RBS’s Libor Fine Bonus Pledge Attacked as ‘Creative Accounting’

Royal Bank of Scotland Group Plc’s pledge to recoup 300 million pounds ($470 million) of its fine for rigging interest rates from bankers’ bonuses was criticized by British lawmakers as an exercise in “creative accounting.”

RBS, Britain’s biggest publicly owned lender, was fined $612 million by regulators in the U.K. and the U.S. last week for rigging the London interbank offered rate and similar benchmarks. The Edinburgh-based lender said it would recoup the U.S. portion of the penalty by shrinking the bonus pool and clawing back awards from previous years.

Chief Executive Officer Stephen Hester and Chairman Philip Hampton, giving evidence to the Parliamentary Commission on Banking Standards in London yesterday, both declined to give lawmakers details of how much the bank had been planning to set aside for bonuses before factoring in the penalty for Libor.

“We weren’t given sufficient confidence that the arrangement for funding the fines from bonuses will do what it says on the tin,” Andrew Tyrie, the commission’s chairman, said in a statement. “This must be more than an exercise in creative accounting. It would be all too easy to artificially adjust a bonus pool, the size of which is yet to be decided.”

RBS paid its investment bankers about 390 million pounds in bonuses for 2011, the bank said in February last year. About half of RBS’s bonuses for 2012 can be clawed back, Hampton said.

“We haven’t decided on our bonus pool yet,” Hampton said. “We’ve got to be very clear and public to this committee and elsewhere that we’ll exercise clawback properly,” he added.

‘Relatively Modest’

Hampton also defended Hester’s 4.8 million-pound compensation, describing it as “relatively modest.” Hester earns 1.2 million pounds in base pay and can potentially earn three times that amount in long-term incentive payments. He has already turned down a bonus potentially valued at as much as 2.4 million pounds for 2012.

“These are theoretical amounts, which Stephen hasn’t received,” Hampton said of the incentive awards. “He has been in one of the most challenging jobs and he has been one of the least paid.”

Earlier, senior RBS bankers told the committee they believed it was impossible to rig Libor, less than a week after regulators found traders at the lender manipulated the benchmark for more than four years.

“None of us thought of this as a risk that needed this level of attention,” John Hourican, who resigned as investment-banking head after the fine, told the hearing.

More than a dozen traders made hundreds of attempts to manipulate yen and Swiss franc Libor between mid-2006 and 2010 to benefit their trading positions, sometimes colluding with other firms, the U.S. Commodity Futures Trading Commission said.

‘Impose Standards’

“It just didn’t occur to anyone that it could be fiddled,” former investment banking chief Johnny Cameron told lawmakers. “You can’t impose standards on people who don’t wish to be moral.”

RBS received the world’s biggest banking bailout in 2008, and is 81 percent owned by the British taxpayer. Treasury Minister Greg Clark described the lender’s fine as a “day of shame” for British lenders.

“For 2009 and 2010, we focused almost exclusively on things that broke the bank,” said Hourican. RBS had suffered a “cardiac arrest,” he said. “Fixing that occupied everybody.”

RBS managers didn’t view the risk that traders could rig the benchmark for profit as “significant,” head of markets Peter Nielsen told lawmakers. He said he had considered resigning over Libor, but Hourican had persuaded him to remain.

“It was my opinion that the bank would be better served by Peter remaining at the bank,” Hourican said. “It was my recommendation to the board that Peter would be better serving all stakeholders were he to remain in post.”

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