Carney Faces BOE Pay Tension as Merger Threatens Culture ClashSvenja O’Donnell and Ben Moshinsky
Bank of England officials absorbing an influx of Financial Services Authority staff face potential tensions on pay thrown up by the merger of their institutions.
The management is confronting a heightened challenge in maintaining morale as employees of the U.K.’s banking regulator join an organization where colleagues tend to be paid less, according to two people with knowledge of the matter. For example, FSA department heads earn up to 200,000 pounds ($297,600) a year, compared with a 158,108-pound maximum for an equivalent job at the BOE.
The central bank is taking on part of the FSA’s responsibilities and about 1,300 of its staff as it assumes new powers to oversee banks in a revamp of regulation. The pay disparity presents incoming Governor Mark Carney with a potential headache as he prepares to take on Mervyn King’s decade-long struggle to retain staff whose earnings can easily be topped in London’s financial industry.
“It’s a challenging aspect of reintegration,” said Simon Wells, who led an economics team at the Bank of England before becoming chief U.K. economist at HSBC Holdings Plc in 2011. “All the BOE noises have been to soothe and reassure, but how you can do that, faced with the cold hard numbers, is another matter.”
Within the FSA, the salary range for a head of department is between 95,000 pounds to 200,000 pounds, data on its website show. For a BOE division chief, that range is 86,689 pounds to 158,108 pounds, according to a 2012 document.
At FSA director level, staff earn up to 281,000 pounds, almost as much as the 305,000-pound salary commanded by King. Salaries of BOE executive directors, the level that includes Chief Economist Spencer Dale, go from 160,983 pounds to 209,967 pounds, according to the central bank’s annual report.
A Bank of England spokesman declined to comment on pay disparities and the effects of the merger.
An official said in January that the Bank of England intends to limit the increase in its wage bill to 1 percent after two years of frozen pay. That restraint contrasts with the increase in remuneration for Carney compared with King. The Bank of Canada governor, who takes over in July, is getting a 480,000-pound base salary -- about 57 percent more than King’s pay -- as well as a 250,000-pound housing allowance.
“Integrating a whole new directorate at a time when pay is frozen presents some challenges,” said Robert Wood, an economist at Berenberg Bank in London who replaced HSBC’s Wells at the BOE before he too left last year. “There’s no guarantee they’ll be paid a comparable amount, as you can’t adjust it.”
The transfer of staff to the BOE is part of an overhaul of bank regulation in the aftermath of the financial crisis driven through by Chancellor of the Exchequer George Osborne. The FSA was originally established by Gordon Brown when he was finance minister in 1997 as an organization to consolidate regulation of Britain’s banking and insurance industries.
The change will see the FSA dissolved and its powers transferred to the Prudential Regulation Authority, which will be a unit of the BOE, and the Financial Conduct Authority, an agency to regulate consumer financial services and markets.
The PRA will be responsible for setting capital, liquidity and bonus rules, and will oversee the stability of the bank and insurance industries. It will be based at 20 Moorgate in the City of London, the former headquarters of broker JP Morgan Cazenove Ltd., and employ around 1,300 people. The BOE, situated a five-minute walk away, has about 1,800 staff, according to its most recent annual report.
The salary issue is part of a wider culture clash created by the merger. Both institutions have developed differently and there are challenges in absorbing so many people, said Lindsay Thomas, a former FSA director who is now an adviser at risk management company Sustainable Risks.
“It’s a significant jump in numbers and the sheer size will be tricky to manage,” he said. At the FSA, “a lot of the senior people are ex-bank and they’ll slot right in, but for those lower down, the culture will get into them gradually like the cold seeping in.”
The BOE has acknowledged the scale of the integration, with David Lees, who chairs the Court of Directors, the Bank of England’s governing body, saying in the 2012 annual report that “none of us on the court underestimates the management challenge involved.”
Both institutions’ differing views on pay have been played out in the public domain. FSA Chairman Adair Turner defended regulators’ wages when questioned by lawmakers in February.
“When you’re paying people to do a public service, you can’t pay them a small fraction of what they would get in the industry,” said Turner, who earned 426,000 pounds last year. “If you end up trying to keep them there for a 10th of what they’d get elsewhere, you’d have difficulties. Most of our best people could walk out for more money.”
In contrast, King said in 2011 that the BOE won’t have to offer “vast sums” to recruit regulators, and wants people who are “committed to a life of public service.”
“I don’t think that we will want to mimic some of the salary scales at the FSA,” he told lawmakers. “Nor do I think that we want to attract people who take short-term periods out of the financial-services sector to come and get two to three years’ experience and then go back. We want people to make careers as a regulator.”
The central bank already had to contend with a string of resignations of its economists before the merger. Brunello Rosa, a member of the Sterling Markets Division, left in December to join Roubini Global Economics LLC. Berenberg’s Wood resigned six months ago.
“Given the Bank of England has had a pay freeze for two years, I know a lot of people who are unhappy with their pay,” said Chris Apostolou, director of London-based recruitment firm Arbitrage Search and Selection Ltd. who has previously headhunted Bank of England staff. “Many are looking to leave, especially when they typically increase their basic by 50 percent or more when moving to the private sector.”