On January 13, 2016, the PRA published a consultation paper on proposals to introduce new rules on buy-outs of deferred variable remuneration, i.e. where a firm compensates a new employee for deferred variable remuneration not received from a previous employer due to the employee having left the former firm. The new rules would apply to PRA-regulated banks, building societies and designated investment firms and would amend the existing Remuneration Part of the PRA Rulebook (known as the PRA Remuneration Code until the PRA and Financial Conduct Authority Remuneration Codes were split). Current remuneration rules, which seek to encourage greater alignment between risk and reward as well as more effective risk management, allow employers to withhold or reduce unpaid or unvested awards (i.e. the rules of malus) or recoup paid or vested awards (i.e. the rules of clawback). The practice of buy-outs could undermine these rules as employees could potentially evade being accountable for actions they carried out in their previous employment by moving to a new employer who buys-out their cancelled deferred remuneration. The PRA proposes that buy-out terms in contracts between new employers and employees should allow for malus or clawback to be applied following a notification by the old employer if an employee is found guilty of misconduct or risk management failings in his previous employment. The PRA is proposing to allow new employers to apply for a waiver for each employee if they believe the old employer’s decision to apply malus or clawback was unfair or unreasonable. Responses to the consultation are due by April 13, 2016.

The consultation paper is available at: http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp216.pdf