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FSA Orders Bonus Clawback Over PPI Scandal

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FSA Orders Bonus Clawback Over PPI Scandal

Post  Panda on Thu 2 Feb - 10:25

Exclusive: FSA Orders Bonus Clawback Over PPI Scandal

February 01, 2012 7:00 PM

Britain's top bankers were today ordered to demonstrate urgent efforts to
reclaim money paid to executives involved in the insurance misselling scandal
that gripped the industry last year.

I have learned that the bosses of the major banks were summoned to a meeting
this morning with regulators from the Financial Services Authority (FSA).

Those who attended the meeting were, I'm told, Lord Turner and Hector Sants,
chairman and chief executive of the FSA; Paul Tucker, deputy governor of the
Bank of England; bank chief executives Stephen Hester of Royal Bank of Scotland,
Barclays’ Bob Diamond, Stuart Gulliver of HSBC and Antonio Horta-Osorio of
Lloyds Banking Group. Richard Meddings, the finance director of Standard
Chartered, was also there.

The meeting included a much broader discussion of regulatory reforms taking
place in the UK and international banking sector.

But I’m told the most topical debate was that relating to how banks planned
to penalise executives involved in the misselling of payment protection
insurance (PPI), which last year saw the industry collectively set aside almost
£6bn to compensate victims of the scandal.

Sants is understood to have told the bankers that they must outline to the
FSA how they have sought to reclaim bonuses awarded in previous years to senior

It underlines the fact that whether from shareholders, Government or
regulators, Britain’s banks are coming under the most relentless pressure to
curb bonuses that they have ever experienced.

Sir Mervyn King, Governor of the Bank of England, and the FSA have recently
told the big banks that they should reduce bonus and dividend payments in order
to conserve capital in the face of the Eurozone crisis.

This week, of course, Hester agreed to waive his 3.6m-share bonus for 2011
under intense pressure from all sides of the political divide. And Horta-Osorio,
who took a two-month leave of absence at the end of last year, asked Lloyds’
board not to consider awarding him a bonus for the year.

The Financial Times reported last month that the banks had been warned to
reduce the bonus pools they award for 2011 because of PPI misselling. But the
FSA's effort to hit bankers in the pocket (where it tends to hurt bankers most)
goes beyond that. At today's meeting, I’m told, Sants said that the past pay of
those in the PPI ‘chain of command’ should be robustly targeted by the high
street lenders.

It's a campaign that will no doubt engender wide public and political support
– but that won’t make reclaiming millions of pounds from culpable bankers easy
to achieve.

This is why.

The FSA’s remuneration code, introduced in 2009 following the G20 summit in
London (one of Gordon Brown’s self-proclaimed triumphs as prime minister),
includes a provision for clawing back money paid to all bankers known as ‘code
staff’ (reflecting their seniority within their institution).

I’m told that the regulator acknowledges that it cannot apply this code
retrospectively – and given that the vast majority of PPI misselling took place
before 2009 and when clawback was not an established feature of bankers’
employment contracts, that would appear to reduce the number of senior bankers
who can be targeted for financial punishment.

There’s also the point that many of those who orchestrated the sale of PPI
policies have now left their roles in the banking industry.

Interestingly, those erstwhile bankers would include Fred Goodwin, who ran
RBS during the most frenzied era of PPI misselling.

That said, because so much of senior bankers’ pay is now deferred over
three-year periods, the FSA is confident that there is sufficient scope to
achieve some degree of clawback.

That’s something former executives at Lloyds Banking Group – including Eric
Daniels, who stepped down as chief executive of the state-backed bank last year
– are discovering through their lawyers. Lloyds is trying to reclaim up to half
of the £1.4m bonus Daniels was awarded last year, which I’m told he
(unsurprisingly) believes is unjust.

It’s unclear how far the banks will go to be explicit about recognising the
impact of the PPI charges in their bonus decisions for 2011. The remuneration
committee of Barclays, for example, is due to meet tomorrow, and it will be
interesting to see whether Diamond's 2011 bonus will be affected despite the
fact the he was not directly involved with Barclays' retail bank during the
period of misselling.

One banker said to me tonight that he sympathised with the FSA campaign to
claw back previously-awarded bonuses but suggested doing so successfully was “a
legal minefield”.

Nonetheless, all the banks will come under intense pressure to disclose with
their annual results this month exactly how far they have reduced their bonus
pools and how much money they have clawed because of the impact of PPI on their

The FSA and the banks all declined to comment on today’s meeting.

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