In a speech in Singapore (28-page / 446KB PDF) earlier this week, Mark Carney backed the development of global standards on bankers' remuneration curbs and claw back provisions which would apply when bankers are found to have engaged in misconduct or excessive risk taking.
Carney said that clawback should apply to fixed remuneration, which broadly means salaries, and variable remuneration, which broadly means bonuses.
"In an international labour market there is a particular role for international standards and co-ordination to ensure a level playing field," Carney said. "It is unfortunate, for example, that new European rules to cap bonuses to half (or with shareholder approval, two-thirds) of total pay have the undesirable side effect of limiting the scope for remuneration to be cut back. This makes the case for additional reforms to ensure that the burden of excessive risk-taking and misconduct by staff can still be borne by those staff."
"Standards may need to be developed to put non-bonus or fixed pay at risk. That could potentially be achieved through payment in instruments other than cash," Carney said. He said plans which could see bank staff paid in part through performance bonds "is worthy of investigation as a potentially elegant solution".
"Senior manager accountability and new compensation structures will help to rebuild trust in financial institutions," Carney said. "In a diverse financial system, trust must also be rebuilt in markets."
Financial services employment specialist Steven Cochrane of Pinsent Masons, the law firm behind Out-Law.com, said Carney's comments "chime with those of others at the Bank of England, specifically the PRA, which is part of the Bank" who have criticised the EU bankers' bonus cap and EU measures to implement it. Those critics have said the measures could potentially frustrate rather than enhance financial stability, and provide a serious competitive risk to EU institutions operating globally, Cochrane said.
"While financial institutions will be concerned by the idea of clawing back fixed pay, and many will wonder how it could operate practically, commercially and legally, it is important to bear in mind that this has been raised as a strictly international proposal, and in a way that highlights concerns over the EU bonus cap," Cochrane said. “As we are expecting the CJEU advocate general’s opinion on the UK’s challenge to the EU bonus cap on Thursday, the governor’s comments are a timely reminder of the Bank/PRA opposition to the bonus cap, and the PRA’s acknowledgement that measures to side step it, which the European authorities have attempted to curb, can be seen as a response to a bad policy. Carney’s speech also effectively suggested one way that international rules might in the future transcend the bonus cap, should it be maintained.”
"Should the governor’s proposal be developed, detailed provisions might be needed as to when and how much claw back would apply. Unlike performance related bonuses, salary could not be subject to a directly applicable post-award 'trueing up', to reflect a changed assessment of the performance for which a bonus had been paid," he said. “However, the possible mechanism highlighted by Carney envisaged a proportion of salary being deferred into bonds, that could be used to pay any regulatory fines or civil or criminal penalties or settlements during the deferral period, which would at least make it clear when and what amount would be recovered.”
Last month the European Banking Authority (EBA) criticised the way some EU banks classify 'role-based allowances' (RBAs) within their remuneration packages. Some banks have taken to paying senior employees RBAs that are "linked to the[ir] position and organisational responsibility", the EBA said.
The EBA said that some banks were classifying the allowances as part of bankers' fixed pay packages and that this may be allowing the institutions to pay more to those staff in bonuses that they are permitted to under EU law.
It said that it believes RBAs qualify as variable remuneration and do not fulfil criteria that would merit their classification as fixed remuneration. How RBAs are classified is important as the maximum amount of variable remuneration that banks can pay staff is calculated on the basis of what their fixed earnings are.
Under the EU's capital requirements directive (CRD IV), bankers' bonuses must not exceed 100% of their fixed remuneration in any given year, or 200% of salary with the agreement of shareholders.
Earlier this week, former members of the Parliamentary Commission on Banking Standards (the Commission) said bankers' bonus claw-back rules in the UK should apply to more than just "material risk takers".
"If the [Remuneration] Code remains restricted to material risk takers, some individuals in the certification regime will fall outside the scope of the Commission’s remuneration reforms," the PCBS said in a new statement. "It is important that some standards – even if not those specific measures set out in the Remuneration Code – apply to these staff, because … they could still cause serious harm to their firm or its customers. It is therefore crucial that they are set the right incentives."
"The regulators should therefore make proposals for applying remuneration standards to those individuals in the certification regime who are not material risk takers," it said.
The Bank of England said recently that bank remuneration rules on bonus claw backs could be extended into other areas of financial services.