LONDON Misbehaving bankers and their bosses will have to hand back bonuses up to six years after they pocket them under a rule the Bank of England is proposing to prevent excessive risk-taking.
The aim of the rule put out for consultation by the central bank on Thursday is designed to stop bankers taking huge bets in the knowledge that they could move jobs before any problems come to light. It marks a toughening of current rules that allow only for the cancellation or reduction of parts of bonuses that have been awarded but not yet paid.
British lawmakers called for such a move in a report on banking standards compiled amid public anger at bankers receiving big bonuses even though some banks had to be propped up by taxpayers in the 2007-09 financial crisis and a number of lenders were hit with misconduct fines.
A new clawback rule will necessitate a rewriting of staff contracts to make it a legal requirement for senior bankers to return bonuses if they are found to have misbehaved, even if they no longer work at the bank.
"The policy we are consulting on will ensure bonuses can be clawed back from individuals, where they have already been paid, if it becomes apparent they have put the stability of their firms at risk or engaged in inappropriate actions," BoE Deputy Governor Andrew Bailey said in a statement.
"This will provide a clear message to individuals of what is expected from them and the consequences of not acting properly," said Bailey, who also heads the BoE's Prudential Regulation Authority, which supervises Britain's banks.
Rob Moulton of Ashurst law firm said clawing back bonuses already paid was politically attractive but tough in practice.
"It may be more PR than practical impact. Do I think bankers won't come to work in London because of this? No," Moulton said.
The British Bankers' Association, a trade body for the UK's lenders such as HSBC and Barclays, said it supported the concept of clawback but the practical difficulties of recouping money already paid should not be underestimated.
The new rule will be applied when there is "reasonable evidence of employee misbehavior or material error", if there is a "material downturn" in the bank's performance or the relevant business unit suffers a material failure of risk management, the BoE said.
Clawbacks will not only be applied to staff directly involved in misconduct, but also to those who could have been "reasonably expected" to be aware of the failure or misconduct at the time and failed to take action.
Bosses of staff caught up in misconduct could also have their bonuses clawed back if they are deemed indirectly responsible or accountable for the failure or misconduct.
The Bank also expects lenders to "take all reasonable steps" to apply the rule to bonuses awarded up to January but which won't be paid until after that date.
Lawyers said this would need the consent of bankers to alter terms already agreed, a tricky task with staff that have left.
"It would, therefore, be another step towards greater regulation of pay albeit with an understandable risk management focus," said Matthew Findley, head of share plans at law firm Pinsent Masons.
The public consultation period will last two months and the rule is due to come into effect in early 2015, meaning it will cover bonuses related to this year's performance.
A six-year cut-off has been proposed because this is the longest period possible under British contract law.
Andrew Tyrie, who chaired parliament's banking standards committee, said the rule was key to reforming pay and he looked forward to the Bank's consultation later this year on longer deferral of bonus elements than the 3-5 years at present.
"Clawback of vested bonuses can help drive up standards. It can also help ensure that those responsible do not keep rewards for failure," Tyrie said in a statement.
Britain views clawbacks as a better way to curb excessive risk-taking than a new European Union cap on bonuses that will affect payments from early 2015.
Under the EU rule, bonuses will be capped at fixed salary, or twice that amount with shareholder approval, and will apply to bankers earning more than 500,000 euros ($695,200).
Britain, the base for about 80 percent of the bankers who will be affected, is challenging the rule in the EU's top court.
($1 = 0.7192 Euros)
(Editing by David Goodman and Hugh Lawson)