Lloyds TSB. Photo credit: Elliott Brown via flickr
Lloyds Bank is set to become the first bank to strip executives of part of their bonuses as a penalty for the Payment Protection Insurance (PPI) mis-selling scandal. Media reports vary as to the extent of the clawback ahead of the official announcement; according to the BBC, the British bank could take back £2 million in total from ten executives, with former chief executive Eric Daniels “expected to lose between 40% and 50% of a £1.45m bonus”.
PPI hit the headlines after it was revealed that policies to cover loan repayments in the event of illness or unemployment were mis-sold in some cases. Some customers were given the impression that the cover was mandatory, while others discovered the policy was essentially worthless due to exclusions in the terms and conditions. The Financial Services Authority (FSA) urged the banks involved to clamp down on bonuses in the wake of the scandal. So far, Lloyds, which is 41 percent taxpayer-owned after the 2008 bail-out, is the only institution to do so.
The move comes at a time when fat cat pay is very much in the public consciousness: Royal Bank of Scotland (RBS) chief executive Stephen Hester turned down a £1 million bonus after considerable media pressure, while Business Secretary Vince Cable announced government plans to curb excessive corporate pay.
How important is the clawback? “Some will say it is small comfort to the Lloyds customers caused considerable distress when they found their PPI insurance was worthless,” wrote Robert Peston at the BBC, pointing out that the affected Lloyds executives will still receive considerable bonuses. However, Peston argued that the Lloyds clawback is a significant move because it could act as a deterrent: “If bankers start to feel that there is a serious risk of impoverishment when decisions they take go bad… it may make them kick the tyres a little bit more assiduously when they launch new products or do assorted deals.”
“The pressure is now on all the other banks involved in mis-sellling. If they cannot swiftly and visibly punish those responsible, you have to question how serious they are about cleaning up their act,” Richard Lloyd from Which? told The Telegraph in the wake of the Lloyds bonus clawback decision.
Everybody’s doing it so why can’t I? RBS director Penny Hughes defended Stephen Hester’s original bonus in an interview with The Financial Times: “We can’t be in a position where we penalise people because RBS is, to an extent, supported by the taxpayer as a consequence of actions from prior management,” said Hughes, reported The Financial Times. According to Hughes, the RBS pay structure is vital to retaining talented managers, who can help return the bank to profitability and therefore ensure the government can eventually sell off its shares for a good price.
No end in sight for bail-out banks. Former Lloyds CEO Daniels told a Parliamentary committee in March 2011 that taxpayers could expect a “very handsome return” when the UK government sells off the bank, reported The Daily Mail. However, this “handsome return” is still a long way off, with Lloyds and RBS, which is 82 percent taxpayer-owned, expected to post billion-pound losses in 2011. Due to the economy, eurozone crisis and recent regulatory changes, “analysts reckon that the government will be stuck with an 82% stake in RBS and a 41% stake in Lloyds for some time yet”, wrote Jill Treanor in The Guardian.
Bonus culture: Not just a banking problem. Ministry of Defence officials have received £40 million in bonuses “at the same time as members of the armed forces have been subject to a two-year pay freeze and 20,000 are to be made redundant”, reported Sean Rayment for The Telegraph. And the fun doesn’t stop there: “It has also emerged that senior servants are entitled to claim for damaged clothing, handbags and shoes at the expense of the taxpayer even if the government department was not negligent,” said Rayment.