FSA Warns Banks On Bonus Culture

The City regulator has warned Britain’s biggest banks that they need to demonstrate "a change in culture" when they unveil their bonus pots for 2012 in the new year, paving the way for one of the steepest reductions in payouts on record.

I have learnt that Andrew Bailey, head of the Financial Services Authority’s (FSA) supervisory arm, has told the chairs of the major UK banks’ remuneration committees that they should take into account the industry’s reputation when they decide on bonuses.

He made the demand at a recent meeting with the chairs of the UK banks’ remuneration committees at which they were told that overall levels of pay should show a sharp decrease for 2012.

They were also informed that the bonus cuts should go beyond the required evidence of banks clawing back pay awarded to executives and staff involved in mis-selling.

Among the attendees at the meeting, which took place several weeks ago, were Penny Hughes, chair of the remuneration committee at Royal Bank of Scotland (LSE: RBS.L - news) ; John Thornton, her equivalent at HSBC; Sir John Sunderland at Barclays; and Tony Watson from Lloyds Banking Group (LSE: LLOY.L - news) .

Major lenders have already begun consulting with shareholders on the shape of their pay pots for 2012, with Barclays’ new management in particular signalling that the proportion of revenues paid to its investment bankers will fall sharply.

The warning from Mr Bailey about clawbacks will ultimately result in hundreds of millions of pounds in previously-awarded bonus payments being reclaimed from relevant staff, according to people close to the regulator.

The two taxpayer-backed lenders, Lloyds Banking Group and RBS, have imposed a ceiling on cash payouts of £2,000 for each of the last three bonus rounds, a restriction that is almost certain to be repeated in 2013.

In October, Mr Bailey wrote to the chief executives of major banks with operations in London to inform them that bonuses for 2012 must reflect the mis-selling and market manipulation scandals that have rocked the sector this year.

The FSA’s intervention will be welcomed by the major investors in banks, who have argued since the financial crisis that the decline in pay levels has failed to keep pace with the diminishing returns distributed to shareholders.

HSBC (LSE: HSBA.L - news) is the only one of the major lenders with which City institutions have declared themselves satisfied with the relative distributions between investors and employees. Banks are also under pressure from regulator to retain more capital to strengthen their balance sheets.

The meeting has become a traditional fixture on the FSA’s calendar ahead of the annual banking industry pay round.

The FSA declined to comment on specific meetings with banks but said it held discussions with them on a range of issues.