf (handicap 11) and tennis.