Investment bankers at the Royal Bank of Scotland are up in arms over last week's bonus clawbacks. Lawyers say they could challenge the extent of the clawbacks, which look legally dubious.
"It all depends upon the contract, but if entirely innocent people are having their bonuses clawed back in response to the breaches of others, it is legally problematic," said Charles Ferguson at Ferguson Solicitors, a law firm which represents traders in grievances against investment banks.
Ferguson and other lawyers said issues arise when bonus clawbacks are used as penalties rather than as recompense for damage done. "If a clawback is designed to penalize someone rather than to properly reflect the damage that they did, it will be unenforceable," said James Davies, joint head of employment at law firm Lewis Silkin. For a clawback to be seen as a penalty it has to be wholly disproportionate to the damage, said Davies. "If an individual is having a bonus clawed back in relation to a loss which had nothing to do with him or her, that may well be a penalty and would be unenforceable," added Ferguson.
RBS, which is 82 percent owned by the UK government, announced last week that it was cutting bonuses for 2012 and clawing back bonuses for previous years to cover its £390m ($612m) Libor fixing fine.
In total, £72m of prior years' investment banking bonuses at RBS are being clawed back. Of these, £59m are being clawed back this year, £10m are being clawed back in 2013, and £3m are being clawed back in 2014 and beyond. Some of the clawbacks will fall upon John Hourican, chief executive of markets and international banking at RBS. Hourican walked away from £4m of bonuses when he left the bank last month. That leaves £68m to be clawed back from everyone else.
RBS is clawing back bonuses from individuals who had nothing directly to do with the Libor scandal. The bank has said that only 21 of its employees were directly implicated in Libor-fixing. It said these individuals and their supervisors received zero bonuses for 2012 and have had their previous years' bonuses bonuses clawed back. However, the clawbacks don't stop there. In last week's report, RBS also said it would also be clawing back bonuses from individuals across the markets division to take account of the reputational damage inflicted on the bank by the Libor scandal. The bank said that employees subject to clawbacks will have received bonuses in excess of £25k in previous years, as bonuses below this level were not deferred. In other words, they're almost all in the investment bank.
"RBS has clawed back bonuses from people right across its fixed income business," said one fixed income headhunter, who declined to be named. "This has affected people who have nothing to do with rates trading. It seems to apply equally across rates and FX. If any other banks were hiring right now, RBS would be in danger of losing 200-300 very annoyed people. As it is, no one's hiring and they'll probably only lose 20-30."
RBS declined to comment on the extent of its clawbacks beyond reiterating what is stated in its annual report.
Client confidentiality meant the lawyers we spoke to were unable to say whether they had been approached by bankers from RBS seeking to contest the removal of prior years' bonuses. However, most lawyers say a high-profile case related to clawbacks is inevitable.
In January, Javier Martin-Artajo, the former boss of so-called London whale Bruno Iksil, settled out of court with J.P. Morgan after contesting the bank's attempt to claw back his previous years' bonuses. Ferguson said he is currently representing a whistleblower who left a bank and had his deferred bonuses removed after departure. The legal situation regarding bonus clawbacks has yet to be fully challenged and clarified in court. "Clawbacks are still a fairly new mechanism. It is only a matter of time before we have a big case on this subject," said Jane Mann at law firm Fox Williams.