Tyrie (pictured) said he has been spurred to write the letter in advance of Tuesday’s evidence session with the FCA, and following the Final Notice issued against Lloyds in December 2013 for serious failings in its controls over sales incentive schemes.
Tyrie said:”Banks have rewarded poor behaviour, causing losses to their firms, their reputations and their customers. In some cases, remuneration structures encouraged behaviour which added great risk to the financial system.
“Incentives have been deeply misaligned for significant numbers of front-line staff, not just highly remunerated traders or the most senior executives. Deep cultural change is needed.”
Tyrie highlighted that the Banking Commission made a number of detailed proposals fundamentally to reform remuneration and accountability structures in banks.
A core principle of the Commission’s work has been the need to align much more closely the payment of the reward to the maturity of the risk.
“The Government legislated to implement some of these recommendations – including the Senior Managers’ Regime and Certification – in law. It is now crucial that the regulators make them work,” he said.
The governor of the Bank of England also recently announced that the Prudential Regulatory Authority will launch a consultation in April on changes to the current remuneration code in order to give effect to the Commission’s proposals.
“This is necessary and welcome but it won’t be sufficient fully to address all the problems of misaligned incentives,” Tyrie said, as the remuneration code applies only to staff deemed to be ‘Material Risk Takers’.
In its response to the Banking Commission, the FCA has already clarified that, in its view, the definition of ‘Material Risk Takers’ does not extend to sales staff in retail banks.
“That is why – having examined the ‘Material Risk Taker’ definition – the Banking Commission also made clear that it wanted specific provisions empowering the regulator to limit the use and scale of sales-based incentives to prevent the kind of conduct failure outlined in [Lloyds’] Final Notice,” Tyrie said.
“So far, the FCA has shown little enthusiasm for taking such action. Following the record fine levied against Lloyds, it should reconsider.
“Unless such issues are addressed now, the risk of conduct failure at some point in the future can only increase,”he added.
