FINANCIAL SERVICES
Osborne seeks European-wide agreement on pay disclosure
George Osborne has indicated that he favours an international approach to regulating disclosure on bankers’ pay. According to a report in the Financial Times newspaper, the chancellor of the exchequer is “to write to European finance ministers seeking support for common rules on the disclosure of bankers’ bonuses, a move that will delay the introduction of such regulations on pay in the UK".
The report adds: “The decision means British banks will not face new disclosure rules during the highly-sensitive bonus rounds in February and March next year.”
“Osborne seeks EU support on bonuses”, by George Parker and Nikki Tait, ft.com, 24 November 2010:
www.ft.com/cms/s/0/58a8510c-f813-11df-8d91-00144feab49a.html#ixzz17LsVKk69
--> The moves follows the publication of an article in the Financial Times by Sir David Walker, warning that Britain would be “mistaken” to act unilaterally on pay transparency.
Walker in his influential review into banking remuneration published in November 2009 recommended that big banks and the largest building societies reveal how many of their “high end” employees – a non-board-level employee whose total compensation is at or above the median for board directors - earn more than £1 million.
In his Financial Times article, Walker wrote: “But the report was also clear that unless such disclosures in the UK were matched by other countries, it would put British banks at a competitive disadvantage”.
He added: “Provisions introduced in one country unmatched by similar provisions elsewhere will restrict the scope for peer group comparison. They will also stimulate regulatory arbitrage. Specifically, any attempt to require banded disclosure for UK banks in isolation would be commercially sensitive vis à vis their non-disclosing competitors elsewhere. It could also stimulate higher executive turnover, and (as a perverse unintended consequence) lead to higher remuneration as a defensive retention measure.”
Walker concluded: “For these reasons, it would be mistaken for the British government to act in the absence of closely aligned similar initiatives elsewhere in Europe and, above all, in the US. But the case for moving towards an international standard for high-end remuneration disclosure on a banded basis remains compelling.”
“Britain must call for more open bank pay rules”, by David Walker, ft.com, 21 November 2010:
www.ft.com/cms/s/0/d0f2499a-f5a4-11df-99d6-00144feab49a.html#ixzz17L5PR1dE
--> Asked on the BBC Radio 4 Today programme if he intended to back away from proposals on extra transparency in bankers' pay, George Osborne referred specifically to Walker's Financial Times article.
The chancellor said: "Now, [Walker] says in that article that it would be a mistake for the UK to act unilaterally. Since he is the person who came up with the proposal, I think we should at least listen to what he's got to say and make our decisions, but the first thing we've got to do is listen to what he's got to say, consider his new insight into this. He points out that he had expected other countries in Europe, and indeed in North America, to follow suit – they haven't. There are European rules being developed in this area and it might be better for Britain to promote this internationally rather than just unilaterally."
Listen to the BBC Radio 4 interview with George Osborne on 22 November 2010:
http://news.bbc.co.uk/today/hi/today/newsid_9214000/9214932.stm
--> The ex-City regulator Sir David Walker was commissioned by the Labour government in February 2009 to undertake an investigation into pay in banks and other financial institutions as part of a general review examining the corporate governance of financial services firms. The Walker Review – as it inevitably became known – produced a set of proposals for wider consultation in July 2009, and final recommendations were published 26 November 2009. The report – A Review of Corporate Governance in UK Banks and Other Financial Industry Entities: Final recommendations – contains a daunting 39 separate recommendations dealing with Board size, composition and functions, the role of shareholders, governance and risk, and remuneration structures.
You can download the 184-page Walker Review in PDF format from the HM Treasury web site:
www.hm-treasury.gov.uk/walker_review_information.htm
--> According to the Guardian newspaper, the chancellor’s perceived weakening of the proposals on pay disclosure has caused a “rift at the top of the coalition government”.
Vince cable, the Liberal Democrat business secretary, issued a statement to make his point. "Transparency is key to creating confidence in any commitment from our banks to behave more responsibly on pay and bonuses. Outrageous and irresponsible pay structures were a driver in our financial crisis," he said.
“Bankers' pay: coalition split over reform”, by Jill Treanor, guardian.co.uk, 22 November 2010:
www.guardian.co.uk/business/2010/nov/22/bankers-pay-coalition-split-reform
--> Commenting on George Osborne’s decision on pay disclosure, Jon Terry, head of reward at PwC, said: "The need to ensure a level playing field internationally on regulation around City pay cannot be overemphasised, so it is positive that George Osborne seems to recognise this point. Without like disclosure rules across the major financial centres, pay information of UK banks will be out of context and be potentially misleading.”
He added: “But even if enforced internationally, disclosure of pay bands could have some unintended consequences, such as the ratcheting of pay. The devil is in the detail and great care will be needed to manage these potential consequences."