Banks In Dispute With FSA Over Bonus Plans (Updated)

UPDATE 18:00: The FSA's thinking on this subject appears to have evolved during the course of the day. As I understand it, the regulator is considering implementing a sliding scale for the level of variable compensation for employees of "significant influence" in the 26 key regulated institutions.

The other option would be to increase the £500,000 threshold for defining "significant influence" (though what any new, higher figure would be isn't yet clear). Banks have been informed of the FSA's adjusted stance this afternoon, so there should be more news on this next week.

Banks In Dispute With FSA

I’ve learned that there are heated discussions taking place between the City regulator and some of the world’s largest banks over the bonuses that they want to pay out in the new year.

The debate (‘row’ would probably be too strong a word for it) has arisen over the definition of a “person of significant influence” in the 26 major banks and building societies which the Financial Services Authority (FSA) is responsible for regulating. That list includes the likes of Barclays, Goldman Sachs, HSBC and Royal Bank of Scotland.

The sticking point relates to Principle 8 of the FSA's new remuneration code, which applies to “a person who performs a significant influence function for a firm”.

The issue is that while many of the firms have submitted proposals to the FSA which include a relatively small number of employees in the Principle 8 category, the regulator believes that the definition of “significant influence” can be much wider.

There has apparently been a wide discrepancy between the submissions of many of the banks on this subject, so I understand that the FSA has decided to define it as meaning anyone who earns more than £500,000 a year, or anyone earning more than twice their basic salary as a bonus. Under the FSA code, anyone falling into either category will have to have at least 60pc (and possibly two-thirds) of their bonus deferred over a period of several years.

This has angered some of the banks, which believe they will find it much more difficult to manage their compensation discussions with employees as a result.

Of course, most people would find it rather bizarre to hear of someone earning more than £500,000 a year in a bank but not being deemed an influential employee. Hard as it may be to believe, there are many people working in the IT and other back-office departments of major investment banks who earn that kind of money.

And of course, there’s unlikely to be a huge amount of sympathy from the general public for bankers who earn more than twice their salary as a bonus.

Indirectly, one of the effects of this FSA decision is likely to mean that the amount of cash paid out by banks in bonuses in 2010 (which was already being sharply reduced by the new FSA and G20 codes and Britain’s one-off bonus tax) will come down even further. But it won’t dramatically alter the overall headline figure for bonus awards - although the Treasury hopes that that part of the job will be achieved by the new 50pc levy on bonuses above £25,000.