30th July 2014
UK bankers may have to hand back bonuses up to ten years after they receive them under new plans published today by the Bank of England. The rules come into force in January next year in time for next year’s bonus season. The rules may see bankers asked to pay back money even if they have already cashed in or spent the money. Under current rules, bonuses are usually deferred for between three to five years, and can be clawed back if appropriate.
The new regime will be overseen by the Prudential Regulatory Authority, part of the Bank of England, and by the Financial Conduct Authority.
The rules would require bankers to prove they had acted appropriately – a reversal of the burden of proof. Senior bankers would also be subjected to annual checks to ensure they comply with the new rules if they fall within the regulatory category of a “significant harm function”.
The regulators said in statement: “The behaviour and culture within banks played a major role in the 2008-09 financial crisis and in conduct scandals such as payment protection insurance misselling and the attempted manipulation of Libor. However, under the statutory and regulatory framework in place at the time, individual accountability was often unclear or confused. This undermined public trust in both the banking system and in the regulatory response.”
For most senior bankers, bonuses must be deferred for seven years and for less senior staff for five years, though in some cases, bonuses could be clawed back after 10 years (see excerpt from consultation paper at foot of this article).
The regulators are also examining how they could stop bankers being “bought” out of their bonuses by new employers.
Bankers can no longer receive payouts entirely in cash and they must be deferred for at least three years. New EU rules this year require bonuses to be capped at one times salary or twice but only if shareholders approve.
Deputy Bank of England governor Andrew Bailey, who also head the FCA, says: “Holding individuals to account is a key component of our job as regulators of banks. The combination of clearer individual responsibilities and enhanced risk management incentives will encourage individuals in banks to take greater responsibility for their actions. We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behaviour and culture within banks and will help to ensure that they are managed in a way that promotes the safety and soundness of individual institutions.”
Antony Jenkins, chief executive of Barclays, supports the plans. Speaking to the BBC, he said: “I believe that banks have to regulate themselves and that’s why culture is so important, so that banks do the right business in the right way. I would say that in principle, I support the idea that where there is wrongdoing, there should be appropriate punishment. If that’s criminal wrongdoing, it should be criminal, if it’s recklessness, that should be punished also, so I’m not against the concept of clawback.”
However the Confederation of British Industry has warned that the plans are the toughest in the world. John Cridland, CBI Director-General, said: “Pay deferral and clawback will make sure that performance and remuneration are aligned for the long term and can help keep conduct in check. “But as these new rules are amongst toughest in world, we need to be careful we don’t create uncertainty which might make it increasingly hard to attract talent to London. The Government needs to work hard to ensure the UK remains competitive as a leading global financial centre.”
PRA and FCA proposals
3.5 The PRA and FCA propose that firms should
provide for an option to extend the clawback period for
Senior Managers of up to a further three years at the end of
the normal seven year clawback period (ie to ten years) in
the following circumstances:
(a) where a firm has commenced its own internal inquiry into
a potential material failure, which could potentially lead
to the application of clawback; or
(b) where a firm has been clearly notified by a regulatory
authority (including an overseas authority) that an
investigation has been commenced which the firm
considers could potentially lead to the application of
The decision on whether the circumstances for extending the
clawback period had been met would be a matter for the firm.
The firm would, however, be expected to discuss the
circumstances giving rise to a possible extension with the
In taking this decision, the firm would need to take
account of all relevant factors, including the degree of
proximity and/or responsibility of individual Senior Managers
for the potential failure in question, and the period of
extension would lapse once the relevant investigations were
concluded and the degree of responsibility of individuals had