Thursday, August 13, 2009

Financial Services Authority (UK) Update: new rules released on bank bonuses

I have written earlier about the U.K. government regulating banking bonuses. Then, Prime Minister Brown announced support for a proposal to withhold banker bonuses for up to a period of five years. Yesterday, the Financial Services Authority ("FSA") published new rules on banker pay, forfeiting both the proposed withholding period and the concept of tying bonuses to bank performance. What the new rules do achieve: prohibition of guaranteed multi-year bonuses, and encouragement of senior level employees’ bonuses being spread over periods of two and three years (that’s right – the second achievement is not a rule as much it is an aspirational objective).

Rules apply to financial institutions head-quartered in Britain. Non-British firms are exempt (unless they have capital in excess of $ 1.6 billion). Firms must submit a remuneration policy statement to the FSA by October. Bank failure to comply results in a fine or a forced higher capital requirement (as the award of larger bonuses suggests more risk-taking). The new rules come into affect January 2010.

Interesting. Bankers in the U.K. are using the same whine as bankers in the U.S.: if you curb our bonuses, we will go. So where are these other financial centers all these immigrating bankers are headed to? Those locales don't have pols at the podium talking legislation on compensation? And if it was so easy to pick-up and go to an other locale, why haven't these bankers done so yet?

Toothless? This seems a pretty meager effort at best, or perhaps a pacifying gesture (as expectations from the G20 meeting in April required participants to do something)? Although I have to applaud the higher capital requirement banks would be subject to if they fail to come into compliance. This seems a novel approach to the boogeyman identified by governments around the world: excessive risk-taking. In fact, it addresses it squarely by indicating those firms which choose a riskier business strategy must retain a larger cushion to break any fall. Too, the threat of a higher capital requirement leaves the ultimate compensation decision to the bank; the board and compensation committees (or remuneration committees in the U.K.) can determine what the give-and-take is to retain top talent, but then have less liquidity available for that talent to turnover into profits.

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