BoE Unveils Tough Clawback Rules On Bankers' Bonuses
The Bank of England on Wednesday outlined plans to tighten bankers' bonus rules that eventually limits their inclination to take high risk.
According to the new proposal, bankers could be forced to pay back their bonuses up to seven years from the date of payment if they break financial conduct rules.
Earlier in March, the BoE had suggested to set the clawback period at six years from the time of receiving the payment.
Currently, bonuses are paid out over a period of three to five years, and it could be clawed back if appropriate. Depending on seniority, the bank today said deferred portion of bonus payment should be made at least in five or seven years.
The consultation on new rules will close on October and it will come into force on January 1, 2015. This new regulatory framework was proposed jointly by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority.
"Clawback is most appropriate in cases where the individual has some responsibility or culpability for the circumstances giving rise to the grounds for action," PRA said. The central bank thus, "narrowed the grounds to exclude a material downturn in financial performance."
The announcement came after Lloyds Banking Group was fined GBP 218 million for rigging market benchmarks, earlier this week.
"As these new rules are amongst toughest in world, we need to be careful we don't create uncertainty which might make it increasingly hard to attract talent to London," said, John Cridland, Director-General of Confederation of British Industry.
New banker rules 'could hurt London as a financial centre'
Bank of England plans to force badly-performing bankers to pay back bonuses could hurt London as a financial centre, the banking industry has said.
The new rules could put UK banks at a disadvantage compared with banks elsewhere, an industry body said.
Bankers may have to give back bonuses up to seven years after being awarded them.
Even if share awards have been cashed and spent, bankers could be asked to pay the money back.
Many bankers receive a substantial chunk of their pay in the form of an annual bonus, which can be up to double their basic salary.
Under current rules, that bonus is usually deferred for a period of three to five years, during which time it can be clawed back if appropriate.
But misconduct such as rigging interest rates or reckless risk-taking can take longer to emerge, so under the new policy, bonuses may be clawed back up to seven years later.
The Bank also published new rules for senior managers in the industry.
The British Bankers' Association (BBA) said the pay rules would put the UK at a competitive disadvantage.
"We now have the toughest regime in banking pay of any global financial centre," said Anthony Browne from the BBA.
"Bankers are paid less here than in New York, Singapore or Hong Kong, and ultimately this could have an impact on the competitiveness of London as a financial centre and the jobs and tax paid here.
"We have the world's largest international banking sector and we do have to make sure that we can continue to employ banking talent from around the world."
Bankers who are found guilty of "causing a bank to fail" by taking a "reckless decision" can already be sent to jail, or given unlimited fines.
To be found guilty, senior managers have to be aware at the time that their actions might cause the bank or building society to collapse.
If convicted, they can face up to seven years in jail.
"Holding individuals to account is a key component of our job as regulators of banks," said Andrew Bailey, the Bank's deputy governor for prudential regulation.
"The combination of clearer individual responsibilities and enhanced risk management incentives will encourage individuals in banks to take greater responsibility for their actions," he said.
The move comes days after Lloyds Banking Group was fined £218m.
The company was condemned for "serious misconduct" over certain key interest rates set in London.
Antony Jenkins, chief executive of Barclays, was supportive of the Bank of England plans.
"I believe that banks have to regulate themselves and that's why culture is so important, so that banks do the right business in the right way," he said.
"I would say that in principle, I support the idea that where there is wrongdoing, there should be appropriate punishment.
"If that's criminal wrongdoing, it should be criminal, if it's recklessness, that should be punished also, so I'm not against the concept of clawback," he continued.
The Bank of England warned in March that bankers might have to return their bonuses up to six years after receiving them.
Speaking earlier in the year, Mark Carney, the governor of the Bank of England, told the BBC's Andrew Marr that bank bonuses should be deferred for a "very long time" to ensure bad practice was not rewarded.
The new rules on bonus payments will come in on 1 January 2015, in time for next year's round of bonus payments in the City.
