IDA will be forced to re-think policy on international finance jobs

The Irish banking landscape may be blasted but, even now, it would be hard to imagine an Irish financial regulator or a senior politician here speaking out so clearly and critically as Adair Turner has done about the future of the financial services industry. Turner - the top man at Britain's Financial Services Authority (FSA) - has clean hands because he took on the job at the British financial watchdog a year ago and was therefore not directly part of the regulatory failures that brought the banks and the economy to their knees. His scathing comments about the City of London caused a small quake in the British financial press but were hardly reported this side of the Irish Sea. That's a huge shame because the Government here, the new Central Bank governor Patrick Honohan and the IDA, the development agency, now face big decisions about both international and domestic banking. Turner said that the City of London had grown beyond "a reasonable size" and was siphoning off too many of the brightest and best graduates for jobs that were questionably useful. Big chunks of the City were either contributing little to the economic wealth of Britain or to its social wellbeing, he said. The language used by such a senior figure of the British financial services establishment was refreshingly direct. Turner told a round-table discussion organised by London's Prospect magazine that the City - a term for the big trading banks based in the financial district encompassing Canary Wharf as well as the traditional Square Mile - were holding back the development of other sectors of the wider economy. Referring to trading in toxic derivative products that big financial centres, like London, helped to bring out of the US and spread around the world, Turner said that the City needed slimming. "I think some of it is socially useless activity," he said in a comment that surprised because it was unusually direct for a banking supervisor, even in these times of economic slump. Turner believes banking activities that had grown too big include bond trading, derivatives, hedging, and possibly also asset management and share trading, the Daily Telegraph informed the readers of its financial pages. The top financial regulator went further: the British government may need to impose new taxes, possibly specific to the types of activity undertaken in the City of London, to help tame the global financial services industry. The City, he said, was generating excessive profits and volumes of unnecessary activity that may need to be controlled by transaction taxes. Phew! If the identity of the speaker was not known - a senior regulator at the heart of the British establishment - you could be excused for thinking that the comments were voiced by a left-of-centre politician. But the FSA chairman, appointed to the watchdog role in September 2008, did not stop there. The culture of paying huge multi-million euro bonuses in financial centres like London would also need to be controlled. Turner suggested that payments should be made in long-term share incentives rather than short-term cash payments. It's a point that has been made many times since the near collapse of banking systems across the world. The G20 meeting last week appears to have agreed to limit banking bonuses, even though it remains to be seen whether the big governments' proposal to claw back bonuses over three years will be anything more than window dressing. Three years is too short a time. Many bankers, including those in Dublin, walked away with huge cash and share bonuses generated by lending policies that led to the destruction of their banks. The lifestyles of our over-paid top bankers will be funded by taxpayers, including the unemployed, for a generation. The response from the financial services industry to Turner's comments was instructive, mainly because it did not generate the usual whiplash response. Whenever it is suggested that paying big bonuses can, in the jargon of the financial markets, incentivise risk-taking that is damaging to real economies, analysts or experts working for financial services or legal and consultancy firms will lead a cacophony of protest against capping pay. It is as if it is business as usual in the banks and markets. A counter-offensive from London and New York was launched a few months back to the proposals led by French finance minister Christine Lagarde to cap top bankers' pay. But the comments of an establishment figure, like Turner, cannot be easily dismissed. It is as if one of their own has been co-opted to support the continental critics of the abuses of unregulated markets. In Dublin or Belfast, the chatter about properly regulating big trading financial centres may appear of little concern. But the tens of thousands of jobs created in international banks and the financial legal firms stretching down the Liffey docklands and the cluster of international financial services jobs along the Lagan suggest otherwise. The type of international financial services firms we need to attract will need careful rethinking if, as Turner suggests, a financial centre like London needs cutting down to size.