UK Bankers Face Toughest Bonus Rules

By Mark Kleinman, City Editor

Staff at British banks could be made to hand back bonuses seven years after the money has been awarded to them under a regime that will introduce the world's toughest rules on clawing back remuneration.

Sky News has learnt that the Bank of England (BoE)'s Prudential Regulation Authority (PRA) has decided to enforce a draconian proposal outlined in March.

In a policy statement to be published on Wednesday, it will confirm that banks will have to amend the employment contracts of senior staff in order to implement the new rules, which will come into force on January 1 next year.

Coming in the wake of a series of market manipulation and mis-selling scandals which have triggered tens of billions of pounds in fines and compensation to consumers, the tougher framework is likely to be welcomed in Westminster but spark opposition from bank executives who argue that the City's international competitiveness will be undermined.

In its consultation paper published earlier this year, the regulator proposed that clawback should operate for a six-year period after bonuses have vested.

The PRA is to enforce the bonus policy on bankers

That period is still expected to apply to awards made prior to the beginning of next year, in line with the statute of limitations for employment contracts, Sky News understands.

However, insiders said the PRA had also been examining whether bonus awards made after January 1 next year could be reclaimed for up to seven years.

The Bank of England declined to comment on Tuesday on whether it would opt to pursue clawback for post-2014 bonuses over the longer, seven-year period.

Either way, the final details will represent tougher rules for bankers employed by UK lenders than those working for German, Swiss or American competitors.

The toughened regime follows last year's report by the Parliamentary Commission on Banking Standards, led by the Conservative MP Andrew Tyrie.

Under the BoE's plans, banks will be obliged to reclaim money already paid to employees even where they have not been directly culpable of misconduct.

Lenders will instead be required to demonstrate that they have done so where "there is reasonable evidence of employee misbehaviour or material error - the firm or the relevant business unit suffers a material downturn in its financial performance - or the firm or the relevant business unit suffers a material failure of risk management".

The rules will apply to the overseas employees of UK-based banks, which the likes of HSBC and Standard Chartered will argue will put them at a major disadvantage in their key Asian operations.

Major lenders already operate lengthy bonus deferrals meaning that share awards do not vest until the end of a three or five-year period, during which time part, or all, of the awards can be cancelled under a mechanism called malus.

Under its March proposals, the new clawback rules would have kicked in at the end of these deferral periods, making a total ranging from nine years to more than a decade before bankers would be able to spend bonus awards safe in the knowledge that they would not have to repay them.

However, some bankers believe the BoE will say that the deferral and clawback periods will be allowed to overlap, meaning that the overall period would be seven years.

The British Bankers' Association argued in its response to the consultation that the PRA's plans were fraught with legal difficulties and that the 'clawback clock' could start ticking at the time bonuses were awarded rather than the point of vesting.

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