GBP/USD drops on hopes for upbeat U.S. jobs report
The pound fell against a the dollar on Thursday on hopes Friday's U.S. monthly jobs report will show continued improvements in the labor market, while disappointing U.K. house price numbers softened the pound.
In U.S. trading on Thursday, GBP/USD was trading down 0.16% at 1.6886 up from a session low of 1.6858 and off a high of 1.6927.
Cable was likely to find support at 1.6739, the low from June 11, and resistance at 1.7001, Monday's high.
The Labor Department on Friday will release its July nonfarm payrolls report, and consensus forecasts see the U.S. economy picking up 230,000 new jobs.
Even if the figure comes in below that number, a reading over 200,000 would represent six straight months of beating that threshold, a sign the labor market is improving even if it's still a little slack.
Earlier Thursday, the Labor Department reported that the number of individuals filing for unemployment assistance in the U.S. last week rose by 23,000 to 302,000 from the previous week’s total of 279,000. Analysts had expected jobless claims to rise by 22,000 to 301,000.
The Labor Department added that the employment cost index rose by 0.7% in the three months to June after a 0.3% increase in the first quarter. Economists had expected a 0.5% gain.
The dollar continued to see support from Wednesday's U.S. gross domestic product report.
The U.S. GDP expanded at an annual rate of 4.0% in the three months to June, blowing past forecasts for a 3.0% reading, according to the Commerce Department. The contraction in the first quarter was revised to 2.1% from a previously reported 2.9%.
Personal consumption grew 2.5%, well above predictions of 1.9%.
Meanwhile in the U.K., the Nationwide Building Society reported earlier that property values rose 0.1% in July from June, missing market calls for a 0.5% reading, which softened the pound.
Property values rose 10.6% on year in July, below expectations for a reading of 11.3%
Elsewhere, sterling was down against the euro, with EUR/GBP up 0.09% at 0.7928, and down against the yen, with GBP/JPY down 0.16% at 173.60.
On Friday, the U.K. is to release data on manufacturing activity.
Markets will move on the U.S. nonfarm payrolls and the unemployment reports, while the Institute of Supply Management is to release data on manufacturing activity.
British manufacturing sector logged its weakest growth in a year in July as growth in output and new orders eased from June, the results of a survey by Markit Economics and the Chartered Institute of Purchasing and Supply showed Friday.
The Makit/CIPS manufacturing Purchasing Managers' Index fell to 55.4 in July from a revised 57.2 in June. Economists had expected the index to come in at 57.2, down from June's original estimate of 57.5.
Although the index remained above the survey average of 51.5, this was the lowest reading in a year. Nonetheless, the index has stayed above the 50-mark throughout the past 17 months.
July's CIPS manufacturing survey has not shaken the belief that the sector will enjoy a strong recovery in the second half of 2014, said Samuel Tombs, a senior economist at Capital Economics. The economist expects 3 percent annual growth in manufacturing output both this year and 2015.
Manufacturing production continued to increase in July, though the rate of increase slipped to its lowest in over a year, Markit said.
New orders also continued to improve but at a slower rate than in June. Companies linked increased inflows of new work to the launch of new product lines, stronger economic sentiment and rising demand.
Staffing levels rose for the fifteenth successive month in July. However, the rate of increase slowed to a nine month low.
On the price front, Markit said input costs grew for the third consecutive month. Higher costs for meals, plastics and timber raised input price inflation.
Output prices increased for the thirteenth consecutive month in July, reflecting improved new work inflow.
Rob Dobson, senior economist at Markit Economics, said if crisis in Russia deteriorates, goods exports of the U.K. would come under further pressure.
"It remains too early to gauge the impact of the Ukraine crisis, but the worry is that the combined effects of expected policy tightening, heightened economic uncertainty and sluggish trade could mean manufacturing growth could suddenly weaken more than expected," Dobson said.
The survey was conducted between July 11 and 28.
