Hester's bonus is a distraction

 By .Martin.

We should not be in too much of a hurry to celebrate the RBS Chief's decision to forego his annual bonus. The excessive remuneration of bankers (as well as City accountants and lawyers) is merely a symptom of a wider problem; a financial sector that has learnt how to ruthlessly exploit its privileged position in the economy.

Investment banking turned from wealth creation to wealth extraction over the past few decades as giant integrated banks built their market power, exploited their obvious conflicts of interest and used the complexity and lack of transparency of their new products to post inflated profits entirely out of kilter with any real economic benefit to society.

As we set out in our recent report Quid Pro Quo, there are many reasons why competition is weak in both retail and investment banking. But just hoping for new banking entrants to sort this out is to misunderstand the nature of financial products and services. It is the ability of providers to exploit the opacity of many financial products to confound the customer, and at worst to nakedly mis-sell financial products, that is at the root of excessive profits and remuneration in the financial system.

Our political leaders should be mounting a determined assault to reduce the size of banks, curb destabilising speculative trading, bring the OTC derivatives market out of its murky depths and to tackle tax avoidance - all these are important sources of profits, and bonuses, that are largely of little social or economic use.

It's not that Stephen Hester's remuneration is too high. He's not even the highest paid employee at RBS. It is the entire industry, regardless of whether in private or public ownership, that has been enjoying easy and undeserved pickings through a long-period of reckless financial deregulation and credit expansion.

Publicly hounding one particular executive is both unseemly and pointless. It will take much more than this to build a safe and useful banking system.

Politicians of all sides have merely allowed themselves to appear like a gang of bullies, picking on RBS because we own it rather than summoning up the guts to challenge the likes of Goldman Sachs, Bank of America, HSBC or Barclays. Where is the political leadership in that?