By Sharlene Goff and Megan Murphy
The City regulator is pressing banks to cut bonus pools to reflect huge losses triggered by mis-sold loan insurance, as it moves to penalise them for one of the worst consumer scandals in decades.
In an attempt to avoid another display of bankers being rewarded for failure, the Financial Services Authority is demanding that institutions take account of the multibillion-pound compensation bill for payment protection insurance when they calculate pay-outs for 2011.
?The FSA has been pushing banks quite hard to recognise PPI in their bonus awards,? said one person familiar with its recent pay discussions with the banks. ?The conversations have been robust.?
Last year the UK?s five biggest lenders took charges totalling almost ?6bn for their longstanding practice of providing loan insurance to people who did not need or want protection. PPI was frequently sold alongside loans to cover repayments when borrowers fell ill or lost their jobs.
The FSA does not have specific power to intervene on bonuses but it believes that, just as bank shareholders bore the brunt of the charges through writedowns made in the first half of 2011, so too should bank staff.
Pay discussions between the FSA and the big banks are set to continue over the coming weeks. While the regulator would not comment on the PPI issue, it said it was ?vigorously engaging? with the banks to ensure they were not paying out large bonuses if they had not yet met tough new capital requirements.
Some banks are expected to resist the pressure, arguing that most staff responsible for PPI mis-selling have since left.
However, many bankers have acknowledged that the PPI mis-selling scandal cannot be ignored. Bob Diamond, chief executive of Barclays, told a parliamentary committee last month that PPI should be a factor in this year?s pay talks. Barclays took a charge of ?1bn for mis-selling the insurance.
Lloyds Banking Group, which took by far the largest PPI chargeof ?3.2bn, is trying to claw back part of the bonus awarded to former chief executive Eric Daniels a year ago.
The FSA?s negotiations come as banks push ahead with plans to make large pay-outs to staff in spite of repeated calls for restraint from policymakers.
David Cameron, the prime minister, came under renewed pressure this weekafter it emerged that Royal Bank of Scotland, which is 83 per cent state-owned, was preparing to award its chief executive a bonus of at least ?1m for 2011, a year in which the bank?s share price fell by 43 per cent.
British banks are expected to reveal their bonus pools next month.
Analysts expect pay-outs across the industry to total about ?4bn, the vast majority of which will be handed to investment bankers.
The impact of the PPI charges is expected to be felt largely among group executives and retail banking staff. But bankers acknowledge that as the losses will affect overall group profitability, investment banking staff may have to take their share of pain.
?We are all part of the same game,? said one senior banker.
? The Financial Times Limited 2012