Current measures ‘not sufficient’ to address series of financial scandals
Bankers’ fixed pay, as well as bonuses, should be clawed back in light of any wrongdoing, the governor of the Bank of England has said.
Mark Carney said “fundamental change” was needed to restore trust in the institution, after a series of banking scandals in recent years including the manipulating of Libor and last week’s £2.6bn fines for rigging foreign exchange rates.
He said that financial penalties alone were “not sufficient” to address the issues, and “standards may need to be developed to put non-bonus or fixed pay at risk.”
Addressing industry experts at the Monetary Authority of Singapore Lecture, Carney said the public’s trust in the financial system had been “severely tested” and it was up to leaders and senior managers to be personally responsible for setting the cultural norms of their institutions. In many cases, he said: “the link between seniority and accountability had become blurred and, in some cases, severed.”
“The succession of scandals mean it is simply untenable now to argue that the problem is one of a few bad apples,” Carney said.
“The public bail outs and the fact that few of the consequences of scandal have been borne by those who were directly responsible revealed a great deal about the balance of risk and rewards for those who worked in financial services.”
Carney said that European rules to cap bonuses to half – or two-thirds with shareholder approval – of total pay, and the UK’s rules to claw back bankers’ bonuses up to seven years after they have been awarded, didn’t go far enough to discourage excessive risk-taking and misconduct by staff.
He has called for additional reforms including the idea suggested by US central banker Bill Dudley to pay certain staff partly in ‘performance bonds,’ which he described as “a potentially elegant solution.”
“Behaviours that aim to undercut market mechanisms, such as collusion, the misuse of confidential information, or the manipulation of market prices and benchmarks, must be stamped out,” he said.
“Most fundamentally, trust between the public and the financial system is needed to maintain the social licence for finance to operate. It has been severely tested by: taxpayer bail-outs of systemic institutions; rewards perceived as undeserved; a perception that clients have become counterparties; and egregious examples of misconduct and rigging of markets.”
“We want to see industry content and finance taking justifiable pride in its contribution to society,” he added.
Carney, who has overall responsibility for financial stability in the UK, said the next step would be to tackle pay in the financial institutions, “to align better incentives with the long-term interests of the firm – and, more broadly, society.”