Keeping you up to date with the important changes in the financial services sector, covering a round-up of recent cases and developments.
Regulators’ statements on Brexit
The FCA and the Bank of England have released statements on Brexit confirming that existing financial regulation will remain in place and that the regulators will work closely with the government in the forthcoming negotiations. Firms should continue with implementation plans for EU legislation that is still to come into effect. The regulators’ statements can be read here:
Andrew Bailey speech at the 2016 Annual Public Meeting
In a speech at the FCA’s Annual Public Meeting, Andrew Bailey, Chief Executive at the FCA, talked about the work of the FCA over the past year, including supervision and the improvement of accountability through the operation of the Senior Managers and Certification Regimes.
Specifically on Brexit, Mr Bailey made clear that, until things change, the UK remains part of the EU and so all the regulators’ rules continue to apply whether they originate from the EU or not. The regulators will continue to implement EU legislation until the future is clear. Beyond that, Mr Bailey welcomed the Chancellor’s statement that the UK would seek access to the single market alongside trade agreements with other countries.
Gender Pay Gap Regulations
The Government Equalities Office has advised that the Gender Pay Gap Regulations will be published shortly. The GEO’s second consultation on the draft regulations received around 150 responses, mainly from employers and business organisations. The government response will be published when the Parliamentary timetable allows and all matters raised have been considered. If the draft legislation is approved, the regulations will commence in April 2017. The focal point date for the first snapshot data remains April 2017.
The draft regulations pose tricky questions for financial institutions, such as when a bonus is valued (on being earned or received?), how to value share options and how the application of malus and clawback affect reporting.
We will be issuing an employment briefing and sector-specific FAQs and will be running sessions on the new regulations once the new regulations are published.
EC Feedback Statement: summary of responses to consultation on CRD IV remuneration rules
A summary of 35 online responses to a consultation on the effects of the maximum remuneration ratio under the Capital Requirements Directive 2013/36/EU (CRD IV) and on the overall efficiency of the rules has just been published.
On the maximum ratio between fixed and variable pay, some respondents highlighted the impact on recruitment. Many organisations felt compelled to increase fixed salary in order to pay market competitive total compensation. International groups highlighted problems with recruiting staff globally. Within the EEA, the level playing field was said to be affected by different rates of success in securing shareholder approval for a higher ratio. Investment firms noted that their business models differ from credit institutions and their fixed pay is typically much lower.
The responses also address views on the impact on financial stability and on staff working outside the EEA.
There was a generally favourable response to performance assessment for remuneration purposes and most respondents agreed with deferral, malus and clawback.
EC report on CRD IV and CRR remuneration rules
CRD IV and the Capital Requirements Regulation (CRR) contain a number of requirements regarding remuneration policies and practices of credit institutions and investment firms. The EC has produced a report on the application of the rules and in particular on the bonus cap. Overall the review suggests a largely positive assessment of the remuneration rules.
The report looks at the interpretation by member states of the principle of proportionality, noting that most member states have put in place thresholds or criteria under which certain remuneration rules do not need to be applied, which are not in line with CRD IV. It also focuses on the interpretation of what is ‘fixed’ and ‘variable’ pay. It considers that some institutions have incorrectly classified ‘role based allowances’ as fixed remuneration.
The EC states that it has not received sufficient data on the application of the rules to investment firms but is reviewing the prudential regime and the application of the remuneration rules to investment firms may be revisited.
With regard to concerns about the application of the CRD IV rules to managers of undertakings for undertakings for collective investment in transferable securities (UCITS) or of alternative investment funds (AIFs) in addition to their sector-specific legislation, the report notes that staff only need to comply if, on the basis of the harmonised criteria for identified staff, it is determined that such staff have a material impact on the risk profile of the CRD group they belong to.
Whilst the rules have overall worked well there have been specific concerns about the need for a proportionate application of the rules. European Banking Authority estimates show that the requirements on deferral and pay out in instruments may be excessively costly and burdensome for small institutions. The EC proposes an impact assessment.
The EC also proposes an impact assessment and a legislative amendment to allow listed institutions to use share-linked instruments to pay variable remuneration.
On the bonus cap, the report suggests that it is still too early to fully assess the impact of the rule. The report looks at how the maximum ratio affects risk taking and conduct; the impact on fixed costs and profitability and on competitiveness.
Culture and Conduct
Role of the Regulator: Speech by Jonathan Davidson, Director of Supervision
Jonathan Davidson, Director of Supervision at the FCA, presented a speech about the regulator’s role in ensuring good culture and conduct at the 2nd Annual Conduct and Culture Forum for the Financial Services industry. He made clear that culture and governance is one of the key priorities for the FCA’s policy work and in day-to-day authorisation and supervision and sets out how the FCA proposes to identify, measure and influence conduct.
Financial Reporting Council: Report on observations on corporate culture and the role of boards
The FRC has produced a report which seeks to address how boards and executive management can steer corporate behaviour to create a culture that will develop sustainable good performance. The key challenge for boards is to understand what, in practice, drives the behaviour of employees and to shape and influence those drivers in a way that will foster greater sustainability and improved performance over time. The report provides practical guidance and suggestions for promoting good culture throughout the organisation.
Women in Financial Services
Women in Finance Charter
72 firms, including major financial services firms, have signed up to the government’s Women in Finance Charter designed to improve gender diversity in senior positions within the sector. The Charter commits financial services firms to link the remuneration packages of executive teams to gender diversity targets. It also commits firms to set internal targets for gender diversity in their senior management, publish progress reports annually against these targets and to appoint a senior executive responsible for gender diversity and inclusion. The commitments are based on the recommendations set out in Jayne-Anne Gadhia’s Review into the representation of women in financial services.
