EBA Benchmarking Report
The European Banking Authority (EBA) published its report on benchmarking of remuneration practices at EU level and data on high earners on 30 March 2016.
The report shows that the number of high earners in EU banks increased significantly in 2014, while the average ratio between variable and fixed remuneration dropped significantly for high earners. The introduction of the bonus cap had an impact on remuneration practices as EU banking institutions shifted remuneration for identified staff towards the fixed component. The UK press has reported the EBA’s finding that the UK had more than three times as many high earners (earning EUR 1 million or more per financial year) as the rest of the EU combined.
ESMA final guidelines on sound remuneration policies
On 23 July 2015 the European Securities and Markets Authority (ESMA) published a consultation paper (CP) on draft guidelines on sound remuneration policies under Directive 2014/91/EU (UCITS V). Consultation closed on 23 October 2015 and ESMA has now published its final guidelines. ESMA has also written to the European Commission, European Council and European Parliament seeking clarity on the proportionality principle and remuneration rules in the financial sector.
Solvency II Remuneration Requirements
From 1 January 2016 the remuneration requirements in the Solvency II Regulation became directly applicable to Solvency II firms. The PRA has now issued a consultation paper (CP) seeking feedback on a draft supervisory statement (SS) setting out the PRA’s expectations with regard to the Solvency II Regulation, in particular the requirements relating to the identification of key staff, performance management and deferral. The consultation is relevant to all UK insurance and reinsurance firms and groups within the scope of Solvency II including the Society of Lloyd’s and managing agents.
The SS clarifies the PRA’s expectations of how Solvency II firms should comply with key Solvency II remuneration requirements and to ensure that the regulatory requirements are interpreted correctly and applied consistently across Solvency II firms with different outcomes due only to differences in the internal organisation of the insurance or reinsurance undertaking.
Trade Secrets Directive
The European Parliament has voted to approve a new EU Trade Secrets Directive. If the European Council approves the Directive it will come into force 20 days after publication in the Official Journal and member states will have two years from that date to implement it into national legislation.
The proposed Directive aims to harmonise across member states the protection given to trade secrets by setting a minimum standard although member states can apply more stringent legislation. The proposed definition of a trade secret is narrower than that for ‘confidential information’ under UK law. The Directive aims to prohibit:
- the acquisition of a trade secret through unlawful access or other conduct contrary to ‘honest commercial practices’
- the use or disclosure of a trade secret where this breaches a contractual or other duty
- the exploitation of goods produced using the trade secret where the user knew or ought to have known that it was obtained unlawfully
The Directive will have an impact on restrictive covenant and confidentiality agreements, which should be reviewed if the Directive is (as it is expected it will be) passed in late May.
Call for evidence on ‘non-compete’ clauses
Business Secretary Sajid Javid has announced the launch of a call for evidence asking for views on ‘non-compete’ clauses and whether such clauses act as a barrier to innovation and employment.
Case law update
Bartholomews Agri Food Limited v Thornton  EWHC 648
The High Court has thrown out an injunction application to enforce a poorly drafted restrictive covenant and confidentiality obligation. The court issued a reminder that a company must be specific when certain information is considered by a company to be confidential to it. Organisations should also remember that the enforceability of restrictive covenants is judged at the time of entering into the covenant, not at any other time. It was also irrelevant to enforceability that Mr Thornton was paid his salary throughout the period of restraint.
Morris-Garner and another v One Step (Support) Ltd  EWCA Civ 180
The Court of Appeal has upheld a High Court’s decision to award damages on a ‘Wrotham Park’ basis where a former director and shareholder and her partner breached confidentiality, non-compete and non-solicitation covenants contained in a Deed of Compromise in the context of a sale of a business providing supported living services. Wrotham Park damages may be awarded where a claimant has suffered no identifiable financial loss but are not restricted to such cases.
The Court held that it was not necessary to show an absence of identifiable financial loss to claim Wrotham Park damages. Here, there were difficulties in establishing damages on the ordinary basis, although these were not insuperable difficulties. There were however real difficulties, for example, in showing what placements might have been lost by the former director’s competitive activities. Loss of goodwill was also hard to quantify.
It will be interesting to see if they are awarded more readily in employment claims after this decision. However, on the facts, this was an unusual case and it is likely that the courts will be restrained when considering its application.
