US banking groups have criticised regulators’ proposed restrictions on certain incentive-based pay saying these were driven by “political” reasons and ignored “significant concerns” by the industry.
The proposal, published yesterday by the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency and the Office of the Comptroller of the Currency, aim to avoid compensation being an incentive to take excessive risks.
Greg Baer, CEO of advocacy group The Bank Policy Institute, said in a statement that the “action by the FDIC [FHFA] and OCC is purely political. The proposal is an attempt to govern how financial services sector employees are paid”.
The American Bankers Association’s CEO, Rob Nichols, said that the authorities seem to be “ignoring the numerous and significant concerns raised by the industry when a nearly identical proposal was introduced in 2016”.
The Dodd-Frank Act, which was enacted in 2010 following the global financial crisis, required six regulators (the FDIC, OCC, Federal Reserve, FHFA, National Credit Union Administration, and the Securities and Exchange Commission) to jointly adopt a rule or guidelines to govern incentive compensation, but the industry has resisted previous regulatory attempts and regulators failed to agree on a common statement.
According to Nichols, “the Dodd-Frank Act required that this regulation be a six-agency effort, but as key officials have made clear in recent public statements, significant disagreements remain”. The fact that the FDIC and the other two regulators pushed forward the proposal without all the relevant agencies being involved is a “disappointing political exercise”, said Nichols.
Implementing yesterday’s proposal “is perhaps the most important Dodd-Frank rulemaking remaining to be implemented. I strongly support the proposed rule”, said FDIC chair Martin J. Gruenberg in a statement yesterday.
According to a review of institutions that failed between 2007 and 2010, poor compensation practices were in some cases a contributing factor to the institution’s failure, said Gruenberg.
The newly proposed rule includes prohibitions to incentive-based compensation arrangements that may encourage riskier behaviour. These include a prohibition on incentive-based compensation arrangements that do not include risk adjustment of awards, deferral of payments, and forfeiture and clawback provisions.
The agencies are now seeking comments on all aspects of the rule, including potential alternative provisions.
