How did we get to a situation where the British financial services regulator is apparently threatening to revoke banking licenses at firms which don't defer, '60% of all pay....with no exceptions', even in situations where people have contracts which say they can access more than 40% of their bonuses immediately?
The answer is, maybe we didn't. Maybe the FSA isn't insisting that 60% of all pay is deferred and isn't threatening to overturn all existing contracts if banks don't comply with its wishes as reported in the Telegraph.
When we spoke to the FSA yesterday, they said 60% of bonuses must be deferred either for people earning more than 1m, or for people in 'significant influence functions' (SIFs). The FSA didn't say anything about forced deferrals for everyone. Nor did the FSA say that all contracts contravening their wishes have to be ripped up: only those that were negotiated after the draft code of practice (see below) appeared in March 2009.
Nevertheless, the FSA has certainly got a lot more assertive when it comes to pay. This increased assertiveness has come in fits and starts rather than following a smooth upwards trajectory.
In the beginning
Around this time last year, the FSA issued its draft code on remuneration practices. This set the ball rolling on deferrals, saying that an, 'example of good practice would be for at least two-thirds of the bonus to be deferred' and that, 'The vesting period of the deferred element should be appropriate to the nature of the business and its risks.'
A brief respite
Five months later (in August), after consultation with the industry , the FSA released a final code of practice on remuneration. At this point, it appeared to pull back from making deferred bonuses mandatory. Instead, it said its previous comments on deferrals were merely 'guidance' and that it would be 'good practice' to defer at least two thirds of 'significant' bonuses.
When the final code was published in August, the FSA's advice on deferrals applied only to people in 'significant influence functions,' or whose activities could have a 'material impact on the firm's risk profile.' It was due to be implemented in November 2009 (later delayed to January 2010).
G20 and the Treasury intervene
However, after the G20 meeting in September recommended that 40-60% of all bonuses ought to be deferred, the climate darkened.
In late September/October Alistair Darling met with various banks. Following this, Bank of America Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs International, JP Morgan Securities Ltd, Morgan Stanley, Nomura, UBS, as well as BNP Paribas, Deutsche Bank and Société Générale (which operate beyond the FSA's remit and could have refused to play ball), agreed to sign up to the FSA's remuneration code and implement the G20 guidelines immediately.
Specifically, this included the stipulation that:
For senior executives, as well as other employees whose actions have a material impact on the risk exposure of the firm, 40 - 60 percent of variable compensation will be deferred over three years, with at least 50% in shares / share-linked instruments.
Then, in January, the FSA broadened the scope of people whose bonuses really ought to be deferred in the name of 'good practice' to anyone earning more than 1m.
After all this, where are we now?
Well, as far as the FSA is concerned, deferrals aren't absolutely mandatory. Nor are they necessary for everyone - only for people earning more than 1m, for people taking risks that might jeopardize the firm, or for people in positions of significant influence. If a high proportion of your bonus is being deferred and you don't fall into any of these categories, it's down to your employer - not the regulator.
Equally, the FSA will only require your contract to be renegotiated immediately if it contains a multi-year guaranteed bonus or a cash payout accounting for more than 40% of the total and it was negotiated after March 2009, when banks really should have known better. If your contract contains these provisions and it was negotiated before March 2009, your employer has until December 2010 to try and wriggle out of it.
Either way, employment lawyers say banks are in a weak position. Employees who are subjected to forcible contract renegotiation or whose contracts are broken, regardless of whether it's at the behest of the FSA, can sue for breach of contract.