FCA introduces ten-year bonus clawback period

The PRA and FCA have extended deferral periods for bonuses and introduced new clawback rules.

Related topics:  Finance News
Rozi Jones
23rd June 2015
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In a statement, the FCA said the rules would discourage irresponsible risk-taking and short-termism, and to encourage more effective risk management.

The new rules include extending deferral of variable pay for seven years for senior managers and three to five years for all other staff whose actions could have a material impact on a firm.

The FCA is also introducing clawback rules (where staff members return part or all of their bonus under certain circumstances) for periods of seven years for all material risk takers. 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.

Additional rules will prohibit variable pay for Non-Executive Directors and ensure that no variable pay can be paid to the management of a firm in receipt of taxpayer support.

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 behaviour which fosters a culture of effective risk management and thus promotes the safety and soundness of individual institutions."

The new rules apply to banks, building societies, and PRA-designated investment firms, including UK branches of non-EEA headquartered firms.

The FCA also addressed 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.

The regulator has not imposed an outright ban on bonus buyouts, possibly due to adverse impacts on competitiveness. However the FCA acknowledged that buyouts could allow employees to distance themselves from their own negligent conduct by moving employer in order to avoid malus reductions.

Andrew Tyrie MP, Chairman of the Treasury Committee and former Chairman of the Parliamentary Commission on Banking Standards, said:

“Firms should not only reward staff for success, but also penalise failure. Individuals should be fully rewarded only once it is clear that those rewards have been earned, that is, by providing benefits to their customers, shareholders and the economy. That is why the Parliamentary Commission on Banking Standards concluded that long deferral may be required in some cases and, where there has been serious misconduct, clawback may also be required.

“Long deferral and clawback will in some cases be essential to ensuring that rewards are more closely aligned to the maturity of the risk. In the last crisis, many people walked away from the mess that they had created with huge rewards, well before the risks matured and it became clear that the rewards were not merited. These proposals will be judged by whether they can help prevent this happening again.

“The regulators’ plans to lengthen deferral and clawback periods are a step forward. But the regulators themselves identified that attempts to manipulate the foreign exchange markets dated back to January 2008 – over seven years ago – when recently fining the banks. There remains a need in a minority of cases for even longer deferral.

“The PRA and FCA have decided to split the structure for material risk takers below senior manager positions, creating what looks like a two-tier structure. It is important that every reasonable step is taken to prevent this from resulting in more bureaucracy, an extra burden on business, ultimately at consumers’ expense. No doubt the Treasury Committee will want to raise this with the regulators at an early opportunity.”

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