FSA Warns Global Banks Over Bonus Levels

The UK bank supervisor has advised banks against increasing bonuses mentioning that the bonuses must reflect the market manipulation scandals and the mis-selling in the past twelve months. The reputation of the financial sector has taken a tip. Bank executives have been warned in October by the UK Bank Supervisor, before the declaring of bonuses that evidence would be looked at to see that the bonuses have been clawed back from the people involved in the scandals. Banks have also been advised to scale back bonuses in general, to other employees as well due to the impact of the scandals. The letter was sent to global financial institutions that has a substantial presence in the UK apart from UK banks.

“Ex-post risk adjustment will be a major area of focus in our 2012 review of the firm’s remuneration policies,” wrote Andrew Bailey, head of the Financial Services Authority’s prudential business unit,on October 22. “Firms should also forfeit or reduce current year’s bonuses if appropriate.” The message was also reinforced at a meeting with the directors who chair the remuneration committee in the banks. There is also pressure on the banks to cut bonuses in case of wrongdoing from the shareholders apart from the regulators. The pressure has gotten stronger since the series of scandals of more than 10 billion personal payment insurance affair as well as Barclays’s 290 million pounds settlement over the alleged manipulation of Libor and other benchmark interest rates.

These scandals have changed the cultural landscape of the financial companies apart from changing attitudes in various boardrooms. People have begun to realize that a big bonus is part of the problem. Bonus cuts are also to be expected this year despite increase in profits and less money is being set aside for bonuses. This is part due to job cuts that have been announced.

The FSA has been reviewing bonus payments since 2009 as part of the reforms that have been put in place since the financial crisis in 2008. Banks executives have been advised that this watchdog will be watching their actions on bonus payments very closely. They have been advised to defer bonus payments in order to comply with the risks related to bottom line of each bank.

Clawback rules is something that gives banks the right to cut or cancel a part of the bonus that is due to an individual that has been awarded but has not been paid out. This has been in place in the UK and in Europe since 2009. But it was not often used until this year, when banks started clawing back bonuses of several employees following the major blunders in trading that cost London operators of these banks at least $5.8 billion.