The Prudential Regulation Authority (PRA) is to consult on revisions to the remuneration code next year, as a result of recommendations made in the final report from the parliamentary commission on banking standards (PCBS) for reforming the banking sector.
In its response to the PCBS report Changing Banking for Good, the PRA says a new statutory framework will not be needed for the revised code to take account of the recommendations, which call for greater and more granular disclosure by remuneration committees in banks' annual reports.
They also include more and longer deferral of variable remuneration for up to ten years; the greater use of instruments such as bail-in bonds; strengthening and broadening the application of malus to unvested awards and of clawback to vested awards; and tackling the practice of compensating recruits upon change of employment.
However, the PRA says it will have to consider how to address one of the recommendations, which states that where direct taxpayer support to a bank is provided in the event of bank failure, the regulators should have an explicit discretionary power to render void or cancel all deferred compensation. The PRA says this may fall foul of European Human Rights provisions.
The regulator also says it has decided it has sufficient powers already to recover vested remuneration in the case of individuals who have been the subject of successful enforcement action, another of the report's recommendations.
While the report suggests that any fines on banks should be recovered from the pool of deferred compensation as well as current year bonuses, the PRA states that it expects firms themselves to pay any fines imposed on them. It wants firms to consider the size and nature of any regulatory fines, alongside evidence of risk management failure, increased business risk, poor financial performance and reputational damage in determining bonus pools.
Tom Gosling, head of PwC's reward practice, said that any further revision to the remuneration code would be 'viewed with trepidation', and would extend the period of uncertainty created by the introduction of the EU bonus cap.
'While the Bank of England is considering all aspects of the Commission's recommendations, there are some clear front runners. The Bank of England's proposal to use its powers to recover bonuses that have already been paid to executives who are subsequently subject to successful enforcement action is significant. While this will doubtless be a popular measure, it will also give rise to significant legal issues and leave executives open to the prospect of claw-back action long after they have left the bank. This would arguably reinforce the view of the UK as having the toughest regulatory regime globally,' Gosling said.
The Financial Conduct Authority (FCA) in its response to the PCBS report said it intended to take forward the majority of the report's 58 recommendations that relate specifically to the regulator. These include a doubling of the time frame for building enforcement cases to six years and the introduction of a new 'senior persons' regime, which will designate roles and responsibilities to senior employees and allow the authorities to hold them to account for specific failures. The existing 'approved persons' regime will continue to apply to financial services firms that are not banks, building societies or credit unions.
Overall, the FCA said it welcomed the commission's support for its 'judgement-based approach to regulation', which 'allows the regulator to take prompt and proportionate action rather than focus on the fine details of the rulebook.'
