The PRA and FCA have jointly published Policy Statement PRA12/15 FCA15/16: Strengthening the alignment of risk and reward: new remuneration rules (PS15/16). In PS15/16 the PRA and FCA jointly provide feedback, final rules and guidance in relation to the proposals that were set out in Consultation Paper 15/14: Strengthening the alignment of risk and reward: new remuneration rules (CP15/14).
The primary 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 claw-back 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 claw-back 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 new rules on deferral and claw-back will come into force for performance years starting on or after 1 January 2016. The new rules on non-executive directors, the updated general guidance on ex-post risk adjustment, and all other new or amended rules will come into force from 1 July 2015.
The FCA has also issued new general guidance on ex-post risk adjustment. This is the adjustment of variable remuneration to take into account specific risk or adverse performance. The general guidance is intended to share the latest good practice observed in the 2014 remuneration round and clarify the FCA’s expectations on how relevant firms should meet the Remuneration Code requirements on ex-post risk adjustment.