The UK banking watchdog will confirm on Wednesday that it is introducing the world's toughest rules for clawing back bankers' pay, even as it offers a fig-leaf to the industry by dropping some of its most punitive proposals for reform.
Sky News has learnt that the Bank of England's Prudential Regulation Authority (PRA) will announce that bonuses paid by the biggest banks operating in the City will be subject to a period of clawback lasting for at least seven years from the point of award.
This will allay fears that clawbacks would begin only when three year or five year bonus deferral periods have ended, which would have meant that bankers faced at least a decade before they could be certain that variable pay was not at risk of being reclaimed by their employers.
The PRA will also disclose that it has also abandoned a proposal contained in a consultation paper published in March for the new rules – which come into effect on January 1 next year – to be applied retrospectively.
Under its original plan, the regulator wanted firms to claw back pay awarded prior to next year but with a six-year limit in accordance with a statute of limitations for employment contracts.
A senior lawyer who spoke to Sky News on condition of anonymity said they had been briefed that the draft rules applying to awards made before 2015 would not be included in the final clawback policy statement to be published by the PRA on Wednesday.
Concerns about the legality of the six-year limit had been overcome, allowing the PRA to propose a longer clawback period, the legal source said.
The new framework for clawing back bankers' pay will be the toughest in the global banking industry.
It is expected to trigger claims from London-based international banks that they will be placed at a significant disadvantage in overseas financial centres, where foreign rivals will not be subject to the same stringent rulebook.
However, the PRA's revised plans suggest that it has heeded some of the industry's warnings about the enforceability of its original proposals.
Senior bank executives are also likely to be privately relieved at the reduction in the overall period in which bonuses are at risk, and at the decision to abandon retrospective application.
Sources said the new rules would apply only to so-called code staff – defined by regulators as bank employees who take material risks – and only to level one and two firms, which are the biggest in the sector.
As Sky News revealed earlier on Tuesday firms will be required to amend the employment contracts of affected staff.
The PRA has, though, decided that the circumstances in which clawback must be applied are narrower than those outlined in its consultation paper in March.
Sources familiar with the matter said the final rules would be limited to misconduct or misbehaviour by individuals, and a material failure of risk management by the firm or business unit where the employee worked.
An earlier proposal to also apply clawback where there has been a material downturn in financial performance is understood to have been dropped.
The Bank of England declined to comment on Tuesday.
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