On January 13, the BoE proposed a new rule on bonus buy-outs – where bankers are compensated by their new employers for any cancelled remuneration – allowing bonuses to be cut, stopped, or clawed back when bankers move jobs.
According to the FCA, a Parliamentary Commission on Banking Standards (PCBS) report made note of the practice whereby staff will leave a firm and join its competitor, only for them to ‘buy-out’ the forfeited awards.
These buy-outs allow employees to move freely from bank to bank, and continue to reap rewards after misconduct within their previous job. The Financial Times gave a recent example of the recruitment of Jes Staley, who received a one-off payment from his new employer Barclays as part of a bonus awarded from his time at JPMorgan Chase.
The big bankers kept fairly quiet in the immediate aftermath of the financial crisis, but the frequency has bred unrest
Although the UK has refused to outright ban these buyouts, regulators say they undermine the ability to claw back a bonus which has been paid or withheld, or cut the unpaid portion of a bonus, when misconduct has been discovered. The plans propose that, if any wrongdoing has been discovered, clawback and malus can occur after an employee has moved bank.
Andrew Bailey, CEO of the Prudential Regulation Authority, said, “Remuneration policies, which lead to risk-rewards imbalances, short-terminism and excessive risk-taking, undermine confidence in the financial sector.” He added, “Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions. Today’s proposals seek to ensure that individuals are not rewarded for bad practice or wrongdoing.”
The buy-outs undermine the BoE’s remuneration rules on malus and clawback that seek to create a greater alignment between risk and reward. These will not only stop the rewarding of those participating in misconduct, but act as deterrence. The BoE also said it will “discourage excessive risk-taking and short-terminism and encourage more effective risk management.
In theory, it is a pragmatic solution. But, there is a fundamental flaw that could subvert its effectiveness – the proposal relies on competitors sharing information. Alexandra Beidas, an employment lawyer at Linklaters, said, “It remains to be seen if this will be workable in practise as it will involve sharing potentially sensitive information between banks.” The BoE have recognised this, and proposed a rule that places obligation upon the old employer to determine if it needs to be done.
Toughened regulators since the financial crisis
The last proposal adds another ripple to the waves of regulation implemented in recent years. Before the financial crisis the FSA intended to impose as little a regulatory burden on Britain’s financial sector as possible.
However, responding to the crisis, there has been an unprecedented surge in regulation. New policies are implemented frequently to ensure the system is safe, and to prevent taxpayers from suffering the consequences of firm failure. Britain has imposed one of the highest capital ratios among major rich countries.
These tougher regulations have not been received well among finance executives. The big bankers kept fairly quiet in the immediate aftermath of the financial crisis, but the frequency has bred unrest.
One of the main criticisms is that tougher regulations are harming the UK’s international competitiveness. According to City AM, an Interim Partners poll concluded that 62 percent of finance executives believe the rules are having a negative effect on the UK’s global standing as a financial sector. A majority of executives also said that changing pay rules, which could delay bonus payments for seven years, would also harm competitiveness.
Angela Hickmore, a partner at Interim Partners, said, “While the financial crisis and subsequent scandals have increased the regulatory burden in other jurisdictions, senior executives in the UK are feeling more pressure than anywhere in the world.” She added, “There’s a real concern among senior executives that we have now reached the point where these stringent controls are starting to put the banking sector in particular, and the UK as a whole, at a significant disadvantage on the international terrain. That level of regulation cannot come without cost.”
One fundamental factor that legitimises the restrictions on bonus buy-outs is that, in most cases, it’s unethical
The BoE refutes these arguments, claiming that their policies and proposals work to aid effective competition. One of the objectives in the FCA’s consultation paper is to analyse the impact of policies on competition, checking that each of them facilitate effectiveness. In regards to the buy-outs, the FCA concluded that the policy was “compatible with achieving the PRA’s secondary objective of facilitating effective competition.”
Sam Theodore, Head of Bank Analysis at Scope Ratings, is in favour of tighter regulations; as he believes they could improve the future of the banking industry. He said, “Leverage is down, capital is up, liquidity is far more reassuring than before the crisis, the credit culture is less risk-prone, business conduct is painfully readjusted – all thanks mostly to the new regulations.” He added, “Regulators are keen not to prevent the banks from growing their business, but are keen, on the other hand, to keep a lid on excessive risk taking.”
One fundamental factor that legitimises the restrictions on bonus buy-outs is that, in most cases, it’s unethical. An anchoring principle in any community, be it business, politics, or society in general, is that actions have consequences. To have a system that excuses or rewards misconduct is unacceptable, and the policy on buy-outs is one of many attempts to set this straight. As regulations continue to tighten, it’s expected that opposition among financial executives will grow.