By Mark Kleinman, City Editor
The Bank of England (BoE) has rewritten the City rulebook, introducing tough new restrictions on bankers' bonuses and the threat of stringent penalties including jail terms for errant executives.
Announcing proposals for measures aimed at strengthening accountability in the industry, the Prudential Regulation Authority (PRA) said on Wednesday that the new regime would make London one of the most closely-regulated financial centres in the world.
The reforms include eye-catching plans such as an annual MOT for senior bankers - a ban on discretionary payments to individuals who work for banks bailed out by taxpayers - and longer deferral periods for variable pay of up to seven years for top executives.
If implemented, there will also be a ban on bankers transferring their bonus pots from one firm to another when they change employer, which has in the past enabled individuals to escape financial penalty for wrongdoing exposed after they have left their previous firm.
The BoE also confirmed new rules that will oblige the biggest banks to claw back bonuses for up to seven years after the money has been awarded, as Sky News revealed on Tuesday.
Where probes into an individual are already underway at the end of the seven-year period, there is an option to extend the term by up to three years.
The clawback rules will come into effect at the beginning of next year, while the other measures announced by the PRA are subject to a consultation period and will be finalised in the autumn.
They come in the wake of a litany of crises which have shaken public confidence in the banking industry, including the Libor rate-rigging scandal, an ongoing probe into the possible manipulation of foreign exchange rates, and consumer mis-selling episodes in payment protection insurance (PPI) and identity theft cover.
Last year's report by the Parliamentary Commission on Banking Standards called for some of the measures announced on Wednesday to be even tougher, but they nevertheless represent a significant strengthening of watchdogs' powers.
The PRA, which has drawn up the new rulebook in conjunction with the Financial Conduct Authority (FCA), wants to oversee the creation of two new frameworks for holding bankers to account.
A Senior Managers Regime will clarify lines of responsibility so that executives cannot abdicate responsibility for misconduct which takes place in the area of their bank that they supervise.
There will also be a Certification Regime, which will oblige banks to conduct annual assessments of the fitness and propriety of staff whose decision-making status means they could pose harm to customers.
A proposed ban on discretionary payments to employees at firms bailed out by the taxpayer will include pensions and other payments, which would have affected a payout to Fred Goodwin, former chief executive of Royal Bank of Scotland, when he left in the wake of its £45.5bn bail-out in 2008.
PRA chief executive Andrew Bailey said: "We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behaviour and culture within banks and will help to ensure that they are managed in a way that promotes the safety and soundness of individual institutions."
However, the CBI, Britain's most influential business group, sounded a note of caution about the new rules, saying the UK's competitiveness as a financial centre remained of paramount importance.
"We need to be careful we don't create uncertainty which might make it increasingly hard to attract talent to London," it said.
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