IHS Global Insight's Chief U.K. Economist Howard Archer said, much attention will now be focused on the PMI survey for the dominant services sector for July which comes out on Tuesday. The service sector has been driving the growth, so the services PMI will provide important evidence as to whether UK growth really is losing momentum.
The GBP/USD pair as you can see fell hard during the course of the week, slamming into the 1.68 level. We are now testing the very uptrend line that has shot this market higher, and as a result the next couple of weeks should be rather interesting. We quite simply need to see some type of supportive candle between here and 1.67 in order to stay positive. If not, we could have a rather significant correction. If we get that correction, we would expect the 1.65 level to be targeted first, and then the 1.62 level.
Pound Has Longest Losing Streak in 16 Months as Data Disappoints
The pound declined for a fourth week against the dollar, the longest losing streak in more than a year, as U.K. economic data from manufacturing output to consumer confidence was weaker than economists predicted.
Sterling dropped to the lowest level in seven weeks versus the dollar after data showed the U.S. economy grew more than analysts forecast and employers added more than 200,000 jobs for the sixth consecutive month, boosting expectations for higher Federal Reserve interest rates. Britain’s currency depreciated against the euro for the first week since the period ended July 11. U.K. government bonds were little changed.
“Sterling declined because of various data results that have been uniformly disappointing this week but not dire,” said Peter Frank, global head of Group-of-10 and Asia currency strategy at Banco Bilbao Vizcaya Argentaria SA in London. “We have a forecast for a mild underperformance of sterling in a short-to-medium term period where we think the market has got ahead of itself on how much growth there is likely to be in U.K. economy and what the reaction function will be of the Bank of England.”
The pound dropped 0.8 percent this week to $1.6832 as of 5:11 p.m. London time yesterday, when it reached $1.6814, the lowest since June 12. The fourth week of declines is the longest run since March 8, 2013. The U.K. currency weakened 0.9 percent to 79.80 pence per euro, the steepest weekly fall since the period ended Feb. 21.
BBVA forecasts the pound will depreciate to $1.65 by the end of September, Frank said.
The dollar traded unchanged or positive against most pairs the G10 during the European morning of Friday. Was positive against the GBP, the JPY, CAD, AUD and NOK, in that order, and negative against the SEK. The "greenback" was unchanged against the EUR, CHF and JPY.
The SEK was the only currency that appreciated against the dollar during the European session this. PMI in this country rose to 55.2 points in July, being above the expectations of the market and 54.8 points above a fractional growth for 54.9 points. Better than expected, this indicator SEK helped recover some losses last Wednesday, resulting from the disclosure of GDP for the second quarter below expectations, giving investors a reason to believe in a strong currency and a more robust economy .
UK Construction PMI 62.4 in July – above expectations – GBP/USD rises
A slightly better than expected number for the UK construction sector.: 62.4 points. Markit’s construction PMI for the UK was expected to slide from 62.6 in July to 62.1 points, still reflecting very strong growth. The construction sector still leads the current growth cycle.
GBP/USD started the new trading week on low ground, trading around 1..6824. The pair is now marginally higher to 1.6830. The surprise wasn’t huge, but after quite a few disappointing figures from the UK, this is good news.
Last week, the manufacturing PMI disappointed by showing slower growth. This dealt a blow to the pound, which was already weakening. Tomorrow we have the last of the series: services PMI. This is also the most important one, as it is the largest sector in the British economy.
The pound edged up against the U.S. dollar on Monday, but still remained within close distance of a one-and-a-half month low as demand for sterling remained under pressure after data showed that activity in the U.K. construction sector slowed in July.
GBP/USD hit 1.6844 during U.S. morning trade, the session high; the pair subsequently consolidated at 1.6838, adding 0.10%.
Cable was likely to find support at 1.6790, the low of June 12 and resistance at 1.6891, the high of August 1.
The U.K. construction purchasing managers’ index slowed to 62.4 from 62.6 in June, but was still slightly ahead of expectations for a reading of 62.0.
