LONDON BRIEFING: City of London watchdog makes a radical call to curb a 'swollen' financial sector

BEHIND THE bark was Lord Turner, head of the City’s regulatory body, the Financial Services Authority (FSA), who enlivened the traditionally quiet last week of August with a radical call for action to curb what he called the “swollen” financial sector.

Maintaining London’s role as a leading financial centre should not be a “major aim”, said Turner, who went on to dismiss some of the City’s activities as “socially useless”. He suggested that new taxes should be levied on the banks if they fail to curb the risk-taking that leads to excessive pay and profits in the sector.

The taxation of financial transactions was an idea first proposed more than three decades ago by American economist James Tobin, who saw it as a way of curbing short-term currency speculation. Tobin’s ideas, although raised from time to time over the years, have never been implemented.

Predictably, Turner’s suggestion of a “Tobin tax” sparked outrage throughout the Square Mile, although the FSA chairman later made it clear that he was opposed to any unilateral action that would damage London’s competitiveness and that any measures would have to be imposed globally.

There was an incandescent reaction to the suggestion that the financial services sector – from which Britain draws a huge proportion of its earnings – had become too large.

Mayor Boris Johnson dismissed Turner’s comments as “crackers” and the reaction from banks and financial services groups was equally scathing. The treasury was careful not to get drawn in, although a spokesman sniffily pointed out that taxation was a matter for the chancellor.

There have been many calls over the past year for the bonus culture to be curbed, but precious few suggestions on how, and when, this might actually be achieved. Gordon Brown, back from holiday, added his voice to the demands for action in an interview with the Financial Times on Monday. “We now have to move faster on bonuses,” he said, with remuneration based on “longterm success rather than short-term speculative deals.”

In what was seen as a rebuke to Turner, the prime minister stressed that it was crucial to protect London’s position as the centre of global finance.

It has not taken long to return to business as usual in the banking world; with the first anniversary of the Lehman Brothers collapse just a fortnight away, bonuses still dominate the City culture. Even the state-backed banks are once again wooing and rewarding bankers with deals that are excessive by any normal standards.

The treasury is correct when it says that taxation is a matter for the chancellor, but why shouldn’t the head of the FSA put forward his suggestions in what should be a much wider – and more intelligent - debate? Lord Turner is perfectly well aware that taxation is beyond the City watchdog’s remit, but that should not preclude him from raising a potential solution to the problems that almost caused the collapse of the world’s financial markets less than a year ago.

Imposing a Tobin tax may well be a truly awful idea, although it certainly has its advocates, including charities which have long argued that a wider transaction tax could raise up to $50 billion a year to fund aid and development work. But it should at least be discussed, along with any other ideas that might end the financial sector’s dangerous dependence on bonuses and risk-taking.

The subject of bankers and their bonuses will be on the agenda at the meeting of G20 finance ministers in London this weekend. Hopefully they can move beyond merely saying “something must be done” and towards formulating a solution.

Tweed trumps ‘wide-boy’ stripes

The financial crisis has been blamed for a good many things and now, it seems, it is responsible for the return of tweed in the Square Mile.

Savile Row tailors have been telling the London Evening Standardhow the "shame" of looking like a banker is changing their customers' sartorial tastes – the traditional City "wide-boy" stripes are out and more subtle designs are in, such as plain dark or dotted pin-head fabrics or extra-thin stripes.

Fiona Walsh writes for the Guardian newspaperin London