LONDON – Bankers who engage in misconduct could have their bonuses clawed back for up to six years after the improper conduct under a new rule proposed by the Bank of England.
Under Britain’s so-called remuneration code, the Prudential Regulation Authority, a regulator in the central bank, can require the lenders it regulates to recoup bonuses that have been deferred when there is misconduct, actions that lead to significant losses and failures of risk management. Under the proposal, the clawbacks would also apply to supervisors of employees who engage in improper behavior.
On Thursday, the authority opened a two-month public comment period to examine expanding clawbacks to include bonuses that have already been paid out. Under the proposal, banks regulated by the Bank of England would have to include the new provision in their employment contracts.
“The policy we are consulting on will ensure bonuses can be clawed back from individuals, where they have already been paid, if it becomes apparent they have put the stability of their firms at risk or engaged in inappropriate actions,” Andrew Bailey, the authority’s chief executive, said in a statement. “This will provide a clear message to individuals of what is expected from them and the consequences of not acting properly.”
The new clawback rules would apply to persons who “could have been reasonably expected to be aware of the failure or misconduct at the time but failed to take adequate steps” to report or stop it.
The proposal also would apply to supervisors deemed indirectly responsible for the failure or misconduct, “including senior staff in charge of setting the firm’s culture and strategy.”
The rules would go into effect on Jan. 1, 2015, but could be applied to bonuses awards granted before the date but vested later.
The six-year time frame reflects the statutory limit under British contract law.
The proposal comes as regulators in Europe and in Britain are facing pressure from lawmakers to discourage risky behavior by bankers that might fuel another financial crisis.
Last week, the European Commission adopted the final framework for a cap on bonuses paid to bank employees.
The 2013 European law limits the bonuses of certain bankers to 100 percent of an employee’s fixed salary, or two times their salary if approved by shareholders.
The law has led some banks to find ways to sidestep the cap, such as adopting so-called role-based pay.
Clawbacks have become a more common way to address bad behavior in the financial industry in recent years.
In the United States, the Dodd-Frank Act, passed in 2010, allows for clawbacks of up to three years on incentive pay to executive officers if there is an accounting restatement. The Sarbanes-Oxley Act, passed in 2002, allowed for the clawback of bonuses from a company’s chief executive and its chief accounting officer if there was a financial restatement.
Many banks also have begun including clawback provisions in their employment contracts or pursuing lawsuits to recoup salary and bonuses from former employees convicted of criminal misconduct.
Last year, Joseph Skowron III, a former fund manager, was ordered to pay back $31 million to Morgan Stanley in compensation after he was convicted of insider trading and a federal judge in Manhattan found he was a “faithless servant.”
On Wednesday, Fabrice Tourre, the former Goldman Sachs trader, was ordered by a federal judge in Manhattan to forfeit a bonus of roughly $175,000 tied to his work on troubled mortgage deal at the center of his trial last year. He was ordered to pay $825,000 in penalties and other costs.
In a civil case brought by the Securities and Exchange Commission, Mr. Tourre was found liable by a federal jury last year of defrauding investors.