BOE targets bankers' bonuses with seven-year clawback rule

PUBLISHED : Thursday, 31 July, 2014, 1:24am
UPDATED : Thursday, 31 July, 2014, 6:23pm

Senior bankers could be forced to pay back bonuses as long as seven years after they are awarded under new Bank of England rules to curb short-term risk-taking.

Banks operating in Britain should amend employee contracts so they can recoup bonus payments from workers who exceed their risk limits or break financial-conduct rules, the Bank of England said.

"As these new rules are among the toughest in world, we need to be careful we don't create uncertainty which might make it increasingly hard to attract talent to London," said John Cridland, director general of the Confederation of British Industry, which represents the business sector.

The rules, which come into force on January 1 next year, are part of a move by global regulators to hit bankers' wallets if their risk-taking leads to large losses. While work at the international level has focused on so-called clawback powers to recover bonuses, and on deferral rules that limit immediate payouts, the European Union has also adopted a ban on awards worth more than twice fixed pay.

Clawback is most appropriate in cases where the individual has … responsibility

The British measures go beyond minimum EU standards, which require at least half of bonuses to be in shares or similar instruments and payment of at least 40 per cent of awards to be deferred for at least three years.

In addition to the clawback rule, British regulators also announced they are seeking views on a range of other curbs, including deferral rules that would delay the paying out of bonuses for as much as seven years.

They are also planning an overhaul of standards for bank managers that would see executives made criminally liable for "reckless misconduct that results in the failure of the institution."

"Banks must act responsibly in setting their pay policies," the UK Treasury said.

The seven-year clawback rule would apply from the date the bonus is awarded and differs from an earlier Bank of England plan to set the cut off date at six years after the banker received the money.

"Clawback is most appropriate in cases where the individual has some responsibility or culpability for the circumstances giving rise to the grounds for action," the bank's Prudential Regulation Authority said.

Antony Jenkins, chief executive of Barclays, said in a radio interview: "I support the idea in principle that where there is wrongdoing, there should be appropriate punishment."