By Huw Jones
LONDON, July 16 (Reuters) - Banks who don't comply with what will be the toughest remuneration regime in the world face big trouble, the author of a British government-sponsored review said on Thursday.
The worst financial crisis since the 1930s forced Britain to tap 1.3 trillion pounds of taxpayer money to nationalise two banks, Northern Rock and Bradford & Bingley, arrange a shotgun wedding of Lloyds and HBOS, and take a majority stake in RBS.
David Walker, a former chairman of Morgan Stanley bank's international unit, published 39 recommendations for changes in the way banks are run, from pay policies to selecting board members, in a bid to apply lessons from the credit crunch.
He noted widespread failures in bank governance but rejected the need for legislation despite critics who warn that when the boom times return, warnings about risk will be drowned out.
"Any bank which fails to conform with these recommendations if they are all adopted is going to be digging a big hole for itself," Walker told Reuters.
"Those who neither comply nor explain are going to have to go through the wringer with the Financial Services Authority. It's just daft to say this is voluntary. You comply or you are in deep trouble," Walker said.
The recommendations should be taken in tandem with measures being taken by the FSA to stop banks betting the shop, such as far higher capital and liquidity requirements, Walker said.
"In relation to remuneration, the combination with what the FSA is proposing gives the UK the toughest regime in the world," Walker said.
He recommends that the bank's remuneration committee report should state if any senior executive has the right or opportunity to receive enhanced pension benefits.
This follows public outrage regarding banks over Fred Goodwin, the former-chief executive of RBS, who walked away with a huge pension despite the bank needing a government rescue.
Walker said his recommendations give real detail to an area where global efforts, such as the Financial Stability Board, have focused too much on broad brush principles.
His recommendations, if adopted by the government, will also be given teeth by EU regulation which applies to Britain.
The European Union's executive European Commission has proposed a draft law that would give national regulators like the FSA powers to fine or raise capital requirements on a bank whose remuneration policies encourage too much risk taking.
It will be up to the UK government how to take the recommendations forward when they are finalised in November.
Walker said they could be included in an existing code on corporate governance enforced by the Financial Reporting Council watchdog which operates on a "comply or explain" basis.
NO SLACKERS
Board members and chairman would have to work harder in future, devoting far more time to the job and prove to the FSA in an interview they have the experience to understand some of the complex activities banks are involved in, Walker said.
Non-executive board members should spend up to 50 percent more time on the job or at least 30 to 36 days a year. Chairmen should devote probably not less than two-thirds of their time to the business of the entity.
"Many boards inadequately understood the type and scale of risks they were running and failed to hold the executive to high standards of sustainable performance," Walker said.
A bank's risk committee should have board level status and oversee due diligence of major transactions like takeovers and be able to challenge them.
Remuneration committees should also have more power to scrutinise company-wide pay and ensure that at least half of a bonus should be paid on a long-term incentive basis, subject to performance conditions and deferred for up to five years.
"Bonus schemes contributed to excessive risk-taking by rewarding short term performance. And shareholders failed to exercise proper stewardship," Walker added.
To help shareholders hold boards and banking executives to account, Walker also recommends they be allowed to agree a memorandum of understanding on collective action.
This aims to overcome the difficulty of institutional investors having a strong say when individually, they hold only a small percentage of the bank's stock.
(Reporting by Huw Jones, editing by Toby Chopra)