New Regulations Proposed to Curtail Bank Bonuses in the UK
Sarah Jane Leake | Bloomberg Law
In February, as part of Project Merlin,1 the UK Government entered into an agreement with four of the country’s major high street banks – Barclays, Lloyds Banking Group, Royal Bank of Scotland, and HSBC. Under the agreement, in an attempt to promote transparency with regard to executive pay and curb the size of bankers’ bonuses, these banks agreed, amongst other things, to lend £190 billion to businesses during 2011,2 curtail bonuses, and disclose salary details of their highest paid employees. As part of this agreement, the Government vowed to consult on extending the remuneration disclosures of the highest paid non-board executives made under Project Merlin, to all of the country’s major banks from 2012.
Now, almost a year after the Financial Services Authority’s (FSA) revised Remuneration Code3 came into force, which also sought to restrain excessive corporate executive pay and increase transparency in this sphere, HM Treasury has published formal legislative proposals to further control this area. These proposals, which take the form of the draft Financial Services Act 2010 (Executives’ Remuneration Report) Regulations 2011, seek to introduce a mandatory requirement on all large UK banks, from 2012, to publish the pay details of their eight highest paid non-board executive officers. The disclosures will not include executives on the main board because their remuneration agreements must already be disclosed.4
The common consensus amongst regulators is that poorly designed remuneration structures incentivised excessive and imprudent risk-taking in the run up to the financial crisis. According to Michel Barnier, EU Commissioner for Internal Market and Services, “[b]anks will need to change radically their practices and the mentality that have led in many cases to excessive risk-taking and contributed to the financial crisis.”5
Greater disclosure would, in the Government’s view, improve transparency for senior executives who manage risk and provide shareholders with more information with which to hold boards to account.
Under the proposals, firms will be required to publish an executive remuneration report, listing the awards made to those with the highest levels of control outside the boardroom. Disclosure will need to be made on an individual, but unnamed basis, so as to retain privacy for those who fall within scope of the new regime, and maintain the competitiveness of the UK on the global stage.
— The Banks
The Government’s latest proposals would apply to banks with assets in excess of £50 billion. According to HM Treasury, this threshold is “a practical means of capturing the most significant firms, whilst excluding a long tail of smaller firms which present a less significant risk.”
While the precise number of banks that fall within scope will be known towards the end of the current financial year, it is anticipated that some 15 banks will be affected, including the largest UK banks and the UK banking operations of large banks established outside the European Economic Area (EEA). Disclosure will not, however, be required from banks from the EEA, as these institutions are already subject to home Member State regulation, and the UK does not have the power to impose further disclosure requirements on these banks in this regard.
To avoid multiple disclosures being made by firms within the same group, the draft regulations explicitly allow such firms to elect to make a single collective disclosure of the eight most highly remunerated relevant executives working for the relevant banking institutions within the group.
— The Executives
Under the draft regulations, all relevant banking institutions will be required to issue an executive remuneration report, disclosing the remuneration awarded to the eight most highly paid “relevant executives.” For the purposes of the draft legislation, a “relevant executive” is an individual who has either direct or indirect authority, and responsibility for controlling the activities of the banking institution in question, regardless of whether they are an employee. Such individuals will therefore be likely to: hold significant managerial responsibility; have the highest level of operational decision-making responsibility outside the boardroom; exercise significant budgetary control; be at the highest level of seniority within the bank’s corporate hierarchy; and/or report directly to the institution’s chief executive officer.
The draft regulations are designed to complement the existing disclosure framework,6 by requiring differing levels of disclosure according to individuals’ seniority and risk profile. All in all, comments HM Treasury, this “provides a comprehensive disclosure regime.” The regulations would, for example, require greater disclosure of information regarding the eight most senior executives than is currently required in relation to “code staff” under the Remuneration Code, but less detailed disclosures than are required for executive directors of quoted companies under the Large- and Medium-Sized Companies Regulations.
The Executive Remuneration Report
For disclosure, HM Treasury has adopted an approach similar to that taken under the Remuneration Code and the Large- and Medium-Sized Regulations. This will, opines HM Treasury, facilitate comparability with other reports, and help minimise duplication and costs.
The proposed disclosure requirements, which draw on both FSA disclosure rules and company law, will require banks to detail, in relation to each relevant executive, every element of remuneration awarded during the year in question. This will include fixed remuneration, variable remuneration, long-term incentive scheme vestings, pension accruals, and golden hellos/handshakes. Notably, the draft regulations explicitly require the structural make-up of a variable award to be broken down in detail, disaggregated into cash components, shares and equity-linked instruments, and all other variable awards. The split between upfront and deferred payments must also be shown.
HM Treasury stresses that the draft regulations will not disproportionately affect the country’s international competitiveness. In fact, it seems that the Government is seeking, as far as is possible, to align the UK regime with those of other jurisdictions. The U.S., for example, requires the disclosure of the pay of five named senior executive officers, whereas in Australia companies are obliged to disclose the pay details of the five highest remunerated company executives.
The Year Ahead
Reports will need to be prepared in relation to each financial year of the company (or, if made collectively, in relation to each financial year of the parent company) and filed with Companies House, the UK’s registrar of companies. Given the timing, transitional provisions will apply for the 2011 financial year and, as such, the obligation to produce an executive remuneration report will only arise once the regulations come into force. As, for some banks, this may not fit with the timing for preparing the 2011 annual reports/accounts, they will be given a longer period for preparing and filing their first executive remuneration report. Failure to prepare and file an annual executive remuneration report will amount to a criminal offence, punishable by way of a fine.
The Government’s consultation on the draft regulations closes for comment on 14 February 2012.
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