BONUSES
FSA to consider clampdown on bonuses in financial services
The new chairman of the Financial Services Authority has warned that it could penalise banks which pay bonuses that encourage too much risk-taking.
Lord Adair Turner told BBC News on 22 September 2008 that the FSA would not regulate how much was paid, but would ask banks to explain their bonus structures. Banks found to encourage risky actions could be compelled to hold more capital, raising their costs.
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Some critics argue that all short-term bonuses in banking should be banned and replaced with arrangements based on longer-term results. "What we are now doing is saying to banks, explain to us what your structure of bonuses are," said Lord Turner.
"If we think they are in danger of encouraging people through that bonus structure to take risky actions which appear to look good at the time, but which create toxic assets for the future, then we have the power to say if you want to do that, you've got to hold a bit more capital because we think you're a more risky institution."
Curbs on bonus culture
There has been scathing criticism that the bonus culture and salaries in the City at least contributed to the current financial meltdown. However, Lord Turner argued that this aspect should not be overstated.
He said other factors would be more important in ensuring there was no repeat of the credit crunch and the subsequent financial turmoil. Lord Turner said regulators should, for example, monitor much more closely the level of liquidity in the system.
Want to know more?
Watch the BBC interview online at http://news.bbc.co.uk/1/hi/business/7629991.stm.
The Financial Services Authority (FSA) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. To find out more visit www.fsa.gov.uk.