Remuneration Code: Consultation on Further Changes

The Prudential Regulation Authority and Financial Conduct Authority are consulting on further changes to the Remuneration Code designed to address weaknesses in the alignment between risk and reward highlighted by the Parliamentary Commission on Banking Standards (PCBS).

The weaknesses were outlined in the final report of the PCBS, Changing Banking for Good, issued in July 2013. 

The proposals include:

• Longer deferral periods – a minimum of seven years for senior managers and a minimum of five years for other material risk takers. In addition, the PRA/FCA will be able to direct firms to defer a substantial part of remuneration for up to ten years where inadequate remuneration policies are being operated;
• Changes to vesting of awards – for senior managers deferred remuneration should not vest earlier than the third anniversary of the award and no faster than pro rata between years three and seven. For all other material risk takers, first vesting should be no earlier than the first anniversary of the award and vest no faster than pro rata;
• Extended clawback period of up to 10 years in relation to senior managers – where there is 
  • an internal inquiry into a potential material failure which could potentially lead to the application of claw back; or
  • a regulatory authority has clearly notified the firm that an investigation is being carried out and the firm considers it could lead to the application of clawback.
• Clarification that the existing presumption against payment or vesting of awards in Banks that have been bailed out extends to payments for loss of office and discretionary pension benefits;
• New rules on buy-outs – where a firm cancels unvested bonus awards of departing staff leaving to join a competitor and the competitor “buys out” the forfeited award. This practice has the effect of insulating the individual against downward adjustment of past awards as risks crystallise or the consequences of poor risk management emerge. Options being considered include:
  • A complete ban on buy-outs;
  • Requiring firms to continue to honour unvested awards when staff leave, whether or not to join a rival, unless there are grounds for making a reduction (in accordance with the rules on malus);
  • Giving the regulator the power to recover buy-outs in cases where the previous employer would have had grounds to do so (in accordance with the rules on malus); and
  • Making no changes to deal with buy outs and rely instead on the new rules on clawback to ensure there would generally be sufficient vested variable remuneration at risk of clawback to balance risk and reward.
• Clarification that non-executive directors should not receive variable pay for non-executive duties.

The proposals are set out in a joint consultation issued by the PRA and FCA Strengthening the alignment of risk and award: new remuneration rules.

Responses are required by 31 October 2014 and the revised rules are expected to come into force on 1 January 2015.