Central banks target bankers' fixed pay
Mark Carney, Governor of the Bank of England, gave a speech to
the Monetary Authority of Singapore targeting bankers' fixed
pay as well to make bankers more personally accountable and to
change their behaviour.
In the wake of the CRD IV provisions limiting bankers' bonuses
(variable remuneration) to 100% of base salary, many banks had
sought to introduce 'personal allowances' –
role-based payments that banks have treated as fixed remuneration
and not subject to the existing EU rules on variable remuneration.
Notwithstanding the PRA/FCA having approved the principle of such
awards being treated as fixed remuneration, following a compliant
about the use of such allowances from the European Financial
Services Commissioner to the EBA, the EBA confirmed that most
personal allowances should be considered as variable remuneration,
(see our
November briefing for more information).
To date, the European-derived rules on remuneration for bankers
have applied to their variable remuneration only. Now the UK and
US's central banks have suggested putting bankers' fixed
remuneration at risk as well to better align their personal
incentives with the risks faced by their banks.
This suggestion was first mooted by Bill Dudley, the President of
the Federal Reserve Bank of New York. On 20 October 2014, Mr Dudley
proposed bankers should be remunerated in part by a performance
bond.
Mr Dudley's suggestion for the remuneration of senior
management and material risk takers is that they would receive a
significant part of their fixed remuneration in a performance bond
in their bank's deferred debt. In the event of a reduction in
the bank's capital below a minimum level (either on account of
fines imposed or poor business performance by the bank) their
performance bond remuneration would be forfeited until the bank had
strengthened its position.
In his own speech this month, Mr Carney described Mr Dudley's
proposal as a 'potentially elegant solution'. This proposal
is also likely to be viewed favourably by banks' shareholders,
who have suffered the brunt of the penalties imposed on their
institutions in the wake of the LIBOR and FX investigations. In the
performance bond proposal, any financial penalty imposed on the
bank would come out of the bank's deferred debt compensation
(in other words, the staff's performance bond) first. Bankers
themselves (rather than bank shareholders) would feel the immediate
pain of any penalties agreed and/or imposed on the banks.
This proposal would also tie-in with the aim of the UK's
Banking Reform Act, which comes into force next year, to make
senior bankers more accountable for their acts and omissions by
compelling them to agree and sign statements of responsibility.
These statements will set out what a senior individual is
responsible for in the bank and create a rebuttable presumption if
there is wrongdoing that they are personally culpable for failing
to prevent. They will not be able to claim that they have delegated
their personal responsibility. On leaving their position, senior
bankers will also need to complete a 'handover note'
setting out everything material which their successor ought to know
– with such notes potentially being relied upon by regulators
in their investigations.
It is telling that this proposal was mooted first in the US, which
has hitherto resisted the EU regulations of compulsory claw-back
and malus provisions and setting ratios between fixed and variable
remuneration. Given that Mr Carney's speech was delivered in
Singapore, to an audience comprised of regulators from around the
world – there can be no doubt that these considerations are
being raised at the highest level by the Financial Stability Board
(the global body comprising regulators from the world's main
financial centres).
Guidelines on data protection in EU financial services regulation
Following just days after the UK lost its European Court of
Justice (ECJ) challenge on the bonus cap and disclosure rules under
CRD IV, (which were based on breaches of EU data protections laws);
the European Data Protection Supervisor (EDPS) has published new
guidelines concerning data protection in EU financial services
regulation.
Data protection issues apply to financial services regulation
because many measures, such as those concerning surveillance,
record keeping and reporting, information exchange, powers of
competent authorities and sanctions for violations of applicable
rules, require the processing of personal information. Some
measures potentially also interfere with the right to privacy which
was one of the issues raised in the UK's ECJ challenge of the
remuneration disclosure requirements under the CRD IV.
The guidelines have been drafted to ensure that EU institutions
and bodies are aware of data protection requirements and integrate
high standards of data protection in all new financial services
legislation.
In addition, the guidelines illustrate the application of data
protection rules by way of specific measures in current or proposed
financial services legislation and further proposes how the EDPS
will continue to work with policy and legislators in the area of
financial services regulation in the future. While it is no
coincidence that the guidelines follow so soon after the UK's
(now abandoned) challenge to the ECJ, there is no guidance
concerning the treatment of financial services regulatory law,
which conflicts with data protection rules.
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