The overall pace of growth was the fastest since 2007, with housing activity still by far the best performing construction category. Last month’s increase in output was the sharpest for over a decade.
Sharp increases in overall construction activity also led to a new survey-record pace of job creation in the sector last month.
Meanwhile, demand for the dollar remained supported despite data on Friday showing that U.S. jobs growth slowed in July.
The U.S. economy added 209,000 jobs last month, below forecasts for jobs growth of 233,000.
Although it was the sixth successive month that the U.S. economy added more than 200,000 jobs, the unemployment rate unexpectedly ticked up to 6.2% from 6.1% in June. In addition, wage growth was flat, pointing to underlying slack in the economy.
The data prompted investors to trim back expectations on the timing of a possible rate hike by the Federal Reserve.
Sterling was higher against the euro, with EUR/GBP edging down 0.17% to 0.7970.
Also Monday, official data showed that the number of unemployed people in Spain dropped by 29,800 last month, compared to expectations for a decline of 116,300. In June, the number of unemployed people in Spain declined by 122,700.
U.K. services PMI rises to 8-month high of 59.1 in July
Service sector activity in the U.K. expanded at the fastest pace in eight months in July, fuelling optimism over the country’s economic outlook, industry data showed on Tuesday.
In a report, market research group Markit said the seasonally adjusted Markit/CIPS Services Purchasing Managers Index rose to 59.1 last month from a reading of 57.7 in June. Analysts had expected the index to inch up to 57.9 in July.
On the index, a level above 50.0 indicates expansion in the industry, below 50.0 indicates contraction.
Commenting on the report, Chris Williamson, Chief Economist at survey compilers Markit said, “The buoyancy of the services and construction sector PMIs suggest the domestic economy clearly continued to boom in July, offsetting the cooling of growth seen in the manufacturing sector.”
“We would expect to see GDP rise by 0.8% again if the surveys hold their current levels,” he added.
Following the release of that data, the pound turned higher against the U.S. dollar, with GBP/USD rising 0.13% to trade at 1.6884, compared to 1.6850 ahead of the data.
Meanwhile, European stock markets remained higher. London’s FTSE 100 tacked on 0.5%, the DJ Euro Stoxx 50 rose 0.65%, France's CAC 40 advanced 0.8%, while Germany's DAX added 0.8%.
Moody's Investors Service on Tuesday lowered the outlook for the U.K. banking system to 'negative' from 'stable' after the new regulation prevent the use of taxpayer funds to support the failed banks.
The key driver for the latest action was that the government is now able to finalize the legislation to implement the structural reforms relating to the UK resolution and bail-in regime and the related ring-fencing framework, said Carlos Suarez Duarte, a Moody's Vice President - Senior Analyst and author of the report.
In addition, banks will be exposed to both conduct and litigation charges, which might constrain profitability and erode capital for some banks.
The negative outlook on the system is consistent with the negative outlooks on the six largest rated UK institutions, which account for 93.6 percent of active current accounts.
Meanwhile, improved credit fundamentals of most UK banks, mainly asset quality, earnings and capital, put them in a stronger position to withstand unexpected shocks, it said.
Manufacturing production in the U.K. rose less than expected in June, while industrial output also came in below forecasts, official data showed on Wednesday.
In a report, the U.K. Office for National Statistics said that manufacturing production inched up by a seasonally adjusted 0.3% in June, disappointing expectations for a gain of 0.6%. Manufacturing production in May dropped by 1.3%.
On an annualized basis, manufacturing production rose at rate of 1.9% in June, below forecasts for a 2.1% increase, after rising at a rate of 3.7% in the preceding month.
The report also showed that industrial production rose by a seasonally adjusted 0.3% in June, compared to expectations for a 0.6% gain, after falling 0.6% in May.
Following the release of the data, the pound added to losses against the U.S. dollar, with GBP/USD shedding 0.28% to trade at 1.6839, compared to 1.6856 ahead of the report.