"Banks have rewarded poor behaviour, causing losses to their firms, their reputations and their customers. In some cases, remuneration structures encouraged behaviour which added great risk to the financial system.
Incentives have been deeply misaligned for significant numbers of front-line staff, not just highly remunerated traders or the most senior executives. Deep cultural change is needed.
The Banking Commission made a number of detailed proposals fundamentally to reform remuneration and accountability structures in banks. A core principle of the Commission’s work has been the need to align much more closely the payment of the reward to the maturity of the risk.
The Government legislated to implement some of these recommendations - including the Senior Managers’ Regime and Certification - in law. It is now crucial that the regulators make them work.
The Governor of the Bank of England also recently announced that the PRA will launch a consultation in April on changes to the current remuneration code in order to give effect to the Commission’s proposals.
This is necessary and welcome but it won’t be sufficient fully to address all the problems of misaligned incentives. The remuneration code applies only to staff deemed to be ‘Material Risk Takers’. In its response to the Banking Commission, the FCA has already clarified that, in its view, the definition of ‘Material Risk Takers’ does not extend to sales staff in retail banks.
That is why - having examined the ‘Material Risk Taker’ definition - the Banking Commission also made clear that it wanted specific provisions empowering the regulator to limit the use and scale of sales-based incentives to prevent the kind of conduct failure outlined in this Final Notice.
So far, the FCA has shown little enthusiasm for taking such action. Following the record fine levied against Lloyds, it should reconsider.
Unless such issues are addressed now, the risk of conduct failure at some point in the future can only increase."
The current Remuneration Code and relevant Directives only apply to ‘Material Risk Takers’ – those individuals who pose the greatest risk to the financial stability of an institution. Applying the Code to other individuals would go well beyond the international standards on remuneration. While we do not believe the Code should be extended beyond Material Risk Takers, we agree with the Commission that remuneration, including sales-based incentives, can cause conduct failings and poor consumer outcomes. We are currently conducting thematic work on sales-based incentives, after which we will consider the need for high-level remuneration principles for UK staff.