FCA could propose clawback provisions for fund managers’ bonuses, according to press reports

Out-Law News | 01 Apr 2014 | 3:12 pm | 1 min. read

The UK ’ s financial services watchdog will consult in the summer on whether to introduce mandatory bonus clawback provisions for all the firms that it regulates, according to press reports.

The Financial Conduct Authority (FCA) is considering the measures after the Bank of England put forward similar proposals last month in relation to bankers’ bonuses, according to the Financial Times. It is particularly interested in reducing the risk of serious misconduct in the asset management industry, according to the newspaper.

Incentives expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that the possible extension of clawback to asset managers was “not a surprise”.

“Proposals which initially focus on the banks tend to filter into other areas of financial services even if they do not ultimately lead to further regulation, as we saw last year in relation to bonus capping,” he said.

“Given the focus on long-term risk management, imposing broader clawback provisions on fund managers - leaving aside enforceability concerns - is consistent with the risk-focussed approach to remuneration regulation,” he said.

According to the FCA’s recently-published business plan for 2014/15, it is planning a programme of work in relation to the asset management industry beginning in the summer.

The Prudential Regulation Authority (PRA) set out proposals which would require the financial firms that it regulates to amend existing employment contracts so that bonus awards could be clawed back from staff in specified circumstances. The new rules would come into force on 1 January 2015 and apply where there is reasonable evidence of employee misbehaviour or material error, or where the firm or a relevant business unit suffers material financial downturn or risk management failures.

The PRA’s Remuneration Code already contains ‘malus’ provisions which prevent the payment of bonuses which have not yet become fully payable to the employee. ‘Clawback’ provisions can instead be used where variable pay awards have already become payable to the employee, known as ‘vesting’.

Proposals to cap bonuses paid to fund managers at 100% of annual salary, which would have been included in the revised Undertakings for Collective Investment in Transferable Securities directive (UCITS V), were ultimately blocked by the European Parliament last year.