17th November 2014
Bank of England Governor Mark Carney has urged that new compensation structures are needed to “help re-build trust in financial institutions”.
Delivering a speech on the future of financial reform in Singapore, Carney, who is also chair of the Financial Stability Board stated that “trust between institutions, counterparties and investors is central to maintaining the ability of finance to function”.
He added: “We want to see industry content and finance taking justifiable pride in its contribution to society. That is far from straightforward when even six years on from the crisis and public bailouts, triggers for public opprobrium are plentiful.”
Carney’s speech comes less than a week after regulators in both the UK and US slapped record fines on five major banks with a combined total fine of more than £2bn for rigging foreign exchange markets. He noted that such misconduct has gone on “long after banks had already been fined for abusing interbank interest rate benchmarks”.
He added: “The repeated nature of these fines demonstrates that financial penalties alone are not sufficient to address the issues raised. Fundamental change is needed to institutional culture, to compensation arrangements and to markets.”
Carney went on to argue that given the succession of scandals, the finger could no longer be pointed at just a few individuals. “It is simply untenable now to argue that the problem is one of a few bad apples. The issue is with the barrels in which they are stored,” he continued.
The BoE governor said it may be the time to start looking at salaries and not just bonuses. He said: “Standards may need to be developed to put non-bonus or fixed pay at risk. That could potentially be achieved through payment in instruments other than cash
He added: “In the UK, we have introduced a remuneration code prescribing that payment of bonuses must be deferred for a minimum of three years and, after payment, be exposed to clawback for up to seven years. Bonuses can be reduced – or clawed back – if evidence emerges of employee misconduct or failures of risk management.”
Carney concluded that the next phase of reform will give businesses and households the confidence that finance, “far from being a threat to them, is here to serve them in their work to deliver prosperity”.
He said: “Reform should stop only when industry and society are content and finance justifiably proud.”