High Pay Centre responds to FCA Consultation

By 06.07.15BlogAugust 28th, 2020No Comments

Read our submission to the Financial Conduct Authority’s Investment and Corporate Banking Study

The terms of reference of this study are focused on three specific issues identified in the prior wholesale sector competition review. However, there are general features of the investment and corporate banking sector that give rise to concern, which we outline in this submission:

  • The prevalence of high pay, comprising high rates of basic remuneration and large bonuses;
  • The existence of high pay both suggests the existence of market failure, in particular a lack of competition, and contributes to high transaction costs for clients.

Pay in the investment and corporate banking sector

Analysis of ‘Pillar 3’ disclosures on remuneration provided by the five FTSE 100 listed banks (HSBC, Barclays, RBS, Lloyds and Standard Chartered) gives an insight into existing pay practices in the investment and corporate banking sector. These banks employed over 4,200 ‘material risk takers’ (MRTs) in 2014, all of whom were paid at least €500,000.

A total of over £3 billion was paid to these individuals, with about £1.3 billion of this money taking the form of variable (ie performance-related) pay. Though  differing forms of disclosure make it difficult to identify precisely which departments these MRTs carry out, it is fair to assume that they are mainly based in corporate and particularly investment divisions – for example, Barclays and HSBC, which both have large investment banking divisions employ over 1,000 MRTs, Lloyds, which does not provide investment banking services, has just 213. Of the £1.1 billion paid to 1,300 MRTs at Barclays, more than half went to those working in the investment banking.

It is therefore clear that pay in investment banking is extremely high compared to other leading professions, including other parts of the banking industry! Pay is also heavily performance-related, with all the issues related to targets and incentives that this entails.

Detrimental consequences of high pay

High returns to employees and shareholders, taken together, constitute prima facie evidence of markets that are insufficiently competitive. This is a consequence of a variety of factors – lack of transparency, myopia, complexity, oligopoly, asymmetry of information and problems associated with principal/agent relationships – all of which permit rent-seeking behaviour. The evidence of such behaviour in the retail sector was made clear when the UK Competition Commission reported that the twelve largest distributors of payment protection insurance made profits that yielded a return on equity of 490 per cent.

Evidence of high pay should prompt thorough analysis of the returns being achieved for each of the main lines of business identified for investigation in the present study. The outcomes of such analysis of business models should be reported at sector level.

High pay contributes to high transaction costs experienced by clients, both wholesale customers and retail customers of firms engaged in wholesale transactions on their behalf. Business model analysis should be used to estimate the magnitude of excessive transaction costs and the scale of consumer detriment.

High pay can act as an incentive to conduct that is not in the best interests of the client, in breach of the principle of treating customers fairly. Performance-related pay based on sales may incentivise mis-selling. High pay per se may encourage risky behaviour where the prospects of regulatory reprimand seem low and the rewards high.


The FCA recognises that a large number of competitors does not necessarily mean that there is effective competition. Equally, identification of measures to promote competition would not necessarily result in markets in which economic rents are competed away. Consideration should therefore be given to regulatory interventions to address high transaction costs if measures to promote competition are ineffective in achieving reduction.

The High Pay Centre has recently reported on performance-related pay in the economy generally, where criticisms include incentives to short-term behaviour that does not align with the long-term interests of the company. However, the characteristics of banking are sufficiently different, requiring sector-specific remedies.

The FCA has put in place a Remuneration Code for the banks which applies to senior staff and which requires that bonus payments are deferred. The purpose of the Code is to discourage inappropriate risk taking and payments by firms more than they can afford. However, while the Code protects the banks, it is not intended to offer any protection to consumers against excessive transaction costs arising from misconduct or lack of competition.

The FCA should therefore consider what remuneration policies might best be required of regulated firms offering banking services in circumstances where competition is insufficient to deliver efficient market outcomes to clients.