Bankers’ will be forced to wait longer to receive bonuses and could see them being clawed back even after they are spent under proposals revealed by the FCA and PRA today.
Currently firms can only pay 50 per cent of a bonus in cash, with the other half in shares or other instruments like bail-in debt, the value of which reflects the firm’s performance. On top of this, at least 40 per cent of the bonus, or at least 60 per cent of bonuses of over £500,000, must be deferred for between three and five years.
A joint consultation paper from the PRA and the FCA, published this morning, proposes extending the deferral period to no less than seven years for senior managers and five for more junior staff.
Banks will be able to clawback the money up to 10 years after it was awarded even if it has already been fully paid out and spent.
The power will be available in the event on an internal inquiry into “potential material failure” or where a firm has been notified by a UK or international regulator that an investigation is underway which the firm feels could justify clawback.
The paper says the extension in the deferral period is necessary because it can take years until the consequences of the actions of staff become apparent.
It says: “This is particularly important for those senior executives who collectively help to determine or are responsible for implementing the overall business strategy of a firm and who are ultimately responsible for risk management.
“For those staff the risk horizon should reflect the timescales over which the risks associated with those strategic decisions are likely to manifest themselves.
“This means setting deferral periods that are closer in length to the typical period over which major business risks tend to play out.”
“The primary purpose of the Remuneration Code is to ensure greater alignment between risk and individual reward, to discourage excessive risk-taking and short-termism and encourage more effective risk management.”
CMS partner Nicholas Stretch says: “At least banks will not have to face amending remuneration which has already been awarded, as the proposals only affect bonuses awarded from January 2015. That would have posed all sorts of contractual issues which have now been avoided.”