Proposed new rules for bankers' pay could put UK at a competitive disadvantage, expert says

Out-Law News | 31 Jul 2014 | 4:37 pm | 2 min. read

Proposed new rules which would criminalise the "reckless" conduct of senior bankers and allow bonuses to be 'clawed back' up to seven years after being issued could but the City of London at a competitive disadvantage and affect UK banks' ability to attract the best staff, an expert has said.

Michael Isaacs of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) published their plans for a new Senior Persons Regime for consultation, alongside details of the PRA's proposed new bonus clawback rules. He said that, if implemented in their current form, the provisions would "make the UK regime one of the toughest in the world for bankers to operate in".

The PRA first consulted on adding clawback provisions to its Remuneration Code in March. It intends that the new rules would come into force on 1 January 2015. Both these changes and the creation of a new Senior Persons Regime for bank staff, to include a new criminal offence of reckless misconduct leading to bank failure, were recommended by the Parliamentary Commission on Banking Standards (PCBS) in 2013.

"Clawback has a lot of support, both in the sector and amongst the wider public, but these proposals would give rise to a significant international disparity and may affect the City's competitive position and ability to attract talent," said Isaacs, a financial services specialist. "We are unlikely to see other regulators in other jurisdictions take such a strident position. I expect we will also see a lot of creativity around remuneration packages as a result."

"The proposed criminalisation of bankers for reckless decisions is politically driven. The new supervisory framework proposed is designed to help the regulator ascribe such blame, but given how decisions are taken in banks whether assigning blame to individuals is really possible in practice remains to be seen. Banks will already have or be looking at compliance models that show consideration of relevant risks is 'built in' to decision making," he said.

The regulators' proposals incorporate and build on legal changes included in the Banking Reform Act and the recommendations of the PCBS, which was set up to review professional standards and banking culture following allegations of misconduct in relation to LIBOR. They are designed to "make it easier for firms and regulators to hold individuals to account", according to a joint statement by the PRA and FCA.

The new regulatory framework proposed by the PRA and FCA would consist of a Senior Managers Regime, which would give senior individuals in banks the responsibility for their decisions and require regular assessments of fitness and propriety; and a Certification Regime requiring firms to assess the fitness and propriety of staff in positions where the decisions they make could pose significant harm to the bank or any of its customers. This two-tier authorisation regime would be backed by a new set of Conduct Rules setting out standards of behaviour for bank employees.

The changes to the remuneration rules are designed to increase the alignment between risk and reward over the longer term by requiring firms to defer payment of bonuses and other variable pay elements for a minimum of five or seven years, depending on seniority. If risk management or conduct failings come to light at a later date, firms would be able to claw back variable pay for seven years from the date of the award. However, the new rules are not as strict as those proposed in March by the PRA, which has dropped plans to make them apply retrospectively.

Both consultations will close on 31 October. The changes will apply to all banks and building societies, as well as to the nine PRA-designated investment firms.

"Holding individuals to account is a key component of our job as regulators of banks," said Andrew Bailey, the Bank of England's deputy governor of prudential regulation.

"The combination of clearer individual responsibilities and enhanced risk management incentives will encourage individuals in banks to take greater responsibility for their actions. We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behaviour and culture within banks and will help to ensure that they are managed in a way that promotes the safety and soundness of individual institutions," he said.