The Government yesterday announced that it had reached agreement with the four largest UK banks that they will disclose the pay of their highest paid individuals, which go beyond the disclosures required by the FSA under the Remuneration Code or required by the Listing Rules. The agreement is part of a wider agreement (known as “Project Merlin”) on bank lending and other matters with Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group and, in relation to lending only, Santander.

Although the agreement currently only applies to the four largest banks, it may be extended to other “large” banks and may indeed in due course lead to wider pay disclosure among other financial services firms and listed companies generally.

Under the agreement, these banks have agreed to disclose, in relation to 2010 and future pay, the remuneration details of the five highest paid senior executive officers below board level who have managerial responsibility. No names need be given. This is unlikely to result in disclosure of star traders’ pay if they do not have managerial status. The agreement is in addition to the existing Listing Rules requirement that the pay of executive directors is disclosed on a named basis.

Consultation

Although this extra disclosure will initially be on a voluntary basis, the Government is planning to consult on whether:

  • such disclosures should be mandatory for all large banks from 2012, which will first apply to 2011 pay and bonuses. “Large” is not defined, but it could possibly refer to the Tier One category in the FSA’s Remuneration Code or the £100 billion assets benchmark proposed in the draft remuneration report regulations produced last year (which have so far not been taken further). It is anticipated that this will apply to UK subsidiaries of overseas banks but it is not clear whether it will apply to UK branches of overseas banks or whether it will only apply to branches of overseas banks based outside the EEA (as is the case with the remit of the FSA’s Remuneration Code, although consultation on this is also proposed later this year);
  • the pay of the eight (as opposed to five under the new agreement) highest paid senior executive officers, in addition to executive directors, should be published annually. It is anticipated that this will also be on a no-names basis. It is also unlikely to apply to star traders.

No timetable has yet been set for this consultation and it is unclear whether it will be by way of amendment to the FSA’s Remuneration Code or otherwise.

Assuming the new rules are adopted, they will go beyond the requirements in CRD3 and the FSA’s expanded Remuneration Code which came into effect on 1 January 2011. They will also go beyond what most other countries currently require – for example in the US the largest banks are required to disclose the pay of the top five individuals, including executive directors – and the Walker proposals. It is unclear what effect this agreement and proposed consultation will have on the delayed proposals contained in the Financial Services Act to require the production of a separate report, including numbers of individuals falling within specified bands of remuneration and non-binding shareholder votes on executive pay generally.

Engagement with shareholders

The four banks have also given a commitment to engage more with their major institutional shareholders on pay and policies before the annual pay round, including in relation to pay policy, the design and scale of incentive structures, performance measurement, risk adjustment and variation in the remuneration levels and composition across businesses and staff types. The remuneration committee of each bank will also specifically consider and approve the remuneration of the ten highest paid staff in each business area where it does not already do so.

The future

Firms in the wider financial sector and beyond will be interested to monitor the developments in this area in anticipation that they may affect regulation and practice beyond the largest banks. Pay proposals initially confined to one area have recently had a tendency to become more widely implemented over time. A “large” institution with a small number of employees could, for example, find that what is supposedly anonymous disclosure is fairly easy to pin to specific individuals.

For a copy of HM Treasury’s announcement on the agreement reached with the banks, please click here.

For a copy of our earlier Law-Now on the FSA’s Remuneration Code and Pay Disclosure Rules please click here.