New Swiss Bonus Rules Target Big Banks and Insurers

By | November 11, 2009

Switzerland’s largest banks and insurers will have to defer the bulk of managers’ bonuses and better match pay to performance under new rules aimed at curbing risky investments.

Swiss financial regulator FINMA had planned to impose the rules on the vast majority of the financial sector, but watered down its original proposals after industry lobbies said it could harm smaller firms.

“We welcome the fact FINMA has differentiated between the different banks so that the smaller banks are less affected,” said Swiss Bankers Association spokesman Jean-Marc Felix.

The new rules, to come into force on Jan. 1, 2010, placed Switzerland in a growing group of countries moving the focus of compensation away from a short-term culture blamed for the financial crisis towards longer-term sustainable profitability.

“Remuneration schemes can create false incentives which may lead to inappropriate risks being entered into, threatening the business and profitability of a financial institution and, at the end of the day, its stability,” regulator FINMA said.

FINMA said there would be no cap on executive bonuses, another point welcomed by the banking association, and that the new system would apply to the country’s seven largest banks and five biggest insurers, although it did not name them.

The Swiss Insurance Association also welcomed the fact that small firms would not be affected but still expressed concerns.”We fear there may be disadvantages for the five international insurers because in our neighboring countries the regulation seems to be not so strict, for instance in France,” said Frank Keidel, spokesman for the insurance association.

FINMA said it would welcome the introduction of clawbacks on bonuses when performance was poor, such as was already the case with the country’s top two banks UBS and Credit Suisse.

Responding to criticism from the financial industry to its original draft, FINMA said the rules were compulsory only for firms with at least 2 billion Swiss francs ($1.98 billion) in equity capital or as solvency.

The new rules are expected to apply to UBS, Credit Suisse and also large insurers such as Swiss Life, Swiss Re and Zurich Financial Services, analysts say.

GLOBAL TREND
Leaders from the Group of 20 nations adopted guidelines on curbing bonuses at a meeting in Pittsburgh in September after countries like Germany, Britain and France had already started to take regulatory action to curb excessive bonuses.

“There is a lot of pressure to do something on the compensation front,” said Andreas Venditti, a banking analyst at ZKB. “At first sight, the Swiss rules appear to be consistent with international guidelines.”

Analysts said base salaries, stuck for years at large Swiss banks, would rise as the importance of bonuses diminishes. This would limit the flexibility the banks have enjoyed until now and also change the way firms spread compensation costs over time as payouts are made more in cash than shares.

Credit Suisse last month unveiled a new compensation scheme that it said would meet new G20 standards.

UBS, which received state aid to overcome the subprime crisis last year, has said in an internal memo seen by Reuters it also plans to change its compensation structure. Hefty bonuses and salaries at UBS caused public outcry in Switzerland, leading former chief Marcel Ospel and other ex-board members to return 33 million Swiss francs ($32.71 million) in payments.

UBS was also sharply criticized earlier this year for increasing bankers’ pay. Newly-appointed new Chief Executive Oswald Gruebel said the bank had to pay market level salaries to retain stuff.
(Additional reporting by Emma Thomasson, Pascal Schmuck, Jason Rhodes in Zurich)

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