Fat cats bounce back

Published on Saturday 15 August 2009 19:25

JUST as the country was beginning to believe that lessons were being learnt from the recklessness of the past decade, news was about to break that would prove to some that the days of banking fat cats had never gone away.

On Thursday morning, it was revealed that Royal Bank of Scotland would part with 10m in "golden hellos" to hire two new recruits.

The poaching of Antonio Polverino from Merrill Lynch and Bruce Van Saun's appointment as finance director raised hackles among hard-working taxpayers furious that nothing seems to have changed.

The timing of the RBS bonuses could not have been worse for Hector Sants. The chief executive of the Financial Services Authority had hoped to put public outrage over City pay to bed on Wednesday when the regulator published the final version of its remuneration code for banks, building societies and broker dealers.

The report was quickly dismissed as a wishy-washy "retreat" by critics as the contents appeared to soft-pedal on the regulator's earlier more Draconian recommendations.

Among the most obvious watering-down of the proposals, the FSA – which the Conservative party has warned is on Death Row if the Tories win the general election next year – has dropped its earlier idea that bankers' individual bonuses should be based on the performance of the whole bank rather than their specific departments. Also, while the FSA says two-thirds of bankers' bonuses should be spread over three years, this is now "guidance" rather than mandatory. And banks' risk managers must have the nebulous-sounding "appropriate" inserted into the setting of pay, the regulator says.

In addition, some critics are upset that the banking remuneration code now only applies to fewer than 30 institutions, compared with nearly 50 proposed by the FSA originally. One leading City figure said: "That's ridiculous. This should apply to all people working in the higher echelons of financial services if it is really worth doing." However, the FSA says it decided to limit the code to what it calls "systemically important banks", including the big investment banks in the City. Big general foreign banks with branches in the UK – the likes of Deutsche Bank, BNP Paribas – fall outside the code.

Many politicians are furious with Sants, himself a former investment banker. George Osborne, the shadow chancellor, says the regulator has "pulled its punches". Liberal Democrat Treasury spokesman Vince Cable claims the FSA "capitulated at the first sign of dissent".

But, perhaps predictably, the rowing back by the regulator has gone down well with many of the big guns of business and banking, which were concerned about the threat to the competitiveness of Britain's financial services sector if Sants had been more dogmatic on bonus rules and regulations. "We welcome the emphasis that the FSA has placed on the importance of the UK's international standing as a financial centre and the need to attract the best talent in a global market," the Confederation of British Industry said. This was echoed by Angela Knight, chief executive of the British Bankers' Association.

"Obscene" corporate rewards in a recession and rewards for failure aside, there appears to be a broad consensus among companies and shareholders that boardroom pay is a matter for boards, not regulators. As Roger Lawson, director of the United Kingdom Shareholders Association, says: "Internationally, regulators deciding on pay would not work anyway. Governments should not be in the business of telling people what they should be paid. The only place that was deemed to be a good thing was communist states, and we all know what happened to them." However, UKSA argues that for banks to put their own bonus houses in order, rather than rely on a regulatory Big Brother, shareholder votes on remuneration needed to be given teeth. It believes the FSA missed a trick in not enforcing this.

Lawson says two problems currently are that shareholders vote on company remuneration packages retrospectively, and the vote is taken as "advisory" to the board rather than mandatory. If a bank or other business organisation is prepared to tough out the brief period of negative publicity, it can ignore any opposition to excessive largesse to staff. Lawson adds: "I think a board should announce what it is planning to pay for the forthcoming year, not the one just gone. And the shareholder vote should be mandatory. It could then be a lot tougher, with boards having to go away and think again if shareholders are unhappy."

Ultimately, the FSA's code will be judged on how well it reins in risky pay practices. The jury is out. The Association of Chartered Certified Accountants says the code is on a "shaky footing" internationally as major financial markets in the European Union and other G20 countries do not immediately appear to agree with the UK's stance. Dr Steve Priddy, director of technical policy and research at ACCA, says: "An international approach to regulation is key, but there is potential for this code to isolate the UK in global financial markets.

"This is a lost opportunity. During the consultation phase there was a chance for the FSA to liaise with major financial centres around the world and arrive at some kind of consensus." This view finds favour with Scottish Financial Enterprise, the representative body for the industry north of the Border. Owen Kelly, chief executive of SFE, says it is crucial to recognise the international nature of the banking industry. "The code will only be fully effective if other countries adopt similar measures, and do so soon," he says.

Many bankers ridicule this as pie in the sky. Both they and other cheerleaders for the non-prescriptive approach to bonuses by the FSA say political pressures and differing economic conditions would make it impossible to get such pan-global co-operation among regulators. Bank hirings are international and the talent would just high-tail it to less strident regulatory climates on pay, they say.

But this runs up against the argument that, while it is not the regulator's job to decide people's pay, any largely voluntary code as put forward by the FSA risks being dismissed as toothless. "The problem with comply or explain is that too often people do not comply and explain that their circumstances make them an exception to the rules," one leading City fund manager says. Meanwhile, to some, the FSA's guidelines are found wanting because they do little for greater transparency of banking bonuses under boardroom level. This is where a lot of the mega-paid "rainmakers" ply their trade.

Simon Culhane, chief executive of the Securities & Investment Institute, the Square Mile's leading ethics and examinations body, says: "I think it is a missed opportunity on bonus transparency below boardroom level. Although I sympathise with the difficulties of the FSA in getting other regulators to act in tandem with it. But there are no numbers or size (of bonuses covered) in the FSA's report, no quantum. It is disappointing that the regulator has rowed back in this area." The SII has previously lobbied for below-boardroom bonuses to be made transparent – if only in terms of numbers qualifying for them rather than individual names – when a payout is equal to 50 per cent of basic salary if that salary is 100,000 or above.

However, some diehard sceptics argue that whatever "structures" and "guidelines" can be put in place on remuneration the bottom line, in every sense, is that it all comes down to changing human behaviour, particularly at senior level. History is littered with examples of people not learning from past experience. On the other hand greed, say those who defend the FSA, is ineradicable.