New remuneration rules for financial services

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority have published new, final remuneration rules for banks, building societies and PRA-designated investment firms. The latest set of rules are part of a wider package being announced over the summer and will mean that senior managers in the finance sector face clawbacks of bonuses for up to ten years if misconduct comes to light.

The primary changes introduced by the new codes are:

  • To extend deferral to seven years for senior managers, five years for PRA-designated risk managers with senior roles and three to five years for all other staff whose actions could have a material impact on a financial services firm.
  • To prohibit variable pay for non-executive directors in financial services.
  • To make it explicit that no variable pay, including all discretionary payments, should be paid to the management of a firm in receipt of taxpayer support.
  • To strengthen the PRA requirements on PRA dual-regulated firms to apply more effective risk adjustment to variable remuneration.

PwC reckons the bank pay regulations are now the toughest in the world

At least one consultant has expressed concern that the final codes will exacerbate the existing differences in banking regimes between the UK and the rest of the EU. Jon Terry, partner and pay expert at PwC, said:

‘As promised by the government, the UK now has the toughest bank pay rules in the world. The biggest concern for banks headquartered in the UK is the uneven playing field that now exists between the UK and the rest of the EU, adding to the existing differences between the EU and the rest of the world. It's helpful that the PRA has avoided lengthening deferral for more junior material risk takers, caught by the extensive European rules. This limits the impact on UK banks' competitiveness overseas. However, the implications for UK banks’ competitiveness can’t be ignored. Although the PRA says they don't want this to happen, it is likely that British banks will need to pay a premium to attract senior executives outside the UK, and more in fixed pay than their foreign competitors.

Regulators are hoping the rules will help re-build trust in the City, but experience suggests that structural pay changes have limited impact on behaviour. We would encourage regulators to focus on creating a positive culture in which ethical behaviour is a result of employees’ intrinsic motivation as opposed to fear of negative consequences. There has already been a move to greater fixed pay and less variable pay over the last few years in response to regulation and we expect this to continue. This will lessen the proportion of pay linked to performance.

The new Code is silent on the matter of key concern for the asset management industry and smaller banks: whether the bonus cap (and other structural rules, such as minimum levels of deferral) will apply to them. Those firms will have an unwelcome period of uncertainty while they wait for the final European Banking Authority Guidelines later in the year, and the UK regulator’s response, to find out if they’ll be caught by the regulation or not.’
‘PS15/16: Strengthening the Alignment of Risk and Reward – New remuneration rules’, published by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority in June 2015. Download the document at www.fca.org.uk/firms/being-regulated/remuneration-codes