The U.K.’s Prudential Regulation Authority and Financial Conduct Authority have published new remuneration rules, which include changes to deferral and clawback of variable remuneration (e.g. bonuses).
The new framework aims to further align risk and individual reward in the banking sector to discourage irresponsible risk-taking and short-termism, and to encourage more effective risk management.
The new rules apply to banks, building societies, and PRA-designated investment firms, including UK branches of non-EEA headquartered firms.
Martin Wheatley, Financial Conduct Authority CEO, commented: "Today’s rules are part of a wider package that is being announced over the summer to embed an accountable culture in the City. Our rules will now mean that senior managers face clawback of bonuses for up to 10 years, if misconduct comes to light.
"This is a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long term decision making and effective risk management into people’s pay packets."
Andrew Bailey, Deputy Governor for Prudential Regulation, Bank of England and CEO of the Prudential Regulation Authority said: "Effective financial regulation involves creating appropriate incentives to encourage individuals to take greater responsibility for their actions. Our intention is that people in positions of responsibility are rewarded for behavior which fosters a culture of effective risk management and thus promotes the safety and soundness of individual institutions."
The FCA is introducing clawback rules (where staff members return part or all of variable remuneration that has already been paid to the institution under certain circumstances) for periods of seven years from award of variable remuneration for all material risk takers, which were already applied by the PRA.
Both the PRA and the FCA clawback rules will be strengthened by a requirement for a possible three additional years for senior managers (10 years in total) at the end of the seven year period where a firm or regulatory authorities have commenced inquiries into potential material failures.
Last year’s consultation paper sought views on a number of options for addressing the issue of buy-outs, in which a firm compensates a new employee for any unpaid remuneration that is cancelled when they leave their previous firm. Following responses to the consultation paper, the PRA and FCA will now explore further the option of requiring buy-out awards to be held in a form that permits them to be subject to malus by the previous employer.
The FCA has also issued new guidance on the adjustment of variable remuneration to take account of a specific risk or poor performance (ex-post risk adjustment). The guidance is intended to share the latest good practice observed in the 2014 remuneration round and clarify the FCA’s expectations on how relevant firms should meet the Remuneration Code requirements on ex-post risk adjustment.
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