UK Finance Minister Outlines Thinking on Bonuses

The British Chancellor of the Exchequer Alistair Darling has been intimately involved in the creation of the modern British regulatory landscape, but all this may be about to change with a General Election due within 10 months. He also succeeds arguably one of the most successful Chancellor’s in the 21st Century – the current Prime Minister, Gordon Brown – just as Tony Blair has been a tough act to follow, Darling has had to step into Brown’s shoes at The Treasury. Darling has remained silent all week since the announcement of the opposition Tory party’s proposals for the abolition of the FSA; handing prudential financial oversight to the Bank of England, a general carve up of the FSA and probable delay on RDR commitment. Today, that changed with an interview published in a leading, left-wing publication, The Tribune.

Darling on Bonuses

Bonuses are going to be a sticky issue for regulators, politicians and employers – “Bonuses are Back!” may be the cry on the Square Mile, after all, if it’s being earned they’re going to be paid or risk losing competitiveness. Darling’s response is that many bank and financial sector employees only have a job today because of the taxpayer monies used to bail out the sector and shore up the banks. For banks now owned by the UK Government, there will be no bonuses this year;

First, we do have restrictions on the banks we own in terms of bonuses; they can’t get cash bonuses this year, it’s got to be deferred, it’s got to be capable of being clawed back, the people who failed can’t get rewards and they always have to be linked to long-term success.

The interim Walker report on working practices and pay structures including bonuses, published a couple of weeks ago, seems to simply state bankers should worry about doing the job they are already being paid to do. Darling disagrees in that Walker is going further; bankers did not do their jobs to begin with which is why we ended up in the global economic mess culminating in the near-miss, banking collapse. As Darling states,

One of the causes of the trouble is that they were not doing what they were supposed do be doing. Too many of them patently didn’t even understand what was going on in their own banks.

When pressed on disclosure of who actually is paid a bonus, Darling rightly concedes that naming the recipient poses issues outside of transparency and financial regulation; after all, I certainly would not like my name published anywhere with a big number printed after it – there is a dividing line between personal security and public disclosure, though directors at the Co-Operative Bank have been making personal identity disclosure without issue. With the FSA under political fire from the Conservatives, who announced they would dismantle the regulator if elected, Darling’s responses give some insight into why Labour wants the FSA to remain and enjoy enhanced power. For instance,

A lot of these people have got to realise they just would not be working today if they did not have the insurance policy provided by the British and American taxpayers and others. That’s why it is right that the Financial Standards Authority now has the power to say to a bank that they don’t like the pay structure of a bank, it’s too risky, you can’t do it.

Also when questioned on Walker’s proposal for a voluntary rather than statutory regime, Darling’s response was,

We have gone beyond that with the FSA and its new power to say we don’t like your pay structure, it’s too risky. That’s not voluntary, because ultimately the FSA can put you off the road.

This fundamentally underlines the difference between Labour and Conservative thinking on who will regulate the banks and financial sector – Labour clearly envisages an FSA with a very wide-ranging remit and the power to assert itself in virtually any aspect it sees fit. The Conservative focus beyond dismantling the FSA is yet to become clear, but it is reasonable to assume at this stage that they see a return of the Bank of England as the banking regulator and not as an “academic” body as Labour Minister Lord Myners recently put it. The Tribune article focused on pay structure and especially bonus payments, it’s to be expected from a socialist paper, but Darling fielded answers which did take the position that pay and bonuses are actually one commercial factor to be taken into account when dealing with banks who received bail-out monies. As he went on to say,

I think, in relation to telling the banks what to do, there is a broader question.

The interviewer’s observation of Darling when the question regarding a National Maximum wage is as telling as the Chancellor’s response:

What about a national maximum wage? Darling’s jaw drops discernibly amid a slight shudder: “People who call for these things are the same people who argued against a national pay maximum in the 1970s. I don’t think pay restraint or arbitrary controls work.”

This article was commissioned by ComplianceAsia, the leading APACS region provider of outsourced compliance support for leading banking and financial institutions operating in the region.

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