Clawbacks

John Gapper

Lloyds Banking Group’s decision retrospectively to reduce the 2010 bonuses of senior executives involved in mis-selling loan insurance is a sign of the increased risks that bankers are starting to face personally.

The move strikes me as appropriate: it is an effective sanction against bankers over-selling high-margin products that will earn them big bonuses but turn out to be bad for customers. But the implications for the individuals involved, and for the industry as a whole, are serious.

It has the effect of turning “bonuses” –  a form of profit-sharing that most investment bankers have come to rely on for most of their income – into actual bonuses. In other words, provisional payments on which no individual can depend.

The fact that bonuses may be clawed back will make it much more risky to spend them on property or other things. Logically, they now ought to be kept in savings or shares for at least three years while there is a possibility they could be taken back. Read more