LONDON (Reuters) - Banks in Britain who don’t comply with what would be the toughest remuneration regime in the world face being held to account by their regulators, the author of a government-sponsored review said on Thursday.
The worst financial crisis since the 1930s forced Britain to tap 1.3 trillion pounds of taxpayer money to nationalise two banks, Northern Rock and Bradford & Bingley, arrange a shotgun wedding of Lloyds and HBOS, and take a majority stake in RBS.
David Walker, a former chairman of Morgan Stanley bank’s international unit, published 39 recommendations for changes in the way banks are run, from pay policies to selecting board members, in a bid to apply lessons from the credit crunch.
He noted widespread failures in bank governance but rejected the need for legislation despite critics who warn that when the boom times return, warnings about risk will be drowned out.
“Any bank which fails to conform with these recommendations if they are all adopted is going to be digging a big hole for itself,” Walker told Reuters.
“Those who neither comply nor explain are going to have to go through the wringer with the Financial Services Authority. It’s just daft to say this is voluntary. You comply or you are in deep trouble,” Walker said.
British Bankers’ Association Chief Executive Angela Knight said some banks have made the recommended changes and the next step was to get similar high standards adopted globally.
Walker said the recommendations should be taken in tandem with measures being taken by the FSA to stop banks betting the shop, such as far higher capital and liquidity requirements.
“In relation to remuneration, the combination with what the FSA is proposing gives the UK the toughest regime in the world,” Walker said.
He recommends that the bank’s remuneration committee report should state if any senior executive has the right or opportunity to receive enhanced pension benefits.
This follows public outrage regarding banks over Fred Goodwin, the former-chief executive of RBS, who walked away with a huge pension despite the bank needing a government rescue.
It will be up to the UK government how to take the recommendations forward when they are finalised in November and British Prime Minister, Gordon Brown, welcomed them.
“(Walker has) recommended bonuses and remuneration should be over a five-year period. There’s got to be far greater transparency so that the public is aware of what’s happening,” Brown told parliament on Thursday.
“The Financial Services Authority will be issuing a revised code on the standards of remuneration,” Brown said.
Paul Myners, a UK Treasury minister, said the responsibility for actions that led to the global crisis ultimately rests with bank boards and weaknesses identified in the review must be addressed nationally and globally.
“The consultation process now needs to look not just at the proposals, but also how to implement and, if necessary, take them further, including their applicability to non-financial sector firms,” Myners said.
The FSA said the review complements its work.
Walker said the recommendations could be included in an existing code on corporate governance enforced by the Financial Reporting Council watchdog which operates on a “comply or explain” basis.
Britain’s business lobby, the CBI, said the recommendations were sensible but must not distract from the need for regulators to monitor systemic risk better.
The European Union’s executive European Commission has also proposed a draft law that would give national regulators like the FSA powers to fine or raise capital requirements on a bank whose remuneration policies encourage too much risk taking.
Board members and chairman would have to work harder in future, devoting far more time to the job and prove to the FSA in an interview they have the experience to understand some of the complex activities banks are involved in, Walker said.
Non-executive board members should spend up to 50 percent more time on the job or at least 30 to 36 days a year. Chairmen should devote probably not less than two-thirds of their time to the business of the entity.
A bank’s risk committee should have board level status and oversee due diligence of major transactions like takeovers and be able to challenge them, Walker said.
Remuneration committees should also have more power to scrutinise company-wide pay and ensure that at least half of a bonus should be paid on a long-term incentive basis, subject to performance conditions and deferred for up to five years.
To help shareholders hold boards and banking executives to account, Walker also recommends they be allowed to agree a memorandum of understanding on collective action but sceptics said this could be counterproductive.
“There must be a real concern that the heightened expectations of shareholders, for example being more activist, might lead to an actual — or at least perceived — dilution of directors’ responsibilities and duties,” said David Berman, a partner at MacFarlanes law firm.
Reporting by Huw Jones, editing by Toby Chopra