Defer bonuses for 10 years to avert risk-taking, report suggests
The long-awaited parliamentary review of the British banking system has advocated jailing senior executives who are found guilty of reckless misconduct.
“Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility,” explained the report from a cross-party group of MPs.
The committee recommended a new ‘senior persons regime’ to replace the current ‘approved persons regime’. This would assign major responsibilities within banks to specific individuals, who were then held accountable for decisions and standards within their given areas.
A criminal offence of reckless misconduct in the management of a bank should be created for these ‘senior persons’, and should carry a custodial sentence, added the MPs.
The recommendations were in the final report from the Parliamentary Commission on Banking Standards, set up by chancellor George Osborne last year after a number of scandals in a sector already reeling from the financial crisis of 2008.
Remuneration, standards, culture and the role of government and regulators across the industry had already been examined by the commission.
The end review recommended that a greater proportion of bankers’ pay and bonuses should be deferred, and for longer – by up to 10 years. It added that any outstanding incentives should be cancelled in the event of a state bail out of a bank.
The committee went on to outline other failings in financial institutions, such as an overly masculine culture. It called for more women on trading floors and suggested that banks should be required to publish gender ratios.
The commission added that the action of governments and financial regulators “have contributed to the decline in standards”, and called for faster reforms and better enforcement.
“Risks and rewards in banking have been out of kilter,” said Andrew Tyrie, the Conservative MP who chaired the parliamentary commission. “Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace.
“The health and reputation of the banking industry itself is at stake,” he continued. “Many junior staff who may have done nothing wrong have been impugned by the actions of their seniors. This has to end.
“This is not a bank bashing report,” insisted Tyrie. “I hope the higher standards it advocates will help revive the banking sector and the UK generally.”
The CIPD welcomed the commission’s findings, but warned that its recommendations were insufficient in themselves to change banking culture.
The institute said that improved leadership from the executive board to the front-line, more employee consultation opportunities and a greater focus on training and development were required.
“Banks need to re-evaluate their core purpose and the values which should define their behavioural expectations and norms,” explained CIPD chief executive Peter Cheese. “A key part of this is to re-consider their longer term duty to customers, shareholders and the wider stakeholders they impact, including the communities in which they work.
“Employees need to be able to understand and relate to the purpose and values at every level. This needs to be reinforced through how leaders and managers behave on a daily basis and how they are recruited, managed, developed and promoted.”
He added: “If we define corporate values in practical and meaningful ways, we can define organisational cultures that are truly values-driven and which are lived, breathed and consistently reinforced through actions and behaviours day-in-day out, from top to bottom.”
Research released by the CIPD earlier this month revealed that two-thirds of bankers felt that some people in their company were still being rewarded in a way that incentivised inappropriate behaviour.
Only four in ten of the 1,000 respondents in the banking sector said that there had been an initiative led by senior executives to change the culture in their organisation over the last 12 months.
The report, Rebuilding Trust in the City, also found that three in ten employees thought senior bankers should be imprisoned where there was evidence of gross misconduct or negligence leading to substantial failure – such as a taxpayer bailout.