After nearly 12 months of relentless interviewing and detailed research, the U.K.’s Parliamentary Commission on Banking Standards has finally spat out an enormous 568 page report full of recommendations for improving banks. There’s no guarantee the Commission’s recommendations will be adopted, but they’re likely to become the clothes horse for future regulatory outfits. Arlene McCarthy, the British Member of the European Parliament who helped push through the European Union’s bonus cap, has already tweeted that the Committee’s recommendations should be adopted in the U.K. as soon as possible.
The huge report contains a multitude of suggestions, but if you work in the City of London – or are thinking of working in the City of London – this is what you need to know.
1. The commission wants ten year bonus deferrals, which would apply very broadly to bankers working in London
The Commission is proposing the most punitive bonus regime in the world. Not only does it want bonuses to be deferred for 10 years, it also wants 10-year bonus deferrals to apply to almost everyone – and not just the most senior staff. This is harsher than European rules (three-year minimum bonus deferrals), harsher than U.S. rules (three-year minimum deferrals for the most senior staff) and harsher than Singapore and Hong Kong rules (no minimum deferrals at all).
The argument for 10-year deferrals is similar to that touted by Andy Haldane at the Bank of England for years: the credit cycle lasts from 10 to 20 years.
The Commission wants the 10-year deferrals to apply to ‘all licensed staff’, who are likely to be far more widespread in future. The Commission notes that the current Approved Persons regime didn’t apply to derelict Libor traders: in future, it says that licensed staff should be defined as anyone, ‘whose actions or behaviour could seriously harm the bank, its reputation or its customers.’
If you come to London in future, you may therefore wait 10 years to get paid. The new regime is likely to lead to a de facto cap on pay for bankers in the City.
2. The Commission is encouraging ‘toilet cleaner job descriptions’
As we mentioned last month, bankers in London are already being advised to seek job descriptions that underplay their real responsibilities. The Commission’s report is likely to encourage this trend.
The Commission advocates a new, ‘Senior Persons Regime’ in which ‘key responsibilities within banks are assigned to specific individuals who are aware of those responsibilities and have formally accepted them.’
These responsibilities must be written documented and a handover document must be prepared detailing the responsibilities of each role whenever someone new is hired. Individuals who behave recklessly in reference to their responsibilities could be jailed.
If the Commision’s proposals are adopted, there will be a clear incentive to have as few written responsibilities as possible.
3. The Commission wants to ban bonus buyouts
The Banking Commission also wants to ban hiring banks from buying out bonuses from staff they’re hiring from elsewhere. Whenever an individual has his/her bonus bought out, the Commission says it becomes impossible for the bonus to be clawed back if previous transgressions emerge.
The upshot of this would be that individuals moving from one bank to another would go without their deferred stock. This might be a good thing in terms of unfreezing hiring: if banks don’t have to buy out stock, new hires will be cheaper to make. However, it would be a bad thing in terms of banker loyalty and individuals’ ability to control their pay – how loyal will a newly hired banker with £5m of stock stuck at a previous employer really be? And what happens if you leave a bank in 2014 and its stock then tanks in 2018 through no fault of your own?
4. The Commission wants to fill trading floors with women
This might be a good thing too. Apropos of nothing in particular, the Commission is advocating that banks publish a breakdown of the percentage of men and women working on their trading floors. Male traders might support this. Women traders might too. In reality, banks might be encouraged to hire a lot of ‘trading assistants’ simply to make up numbers.