The Financial Conduct Authority (FCA) and the Bank of England Prudential Regulation Authority (PRA) released new rules that will affect the bonuses of bankers, senior managers and risk managers. If regulators uncover unethical activity or misconduct, chief executives and chairmen will run the risk of having their bonuses for up to 10 years clawed back.

“This is a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long term decision making and effective risk management into people’s pay packets,” said Martin Wheatley, CEO, FCA.

But restoring public trust in this sector is not an easy game. The regulators found that targeting bonuses will not only promote a better culture of compliance but it will discourage irresponsible risk-taking and short-termism—a move that once required taxpayer bailout and allowed the easy rigging of Libor interest rates at some international banks.

"This is a crucial step to rebuild public trust in financial services."
Martin Wheatley, CEO, FCA

Bankers now have to take into consideration that a risky trade will not only land them in regulatory hot water but they will have to return bonuses that were paid out over a decade, once an investigation is launched.

“Effective financial regulation involves creating appropriate incentives to encourage individuals to take greater responsibility for their actions. Our intention is that people in positions of responsibility are rewarded for behavior which fosters a culture of effective risk management and thus promotes the safety and soundness of individual institutions,” said Andrew Bailey, deputy Governor for Prudential Regulation, Bank of England and CEO of the Prudential Regulation Authority.

The clawback and deferral rules will go into effect to variable remuneration awarded for performance periods on or after January 1, 2016 while other requirements will apply from July 1,2015, the watchdogs said.