UK Bankers Face Longest Bonus Clawbacks

By Mark Kleinman, City Editor

Staff at British banks could be made to hand back bonuses more than six years after the money has been paid to them under a regime that will amount to the world's toughest rules on clawing back remuneration.

Sky News has learnt that the Bank of England (BoE)'s Prudential Regulation Authority (PRA) has decided to enforce, and potentially augment, a draconian proposal outlined in March.

In a policy statement to be published on Wednesday, it will confirm that banks will have to amend the employment contracts of senior staff in order to implement the new rules, which will come into force on January 1 next year.

Coming in the wake of a series of market manipulation and mis-selling scandals which have triggered tens of billions of pounds in fines and compensation to consumers, the tougher pay framework is likely to be welcomed in Westminster but spark opposition from bank executives who argue that the City's international competitiveness will be undermined.

In its consultation paper published earlier this year, the regulator proposed that clawback should operate for a six-year period after vesting.

That period is still expected to apply to awards made prior to the beginning of next year, in line with the statute of limitations for employment contracts, Sky News understands.

The PRA is to enforce the bonus policy on bankers

However, insiders said the PRA had also been examining whether bonus awards made after January 1 next year could be reclaimed for up to seven years.

The Bank of England declined to comment on Tuesday on whether it had opted to pursue clawback for post-2014 bonuses over the longer, seven-year period.

Either way, the final details will represent tougher rules for City bankers than those based in other international financial centres such as Frankfurt, Hong Kong or New York.

The tougher regime follows last year's report by the Parliamentary Commission on Banking Standards, which was chaired by the Conservative MP Andrew Tyrie.

Under the BoE's plans, banks will be obliged to reclaim money already paid to employees even where they have not been directly culpable of misconduct.

Lenders will instead be required to demonstrate that they have done so where "there is reasonable evidence of employee misbehaviour or material error; the firm or the relevant business unit suffers a material downturn in its financial performance; or the firm or the relevant business unit suffers a material failure of risk management".

The new framework will mean that many senior employees of UK-based banks will have to wait for at least 12 years - and possibly longer - between the point at which they are awarded a bonus and that at which it can no longer be either cancelled or reclaimed by their employer.

The rules will also apply to the overseas employees of UK-based banks, which the likes of HSBC and Standard Chartered will argue will put them at a major disadvantage in their key Asian operations.

Major lenders already operate lengthy bonus deferrals meaning that share awards do not vest until the end of a five-year period, during which time part or all of the awards can be cancelled under a mechanism called malus.

The new clawback rules would kick in at the end of the initial five years, making a total of well over a decade before bankers can spend bonus awards safe in the knowledge that they will not have to repay it.

The BoE will set out its policy just days after accusing employees of Lloyds Banking Group of "reprehensible" and "possibly criminal" behaviour for attempting to manipulate an emergency funding scheme set up to help banks like it avoid outright collapse during the 2008 financial crisis.

Andrew Bailey is the chief executive of the PRA

In a report published on Tuesday, the think-tank Respublica suggested that bankers should swear an oath that "would put them on the path to absolution".

Speaking in March, Andrew Bailey, the PRA chief executive said: "We have an objective to ensure the safety and soundness of the firms we regulate and 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."

Alongside the clawback policy statement, the BoE will also publish further details of the City watchdog's senior managers' regime and other details of its remuneration policies.

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