U.K. Banks Face ‘Toughest Bonus Rules,’ Walker Says

By Gavin Finch and Andrew MacAskill

Nov. 26 (Bloomberg) -- U.K. banks face the toughest bonus regime in the world if proposals outlined in a government- commissioned report are accepted, according to its author, Morgan Stanley & Co. Senior Adviser David Walker.

Banks should delay bonus payments for as much as five years and have the power to “claw back” awards, Walker, 69, said in his final report on improvements to U.K. corporate governance released today. The government strongly supports Walker’s recommendations “and will take steps to implement them as soon as possible,” according to a statement from Chancellor of the Exchequer Alistair Darling.

“If we implement what I propose, we have a tougher regime than is in place in any jurisdiction in the world,” Walker said in a telephone interview yesterday. Unless remuneration policies are enforced, then companies “just won’t do it,” Walker said.

The British government is seeking to assuage voter anger over bankers’ pay following more than a trillion pounds ($1.67 trillion) of publicly funded support to keep the country’s financial system afloat amid the worst financial crisis since the Great Depression. U.K. banks were concerned about the risk of publishing details on top-paid staff given that “too many countries show no sign of following suit,” the British Bankers’ Association said in a statement.

New Pay Policies

The Group of 20 leading industrial countries are reconsidering pay policies after an agreement in September to crackdown on excesses that helped trigger bank collapses. The Federal Reserve said last month that it will review practices at the 28 largest bank holding companies it regulates to ensure pay packages don’t encourage risk-taking. Germany’s financial- regulatory authority, BaFin, has asked all lenders to submit new pay policies by the end of the year.

The government asked Walker to review the link between pay and risk-taking and whether directors had done enough to prevent the decline of the financial industry.

Walker called for pay to be “balanced,” so that at least half of bonuses are awarded using long-term incentives over a three-to-five-year period, with the other half in short-term bonuses paid in three years. No more than one-third could be paid in the first year. Banks should be allowed to “claw back” payments in cases of “misstatement and misconduct,” he said.

The FSA gave U.K. banks until Nov. 2 to comply with a new remuneration code. The code stipulates that employee awards will be made up mostly of shares, rather than cash.

‘Broad Principles’

The interim report was criticized by banks and the industry’s main lobby group as overly detailed. The proposals should be “limited to broad principles” on pay, Royal Bank of Scotland Group Plc Chairman Philip Hampton wrote in an Oct. 1 submission to Walker, while the BBA said on Sept. 29 that the review should cover “broader remuneration policies.” HSBC Holdings Plc, Europe’s biggest bank, said lenders should be required to comply with the existing FSA remuneration code.

Banks should disclose the number of employees earning 1 to 2.5 million pounds, 2.5 to 5 million pounds and more than 5 million pounds in remuneration, including cash, shares and pension contributions, Walker said. The workers would not be named. That goes further than recommendations in the interim report that would have required banks to disclose only the number of employees earning more than the median compensation of board members. Walker told the British Broadcasting Corp. that he estimated 1,000 City of London financiers earn more than 1 million pounds a year.

Government to Legislate

The government today said it would legislate on publication of 1 million pound-plus pay packages, forcing disclosure for the 2010 performance year.

“If New York, Frankfurt and Paris don’t follow suit then presumably that is not such a fantastic thing for the U.K.,” said Rachel Kent, a regulatory lawyer at Lovells LLP in London.

Walker’s interim report recommended U.K. banks should delay bonus payments, increase the policing powers of risk committees and bolster the responsibilities of chairmen to avert a repeat of the financial crisis. Today’s document reiterated these plans, along with a recommendation that banks should consider annual re-election of their boards by shareholders.

“Several” non-executive directors on any bank board should commit to working 30 days to 36 days a year for the company and should be told in writing that this may limit their ability to take on boardroom roles elsewhere. When this isn’t possible, details of the time commitment agreed should be available to shareholders, the report said.

Risk Management

Banks and life insurers should create a committee to oversee the management of risk, including capital and liquidity, the report recommended. Fund managers and investors should disclose their voting record, the report said.

Walker received about 180 written submissions from institutions ranging from banks and assets managers and unions following his interim report. Prime Minister Brown said last week he will respond “swiftly” to the proposals in the report.

Walker, a former executive director at the Bank of England and ex-chairman of Morgan Stanley International, previously wrote a government-commissioned report recommending a code of conduct for British private equity firms published in 2007.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net