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Financial Services: Regulators Lost for Words on Buy-Outs

Financial Services: Regulators Lost for Words on Buy-Outs

Readers in the financial services sector will no doubt be keen to know what the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) intend to do about buy-out awards.

The regulators started consulting about them a year ago (July 2014) but still don’t know what to do. To be fair to them, it is a particularly sticky situation and there are no obvious solutions.

The problem, as the regulators see it, is this. An employee leaving one bank and joining another bank quite often gets his or her new bank to “buy out” any unpaid bonus award from the old bank that the employee loses by changing jobs. However, in practice this also means that if something comes out of the woodwork at the old bank, which would have resulted in the unpaid bonus being reduced by the old bank, the new bank can’t really do anything about it. So the employee escapes his or her bonus being reduced simply by changing jobs. In the eyes of the regulator, this means there is a misalignment between risk and reward – which is inconsistent with the new European dogma on bankers’ remuneration.

So how do we fix it? So far, the regulators have floated four options (in July 2014) and discarded two (in June 2015), leaving two more for further consideration.

To bring you up to speed, here are the four options and the current position:

Option 1: Ban buy-out awards from new employers completely. This has been dropped completely because of the view that it will place UK-based businesses at a significant competitive disadvantage to their overseas counterparts (many of whom can still do what they want when it comes to bonuses).

Option 2: Stop an employee’s old firm from cancelling his or her unpaid bonus awards just because the employee changes jobs. This has also been dropped because it was considered too impractical.

The two final options, which are both under further consideration, are:

Option 3: Buy-out awards offered by a new employer must somehow be subject to a potential reduction by the new employer or the regulator, if anything comes out of the woodwork at the old employer. We do not know how this will work in practice but it must, at the least, involve a degree of information-sharing by the old employer.

Option 4: Not regulate buy-outs at all but to strengthen existing claw-back rules to ensure that any departing employee has received sufficient vested bonus payments that may be subject to future repayment in the future.

Neither of the two remaining options provides a perfect solution, but it is difficult to see what else the regulators can do. For what it’s worth, our money is on option 4.