City of London banks agree to support G20 bonus reforms
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Issued 14 October 2009
The UK subsidiaries and branches of leading overseas banks have agreed to
support the implementation of reforms to bank pay agreed by the G20 in
Pittsburgh, the Financial Services Secretary, Lord Myners, announced today.
Bank of America, Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs
International, JP Morgan Securities Ltd, Morgan Stanley, Nomura and UBS have
confirmed their commitment to the FSA Rule and supporting Code on remuneration
practices, which was published in August and comes into force on 1 January 2010,
and their full support for the G20 agreement, which sets global standards for
the implementation of the Financial Stability Board’s remuneration principles.
EU banks with major London branches, BNP Paribas, Deutsche Bank and Société
Générale confirmed that they will implement the G20 agreement in accordance with
their home regulator and would seek to voluntarily comply with the FSA Rule on
Remuneration for their UK based employees.
In a joint statement, the banks said:
"In a competitive and global business, banking remuneration must be
consistent with effective risk management and there must be national and
international consistency on this issue. We welcome the global nature of the
G20 remuneration reforms and will work with the FSA and regulators in our home
countries in adopting the reforms, recognising that all G20 nations have also
committed to their implementation to ensure a level playing field.”
The Financial Services Secretary said:
"The financial services industry must take a responsible and long-term
approach to remuneration if it is to retain its competitiveness and regain
public trust. I am pleased that the most significant banking institutions
operating in the UK have moved quickly and are supporting our implementation of
the agreement reached on bank remuneration at the G20, and this reinforces the
standard we have set for other financial institutions and countries to follow. I
will be writing to the chairs of their parent companies’ Remuneration Committees
to share with them the outcome of this meeting."
1. The G20 reforms are available on the Pittsburgh Summit website.
2. The FSA Remuneration Code comes into force on 1 January 2010. This would
include payments made for performance year 2009.
3. UK regulated banks will continue to work with the FSA in implementing the
G20 principles. The FSA Rule on remuneration is already broadly in line with
the G20 Implementation Standards and will be updated in 2010 to reflect the
remaining differences, developments within the EU, and experience in
implementing this Rule. The FSA will apply the same standards to all entities
covered by the Rule on remuneration in the UK (and as it does already, including
foreign owned subsidiaries), and will work with overseas banking regulators to
ensure a consistent and timely global application of these reforms.
4. Key elements of the G20 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 /
- 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.
- 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).
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Article Published/Sorted/Amended on Scopulus 2009-10-15 13:56:05 in Economic Articles