Bonuses could be clawed back for as long as a decade under new rules published by City regulators today.
The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) confirmed they were pushing ahead with rules for a wider seven-year claw-back period but that an added three years is being considered for senior managers.
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.
The two bodies said these rules would “further align risk and individual reward in the banking sector, to discourage irresponsible risk-taking and short-termism and to encourage more effective risk management”.
Bonus buy-outs will not be banned – but new rules could be adopted that mean an employee could not escape negative bonuses.
Regulators stopped short of issuing a definitive announcement on bonus buy-outs, but said they would “explore further” the option of insisting that buy-out awards could only be given if they were subject to malus by the previous employer.
Bonus buy-outs allow a firm to compensate a new employee for any unpaid remuneration that is cancelled when they leave their firm. This means individuals can avoid malus – negative bonuses for poor performance- by changing firms.
The two bodies have been consulting on the issue for more than a year, after it was criticised by the Parliamentary Commission on Banking Standards for allowing employees to distance themselves from negligent conduct to avoid a reduction of unvested bonuses.
But City figures have warned that banning them outright could undermine the UK's competitiveness. Yesterday it emerged the regulators were planning to avoid an outright ban.
PRA chief executive Andrew Bailey said: “Effective financial regulation involves creating appropriate incentives to encourage individuals to take greater responsibility for their actions.
“Our intention is that people in positions of responsibility are rewarded for behaviour which fosters a culture of effective risk management and thus promotes the safety and soundness of individual institutions.”
FCA boss Martin Wheatley added: "Today's rules are part of a wider package that is being announced over the summer to embed an accountable culture in the City.
“Our rules will now mean that senior managers face clawback of bonuses for up to 10 years, if misconduct comes to light."
"This is a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long term decision making and effective risk management into people's pay packets."
The clawback and deferral rules will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016, while other requirements will apply from 1 July 2015.