The Prudential Regulation Authority (PRA) last month published a controversial proposal on buy-out bonuses aimed at stopping employees at the largest banks from being able to wipe the slate clean when they move firm. The proposal requires new employers to reduce or clawback buy-out bonuses if the ex-employer decides that the employee was involved in misconduct at the old firm. The draft rules apply to material risk takers at certain capital requirements directive IV firms, and present a host of challenges.
A key issue is who has responsibility for ensuring that the decision to apply malus or clawback is fair and reasonable. While malus or clawback will be applied by the new employer, it will not control the investigation on whether it should be applied, and will not have the full facts on why it should be applied.
Concerns over the sharing of sensitive personal data, confidential information and competition issues will probably result in competitor firms disclosing very little to one another. However, the new employer will need to ensure it does not breach its own legal duty of trust and confidence, or sully the employment relationship, by acting blindly on the ex-employer’s instructions.
The PRA Rulebook does provide the new employer with the discretion to apply for a waiver from this rule if it thinks the ex-employer’s decision to apply malus or clawback is unfair or unreasonable. But, it will be difficult for the new employee to conclude this with limited information. In practice, if the new employer is reluctant to apply malus or clawback, the PRA may need to get involved, which will put it in a difficult position.
In short, while the rationale for the proposal is understandable, the practicalities of operating it may be extremely difficult.
Juliette Graham is an associate at law firm Linklaters