City watchdogs the FCA and PRA have issued a joint policy statement, outlining a new framework that will crack down on remuneration related to irresponsible risk-taking and short-termism across the industry.
The 139-page policy statement, PS 15/15: Strengthening the Alignment of Risk and Reward: New Remuneration Rules, includes changes to deferral and clawback of variable remuneration, such as bonuses.
According to the FCA, the new framework aims to do more to align risk and individual reward in the banking sector, to discourage irresponsible risk-taking and short-termism and to encourage more effective risk management.
The new rules apply to banks, building societies, and PRA-designated investment firms, including UK branches of non-EEA headquartered firms.
The primary changes include extending the period during which variable remuneration is withheld following the end of the accrual period 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 is also introducing clawback rules for periods of seven years from award of variable remuneration for all material risk takers, which were already applied by the PRA.
Both the PRA and the FCA clawback rules will be strengthened by a requirement for a possible three additional years for senior managers (10 years in total) at the end of the seven year period, where a firm or regulatory authorities have commenced inquiries into potential material failures.
The clawback and deferral rules will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016, while other requirements will apply from 1 July 2015.
The policy statement also states that variable pay for non-executive directors will be prohibited, while no variable pay including all discretionary payments should be paid to the management of a firm in receipt of taxpayer support.
The rules will also strengthen the PRA’s requirements on dual-regulated firms to apply more effective risk adjustment to variable remuneration.
Martin Wheatley, chief executive of the FCA, said: “The rules are part of a wider package that is being announced over the summer to embed an accountable culture in the City.
“Our rules will now mean that senior managers face clawback of bonuses for up to 10 years, if misconduct comes to light.”
He said this was a “crucial step” in rebuilding public trust in financial services, adding: “This 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, 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.”
|Earlier this month, the PRA revealed that Andrew Bailey’s remuneration package had risen by 1.5 per cent year on year. |
Mr Bailey received a base salary of £263,986, which was supplemented by £2,791 in taxable benefits and a £79,196 supplement in lieu of pension contributions.
In total his remuneration package – the largest of the PRA’s board members – was more than £5,000 larger than last year; an increase of 1.5 per cent.