While everyone's been distracted by Deutsche Bank, the UK's Prudential Regulation Authority (part of the Bank of England), slipped out some new rules about banking bonuses. In the event that you missed them, here's the takeaway.
Banks employ many thousands of people in London, but only a small proportion of them are designated "material risk takers" (MRTs) who are subject to the existing bonus rules stating that salaries must be no higher than 200% of bonuses and that 60% of bonuses above £500k should be deferred. Goldman Sachs employs 6,000 people in the City, but has around 500 MRTs, for example.
In future, the PRA says it will expect banks to "provide more detailed evidence to justify exclusion" when they decline to designate senior staff as material risk takers. This applies in particular to high earners (see the table below) and to traders. In the past, banks have tried to argue that traders in areas like FX aren't material risk takers because they're operating under value-at-risk limits, says the PRA. These arguments will no longer hold.
Justifying the fact that highly paid employees are not MRTs:
As we've noted before, the UK bonus rules don't apply to so-called "Tier 3" firms, defined as those with assets of less than £15bn. This has enabled banks like Jefferies to pay huge all cash bonuses in London. The PRA said today that the tier 3 exemption still stands.
If you swap jobs into an MRT role, or are promoted into an MRT role midway through a year, you won't be able to escape the bonus rules. As long as you're in your new job for more than three months they will still apply proportionately.
Lastly, the PRA has changed the bonus rules concerning clawback of stock paid by previous employers. “The new rule on buy-out bonuses is designed to stop employees from being able to wipe the slate clean by changing jobs," says Alexandra Beidas, a partner at Linklaters. "Bought out awards will no longer be immune from forfeiture or clawback for actions at the previous firm. If a former employee is found to have misbehaved, committed a material error or material failure of risk management his former firm will be able to request his new employer to forfeit or clawback his bought out awards."
This is good in theory, but it could lead to problems in practice. Current employers who are asked to clawback bonuses issued by previous employers may not be entirely impartial.