France takes lead in regulating bankers' bonuses

12:08, November 08, 2009      

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France, which is pressing for concrete measures to stop bankers' excessive bonuses at the ongoing G-20 finance ministers' meeting in Scotland, has issued a decree of regulation on the eve of the meeting, expecting other participants to follow suit.

The regulation issued Thursday by the French finance ministry summed up the professional rules published by the French Banking Federation (FBF) two days earlier, putting forth tough rules about "say-on-pay" and certain remuneration bans for financial market professionals in France.

Attending the G-20 meeting in Scotland's St. Andrews on the weekend, France's Minister of Economic Affairs, Christine Lagarde, told the BBC radio that she hoped that more could be done to show a determination "to stop excesses, stop abuses, and bonuses that are strictly risk incentives."

The French government's decree, which takes effect immediately and will apply to all banks operating in French territory, including foreign banks' operation in France, stipulates corporate governance rules about transparency in banks' annual reports and the requirement of reinforcing internal audit on pay, as well as a ban on guaranteed multiyear remuneration.

The French government said that French banks are therefore the first to implement the international principles set forth in the recommendation of the Pittsburgh G-20 meeting, which took place in September 2009: a significant portion of bank officials' variable compensation should be delayed and tied to the performance of their investment decisions.

The FBF's professional rules presented more precise details to complement the government decree regarding variable remuneration: guaranteed variable bonuses are prohibited, except for new employees' signing bonuses, which is also strictly limited to one year; among the variable bonuses, at least 50 percent must be deferred, and regarding the large size of bonuses, the rate is lifted up to 60 percent. Payment is deferred over at least three financial years following the first payout.

The rules also stipulate that for all variable bonuses, at least half of the total must be in stocks, which are subject to a minimum holding period of two years; and payouts of actual deferred variable bonuses will be cut back either in part or entirely if the criteria on which the bonus was calculated could not be realized at the time of the award.

Baudouin Prot, president of FBF and CEO of the French top bank BNP Paribas, said at a joint press conference Thursday with Lagarde that he was expecting other G-20 countries would follow suit with similar rules and create a level playing field in the international financial market.

In Britain, a banking code that links bonuses to long-term performance came into force early in January.

In Germany, the government is also pushing for restraint measures. Berlin has said in August that it fully "supports the French proposal for an international initiative on bankers' bonuses."

However, the G-20 financial ministers' meeting in the Scottish coastal town failed to reach an accord over bankers' bonuses and to give priority to the issue in the communique released after the discussion among financial officials and central bankers from the world's leading rich and developing countries.

Besides the differences between legal systems and legal cultures, and the seesaw game between regulators and profit groups, not every country is as willing to take action like France. Evidently, Britain and the United States are reluctant to impose compulsory caps on banking groups by pushing other reforms.

Even in France itself, the new rules probably won't reduce the public controversy over bonuses. Privately, some top French bankers are concerned that the tightened rules would lead to a loss of talent. For their part, some market practitioners and professional associations are concerned that stern rules might stifle market innovation as well.

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