Published on 28 September 2016
Buy-outs of variable remuneration – PS26/16
Overview
This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback on responses to Consultation Paper (CP) 2/16 ‘Buy-outs of variable remuneration’. The PS also includes final rules amending the Remuneration Part of the PRA Rulebook intended to ensure that the practice of buy-outs does not blunt the beneficial incentive effects of the existing rules on malus and clawback, or allow employees to avoid the proper consequences of their actions.
This PS is relevant to banks, building societies and PRA-designated investment firms, including UK branches of non-EEA headquartered firms, and should be read alongside the Remuneration Part of the PRA Rulebook.
In response to consultation feedback, the PRA has made changes to the proposed rules set out in CP2/16. These changes are described in Chapter 2. The PRA is required by the Financial Services and Markets Act 2000 (FSMA) to publish a statement on the impact of rules on mutuals where the final rule differs from the draft of the proposed rule.3 The PRA is also required by FSMA4 to publish a cost benefit analysis of any changes to the consultation proposals which the PRA considers to be significant.
The proposed amendments are responses to the consultation and do not depart materially from the original proposals. In particular, the requirement for the previous employer to provide employees with a remuneration statement is likely to reduce costs on firms by removing the need to trace all previous employers and determine the amounts of the buy-out award pertaining to each, shifting the responsibility to employees and former employers who should already have access to this information. As such, in the PRA’s opinion, the impact of the rules as made is not significantly different from the impact of the proposed rules on mutuals or other deposit-takers.
On 28 September 2016, the PRA also published CP33/16 ‘The PRA’s expectations on remuneration’ which consults on the consolidation of remuneration guidance, and should be read alongside this PS.
Appendix
PRA RULEBOOK: CRR FIRMS: REMUNERATION BUY-OUT RULES 2016
Published on 13 January 2016
Buy-outs of variable remuneration – CP2/16
Background
In this consultation paper the Prudential Regulation Authority (PRA) sets out its proposal for the introduction of a new rule on buy-outs of variable remuneration, relating to the practice whereby firms recruiting staff ‘buy-out’ deferred bonus awards that have been cancelled by their previous employer.
The proposed changes to the Remuneration Part of the PRA Rulebook will apply to all material risk takers (MRTs) at PRA-regulated banks, building societies and designated investment firms. However, in accordance with the PRA’s existing approach to proportionality, these rules would not need to be applied to firms which fall within level three of the proportionality framework.
This CP follows Policy Statement 12/15 ‘Strengthening the alignment of risk and reward: new remuneration rules’, published in June 2015 which readers may wish to refer to.
Proposal
The PRA proposes a model that allows for the possibility of malus and clawback to be applied to bought-out awards, based on a determination by the old employer.
The principal mechanism would be a contract between the new employer and employee. It would involve the old employer notifying the new employer of the determination and that a certain amount should be applied to the employee’s deferred variable remuneration by way of malus and/or clawed back where the variable remuneration has already vested.
The proposed rule would also provide scope for new employers to apply for a waiver where they have reason to believe an old employer’s decision to apply malus or clawback has been manifestly unfair or unreasonable.
Responses
The consultation closed on 13 April 2016.