The bosses of leading City firms are to be made more accountable for their actions under proposals that could make them wait up to seven years for their bonuses and potentially be jailed if their banks fail.
Responding to recommendations made by the parliamentary commission on banking standards, the two main City regulators on Wednesday set out lengthy consultations (pdf) aimed at framing a new licencing regime for bankers and the creation of a "potential criminal liability under a new offence relating to a reckless decision causing a financial institution to fail".
The Financial Conduct Authority and the Bank of England's regulation arm, the Prudential Regulation Authority, want the new regime to be in force by January next year and would force bankers to prove they had acted appropriately – a reversal of the burden of proof.
Bankers would be subjected to annual checks to ensure they comply with a regime which covers those involved in what is known as a "significant harm function".
"The behaviour and culture within banks played a major role in the 2008-09 financial crisis and in conduct scandals such as payment protection insurance mis-selling and the attempted manipulation of Libor. However, under the statutory and regulatory framework in place at the time, individual accountability was often unclear or confused. This undermined public trust in both the banking system and in the regulatory response," the regulators said.
But the regulators have stepped back from the idea of the parliamentary commission – set up in the wake of the Barclays' fine for rigging Libor two years ago – that bonuses be deferred for as long as 10 years.
"The PRA and FCA note that increasing the overall length of deferral is not the only way in which the typical present pattern of deferrals might be altered to improve risk alignment. There is scope to increase the proportion of awards that are held for longer within the overall deferral period, either by requiring a greater proportion of awards to be deferred, or by delaying the start of vesting, which typically starts a year following the initial award," the regulators said.
Instead, for the most senior bankers, bonuses must be deferred for seven years and for less senior staff for five years, according to the consultation.
But new rules coming into force will allow bonuses to be clawed back for up to 10 years. This would force bankers to repay bonuses already received as well as having deferred bonuses withheld.
The regulators are also looking at ways of stopping bankers being bought of their bonuses by new employers, and avoiding a repeat of scenario at Royal Bank of Scotland where former CEO Fred Goodwin's pension payments were eventually reduced.
The regulators note that the longer deferral periods for bonuses and tougher regime "may affect the labour market as risk-averse staff might be less willing to take on additional responsibility and progress to senior management level as a result".
Since the 2008 banking crisis changes have already been made to bonuses to ensure top bankers no longer receive payouts entirely in cash and that they are deferred for at least three years. New rules this year require bonuses to be capped at one times salary or twice if shareholders approve.
"While the PRA and FCA believe the new regime will deliver significant improvements, behavioural and cultural change must also come from individuals themselves as they carry out their roles," the paper said.
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