The financial authorities’ clampdown on bankers’ bonuses has been criticised for lacking sufficient bite and for being conceptually muddled.
The Bank of England’s Prudential Regulation Authority and the Financial Conduct Authority jointly announced that from next year senior managers at financial institutions could see their bonuses “clawed back” for up to 10 years after awards are made, if the beneficiaries are found to have been guilty of misconduct. The maximum clawback period today is seven years.
Senior managers will also have to wait seven years before receiving their bonuses, while risk managers will face a five-year wait. This goes beyond European Union rules, which require deferrals of at least three to five years. Other new UK rules include a ban on bonuses for managers in firms that get state bailouts.
“This is a crucial step to rebuild public trust in financial service, and allows firms and regulators to build long-term decision making and effective risk management into people’s pay packets,” said Martin Wheatley, head of the FCA.
The Treasury said: “The reforms the Government has put in place since 2010 mean Britain now has the toughest rules on bankers’ pay of any major financial centre.”
Andrew Tyrie, the chairman of the Treasury Select Committee, said the rules were a “step forward” but added that some of the rate-rigging abuses committed at big banks in 2008 are only coming to light now. “There remains a need in a minority of cases for even longer deferral,” he said.
Large UK banks have been fined billions of pounds by regulators in Britain and abroad for historic abuses ranging from mis-selling insurance products to rigging key interest rates.
Philip Booth of the Cass Business School suggested the ban on bailed-out bankers receiving bonuses represented a tacit admission that the regulators have not solved the too-big-to-fail problem.
“The PRA should ask themselves [if they] yet have in place procedures to ensure that banks can be wound up without taxpayer support?” he said. “If the answer is ‘yes’, then further regulation is not needed. If ‘no’ then they should fix that problem.”
Some legal experts also warned it could be tough to make the clawback rules work as bankers may have moved overseas by the time a payback is ordered. “Possession can be nine-tenths of the law, and recovery actions will be very difficult,” said Nicholas Stretch of CMS Cameron McKenna.
The regulators stopped short of banning bonus “buyouts”, whereby a new employer immediately compensates a banker for unvested bonuses from his previous job; this is seen as a means for bankers to bypass the new regulations. But the PRA and the FCA said the deferral period must still be binding at the new firm and that they are exploring how to require buyout awards to be held in a form that still enables them to be clawed back by the previous employer.
“In the last crisis, many people walked away from the mess they had created with huge rewards, well before the risks matured and it became clear that the rewards were not merited,” said Mr Tyrie.
“These proposals will be judged by whether they can help prevent this happening again,” he added.Reuse content