UK Regulators Announce New Remuneration Rules
Hard on the heels of Bank of England Governor Carneys 10th June Mansion House speech warning City of London bankers and financial managers the ‘next time’ they crash the global economy and then commit widespread frauds someone might go to jail the twin UK regulators have announced a toughening of conditions around remuneration.
The Prudential Regulation Authority and Financial Conduct Authority have published a joint policy statement, titled Strengthening the alignment of risk and reward, which sets outs new rules around to variable remuneration including bonuses.
According to a statement released by the regulators 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.
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 (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 proposals also suggest variable pay for Non-Executive Directors and making explicit that no variable pay including all discretionary payments should be paid to the management of a firm in receipt of taxpayer support.
It also further strengthens the PRA requirements on PRA dual-regulated firms to apply more effective risk adjustment to variable remuneration.
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 PRA has also published a Supervisory Statement and other reference documents. A further statement is expected in the near future containing additional rules for increasing individual accountability in banking.
The announcement is another measure to improve accountability in the UK finance sector in response to a decade of bank collapses and post crisis scandals that includes a new Senior Managers Regime, its extension to Non Executive Directors and further regulation in FICC markets.