London - Misbehaving bankers and their bosses will have to hand back bonuses up to six years after they pocketed the cash under a proposed rule from the Bank of England to prevent excessive risk-taking.
The aim of the rule put out for consultation by the central bank on Thursday is designed to stop bankers taking huge bets in the knowledge that they could move jobs before any problems come to light and marks a toughening of current rules that allow only for the cancellation or reduction of parts of bonuses that have been awarded but not yet paid.
The latest move follows a call from British lawmakers in a report on banking standards in response to public anger at continuing high bonuses after lenders had to be propped up by taxpayers in the 2007-09 financial crisis and heightened by a spate of misconduct fines for a number of banks.
A new clawback rule will necessitate a rewriting of staff contracts to make it a legal requirement for senior bankers to return bonuses if they are found to have misbehaved, even if they no longer work at the bank.
“The policy we are consulting on will ensure bonuses can be clawed back from individuals, where they have already been paid, if it becomes apparent they have put the stability of their firms at risk or engaged in inappropriate actions,” BoE Deputy Governor Andrew Bailey said in a statement.
“This will provide a clear message to individuals of what is expected from them and the consequences of not acting properly,” said Bailey, who also heads the BoE's Prudential Regulation Authority, which supervises Britain's banks.
The new rule will be applied when there is “reasonable evidence of employee misbehaviour or material error”, if there is a “material downturn” in the bank's performance or the relevant business unit suffers a material failure of risk management, the BoE said.
Clawbacks will not only be applied to staff directly involved in misconduct, but also to those who could have been “reasonably expected” to be aware of the failure or misconduct at the time and failed to take action.
Bosses of staff caught up in misconduct could also have their bonuses clawed back if they are deemed indirectly responsible or accountable for the failure or misconduct.
The public consultation period will last two months and the rule is due to come into effect in early 2015, meaning it will cover bonuses related to this year's performance.
A six-year cut-off has been proposed because this is the longest period possible under British contract law.
Britain views the ability to claw back bonuses as a better method for dampening excessive risk-taking than the new European Union cap on bonuses that will affect payments made from early next year.
Under the EU rule, bonuses will be capped at no more than fixed salary, or twice that amount with shareholder approval, and apply to bankers earning more than 500,000 euros ($695,200).
Britain, the base for about 80 percent of the bankers who will be affected, is challenging the rule in the EU's top court. - Reuters