The most senior bankers in the City may have to wait 10 years to guarantee that their bonuses will not be clawed back, as a result of a series of measures intended to rebuild public trust in the financial services industry.
However, outlining their proposals on Tuesday, the Bank of England and the Financial Conduct Authority backed down from preventing bankers from buying-out bonuses that new recruits forego by leaving their previous employers. The City regulators considered the move to stop bankers walking away from their jobs before any problems – such as rigging Libor or foreign exchange markets – were uncovered.
The regulators are also sparing thousands of less senior bankers from potentially more draconian deferral periods, stepping backfrom requiring staff to have bonuses paid out over five years.
From next year, any firm subject to an investigation into wrongdoing must put the bonuses of their top bosses at risk of being clawed back for 10 years. The timescale was suggested by the parliamentary commission on banking standards following the Libor-rigging scandal in 2012.
Less senior bankers are subject to a seven-year clawback period, already in place. Non-executive directors will not be able to receive bonuses – already regarded as standard practice.
Andrew Tyrie, the Conservative MP who chaired the commission, said: “In the last crisis, many people walked away from the mess that they had created with huge rewards, well before the risks matured and it became clear that the rewards were not merited. These proposals will be judged by whether they can help prevent this happening again.”
Tyrie, who was reinstated as chair of the Treasury select committee after the May general election, added: “The regulators’ plans to lengthen deferral and clawback periods are a step forward. But the regulators themselves identified that attempts to manipulate the foreign exchange markets dated back to January 2008 – over seven years ago – when recently fining the banks. There remains a need in a minority of cases for even longer deferral.”
Three tiers of employees are effectively being created: the senior managers subjected to 10-year clawback; the managers whose bonuses must be deferred for five years; and less senior staff whose bonuses are deferred between three and five years. .
The 10-year period for top bankers will only kick in if their firm comes under a regulatory investigation. Martin Wheatley, head of the FCA, said: “Our rules will now mean that senior managers face clawback of bonuses for up to 10 years, if misconduct comes to light. This is a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long term decision making and effective risk management into people’s pay packets.”
During the consultation period, the regulators had been warned that if deferral periods were too long, salaries may become inflated – a consequence that watchdogs were keen to avoid. Regulators have been concerned that the EU’s cap on bonuses, which limits payouts to no more than salaries – or double if shareholders approve – has also inflated pay levels.
Oliver Parry, senior corporate governance adviser at the Institute of Directors, said: “Today marks a significant milestone in overhauling pay practices in the City following the crisis of 2008. The era of rewards for failure along the lines of [former Royal Bank of Scotland boss] Fred Goodwin must be buried once and for all.”
However, remuneration experts warned that salaries would rise and the City’s competitiveness damaged. Jon Terry, partner and pay expert at PwC, said: “Although the [Prudential Regulation Authority] says they don’t want this to happen, it is likely that British banks will need to pay a premium to attract senior executives outside the UK, and more in fixed pay than their foreign competitors”.
This article was written by Jill Treanor, for theguardian.com on Tuesday 23rd June 2015 17.05 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010