Banking & Payments Federation Ireland (BPFI) has warned members of the Oireachtas finance committee that planned new laws to make it easier to hold financial firm managers accountable for failings under their watch “cannot operate effectively” as long as a ban on bonuses remains in place.
The comments were contained in a 15-page submission to the committee as it prepares to carry out pre-legislative scrutiny of the general outline of the so-called Central Bank (Individual Accountability Framework) Bill 2021, aimed at improving the culture and governance of a sector grappling with low levels of public trust.
The proposed laws involve the setting up of a senior executive accountability regime (Sear) as well as the introduction of common conduct standards for key employees, and follow on from a similar rules introduced in the UK in 2016.
“Sear cannot operate as effectively as it could without variable remuneration. While variable remuneration is important to incentivise better decision making and risk taking, the use of malus [the canceling of executive bonuses] and clawback [of bonuses] provides another tool to punish poor behaviour, in addition to regulatory sanction,” BPFI said in the submission, seen by The Irish Times.
“The continued restriction on the application of variable pay in Irish retail banks will set Ireland’s accountability framework apart and increase the competitive disadvantage of the retail banks.”
A BPFI report at the end of last month said that an ongoing ban on variable pay among bailed-out domestic banks, in place since the outset of the financial crisis, is putting them at a “considerable and growing disadvantage” to other banks, fintech companies and corporations. Bank of Ireland chief executive Francesca McDonagh blamed pay restrictions the same week as a second group finance chief quit in a little over two years.
Minister for Finance Paschal Donohoe said in response to a parliamentary question last week that he believes the issue of bank remuneration is “inextricably linked to further restoring public confidence in the culture and accountability of our banks” and that the planned new laws “will provide an effective framework and will help to reassure the public that meaningful cultural change is underway in the banking sector”.
The Irish public has lower trust in its banking system than consumers globally have of financial firms, according to a survey carried out by consultancy firm Edelman for the Irish Banking Culture Board (IBCB) earlier this year. It follows on from taxpayers having to commit €64 billion to bailing out the sector during the crisis, and the industry-wide tracker mortgage scandal.
A central aim of Sear is to do away with a key part of the existing regime, what is known as the “participation link”, where regulators must first find that a financial firm committed regulatory breaches before they can take individuals to task.
The Central Bank’s current sanctions toolkit, ranging from barring executives from senior financial roles to fines of up to €1 million, will apply.
The BPFI submission to the Oireachtas finance committee raised a number of issues that would need to be clarified. These include the need for clear Central Bank guidelines on what it considers to be “reasonable steps” that financial executives need to ensure the areas that they are responsible for are controlled effectively and comply with regulatory requirements.
It also outlined concerns about general nature of a proposed obligation, under general outline of the Bill, that firms “disclose promptly, proactively and appropriately anything relating to the firm of which the Central Bank would reasonably expect notice”.
This fails to recognise that some information may be privileged, and also forces firms to try and work out what the Central Bank might expect be informed about, in the absence of clear guidance, it said.