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UK's imperfect bank pay rules still pack a punch

Fudged rules can still be effective. The UK's regime for banker pay, finalised on June 23, is an unwieldy compromise of the sort that can come with committee-led decisions. Fortunately, though, the Bank of England (BoE)'s rules have retained a toughness which means they should succeed in their original aim of making bankers more responsible for the decisions they take.

After a year of consultation, the published rules contain four different timeframes relating to variable pay. The most stringent is a provision that would allow regulators to claw back the pay of senior managers for up to 10 years - that's an additional three-year top-up to the standard seven years for which bosses' pay is at risk. The extension is applicable if an institution is in the midst of a misconduct probe. There are also fresh deferral requirements that apply to bonuses for senior risk managers and to other material risk-takers as mandated by European authorities.

It would have been better if Britain's central bank plumped for even longer deferral and clawback periods. The academic literature, including a paper by the Bank for International Settlements (BIS), points out that financial cycles are different to business cycles that non-banks might be tied to. Financial cycles, says the BIS, typically last for 15 to 20 years. So it is entirely possible that not all of a bank chief's ill-gotten gains might be subject to clawback, even within a 10-year timeframe.

Still, the BoE's new regime is a big improvement on the status quo. Two other common-sense changes underscore the point. From the start of next month, managers in charge when a bank is bailed out in the UK would be unable to receive bonuses. Second, non-executive directors will be prevented from receiving variable compensation. That is sensible because it gives non-executive directors a degree of detachment that should foster better boardroom decision making.

A degree of fudge may have been inevitable. The bank was caught between the UK parliamentary committee pressing for radical action and lobbyists working at the behest of lenders who wanted the reverse. Taken together, the new rules leave the UK looking a lot less susceptible to cavalier or fraudulent bank bosses.