Bankers’ pay would be at risk of being clawed back for up to six years under proposals released the Bank of England.
The central bank already has the power to require firms to stop paying unvested bonuses. On Thursday, the bank proposed to further strengthening remuneration rules to require all firms to amend employment contracts to ensure bonus awards that have been vested can be clawed back in the event of misconduct or poor performance.
The bank is proposing to require firms to ensure they can clawback vested remuneration when there is reasonable evidence of employee misbehaviour or material error; if, the firm or a business unit suffers a material downturn in its financial performance; or, if it suffers a material failure of risk management.
It also says that the clawbacks should not be limited to employees directly culpable for malfeasance, and should include employees that are expected to be aware of a failure or misconduct, and senior staff in charge of setting the firm’s culture and strategy.
“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 behaviour likely to jeopardise financial stability,” said Andrew Bailey, deputy governor for prudential regulation and CEO of the Prudential Regulation Authority (PRA).
“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,” he says. “This will provide a clear message to individuals of what is expected from them and the consequences of not acting properly.”
The proposed rules would come into force on January 1, 2015 and clawbacks could be applied to awards made before that date but which vest after that date, subject to a six year time limit due to the statute of limitations for contracts.
The proposed rules are out for comment for two months.