The BoE has revealed plans to allow bonuses to be 'clawed back' up to 7 years after issuance, alongside criminalizing excessive risk taking.
The Bank of England has revealed plans, due to be implemented in January 2015, which will force the repayment of bonuses up to seven years after they have been awarded (even if they have already been spent). Under current rules the payment of annual performance bonuses in the financial sector is usually delayed for between 3 to 5 years, during which period it can be reclaimed by the employer. The new rules to lengthen this period are designed to reflect the time it takes for cases of financial misconduct to emerge, such as excessive risk taking or collusion to rig index rates . This announcement comes less than a week after Lloyds Banking Group paid a £218m fine for fixing the LIBOR, following large settlements by Barclays and RBS.
There are further proposals to introduce new laws that will criminalize “a reckless decision causing a financial institution to fall”. The Bank of England’s deputy governor for prudential regulation, Andrew Bailey, has commented that these new reforms are designed to promote “clearer individual responsibilities and enhanced risk management incentives” within UK financial institutions.
Responses to these plans have been predictable. Shadow chancellor Ed Balls stated that “being able to claw back bonuses from people who don’t deliver is an important part of changing our banking industry “. On the other side of the debate the British Bankers Association has argued that further regulation will worsen the ‘uneven playing field’ of international finance on which UK banks compete, and thus cause ‘star performers’ to emigrate to friendlier jurisdictions. Evidently the BBA is comprised entirely of a man sitting at a computer with a post-it note stuck prominently on the screen, upon which “regulation=bankers leave=less tax’ is written in bold red marker pen. In a slightly more believable gambit put forward in May the BBA argued that lengthening retrospective claw back provisions would be illegal in key economies such as Brazil, Mexico, France and Germany.
One may certainly be justified in asking what took them so long. Having waited 6 years it seems that a senior individual at the BoE is a fan of Beyond the Fringe and declared at a board meeting that “We need a futile gesture at this stage”. Despite the broken-record protests from the financial community these new proposals seem unlikely to go a long way to changing the status-quo in the Square Mile. Given that they have at their disposal some of the worlds most skilled and creative accountants, an additional 2 years of ‘claw back time’ will not significantly alter the nature of remuneration at the UK’s top banks. The criminalization of reckless decision making resulting in institutional collapse is also rather superfluous to requirements; in most cases the (ir)responsible individuals have committed fraud along the way and in any case are ruthlessly prosecuted once the true impact of their actions are discovered (although nothing ‘collapsed’, the case of Kweku Adoboli at UBS in London is a recent example).
The opposing argument, that further regulation harm’s London’s competitiveness as a financial centre, is also somewhat hard to believe. For one, this is (as above) by no means a draconian steamroller of stifling regulation. Further, East Asian financial centres have long undercut the UK with low tax rates (e.g. 20% top rate on income in Singapore, 15% in Honk Kong) and yet London remains a global financial powerhouse.
It is very easy to fall into disaffected cynicism or indignant rage when discussing bankers and their bonuses. Either the BoE and government have fallen prey to regulatory capture and act only in the vested interest of shady faceless corporations, or the problem could be solved if only it were legal to guillotine every single person in the City with a tailored suit and a watch worth more than a car. These new plans are certainly of a ‘via media’ persuasion, but it would take a rather brazen optimist to see then having much effect on the ‘culture’ of risk and remuneration within UK banks. Luckily, the aftertaste of the financial crisis is currently an ample restraint on the excesses of banking culture. In the words of John Kenneth Galbraith; ‘As a protection against financial illusion and insanity, memory is far better than law’.