City should not fear new regulations on bonuses
No sooner had the Financial Services Authority (FSA) announced new proposals on how financial institutions should determine salaries and incentives last week, they were attacked for being too soft on bankers’ pay. Some critics even went so far as to call for a windfall tax on bonuses.
However, now that we have seen several banks deliver strong profits, it is vital that regulators resist the urge to adopt an excessively punitive approach towards remuneration. Instead, as the FSA has recognised, a greater focus needs to be placed on improving transparency and risk management without compromising the Square Mile’s ability to attract top talent both domestically and from overseas.
Of course, bonuses – in particular, the five- and six-figure pay-outs – provoke considerable public anger, because they have become synonymous with short-term risk-taking during the current financial crisis. But pay structures designed to reflect the long-term profitability of banks are essential to maintaining the City’s status as a pre-eminent global centre.
In this light, the FSA’s code of practice is a welcome addition to the regulatory framework, because it promotes a more sensible approach to risk control. Bankers’ pay packets should reflect performance, and not be recklessly guaranteed across lengthy periods. Consequently, limiting bonus guarantees to 12 months, and ensuring that senior employees see two-thirds of their bonuses spread over three years, will ensure that institutions do not take unnecessary risks in their remuneration practices.
And yet, any attempts to reform the financial services sector must be co-ordinated on a global level. City-based firms operate in an international market and they will simply relocate if they feel encumbered with an overly-restrictive regulatory regime. Institutions would swiftly be followed by skilled staff, leaving London to face an increasingly problematic talent shortage. This would have a disastrous impact, not only on employment and taxes, but also local businesses as a whole.
Therefore, we need to work more closely with other global financial centres to ensure regulation promotes the same outcomes. It is vital we prevent regulation turning into another form of protectionism. An uneven playing field would benefit no one.
In the end, though, regulation should begin with strong corporate governance. It is the role of shareholders and boards to scrutinise remuneration and ensure their companies are being led in the right direction over the long-term. This will require non-execs and shareholders to be more actively engaged in how their businesses are being run on a day-to-day basis. Passivity is no longer permissible.
Stuart Fraser is policy chairman of Canada Corporation.