Bank of England Consults on Extending Bonus Clawbacks

The Bank of England is consulting on a proposal which will see all firms authorised by the Prudential Regulation Authority (“PRA”) having to amend employment contracts to enable them to claw back bonuses which have already vested. The Bank of England already has powers to require firms to claw back unvested bonuses.

Under the proposals, bonuses could be clawed back where:

• 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; or 
• the firm or the relevant business unit suffers a material failure of risk management.

The PRA expects firms to amend employment contracts to allow claw back to be applied to all vested awards up to six years after vesting. 

The PRA proposes that clawback should not be limited to employees directly culpable of malfeasance. For example, in cases involving a material failure of risk management or misconduct, firms should consider applying clawback to 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. 

The proposed rules will come into force on 1 January 2015 and will be implemented by way of a change to the Remuneration Code. Clawback could be applied to awards made before that date but which vest after that date, subject to a six year time limit after vesting. 

The proposed changes are subject to two months’ consultation.  The consultation document can be viewed here.