The new framework aims to further align risk and individual reward in the banking sector, to discourage irresponsible risk-taking and short-termism and to encourage more effective risk management.

The rules apply to banks, building societies, and PRA-designated investment firms, including UK branches of non-EEA headquartered firms.

Martin Wheatley, CEO of the FCA, said: ‘The rules are part of a wider package that is being announced over the summer to embed an accountable culture in the City.

‘Our rules will now mean that senior managers face clawback of bonuses for up to 10 years, if misconduct comes to light.

‘This is a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long term decision making and effective risk management into people’s pay packets.”

The key changes are:

• Extending deferral (the period during which variable remuneration is withheld following the end of the accrual period) to seven years for senior managers, five years for risk managers with senior, managerial or supervisory roles at PRA-regulated firms and three to five years for all other staff whose actions could have a material impact on a firm (material risk takers);
• The FCA is introducing clawback rules (where staff members return part or all of variable remuneration that has already been paid) for periods of seven years from award of variable remuneration for all material risk takers, which were already applied by the PRA. Both the PRA and the FCA clawback rules will be strengthened by a requirement for a possible three additional years for senior managers (10 years in total) at the end of the seven-year period where a firm or regulatory authorities have commenced inquiries into potential material failures.
• Prohibiting variable pay for non-executive directors
• Making explicit that no variable pay including all discretionary payments should be paid to the management of a firm in receipt of taxpayer support; and
• Strengthening the PRA requirements on dual-regulated firms to apply more effective risk adjustment to variable remuneration.

The clawback and deferral rules will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016, while other requirements will apply from 1 July 2015.

Following the initial consultation in 2014, the FCA and PRA will also review the issue of buy-outs, where a firm compensates a new employee for any unpaid remuneration that is cancelled when they leave their previous firm (meaning that the employee can sometimes avoid malus reductions by changing firms). They are considering changing the rules so that buy-out awards have to be held in a form that permits them to be subject to malus by the previous employer.

The rules may have to be reviewed following publication of new European Banking Authority remuneration guidelines later this year. The PRA and FCA will consult on any consequential rule changes which may be required.

Commenting on this news, Graeme Standen, a remuneration expert at law firm Pinsent Masons said that while they obviously chime with public and political concerns about the lasting impact of the 2008 financial crisis, they will raise some concerns about the competitive position of UK financial services firms.

'There is also the possibility of unintended inflationary pressures on total pay, as longer deferral inevitably reduces the value that recipients attach to deferred bonuses.

'The PRA’s opposition to the EU bonus cap has been widely reported, and some may find that contradictory to the stricter deferral and clawback rules adopted today. In fact, the PRA’s stance is logical: put simply, the PRA thinks deferral, malus and clawback preferable to the cap, as the latter is more likely to drive up pay and harm competitiveness, and less likely to effectively align pay with risk management,' said Standen.

The policy statement, PS 15/15: Strengthening the alignment of risk and reward: new remuneration rules, is available here