UK Prudential Regulation Authority Publishes Final Rules for Buy-Outs of Variable Remuneration

The Prudential Regulation Authority published a Policy Statement and final rules on buy-outs of deferred variable remuneration, i.e., where a firm compensates a new employee for deferred variable remuneration not received from a previous employer due to the employee having left the former firm. Current compensation rules, which seek to encourage greater alignment between risk and reward, as well as more effective risk management, allow employers to withhold or reduce unpaid or unvested awards (i.e., the “malus” rules) or recoup paid or vested awards (i.e., the “clawback” rules). The PRA is concerned that the practice of buy-outs could undermine these rules as employees could evade accountability for their actions during a previous employment by moving to a new employer who buys out their cancelled deferred remuneration.

The PRA had proposed that buy-out terms in contracts between new employers and employees should allow for malus or clawback to be applied following a notification by the old employer that an employee had been found to have committed misconduct or had risk management failings in his previous employment. Due to concerns about the administrative burden on prospective employers, the PRA has amended the rules so that an employee can request a remuneration statement from their previous employers which includes details of unvested variable remuneration which can then be passed to the new employer. The new employer would then be able to decide whether to provide a buy-out and, if it proceeds, provide a buy-out notice to all previous employers where the unvested variable remuneration is attributable. The new employer will not be able to provide a buy-out of more than the aggregate amount in the statements provided to it. The PRA is retaining the rule that will allow new employers to apply for a waiver for each employee if they believe the old employer's decision to apply malus or clawback is unfair or unreasonable. However, the PRA's view is that firms are unlikely to need to make a waiver application.

The new rules will apply to banks, building societies and PRA-designated investment firms, including UK branches of non-EEA headquartered firms and amend the existing Remuneration Part of the PRA Rulebook. The rules will apply to buy-out contracts concluded on or after January 1, 2017. The PRA has added guidance on buy-outs to its proposed consolidated Supervisory Statement on remuneration, the consultation on which was launched on September 28, 2016. 
 
View the PRA's Policy Statement on Buy-outs.

View the PRA's final rules on Buy-outs.

View information on the proposed consolidated Supervisory Statement.