Senior bankers may be forced to pay back bonuses as long as six years after they cash the checks under proposed Bank of England rules to curb short-term financial risk-taking.
The central bank is readying rules that would take effect in 2015, Katherine Braddick, director for policy at the central bank’s Prudential Regulation Authority, said in a speech in London today. Braddick didn’t specify the circumstances under which the clawbacks would be enforced.
“The ability to apply clawback should further encourage the avoidance of excessive risk taking and the alignment of incentives with firms’ longer-term interests,” Braddick said.
The U.K. prefers clawing back compensation to capping bonuses, which PRA Chief Executive Officer Andrew Bailey has said will lead to higher salaries. Royal Bank of Scotland Group Plc last year recouped about 302 million pounds ($502 million) by cutting its bonus pool and reclaiming deferred 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 last year to outlaw bonuses that are more than twice fixed pay in the 28-nation bloc.
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 argued.
“Remuneration is an issue that continues to preoccupy the public consciousness and feed public debate,” Braddick said. “This year’s bonus season has been dominated by allegations that banks are circumventing the bonus cap.”
The EU caps, which will apply to anyone at a European bank earning more than 500,000 euros ($693,000), 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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