Photographer: Simon Dawson/Bloomberg

Bonuses May Be Clawed Back After U.K. Bankers Move, BOE Says

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  • Proposal aims to strengthen link between bonuses and safety
  • New employers can ask for waiver if clawback is unjustified

U.K. bankers may lose part or all of their bonuses even after they switch firms if they are responsible for losses at their previous employer, according to a Bank of England proposal.

The BOE’s Prudential Regulation Authority is asking for feedback on the plan designed to ensure that employees can be punished financially for excessive risk-taking that goes wrong, it said in a statement Wednesday. The PRA is suggesting that an employee’s contract with any new firm would allow a penalty to be applied should the old employer determine he or she engaged in misconduct.

Buyout packages from new employers threaten to undermine regulations for compensation put in place after the financial crisis that seek to curb excessive risk-taking, the PRA said. By switching jobs and having new employers buy out the unvested portions of bonuses, employees are able to sidestep the impact of pay clawbacks from their old firms, the regulator said.

‘Held Accountable’

“Having the right incentives is a crucial part of an effective accountability regime,” said Andrew Bailey, chief executive officer of the PRA. “Remuneration policies which lead to risk-reward imbalances, short-termism and excessive risk taking, undermine confidence in the financial sector. Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions.”

The plan would also allow new employers to apply for a waiver if they believe the decision was unfair or unreasonable.

The proposal at present would apply only to senior staff, known as material risk takers, at PRA-regulated firms. The Financial Conduct Authority, which also regulates financial companies, plans to wait for responses to the PRA’s consultation before deciding how and whether to apply rules on buyouts to its charges, the PRA said.

Grounds for clawback or other penalties would have to include, “as a minimum, misconduct or failures of risk management,” the PRA said. A “material downturn in the financial performance” of a former employer would not be a reason to penalize a departed employee, the PRA said.

The PRA consulted on ways of resolving the issue in July 2014, offering four alternatives, including banning buyouts outright. A prohibition would be likely to disadvantage U.K. firms and could drive up fixed pay as firms sought to attract staff, according to the PRA.

The consultation closes on April 13.