Britain’s financial regulator may force reckless and corrupt financiers to pay back their salaries and bonuses to state authorities in an effort to clamp down on rampant financial crime. Experts doubt the policy will prove effective, however.
The Financial Conduct Authority’s (FCA) suggested policy shift follows a soon-to-be implemented EU bonus cap, fiercely opposed by City bankers and the British government.
The EU-wide measure was created to curb financiers' colossal salaries and rogue behavior.
But prior to its implementation the move has backfired and prompted a further rise in bankers’ basic salaries, opponents say.
The bonus cap will come into force across EU member states later this year. It stipulates bankers’ bonuses should not exceed 100 percent of their paycheck, or double their salary in cases where shareholders approve.
In light of a shifting regulatory climate, the FCA is no longer able to retract bonuses in cases where financial misconduct has occurred. Speaking to the Treasury Select Committee on Tuesday, FCA chief Martin Wheatley told the body its newly acquired ability to “claw back” rogue financiers’ fixed salaries could function as a substitute.
The watchdog said legal obstacles to enforcing this revised penalty system exist. It stressed, however, that it supports the concept.
Chancellor of the Exchequer George Osborne took legal action over the planned EU bonus caps last year, but the legal challenge was eventually scrapped. Central to the lawsuit, was the argument bonus restrictions would spawn “perverse incentives” to higher fixed salaries.
Despite stringent opposition from the British government and City financiers, EU regulators are expected to pass new guidelines on the bonus restrictions in early March.
Andrew Tyrie, Chairman of the Treasury Select Committee, said the blanket policy was ill thought out, and could have disastrous effects in the future.
Wheatley slammed the measure, warning regulators’ capacity to penalize financial crime would be diminished.
The FCA chief told the committee that evidence gleaned by the financial watchdog reveals how financiers’ fixed salaries had soared by 100 percent since 2008, despite bonus restrictions implemented since the global financial crisis.
He said this occurred amid a steady stream of financial scandals that have decimated public trust in the banking sector.
Following Tuesday’s hearing, Conservative MP and member of the Treasury Select Committee Alok Sharma said the current framework for penalizing financial misconduct in Britain is unsustainable.
But he expressed doubt over the viability of potential clawbacks proposed by the FCA. He said he’d be interested to know precisely how the FCA would go about revoking rogue financiers’ fixed salaries.
Legal experts also questioned the ability of the financial regulator to retract bankers’ salaries.
“A fixed-pay clawback regime would be a sea-change in the UK and create administrative and legal costs for the banks,” Caroline Doran, an employment partner at London law firm Royds, told the FT.
Friction over bankers’ salaries has long existed between Brussels and Britain. The City of London, Europe’s financial capital, is widely seen as a core driver of the British economy.
Whether the FCA will revoke reckless bankers’ salaries in the future remains to be seen.
In a lax regulatory climate, critics say policymakers tend to back the interests of City financiers and big banks to the detriment of UK taxpayers.
Joel Benjamin, a leading researcher at UK ethical finance think tank Move Your Money, argues the City is characterized by widespread impunity that breeds financial crime.
Tuesday’s committee hearing coincides with mounting controversy over HSBC’s alleged use of murky Swiss financial terrain to facilitate widespread tax evasion.
Accounting giant PwC has also recently come under fire over its suspected role in mass marketing tax avoidance schemes to profit hungry corporations.