Bankers’ bonus restriction powers unlikely to be enforced by FSA

Measures set out in the 2009 Queen’s Speech to stop bankers who take ‘reckless risks’ from getting bonuses sound more dramatic than they actually are and are unlikely to be used, a law firm has claimed.

Mathew Rutter, a partner at Beachcroft LLP, said the power to tear up bankers’ service contracts would not be something the Financial Services Authority (FSA) would be keen to use.

Under the Financial Services Bill, the FSA would have the power to cancel contracts that would see bankers pocketing excessive bonuses or pay packages that reward undue risk-taking.

But Rutter described the move as an ultimate sanction, which is designed to strengthen the negotiating position of the FSA, rather than ever be used.

“If it were to be used, there would be lots of scope for legal challenge and probably lots of aggrieved bankers ready to bring such a challenge,” he said.

“On the face of it, the new powers appear draconian but, in practice, may well be no more than a blunt instrument. The vast majority of bankers’ employment contracts provide for discretionary bonuses only with the result that there will be little for the FSA to veto in the contract.

“The FSA is also likely to be extremely wary of becoming involved in legal action brought by aggrieved bankers seeking to enforce their contractual terms.”

Jon Terry, partner and head of reward at PricewaterhouseCoopers LLP, said: “What is clear it that pay for performance must become a reality, which means an end to pay for effort and a clear articulation of what constitutes performance underpinned by robust governance.

“Banks are under real pressure to get their pay and bonus structures right – this is best achieved by tailoring their models to their individual business and risk strategies.”

Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development (CIPD), added it was dangerous for politicians to overplay the role of remuneration in contributing to the financial crisis.

“There is a real danger that any regulator will end up focusing on the reward aspects of people management at the expense of the other causes of the crisis, such as organisational culture, performance management and governance,” he said.

“The reforms will have to make sure it doesn’t become easier for regulators to just say no to the bank bonuses, otherwise they might have a significant impact on the City’s ability to attract, retain and motivate the best. Not to mention its contribution to the economy.”

Reaction to Bills outlined in the 2009 Queen’s Speech

Equality Bill

Dianah Worman OBE, CIPD’s diversity adviser: “We are still disappointed that the government has not moved to scrap the default retirement age. It seems counter-intuitive to create a Bill giving older people new rights, and yet keep discrimination at the point of retirement. Hopefully the government will finally see sense in next year’s review and resolve the issue once and for all.”

Kevin Green, chief executive of the Recruitment and Employment Confederation: “The Equality Bill proposals on reporting gender pay differences should not clog up companies with added bureaucracy when they are trying to re-staff as we pull out of recession.

“These measures need to be proportionate and effective. Simply reporting gender pay differences will not help create more high quality flexible working, which could give many women a more effective route back into the labour market.”

Personal Care at Home Bill

Jackie Lindsay, head of independent living at health and social care staffing and service company Pulse: “We welcome the government’s pledge to provide free personal home care for users with critical needs and fully support a ‘need not means’-based approach. We’ve experienced a significant increase in demand from those with critical needs wishing to be cared for by a dedicated nurse or support worker in their own home, and this new funding will help ensure that their financial situation doesn’t deprive them of the type of care they choose.”

Fiscal Responsibility Bill

Mark Serwtoka, Public and Commercial Services Union general secretary: “The Bill on halving the public deficit should not be seen as a green light to slash and privatise vital public services. Investment rather than cuts, combined with a drive to tackle more than £100bn in uncollected, evaded and avoided tax is the best way to tackle the public deficit. Ordinary people should not be made to pay for a crisis caused by the casino capitalism of the city and banks.”

Bribery Bill

The Bill would create a new offence in relation to commercial organisations which fail to prevent a bribe being paid by those who perform services for or on behalf of the organisation. It will be a defence if the organisation has adequate procedures in place to prevent bribery. (There has been no comment as yet on this Bill.)

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