The report from the Parliamentary Commission on Banking Standards includes recommendations on remuneration, diversity, and whistleblowing.
On June 19, the Parliamentary Commission on Banking Standards (the Commission) published its report "Changing banking for good" (the Report). The Report, which is nearly 600 pages long, contains a number of recommendations aimed at raising banking standards in the UK. Whilst much of the initial media coverage of the Report has focused on the proposed criminal offence that would make it easier to send top bankers to jail for "reckless conduct", the Report also contains important recommendations in respect of bankers' pay, the role of chairmen within financial institutions, and ensuring that banks have an effective and robust whistleblowing regime.
Financial institutions with operations in the UK should be aware of the Report's recommendations, which, if approved by the UK Treasury, could be enacted in UK legislation.
Following a number of scandals involving the banking industry, the Commission was created in July 2012 to conduct an inquiry into professional standards and culture in the UK banking market. The Commission has taken six months to gather evidence from more than 250 witnesses and produce the Report, which has allegedly cost £850,000. The Report's recommendations focus on the following themes: making senior bankers personally responsible; reforming bank governance; creating better functioning and more diverse markets, which ultimately will raise standards; and reinforcing the power of regulators.
The Report calls the remuneration structure in investment banking "thoroughly dysfunctional". It claims that remuneration has incentivised misconduct and excessive risk taking, thereby instilling a culture where poor standards have become the norm.
The Report therefore calls for a radical reform of the way remuneration is calculated as well as new policies to end pay structures that reward failure and do not take into consideration long-term risk. The Report recommends the following:
Importantly, the Report does not support the recent European Banking Authority plan to cap bankers' bonuses at 100% of an individual's basic salary or 200% where express shareholder support has been given.
Women on the Trading Floor
In light of recent efforts to promote women to boardroom positions because of the recognised benefits that a diverse workforce can bring, the Report highlights the lack of women on the trading floor. It further recommends that the main UK banks should publish a gender breakdown of their trading operational staff and, where there is a significant deficit of women, set out what measures they intend to take to redress the balance in the next six months and annually thereafter.
The Role of Chairmen
Evidence presented to the Commission suggested that the chairmen of banks were often "weak" and too close to the banks' chief executive officers to provide a genuine "check and balance" on all of the banks' executives. The Report highlights the very valuable role that a chairman should play within an organisation and, to support this, recommends that all banks should have a full-time chairman who would not usually be expected to have any other significant commercial roles.
The Commission was surprised by evidence it received related to banking staff ignoring and failing to report misbehaviour within financial institutions. To improve this, the Report recommends the following:
The British Bankers' Association has described the Report as "the most significant report into banking for a generation." Whilst the remit of the Report was to make recommendations for reform, the UK Treasury will now consider the Report and is committed to producing a full response within a month. Its response is expected to include proposals for legislative action where it is needed to implement the recommendations.
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. For more information on the European Banking Authority's guidance on bonus caps, see our 24 May 2013 LawFlash, "European Banking Authority Guidance on Financial Services Bonus Cap", available here.