On June 23, 2015, the Prudential Regulation Authority and Financial Conduct Authority issued a joint Policy Statement on new remuneration rules to strengthen the alignment of risk and reward, encouraging more effective risk management and discouraging excessive risk taking. The changes to the PRA Rulebook and FCA Handbook will apply to banks, building societies, PRA-designated investment firms as well as UK branches of non-EEA headquartered firms. The new rules apply to all Material Risk Takers and Senior Managers covered by the incoming Senior Managers Regime which takes effect next year. The changes include: (i) extending deferral periods for Senior Managers to no less than seven years, with no vesting period prior to the third anniversary of the award and vesting no faster than on a pro-rata basis; (ii) extending deferral periods for all other MRTs to no less than five years, with vesting no faster than pro-rata from one year (PRA only requirement); (iii) clarifying the rule that no variable remuneration should be paid to the management body of a firm which receives exceptional government support unless justified – the rule applies to all discretionary payments, including payment for loss of office and discretionary pension benefits and applies to firms in receipt of exceptional governmental support whether by direct support or a guarantee but will not apply to firms which receive emergency liquidity assistance; (iv) a new FCA rule requiring firms to apply clawback where there is misconduct or risk management failures up to seven years from the date of a variable remuneration award (the PRA implemented the same rule from January 1, 2015); and (v) extending the clawback period by up to three years, in addition to the seven years for PRA-designated Senior Managers where there are outstanding internal or regulatory investigations at the end of the normal seven-year clawback period. The final rules on clawback and deferrals will apply to variable remuneration awarded for performance periods beginning on or after January 1, 2016. The remainder of the new rules will apply from July 1, 2015. The PRA also published a new Supervisory Statement on remuneration which supplements its existing statements on remuneration standards. The Supervisory Statement clarifies the objectives of the PRA and sets out the expectations of firms relating to proportionality, remuneration structures, risk management and control functions. The FCA published guidance on the application of malus to ex-post risk adjustment and variable remuneration as well as guidance on proportionality for dual-regulated PRA and FCA firms.
The Policy Statement, Supervisory Statement and guidance documents are available at: http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps1215.pdf; http://www.bankofengland.co.uk/pra/Documents/publications/ss/2015/ss2715.pdf; http://www.fca.org.uk/static/documents/finalised-guidance/guidance-dual-regulated-firms-remuneration-code.pdf; and http://www.fca.org.uk/static/documents/finalised-guidance/guidance-on-ex-post-risk-adjustment-variable-remuneration.pdf.