U.K. May Extend Bonus Rules on ‘Shocking’ Market Abuse

Bank of England Deputy Governor Minouche Shafik said benchmark rigging and other misconduct must be stamped out as the institution raised the prospect of extending bonus clawbacks to brokers and trading firms.

Describing the behavior of some traders as “truly shocking,” the head of markets and banking at the BOE said confidence in fixed income, currency and commodity markets has been damaged by “unacceptable abuses.”

London is at the center of probes into the manipulation of key interest rates and foreign-exchange benchmarks. At least 10 companies, including Barclays Plc and Royal Bank of Scotland Group Plc, have been fined more than $6 billion after traders colluded to rig the London interbank offered rate and related benchmarks for profit. Regulators around the world are probing allegations traders manipulated the WM/Reuters currency rates used by pension fund managers.

Shafik spoke last night as the BOE published a consultation document on market regulation that included proposals on extending bonus restrictions and tougher capital rules for firms found guilty of conduct failings. The paper is part of the Fair and Effective Markets Review, the government’s response to allegations that traders rigged interest-rate and currency benchmarks, colluded on pricing and misled clients on products.

‘Outrageous Conduct’

“Much has been done to strengthen the financial system,” Shafik said in a speech at the London School of Economics. “But some of the benefits of these advances are being offset by a long tail of outrageous conduct cases. These are like salt rubbed into the wounds to public confidence in financial markets.”

The review, focused on the fixed income, currency and commodity markets, split the potential deficiencies into structural issues such as competition and benchmarks, and conduct issues such as incentives and penalties.

Within that framework, the review is aimed at working out what additional regulations are needed to ensure markets operate fairly. The document, by the BOE, the U.K. Treasury and the Financial Conduct Authority, includes a proposal to extend bonus restrictions to some non-bank market participants, and enforcing higher capital levels on firms guilty of conduct or governance failings.

Bonus Clawback

The BOE is already consulting on a seven-year bonus clawback at banks for employees that break financial-conduct rules. The mechanism allows banks to recoup payments to workers for previous years. In addition, the U.K. government is examining whether to expand new legislation regulating Libor to cover other key rates.

“The integrity of the City matters to the economy of Britain,” Chancellor of the Exchequer George Osborne said in a statement. “I am determined to deal with abuses, tackle the unacceptable behavior of the few and ensure that markets are fair for the many who depend on them.”

The review was set up by Osborne in June and is a joint exercise led by Shafik, FCA Chief Executive Martin Wheatley, and Charles Roxburgh, director general for financial services at the Treasury. It will make its final recommendations in June 2015.

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