Bonuses within bounds

What is the answer to huge bonuses in the financial sector (and do we need one)? Lord Turner of the Financial Services Authority has sparked a bit of a row with comments that the sector has grown beyond a "socially reasonable size" and severe measures might be needed to cut it, and the salaries paid there, down to size.

In calling for taxes on transactions and payouts, he was reviving a French proposal known as the "Tobin tax", put forward four years ago but blocked by Britain and other countries.

Predictable City reaction, echoed in Scotland's financial services sector, included a call not to lose the competitive edge of the sector and see it go the same way as our manufacturing industry. And it is true that despite the troubles of the past year and more, financial services are still a key pillar of our economy.

It also has to be acknowledged that however much our gut feeling may support targeted taxes of this sort, they are difficult to apply fairly and may well have the effect of driving out of the jurisdiction a much greater revenue-generating potential on which the Government currently relies.

So can nothing be done, when it was the "bonus culture" that was largely responsible for the scale of the financial crash in the first place? In fact the FSA itself has come up with a raft of measures which, properly applied, should help avoid a repetition. These include spreading the payment of bonuses over a longer period and linking them to future performance of the whole business, not just the employee's own section, and preventing them being paid at all if a firm has performed badly. Tighter controls are also proposed on the assessment of profits from which bonuses are calculated in the first place.

All part of the somewhat belated efforts to reintroduce a measure of probity to the sector, but surely sensible measures which stand a greater chance of success than an ongoing battle of wits between tax draftsmen and financial wizards.

Postscript: I see Lord Turner has since denied that he was proposing a new tax that would apply in London and not the rest of the world. He argues that you cannot ask the FSA to deal with high bonuses by regulation (is that not to some extent what the FSA is now proposing?), and that the only way to reduce overall bonuses is to make sure banks make smaller profits, either by requiring them to keep a higher proportion of their funds deposited at the Bank of England or imposing a new tax. But he was not propose specifically introducing a new tax.