The UK’s banks have been told by the Bank of England that they need to rewrite the employment contracts of hundreds of staff receiving top-up payments alongside their salaries because of the European Union’s bonus cap.
Andrew Bailey, deputy governor of the Bank of England, says the contracts must be amended to comply with a ruling from the European Banking Authority, which says that many of the attempts by major banks in the UK to sidestep the restrictions on bonuses are breaching the spirit of the rules.
Ever since last year – when the EU imposed a limit on bonuses to 100% of salary, or 200% if shareholders give their approval – banks have been looking for ways to prevent the pay of their top bankers from falling. Many started paying “allowances” but the EBA concluded in October that these were effectively variable pay – with characteristics like bonuses – and in breach of the ratio imposed by the EU.
Bailey, who remains opposed to the bonus cap, has now responded to the EBA’s findings and told banks to make sure that any allowance – also known as role-based pay – cannot be withdrawn or clawed back as a bonus might be.
Interviewed at the Reuters financial regulation summit, Bailey said: “Many of them don’t need to rip them [the contracts] up. They need to amend the terms. The effect is to make the allowances more fixed and the scope to withdraw them is that much more limited,” he added.
Most top bankers in the UK have been handed allowances to get around the bonus cap. Antony Jenkins, boss of Barclays, and his counterpart at Lloyds Banking Group, António Horta-Osório, received around £1m each in allowances. Stuart Gulliver, HSBC’s chief executive, has been handed £1.7m. The allowances are also being paid to senior individuals inside the organisations.
The requirement is expected to be enforced for the 2015 bonus year – and have an impact on payouts next April. According to the EBA’s analysis 39 banks in six EU states are paying allowances following the introduction of the bonus cap although it is not clear how many of these top-up payments were regarded as being variable rather than fixed pay.
Bailey, who runs the Bank of England’s regulation arm, the Prudential Regulation Authority, is opposed to the bonus cap as he has warned it will push up salaries and make it more difficult to claw back pay when losses occur later.
“It’s a bad policy and it’s got the wrong incentives,” Bailey told the Reuters conference.
Bailey also revealed he had been in contact with HSBC about its ongoing review about whether to keep its headquarters in the UK, where it has been based since 1992 following the taking over of Midland Bank. “It is entirely natural that as an institution your shareholders should demand that you do this assessment. As a private organisation they should do it,” Bailey was reported as saying.
He later gave a speech in Cambridge in which he outlined the Bank of England’s approach to identifying risks in the financial system and those which could arise from “shadow banks” which can provide a means of finance outside the traditional banking sector. “Put simply, it is quite often said that we are living in unprecedented times in the performance of financial markets,” Bailey said.
Bailey discussed the increasing used of automated trading strategies – where algorithms replace human decision making – which have felt the impact of sudden market moves . He provided two examples: bond market volatility on October 15 last year; and the currency market gyrations on January 15 when the Swiss central bank removed the Swiss franc floor against the euro.
Regulators needed to be “keenly interested” in such events, said Bailey. Referring to the events of 15 January, he said the automated trading systems used by banks to protect their trading positions were unable to operate and dealers resorted to using telephones. “Whilst each algorithm operating independently may well have been quite prudently calibrated to protect the bank from building an exposure that exceeded its risk appetite, collectively the impact on market liquidity was akin, albeit temporarily, to a cascading failure across a power grid”.
This article was written by Jill Treanor, for theguardian.com on Friday 15th May 2015 19.04 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010