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Lawyers warn on crackdown of banking bonuses

Proposals may 'adversely impact' on London's appeal as an international financial centre

28 October 2014

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Excessive bonuses paid to senior banking managers could backfire under new proposals, according to the Employment Lawyers Association (ELA).

The clampdown comes after a raft of proposals outlined in twin consultations from the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) which come in the wake of government pledges to curb perceived excessive rewards.

The ELA, however, believe the outcome may deter the most talented from taking on senior manager roles; shifting reward payments from bonus to salary, consequently neutralising cost benefits, could potentially undermine London's status as the leading international financial centre by driving talent abroad.

Responding to the two consultations, the ELA highlights instances where current draft regulations could spawn litigation, potentially be unlawful, and increase the regulatory burden on employers.

Caroline Stroud, joint chair of the ELA Working Party, commented: "There are significant HR implications of the proposed senior managers regime. This is likely to drive up fixed salaries because of the level of risk individuals are required to assume, make recruitment more difficult and put individual and collective responsibility in conflict."

Working Party joint chair, Stephen Levinson, added: "We sympathise with the sentiment here, and it is not our place to criticise policy objectives, but it is hard to escape the fact that, if implemented, these measures will adversely impact on London's appeal as an international financial centre. They will affect highly sought-after senior staff who can work anywhere in the world. It is vital to strike a balance between proposals that fulfil a public commitment to reduce risk and retaining the attraction of working in the UK."

The ELA suggests that amendments to the proposals might make them more workable, leading to fewer disputes.

Risk and reward

The ELA warns that proposed discretionary powers for employers to extend claw back period will increase the likelihood of litigation. A set period of seven years is set out, with employer discretion to extend this by a further three years.

Applying an extension to the claw back period could be seen as pre-judgement of an employee's guilt of wrongdoing. The ELA state that a host of practical and burdensome enforcement issues surround claw back, meaning it should be used only as a last resort.

Addressing these points, Levinson said: "The time lag involved may make it difficult for employers establishing evidence for grounds of claw back. The employee may no longer have the money making recovery an even greater penalty. We also have concerns around what issues might trigger claw back and the potential for serious legal disputes."

Framework of individuals

The ELA also suggests that the introduction of the senior managers' regime will lead to fixed salary increases because of the level of risk individuals will have to take on. Furthermore, there will need to be significant negotiations between senior managers and employers which will lead to a natural conflict between individual and collective responsibility.

Necessary changes will have to be made to HR systems to reflect the introduction of a new regulatory regime. This, they say, will affect appraisals, remuneration systems and disciplinary processes.

Stroud said: "We're concerned that the proposals as they stand may drive up fixed salaries, de-linking risk from reward which is not what the regulators want and further, people may be discouraged from taking on these important roles."

John van der Luit-Drummond is legal reporter for Solicitors Journal

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