Reckless bankers face retrospective bonus clawbacks

Changes to the Bank’s remuneration code will also mean that even pay-outs that have already been pocketed could be reclaimed.

The announcement comes after a consultation launched earlier this year and the new rules are expected to come into force from January next year, in time for the next round of City bonuses.

It follows the financial crisis and a series of scandals in recent years, such as the mis-selling of payment protection insurance (PPI), which has already cost the banking industry more than £20 billion in compensation costs so far.

Bonus rules have been strengthened since the credit crunch struck, with bank payouts deferred for five years and made largely in shares.

But there has been frustration that millions of pounds in bonuses paid out in the run-up to the banking meltdown are untouchable.

The rules on clawback set out by the Bank’s Prudential Regulation Authority (PRA) will not apply retrospectively.

It said there was a concern that many firms might have to obtain the consent of employees for this and “might be open to challenge for doing so”.

“In order to ensure a consistent and even application of the clawback requirement across industry, the final rule requires the application of clawback only to awards made on or after 1 January 2015.”

The rules were announced as the PRA and City regulator the Financial Conduct Authority (FCA) published consultations on “improving individual responsibility and accountability in the banking sector”.

It follows recommendations last year by the Parliamentary Commission for Banking Standards (PCBS).

A Treasury spokesman said: “This Government has been clear that banks must act responsibly in setting their pay policies, and we have consistently taken robust action to tackle inappropriate remuneration.”

The consultation sets out a new approval regime for the most senior individuals “whose behaviour and decisions have the potential to bring a bank to failure”.

This will enhance regulators ability to hold senior managers to account and require banks to regularly vet them “for fitness and propriety”.

A further certification regime will require firms to assess the fitness of other staff “in positions where the decisions they make could pose significant harm to the bank or any of its customers”.

Meanwhile there will be a new set of conduct rules, described as “brief statements of high level principle” setting out the standards of behaviour for bank employees.

Proposals on pay will require banks to defer payment of bonuses for a minimum of five to seven years depending on seniority, with the awards being vested in phased stages.

They will also beef up firms’ abilities to recover bonuses “even if paid out or vested, from senior management if risk management or conduct failings come to light at a later date”.

Further proposals aim to shut down the loophole of bankers evading reductions in pending awards by changing employer.

The plans also strengthen the existing presumption against discretionary payments from bailed-out banks.

Final rules based on the consultation will be published by the FCA and PRA in early 2015.

But the PRA final rules on clawback are published today to come into force in January.

Andrew Bailey, the Bank of England’s deputy governor for prudential regulation and chief executive Officer of the PRA said: “Holding individuals to account is a key component of our job as regulators of banks.

“The combination of clearer individual responsibilities and enhanced risk management incentives will encourage individuals in banks to take greater responsibility for their actions.

“We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behaviour and culture within banks and will help to ensure that they are managed in a way that promotes the safety and soundness of individual institutions.”

FCA chief executive Martin Wheatley said: “How a firm conducts its business and treats its customers must be at the heart of how it operates. This has to start at the top.

“Today’s consultations mark a fundamental change in the regulators’ ability to hold individuals to account, which is what the public expects of us.

“It will also build on the cultural change we are beginning to see in the boardrooms of firms across the country.”

Barclays chief executive Antony Jenkins told BBC Radio 4’s Today programme that the claw back rule was a good idea in principle and “could be extremely useful”.

He said Barclays already claimed back bonuses of misbehaving bankers - usually paid in shares and deferred - but not if they had been cashed in.

Shadow chancellor Ed Balls said the Bank of England was fundamentally doing the right thing.

He told Today: “Clearly something went badly wrong in our banking industry in the last 10 or 15 years.

“On pay, it was almost as though if people were doing well they got bonuses, but then when things went badly they didn’t really pay anything back, they didn’t lose, they took a very short-term view.”

CBI director-general John Cridland sounded a note of caution.

He said: “Pay deferral and clawback will make sure that performance and remuneration are aligned for the long term and can help keep conduct in check.

“But as these new rules are amongst toughest in world, we need to be careful we don’t create uncertainty which might make it increasingly hard to attract talent to London.

“The Government needs to work hard to ensure the UK remains competitive as a leading global financial centre.”

The moves come after a series of scandals such as the mis-selling of payment protection insurance (PPI) and interest rate swaps for small businesses, Libor rate rigging and even money laundering.

As part of an ongoing probe into Libor interest rate fixing, Lloyds Banking Group was this week fined £218 million by UK and US authorities.

The state-backed lender admitted to ‘’shocking’’ rate rigging practices, including ripping off the Bank of England over its financial life support scheme.

Bank of England governor Mark Carney said such manipulation was “highly reprehensible, clearly unlawful and may amount to criminal conduct”.