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“A big, positive step,” is how Vince Cable described the Bank of England’s consultation papers published this morning. He went on to say that, “It is absolutely right that banker’s bonuses should be properly regulated so that they cannot cause the collapse of banking institutions.”
Andrew Bailey, CEO of the Prudential Regulation Authority lauded the proposals that “would mean bankers would be more accountable for their own actions.” He said that, “We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behavior and culture within banks.”
Even Antony Jenkins, Barclays CEO, said that, “In principle, I support the idea that where there is wrongdoing, there should be appropriate punishment.”
On the other hand, there are those who oppose the stricter rules that will be implemented in 2015 as a result of the bank bailouts and the scandalous misselling of PPI and misuse of the Libor system. Yesterday we noted the displeasure of the British Bankers’ Association, which should not come as a surprise to anyone. Today Andrew Brown of the BBA lamented what is now “the toughest regime in banking pay of any global financial center,” saying that “We have the world’s largest international banking sector and we do have to make sure that we can continue to employ banking talent from around the world.”
Consultation Paper 14/14 – Strengthening accountability in banking
PRA CP 14/14 (click here for the complete report) boils down to several major points
- Defining a ‘Senior Managers Regime’ (SMR) “for individuals who are subject to regulatory approval, which will require firms to allocate a range of responsibilities to these individuals and to regularly vet their fitness and propriety. This will focus accountability on a narrower number of senior individuals in a firm than the current Approved Persons Regime (APR).
- A ‘Certification Regime’ which will require relevant firms to assess the fitness and propriety of certain employees who could pose a risk of significant harm to the firm or any of its customers. This assessment would be ongoing.
- A new set of ‘Conduct Rules’ defining professional conduct in a broader sense than that which is relative only to the PRA and the Financial Conduct Authority (FCA). These rules will apply to employees other than those whose activities would be essentially the same regardless of where else they might work, (e.g., facilities management, receptionists, event managers).
- Individuals found to be in violation of the standards will be subject to criminal proceedings, including prison terms of up to seven years and fines without limitation.
PRA CP 15/14 (click here for entire report) proposes several points as well.
- Deferral of certain remunerations to allow opportunity to reassess the relationship between the size of the risk for which the employee is being rewarded. The PRA is proposal a deferral period of seven years for senior level bankers and five years for others.
- A clawback period of three years in addition to the deferral period.
- Measures to more closely monitor discretionary compensation at banks that have been bailed out by the government.
- Measures to control the practice of buy-outs that “wipe the slate clean” for senior employees moving from one institution to another.
- Establishment of controls over sales incentives to avoid their misuse especially relative to the safety of customers and their assets and risks.
The moral of the story
Several lessons come to mind, not the least of which is, “Be sure your sins will find you out,” or “Don’t do the crime if you can’t do the time.” I personally have little sympathy for the BBA, which is, in effect, a union for bankers. They are, in my opinion, objecting to controlling the activities of their constituents who have proven that they are unreliable when left uncontrolled. Not only that, they want to ensure that they are the highest paid criminals in the world.
I salute the Bank of England, the PRA and the FCA for a job well done. Huzzah!
