The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) are introducing new bonus claw back rules. Bankers in the City will never be able to spend in the same way again.
For example, imagine you worked in M&A for Bank X in 2008. You had nothing to do with the financial crisis of that year and even helped mitigate problems at that time by bringing in three big fee-paying deals. Such was Bank X’s admiration that you were paid a £2m ($3.15m) bonus, vesting over a three year period. By 2011, you’d spent this bonus on on school fees, a new family home in Surrey, a family holiday and a set of extended spa treatments for your spouse.
Seven years later, you’re no longer working for Bank X. You quit in 2012 and have spent the past three years living a leisured existence at a boutique firm run by a chum and former colleague. Suddenly one of the large syndicated loans used to finance the largest of your deals goes into default, having proven far more risky than anticipated. You had a few doubts at the time, but didn’t pursue them as this wasn’t your area. Now, the investment banking division as a whole is likely to suffer. Bank X gets in touch. They want to claw back £250k of your 2008 bonus. You no longer have that money. What do you do? – Sell your house?
This is the sort of scenario that could face London based bankers once the PRA and FCA’s new bonus rules come into force. Put briefly, they want to claw back bonuses for up to seven years – and 10 years for senior management. Moreover, the new remuneration rules state that those claw backs will include bonuses already vested if, “there is reasonable evidence of employee misbehaviour or material error;” or, “the firm or the relevant business unit suffers a material failure of risk management.”
It’s not just ‘fee earners’ who will have bonuses they’ve already spent ‘recovered’. Risk managers will be subject to the same rules. And everyone will have their bonuses deferred for longer, as per the table below.
What about income taxes paid on bonuses that are clawed back seven years later? “The regulators don’t care about taxes, they’re someone else’s problem,” says Graeme Standen, a remuneration expert at law firm Pinsent Mason. In fact, you actually might be able to get your taxes repaid, adds Standen, but you almost certainly won’t be able to recover national insurance.
What about international bankers working in London? They might want to earn their money at home, where at least they’ll know it’s theirs to keep. “The UK now has the toughest bank pay rules in the world. The biggest concern for banks headquartered in the UK is the uneven playing field that now exists between the UK and the rest of the EU, adding to the existing differences between the EU and the rest of the world,” says Jon Terry, partner and pay expert at PWC.