FSA under fire over bank remuneration oversights

The Treasury Select Committee, which today (14 May) released its third report on the banking crisis entitled 'Banking crisis: reforming corporate remuneration in the City', said it had exposed "serious flaws" in remunerations practices, particularly within investment banking.

But the committee is also concerned that the FSA’s Turner review downplays the role that remuneration played in causing the banking crisis and questions whether the regulator is attaching sufficient priority to tackling the issue.

Committee chairman John McFall said: "Bonus-driven remuneration structures led to a lethal combination of reckless and excessive risk-taking.

"We are also concerned that the FSA seems not be taking tackling this issue seriously enough."

He added: "We will turn the spotlight on the FSA in coming months."

The report also suggests that the apologies the committee heard from former Royal Bank of Scotland (RBS) and HBoS executives had a "polished" and "practised" air, with the witnesses portraying a degree of self-pity and making themselves out to be the unlucky victims of external circumstances.

The report concludes that Lord Myners' assertion that his precept to the RBS board - that there should be no reward for failure - did not represent an adequate oversight of the remuneration of outgoing senior bank staff.

Instead, the report said it would have been far better if Lord Myners had given a stronger, clearer direction of government requirements for a bank in receipt of public funds and had assured himself by demanding to be kept informed of the detailed negotiations that were taking place.

Furthermore, the committee is not convinced that Lord Myners was right to take on trust RBS's suggestion that there was no option but to treat Sir Fred Goodwin as leaving at the employee's request.

In the committee's view, it would have been open to Lord Myners to insist that Sir Fred Goodwin should have been "dismissed".

Finally, the report casts doubt on the Treasury's decision to rely on the then RBS board to handle these negotiations without direct Treasury involvement.

It said the RBS board had shown itself to be "incompetent" in the management of the bank, steering it towards catastrophe, and was also possibly dominated by Sir Fred Goodwin. As such, there were no grounds for trusting them with this operation, the report added.

The report also notes the failure of institutional investors effectively to scrutinise and monitor the decision of boards and executive management in the banking sector, concluding that this may reflect the low priority some institutional investors have accorded to governance issues, and that, in some cases, they may have even encouraged the risk-taking that proved the downfall of some banks.

McFall added: "The failure of institutional investors has been another sobering lesson to emerge from the banking crisis.