This Supervisory Statement clarifies how the Prudential Regulation Authority (PRA) expects firms subject to the Remuneration Code in SYSC19A of the Handbook to comply with the requirements on the use of malus in Principle 12(h). It also states the PRA’s intention to consult soon on extending the Code to require firms to apply clawback to vested awards.
The effective and meaningful use of performance adjustment, including malus, is necessary to align remuneration policy with risk taking. This is acknowledged both in CRD IV, which establishes that “up to 100 % of the total variable remuneration shall be subject to malus or clawback arrangements”, and the Parliamentary Commission on Banking Standards’ (PCBS) final report.
The Supervisory Statement sets our expectations in several areas including the:
- wording in employment contracts and firms’ remuneration policies;
- potential scope of application of malus to individuals and groups;
- relationship between the timing of a risk management failure or misbehaviour and the firm’s ability to apply malus;
- procedure for considering malus cases; and
- process for calculating the amount of variable remuneration.
PRA expectations regarding the application of malus to variable remuneration - SS 2/13