UK to hit bad bankers with bonus clawbacks

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U.K. authorities have announced plans to hit misbehaving bankers in the pocket, and could potentially demand the repayment of seven-year-old bonuses.

Individual bankers caught up in misconduct such as fraud or reckless trading will be held directly responsible for their own actions, and could have to repay bonuses paid up to six years previously, if the results of a consultation by the Bank of England and the Financial Conduct Authority become law.

The new proposals, which if agreed on will come into force in 2015, "will be some of the toughest rules in the financial sector anywhere in the world," according to Jean Lovett, Linklaters employment lawyer.

They follow a public backlash against big banks, after high-profile taxpayer bailouts of Royal Bank of Scotland and Lloyds, and the emergence of several big banking scandals, such as the Libor and foreign exchange rate rigging scandals.

Martin Wheatley, chief executive of the FCA, said: "How a firm conducts its business and treats its customers must be at the heart of how it operates. This has to start at the top. Today's consultations mark a fundamental change in the regulators' ability to hold individuals to account, which is what the public expects of us. It will also build on the cultural change we are beginning to see in the boardrooms of firms across the country."

It is hoped that the new rules would make it easier to identify who is responsible for misconduct, and more difficult for senior staff to distance themselves from the actions of others in their team.

Employment lawyers have warned of the prospect of an increase in legal disputes, similar to the dispute Commerzbank had with former staff over cut bonuses.

The rules could also mean banks can defer payment of bonuses for a minimum of five or seven years, depending on how senior the employees are.

This apparently tougher line on bonuses comes at the same time as the U.K. is challenging new European directives limiting bonuses to twice annual salary.

Under current European laws, bonuses can in theory be clawed back within three years – although that has rarely been enacted. Banks are currently more likely to cut or halt bonuses which haven't vested yet.

Employment lawyers have warned of the prospect of an increase in legal disputes, similar to the dispute Commerzbank had with former staff over cut bonuses.

"We need to be careful we don't create uncertainty which might make it increasingly hard to attract talent to London," John Cridland, director-general of U.K. business group the CBI, warned.

- By CNBC's Catherine Boyle

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