Last week saw the publication by the Prudential Regulation Authority (“the PRA”) of new rules on bankers’ bonuses. In particular, from 1 January 2015 PRA-regulated firms are required to ensure that variable remuneration (i.e. pay by way of bonus) is subject to “clawback” for a period of at least seven years from the date of the award. That means that certain employees may be required to repay sums already paid to them where:
(a) there is reasonable evidence of employee misbehaviour or material error; or
(b) the firm or the relevant business unit suffers a material failure of risk management.
Clawback differs from and is more onerous than existing “malus” provisions (which bite on unvested awards so that they do not vest) in that it requires repayment of sums already paid to employees - which may of course already have been spent. This could lead to sleepless nights for some, and other commentators have speculated that it may also encourage senior bankers to “spread their risk” by moving more frequently around different financial institutions, to limit the total remuneration that one incidence of clawback may affect. One can see that this would not be in the interests of stability within the management of financial instuitions.
In addition, on 30 July 2014 the PRA and the Financial Conduct Authority issued a consultation on proposals to improve responsibility and accountability in the banking sector. These proposals are wide-ranging, but the key focus is to make it easier for firms and regulators to hold individuals to account.
Amongst other things, the regulators have proposed:
- an increase to the deferral period for bonuses to a minimum of five or seven years depending on seniority, with a phased approach to vesting;
- an extension of clawback to cover the remuneration of both FCA and PRA-regulated firms within the Remuneration Code’s scope; and
- options to address the problem of firms “buying out” an individual’s unvested remuneration on change of firms, which then restricts the operation of malus where the unvested sums would never otherwise have been paid out.
The underlying objectives behind the proposals on remuneration are to “strengthen the alignment between long term risk and reward in the banking sector”, in other words to encourage effective risk management and avoid rewarding failure, even where that only becomes clear in the long term. It remains to be seen to what extent the increased regulation of bankers’ bonuses in this way will result in an exodus of talent, but certainly the rules on clawback do look severe, particularly where, when the sums are paid, an individual has arguably no way of knowing whether it may need to be paid back at a later date. I do wonder how many people will be sensible enough to squirrel away savings to ensure that they have cash available to repay their employers in the event that the right to clawback is exercised.