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Banks to Put "Clawbacks" on Bonuses

By Principal Lawyer, Employment & Partnership

After proposals were first floated in March, the Bank of England yesterday confirmed that from next year, banks and other financial institutions will have to make their variable remuneration payments (i.e. bonuses) subject to “clawback” arrangements.

Consequently, for any bonuses awarded after 1 January 2015, bankers and senior executives could be required to return payments for a period of seven years. (This could possibly be extended to as long as 10 years for senior managers; to be decided under a separate consultation, closing in October).

This will be a major shift in the City of London, where typically, the variable bonus pay component may have been the lion’s share of any employee’s pay packet. The new regulations mean that even if employees have received and spent their bonuses, potentially for up to 7 years; they could be asked to repay them.

Against the backdrop of scandals like PPI mis-selling and LIBOR manipulation, public anger has been provoked by reports that those culpable or with management responsibility have left with their rewards intact, while economic hardship has been experienced by innocent victims and the wider population as a whole. In the face of this pressure to change the system, clawback is the latest response. The logic behind the new rules is to discourage excessive risk-taking, and foster a culture of more long-term consideration, aligned to the interests of the business as a whole.

But will it work? And is it lawful anyway? These are good questions, and the answers are not clear-cut. The fact is that it may not be possible ultimately to recover payments from individuals seven to ten years down the line if they no longer have the funds, or other assets against which damages awards can be enforced.

Bonuses that have long since been spent on school fees, a lavish lifestyle, and have become the property of others may not realistically be retrieved; unless the individual has other funds or property against which they can be recovered. That could mean that these clawback arrangements penalise the savers and not the spenders… so it’s interesting to speculate on what new culture might be inadvertently incentivised by way of these reforms.

Yesterday’s proposals were silent about how individual firms should go about introducing these changes, although the suggestion in March was that employees’ contracts should be amended. Employers can’t reasonably expect staff voluntarily to sign up to changes which mean they are worse off.

When reforms to bankers’ bonus were first introduced in 2010, we saw fixed base pay go up across most major institutions. But if that happens again now, to encourage staff to sign up to new pay deals, the reforms may be seen as counter-productive by the public. Alternatively, if employers try to introduce these changes without consent, that may risk making the clawback arrangements unlawful anyway.

Samantha Mangwana is a Senior Employment Solicitor at Slater and Gordon Lawyers in London.

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