Banks Flouting Bonus Rules in Denmark Set to Be Named by FSA

Denmark’s financial watchdog will begin naming banks that fail to comply with bonus restrictions amid a crackdown on incentive programs found to have helped fuel a property bubble.

Spot checks into bonus practices, which begin this year, come as police look into how remuneration structures at Danske Bank A/S influenced employees accused of fixing bond prices in 2009. Public Prosecutor Hans Fogtdal said this week he’s trying to find out whether the prospect of a bigger pay check tempted employees at Denmark’s biggest bank to rig prices and inflate trading results.

The alleged manipulation of mortgage bond rates, which police say made client redemptions more costly, coincided with a fivefold jump in Danske’s first-quarter 2009 trading income. Chief Executive Officer Thomas Borgen said Feb. 7 the bank is cooperating fully with the authorities. Danske has suspended the six employees being probed. Police are also investigating the bank and its mortgage unit.

Denmark’s FSA will “disclose inspection reports covering the remuneration policies and practices in individual institutions,” Julie Galbo, the regulator’s deputy director general, said yesterday in an e-mailed response to questions.

Clawback Clauses

Danske may be able to reclaim bonuses paid to the employees being investigated, under rules introduced since 2010 restricting incentive pay and giving the FSA greater powers to scrutinize compensation packages.

“We live up to the law and have integrated” regulations “into our remuneration policies,” spokesman Kenni Leth said in an e-mailed reply to questions. He declined to comment on whether the bank has clawed back bonuses in the past or whether it has any plans to do so in the future.

Shares in Danske Bank fell 1 percent as of 3:53 p.m. in Copenhagen, Jyske Bank A/S lost 0.6 percent, Sydbank A/S dropped 2.4 percent and Spar Nord Bank A/S declined 1.8 percent. Denmark’s benchmark index of the country’s 20 most-traded stocks slipped 0.6 percent.

Bonus rules for bankers in Denmark cap incentive pay at 100 percent of base salaries. That compares with a 200 percent cap in the European Union.

Pay Gap

How banks reward their employees has come under greater scrutiny as the gap between financial industry pay and salaries earned elsewhere widens. Danish banker pay gains outpaced increases in other industries as much as fourfold from 2004 through 2008, according to a government-commissioned study into the causes of the nation’s banking crisis, known as the Rangvid report.

Denmark introduced banker bonus limits more than three years ago, after executives at a number of community banks started paying themselves bonuses that dwarfed their fixed pay.

The former CEO of Roskilde Bank A/S, once Denmark’s 10th largest lender, was awarded stock options that peaked at almost 140 million kroner ($26 million) in 2007, according to the Rangvid report. A year later Roskilde Bank’s failure marked the start of Denmark’s financial crisis, in which 62 lenders were wiped out.

The Danish FSA asked banks two years ago to identify “risk-takers” as part of its effort to monitor remuneration practices. According to a November 2012 report, 25 percent of the country’s biggest financial institutions claimed no one on their staff took any risks, a result the regulator characterized as “surprising.”

FSA Scrutiny

“We continue to focus on the Danish financial institutions’ remuneration practices,” Galbo said. “We are currently working on a benchmark report similar to the one in 2012, which we plan to publish later this year.”

Even after Denmark’s property crash ripped through the country’s financial industry, bank employees continued to make more than their Nordic peers, according to statistics compiled by employer associations in the five countries. Danish banker pay in 2012 was 16 percent higher on average than salaries in Sweden, the latest data show. Real wages in Denmark and Finland fell in both 2012 and 2011 as inflation outpaced pay gains.

Variable pay at Danske fell last year to 5.9 percent of total salary, compared with 6.8 percent in 2012, according to the bank’s annual report. Variable pay for employees outside the bank’s top management and designated as “material risk takers” shrank to 26 percent of total pay from 39 percent in 2012, the report showed.

Suspended Bankers

Danske hasn’t revealed details on the positions held by the employees who were suspended. Leth declined to comment on how they were remunerated.

The regulator said it won’t comment on Danske Bank’s investigation since handing the matter over to the police at the beginning of the month.

Soeren Gade, deputy director at the Danish Bankers Association, said the group won’t comment until the FSA’s findings are made public.

“That is part of their remit, and we will comment when the results are published,” Gade said in an e-mail in response to questions.

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