Bankers could loses bonuses after six years

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A British banker sat at a desk holding a money bag and adding a pound coin to a stack of coins.

Bankers might be forced to put the champagne on hold during bonus season, because the Bank of England is pushing for tougher rules that will mean that if the banker has done something wrong - or made a major mistake - their bonus can be clawed back from them - up to six years after they received the payout.

So is this a good idea?

The regulators already have the power to step in and force firms to stop paying bonuses that have yet to be paid out. They can do this wherever there is evidence of wrongdoing, or significant failures.

There have been some high profile examples where bonuses have been cut because of organisational failures. Last year, Lloyds Banking Group cut former chief executive Eric Daniels' 2010 bonus to £300,000 from £1.45m because of PPI mis-selling.

Proposal

However, the Bank of England's Prudential Regulatory Authority is proposing rules which mean they will be able to claw back some or all of the bonus payments that have been paid out at any stage in the previous six years - even when that bonus has been spent by the banker in the interim.

They would be able to take this step where they can show there has been wrongdoing, or a major error which has caused the bank financial problems or risk management issues.

According to the Guardian it will not just apply to the individual directly involved in misconduct, but also to those who might reasonably be expected to be aware of it - if they failed to take action. Top executives who set the strategy and culture could also be held responsible.

The plan will need to get the right approvals, but if it is agreed it will be in place by the beginning of the next bonus season in January.

Is this a good idea?

The idea of halting bonuses or clawing them back has gained more currency in the city since the financial crisis, when organisations were brought to their knees, while the former management who presided over the mistakes watched from the safety of their multi-million pound mansions.

One of the most well known was Fred Goodwin, the former Royal Bank of Scotland boss, who received millions for decisions such as the takeover of ABN Amro, which almost destroyed the bank.

Deborah Hargreaves, director at the High Pay Centre, told the BBC there were big advantages to the change. She said: "I think claw back is a good thing and extending it to six years does give a chance for those bets to go wrong - some of them can take a while to come to light." She added: "What the public really sees, and I agree, is it is quite hard to justify getting a bonus if the bank is making a loss."

Even the bankers are in favour: the British Bankers' Association said that it was only right for bonuses to be returned where they had been received because of wrongdoing.

The flaws

However, there are those who argue that the plan has its flaws. The BBA highlights that it's not always going to be easy to claw back the cash when it has been paid out - particularly because bankers tend to spend their bonuses rather than put them away for a rainy day.

Jill Andrew, a partner at law firm Beam Law, also warned that Guardian that there could be legal challenges. She said: "If a banker came to me and said: 'They want to change my contract' I would tell them to say: 'No thank you.'"

Bankers and executives also have their ways of getting around curbs like this. If bonuses are made too perilous, then the banks will simply find another way to reward people. One of the reasons why we have a company car culture in the UK was because during the 1970s the punitive higher rates of tax forced businesses to find alternative ways of paying executives - and at the time tax on company car perks was far lower.

If bonuses become subject to more regulation, there's always the risk that they will be phased out in favour of higher basic pay, or other perks - which cannot be clawed back later.