BOE Tells Bankers Covering Up Bad Behavior to Pay Back Bonuses

Royal Bank of Scotland Headquarters
Royal Bank of Scotland Plc. this year recouped about 302 million pounds ($486 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. Photographer: Chris Ratcliffe/Bloomberg

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 ($486 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 European Banking Authority is preparing to finalize the world’s toughest bonus rules, which will cap payouts to twice fixed salary.

Clawbacks should also apply to senior managers directly or indirectly responsible for misconduct, the PRA said in the statement, and individuals that are under investigation for wrongdoing should have all of their deferred awards frozen until the probe is finished.

The PRA told lenders to write provisions for clawbacks into the 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.