Three Regulators Propose Ban of Incentive-Based Compensation Arrangements

A trio of regulators have jointly proposed regulation aimed at increasing the risk sensitivity of executive compensation schemes within financial institutions.

The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Federal Housing Finance Agency proposed a rule that would prohibit incentive-based compensation arrangements that encourage inappropriate risks by a covered institution.

The regulation is designed to prevent leaders of financial institutions from taking on excessive risk in order to boost their personal compensation as this could lead to material financial loss for the firm.

The proposed rule would apply to national banks, federal savings associations and federal branches and agencies, as well as these institutions’ subsidiaries.

However, the rule is not applicable to brokers, dealers, insurance providers, investment companies and investment advisers or any firms with less than $1 billion in average total consolidated assets.

The rule resumes work on a long-delayed rule-writing project as it represents a renewed effort of a rule that was first proposed in 2016 as part of the 2010 Dodd-Frank financial reform law.

Following the announcement, the proposal has received backlash from the banking industry.

Greg Baer, president and CEO of Bank Policy Institute, said:  “As with its 2016 ancestor, the proposal is inconsistent with the statute they purport to be implementing, and an attempt to govern how financial services sector employees are paid, rather than a fact-based determination that certain pay practices are risky and should be prohibited, consistent with the statute.”

Rob Nichols, president and CEO of the American Bankers Association, said:  “Today’s unorthodox decision by the FDIC and other regulators to issue a notice of proposed rulemaking on incentive compensation without all the relevant agencies participating is a disappointing political exercise.”