Seven years ago, London’s bankers were riding high. The collective annual bonus pool (pdf) shared by traders and bankers in the city was worth more than £11 billion ($18.6 billion), ten times the amount today (pdf).
But we all know what came next—the global financial crisis hit the UK hard, forcing some banks into bankruptcy and others into billion-pound bailouts. And all manner of dodgy practices by some of those traders and bankers have since come to light. Just this week, Lloyds Banking Group was hit with a big fine for its traders rigging a variety of interest rates, starting in 2006.
Under new rules announced today by the Bank of England, banks such Lloyds would have had to power to recoup the bonuses paid to the offending traders, even if they have already spent the money. This “clawback” will extend seven years from when the bonus was awarded, starting with bonuses awarded in pay packages starting next year.
Like most financial regulation, the final rule is much softer than the initial proposal. Originally, regulators proposed that companies could rescind a bonus up to six years after it vested, which is typically three to five years after it is awarded. They also proposed that a “material downturn in financial performance” was cause enough to claw back all or part of an employee’s bonus. By that standard, broad swathes of London bankers’ bonuses before the crash could have been fair game for a refund.
Now, the rules say that bonuses can be revoked up to seven years after they are awarded, and only for one of two reasons: there is “reasonable evidence” of employee misbehavior or error, or the unit where the employee works “suffers a material failure of risk management.” Business lobby groups in the UK aren’t too keen on the rules, citing the risk of London losing its edge as a global financial center.
Most big banks can already rescind bonuses if they want to, but usually only do it a year or two after awarding them, before the employee ever sees the money. The UK’s new rules on clawbacks will be much tougher than this, with bonuses at risk long after they have hit workers’ wallets. If the new rules were in place at the time, the Lloyds traders who were fiddling with the Libor benchmark interest rate in 2008 could be forced today to pay back the bonuses they received that year.
Needless to say, the policy’s wording leaves room for interpretation and, inevitably, litigation. (Some traders, after all, have successfully appealed their dismissals in court, even after they were found to have rigged rates.) It goes without saying that few bankers will willingly part with money so long after they received it, whatever the justification.