UK limits bankers' bonuses

Financial authority hails new code, but union says it is 'as watertight as a string bag'.

LONDON // The UK's financial watchdog Wednesday published rules to reduce risky banker bonuses but stopped short of outlawing them. In a move to curb excessive payouts by British banks, the Financial Services Authority (FSA) said the new code would limit the size of annual bonuses after the economic crisis sparked a public outcry over multimillion-pound salaries.

"The FSA is determined that banks' remuneration policies should be consistent with, and promote, effective risk management," said Hector Sants, the FSA chief executive. "While there is general international agreement on the need for supervisory action on remuneration policies and practices, we will be the first major financial regulator to take this step." If banks fail to comply with the code they will be deemed to have risky pay structures and forced by the FSA to hold more capital. The UK government, like the US administration, has been under pressure to clamp down on excessive pay in the banking sector since taking on £1.4 trillion (Dh8.48tn) of liabilities to support a financial system in crisis.

Last February's draft code had 10 so-called "evidential provisions" that would allow banks to demonstrate to the regulator that they were keeping to the general principle of having compensation policies that were consistent with "effective risk management". The final code has just eight provisions, diluting three that covered how bonuses should be structured. Major banks and trade associations had voiced concerns about those provisions, the FSA said yesterday.

Mandatory provisions on deferring two thirds of bonuses and tying incentives to the future performance of an overall group, rather than just a trader's team, are now simply recommended suggestions. "The so-called FSA code to curb bonuses will be as watertight as a string bag," said the GMB, a general trade union with 600,000 members. "This is individual greed versus social responsibility." Banks told the regulator that February's draft rules "were too prescriptive and too inclined to a 'one size fits all' approach", the FSA said. They told the regulator that if the rules were implemented in the UK alone, "they would have adverse implications for the UK as a financial centre".

"The FSA has stuck to its principle of linking remuneration to risk, while making the code less prescriptive and narrowing the scope of the organisations covered," said Peter Montagnon, the director of investor affairs at the Association of British Insurers. "As shareholders, we support the proposal that bonus pools should be formed only after taking into account the cost of capital, adjusted for risk."

Policy makers across the world are seeking to reduce banking salaries and bonuses to try to stop what they see as excessive risk-taking that helped trigger the worst financial crisis since the Great Depression in the 1930s. 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" in their implementation by this year's bonus round. Progress will be reviewed at a summit in Pittsburgh next month.

The G20 recommendations state that firms must demonstrate to regulators that their remuneration policies are sound. Christine Lagarde, the French economy minister, wants the Pittsburgh summit to beef up the G20 principles, saying it was an "absolute disgrace" that guaranteed bonuses for several years could still be paid. The UK and continental European regulators have said that bonuses should be linked to long-term profitability, with claw-back provisions, and threaten banks that fail to comply with the possibility of higher capital requirements.

* with Bloomberg and Reuters