FSA faces criticism on softened bonus stance

Wednesday, 12 August 2009 4:00 PM

By Liz Stephens

The Financial Services Authority (FSA) is to publish its code for bankers' pay and bonuses today - but it will be milder than previously promised.

A draft version of the remuneration code, which is supposed to be designed to discourage the kind of risk-taking responsible for the banking crisis, was published in March, suggesting two-thirds of bonuses should be deferred so they were only paid out for long-term success.

Another clause said that bonuses should be tied to the overall performance of the business.

These proposals had met strong opposition from the industry, with banking leaders saying restrictions could affect recruitment of 'top' bankers.

Both clauses have now disappeared from the new report.

In an article for the Financial Times, FSA chief executive Hector Sants said this was because the FSA feared such clauses would restrict competition because the US and EU have not implemented similar rules.

Mr Sants said: "Such an approach cannot work if it is only applied in the UK".

There were also concerns institutions would relocate 'high-flyers' outside the UK to get around the guidance.

The FSA has faced criticism in recent government reports for its 'light-touch' approach in the wake of the financial crisis.

The Conservatives have also publicly hinted they would transfer the FSA's powers to the Bank of England if they won the next election.

The Treasury has yet to comment on the revisions in the FSA report.

Last month Lord Myners, the City minister, criticised Sir David Walker's draft report on bank corporate governance for not being tough enough on pay disclosure, so it is likely the government will be displeased with this new turn of events.

Liberal Democrat treasury spokesman Vince Cable said: "These watered down plans send out entirely the wrong message to an industry which is already forgetting that just a matter of months ago it had to come with its begging bowl to the taxpayer.

"This also shows the total lack of authority of the Prime Minister who talked tough on bonuses in the spring, but now he is on his summer holiday, the FSA has shelved his plans.

"It's all very well gnashing your teeth and beating your chest when things go wrong but if you are toothless at the start then you are on a hiding to nothing."

Shadow chancellor George Osborne, said: "The FSA has pulled its punches, leaving the promises of the Prime Minister and others to curb excessive bonuses absolutely worthless.

"Banks need to be told that the support provided by the tax payer is there to rebuild their balance sheets and resume normal lending; it is not there to help with mega payouts to bankers.

"This failure to act is further evidence of the need to put an institution with the clout and authority of the Bank of England in charge, and that is what a Conservative Government will do."

The report comes amid signs the bonus culture is returning to the City.

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• banking crisis
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• economy
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• economy and finance