Experimental feature

Listen to this article

00:00
00:00
Experimental feature

Who’s afraid of the Financial Services Authority? Fewer and fewer people, now the opposition Conservatives have pledged to abolish it. But the latest “Dear CEO” letter written by Hector Sants, the FSA’s chief executive, shows the regulator can still bare its teeth. It gives UK banks until October to demonstrate their remuneration policies are compatible with the regulator’s code of conduct. The FSA will then open a dialogue with remuneration committee chairmen to discuss any concerns. The implicit threat is that it could force banks to renegotiate contracts and, possibly, impose higher capital requirements.

Short-term guaranteed bonuses, although an oxymoron, are common and relatively harmless: they are often the only way to hire staff mid-year. For banks such as Barclays rapidly expanding their investment banking operations, such guarantees are hardly unusual. The FSA’s real target is long-term guaranteed bonuses. Contracts guaranteeing variable pay for several years, in flagrant breach of the code’s principle of pay for performance, are rarer. The FSA is right to insist it will not allow any grandfathering of contracts entered into after the publication of its consultation paper on remuneration on March 18.

Reining in Royal Bank of Scotland will be particularly hard because of the way the government is conflicted. If bankers critical to the profitability of important business units leave for rivals, the government’s chances of getting RBS off its books and snaring privatisation receipts will be harmed. UK Financial Investments, custodian of the government’s stake, has accepted that RBS must offer market rates if it is to stop haemorrhaging talent. If that means honouring legally binding guaranteed bonuses, as RBS said it would in February, so be it. Mr Sants may find his hands are tied by a desperate Treasury as much as by incorrigible bankers.

E-mail the Lex team confidentially
OR
Post public comments

The Lex column is on Twitter

_________________________________________

Lex is the FT’s agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe to FT.com

If you have questions or comments, please e-mail help@ft.com or call:

US and Canada: +1 800 628 8088
Asia: +852 2905 5555
UK, Europe and rest of the world: +44 (0)20 7775 6248

Get alerts on Central banks when a new story is published

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.

Follow the topics in this article