On 23 June 2015, the FCA and PRA issued their final rules and guidance to implement the proposals set out last year in their Consultation Paper in relation to remuneration. These rules mean that Britain now has the toughest rules on bankers’ pay of any major financial centre. The new rules on deferral and clawback will apply to bonus awards for performance periods commencing on or after 1 January 2016, while various other rules and guidance became effective on 1 July 2015.
The rules form part of a wider package designed to enhance market integrity and bolster the FCA’s policy of credible deterrence. The promotion of market integrity as a key objective of the FCA was demonstrated by the elevation of financial crime as a key area of focus in the FCA’s 2015/16 business plan and is also supported by the recent extension of the criminal offence of making misrepresentations in the course of setting a relevant benchmark, introduced to combat future attempts to manipulate LIBOR, to encompass seven additional benchmarks. Further, and although likely only to apply in the most exceptional cases, the new offence of reckless banking also came into force this year, aimed at punishing senior persons for the failure of a financial institution.
As such, the regulation of bankers’ bonuses and remuneration is just one part of the picture and parallel changes will be introduced to the Approved Persons Regime. These will result in a strengthened regime for the regulation of senior persons and a new fit and proper licensing regime for more junior employees.
The changes apply to banks, building societies and PRA-designated investment firms, including UK branches of non-EEA headquartered firms. The aim of the rules is to discourage excessive risk-taking and short-termism and they will apply to all Material Risks Takers who are within the scope of the remuneration code at these firms, including Senior Managers under the Senior Managers Regime (SMR) from 2016. When implemented, bonus awards will be subject to lengthier deferral periods depending on the seniority and role of the individual. Senior Managers, as defined under the SMR, with the greatest influence over the strategic direction of the business will be subject to the longest deferral periods with the introduction of a minimum seven year deferral period, no vesting before the third anniversary of the bonus award, and then vesting no faster than pro rata. Additionally, the rules will see the extension of the clawback rules (which only came into force at the start of 2015) to 10 years for Senior Managers where there are outstanding internal or regulatory investigations at the end of the normal seven year period. This will allow employers to go back further in time than a court would be able to under proceeds of crime legislation if the individual were prosecuted and convicted for their conduct.