FSA Warns Global Banks Over Bonus Levels

Global banks operating in London have been warned by the top UK bank supervisor that this year's staff bonuses must reflect the mis-selling and market manipulation scandals that have damaged the sector in the past 12 months.

Andrew Bailey, head of the Financial Services Authority's prudential business unit, wrote to bank chief executives in late October ahead of this year's bonus round warning them that the watchdog would be looking for evidence they had "clawed back" deferred bonuses from people involved in scandals.

He also urged banks to consider firm-wide bonus reductions to account for the impact of the scandals.

The letter went not only to UK banks but also global institutions with substantial presences in the country.

"Ex-post risk adjustment will be a major area of focus in our 2012 review of the firm's remuneration policies," he wrote on October 22. "Firms should also forfeit or reduce current year's bonuses if appropriate."

Mr Bailey reinforced the message at a meeting with the directors who chair each bank's remuneration committee, according to people familiar with what went on.

Regulators and shareholders have this year intensified pressure on bank boards to cut pay and claw back bonuses in the case of wrongdoing.

This push has been further amplified this summer by the escalation and eruption of a series of scandals including the more than 10 billion personal payment insurance affair as well as Barclays's 290 million pounds settlement over the alleged manipulation of Libor and other benchmark interest rates.

"All of those scandals have really rocked the boat at bank boards," a senior adviser to the banking sector said. "They have changed attitude over the summer and realised they have a cultural problem and that pay is a big part of it."

Analysts expect investment banks to embark on another round of sharp bonus cuts this year despite mostly improved profits. In the third quarter, most banks have already set aside less money than last year for staff pay, partly because of job cuts.

The FSA, which declined to comment, first started reviewing bank bonus payouts in 2009 as part of reforms enacted after the financial crisis. Hector Sants, former FSA chief executive, traditionally used one of his monthly meetings with the bank chiefs to remind them that the watchdog expected them to abide by rules requiring them to defer large bonuses and make sure they reflected the risks to each bank's bottom line.

Mr Bailey has now taken up that responsibility and placed a particular emphasis on cancelling deferred bonuses for executives and traders with responsibility for troubled areas.

"Clawback" rules, which give banks the power to cut or cancel the portion of an individual's bonus that has been awarded but not yet paid out, have been in place in the UK and Europe since 2009.

But it took until this year for banks to start clawing back bonuses more often. US bank JPMorgan Chase, for example, said it would take back millions in promised bonuses from several employees after a trading blunder that cost at least $5.8 billion at its London operations.