13 March 2014
The Bank of England (BoE) has launched a consultation on proposals looking at bonus clawbacks.
The consultation is regarding proposals that will apply to all firms authorised by the Prudential Regulatory Authority (PRA), which is looking at requiring these firms to amend employment contracts in order to ensure that bonus awards that have been vested can be clawed back from individuals if and when necessary.
Speaking to Governance & Compliance, ICSA Policy Director Peter Swabey commented: ‘It is clearly inappropriate for bonuses to be paid and retained by those guilty of misbehaviour or material error, and the steps that the BoE is taking to require PRA authorised firms to amend contracts as necessary are therefore welcome.’
The conditions in which vested remuneration would be clawed back under the proposals in the consultation paper include when, there is reasonable evidence of employee misbehaviour or material error; the firm or the relevant business unit suffers a material downturn in its financial performance; and the firm or the relevant business unit suffers a material failure of risk management.
The BoE has also outlined other instances where bonus clawback would be applicable. According to the organistion, clawback should not be limited to employees directly culpable of malfeasance.
In cases involving a material failure of risk management or misconduct, firms should consider applying clawback to those employees who, could have been reasonably expected to be aware of the failure or misconduct at the time but failed to take adequate steps to promptly identify, assess, report, escalate or address it; or by virtue of their role or seniority could be deemed indirectly responsible or accountable for the failure or misconduct, including senior staff in charge of setting the firm’s culture and strategy.
However, on these points, Swabey commented that ‘the argument for extending clawback to those who are not directly culpable is slightly different and should be considered on a case by case basis. Much will depend on the wording of the final regulations.’