Out-Law News 3 min. read

UK market fairness review could extend bank remuneration rules such as mandatory bonus 'clawback' more widely

Bond, currency and commodities traders and brokers outside large banks and similar institutions could have bonuses deferred, and those who are found to have been involved in benchmark manipulation or other forms of market misconduct could have bonuses granted to them in previous years adjusted or 'clawed back', as the outcome of a market review, the Bank of England has suggested in a recent consultation document.

The regulator is currently developing proposals to improve the "fairness and effectiveness" of fixed income, currency and commodities (FICC) markets (69-page / 1MB PDF), as part of a UK government review announced earlier this year, and expected to report by June 2015. As part of that consultation, the Bank has suggested extending the regulation of remuneration to hedge funds, interdealer brokers and "other types of firm engaged in the FICC market", perhaps going as far as a proposal for senior bank managers to be chargeable with a  new offence, and subject to bonus clawback, up to seven years after being awarded.

Remuneration expert Graeme Standen of Pinsent Masons, the law firm behind Out-Law.com, said that an extension of the detailed bank remuneration or similar rules to non-bank financial services staff with a goal of improving "conduct risk" management and supervision outside a strictly prudential context would be a significant development.

"The logic seems to be that the approach already taken in the bank remuneration code, to promote better prudential risk management and so better financial stability for the economy as a whole, could also be applied to other public policy goals, such as promoting proper market conduct," he said. "The remuneration code requires incentive terms and policies to motivate relevant employees to adopt the right behaviour and penalise them for the wrong behaviour."

"Senior bankers are already subject to mandatory bonus clawback and malus for conduct that results in significant losses, or is not fit and proper, so the remuneration code already applies to misconduct by some FICC market participants, and may increasingly do so, as standards of fitness and propriety adapt in the light of well-publicised failings and the fairness review itself," said Standen.

Matthew Findley, a share plans and incentives expert at Pinsent Masons, added: "This has already cropped up less formally to some extent, as non-bank financial services incentives have already been subject to regulatory intervention to secure proper treatment of customers under the EU MiFID directive - even though that directive does not set out detailed remuneration rules. In contrast, the banking directives CRD IV and its predecessors, set out detailed remuneration rules from the start: CRD IV is now the source of the main bank remuneration code."

The chancellor announced that the government and market regulators were collaborating on a review of the UK's wholesale financial markets as part of his annual Mansion House speech in June. The Fair and Effective Markets Review will look at a wide range of wholesale markets, with a particular focus on those in which recent allegations of the most serious misconduct have arisen, and is due to publish its final report in June.

The government has already announced that it will extend the criminal offence of making false and misleading statements in relation to LIBOR to some of the main rates applying to currency, fixed income and commodities markets as part of the review. Affected rates include the Sterling Overnight Index Average (SONIA) and Repurchase Overnight Index Average (RONIA), which are reference rates for overnight index swaps; the WM/Reuters 4pm London Fix, which is the dominant global foreign exchange benchmark; and ISDAFix, the principal global benchmark for swap rates. Commodity rates that would fall within the new regime are the London Gold Fixing and LBMA Silver price rates; and the ICE Brent futures contract, which is the world's most-traded crude oil future.

The consultation split potential issues and solutions into structural ones, such as competition and benchmarks; and conduct issues, such as governance, incentives and penalties. It set out a number of proposals including a global code of conduct; greater use of electronic surveillance on trading floors; stronger penalties for staff that breach internal guidelines; improved transparency, for example through greater use of electronic platforms; and potential structural changes to benchmarks.

As part of the review, regulators will have to consider whether ongoing regulatory, organisational and technological changes are likely to address the issues that it identifies and whether new rules are needed. For each recommendation, it will have to consider whether that change is one that can be made by the industry alone or by the UK government, or whether it would require wider discussion with the international authorities to implement.

Minouche Shafik, chair of the review and deputy governor of the Bank of England, said that previous "unacceptable abuses" had "severely damaged" confidence and trust in the markets.

"Fixing these markets is essential to restore trust – among participants, and among the public," she said. "That requires market practitioners to recognise current market shortcomings and engage with each other and the official sector to enact lasting change to create real markets that are fair, effective and trusted by all."

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