The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have published two joint consultation papers aimed at improving individual responsibility and accountability in the banking sector.
One of the consultation papers, Strengthening the alignment of risk and reward: new remuneration rules, include proposals for the introduction of new rules on remuneration to strengthen the alignment between long-term risk and reward in the banking sector.
In June 2013, the Parliamentary Commission for Banking Standards (PCBS) published a report, Changing banking for good, which set out recommendations for legislative and other action to improve professional standards and culture in the UK banking industry. This was followed by legislation in the Banking Reform Act 2013.
The PRA and FCA are now consulting on proposals that incorporate and build on the Banking Reform Act and the recommendations made by the PCBS.
The proposals announced in the consultation papers include:
- Increasing the alignment between risk and reward over the longer term, by requiring firms to defer payment of variable remuneration (bonuses) for a minimum of five or seven years depending on seniority, with a phased approach to vesting.
- Further enhancing the ability of firms to recover variable remuneration, even if paid out or vested, from senior management if risk management or conduct failings come to light at a later date.
- Options to address the problem that employees can sometimes evade the application of malus (reductions in unvested awards) by changing firms.
- Strengthening the existing presumption against discretionary payments where banks have been bailed out.
The PRA has also published final rules on clawback, which introduce a seven-year minimum period for clawback from the date of award. These rules will come into force on 1 January 2015.
The PRA and FCA aim to publish final rules in early 2015.
Andrew Bailey, deputy governor, Prudential regulation and chief executive officer of the PRA, said: “Holding individuals to account is a key component of our job as regulators of banks.
“The combination of clearer individual responsibilities and enhanced risk management incentives will encourage individuals in banks to take greater responsibility for their actions.
“We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behaviour and culture within banks and will help to ensure that they are managed in a way that promotes the safety and soundness of individual institutions.”
Martin Wheatley, chief executive of the FCA, added: “How a firm conducts its business and treats its customers must be at the heart of how it operates. This has to start at the top.
“Today’s consultations mark a fundamental change in the regulators’ ability to hold individuals to account, which is what the public expects of us. It will also build on the cultural change we are beginning to see in the boardrooms of firms across the country.”
Simon Gorham, senior associate in the employment team at international law firm Taylor Wessing, said: “A tough clawback regime coupled with a legal cap on bonuses is a double whammy for the banking sector.
“We will, of course, need to see the fine print, but careful consideration will need to be given to creating an appropriate clawback mechanic in bankers’ employment contracts.
“These types of clauses are fraught with difficulty and there are real issues with enforceability. As such, this could be an area ripe for litigation in the future.”