Bankers that fail to report colleagues’ misconduct should be forced to pay back a portion of their bonuses, the Bank of England said as it seeks to rein in practices that tarnished the reputation of lenders.
Banks should penalize staff that don’t “take adequate steps to promptly identify, assess, report, escalate or address” poor behavior by colleagues by taking away some of their deferred bonus awards, the BOE’s Prudential Regulation Authority said in a policy note on its website.
“Risk management failures and misconduct can take years to come to light,” the PRA said in the document, dated Oct. 28. “This should not prevent firms from applying ex-post risk adjustment to the extent that the relevant individuals have variable remuneration capable of reduction.”
Royal Bank of Scotland Plc. this year recouped about 302 million pounds ($487 million) by cutting its bonus pool and clawing back compensation to help meet the 381 million-pound cost of fines in the Libor rigging-scandal. The PRA’s bid to improve banker behavior follows a European Union deal in March to outlaw bonuses that are more than twice fixed pay in the 28-nation bloc.
Clawbacks should also apply to senior managers directly or indirectly responsible for misconduct, the PRA said in the statement. Individuals that are under investigation for wrongdoing should have all of their deferred awards frozen until the probe is finished, it said.
The PRA told lenders to write provisions for clawbacks into employment contracts with staff and to take into account the costs of fines, financial losses and reputational damage of poor behavior when calculating how much to take back.
The U.K. prefers clawing back pay to capping bonuses, which PRA chief Andrew Bailey has said will lead to higher salaries. The U.K. Treasury challenged the legality of the EU’s limits on variable pay at the European Court of Justice in September. The EU gave too much power to a regulator, the European Banking Authority, to set the parameters of the bonus caps, the Treasury said at the time.
The caps, which will apply to anyone at a European bank earning more than 500,000 euros ($676,000), breach treaties protecting the “rights and interests of employed persons,” the Treasury said in its statement in September.
More than half of global banks said they would increase salaries to offset the effect of European Union bonus caps, according to a study by human-resources consultants Towers Watson & Co. in June.
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