Hong Kong pay proposal aims to curb excessive risk

"Hong Kong pay proposal aims to curb excessive risk | AboutHK.Com - More Information About HK"

Robert Cookson The global crackdown on bank bonuses gained momentum in Asia yesterday as Hong Kong unveiled plans to rein in pay systems that encourage excessive risk-taking. Hong Kong is the first jurisdiction in the region to join Europe and the US witha proposed clampdown on remuneration structures blamed on contributing to the financial crisis. "Remuneration systems which create incentives for inappropriate or excessive risk-taking have the potential to threaten the safety and soundness of individual institutions and thereby ultimately the stability of the banking system as a whole," said the Hong Kong Monetary Authority, the territory's central bank. In a draft proposal set to be implemented by the end of the year, the HKMA said banks had until the end of 2010 to overhaul "poorly designed remuneration policies and structures". Both local banks and the Hong Kong operations of overseas-incorporated banks will be expected to demonstrate that they are in compliance with the HKMA's guidelines, which are broadly designed to link bonus pay to the creation of long-term value. Specific measures include giving risk managers a key role in setting remuneration policy, restricting guaranteed minimum bonuses, and linking pay to performance over several years. "We do not intend to prescribe particular levels of, or limits on, individual remunerations," the draft proposal said. But senior management and other employees "whose activities could have a material impact on the risk exposure" of the bank should receive bonuses mainly in the form of shares or other non-cash instruments, it said. The proposed rules would allow banks to "claw back" deferred bonuses from employees who failed to meet their targets. Institutions that failed to follow the guidelines would be subject to restrictions - for example, a limit on total bonus payments as a proportion of revenues. Karen Kemp, executive director for banking policy at the HKMA, said the regulator could impose stricter capital controls on banks that ignored the guidelines. Although it was unlikely, she said, in extreme situations banking licences could be revoked. The proposed guidelines are based on those issued by the Financial Stability Board in April. Banks in the territory have one month to respond to the proposals before they are implemented at the end of the year. The HKMA said it was consulting the Hong Kong Association of Banks. Copyright The Financial Times Limited 2009.