Bankers working in the UK will be the first group of employees subject to mandatory clawback requirements in relation to their vested variable remuneration. This follows the Bank of England’s Prudential Regulatory Authority’s (PRA) policy statement on clawback. From 1 January 2015, any awards made by firms subject to the Remuneration Code (namely banks, building societies and designated investment firms) will be subject to clawback.
The policy statement has been issued following the PRA’s Clawback Consultation in March (see our previous blog post for details). The policy statement sets out a couple of areas where the proposed rules have changed following responses to the consultation.
The first change is in respect of the minimum period for clawback, which has been changed from six years from vesting to seven years from the grant of the award. This is in response to concerns about the cumulative impact of clawback in combination with deferral. Now, we have checked our abacus and seven is definitely more than six. Only in this case, it may not be. If the award is subject to a deferral period of more than a year, the revised proposal of applying clawback for seven years from the grant of the award results in a shorter ultimate period to recover the award than a six year period from the vesting of the award (or the end of the deferral period, if you like).
From an employer’s perspective, this is a very sensible change of approach from the original proposal. First, there is an ultimate cut off of seven years which will aid competitiveness in the market globally. If, under the original proposal, awards were deferred, clawback could operate for a further six years from vesting, meaning the employee could have the possibility of clawback hanging over them for quite a while; something that isn’t going to work well for a UK employer when it’s on a recruitment drive, for example. Secondly, it must be better to encourage firms to extend the deferral period for as long as possible and therefore allow them the opportunity to apply malus rather than clawback; a definite plus for an employer, not least because malus (which can be enforced during the deferral period) is going to be a lot easier and more reliable to enforce than clawback. In short, not having to hand the award over to the employee in the first place is far better than having to recover it, particularly if it has been spent or, if the award was shares, the value of those shares has decreased and/or they have been sold.
The policy statement comes at the same time as a broader consultation on bankers’ pay and the PRA is proposing the possible extension of the clawback period by another three years for senior managers if there are outstanding investigations underway at the end of the seven years.
Originally, it was also intended that clawback could apply to awards granted before 1 January 2015. However, this has been scrapped and the clawback will only apply to awards made on or after 1 January 2015.
The second amendment is in relation to the grounds for applying clawback. The PRA has recognised that it may be particularly harsh (or perhaps just difficult to enforce!) to pursue clawback on the basis of a material downturn in financial performance and has removed this ground. This change clarifies that clawback should only be applied where the employee has some direct responsibility for the circumstances. In order for the PRA to keep an eye on the implementation of clawback policies, the statement notes that each firm’s approach and the way each intends to apply the flexibility should be included within firms’ internal policies.
The idea of clawback has been thrown around in executive remuneration circles recently, with the Financial Reporting Council (FRC) also consulting on whether to amend the UK Corporate Governance Code and include a requirement for companies to include clawback provisions; however, the PRA is the first to set it in stone. It will be interesting to see how the FRC follows this latest development. The FRC’s proposals are much more light touch, stating that “schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which the committee considers it appropriate”. Perhaps, if no further guidance is issued by the FRC, companies will use the PRA’s policy statement as a starting point as to when it is appropriate to exercise clawback.
And we can’t help wishing that someone would engage with HMRC to secure a clear statement (preferably through legislation) that individuals who have had to return their variable remuneration can also get the tax back – at the moment, all we have on the topic is the First Tier Tribunal decision in Martin v HMRC (see our alert), which is still under appeal. Hardly ideal.