On 28 October 2008 Henry Waxman, chairman of the oversight committee in the House of Representatives, wrote to nine major US banks participating in the state bail-out, to demand employee compensation metrics for the years 2006 to 2008, particularly focusing on personnel paid more than $500,000 annually, and the ten highest-paid employees in those years. In Germany, any financial institution participating in the state bail-out must accept, among other requirements, a cap on directors' pay of €500,000 per year.
The UK government also intends to restrain future financial sector pay. In an open letter to bank CEOs, the regulator, the Financial Services Authority (FSA), announced on 13 October 2008 that: "there is widespread concern that inappropriate remuneration schemes, particularly but not exclusively in the areas of investment banking and trading, may have contributed to the present market crisis". It went on to state: "It would appear that in many cases the remuneration structures of firms may have been inconsistent with sound risk management. It is possible that they frequently gave incentives to staff to pursue risky policies...". The FSA wants to ensure that in future firms follow remuneration policies that are aligned with sound risk-management systems and controls, and expects firms to be moving towards such good practice.
It is not yet clear how the FSA will pursue this objective. However, momentum for global change is gathering. Following a Summit on Financial Markets and the World Economy held in Washington, DC, on 15 November 2008, the leaders of the G20 released a declaration emphasising their collective determination to enhance cooperation and work together to restore global growth and achieve needed reforms in the world's financial systems. Setting an "Action Plan to Implement Principles for Reform", the G20 included the proposal - for immediate action by 31 March 2009 - that: "Financial institutions should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking".
Immediate reactions to the political and regulatory rhetoric have included senior executives at institutions such as Goldman Sachs, RBS, Barclays, Deutsche Bank and UBS voluntarily waiving their latest bonus payments. Notably, UBS has also reclaimed a bonus paid to its ex-CEO.
This downward pressure on financial sector pay is being increased by media speculation and negative public perception. After widespread public criticism of its spending on executive and employee events immediately following its bail-out, AIG has been forced by Andrew Cuomo, New York attorney general, to freeze employee compensation payments, on the basis of preserving taxpayer funds.
Such extreme steps raise the unwelcome prospect of employees litigating to claim accrued but unpaid compensation (whether deferred or not). Given the potential scale of the problem, this could easily take the form of class actions. While senior bankers might seek to assuage public opinion by waiving their own bonus entitlements, if financial institutions reduce or withhold employee bonuses on a wider scale, they face an educated, affluent and motivated class of potential litigants who may have nothing to lose by banding together, particularly if facing redundancy.
US class actions operate on an 'opt-out' basis. There is no punitive costs regime and the sector is well-developed and funded. In the UK, employment class actions are still relatively rare, predominantly taking the form of equal pay disputes in the public sector. Significant inhibitory factors are the 'opt-in' basis (all litigants must be expressly included from the outset), a crippling civil court costs regime penalising the loser, and the resulting lack of third-party (or any) funding to fuel growth in such litigation.
However, change in the UK may be forthcoming. In July 2008 the Civil Justice Council (CJC), an advisory public body with responsibility for overseeing and coordinating the modernisation of the civil justice system, recommended to the UK government that there should be a more efficient and effective procedure for collective actions.
Simply put, its proposals could open up a class action regime in the UK. The CJC recommended the introduction of a generic UK collective action on either an opt-in or an opt-out basis for all civil claims that affect multiple claimants. In particular, it indicated that large-volume claims with common issues, such as equal pay, discrimination and pension claims, would be suitable for the US-style opt-out system. It also proposed a new power to award ‘aggregate' damages in opt-out cases - which would allow a court to make a global award covering the overall damages suffered by the class. The current, more difficult, requirement is the assessment of damages on an individual basis.
The UK government is considering the CJC proposals at the same time as its own, much-trumpeted equality reforms, due to be fully laid out in an Equality Bill (probably in 2009). This could add yet more pressure to a financial sector already beset with remuneration issues. The government is actively targeting the sector's allegedly unequal pay practices, claiming a gender pay gap of 41.5 per cent (men being higher-paid).
Government proposals to address such disparity include expanding the rights of statutory bodies and trade unions to bring collective pay and discrimination claims, asking the Equality and Human Rights Commission to conduct an inquiry into pay inequality in the financial sector, and banning "gagging" clauses (commonly used in financial institutions), which prevent employees discussing their pay and bonus. Focusing publicly on such equal pay issues will surely increase the potential for generating private sector class actions under any new regime instituted as a result of the CJC recommendations.
A mood for change is in the air, at both global and national level. The nature and extent of the regulation of financial sector pay will be one of the key political issues of 2009. Change will only be accelerated should financial sector workers feel forced to take matters into their own, collective, hands in the interim - no doubt illustrating the difficulties of seeking a collective remedy under the current UK legal system.