In a speech in Singapore today, Carney said:
"In the UK, we have introduced a remuneration code prescribing that payment of bonuses must be deferred for a minimum of three years and, after payment, be exposed to clawback for up to seven years. Bonuses can be reduced – or clawed back – if evidence emerges of employee misconduct or failures of risk management."
"We are consulting on extending deferral periods, widening the scope for groups of employees to have their bonuses reduced where there are more pervasive issues of performance or risk management, and considering options to prevent individuals side-stepping these rules.
"It is unfortunate that new European rules to cap bonuses to half of total pay have the undesirable side effect of limiting the scope for remuneration to be cut back. This makes the case for additional reforms to ensure that the burden of excessive risk-taking and misconduct by staff can still be borne by those staff.
"Standards may need to be developed to put non-bonus or fixed pay at risk. That could potentially be achieved through payment in instruments other than cash."
In his speech, Carney argued that there had been progress in creating a safer financial system following financial crisis, and that the system was now safer, simpler and fairer.
He added:
"Before the crisis, risks were hidden and financing chains were fiendishly complex. Banks were complacent, building business models on the belief that “this time is different” and assuming markets would be continuous and deep.
"A diverse system, with market-based as well as bank-based finance, can best support a wide variety of investment from infrastructure to SMEs that is necessary to create the jobs our citizens deserve.
"In short, any serious look at the experience of post-crisis reform shows that reform and regulation support – not damage – long-term prosperity.
"Furthermore, the reforms have also brought benefits in terms of the distribution of the costs and benefits of finance. The removal of the implicit taxpayer subsidy transfers the costs of excessive risk taking to private creditors and away from the taxpayer.
"And by making resolution of failing institutions a real possibility and facilitating smooth exit, the reforms will also promote competition. Before the crisis, the largest and most systemic firms enjoyed the largest subsidies.
"Now, over time, the absence of that subsidy will create a level playing field, transferring the benefits of finance to customers and clients.
"These benefits will accrue slowly over time. Indeed, they may never be obvious to many who don’t recall a different world. That is why it is vital that our sons and daughters are taught not that financial crises are inevitable, but that they are both avoidable and tremendously costly for jobs, growth and prosperity."
Andrew Tyrie MP, Chairman of the Treasury Committee and former Chairman of the Parliamentary Commission on Banking Standards, said:
“The Governor has acknowledged that full implementation of a number of the fundamental reforms proposed by the Banking Commission is essential—a regulatory and supervisory framework strong enough to ensure that senior individuals can be held to account, remuneration structures that adequately align risk and reward, and reforms to address ‘too big to fail’ and the implicit taxpayer subsidy.
“The Governor has also agreed with the Commission that the EU’s crude bonus cap has the absurd and counterproductive consequence of limiting the scope for remuneration to be cut back. It is a fundamentally flawed tool that may serve only to push up fixed pay.
“As the Commission said eighteen months ago, improving standards in banking is a big job. There’s a lot more to do. The Bank of England, as well as the FCA and the banks themselves, have crucial work ahead in implementing the Commission’s reforms.”
