Whenever there’s a financial scandal, someone asks: “Where was the regulator?” The answer may soon be: “On strike.”
On Monday, trade union Unite started balloting staff at the Financial Conduct Authority over industrial action. It hasn’t said how many FCA staff are members and the union is yet to be formally recognised by the watchdog. But it is clear enough that morale is low, turnover is high and that this is a new nadir in relations between employees and employer — which, for a regulator that once had to upbraid staff for defecating on the floor in its new headquarters, is quite something.
The upset is over proposals to reform pay. There is little doubt that the regulator itself needs reform. A scathing report into its handling of the London Capital & Finance minibond scandal made that clear. Bondholders lost thousands. FCA executives lost their bonuses.
The regulator is now under new management. Chief executive Nikhil Rathi has set out his aim to fashion an organisation that is more innovative, assertive and agile. He wants to harmonise pay scales to make it easier for staff to move and break down silos in the process. Few in the industry would argue against a reduction in bureaucracy from Stratford’s financial enforcers.
The question is whether making individuals take a pay cut is the best way to boost performance.
The board wants to change the bonus system to encourage employees to achieve the FCA’s objectives. These are hard things to incentivise: it is difficult to concoct key performance indicators that measure protecting consumers from harm, enhancing the integrity of the UK’s financial system and promoting competition.
So it is easy to see why the FCA has ended up with a system where its bonuses aren’t really bonuses. Instead, the 70 to 90 per cent of people who are at least fulfilling their objectives — doing their job — get a “discretionary” payment of roughly 10 per cent or more each year. In this case, the 10 per cent uplift is not really pay for outperformance. It is more akin to base pay. And the new scheme gets rid of it.
Staff will be given an increase to their base pay if they meet their objectives and aren’t already high earners. But these pay rises will be less than under the current system, even if they compound over time. The lowest paid will receive bigger salary bumps. That still means an immediate pay cut for most though.
Slimming down bonuses isn’t a bad idea in principle. Few people join a regulator for the money they earn while they’re there. But trying to cut variable pay without increasing base salaries is a difficult task that needs to be delicately handled. And that is where the FCA’s managers look to have badly bungled.
Rathi’s reforming zeal is not a bad thing — occupants of the FCA’s top job do not get much time in the role. But restructuring employee pay is more sensitive than reforming its organisational structure — and his timing is terrible.
Working for a watchdog can feel thankless at the best of times. These are not the best of times for the FCA. Staff have been working flat out, first because of Brexit and then the pandemic. The LCF report hardly helped morale — a report into the Neil Woodford debacle is yet to come.
If the FCA will always come under fire from external critics, it is all the more important for staff to have an internal champion. Yet to some, Rathi looks to have joined the ranks of the critics. His comments dismissing employee concerns about pay cuts as “noise” at the Treasury select committee last month will do nothing to quieten dissent.
The reforms look likely to be pushed through regardless. Inertia means many staff will stay and anger will ease. But the FCA may be stuck with a more antagonistic workforce. That will do nothing to enhance the reputation of a regulator already seen by many as a second-rate option to the Bank of England and the private sector. In his attempt to overhaul pay, Rathi has made the job of reforming the FCA all the more difficult.
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