‘Toughest rules in world’ to rein in UK bankers

The City already has some of the toughest rules in the world following banking excesses. Picture: Getty

Bonuses for Britain’s most senior banking executives could be clawed back for up to a decade in the event of bad behaviour. That compares with seven years now, already seen as one of the toughest banking pay frameworks globally.

Following a year-long consultation, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) also said they plan to ban bonuses for non-executive directors and for senior managers of any bank or lender that is bailed out by the taxpayer in the future.

A Treasury spokesman said: “The new rules will reinforce the link between pay and performance and ensure bankers are left in no doubt that their bonuses are at risk should any misbehaviour occur.

“The reforms the government has put in place since 2010 mean that Britain now has the toughest rules on bankers’ pay of any major financial centre.”

During the 2008 financial crash, Royal Bank of Scotland and Lloyds Banking Group received state bailouts of £45 billion and £20bn respectively, with Northern Rock and Bradford & Bingley also receiving financial lifelines.

The new plans also extend the period over which bonuses must be deferred, to seven years for senior managers – three years longer than currently; five years for risk managers; and three to five years for all other “material risk-takers”.

Martin Wheatley, chief executive of the FCA, the remit of which is to regulate financial markets, said the new rules would help create an “accountable culture in the City”.

He added: “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.”

The proposals are also seen as being aimed at defusing public anger over bankers being “rewarded for failure” in the past.

But while the regulators are pressing on with the most stringent clawback changes, the consultation will not see so-called bonus “buyouts” axed.

These are the payments guaranteed by banks when they poach high-flying staff from rivals, to compensate them for any unpaid deferred bonuses that are cancelled when they leave their previous employer.

The bonus buyouts are often part of multi-million pound “golden hellos” top-level executives pocket when they switch banks, but critics have claimed they were a way of avoiding clawbacks.

The regulators had considered an outright ban on these payments, but decided against that because it risked creating a competitive disadvantage for British banks as foreign institutions would not be subject to the prohibition.

Instead, the FCA and PRA, the latter being mainly concerned with the financial strength of Britain’s banks and insurers, plan to ringfence bonus buyouts so they are still subject to clawback by a previous employer.

The new rules are due to come into effect for performance periods beginning on 1 January next year, although some changes, such as the banning of bonuses for non-executive directors, will kick in next month.

Andrew Bailey, deputy governor for prudential regulation at the Bank of England and chief executive of the PRA, said: “Effective financial regulation involves creating appropriate incentives to encourage individuals to take greater responsibility for their actions. Our intention is that people in positions of responsibility are rewarded for behaviour which fosters a culture of effective risk-management and promotes the safety and soundness of individual institutions.”

Jon Terry, partner and pay expert at PricewaterhouseCoopers, said the UK now had “the toughest bank pay rules in the world”.

But he added: “Regulators are hoping the rules will help rebuild trust in the City, but experience suggests that structural pay changes have limited impact on behaviour.”

Yesterday’s moves, which come against the backdrop of scores of bankers in the big four lenders regularly earning over  £1 million a year, were cautiously welcomed by the industry.

Simon Hills, executive director at the British Bankers Association, said: “Banks want compensation that rewards long-term performance, discourages excessive risk-taking and appropriately aligns risk with reward.

“It is right and proper that designated senior managers should be subject to a further three-year clawback period where there are outstanding internal or regulatory investigations at the end of their normal seven-year deferral period.

“We also think it’s right that the PRA has recognised that more junior material risk-takers do not need to be subject to a five-year deferral, but that they should instead be subject to between three and five years.”

Andrew Tyrie, chairman of the cross-party Treasury select committee, said the latest plans were a “step forward”. But he added the new rules may not go far enough.

“The regulators themselves identified that attempts to manipulate the foreign exchange markets dated back to January 2008 – over seven years ago – when recently fining the banks. There remains a need in a minority of cases for even longer deferral,” Mr Tyrie said.

Public anger at what is seen as excessive pay has been stoked by a cascade of high-profile fines for leading players, including RBS, Lloyds, Barclays and HSBC.

Offences include rigging Libor, the rate at which banks lend to each other, manipulating currency markets, international sanctions-busting, money-laundering for Mexican drug barons, and mis-selling insurance and complex hedging products to small businesses.

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