VZCZCXRO1112
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHLO #0478 0551534
ZNR UUUUU ZZH
P 241534Z FEB 09
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 1490
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBL/AMCONSUL BELFAST PRIORITY 1260
RUEHED/AMCONSUL EDINBURGH PRIORITY 1096

UNCLAS LONDON 000478 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV UK
SUBJECT: MPs Examine Banking Remuneration As Prime Minister 
Announces Measures To End "One-Way Bet" Culture 
 
¶1.  (U) Banking remuneration structures have become hotly debated in 
the UK following the part-nationalization of some of the country's 
largest banks.  RBS in particular caused a media outcry when it 
announced it planned to pay GBP 1 billion in bonuses for 2008, 
despite share prices falling 90 percent, having to write-off GBP 20 
billion of assets, predicting a GBP 8 billion loss, laying off 2,300 
staff and being 70 percent owned by the taxpayer.  PM Gordon Brown 
faced increased pressure to act on the banking system's bonus 
culture following President Obama's plan to cap senior bankers' pay, 
which was widely praised in the UK.  The Conservatives are drawing 
up measures to curb City excess and have not ruled out capping 
bonuses.  A Tory party spokesman said HMG owns these banks and 
should ensure executive pay is reasonable. 
 
¶2.  (U) Richard Lambert, director general of the Confederation of 
British Industry, singled out the bonus culture as one of the 
central factors in creating the financial problems now engulfing the 
banking sector.  He said bonuses rewarded bankers for success but 
failed to penalize failure.  He accused investment bankers of being 
cavalier in their attitude to risk and said there is a serious 
misalignment between the interests of managers and shareholders. 
Hector Sants, Chief Executive of the Financial Services Authority 
(FSA), echoed Lambert's critique of remuneration structures in a 
letter to the bank chief executives as early as October 2008.  He 
said a major contributor to the current crisis was the bonus driven 
culture, which led to short-term decision making and high risk 
taking. 
 
¶3.  (U) As part of its enquiry into the banking crisis, the House of 
Commons' Treasury Committee held hearings with the heads of the UK's 
largest banks February 10-11 that examined how far remuneration 
policies contributed to the financial crisis by rewarding the "wrong 
kind" of risk taking.   The Committee charged the bank chiefs with 
paying insufficient regard to the need to secure long-term 
shareholder value.  Chairman John McFall said the former Deputy 
Prime Minister, John Prescott, presented him with 23,000 signatures 
prior to the hearings - all requesting that bonuses not be paid out 
by banks in receipt of public money.  Andy Hornby, former Chief 
Executive of HBOS, acknowledged that executive compensation should 
be closely tied to long-term performance.  Sir Tom McKillop, former 
Chairman of RBS, said a fundamental look at remuneration policies 
should happen across the board in a coherent, consistent way to 
avoid the risk of personnel arbitrage.  Despite a general acceptance 
of the need for reform, Sir Fred Goodwin, former Chief Executive of 
RBS, said it is very difficult for an individual institution to make 
a change unilaterally.  He said it's a highly competitive market and 
many of the remuneration practices imported from the U.S. have 
become part of the UK banking culture. 
 
¶4.  (U) HMG must take action to end the "one-way bet culture" that 
encouraged banks to make reckless decisions, PM Gordon Brown wrote 
in an article in The Times February 18.  He outlined four principles 
that will apply to executive compensation in the part-nationalized 
banks going forward.  He said there will be no reward for failure - 
people associated with losses will not be entitled to receive a 
bonus.  Second, no bonuses will be issued in the future unless they 
are based on long-term sustainable performance.  Third, clawback 
clauses will be introduced and used if performance is not sustained 
or employees leave before the consequences of their activities fully 
feed through.  Finally, the FSA will take into account a bank's pay 
and bonus structures when supervising a bank.  On February 9, 
Chancellor Darling announced an independent review of corporate 
governance.  It will be led by the former financial services 
regulator, Sir David Walker, and will examine measures to improve 
the corporate governance of UK banks, including the incentives to 
manage risk in remuneration policies. 
 
¶5.  (SBU) "Lots of politics" surrounds the issue of executive 
remuneration, according to Sally Scutt, Deputy Chief Executive of 
the British Bankers' Association (BBA).  She told us that HMG is 
looking for people to blame for the financial crisis in the run-up 
to the next general election and sees that it can take popular 
action on the banking bonus culture.  She said HMG needs to find a 
proper form of corporate governance that aligns remuneration with a 
bank's risk appetite.  She was critical of clawbacks which would be 
technically difficult and would have big tax implications for banks 
operating internationally.  She said the Financial Services 
Authority (FSA) started a project last year to examine good and bad 
remuneration practices with a small number of banks and expects its 
initial findings in March, before it starts a broader consultation. 
Scutt expects the FSA to roll remuneration into its Arrow Risk 
Assessment Process, with supervisors established to monitor 
compensation structures within banks.  She cautioned that banking 
talent could flow to the unregulated sector, including hedge funds 
and off-shore centers, if banking remuneration structures become too 
restrictive. 
 
LEBARON