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Traders will be relieved that FSA proposals demand they retain shares from bonuses for just six months extra
New proposals from the Financial Services Authority on potential changes to its remuneration code which prohibit sales of shares by bankers are not as draconian as first feared, according to a leading pay consultant.
Jon Terry, remuneration partner at PricewaterhouseCoopers, said traders would be relieved that the FSA had not taken a tougher stance on the length of time shares must be held after they have been awarded as part of a bonus package. However, Terry said that the new proposals, published last week, would make it very difficult for bankers to be offered guaranteed bonuses and pointed out the FSA had "introduced the world's toughest pay rules to the UK financial services industry".
The proposed changes to the code cover the length of time shares must be deferred and then retained by a trader or banker. A proportion of a bonus is typically deferred over three years and, while the FSA insists its code will be tougher as it is demanding that those shares are then retained for an extra six months, some experts had feared the FSA could demand they should be retained for an extra three years – the same length of time as the deferral period. The code was introduced after the banking crisis revealed that many banks were paying bonuses entirely in cash, giving staff little incentive to think about the long-term consequences of their trading activities.
"Of the changes, bankers are likely to be most relieved by the smaller than expected retention period for shares and other instruments paid out as variable remuneration. The European guidelines had recommended the retention time matched the deferral period, which in many cases is at least three years," Terry said. The decision by the FSA was entirely "practical" and "logical", he said.
For the first time, the FSA spells out that contingent convertible bonds can be used to pay staff. Last week Barclays shareholders sanctioned the use of these controversial instruments, known as cocos, despite fears that they will prove lucrative for executives but expensive for investors.
Terry said: "The potential use of cocos in place of shares in certain scenarios is also likely to be well-received. The FSA's flexibility here is likely to lead to far greater use of cocos in next year's compensation cycle and they might well become a regular part of pay packages."
But Terry warned that more staff based overseas would now be drawn into the FSA code, and said that next year banks might need to report a greater number of "code" staff in their regulatory filings. Big firms had been lobbying the FSA so that only the portion of pay earned in the UK be covered by the code, but this has been rejected by the FSA. This year, the need to publish the earnings of "code" staff – those taking and monitoring risks – has provided more information about pay inside big firms than ever before.
