On Wednesday, the U.K.'s five largest banks, Barclays PLC, HSBC Holdings PLC, Royal Bank of Scotland Group PLC, Lloyds Banking Group PLC and Standard Chartered PLC jointly announced that they "will work with the [Financial Services Authority (FSA)] in adopting [bank] remuneration reforms" as outlined by the Financial Stability Board (FSB) and agreed to by the G20 leaders in Pittsburgh last week. The existing Financial Services Authority Rule on remuneration, set to take effect on January 1, 2010, is "already broadly in line with" the G20 reforms and will be updated in 2010 to reflect the remaining differences, developments within the EU, and experience in implementing the rule.
Key elements of the reforms include:
- Significant financial institutions should have an independent board remuneration committee to exercise competent judgment on compensation policies and the incentives for managing risk, capital and liquidity. It should ensure that the bank’s policy complies with FSB principles and standards and with the FSA’s code, and undertake an annual compensation review which should be submitted to the FSA for them to assess compliance.
- Remuneration for employees in the risk function should be determined independently of other business areas.
- Firms must ensure that total variable pay is consistent with ensuring that they have the ability to maintain a sound capital base over the long term, while managing the risks that arise if an organization cannot pay competitively to retain the right people.
- Failure by firms to implement sound policies in line with the FSB implementation standards will result in appropriate corrective measures by the FSA to offset the extra risk, including requiring additional capital.
- Bonus pools must take into account the full range of current and potential risks, including capital, liquidity and timing of potential future revenues.
- For senior executives, as well as other employees whose actions have a material impact on the risk exposure of the firm, 40 – 60% of variable compensation will be deferred over three years, with at least 50% in shares or share-linked instruments.
- Multi-year guaranteed bonuses should not be part of future arrangements – any minimum bonus agreements should be limited to one year.
- Poor performance will lead to a "considerable contraction" of bonus payments, including through malus or clawback arrangements.
- The FSA can increase these requirements to prevent excessive risk taking or to ensure consistency with a sound capital base.
- Firms will be required to publish an annual report on compensation, providing information to help shareholders hold boards accountable, such as the remuneration committee mandate, performance criteria and information on the linkage between pay and performance.
- Disclosure of aggregate information on the pay of senior executives and all employees whose actions have a material impact on the risk exposure of the bank.