On 24 June 2015 the PRA and FCA issued the “Strengthening the Alignment of Risk and Reward: New Remuneration Rules”. The new rules apply to Banks, Building Societies and all PRA-regulated investment firms i.e. the same businesses as the Senior Managers and Certification regime (“SMCR”). It therefore captures some employers not previously within the Remuneration code net. The new regime is in force and applies from 1 January 2016.

What’s changed?

  • The mandatory period of deferral for variable remuneration has been extended to seven years for “senior managers” (as defined under the SMCR). No vesting can take place until the third anniversary of the award and subsequent vesting must be on a pro-rata basis.
  • Individuals with responsibility for managing or supervising risk-taking or significant risk-functions i.e. Material Risk Takers, must be subject to a five year deferral for awards with pro-rata vesting from the first anniversary of the award.
  • For Material Risk Takers clawback provisions must apply in the seven year period from the date of the award. These require an employee to return ownership of some or all bonus payments to their employer is certain defined circumstances e.g. the discovery of wrongdoing.
  • For PRA designated Senior Managers where there are outstanding regulatory or internal investigations likely to lead to the need for adjustments to remuneration, a ten year clawback will be required.
  • Bonuses and other variable remuneration for non-executive directors has been banned.
  • The key outstanding issue is how to deal with the buyout of awards when employee who moves from one firm to another. The concern is that if an award has been bought out by a new employer how could a previous employer apply “malus” provisions i.e. arrangements which permit the employer to prevent vesting of all or part of deferred remuneration based on risk outcomes or performance? There are a number of possible options:
    1. require monies to be had in escrow so the employee could be subjected to malice by the previous employer; or
    2. ban buyouts altogether; or
    3. rely on clawback rules; or
    4. require firms to maintain unvested awards when the employee leaves.

Options 1. and 3. look the most likely approaches but further guidance needs to be provided.

The hrlaw team at Fox Williams will continue to provide updates on this topic.

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