24th June 2015
UK regulators have published new rules allowing them to clawback bankers’ bonuses for up to 10 years if misconduct comes to light. The rules will come into force between next month and the start of 2016.
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) say the new framework aims to “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 some other designated investment firms.
Martin Wheatley, Financial Conduct Authority chief executive says: “The 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 says: “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 behaviour which fosters a culture of effective risk management and thus promotes the safety and soundness of individual institutions.”
The primary changes are:
Extending deferral (the period during which variable remuneration is withheld following the end of the accrual period) to seven years for senior managers, five years for PRA designated risk managers with senior, managerial or supervisory roles, and three to five years for all other staff whose actions could have a material impact on a firm ( known as material risk takers).
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.
The clawback and deferral will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016, while other requirements will apply from 1 July 2015.
The regulators are also examining how to take bonuses from employees who may have moved firms and received a bonus from the new employer by way of compensation.