“As temperatures soar in the City, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) are again poised to ramp up the heat on variable remuneration with the introduction of their new remuneration rules. The details are set out in their joint policy statement and will be reflected in the relevant sections of the PRA Rulebook and FCA Handbook.

“The policy statement also contains: Guidance and feedback on the July 2014 consultation proposals (which were discussed in our July 2014 alert); and The FCA's finalised (non-Handbook) guidance – effective 1 July 2015 – on proportionality under the IFPRU, BIPRU and Dual-Regulated Firms Remuneration Codes, and its expectations of how firms comply with ex-post risk adjustment requirements (like malus).   “The PRA has also issued a supervisory statement on remuneration, designed to “clarify PRA expectations on how firms should comply with the Remuneration Part of the Rulebook”.

Who is caught?

“The new remuneration rules apply to banks, building societies and PRA-designated investment firms, including UK branches of non-EEA headquartered firms, and to all Material Risk Takers (“MRTs”, as identified by reference to the qualitative and quantitative criteria set out in the MRTs Regulation 604/2014) at those firms, including those designated as Senior Managers under the Senior Managers Regime from 2016.

What has changed?

“Some of the key changes are as follows: New minimum deferral periods for variable remuneration – Seven years for Senior Managers, with vesting no earlier than the third anniversary of the award and then no faster than on a pro rata basis (PRA and FCA requirement); five years for those who are not Senior Managers but who are designated as Risk Managers at PRA-regulated firms (e.g. heads of material business units and managers of risk-taking MRTs), with vesting no faster than pro rata from year one (PRA only requirement); and three years with vesting no faster than pro rata from year one (PRA) or three to five years with no vesting before the first anniversary of the award and no faster than pro rata (FCA) for all other MRTs (e.g. individuals exposing firms to credit, trading book/market risk and those on risk committees).

Longer clawback periods – As expected following last year's consultation, the FCA is mirroring the PRA's minimum clawback period for all MRTs of seven years from the date on which variable remuneration is awarded.  For MRTs who perform a PRA-designated senior management function, PRA and dual-PRA/FCA regulated firms must also ensure that they can extend the initial clawback period (before it expires) by an additional three years (10 years in total from the date of the award) where there are on-going internal or external regulatory investigations which could lead to the application of clawback.

No variable remuneration for Non-Executive Directors (NEDs) – In line with the Parliamentary Commission for Banking Standards' concern about ensuring their independence, NEDs cannot be awarded variable remuneration. Bailed-out banks restrictions – The existing rule that, unless it is justified, bailed-out firms should not pay or vest variable remuneration for their management boards now explicitly extends to all discretionary payments, including payments for loss of office and discretionary pension benefits. This change does not apply retrospectively, even if elements of the historic government support are still in place, and does not apply if a firm avails itself of emergency liquidity assistance.

When do the new rules take effect?

“The new rules on clawback and deferral apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016.  All other changes apply from 1 July 2015. Buy-outs – The options of a total ban, or requiring firms to maintain departing employees' unvested awards proved unpopular with those who responded to the July 2014 consultation.  The PRA and FCA are now considering more detailed proposals on the remaining options, namely, requiring buy-outs to be held in a form that permits former employers to apply malus, alongside firms having robust clawback arrangements.

European Banking Authority's (EBA) position on role-based allowances and proportionality – Firms eagerly await the EBA's finalised Guidelines on Sound Remuneration Policies (EBA Guidelines), which will confirm whether the proportionality exemption (which allows smaller firms to relax or disapply some of the Remuneration Code provisions) is removed or restricted, and whether the use of role-based allowances (which are currently treated by many firms as an element of fixed pay for the purpose of the bonus cap) will be outlawed. Consultation on the draft EBA Guidelines closed in June 2015.

What should employers do next?

“Review/amend employment contracts, Remuneration Policies, incentive schemes and other documentation relevant to variable remuneration so that it accommodates the changes that came into effect on 1 July 2015 and allows for the new clawback and deferral requirements that will apply to variable remuneration for performance periods beginning on or after 1 January 2016. “Keep a watchful eye out for the finalised EBA Guidelines, which are expected by the end of the year and may prompt the PRA and FCA to issue further remuneration rule changes and related consultation.”