The Bank of England (BoE) has published a speech given by Mark Carney (Governor of the BoE) entitled The future of financial reform.
At the beginning of his speech Mr Carney states that the Brisbane G20 Leaders’ summit was a landmark. The prudential requirements and supervisory framework for banks are now largely settled. There will be adjustments where necessary but from a prudential perspective banks now know what they need to do.
However, Mr Carney states that the job of financial reform is not complete and that implementation must follow agreement. Progress must be consolidated to build a financial system that can deliver strong, sustainable and balanced growth for all economies. Just avoiding the repeat of past failures is not a recipe for success.
Mr Carney then discusses certain drivers of the future reform agenda which includes compensation schemes. He notes that in the UK, there has been introduced a remuneration code prescribing that the payment of bonuses must be deferred for a minimum of three years and, after payment, be exposed to clawback for up to seven years. Mr Carney also mentions that the UK is currently consulting on extending deferral periods, widening the scope for groups of employees to have their bonuses reduced where there are more pervasive issues of performance or risk management, and considering options to prevent individuals side-stepping these rules.
Interestingly, Mr Carney states that in an international labour market there is a particular role for international standards and co-ordination to ensure a level playing field. He adds that it is unfortunate that, for example, new European rules to cap bonuses to half (or with shareholder approval, two-thirds) of total pay have the undesirable side effect of limiting the scope for remuneration to be cut back. Mr Carney states that this “makes the case” for additional reforms to ensure that the burden of excessive risk-taking and misconduct by staff can still be borne by those staff. Mr Carney also mentions that “standards may need to be developed” to put non-bonus or fixed pay at risk. This could potentially be achieved through payment in instruments other than cash.
View The future of financial reform, 17 November 2014