U.K. Bonus Rules Should Cover 2,500 Banks, Funds, Financial Regulator Says

The U.K. financial regulator proposed expanding the firms covered by rules on bonuses and compensation from 27 to 2,500 banks, building societies and hedge funds to comply with European Union legislation.

The proposed compensation rules require that at least 40 percent of bonuses be deferred for at least three years, the Financial Services Authority said today in a statement on its website. At least 50 percent of the bonuses should be paid in shares. The previous FSA rules only applied to the largest lenders operating in the country.

Regulators worldwide have been scrutinizing executive compensation after it was blamed for excessive risk-taking that contributed to the worst financial crisis since World War II. European Union governments agreed on June 30 that directors of banks who received public money will be forced to justify their bonuses and lenders will have to report the number of people earning more than 1 million euros ($1.3 million) to regulators.

“The FSA is implementing what has already been decided at European level,” said Nicholas Stretch, a tax lawyer at London- based law firm CMS Cameron. “Market participants will be disappointed to detect enthusiasm on the part of the FSA to implement changes with such vigor and in such detail.”

EU governments blocked plans by some lawmakers to limit bankers’ bonuses to half their total pay during talks to set tougher capital and remuneration rules for lenders.

The new rules require at least 60 percent be deferred when the bonus is more than 500,000 pounds ($779,550), the FSA said.

Fixed Income, Equities

Employees who “have a material impact on a firm’s risk profile” will fall under the new rules, the FSA said.

Typically the employees covered will be heads of business areas such as fixed income, equities, trading, commodities and commercial and investment banking, the FSA said. Heads of human resources departments and information technology will also fall under the new rules.

The British Bankers Association, the trade group for the industry, said any changes to the bonus system must be global and warned that business will flow to countries that have lighter rules.

“U.K. banks recognize that reform of pay structures plays a significant part in restoring confidence in the industry,” the BBA said in an e-mail. “A global industry needs to conform to global standards, as any country which takes a lighter approach will prove to be a magnet for business.”

Capital Base

The FSA told companies not to risk harming their capital base with bonuses and said it will hold an annual review “on a forward looking basis” to assess the largest firms’ compliance with the rule.

The FSA was one of the first regulators to introduce bonus curbs last year and there had been concern that it was “front- running” on the issue and could hurt U.K. banks, said Tamara Cizeika, a senior associate at London-based law firm Eversheds LLP.

“Although there are still issues to work through, the fact that the EU has largely caught up should mean that there is a more level playing field,” Cizeika said.

The regulator will also focus on the methods banks use for calculating bonuses.

“Last year we paid close attention to how firms adjust for risks after the pay-out of bonuses,” the FSA said. “This year we intend to focus on the techniques used by firms to take account of risks when calculating their bonus pools prior to payout.”

The FSA invited comment on the proposals contained in CP10/19: Revising the Remuneration Code by Oct. 8 and said it will make a statement in November. The rules come into being Jan. 1 2011.

To contact the reporters on this story: Nandini Sukumar in London at nsukumar@bloomberg.net.