FSA sees big changes for UK banks

[Legal Beagles]

The Financial Services Authority says the credit crisis will force banks to change how they do business.

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[EXC]

Re: FSA sees big changes for UK banks

FSA and Bankers' Bonuses

• Robert Peston
• 27 Feb 08, 06:42 AM

In his interview with me for this morning's Today Programme, the leader of the City's pack of watchdogs came intriguingly close to saying that the economic mess we're in stems from bankers' greed and the foolishness of those who negotiate their remuneration.

Hector Sants, the Chief Executive of the Financial Services Authority, said that the way bankers are rewarded is not helpful to financial stability and magnified risks for their respective firms. Which, from an habitually cautious regulator, represents a sound ticking off for the City.

What bothers him is the so-called assymetry of bankers' rewards.
Bankers received fat bonuses, often running to millions, for their deals, most relevantly the parcelling up of dodgy loans for sale as supposedly rock-solid bonds to international investors.

But when those bonds turned out to be radioactive duds, foisting big losses on their holders - including the banks that employed the clever-clogs bankers - there was no way of reclaiming those bonuses.

The creators of the toxic investments had already trousered their fat wedges - and there was no way to reclaim any of this cash. In crude terms, they had been given the banks capital to gamble in a game of global roulette. Before the wheel stopped turning, they were rewarded as though their bet on red had come good. But when the ball finally kerplunked in a black slot, well they and the moolah were long gone.
As Mr Sants says, these systems for incentivising bankers were - ahem - a bit too short-termist.

So what should the FSA do? Should it, as some commentators believe, directly regulate bankers pay, to prevent this kind of dangerous silliness. Mr Sants - who in his previous life as a successful investment banker received rather more than a bob or three in bonuses - thinks not.

He would hope that the banks' owners, their shareholders, would insist that bonuses were linked much more closely to the long-term performance of individual bankers.
But if shareholders fail to act, so be it. He believes it would not be appropriate for the FSA to intervene in a commercial, competitive issue of this sort.

It's every banks' fundamental right, the FSA seems to believe, to be gulled by its brightest and best employees. Many would agree. Too much nannying is bad for us all - although arguably banks' licence to be foolish should be restricted as and when that foolishness harms all our economic prospects, as it may have done in the debt bubble that has just been burst.