City watchdog finds 170 people with contracts that breach bonus rules as it tries to tighten up pay code
More than 2,800 people in the City took home more than £1m last year, the Financial Services Authority (FSA) revealed today as it prepared to stop City firms exploiting potential loopholes in its pay code. Providing a rare insight into pay levels in the City, the regulator said it had found 170 people whose contracts breached new rules that require up to 60% of bonuses to be deferred over three years. The FSA said it had applied pressure to their employers to change the contracts.
The rules are designed to discourage excessive risk-taking and were introduced after the meltdown in the financial industry in the autumn of 2008. The FSA also revealed that the industry had lobbied for a relaxation of its ban on guaranteed bonuses that run for more than a year, claiming it was having an “adverse effect on employee mobility or staff retention”.
As the FSA began a consultation on its pay code, it warned that its scope would have to expand from 27 companies to 2,500 as a result of new European rules, known as the capital requirements directive.
In the wide-ranging consultation, the FSA also set out ways to stop “rewards for failure” and to ensure that pensions do not inadvertently reward poor performance, by demanding that any enhanced contributions are held in shares for five years.
The regulator also said that companies should decide how much money to pour into their annual bonus pots on the basis of the amount of profit being made rather than the size of the revenue generated. The FSA said that paying bonuses out of revenue would not “pay sufficient regard to the quality of business undertaken or services provided”.
The FSA reviewed the deferral arrangements of 4,300 City workers covered by its code because they were senior managers, influential traders or because they earned more than £1m. It said that 2,800 of them came under the code because they earned at least £1m and 1,300 of these were employed by UK banking groups, with the rest at big investment banks.
The consultation is taking place as a result of the changes in Europe, and because of new powers that were handed to the FSA in the dying days of the Labour administration, such as allowing the regulator to tear up contracts that it believes encourage bankers to take too much risk.
“A new rule will be introduced that defines instances where breaches of the code may render a contract void and/or require recovery of payments made,” the FSA said.
It acknowledges that some companies covered by the existing code are concerned about their competitive position, saying: “The firms currently within scope of the code have expressed concerns about losing their staff to competitors outside the scope of the code.” But with the EU now enforcing a pay code across Europe there are hopes that this might become less of a problem. Even so, this point was echoed by the British Bankers’ Association. “We now need other countries to co-ordinate their reforms with the UK and EU rules,” the lobby organisation said.
Tom Gosling, reward partner at PricewaterhouseCoopers, said: “There is a wider question of differences in regulatory approach at the global level creating an uneven playing field, and a risk of geographic arbitrage in favour of jurisdictions that are perceived to be more lenient.”
The regulator intends to clamp down on some of the methods used by companies to avoid its existing code. It plans to stop employers paying staff through “alternative vehicles” or offering staff loans which effectively enable them to behave as if they had received their bonuses.
Any companies that allow staff to use hedging strategies to buy insurance contracts to protect their bonuses will also be regarded as in breach of the FSA rules. The regulator believes this would break one of the basic tenets of its code – “that remuneration policies must be consistent with and promote effective risk management”.
Gosling said it was “encouraging” that the FSA had committed to adopting a “proportional” approach in implementing the code, which means it will take into account the size, nature, the scope and the complexity of the firm’s activities.
Thursday 29 July 2010 22.18 BST
Source: The Guardian