Banks Warn Regulator On 'Illegal' Bonus Rules
New rules that would force bankers to wait more than a decade to get their hands on bonuses would breach "the principle of natural justice" and leave lenders exposed to costly legal challenges, a trade body has warned.
In a document obtained by Sky News, the British Bankers' Association (BBA) argued that plans to apply clawback provisions retrospectively would be illegal in Brazil, France, Germany and Mexico, countries in which UK-based lenders such as HSBC have a substantial presence.
The BoE's proposals would force banks to reclaim variable compensation from senior employees for up to six years after it has been handed over and spent.
Critics argue that they would amount to the toughest regime in the world for governing bank pay and would go well beyond the remit recommended by last year's Parliamentary Commission on Banking Standards, the BBA said.
The PRA already has the power to force firms to cancel unvested bonuses through a system known as malus.
The body's submission to the BoE's Prudential Regulation Authority, which has been consulting on clawback since March, added that even in the UK, where they would not technically be illegal, they would still be subject to challenge.
"Whilst [it] may be legally possible the actual ability to enforce clawback will be dependent on the decision of a court to enforce clawback clauses in employment contracts.
"For instance it could be argued that such repayment provisions are unenforceable on legal grounds because they are a 'penalty clause'; and/or a restraint on trade; and/or counter to the doctrine on forfeiture," the BBA said.
The BBA said that courts may not be willing to enforce the new rules where an employee had only been "tenuously involved" in wrongdoing, or where the reclamation of bonuses was the result of a broader failure of risk management at a bank.
In such cases, it added, the costs of legal challenges could exceed the value of the bonuses which banks were attempting to claw back.
"For this reason we think a de minimis amount should be established, probably by the firm but subject to the PRA's agreement, below which clawback should not be sought," the BBA said.
The UK also risked exacerbating the perception of an "unlevel playing field" between British banks and their international counterparts, increasing the likelihood that star performers would defect.
"Claw-back and indeed malus are not practices that are prevalent in many markets and there is little prospect of other regulators in, say, Asia adopting claw-back provisions" the document said.
To reduce disparities, the regulator should amend its plans to start the 'clawback clock' ticking at the point at which bonuses are awarded, rather than the point at which they vest.
Some lenders have five-year deferral periods for variable pay, meaning that under the new rules recipients would not be sure that the money could not be taken from them for eleven years.
The BoE consultation process closed earlier this week, and will lead to the publication of during the next few months.
Both the BBA and the BoE declined to comment.