Strengthening accountability in banking: PRA and FCA policy statements
The PRA has issued a policy statement (PS) setting out the amended definition of the term ‘significant risk taker’ in the certification rules, which has been aligned more closely to the definition of material risk taker in Commission Delegated Regulation (EU) No 604/2014 and the PRA’s Remuneration rules. The PS also makes amendments to rules and forms (in particular, to reflect the proposed removal of section 64B(5) in FSMA 2000, which would have required relevant authorised persons to notify the regulator(s) if they knew or suspected that an individual performing a senior management function had failed to comply with the conduct rules).
The FCA also consulted on identical amendments and changes and published its PS and responses to consultation in March 2016.
The FCA PS also finalises some technical amendments dealing with how the SYSC applies to foreign branches. After 7 March 2016 firms should use the updated forms attached to the PS.
In response to questions raised on consultation, the FCA confirmed:
- the reporting requirement for ‘other conduct rules staff’ will not apply until 7 March 2017
- junior staff are included in the definition of ‘relevant person’ under section 64C FSMA and will be included in the regime from 7 March 2017
- the definition of disciplinary action in section 64C FSMA includes suspension; however a firm is only required to notify the regulator of disciplinary action after a breach of a conduct rule has been confirmed
- there is no requirement to notify the regulator of disciplinary action if the firm does not yet know if there has been a conduct rule breach (see SUP15.11.6 of the FCA handbook)
- notifications should be made under section 64C at the point when relevant internal disciplinary action is first taken. Do not wait for individuals to exhaust all available internal appeals processes
The PRA’s PS reflects the FCA’s position and also states that firms should notify the regulator where the individual has appealed and to update on the outcome of the appeal.
Bank of England and Financial Services Act 2016
The Bank of England and Financial Services Act 2016 was passed on 4 May 2016.
The Act forms part of the government's reform of the financial services sector and, among other things:
- ends the subsidiary status of the PRA and establishes a new Prudential Regulation Committee
- extends the SM and CR regime to all authorised persons under the Financial Services and Markets Act 2000 (FSMA)
- gives powers to HM Treasury to provide financial assistance in order that action may be taken against illegal money-lending
The 'duty of responsibility' for senior managers in authorised firms will supersede the 'reverse burden of proof' that would have applied in the banking sector.
Section 3B of FSMA (the application of regulatory principles) is amended to clarify that the regulators must have regard to the differences between different kinds of business organisation adopted by financial services firms in exercising their general functions.
Most of the Act's provisions will come into force on dates to be specified in regulations.
FCA Business Plan 2016/17
The FCA has published its business plan for 2016/17. It states that the core of its work will continue to be challenging poor conduct and one of its seven priorities will be firms’ culture and governance. Culture remains, for the FCA, a key driver of significant risks in every sector and the root of high-profile and significant failings. In this regard, the FCA underlines that boards have a critical role in setting the ‘tone from the top’: boards should take responsibility for their firms’ culture, ensuring it remains high on firms’ agendas and that this tone is replicated throughout the firm. As a regulator, the FCA’s focus is on the most significant drivers of good or poor mindsets or behaviours, such as incentives or remuneration and the steps firms take to address associated risks.
The FCA highlights a change in working patterns and make-up of the working population. There has been an increase in self-employment, part-time work and temporary workers since the onset of the crisis and a rise in zero-hour contract workers.
With regard to the extension of the Senior Managers and Certification Regime to all Financial Services and Markets Act 2000 (FSMA)-authorised firms in 2018, the FCA says that it will, together with the PRA, consult on and develop detailed rules and guidance required for implementation.
Supervisory Statement on Board Responsibilities
The PRA has published a supervisory statement for boards of firms regulated by it to help identify aspects of governance to which the PRA attaches particular importance and to which the PRA may devote particular attention. The SS is not intended to be a comprehensive guide to good corporate governance, which can be found elsewhere, including the Financial Reporting Council’s Corporate Governance Code.
The PRA notes that the specific accountabilities of individual directors established by the SM & CR and the SIMR are additional and complementary to the collective responsibility shared by directors as members of the board.
Mark Carney’s letter on how EU membership affects the Bank of England
Mark Carney’s letter to HM Treasury summarising the Bank of England’s assessment of how EU membership affects the Bank of England’s ability to achieve its statutory objectives can be read here.
Women in Finance report
Jayne-Anne Gadhia has published the report of her review into the representation of women in senior managerial roles in the UK’s financial services industry.
Links to HR E-briefings