Reckless bankers could be stripped of bonuses up to ten years after they are awarded under plans set out by the Bank of England.
The changes are part of proposals to toughen the regime for lenders.
Newly-confirmed rules – which will come into force in January in time for the next round of City bonuses – will mean payouts can be clawed back up to seven years after they are handed out.
These rules, finalised by the Bank’s Prudential Regulation Authority (PRA), will not apply retrospectively, partly for fear this could result in legal action.
But as part of a further consultation, authorities said they were looking at extending clawback beyond seven years from the date of a bonus award, to enable the term to be extended by three years for senior executives.
This could be activated if there were an ongoing internal or regulatory investigation over a “potential material failure” at a bank which might be linked to the executive in question.
The proposals from the PRA and City watchdog the Financial Conduct Authority (FCA) would also beef up firms’ ability to recover bonuses “if risk management or conduct failings come to light at a later date”.
In addition, they spelled out the role of the two bodies in being able to start criminal prosecutions, under existing legislation, against senior managers “where they take a decision that causes an institution to fail”.
Business Secretary Vince Cable said: “Enormous damage has been done to the UK by the collapse of the banking system. It must not happen again.”
Shadow chancellor Ed Balls said the Bank was doing the right thing, but critics warned of the risk of undermining the City by pushing talent and investment overseas.
FCA chief executive Martin Wheatley said: “How a firm conducts its business and treats its customers must be at the heart of how it operates. This has to start at the top.”
However, CBI director-general John Cridland said: “Pay deferral and clawback will make sure that performance and remuneration are aligned and can help keep conduct in check.
“But as these new rules are amongst the toughest in the world, we need to be careful we don’t create uncertainty which might make it increasingly hard to attract talent to London.”
This announcement follows recommendations last year by the Parliamentary Commission for Banking Standards.
Those follow the financial crisis and scandals, such as the mis-selling of payment protection insurance, which has cost the banking industry more than £20 billion in compensation.