The Parliamentary Commission on Banking Standards has published its fifth and final report.
The Changing banking for good report, which has been heavily influenced by recent banking misconduct that took place under the former Financial Services Authority (FSA) regime, contains a package of recommendations intended to raise standards in, and transform the culture of, the UK banking sector.
The report recommends that a new remuneration code is established in order to more closely align risk and reward in banking.
The commision stated that under the code a greater proportion of senior employees’ remuneration should be be deferred, generally for a longer period of up to 10 years.
The group’s other key recommendations include:
- A new criminal offence for ‘senior persons’ who carry out their professional responsibilities in a reckless manner, which may carry a range of sanctions, including a prison sentence in the most serious cases.
- The establishment of a ‘senior persons regime’ for individuals within banking, replacing the current significant influence functions in the ‘approved persons regime’. Key responsibilities within banks will be assigned to specific, senior individuals.
- The establishment of a licensing regime alongside the senior persons regime, covering any individuals within banking (including those within the senior persons regime) whose actions or behaviour could seriously harm the bank, its reputation or its customers. The licensing regime would have a wider scope than the current approved persons regime.
- A new set of banking standards rules to be developed by regulators, applying to all individuals within the licensing regime and governing conduct, treating customers fairly and managing conflicts of interest. Breaches of the new standards may lead to enforcement action by regulators
- Directors should be required to ensure the financial safety and soundness of the bank ahead of the interests of its shareholders.
- A proposal that the government should immediately examine the options for the future of the Royal Bank of Scotland (RBS), including splitting the bank and putting its bad assets in a separate legal entity, and that it should report on this by September 2013.
Isabel Pooley, a senior associate in CMS Cameron McKenna’s tax team, said: “Banking pay now feels as if it is caught in a pincer movement with political and regulatory pressure suddenly now both addressing the same issues at the same time.”
Tom Gosling, head of PwC’s reward practice, added: “Regulators are looking to deferral as the answer, but we’re sceptical this will do much to change bankers’ behaviour as deferred bonuses hold little value in their eyes.
“Our research shows that people discount bonus payments by around 25% for each year they are deferred. Deferring bonuses for even longer periods, particularly if claw-back becomes more likely, will mean they are entirely disregarded in employees’ eyes.”