Banker bonus clawbacks proposed

Times Series: The Bank of England is considering measures to allow for bonuses for reckless bankers to be clawed back. The Bank of England is considering measures to allow for bonuses for reckless bankers to be clawed back.

Reckless bankers could be stripped of bonuses even after they have cashed them in under plans set out by the Bank of England.

The Bank is proposing new rules to toughen up the remuneration code that would see employment contracts changed to allow for clawback of bonuses already pocketed.

Regulators have the power to force firms to halt bonus payments that have not yet been cashed in, but once paid they are immune from clawback.

The Bank is carrying out a two-month consultation on these new clawback plans where there is evidence of employee misbehaviour or significant error, where a firm or business division has suffered a material financial hit, or where there has been failure in risk management.

It also wants to ensure the new rules apply to those indirectly responsible , such as bosses who should be held accountable for the behaviour of their staff, culture and strategy, as well as th ose who failed to take steps to identify or address misconduct.

If given the green light, the new rules would come into effect on January 1 next year - in time for the next round of City and bank bonuses.

The move comes in the wake of recommendations from MPs and peers on the Parliamentary Commission on Banking Standards.

It follows the financial crisis and a series of scandals in recent years, such as the mis-selling of payment protection insurance (PPI), which has already cost the banking industry more than £20 billion so far after poor selling practices dating back many years.

Bonus rules have been strengthened since the credit crunch struck, with bank payouts deferred for five years and made largely in shares.

This has allowed for a number of recent high profile clawbacks, with taxpayer-backed Lloyds Banking Group now set to recover all of the £1.45 million bonus handed to former chief executive Eric Daniels in 2010 as a result of its escalating PPI bill.

But there has been frustration that millions of pounds in bonuses paid out in the run up to the banking meltdown are untouchable.

Andrew Bailey, deputy governor for prudential regulation and head of the Prudential Regulation Authority, said: "We won't allow remuneration schemes to exist that encourage behaviour likely to jeopardise financial stability.

"The policy we are consulting on will ensure bonuses can be clawed back from individuals, where they have already been paid, if it becomes apparent they have put the stability of their firms at risk or engaged in inappropriate actions.

"This will provide a clear message to individuals of what is expected from them and the consequences of not acting properly."

Andrew Tyrie, c hairman of the Treasury Select Committee, said : " Many bank employees continue to receive performance-related rewards long before it is clear that they have been fully earned.

"This must be addressed. Ill-designed remuneration packages have rewarded misconduct and added risk to balance sheets.

"Clawback of vested bonuses can help drive up standards. It can also help ensure that those responsible do not keep rewards for failure."

The Bank is proposing that clawback of paid bonuses could apply to awards made before January 1 2015, which have not vested.

But there will be a six-year cut-off, as this is the longest period possible under British contract law.

The British Bankers' Association (BBA) said it supported the plans, but raised concerns over how clawback will work in practice.

Simon Hills, BBA executive director in charge of prudential capital and risk, said: " If variable remuneration has been paid by a bank and received by an employee or former employee based on performance or conduct that has later been shown to be sub-standard, it is only proper that it should be returned.

"However, we should not under-estimate the practical difficulties of recouping money that has already been paid. The BBA will work with our members and the PRA in seeking to overcome those challenges."

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