Bank executives face bonus clawbacks of up to a decade for conduct failures, as part of new remuneration rules announced by the UK’s two financial regulators.
The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) this morning announced the changes to the deferral and clawback of variable bonuses.
The regulators said the new framework will align risk and individual reward in the banking sector, discourage irresponsible risk-taking and encourage more effective risk management.
The primary changes include:
• Extending deferral of withheld bonuses to seven years for senior managers; five years for risk managers with senior, managerial or supervisory roles at PRA-regulated firms; and three to five years for all other staff whose actions could have a material impact on a firm;
• The FCA introducing remuneration clawback rules (where staff members return part or all of already-paid bonuses) for periods of seven years for all material risk takers, which were already applied by the PRA;
• The PRA and the FCA strengthening clawback rules by a requirement for three extra years for senior managers (10 years in total) at the end of the seven-year period where a firm or regulatory authorities have started investigating potential failures;
• Prohibiting variable pay for non-executive directors;
The clawback and deferral rules will apply to variable remuneration awarded for performance periods beginning on or after January 1 2016, while other requirements will apply from July 1 2015.
The new rules apply to banks, building societies, and PRA-designated investment firms, including UK branches of non-EEA headquartered firms.
The Financial Conduct Authority (FCA) said today’s rules are part of a wider package that is being announced over the summer to embed an accountable culture in the city.
Martin Wheatley, chief executive of the (FCA), “Our rules will now mean that senior managers face clawback of bonuses for up to 10 years, if misconduct comes to light.”
He added: “This is a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long term decision making and effective risk management into people’s pay packets.”
Andrew Bailey, deputy governor for prudential regulation at the Bank of England and chief executive of the PRA, 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.”
By Marcel LeGouais