Bankers could be forced to hand over bonuses dating back up to seven years if they break rules set to be introduced by the Bank of England, leading to concerns in the sector that UK firms could lose high-fliers to overseas rivals.
In an effort to improve “individual responsibility and accountability” in the sector, the central bank will also usher in a regime forcing lenders to regularly vet their senior managers for “fitness and propriety”.
The measures are the latest response to multi-billion pound taxpayer bailouts of Lloyds and Royal Bank of Scotland in the financial crisis of 2008, with few individual bankers subsequently punished for reckless behaviour.
Anthony Browne, chief executive of the British Bankers’ Association, said that “one banker rewarded for failure is one too many” but pointed to research from pay consultant McLagan that showed cash bonuses fell by 77 per cent between 2007 and 2011.
He said: “We’ll examine the detail of these new proposals with interest, but it is important that any new regulation does not put British banks at a disadvantage when it comes to attracting and retaining the best workers here and overseas.”
CBI director-general John Cridland said that clawing back bonuses could help to “keep conduct in check”.
However, he warned: “As these new rules are amongst the toughest in world, we need to be careful we don’t create uncertainty which might make it increasingly hard to attract talent. The government needs to work hard to ensure the UK remains competitive as a leading global financial centre.”
Changes to the Bank of England’s remuneration code will also mean that even pay-outs that have already been pocketed could be reclaimed.
The announcement comes after a consultation launched earlier this year, and the rules are expected to come into force from January next year.
However, the new clawback regime will not apply retrospectively, because the Bank’s Prudential Regulation Authority (PRA) said many firms would have needed permission to change their employees’ contracts.
“In order to ensure a consistent and even application of the clawback requirement across industry, the final rule requires the application of clawback only to awards made on or after 1 January, 2015,” the PRA said.
Proposals on pay will require banks to defer payment of bonuses for a minimum of five to seven years depending on seniority, with the awards being vested in phased stages.
PRA chief executive Andrew Bailey added: “We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behaviour and culture within banks and will help to ensure that they are managed in a way that promotes the safety and soundness of individual institutions.”
The moves come after a series of scandals such as the mis-selling of payment protection insurance and interest rate swaps for small businesses, along with the rigging of benchmark interest rates.
As part of an ongoing probe into Libor fixing, Lloyds was this week fined £218 million by UK and US authorities.
A Treasury spokesman said: “This government has been clear that banks must act responsibly in setting their pay policies, and we have consistently taken robust action to tackle inappropriate remuneration.”
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