2011 - A new year and a new era in banking

The new year will spark a new era in the City for many UK bankers, particularly when it comes to bonus payments.

It could be said that 2010 has been a dramatic 12 months for the financial services sector, which saw the finalised details of Basel III announced, learnt that its watchdog the Financial Services Authority (FSA) was to be scrapped by the coalition government and witnessed the economic crash of its neighbour Ireland. And 2011 looks set to be no less remarkable, with one big change for those with banking jobs in London already looming on the horizon.

From January 1st, financial services providers across Europe will have to implement rules set out by the Committee of European Banking Supervisors (CEBS). Under the new guidelines the committee has set out to be used by European financial regulators, it has been stipulated that banks only pay a proportion of 20 to 30 per cent of bonuses to staff members up front in cash. In addition, 40 to 60 per cent of bonuses should be deferred for three to five years, with half paid in the form of shares, rather than cash. Meanwhile, regulators have the power to set a cap for bonuses as a percentage of the individual's pay.

The rules caused significant tremors in the City, with the British Bankers' Association saying that the announcement from the CEBS "changes dramatically the bonus landscape". It added that the new system represents a "huge change away" from the bonus arrangements seen in the past and represented a levelling of the European Union playing field for many institutions.

While the group noted that it recognised that a reform of pay structures could play an important role in restoring confidence within the financial services industry, it claimed that banks link pay to the long-term success of their operations and do not simply reward employees in a way that would encourage undue risk taking.

"For the past year, pay policies and distributions have been regulated by the FSA. Banks have also paid additional tax on variable pay. Remuneration policies at banks in receipt of government support are monitored by the government.  The UK has moved further on the reform of remuneration than any other jurisdiction," the body said.

"We maintain that reform of the remuneration system in financial services must be globally coordinated. A global industry needs to conform to global standards, as any jurisdiction which takes a lighter approach will attract business and staff," the group asserted, adding that emerging markets and the US should now coordinate their own reforms with the EU rules.

According to the BBC, the CEBS guidelines prompted concern in the UK that valued employees would leave the City in order to take up finance jobs in Singapore, Hong Kong, Australia and other markets not affected by the guidelines. Banks outside of Europe will only have to impose the restrictions on individuals they employ at their subsidiaries within the European Economic Area. As a result, some banks in Europe warned that not only could some workers relocate overseas to markets where bonus rules are not as tight - such as Singapore - but also that some financial services providers may choose to move their corporate headquarters abroad.

Commenting on this, Simon Lewis, chief executive of the Association for Financial Markets in Europe, told the news corporation that banks operating in Europe or European lenders with operations elsewhere in the world "will be at a competitive disadvantage unless there is recognition of the need for a global agreement on compensation practices".

However, following the announcement of the guidelines, the FSA published its revised Renumeration Code, which will allow many of the UK's financial services institutions to escape the strict rules. Under the City watchdog's guidelines, only the biggest banks will miss out on an exemption from the rules, as hedge funds, asset managers and smaller banks will dodge setting a maximum bonus level.

But the FSA's Renumeration Code has been aligned to the rules set out by the CEBS, with the regulator noting that the revised code will take in a significantly larger group of companies than it does currently, totalling some 2,700 altogether. One rule that will apply to all of these is that guaranteed bonuses are applied on a company-wide basis, rather than being limited to specific departments.

Meanwhile, it has been claimed in various publications that some businesses within the financial services sector are now taking action to prepare for the introduction of the CEBS rules. According to the Financial Times, some of the world's biggest investment banks are amending their existing pay structures in order to fit in with the regulations. It was suggested that some are now considering paying their employees inside the European Union a higher salary but awarding them lower bonuses, while outside of Europe staff members will have the opportunity of higher bonuses.

Elsewhere, the Daily Telegraph has claimed that some London-based hedge funds brought forward their bonus pay days - which traditionally fall in February or March - to December 2010 in order to deliver the payouts ahead of the January CEBS introduction. One hedge fund consultant told the newspaper: "The decision to bring bonus payment forward was taken as the industry faced new pay rules from CEBS and UK regulators."

It remains to be seen whether the introduction of the new guidance will prompt a change in the public's perception of and confidence in the financial services sector, or whether it will create any major changes within the core of the industry itself, such as more employees opting to work overseas. However, whatever is on the horizon, it looks likely that 2011 will be just as important a year for the City as 2010 before it.

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