Bankers across the UK woke up on 1 January 2015 with a new headache to compound the after-effects of New Year’s Eve – the coming into effect of the PRA’s new bonus clawback rules. Prior to 1 January, PRA-authorised firms were only required to apply malus arrangements to variable compensation. This meant that in certain circumstances firms were required to reduce unvested variable remuneration in cases of employee misbehaviour, a material downturn in the firm’s performance, or a material risk management failure. Malus arrangements apply to variable remuneration which has been awarded but not yet paid, and consequently are only effective over the period of deferral.
The new rules
As of 1 January, however, even awards of variable remuneration that have already vested are no longer safe. PRA-authorised firms must now ensure that vested awards can be clawed back in certain circumstances. The key new rule in the remuneration code is SYSC 19A.3.51BR, which sets out the following:
A firm must make all reasonable efforts to recover an appropriate amount corresponding to some or all vested variable remuneration where either of the following circumstances arise during the period in which clawback applies:
A firm must take into account all relevant factors (including, where the circumstances described in (b) arise [NOTE: this should refer to (2), but appears to have been incorrectly transposed from the implementing legislation into the Handbook], the proximity of the employee to the failure of risk-management in question and the employee's level of responsibility) in deciding whether and to what extent it is reasonable to seek recovery of any or all of their vested variable remuneration.
Under the new rules, awards of variable remuneration are subject to clawback for a minimum period of seven years from the date of award. However further rules are currently under consideration that would require all PRA-authorised firms to extend the clawback period from seven to ten years for senior managers if there is an on-going internal inquiry or a PRA investigation which may lead to the application of clawback.
What should affected firms do?
PRA-authorised firms should implement clawback arrangements if they have not already done so, as awards of variable compensation that are not subject to such arrangements will be void. Given the difficulties such firms will face if they try to clawback money that has already been paid out, they should ensure that they have enforcement mechanisms in place such as the right to withhold future bonus payments, to adjust unvested awards, and to adjust vested but unpaid awards.