Top bankers in Britain could have their bonuses clawed back a decade after they were awarded under proposals from regulators on Tuesday (23 June) that would make industry pay curbs the toughest in the world.
Critics said the plans meant that British banks would have to pay a premium to attract top bankers from overseas, while lawyers questioned whether they could be enforced.
For chief executives and chairmen, a bonus could be clawed back for up to 10 years if misconduct is uncovered, the Bank of England’s Prudential Regulation Authority and Britain’s Financial Conduct Authority said.
Senior managers face a seven-year clawback period, dropping to five years for more junior staff.
“This is a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long term decision making and effective risk management into people’s pay packets,” FCA Chief Executive Martin Wheatley said.
Public anger at big bonuses awarded to bankers who were bailed out by taxpayers or found to have tried rigging Libor interest rates or currency markets sparked new curbs across the world but Britain has gone much further than other countries.
Nicholas Stretch of lawfirm CMS said it would be very difficult to make the lengthy clawback rules work in practice. Bankers may have moved to another part of the world by the time a clawback is ordered.
Most of a bonus is now deferred over several years to make it easier to halt payments if misconduct is uncovered.
The new rules require the non-cash part of a bonus to be paid out over seven years for top managers.
No ban on buyouts
Bonuses for non-executive directors and for management of a bank being shored up by taxpayers are banned from July. The clawback and deferral rules come into force next January.
After the government had to rescue several lenders in the 2007-09 financial crisis, policymakers want to make it harder for bankers to escape financially if misconduct is uncovered years later.
“As promised by the government, the UK now has the toughest bank pay rules in the world,” said Jon Terry, a pay expert at consultancy PwC.
“The biggest concern for banks headquartered in the UK is the uneven playing field that now exists between the UK and the rest of the European Union, adding to the existing differences between the EU and the rest of the world,” Terry said.
British banks will likely have to pay a premium to attract senior executives from outside the country with more in the form of fixed pay, Terry added.
The FCA’s Wheatley said the rules are part of a wider package being announced over the summer to include requirements for banks to specify who is responsible for what and make it easier for regulators to pin blame.
The regulators also spelled out on Tuesday what must happen when a rival bank offers to honour a new hire’s bonus awarded by their former employer, a key element in recruiting staff.
Buyouts must be structured so that they vest no earlier than the awards they replace, meaning the deferred portion of the bonus cannot be cashed in any quicker.
A simple ban on buyouts had been among the options proposed last year but this has now been rejected. The regulators will now look at how the transferred bonus could be clawed back by the bank that originally awarded it if misconduct emerges.
Britain suffered an embarrassing defeat in its attempt to block the European Union’s new limits on bank bonuses in November last year, withdrawing its legal challenge after an adviser to the bloc’s top court made clear it was unlikely to succeed.
The EU law aims to curb the kind of risk-taking that led to the 2007 to 2009 financial crisis by limiting bonuses awarded from next year to a sum no more than a banker’s fixed pay, or twice that level with shareholder approval.
London, where most of the bankers hit by the cap are based, said the law would push up fixed pay and goes beyond the EU’s powers, a sensitive subject at a time of rising British anti-EU sentiment.
However, Finance Minister George Osborne was forced to concede defeat after an adviser, whose opinions are non-binding but are generally followed at least in part by the Luxembourg-based European Court of Justice, said he supported the limit on banker bonuses and that it did not restrict total pay.
Capping bankers' bonuses in the EU has been on the European Commission's agenda since the onset of the financial crisis.
Under a deal struck by MEPs and EU member states in 2010, bonuses could be capped at 30% of their bankers' salaries, rising to as much as 20% for higher salary bands.
But Britain launched a legal challenge against the EU proposal, saying it will hurt its financial industry.
The British Treasury said the EU cap had been rushed through without any assessment of its impact and would push up bankers' fixed pay, making the banks riskier rather than safer.
EU rules on compensation are enshrined in proposed amendments to the existing Capital Requirements Directive.
Now, top bankers in Britain could have their bonuses clawed back a decade after they were awarded under proposals from UK regulators on Tuesday (23 June) that would make industry pay curbs the toughest in the world.