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Economic crisis hits financial workers

Linda Somerville has been an activist in financial sector trades-unionism for many years. In this article she outlines the impact of the economic crisis on financial services workers.

“Unprecedented”, “incredible”, “astonishing” shout the headlines as every week the politicians and the pundits struggle to find new words to describe the latest events in the finance sector.

While socialists have long predicted a crisis in capitalism and knew that bust would surely follow boom, we have all been taken aback at how quickly the financial services sector has gone from top performer to become the lame duck of the global economy. The glittering stars of the UK economy are now on their knees, dependent on tax payers money, vilified by the media and hated by the public.

The UK government has already poured billions of pounds of our money, over 20% of GDP, into the banks to keep them afloat. But will the rescue plan work? It is not only economic factors that will decide this outcome but also what happens inside the industry. Has the bonus culture affected the decision making process? Do staff perform better when given challenging targets and rewarded in shares? Is the UK government demanding fundamental changes in our part nationalised companies? Will the current operating models for UK banks continue? Is tougher regulation enough to restore public confidence? Will workers have to foot the bill? The answers to these questions will not only shape the financial services industry in the future, they have also provided the opportunity to challenge current inequitable practices and demand radical changes. Just as the MPs expenses scandal has led to a crisis at the core of our democratic institutions and triggered a debate on the future of democracy in the UK, the crisis in the economy has initiated a debate on the role of governments in the economy and the very future of capitalism itself.

The changing face of Financial Services

The financial services industry has changed dramatically in the last 20 years. Traditionally the bank sat at the heart of a local economy providing services for local business and residents. Banks would close mid afternoon to count their cash and bank staff knew which of their established customers were credit worthy. Building societies and insurance companies were run as mutuals where their profit went back to policy holders and payments were collected in cash when ‘the insurance man’ visited every week.

New technology radically altered this model as financial services were automated. Processing was moved to centralised back offices freeing up the front line staff to sell new products. Competition in the sector intensified as deregulation led to retail companies with aggressive marketing strategies moving into the market. Sales targets were introduced, increased and linked to wages. The 24/7 servicing model created low paid jobs offering shifts in call centres seven days a week, fifty two weeks a year. To reduce transaction costs customers were pushed into new direct servicing channels - telephone banking and the internet. Globalisation and new technology created further opportunities for reducing labour costs as work was sent offshore to countries with developing economies where labour was cheaper. Running in parallel to these organisational changes was the introduction of Human Resource Management bringing with it an attack on collective bargaining and the introduction of individualised pay schemes.

These changes brought difficulties for workers as jobs were de-skilled. Job losses followed as a result of ‘synergies’ due to company takeovers and mergers. For those still in work, the pressure increased as work was intensified under a target-driven results-focused culture.

These changes set the scene for the creation in the last 10 years of the ‘shadow banking system’. Deregulation had removed the barrier between traditional banking and investment banking. Traditional banking was replaced by the ‘originate and distribute’ model that saw products packaged up and sold on, from company to company, and country to country. Financial innovation attracted investment, and led to the creation of complex derivatives, often based on statistical models taking no account of actual situations. These new markets appeared to offer endless returns for investors with surplus capital looking for a home. From 2000 to 2007 the money invested in financial assets rose over 50% to $197 Trillion. Investment in manufacturing and other sectors has declined as money has been poured into financial assets. As this financial bubble expanded very few criticised the system, although the billionaire investor Warren Buffett described derivatives as “financial weapons of mass destruction”. As the catalyst that began to shake the system it appears he was right.

Reform the Finance Sector to protect our money

The crisis has shown that the current operating model of the banks does not work. Banks need to be reformed to focus on credit provision and deposit taking. Destabilising practices and structures should be prohibited: this includes unregulated hedge funds and securitisation. Only by splitting up banks to protect assets can we ensure that our money is safe. Common good, utility banks with public interest objectives should be created. Supporting the Communication Workers Union campaign for a Post Office Bank is a starting point. To promote financial inclusion banking should be a universal service provision provided by the government and run in the public interest.

End the Bonus Culture

Over the last 15 years every major company in the sector has sought to dilute collective bargaining and reduce their salary costs by moving to individual performance related pay systems (PRP). Running along side PRP was a move towards ‘Reward’ rather than wages. The ‘Reward’ culture has meant that those at the top were further rewarded with unjustifiable and obscene bonuses. The average starting salary in the sector is around £11,500 and after 5 years you can expect to earn about £16,000. No matter what way you calculate it, a 5% or even a 10% bonus paid on that salary will never make you rich. The bonuses paid to workers have unfortunately become an integral part of their remuneration. As wages have been held down and more money poured into bonus schemes staff have come to depend on their bonus. Staff throughout the sector use bonus money to pay for a holiday or Christmas, but increasingly staff use their bonus to pay bills, debt and their credit cards. Bonuses are not just handed out to staff, they are all tied into aggressive targets normally for sales or performance. Workers should not have to jump through hoops to get bonuses: decent pensionable salaries should be provided for all in the sector. Workers should have their pay increased to reflect the bonuses that were previously paid to them.

