Bank of England beefs up bonus clawback rules

Bank of England beefs up bonus clawback rules

The Bank of England is proposing to strengthen the remuneration requirements on buy-outs of variable remuneration.

This represent an “important addition” to the current bonus rules, which seek to ensure greater alignment between risk and reward, discourage excessive risk-taking and short-termism and encourage more effective risk management.

The Bank has previously sought views on a number of options for addressing the issue of buy-outs, in which a firm compensates a new employee for any unpaid remuneration that is cancelled when they leave their previous firm.

The practice has the potential to undermine the effectiveness of the current remuneration rules, according to a statement from the Bank.

It explained that when a new employer buys-out an employee’s cancelled bonus, the individual becomes insulated against the possibility of their awards being subject to ex-post risk adjustments through the application of either malus (the withholding or reduction of unpaid awards) or clawback (the recouping of paid awards).

Through the practice of buy-outs, individuals can therefore effectively evade accountability for their actions, the Bank added.

Today’s (13 January) proposals intend to ensure the practice does not undermine the intention of the current rules on clawback and malus, or allow employees to avoid the proper consequences of their actions.

The Bank has therefore recommended buy-outs should be managed through the contract between the new employer and employee.

The employment contract would allow for malus or clawback to be applied, should the old employer determine that the employee was guilty of misconduct or risk management failings.

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

Andrew Bailey, deputy governor for prudential regulation and chief executive of the Prudential Regulation Authority, said having the right incentives is a crucial part of an effective accountability regime.

“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.

“Today’s proposals seek to ensure individuals are not rewarded for bad practice or wrong-doing and should help to encourage a culture within firms where reward better reflects the risks being taken.”

The proposals are now out for consultation with a deadline set for 13 April.

This follows a joint policy statement from the PRA and FCA last summer, outlining a new framework that will crack down on remuneration related to irresponsible risk-taking and short-termism across the industry.

Nick Elwell-Sutton, employment partner at law firm Clyde & Co, said in principal it must be right that an employee who commits misconduct cannot avoid the clawback or malus consequences by moving jobs and being awarded a sign on bonus by the new employer to cover the loss of remuneration from the old employer.