Published: Wednesday, 12 Aug 2009 | 9:36 AM ET

Text Size

Britain's financial regulator on Wednesday banned guaranteed banker bonuses of more than one year, as it leads a global crackdown on a culture of excessive risk-taking that has destabilized economies.

The Financial Services Authority (FSA), which has been slammed for failing to address problems that led to the near collapse of the financial system last October, also said two thirds of bankers' bonuses should be spread over three years to discourage short-term decision-making.

Banks tend to offer guaranteed bonuses, sometimes stretching for a number of years, as a recruitment tool to woo star performers who stand to lose payments already agreed with their previous employers.

After five months of consultation, the FSA published its new code of practice on pay at large banks, home loan companies and broker dealers, warning that those who did not comply with the rules faced higher capital charges or enforcement action.

Nevertheless, industry experts said the regulator had watered down some of its original proposals set out in March.

The code now affects only 26, rather than 45, institutions. It also allows companies to justify cases that breach the guidelines.

"This is to be welcomed, as in some instances multi-year guaranteed bonuses can be needed to expand a business line and reassure a banker about joining a new business," said Nicholas Stretch of law firm CMS Cameron McKenna. "This helps to ensure that banks can maximize new business potential — something that all institutions need to be able to do at the moment."

Stephen Hester, chief executive of part-nationalized Royal Bank of Scotland, said he needed to offer "selected guarantees" to keep or retain staff worried about the future of RBS. He said some areas of RBS's investment bank had lost "significant" numbers during the first-half due to poaching by rivals.

Outcry

Others noted that the FSA had given itself room to revamp parts of the code in future to ensure it met any international guidelines.

Sharon Lorimer

"The FSA says that it may amend its new code if it's inconsistent with what is agreed in Basel and Europe — but that isn't much use to the people who now have to design new pay structures and contracts," said James Perry, a partner at law firm Ashurst.

Policymakers across the world are seeking to rein in banking remuneration in a bid to stop what they see as excessive risk-taking that helped create the conditions for the worst financial crisis since the Great Depression.

The Group of 20 (G20) leading world economies agreed in April on a broad set of principles on bankers pay, saying it expected "material progress" by the 2009 bonus round. Progress will be reviewed at a summit in September in Pittsburgh.

In Britain, Europe's largest financial center, there has been a public and political outcry at what Bank of England Governor Mervyn King dubbed "absolutely astronomic" bonuses after taxpayers were forced to foot an estimated 1.3 trillion pound ($2.14 trillion) bailout bill for the banking industry.

The FSA demands that banks take into account risk and long-term performance when determining bonuses, but it stopped short of overly prescriptive measures that banks said would encourage top executives to move abroad.

Angela Knight, the chief executive of the British Bankers Association (BBA) trade body, welcomed the new code but said she was concerned that Britain risked becoming uncompetitive if international regulators failed to follow suit quickly.

"For this code to succeed, our European partners and the G20 countries must also step up to the plate and do what the UK has done," she said. "The principal cause of the global financial problems was not bankers' pay. It was, however, a contributory factor globally, and as such it needs to be addressed globally."

Print

Email

Text Size