UK lenders can expect bonuses to be next battleground amid BoE's Covid-19 push

06 Apr 2020 7:16 pm by Fiona Maxwell

Major UK banks may have acquiesced to a Bank of England request to ditch dividend payments amid the Covid-19 crisis. But on a further request to withhold lucrative staff bonuses they have been conspicuously quiet. How far they will try to resist remains to be seen.

A push from the central bank's regulatory arm last night saw the biggest lenders agree to freeze dividend payouts, following international pressure and similar moves from European regulators.

But BoE deputy governor Sam Woods, who heads the Prudential Regulation Authority, said it "also expects banks not to pay any cash bonuses to senior staff, including all material risk takers," and voiced confidence that bank boards had already heeded the call.

When a policymaker expects something of a bank, it's more than likely that the bank will have to do it — even if grudgingly. The seven lenders targeted — Barclays, HSBC, Lloyds, Royal Bank of Scotland, Nationwide, Standard Chartered and Santander — published statements last night agreeing to halt all dividend payments.

But on the bonus question, they have all stayed silent.

That will likely prompt more discussions before they agree to freeze bonuses, which in European banks often far exceed salaries — even for relatively low-level staff. Bonuses are a key driver for individuals in the industry; far more so than for those in the financial technology or accounting sectors, for example.

It’s fair to say that staff with bonuses that can run into hundreds of thousands or even millions of pounds won’t be too pleased. That’s especially true as banks have been given the key role of supporting the economy through the crisis brought about by the coronavirus pandemic, by beefing up their lending to households and businesses.

There is a lot at stake. European Banking Authority figures show that in 2017 there were 4,859 individuals in the financial industry in the EU earning more than a million euros a year, with 3,567 of those in the UK — the vast majority of them in investment banking. Bonuses totaled 4.5 billion euros that year alone.

While the financial services sector justifiably took the blame for the 2008 financial crisis, this time they’re part of the solution — and many will argue that their pay shouldn’t be docked as a result.

Gripe

One reasonable gripe for the seven lenders targeted is that the PRA's demand last night to cancel bonuses as well as dividends goes a step beyond those of EU supervisors.

In the eurozone, the European Central Bank on Friday ordered its regulated institutions to freeze dividend distributions and share buybacks, but it stayed silent on bonuses.

The EBA has gone a little further, instructing national regulators to ask lenders to review their bonus policies to ensure they are “reflecting the current economic situation.”

But that doesn’t leave them completely without the ability to pay bonuses. In fact, the EBA statement left it open for banks to set variable remuneration at “a conservative level” and with longer deferral periods and a larger proportion paid in shares.

Back in the UK, insurers have been left off the hook. A letter from Woods to chief executives of UK insurance companies on distribution of profits requested them to “pay close attention to the need to protect policyholders and maintain safety and soundness” when considering shareholder payouts or remuneration decisions.

All in all, UK lenders might be a little miffed.

Precautionary step

The reason for the dividend and bonus freeze is for banks to preserve capital in what is a health and economic crisis unseen in a generation.

The PRA described it as a “precautionary step, given the unique role banks need to play in supporting the wider economy through a period of economic disruption.”

The preserved capital is not needed to maintain adequate capital positions, the regulator said, but to give the banks "extra headroom" to help them support the economy through 2020 — something urgently needed as thousands of businesses across the UK have seen their doors forcibly shut by social-distancing and stay-at-home policies.

The BoE has been clear that it wants that extra headroom, and banks are likely to be pushed to deliver it. But will they go down with, or without, a fight?

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