British banks agree to G20 bonus curbs

After weeks of will they, won’t they and political horse-trading Britain’s top banks have committed to implement the remuneration reforms agreed by the G20 in Pittsburgh.

The five banks, Barclays, HSBC, Lloyds, RBS, and Standard Chartered – have confirmed their commitment to comply with the Financial Services Authority’s remuneration rules, which comes into force on 1 January 2010. In a joint statement, the five banks said: “In a competitive and international business it is right to make sure that our staff are appropriately and competitively rewarded for sustainable, long-term performance. We therefore welcome the G20 remuneration reforms, and their global nature, as it is essential that banking reward is consistent with effective risk management and that there is parity both nationally and internationally on these issues. We will work with the FSA in adopting these remuneration reforms, recognising that all G20 nations have also committed to their implementation to ensure a level playing field.”

At the same time, Britain’s Chancellor, Alistair Darling said: “It is vital that our financial services industry remains at the forefront of the industry globally and takes a responsible and long-term approach to remuneration. I am therefore pleased that the main banks incorporated in the UK have agreed to lead the way in implementing the agreement reached on bank remuneration at the G20, and expect them to set the standard for all other UK and international financial institutions to follow.”

The FSA remuneration rules are broadly in line with the G20 Implementation Standards and will be updated in 2010 to reflect the remaining differences together with any developments which come out of discussions with the EU. The FSA will apply the same standards to all entities covered by the Rule on remuneration in the UK and will work with overseas banking regulators to ensure a consistent and timely global application of these reforms.

The measures will cover all senior executive officers and employees whose actions have a material impact on the risk exposure of the firm, including, but not limited to all PDMRs (Persons Discharging Managerial Responsibility). 

The key elements of the reforms include:

  • Significant financial institutions should have an independent board remuneration committee which is constituted in a way that enables it to exercise competent judgment on compensation policies and the incentives for managing risk, capital and liquidity.   It should ensure that the bank’s policy complies with FSB principles and standards and with the FSA’s code, and undertake an annual compensation review which should be submitted to the FSA for them to assess compliance.
  • Remuneration for employees in the risk function should be determined independently of other business areas.
  • Firms must ensure that total variable pay is consistent with ensuring that they have the ability to maintain a sound capital base over the long term, while managing the risks that arise if an organisation cannot pay competitively to retain the right people.
  • Failure by firms to implement sound policies in line with the FSB implementation standards will result in appropriate corrective measures by the FSA to offset the extra risk of this, including requiring additional capital to be held.
  • Bonus pools must take into account the full range of current and potential risks, including capital, liquidity and timing of potential future revenues. 
  • For senior executives, as well as other employees whose actions have a material impact on the risk exposure of the firm, 40 – 60 percent of variable compensation will be deferred over three years, with at least 50% in shares / share-linked instruments.
  • Multi-year guaranteed bonuses should not be part of future arrangements – any minimum bonus agreements should be limited to one year.
  • Poor performance will lead to a considerable contraction of bonus payments, including through malus or clawback arrangements.
  • These are the FSB’s global implementation standards aimed at preventing global arbitrage.  The FSA can increase these requirements to prevent excessive risk taking or to ensure consistency with a sound capital base.
  • Firms will be required to publish an annual report on compensation, providing information to help shareholders hold boards accountable, such as the remuneration committee mandate, performance criteria and information on the linkage between pay and performance.
  • This will include disclosure of aggregate information on the pay of senior executives and all employees whose actions have a material impact on the risk exposure of the bank.

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