4 June 2015
Could Lloyds chief be the next to have his bonus clawed back?
One of the best ideas to emerge from regulators in the wake of the financial crisis was the creation of new bonus clawback rules, which allowed senior banking executives to have their pay taken back from them if it emerged they'd played a hand in any misconduct. At the start of this year, these rules were formalised so that all banks now must have clawback mechanisms in place, which include the ability to take back executives' pay up to seven years after an event.
In theory, it raises the stakes for those who run banks to a whole new level. Surely senior staff will have to think twice about treating their customers unfairly if they realise they could be held accountable for decisions they had made up to seven years previously, and forced to pay back bonuses which by then may have been spent on holidays in the Seychelles.
Lloyds was the first to use clawback
Enforcing such rules was never going to be easy. And since the creation of clawback, there have been few examples of it being used. Perhaps the most prominent so far was at Lloyds - where the former chief executive Eric Daniels and a few of his senior team were stripped of some of their share awards, as the extent of the PPI mis-selling scandal came to light. Lloyds has so far put aside some £11bn to cover PPI losses - and the hit that the likes of Daniels and co took for presiding over this mess was frankly peanuts. Nevertheless, it was an statement of intention from a bank that seemed to be working hard to persuade people that things had changed.
When Antonio Horta-Osario took over from Daniels in 2011, his first major job was to begin the mammoth task of clearing up the destruction that PPI had left. One of the first things he did in his new role was to withdraw Lloyds' support for the British Bankers' Association judicial review - which challenged the regulators' right to force banks to look at PPI cases even where the customer had not yet complained. It was a smart move on Horta-Osario's part - not least because it distanced Lloyds from the inevitable defeat that the BBA suffered a few months later.
Next up, he became the first bank CEO to put the company's PPI liabilities on its balance sheet - funneling billions into a contingency pot to deal with the mounting compensation bill. This was another smart move, which reset the market's expectations, and allowed Horta-Osario the chance to build up the business from a new low. Seven months after he joined, the share price hit lows of around 23p - from which point the only way was up.
Expertly managing the market's expectations
But the fairy tale doesn't continue quite as consumer campaigners like me might have hoped. Over the next few days, Lloyds is set to be fined over £100m for failures in its PPI complaints handling - failures which seemingly happened while Horta-Osario was running the ship. We'll have to wait to see the detail of the FCA's ruling before we know the specifics of the Lloyds case. But if the company has been fined over £100m, then it would indicate misconduct on a major scale.
Far from being the scourge of the PPI scandal, the current CEO has now presided over a period in which the firm paid too little to people with valid PPI claims, or deliberately steered them away from making complaints.
All this comes just weeks after shareholders approved an £11m pay package for Mr Horta-Osario - most of which was accounted for by stock awards relating to the performance of the share price over the past three years.
While Mr Horta-Osario may have expertly managed shareholder's expectations about the bank's PPI liability - and presided over stellar growth in its share price - he cannot yet claim to have completed the cultural revolution which is needed in the organisation.
Having set the wheels in motion to claw back some of Eric Daniels' bonus - it now seems only right that he and some of his senior team are subject to the same sanctions.
The regulations still put the onus on companies to put clawback into place - but the Prudential Regulation Authority has the power to force companies to implement these policies if it tries to side step them.
If the regulators are not willing to use these new powers in high profile cases such as this, then they may as well have not bothered introducing them. Senior executives in the banking industry need to shown that if they preside over failings which penalise their customers - then there will be personal implications for them financially, and even possible criminal sanctions.