The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have announced new remuneration rules for the banking sector, including changes to deferral and clawback of variable remuneration such as bonuses.
The measures have been introduced to further align risk and individual reward in the banking sector, as well as discourage risk taking and short-termism.
The rules apply to banks, building societies, and PRA-designated investment firms, including UK branches of non-European Economic Area (EEA) headquartered firms.
The changes include:
- Extending deferral (the period during which variable remuneration is withheld following the end of the accrual period) to seven years for senior managers and five years for risk managers with senior, managerial or supervisory roles at the PRA.
- Clawback rules (where staff return part or all of variable remuneration that has already been paid) for periods of seven years, with a possible three additional years for senior managers.
- Prohibiting variable pay for non-executive directors.
- Making it explicit that no variable pay, including all discretionary payments, should be paid to the management of a firm in receipt of taxpayer support.
The provisions on clawback and deferral will apply to variable remuneration awarded for performance period beginning on or after 1 January 2016. The rest of the new requirements will apply from 1 July 2015.
Andrew Bailey, deputy governor for Prudential Regulation, Bank of England and chief executive officer 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.”
Martin Wheatley, chief executive officer of the Financial Conduct Authority, added: “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 [employers] and regulators to build long-term decision making and effective risk management into people’s pay packets.”