The recent clawback laws being discussed and introduced in the UK and the US differ quite markedly and represent two almost entirely different approaches to recovering “erroneously” awarded incentive-based compensation.  So which flavour do you prefer?

One shouldn’t forget, of course, that the PRA’s provisions regarding clawback are only one half of a two pronged attack on overpaid remuneration.  The other aspect of the PRA’s requirements relate to deferral obligations to enable more effective operation of malus provisions.  Interestingly, the US proposals do not include any requirements or recommendations regarding deferral periods.


The first major difference is who the new laws are applicable to.  There are actually two “who’s” to compare.  “Who” in the sense of which entities the new rules apply to and “who” in the sense of which people at those entities.

Whilst the SEC (US) proposed that the new clawback laws must be implemented by all listed companies, the PRA (UK) clawback provisions only need to be implemented by all financial services companies (for which read banks, building societies and PRA-designated investment firms and UK branches of non-EEA headquartered firms), and a strong recommendation for all other public companies (see our previous post  regarding changes to the Corporate Governance Code).

As for who, within those organisations, must have clawback provisions applicable to them, the SEC have proposed current and former executive officers who received incentive based compensation.  This is coupled with a proposal to define executive officers by reference to the meaning of “officer” in the Securities and Exchange Act.

The PRA’s clawback provisions are to apply to “material risk takers”.  This would include senior managers within the organisation and other material risk takers using the qualitative criteria from the European Banking Authority’s regulatory technical standard on the identification of staff with a material impact on the risk profile of a firm.


The second and seemingly most striking difference, is under what circumstances clawback can be claimed. The PRA decided that for clawback to be claimed against an individual, there has to be reasonable evidence of employee misbehavior or material error or there has been a material failure of risk management in the relevant business unit but taking account of the proximity of the employee to the failure and their level of responsibility, i.e. the individual must have some responsibility or nexus to the problem that gives rise to the ability to clawback remuneration. By contrast, the SEC plans to operate their laws on a “no fault” basis, without regard to whether there was any misconduct by the executive officer in question. However, clawback will only be required if there is accounting adjustment or restatement to correct a material error.  The two approaches are a fascinating contrast of breadth and causation.  On the one hand clawback “UK style” can be triggered by a broader range of circumstances than proposed in the US but on the other hand the US approach does not allow for any discretion even if the employee had nothing to do with the issue that caused the problem.


The third difference relates to the “when”.  Clawback under the PRA’s proposals should be possible up to seven years after the grant of the award (unless there is an existing investigation underway at the end of that seven-year period).  In the US, the SEC has recommended that clawback could be enforced against remuneration paid in the three fiscal years that precede the accounting restatement.

Both sets of provisions include several other aspects, including the SEC’s specific acknowledgment that the companies should not seek to enforce clawback if the expense of recovery would exceed the amount to be recovered, but in so far as they cover the same ground the differences in approach reflect different “US style” and “UK style” philosophies to recovering “overpaid” variable remuneration.