Lloyds Banking Group’s decision retrospectively to reduce the 2010 bonuses of senior executives involved in mis-selling loan insurance is a sign of the increased risks that bankers are starting to face personally.
The move strikes me as appropriate: it is an effective sanction against bankers over-selling high-margin products that will earn them big bonuses but turn out to be bad for customers. But the implications for the individuals involved, and for the industry as a whole, are serious.
It has the effect of turning “bonuses” – a form of profit-sharing that most investment bankers have come to rely on for most of their income – into actual bonuses. In other words, provisional payments on which no individual can depend.
The fact that bonuses may be clawed back will make it much more risky to spend them on property or other things. Logically, they now ought to be kept in savings or shares for at least three years while there is a possibility they could be taken back.
Lloyds’ move comes after UBS decided to claw back the bonuses of senior investment bankers to reflect a loss in its investment banking division in 2011. It is taking back 50 per cent of the share-based bonuses of bankers whose pay exceeded $2m.
The FT reports on Lloyds:
The state-backed bank is set to take the rare step of stripping Eric Daniels, former chief executive, and a number of other current and former directors of a portion of the awards they received in 2010 as punishment for their role in the sale of payment protection insurance (PPI), according to people familiar with the situation.
The move is the first example of a bank reclaiming bonuses paid to top staff since the Financial Services Authority introduced new “clawback” rules in 2009. The Daily Telegraph, which first reported the story, suggested that the total amount claimed back could exceed £1m.
For a long time after the 2007-2008 bailouts, the investment banking industry appeared to be carrying on much as before, buoyed by low interest rates and government liquidity support. Now things are starting to bite, both for the industry and the individuals who earn the most within it.