Scrap the Share Schemes

The really unlucky staff were those that put their bonuses into company shares. The collapse in the share price across all the major companies in the sector has had a devastating effect on staff. Shares in HBOS are now worth 2% of their value compared to 18 months ago and RBS shares have fallen in the same period to 6% of their previous value. Many have argued that workers should have known better than to get involved in buying shares and surely they knew that the value could go down as well as up. Workers in the industry are not speculators searching for their next profit, they are working class people who have been very actively encouraged to take shares and participate in share schemes by their employers. By investing in these schemes workers may have had the opportunity of some tax-free savings but the shares culture has driven the take up of shares often by those who could least afford it. With special offers, discounted schemes and the hard sell from their ‘trusted’ employers it became common for staff to sink some of their bonus into shares and buy more shares each month. The irresponsible executives who were handing out money that they didn’t have were also conning their own staff. The companies de-valued the risk associated with shares by packaging it up and making is as easy and apparently risk free as buying milk. In the wake of this crisis many finance workers have lost their life savings and are angry that they have been misled and lied to by their employers. These discredited schemes should be scrapped and workers paid fairly for the job they do.

Demand a Public Enquiry

As with all Performance Related Pay schemes there has to be a way to measure workers performance. Throughout the industry there are a multitude of complex and inconsistent measures, most are based on some form of targets. In a customer related job the targets will be sales driven and in back office areas they are often related to spurious quality or quantity measures. Meeting the target is not only necessary to get a bonus but workers’ performance also equates to their annual pay increase. A significant proportion of workers in the sector receive no pay increase each year as they are deemed to be under-performing or earning too much for their current job. This is the link that has seen risk taking rewarded at the highest levels as the unscrupulous senior executives have imposed unrealistic targets on staff and meanwhile exceeded their own targets by hook or crook. This link must be broken, and a fair, negotiated pay system introduced for all. It is only through a full public enquiry into the crisis that these exploitative practices will be exposed and eradicated.

Make Greed History

Many finance sector companies have introduced Performance Management schemes. Employers argue that Performance Management schemes protect a struggling worker from disciplinary action and allow them to focus on performance issues and training. In reality Performance Management Schemes provide a route for managers to push workers who don’t meet their targets out of a job. The crisis in the banks has seen an increase in staff being squeezed for not meeting imposed targets. A return to collective bargaining with a negotiated annual cost of living settlement would end the divisive performance systems that see workers demoralised as they are measured and monitored. The industry should have an agreed national starting salary to provide a real living wage for workers. This is also the time to demand a national maximum wage to curtail the pay of senior executives and managers. A campaign that focuses attention on the excessive salaries paid to the minority of the population seems essential at this current juncture. The high salaries in the private sector have led to the creation of a layer of fat cats in the public sector also as they have looked to entice ‘business gurus’ to run our public services. In order to Make Greed History we need to set the boundaries through progressive taxation and a national maximum wage.

These same senior managers were rewarded with huge bonuses for bringing in new business. It is unbelievable that some lending decisions were not influenced by the bonus that would be attached to the completion of the deal. Despite the revelations about the bonus culture where even the Treasury Select Committee concluded that the bonus culture had led to “excessive risk taking”, the pressure to sell continues. In the first quarter of 2009 sales staff have received an increase in their sales targets despite the recession. The UK Government has done nothing to stop the pressure being put on staff to meet imposed targets in the companies that they are the largest shareholders in. The pay systems within the industry must be changed to end to bonus culture and demand wages not reward. Regulators also need to examine the practise where banks sell on their credit risk to third parties. As credit risk is sold on regulators then allow more money to be made available for risky lending.

Protect jobs

In the past year we have heard all about the fall in bank share prices, the nationalisation of Northern Rock, HBOS’s reliance on the wholesale markets and RBS’s ill judged takeover of ABN Amro. But it is only now that the focus is on some of the practices and employment conditions within the finance sector that we can have a clearer idea of how this effects workers in the industry.

This crisis has hit bank workers hard as they loose their life savings tied up in shares schemes, loss of bonus and now their jobs are on the line. Some newspapers were quick to criticise the bonuses paid to Northern Rock staff recently as they bleated that this was ‘government money’ or ‘our money’, did they not realise that finance workers are tax payers too? No one took time to point out that Northern Rock have already made over 2000 staff redundant with another 700 jobs to go.

There have been over 24,000 jobs lost in the UK Financial Services Sector in the first quarter of 2009. With the Royal Bank of Scotland and the newly created Lloyds Banking Group still reporting losses it is expected that more jobs will follow. The UK Government must step in to protect jobs in both these companies. The government should propose changes in the UK redundancy laws to make it more expensive to pay off workers. The terms of the bailouts should ensure that jobs are guaranteed.

Scotland’s Prospects

The finance sector employs 1 in 10 of the Scottish population contributing £7 billion to GDP. The Scottish economy has benefited greatly as the Scottish finance sector giants traded on their brands’ association with stability and prudence. The merger mania and de-regulation of the sector has created a cash hungry monster that is now eating itself. The impact of the chaos in the sector, in particular the fall of HBOS and RBS will be felt for many years in Scotland. So far we have seen a handful of high profile resignations and some shamefaced Executives giving evidence to the Treasury Select Committee. The senior management of companies in the finance sector have to be held accountable for this disaster. The responsibility lies with the decision makers, not the workers. The decisions they took are devastating for workers in the sector who now face losing their jobs and the UK economy in general. Those responsible for failings on such a massive scale should face the consequences, not just of a public enquiry, but an investigation and criminal proceedings where appropriate.

As the crisis spreads from the finance sector to the real economy workers in all areas will have to defend their jobs and wages. As a counter balance to the variances in the private sector there has to be a strong and democratic public sector.

The current neo-liberal system has failed the test with no credible alternative waiting to take over. Capitalists are now realising that the world of the last three decades has gone. The crisis has created an opportunity for socialists and trade unionists to shape the future and to Make Greed History.