The decision to extend clawback rules around bankers' bonuses has been heralded as a way of ending "rewards for failures" - but some have said it could go even further.
Regulators FCA and PRA are extending the amount of time bonuses can be clawed back from senior managers from seven to 10 years, while strengthening the seven year ruling less for senior "material risk takers". Deferral periods have been extended to seven years for senior managers, five for risk managers and three-to-five for all other staff “whose actions could have a material impact on a firm”.
Variable pay is being banned for non-executive directors, while no variable pay – including discretionary payments - should be received by the management of a firm in receipt of taxpayer support – in other words Lloyds and RBS.
Conservative MP and chair of the Treasury committee Andrew Tyrie praised the move as a “step forward”, saying long deferral and clawbacks could be “essential” in some cases to ensure that reward and risk-taking were better aligned.
“In the last crisis, many people walked away from the mess that they had created with huge rewards, well before the risks matured and it became clear that the rewards were not merited. These proposals will be judged by whether they can help prevent this happening again.”
However Tyrie said there was a minority of cases – for example, the manipulation of the forex markets, which happened more than seven years ago – that should be subject to even longer deferral.
He also noted that the PRA and FCA had created “a two-tier structure” by distinguishing between senior managers and other material risk takers, warning this could lead to more bureaucracy and cost to business, which would come “ultimately at consumers’ expense”.
Oliver Parry, senior corporate governance adviser at the IoD, said the ruling was a “significant milestone in overhauling pay practices in the City”.
The ruling on deferring variable pay for up to 10 years, with the possibility of clawing it back in cases where executives were engaged in wrongdoing, is “particularly welcome”, he said, as is the banning of bonuses for non-executive directors.
“In addition, it is clearly right that the senior management responsible for collapses at banks which lead to taxpayer bailouts should not receive bonuses,” Parry said. “The era of rewards for failure along the lines of Fred Goodwin must be buried once and for all.”
Parry added: “There must be an end to excessive exit payments for executives who have failed to create value for investors, or who have damaged the reputation or long-term prospects of the organisation. Undeserved ‘golden handshakes’ have undermined the legitimacy of the entire financial services sector and we must ensure that this does not happen again.”
However not everyone welcomed the changes.
Graeme Standen, a remuneration expert at law firm Pinsent Masons said: “While they obviously chime with public and political concerns about the lasting impact of the 2008 financial crisis, they will raise some concerns about the competitive position of UK financial services firms. There is also the possibility of unintended inflationary pressures on total pay, as longer deferral inevitably reduces the value that recipients attach to deferred bonuses.
“The regulators’ new rules are much tougher than exist in almost all overseas financial centres,” added Nicholas Stretch of law firm CMS. “Putting in a claw-back and deferral rule is one thing, actually enforcing it is another. Possession can be nine-tenths of the law, and recovery actions are going to be very difficult to pursue successfully.”