The PRA and FCA yesterday published additional remuneration rules on deferral and clawback for those firms subject to the banking Remuneration Code. The rules are in much the same form as was proposed in a consultation document last year (click here to see our earlier Law-Now on the proposals). Both have also announced that they will consider the position of buy-outs further, with a view to making sure that they are properly subject to adjustment prior to payment and clawback after payment. 
 
In more detail

  • Both the PRA and FCA rules will require longer deferral of variable remuneration. Although the percentages of variable remuneration which must be deferred will not change, what is deferred must be deferred for longer. Deferral will be for up to 7 years in the case of those who are senior managers within the framework of the new senior manager regime (with no vesting beginning before the 3rd anniversary of the award). Deferral will be up to 5 years for material risk takers (or Code Staff as they are commonly known) who are “risk managers” (which will only be relevant for PRA regulated firms), and 3 years for other material risk takers. In the original proposal, all material risk takers were to have a 5 year deferral period and so this is a concession.
  • The FCA is introducing the same clawback rules as the existing PRA rules so that there will be a 7 year look back provision, but both the PRA and FCA will extend that look-back period to 10 years where there are ongoing regulatory proceedings. 

These changes take effect for pay for performance years beginning on or after 1 January 2016. With effect from 1 July 2015, there are also changes making clear that Non-Executive Directors cannot receive variable remuneration, making sure that no discretionary payments can be made to “the management body“ of firms in receipt of new taxpayer support and strengthening the PRA requirements for dual-regulated firms to apply more effective risk management to variable remuneration. Other changes will also be made on how risk-based pools can be calculated and to stress that narrow revenue-focused metrics are insufficient.
 
The PRA also consulted on whether and if so how buy-outs could support its regulatory principles on pay. It has concluded that they can, but they need proper linkage to the performance of the previous employer and relevant malus/clawback terms. They will consider whether any further rules are needed on this (though no timeframe is given).

Both the PRA and FCA warn, however, that this may not be the end of what seems a never-ending series of consultations and changes on banking remuneration. Their rules may need to change further depending on final European Banking Authority updated remuneration guidelines when they are published later this year (click here to our earlier Law-Now on the draft proposals), and the PRA/FCA response to them. The EBA proposals include controversial changes in the UK such as requiring all firms affected by CRD4 to impose pay deferral etc. without any proportionality concessions and requiring all companies within a banking group - not just banking companies - to comply with relevant rules. There has been wide UK opposition to these proposals.