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Will FCA bonus rule cut mis-selling risk? We ask 4 wealth managers

Following the FCA's banking proposals, we asked wealth managers whether a 7-10 year bonus clawback period would be effective?

Bankers' bonus subject to 10-year clawback period

The Financial Conduct Authority and Prudential Regulation Authority plan to increase the clawback period for bankers’ bonuses to up to 10 years and extend the deferral of remuneration by a minimum seven years for senior managers.

New banking rules coming in next January extend the current clawback period to seven years from the date of award, but the regulators have proposed that firms are allowed to extend this to 10 years for senior managers if it has launched its own internal inquiry into a potential material failure.

Under the tough new rules, firms are currently required to defer at least 40% of awards for ‘material risk takers’ (MRTs) and at least 60% of awards for directors and other high earners with total variable remuneration of £500,000 or more for three to five years on a pro rata basis.

But will the measures curb mis-selling? We ask four wealth managers.

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Alan Beaney, Investment Director, R.C. Brown Investment Management, Bristol

‘In theory, the Financial Conduct Authority’s proposals are a good idea because they will encourage bankers to take a more long-term view. Hopefully, this will dissuade them from selling inappropriate products for short-term gain (the consequences of which can be seen in the payment protection insurance and the pensions misselling scandals of recent years).

‘However, like all good ideas, there are usually a few unforeseen consequences. Employers may well change compensation packages so bonuses form a smaller part of the total, thus reducing the impact of any clawback.

‘When a firm wants to recruit someone tied into a long bonus arrangement, they typically pay a hefty welcome package to compensate him for his potential loss- this effectively bypasses the proposals. Tying up people’s bonus entitlements up over a longer period of time could also reduce the mobility of the labour market.

‘Imposing these regulations just in the UK runs the risk of reducing the attractiveness of the UK as a place to do business.

‘The proposals are sensible but in practice I doubt they will have the desired effect. The City is very innovative when it comes to adapting to rule changes such as this.’

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Amanda Tovey, Head of Direct Equities, Whitechurch Securities, Bristol

‘In essence, the idea of making bankers more accountable over a longer timeframe seems a good one. However, there are difficulties with this approach. The current rules allow clawback over three to five years but these laws have not long been in place. They are as yet untested in UK courts and are contrary to employment laws in some parts of the world. It is therefore unclear how this would work in a globalised banking industry where many top level bankers move abroad.

‘The other key risk seems to be that these changes will make the UK market the most heavily regulated in the world, making it less competitive than other major markets such as New York, Singapore and Hong Kong. In order to attract and maintain key people, base rate salaries may increase.

‘It seems likely these rules will have the most impact on the lower level bankers and wealth managers’ rules while the high level bankers will continue to be less affected due to their ability to move and work globally – thus avoiding the UK rules.’

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John Thornber, Investment Manager, Andrews Gwynne Private Wealth Management, Leeds

‘The clawback rules appear primarily to apply to the institutional end of the banking process. It is the big decision-makers that need to be watched but whether this is the best approach is less than clear. It is going to be difficult to look back seven years and argue an individual did not act in what they thought were the best interests of the client if everyone else was doing the same, and regulators were relaxed about events.

‘How the new rules apply to high street misselling remains to be seen. It is hard to motivate a sales force if you defer the bonus for an extended period, so organisations may simply move to other forms of motivation, such as share options or higher wages, aligned to rolling short-term contracts. I think it will have muted impact on high street misselling even if it can be effectively applied.

‘Where it might have an impact is at management level, creating clever schemes with hidden risk for unknowing salesmen to sell. However, as we see so many organisations oblivious to growing risk and market mispricing, I don’t think it will make much difference in large organisations where individual intelligence seems largely devoted to the next greasy step on the ladder rather than what is right for the customer. Overall, I think these rules are aimed at high end foolishness and that they will be ineffective there too.’

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Jon Wingent, Investment Client Director, Close Brothers Asset Management, London

‘While I am no idealist, I believe the vast majority of people working in financial services are honest professionals and sadly suffer the consequences of banker-bashing through association of their chosen profession. If someone is dishonest, that is a trait of character and they are more likely to missell than someone who acts with honesty. The clawback is a significant move to reduce the risk of this and I believe it will have some impact. However, dishonest characters appear in all walks of life, and I fear the latest proposals draw attention back to the industry’s darker side as those of us working within it continually strive to act with integrity and to rebuild its reputation.’

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