Brown Plan to Curb Bank Pay Has Conservative Support (Update1)

By Gonzalo Vina and Andrew MacAskill

July 17 (Bloomberg) -- Prime Minister Gordon Brown’s plan to force banks to hold back half of the bonuses of their top executives for five years won the support of Britain’s two main opposition parties, ensuring the measure will be enacted.

David Cameron’s Conservative Party, which has led in opinion polls for more than a year, and the Liberal Democrats said they support proposals made by former Morgan Stanley International Chairman David Walker.

Both parties want pledges that Brown will make sure Walker’s plan, which was commissioned by the Labour government, will be enforced. Royal Bank of Scotland Group Plc’s Chief Executive Officer Stephen Hester’s 9.7 million-pound ($15.8 million) pay package last month spurred renewed calls for scrutiny of remuneration at U.K. banks.

“Deferring bonuses is a move in the right direction,” Mark Hoban, a Conservative lawmaker who speaks on Treasury matters, said in an interview. “We would propose extra capital requirements where banks are following risky strategies.”

With an election less than a year away, lawmakers want tougher rules and curbs on pay to prevent lending practices that helped trigger the worst recession since World War II. They are also tapping voter anger after taxpayers were left with 1.3 trillion pounds in liabilities to rescue RBS, Lloyds Banking Group Plc and other lenders.

‘Greater Appetite’

“There is a greater appetite to tackle investment banks, hedge funds and bonuses in an aggressive way,” said Alistair Milne, a senior lecturer in finance at London’s Cass Business School. “Walker is carefully picking recommendations that are not going to cause complete outrage in the city.”

The proposals also suggest banks disclose in annual reports how much they pay their top traders. Goldman Sachs Group Inc. set aside a record $11.4 billion for compensation and benefits in the first half, enough to pay each worker $386,429 for the period, the company disclosed this week. Former RBS CEO Fred Goodwin agreed last month to cut his annual pension by 38 percent to 342,500 pounds after lawmakers and shareholders criticized the award.

Industry lobby groups welcomed Walker’s plan, noting it reflects work already under way to clamp down on pay and governance.

Industry Reaction

“These recommendations stem from actions that a large number of banks and other financial institutions already have in place,” said Angela Knight, chief executive of the British Bankers’ Association. She said her main concern was that the U.K. coordinate its program with other nations.

Brown and the opposition parties say pay practices including bonuses for bankers based on annual performance encouraged executives to seek short-term gains by writing loans and selling securities that would generate profit quickly. The government is concerned those bankers didn’t think enough about how the trades would perform in the years to come.

While the code Walker recommends would be nominally voluntary, government officials say the Financial Services Authority has enough leverage over banks that it would be difficult for any to refuse to sign up.

Vince Cable, a lawmaker who speaks for the Liberal Democrats on finance, advocated a more stringent approach. “The emphasis on transparency for pay is right, and we support that, but this voluntary code concept is weak,” he said. “It’s got to be a mandatory requirement.”

‘Casino Banks’

Cable, who was the first British politician to suggest that banks may need to be nationalized after credit dried up in 2007, said concerns that the restrictions would cause bankers to leave London weren’t justified. He said more steps are needed to tackle “casino banks.”

Brown says the Treasury will study the report before acting later this year. The FSA, which regulates banks, soon will amend its code on bonus pay in ways to guarantee that the short-term interests of traders don’t jeopardize a bank’s future.

The FSA has said that if it is unhappy with a bank’s bonus structures, it could force it to hold more capital.

“Remuneration has got to be long term,” Brown told a committee in Parliament yesterday. “In other words, it is only on the basis of long-term performance that we can guarantee the bonus system in the future.”

My 2 comments on this :
1 - 50% of zero is still zero
2 - Spread betting is still tax free