Downing Street Says

Asked for more details on the Prime Minister’s idea of a bonus claw-back scheme, the Prime Minister’s Spokesman (PMS) replied that clearly this was something that needed to be discussed with the banks and others, and worked through. The Prime Minister set out two main principles this morning in relation to bank bonuses. The first was that there should be no reward for failure, and we were clear, particularly for the banks that we had significant shares in, that anybody associated with a loss should not receive a bonus. And secondly, and this was where the claw-back idea came in, bonuses should be based on long-term sustained performance. So it could be “for example” that people take bonuses in the form of shares, and that these are held on their behalf and depending on their performance over time, the value of these shares could be adjusted.

Asked if this was about bonuses accumulating and then being reduced if necessary, the PMS replied that this was the basic idea. The Prime Minister this morning was setting out some of the principles behind what our approach might be in the future.

Put that during the Treasury Select Committee yesterday both RBS and Lloyds basically said that they could not touch the bonuses as they were contractually obliged, the PMS replied that there was a number of separate issues here. There were clearly a number of inherited legal commitments in relation to particular individuals, and as we had been making clear the Treasury and UK Financial Investments would be examining the exact nature of the legal commitments and how watertight they were. But what the Prime Minister was talking about here was what some of the principles should be going forward in terms of how bonuses and bonus systems should operate in banks.

Put that the Prime Minister had been talking about principles for quite some time, and today was the first time that he had talked about those two specific measures, the claw-back and the idea of penalties, and asked how he saw the penalty system working and how soon could people see specific changes, the PMS replied that this was something that the FSA were looking at, and they had been looking for a while at exactly how they should take into account a financial institution’s remuneration system when they assess what the appropriate regulatory framework should be for that particular institution. In other words, if the FSA believed that because of the particular pay and bonus structures that were in place that resulted in an institution taking unnecessary risks, then that would have to be taken into account when they decided what sort of controls they put in place to regulate that particular financial institution.

Asked how soon we could see legislation or new frameworks for regulation, the PMS replied that the most immediate issue was the decisions that were taken in relation to the banks in which we had significant shareholdings, in particular RBS.

Asked if that was something the Government was already doing, the PMS replied that as we had been saying, the UKFI were in discussion with RBS about exactly how they deal with bonus payments that they need to make this year.

Asked whether we were pre-empting the David Walker review, the PMS replied that this was very separate from the Walker review. The Walker review was very much about what we needed to do to strengthen bank governance, including how they dealt with issues in relation to remuneration. But despite the way in which it was reported at the weekend, the Walker review was not seen as the solution to issues relating to bonuses now. There was action that we had already taken last October in relation to board members and their bonuses for last year. There were decisions that need to be taken for how we deal with this year, and for the future. This was part of a wider debate about how banks operated going forward, and what the governance arrangements were about banks in the future, and that was what the Walker review was looking at.

Asked about those associated with a loss not getting a bonus in banks where the Government had a significant share, the PMS replied that this was a more general principle and something that Stephen Hester for example was making clear yesterday.

Asked if this principle had been agreed with the banks, the PMS replied that certainly in relation to RBS, they had been making it clear that that was a principle that they would apply.

Asked if no reward for failure going forward was true of “golden parachute” type contracts, the PMS replied that the Prime Minister thought that there was a general issue about how the bonus culture has operated in banks in recent years, and he made that clear at the Committee this morning. This was clearly something that needed to change, and that was why we had taken action already in relation to what we did last October, this was also a live issue with the banks now, and this was something more general that David Walker was looking at.

Put that John McFall made the point that the Prime Minister and MPs more generally were being lumped in with bankers in the public mind, and asked if this troubled him, the PMS replied that the Prime Minister was concerned about doing the right thing for the economy, and the right thing for the country. We were not interested in supporting the banks for the sake of supporting bankers, we were interested in making sure that the banks operate so they can lend to individuals and lend to businesses, and to ensure that we could get the economy moving.

Asked if there was any contact between the FSA and the Government about the potential problems at HBOS, the PMS replied that the Prime Minister dealt with that question this morning.

Put that the Prime Minister gave two slightly different answers, the PMS replied that in relation to that the Treasury had quite a lot to do at the moment, and it was quite difficult for them to go through every single piece of paper over the last ten years at very short notice. In relation to the specific issue that was raised overnight, which was the issue about the 2002 review, the Treasury were clear that they had no record of being informed of that particular review. Hector Sants “the Chief Executive of the FSA” had been saying today that it would not be normal practice for the FSA to communicate individual supervisory issues to other members of the tripartite committee. It was important to remember that we set up the FSA as an independent regulator, and it was the FSA that took decisions and took action in relation to individual institutions. Ministers in the Treasury were responsible for the framework, and responsible for wider systemic issues. So if there were any wider systemic issues then the Treasury would have been expected to be informed. But in this case, as the Prime Minister had been saying this morning, and the FSA had also been making clear, the action that they took in relation to HBOS was not unusual. This was a normal part of the regulatory process, there was a number of issues that they identified, they recommended a few changes that HBOS should make, and then was then implemented. This was something that happened quite regularly as part of the normal functioning of the regulatory system.

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» Thursday, February 12, 2009

Bonuses

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