Women in UK financial services 2016 report
The Gadhia Review and HM Treasury’s Charter are voluntary but intended to be catalysts for discussion and to provide a clear set of action points. The New Financial report on women in UK financial services examines the context of the Review and the Charter and discuss how the financial services industry can engage with these initiatives as a stepping stone towards permanent, sustainable change.
The report presents a detailed analysis of the data that New Financial provided to the Gadhia Review on female representation on UK executive committees and boards as well as a qualitative survey of six of the Charter’s founder signatories.
Review on women in senior leadership
Business leaders have been asked to help deliver the new progress for greater female representation in business. They will undertake a new review on improving female representation in leadership positions, broadening the ambition to the entire FTSE 350 and raising the target to 33% of women on boards by 2020. The focus will be on representation on executive committees and direct reports to the executive committee in FTSE 350 companies.
EBA Benchmarking report on diversity practices at EU level
The European Banking Authority has published a benchmarking analysis of diversity practices at EU level, which discloses that despite the requirements introduced by the Capital Requirements Directive (CRD IV) only a limited number of institutions have already adopted a diversity policy, and only two thirds have one that promotes gender diversity.
Representation of women within the management body is still very low, with 13.6% in the management function and 18.9% in the supervisory function.
General Data Protection Regulation
The Information Commissioner’s Office has published a blog setting out its position with regard to the General Data Protection Regulation, due to come into force in the UK on 25 May 2018. The referendum outcome has brought this implementation into question. The ICO makes clear that the underlying reality on which the policy is based has not changed. The ICO will be producing a set of guidance, the first of which is an overview of the law, which can be read here.
Once implemented in the EU, the GDPR will be relevant for many organisations in the UK, particularly as so many businesses operate across borders. International consistency around data protection is crucial. The GDPR also has many new features, such as breach notification and data portability with which businesses should in any event be familiar, irrespective of what may happen in the future.
Case law update
Decorus v (1) Penfold (2) Procure  EWHC 1421
This case is an example of a restrictive covenant case fought (partly) on the argument that there was no consideration for restrictive covenants imposed mid-way through employment and that therefore (so Mr Penfold tried to argue) the covenants were unenforceable.
Mr Penfold signed up to broad (probably unenforceable) covenants when he joined Decorus as a sales manager. Some time later HR consultants for Decorus recommended implementation of a 3 stage process of appraisal, salary increase and new contracts (with tightly drafted restrictions). When Mr Penfold left to set up in business on his own account and tried to poach customers, Decorus sought to rely on the new covenants. Mr Penfold argued that, as he received the salary increase prior to signing the contract, he had received no consideration and the covenants were unenforceable. The Court disagreed: the new contract was always expressed to be part of a three-phase process. Taken together, the appraisal, pay rise and continued employment amounted to valid consideration.
This serves as a reminder, however, that it is important to tie in any pay rise (or bonus awards) to the new restrictions, particularly where the pay rise comes first.
Elliston v Glencore Services  EWCA Civ 407
This Court of Appeal case concerns the payment of a transaction bonus to Glencore's company secretary, Mr Elliston, in the context of Glencore's merger with Xstrata. Under Mr Elliston's service agreement he was also entitled to payment of a 'prescribed sum' in the event of a change of control (which this was).
The issue was whether Mr Elliston was, on the facts, entitled to both payments.
At issue was whether a clear condition had been imposed upon payment of the transaction bonus that the prescribed sum would be forfeited. Glencore said that there was a clear oral agreement with the HR manager that Mr Elliston could not 'double dip' if he accepted the transaction bonus.
The Court at first instance concluded that, to be effective, the oral agreement made with Mr O’Brien was not in itself enough and the service agreement would have had to have been amended in order for Mr Elliston to forego the prescribed sum.The Court of Appeal overturned the decision and ruled that a clear oral agreement would be enforceable.
However, this case serves as a reminder that it is always prudent to ensure that oral agreements are clearly reduced to writing and signed by the parties in order to avoid disputes of this kind.
Pickwell & another v Pro Cam Limited
In our last Quarterly Briefing, we highlighted the case of Bartholomew Agri Food v Thornton. This restrictive covenant case deals with similar facts.
Two agronomists were hired as trainees on offer letters setting out standard terms. They signed contracts of employment containing non dealing/ non solicitation covenants some months after starting work. When they resigned to join a competitor they argued that the covenants were unenforceable because there was no consideration since they had already accepted employment on the terms of the offer letter which contained no restrictions. The Court disagreed: it was clear to the trainees that, had they not accepted the contract, their employment would have been terminated. Neither objected to the contract's terms. The fact that ProCam regarded acceptance of the terms as a pre-condition to allowing access to clients was sufficient consideration. Further, ProCam conferred benefits by continuing to employ them and allowing them to progress in their careers. The agronomists also tried to rely on Bartholomew Agri Food v Thornton to argue that a restrictive covenant was unenforceable where the terms were manifestly inappropriate for a junior employee. The Court rejected this too: the covenants catered for a time when the agronomist, duly trained, starts bringing business in. A restrictive covenant has to be an attempt to deal with future events and therefore involve an exercise in foresight. To be enforceable, the law confines the exercise to matters which are in the reasonable contemplation of the parties at the time they made the contract. Bartholomew was distinguishable as it was a plainly unenforceable restrictive covenant forbidding any competition.