Why regulators should be cautious about new banker bonus proposals

Oliver Parry
City bonus reform is tough by international standards

IT CANNOT be ignored that trust in banking is still lingering at all-time lows and, according to a recent YouGov survey, 78 per cent of the public think there is an unhealthy bonus culture at the banks. Certainly, as the likes of Financial Reporting Council chairman Sir Win Bischoff have argued, more needs to be done to tackle short-termism.

Yet I have reservations about the proposals outlined in yesterday’s joint Financial Conduct Authority (FCA)/Prudential Regulation Authority (PRA) consultation on new remuneration rules in banking. Many would accept that, if someone were responsible for misconduct that only came to light after they had banked their bonus, there should be a mechanism to take that bonus away. Yet the proposal for bonus clawbacks for senior managers to extend to up to 10 years if they are under investigation does seem extreme. It could also have unintended consequences, least of all because a lot can happen in a decade, and much that could be outside the control of the executive in question.

Clawback is not a crude regulatory instrument like the EU bonus cap. But in suggesting tough rules by international comparison, UK regulators must be very careful to balance the stability of the system against the need for vibrant banks that oil the wheels of the economy.

Yet this doesn’t mean nothing should be done. We have expressed concern about the level of executive pay at the largest UK listed companies, not just in banking. Over the decade to 2012, according to the Department for Business, such pay quadrupled, with no clear link to company performance. While exceptional levels of pay may be justified in exceptional circumstances for exceptional individuals, the median level of executive pay has ratcheted up to a level that is at times hard to justify. This is unhelpful to the reputation and legitimacy of UK businesses.

Despite this, executive and director pay is primarily a matter for firms and shareholders. Yes, government has a role in facilitating the shareholder-company engagement process. Wider civil society should also be involved in defining cultural norms in respect of appropriate levels of pay. But the determination of pay levels and structures in specific cases is a matter for shareholders and boards, who can relate their deliberations to the individual circumstances of each company.

Indeed, we have called for remuneration to be designed to promote the long-term success of the company and for performance-related elements to be stretching and rigorously applied. To quote Bischoff, “Remuneration and incentives that encourage people to cut corners or prioritise short-term gains over the long-term interest of the company should be rejected.”

The level and structure of pay can also have an important effect on behaviour, and needs careful thought if it is to create the right incentives. This is no better demonstrated than in banking. And it does need to be acknowledged that the PRA/FCA is seeking to amend regulation for a specific sector – banks, building societies and designated investment firms.

So over the coming months, we will be looking to actively engage with the PRA and FCA on the core elements of this consultation. The regulators have started an important discussion and we look forward to contributing to it.

Related articles