Bank of England looks to extend bonus clawback rules to ex-employees

The Prudential Regulation Authority plans to introduce yet tougher laws around bonus buyouts (where an organisation compensates a new employee for any unpaid bonus after they leave the firm) as it believes the practice may be undermining the effectiveness of the current remuneration rules.

The new, tighter bonus rules were introduced in the wake of the 2008 financial crisis and allow bonuses to be clawed back if a banker is later found to be guilty of misconduct or risk management failings.

PRA chief executive officer Andrew Bailey said: “Having the right incentives is a crucial part of an effective accountability regime.

“Remuneration policies, which lead to risk-reward imbalances, short termism and excessive risk-taking undermine confidence in the financial sector.”

The PRA said its proposals intend to ensure the practice of buyouts does not undermine the intention of the current rules on clawback and malus – the withholding or reduction of unpaid awards – or allow employees to avoid the proper consequences of their actions.

The proposals being floated include ensuring buyouts are managed through the contract between the new employer and employee.

Under such circumstances, the employment contract would allow for malus or clawback to be applied should the old employer determine the employee was guilty of misconduct or risk management failings. The proposed rules would also allow new employers to apply for a waiver if they believe the determination was manifestly unfair or unreasonable.

Mr Bailey added: “Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions.

“Today’s proposals seek to ensure that individuals are not rewarded for bad practice or wrong-doing and should help to encourage a culture within firms where reward better reflects the risks being taken.”

Looking at the proposals Nick Elwell-Sutton, employment partner at law firm Clyde & Co said: “The devil is likely to be in the detail and what mechanism the employee would have to challenge with his new employer based on a determination by the former employer that he had committed misconduct. Nevertheless it would be a powerful incentive to keep bankers on the straight and narrow.”