ABI demands banks rein in big bonuses

Unprecedented letter to lenders warns 'business as usual' is over in this year's bonus round

Shareholders yesterday called time on bumper bank bonuses, demanding that lenders rein in pay to reward investors and preserve capital.

In an unprecedented move, the Association of British Insurers has written to the chairmen of the UK's five publicly traded banks demanding wholesale, fundamental reform on pay.

With the end-of-year bonus season approaching, the ABI's demands will pile pressure on banks planning to shell out billions to top executives and traders.

The letter is the first time the ABI, which represents some of Britain's biggest institutional investors, has made such demands from one sector of British business. The move demonstrates that shareholders have finally lost patience with the huge rewards earned by top bankers at the expense of investors.

In the letter, Otto Thoresen, the ABI's chief executive, said: "It is our members' view that it can no longer be business as usual for this remuneration round. They expect to see significantly lower bonus pools and individual awards given the current market circumstances."

The ABI attacks the banks for their "inequitable" sharing out of profits, with too much going to employees compared with dividends for shareholders.

The letter is also addressed to remuneration committee chairmen at the five banks: HSBC, Barclays, Royal Bank of Scotland, Lloyds and Standard Chartered. It rejects the argument put forward by banks for years that if they cut bonuses their best employees will leave.

"This year is the time to make these changes. Very few banks are recruiting and most are reducing employee numbers. Given this lack of competition for staff, our members believe that the retention risk is now reduced."

The ABI also instructed banks to hold back capital to meet regulatory requirements and to make sure buffers are not boosted solely by cutting dividends.

The ABI also warned remuneration committees not to use "events outside management's control" as an excuse to boost pay. These could include the eurozone crisis or payments forced on the banks for misselling payment protection insurance.

Banks are also warned to take share price falls into account when setting bonuses. After big declines this year, bosses could be in line for windfall gains if the level of shares awarded is maintained as a multiple of salary.

The banks are already under pressure from the Bank of England to cut bonuses or dividends to boost their capital reserves instead of reducing lending to the wider economy. The ABI's intervention makes it clear that shareholders will not tolerate dividends suffering to maintain out-of-control bonuses for top executives and bankers.

The Government has vowed to clamp down on board pay. The ABI has aimed its demands at banks in particular because they face the biggest questions about how capital is divided up.