Returning bank bonuses, Bank of England proposal

Returning bank bonuses may become possible in the United Kingdom if a Bank of England proposal goes through. The BoE is proposing that all financial institutions authorized by the Prudential Regulation Authority (PRA) should amend their job contracts to make sure bonuses that have been awarded can be clawed by from executives when necessary up to a period of six years.

The UK’s central bank currently is empowered to stop companies from paying unvested bonuses, known as malus. According to the Bank of England (BoE), its proposals in today’s document “would represent a further strengthening of the remuneration code.”

The consultation paper proposes the possible returning bank bonuses be possible if:

  • There is reasonable evidence of material error or misbehavior.
  • The company experiences a material downturn in its financial performance.
  • The company suffers a material failure of risk management.

Clawback should extend to those indirectly involved

As is the case with current regulations on malus, returning bank bonuses should not be limited to executives directly culpable of wrongdoing. For example, if a company suffers misconduct or a material failure of risk management, it could consider applying clawback to those executive who:

  • would have been realistically expected to be aware of the misconduct or failure at the time, but did not take proper steps to promptly identify, assess, report, escalate or address it, or…
  • by virtue of their position (seniority) could be considered indirectly accountable or responsible for the misconduct or failure, “including senior staff in charge of setting the firm’s culture and strategy.”

Six year limit on clawback regulation

The consultation paper proposes that the new regulations would come into force on the first day of 2015, and clawback could be applied to bonuses awarded before that date, “but which vest after that date, subject to a six year time limit due to the state of limitations contracts.”

The proposal is subject to two months consultation. Later this year the Prudential Regulation Authority will consult on going ahead with the recommendations in the report the Parliamentary Commission on Banking Standards will have published.

CEO of the Parliamentary Commission on Banking Standards, Andrew Bailey, who is also Deputy Governor of Prudential Regulation, 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 behavior likely to jeopardize 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.”

Bankers’ bonuses rose 29% worldwide last year, and increased faster in London than anywhere else.