Bank of England tightens bonus rules
“Bad apple” traders who jump from job to job around the City of London could have their bonuses revoked even after they move to new employment, under proposals from the Bank of England.
The bank’s Prudential Regulation Authority said on Wednesday that it wanted to tighten rules around so-called bonus buyouts, where banks compensate new employees for any remuneration cancelled when they change jobs.
Buyouts have been used legitimately in high-profile cases such as the recruitment of Jes Staley as chief executive of Barclays, who received a big one-off share payment from the bank to replace part of a bonus awarded from his time at JPMorgan Chase.
While the UK authorities have rejected an outright ban on these buyouts, there is concern that they can be used by bankers with a patchy regulatory record to get around tough rules introduced in the wake of the financial crisis.
These rules, designed to improve accountability and deter risk-taking, include clawback, where a bank recovers some or all of a bonus already paid out if a regulatory breach is discovered; and awards that have not yet vested — a move known as malus.
Under Wednesday’s plans, clawback and malus could occur after an employee has moved to a new bank, should wrongdoing be discovered.
It would be for the old bank to inform the new employer that all or part of a bonus should be revoked. Waivers from the BoE could be requested if the new bank thought the former employer was acting in an unfair or unreasonable way, the PRA added.
“Remuneration policies, which lead to risk-reward imbalances, short-termism and excessive risk-taking, undermine confidence in the financial sector,” said Andrew Bailey, the PRA’s chief executive.
“Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions. Today’s proposals seek to ensure that individuals are not rewarded for bad practice or wrongdoing.”
Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions. Today’s proposals seek to ensure that individuals are not rewarded for bad practice or wrongdoing– Andrew Bailey, PRA chief
Still, legal experts questioned whether the plan would actually work.
“If today’s proposals are introduced it won’t be possible for someone to wipe the slate clean by changing jobs,” said Alexandra Beidas, an employment partner at Linklaters, the law firm. “It remains to be seen if this will be workable in practice as it will involve sharing potentially sensitive information between banks.”
A London-based senior banker said bonus buyouts were standard across the industry but that each bank’s model differed; some replicated the banker’s former compensation, others brought the new employee in line with its own internal policies.
He questioned how much impact the BoE’s plans would have, however, and whether people really changed jobs to avoid clawback.
Wednesday’s plans add to a remuneration regime in the UK that is one of the toughest in the world. The most senior managers of banks can have their bonuses withheld for as long as a decade under proposals made last year by the bank. That rule now applies to any award for performance assessed from the beginning of this year.
The UK has historically favoured discretion over the value of bonuses, arguing that it strengthens the power of clawback provisions: it eventually dropped a legal challenge against EU rules to impose a cap of twice the base salary, and has now implemented the rule.
UK politicians and policymakers have argued that bonus caps can distort remuneration by incentivising banks instead to raise base pay, which legally is nearly impossible to claw back should wrongdoing be discovered later.