New standards may be needed to put bankers' fixed pay at risk, as part of efforts to reduce imprudent risk-taking and short-termism in finance, the Bank of England governor has said.
Mark Carney said the new European Union bonus cap - which the UK is challenging in the EU court - would have the "undesirable side effect of limiting the scope for remuneration to be cut back" .
This, he argued, means there is a case for further reform to make sure that the burden of misconduct and bets that go wrong is properly borne by bankers.
Britain's existing regime allows the deferral and clawing-back of bonuses, an issue that has come to the fore following the multi-billion dollar settlements last week following allegations of foreign exchange market rigging.
"Standards may need to be developed to put non-bonus or fixed pay at risk," Mr Carney said in a speech in Singapore on Monday. "That could potentially be achieved through payment in instruments other than cash."
He cited a suggestion by Bill Dudley of the New York Federal Reserve for certain staff to be paid partly in "performance bonds" as one possible solution. Mr Carney said: "Senior manager accountability and new compensation structures will help to rebuild trust in financial institutions."
Reform will be helped, Mr Carney argued, by the UK's Fair and Effective Markets Review, which is being jointly led by his BoE colleague Minouche Shafik.
The review would explore ways to improve market transparency, competition and trading infrastructure, he said.
"Principles of fair markets, codes of conduct for specific markets, and even regulatory obligations can all help. There must be clear consequences - including professional ostracism - for failing to behave properly."
In his address, Mr Carney argued that there had been major progress in creating a safer financial system following the 2007-09 crisis. The prudential requirements and supervisory framework for banks were now "largely settled", he said.
The system, he argued, was now safer, simpler and fairer - the latter thanks to moves to end implied public subsidies for banks that are too big to fail.
This did not, however, mean the task of reforming finance was over. Steps were needed to secure a more diverse, trusted and open financial system were needed.
On the diversity front, for example, regulators needed now to work on ensuring market-based finance is resilient -- on top of bank-based finance. Mr Carney pointed out that almost half of the $70tn in managed assets globally is in funds that offer investors redemption at short-notice, and that funds are increasingly investing in higher-yielding, less liquid assets.
"The compression of liquidity risk premia suggests that investors are assuming any future withdrawals from funds will be conducted in an environment of continuous market liquidity and that the value of their fund holdings will not fall substantially when they exit. The risks to that assumption are in only one direction."
Global regulators are examining whether certain big asset managers should be designated as systemically important as a prelude to subjecting them to sharper oversight.
Mr Carney said that size may not be the best indicator of systemic importance, and that regulators may need to assess risk based on the types of activity being undertaken by firms.
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