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Bye-Bye Bonus

The PRA and the FCA have today issued a joint statement outlining far-reaching changes to remuneration policy. PS 15/16: Strengthening the Alignment of Risk and Reward: New Remuneration Rules aims to improve risk-reward alignment, deter the irresponsible and short-term appetite for risk, and to encourage effective risk-management. The rules will apply to FCA-regulated banks and building societies, to PRA-designated investment firms and to UK branches of non-EEA banks or building societies. Clawback and deferral rules will apply to performance periods beginning 1 January 2016, new rules on Non-Executive Directors, Ex-Post Risk adjustment and other new rules will apply from 1 July 2015.  The 139 page report is the one feedback-filtered result of the June 2013 PCBS “Changing Banking for good” behemoth. Major changes are noted below:

  • Extension of variable remuneration (bonus) withholding period. The withholding period following the end of the accrual period will be: 7 years for senior managers, five years for risk managers with senior/supervisory roles at PRA-designated firms, 3-5 years for all other staff whose activity may have a material impact on the firm
  • Extra extension of bonus withholding consequent upon investigation. PRA/FCA clawback capability augmented by an ability to withhold senior management bonuses for an extra 3 years (maximum 10) where a firm is under investigation during the initial seven year period
  • NED bonuses prohibited. Variable remuneration is prohibited for non-executive directors
  • Bonuses prohibited for “wards of state”. Bonuses to management of a firm which is receipt of taxpayer support are prohibited
  • PRA to require enhanced risk-adjustment to bonus calculations. Dual-regulated firms may not rely solely on simple revenue/profit metrics for determining variable remuneration

The final framework is the result of extensive industry consultation and as a result, contains few surprises. The FCA extension of the withholding period serves to bring it in line with previous PRA proposals. Alongside existing rules on clawback and malus, the UK can now plausibly claim to (currently) have the most stringent remuneration rules in the world; this final iteration represents a significant enhancement to the CRD IV structure. However, like CRD IV, the UK rules contain no provision for capping total pay. It is difficult to see why irresponsibility and short-termism may not equally apply to the pursuit of wages rather than bonuses; there is already evidence of basic wage increases to compensate for anticipated bonus reductions. It remains to be seen whether the US/Asian grass will prove “greener” enough to prompt material relocation of trading talent.

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