James Moore: The (fat)cat is out of the bag. RBS is thriving despite caps on bonuses

Outlook Sometimes the most revealing testimony is inadvertent, observed the Treasury Committee chairman Andrew Tyrie during a grilling of James Leigh-Pemberton, the executive chairman of UK Financial Investments (UKFI).

Quite. Take Royal Bank of Scotland and the vexed question of whether it should be allowed to pay a maximum of 200 per cent of salary to its top bankers in bonuses.

Such bonuses are permissible only if a super-majority of shareholders approve, thanks to the EU’s bonus cap. And as we know UKFI, which oversees the taxpayer’s stake in the banking industry, made it clear to RBS that it would vote against any such motion were the issue to come before the bank’s AGM (it didn’t). As a result, RBS was restricted to paying bonuses of no more than 100 per cent of the salaries of its elite.

Mr Leigh-Pemberton was then asked about the impact on the bank of this decision. His response? So far, there has been “no material damage to RBS from a competitive point of view”.

Au contraire, the committee was told that institutions are showing increased interest in the prospect of a sale of part of the state’s stake in RBS. Mr Leigh-Pemberton also hailed the last year as a “very good one” in terms of turning the business into a realistic investment proposition.

What is revealing about this is that he has, perhaps inadvertently, killed one of the City’s sacred cows: the idea that banks cannot compete effectively without paying their top people ever higher bonuses.

This shouldn’t be read as a defence of the bonus cap. I still sympathise with the view of Andrew Bailey, deputy governor of the Bank of England, that it is a bad policy. It leads to sharply higher base salaries, for a start. And, as a result, it decreases the amount of money that can be clawed back in future if a banker’s actions are found to have damaged his or her employer.

Before drawing any firm conclusions from what Mr Leigh-Pemberton said we would need to know whether RBS is paying out more through this cynical practice than other banks are.

Sadly, no one on the committee thought to ask about this.

That being said, RBS is still proving that a bank can manage quite well even with its maximum bonus payments capped at half what its competitors can pay. According to Mr Leigh-Pemberton, it is not only surviving but thriving.

Shareholders might like to reflect on that. They have been repeatedly told – and not just by banks – that more and more of their money just has to be paid out in bonuses to keep the talent happy.

On this evidence, it appears that they have been conned.