Governance, compliance and remuneration in the post-Lehman era

The financial world has learned the lessons of rewarding reckless behaviour – but has change been universal?

This article was first published on the Financial Times website on 10 September 2018.

While the global markets were imploding back in 2008, the public had very clear views on where the blame lay.

Years of reading headlines about bumper bonuses had fostered a hostile public attitude towards bankers.

Looking back, however, it is clear that the fault lay not with individual traders but rather with a broken system that prized results to the exclusion of everything else.

Since then governance has been transformed, resulting in a fundamental change in banking culture, with part of the focus on bonuses.

Following the financial crisis, the EU brought forward a wave of regulation to tackle the perceived roots of the risk-taking culture in banks. Alexandra Beidas, Employment and Incentives Partner at Linklaters, says:

“Before the financial crisis, what people got paid was very much about what they brought in and nothing to do with how they went about it. But now, it’s largely about the ‘how’ when evaluating staff performance. The idea is that we should see less of the excessive risk-taking that was widespread before the global financial crisis.”
The big regulatory shake-up

During the crisis, the bonus pool on both sides of the Atlantic shrank for several years. It was a time for banks to focus on repairing their balance sheets and addressing the new regulations coming their way.

Beidas says: “Regulators wanted to send a clear message that they understood the impact remuneration was having on risk-taking and they wanted to do something to address it.”

When new regulations were drafted in the wake of the financial crisis, there was a sense that the UK would end up with the most stringent rules in the world.

Former Chancellor George Osborne fought against moves to limit bonuses, saying:

“Our concern is that it may have a perverse effect, it may undermine responsibility in the banking system rather than promote it.”

He was overruled by 26 votes to one when the EU voted on the matter. The numbers are a stark illustration of how this has played out in reality.

“It’s no secret that US bankers have historically been paid larger bonuses than their European counterparts but it’s a bitter pill to swallow when you can see that some regulators are being quite tough on financial institutions and others less so,” says Beidas. “It seems that the UK’s financial sector really has ended up with the toughest rules anywhere in the world.”
A change of culture

Following the overwhelming EU vote, the UK has announced rules that not only capped bonuses but also introduced bonus clawbacks of up to ten years if a banker’s employer later discovered misconduct or material errors as a result of their actions.

“There had been a concern that talent would move to the US but in practice that hasn’t really happened,” adds Beidas.

Along with the Senior Managers and Certification Regime, which clarifies who in a financial institution is responsible for what, the remuneration rules have had a clear impact on the culture within banks.

As Beidas puts it: “It’s questionable whether these rules would have prevented the collapse of Lehman Brothers altogether, but it’s certainly removed the incentive for some of the excessive risk-taking you saw pre-2008.”