Regulators Reject Ban On Bank Bonus Buyouts

Sky News understands that the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have decided not to impose an outright ban on so-called bonus ‘buyouts’, and will instead opt for less draconian measures to police their practice.

The watchdog’s decision will be published after a consultation lasting nearly a year, and will be an important step towards the radical overhaul of banker’s pay in the aftermath of the 2008 financial crisis and subsequent trading scandals.

Bonus buyouts have been a common feature of banks’ efforts to lure rivals’ star traders and advisers.

They involve the cancellation of unvested variable compensation by the existing employer, with the new employer picking up the tab.

However, the widespread use of the policy drew criticism from the Parliamentary Commission on Banking Standards (PCBS), which said in its 2013 report that bank employees had been allowed to distance themselves from their own negligent conduct by moving employer in order to avoid the application of malus – the reduction of unvested bonuses.

Sources said on Monday night that UK regulators had acknowledged that an absolute prohibition on buyouts would have had an unacceptable impact on the City’s competitiveness, reflecting remarks made in last year’s consultation paper.

“This [ban on bonus buyouts] is likely to have major adverse impacts on competitiveness, putting firms subject to the UK ban (and therefore prohibited from using buy-outs) at a significant disadvantage when hiring staff versus overseas and other firms which would remain free to offer buy-outs to new staff.

“It would be likely to drive up levels of fixed pay in UK firms as they fought to attract staff,” they said.

The move to address bonus buyouts will come as regulators confirm plans to introduce rules requiring the deferral of variable pay for seven years for senior managers and five years for material risk-takers.

A seven-year clawback period for money already paid out to bankers was introduced this year.

Separate rules requiring limits on the level of bonuses as a proportion of their basic pay have also been enforced.

Attempts by banks to circumvent these rules by introducing role-based allowances have drawn the ire of European regulators, which said they must be modified.

The PRA and FCA declined to comment ahead of Tuesday’s announcement.

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