"Don't punish us" plead UK's fledgling banks as new rules bite

By Sinead Cruise and Lawrence White

LONDON, March 23 (Reuters) - Tougher rules aimed at holdingtop UK bankers to account when things go wrong are driving uppay, which smaller "challenger" banks say is making it harder torecruit senior staff.

Executives at several such banks told Reuters the SeniorManagers Regime (SMR), which came into force this month, ishurting those with no history of wrong-doing more than biggerrivals, who were the ones the rules were aimed at.

Public outrage over the financial crisis and subsequentscandals prompted the SMR, allowing regulators to pin the blamefor excessive risk-taking and reckless expansion on individuals.

This marks a step change for British banking, wherepolitical scrutiny and tough new regulations had already made ithard to find people to take on some of the most senior jobs.

"While the SMR could potentially improve accountability andtransparency, it raises that barrier further," Rishi Khosla,Chief Executive of OakNorth Bank, said.

The challengers say a one-size fits all approach toregulation is stifling their efforts to grab market share frombig fish such as HSBC, Lloyds Banking Group,Barclays and Royal Bank of Scotland.

This now appears to be at odds with the aim of Britain'sfinance minister George Osborne and other politicians ofboosting retail banking competition by encouraging new players.

HSBC, Lloyds, Barclays declined to comment, while RBS andthe Financial Conduct Authority, which designed the regulation,did not immediately respond to requests for comment.

While rising pay impacts all banks, the problem isparticularly acute for the minnows trying to recruitNon-Executive Directors (NEDs) who see increased risk fromjoining new banks with no track record and are demanding morepay.

"(They) are having to pay more to attract NEDs to theirboards due to the competition with the larger banks for thelimited pool of NEDs with relevant experience and willingness tojoin a bank's board," said Paul Lynam, Chief Executive ofchallenger Secure Trust Bank.

Barclays and HSBC, which reported billions of pounds inprofits last year, paid NEDs an average of 211,857 pounds and229,933 pounds respectively, while Shawbrook Group posted underlying pretax profit of 80 million pounds and paidthem a base fee of 65,000 pounds.

PERSONAL RISKS

The challenger banks are also harder hit by the fixed costsof complying with the new regime, the executives said.

Shawbrook needed six months to prepare the papers to complywith the SMR, its chief executive Steve Pateman told Reuters.

"The cost to the organisation was huge, both relative to oursize and relative to the damage or harm that we could do to theeconomy if we got it wrong," he said.

The rules are also impacting middle-managers, with some nowpreferring to keep a low profile in order to avoid being singledout in the event of another banking scandal.

Some are concerned about gaining promotion at smaller bankswith a shorter path to the top, according to PWC risk andregulatory partner Sarah Isted. This leads some to seek roles inbigger banks, enabling them to advance without taking on a moreregulated status.

At the same time the SMR has clarified responsibilities,Chris Box, human resources partner at PWC said, adding thatpeople wanting to join an institution perceived to have acleaner culture are more likely to work for a challenger.

It is not just the SMR which fledgling lenders say isstunting their growth. They already face sharp rises in taxafter Osborne introduced a profit surcharge because of the riskthey pose to the economy, a policy approved by Britain's topcompetition watchdog last month.

Osborne hinted at more proportionate regulation of smallerlenders in his budget last week, including possible changes tocapital requirements, but said nothing on executive supervision.

"It seems slightly arbitrary to punish the challengers when,in most instances, their existence postdates the credit crunchand they're far too small to pose any broader systemic risk,"Jamie Clark, a fund manager for Liontrust, said.

(Editing by Alexander Smith)