BackgroundIn 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.
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.
The consultation closed on 13 April 2016.