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).
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.