PS15/16: Strengthening the Alignment of Risk and Reward: New Remuneration Rules

The FCA and PRA have released new rules for remuneration of banking staff, following recommendations made by the Parliamentary Commission on Banking Standards (‘PCBS’). The rules seek to strengthen the alignment between risk and reward by introducing measures including longer deferral periods and clawback for all risk takers.

Why are we issuing this Policy Statement?

This joint FCA and PRA policy statement presents new rules and guidance for the remuneration of banking staff.

The paper follows our joint consultation paper (FCA CP14/14; PRA CP15/14) in June 2014 in which both regulators proposed a number of changes to the FCA Handbook and PRA Rulebook in response to the final report of the PCBS, ‘Changing Banking for Good’.

The paper should be read alongside our forthcoming publication, to be published shortly, which sets out our joint rules for increasing individual accountability in banking.

Policy Statement PS15/16 [PDF]

Who is this PS aimed at?

These changes will affect:

  • Banks
  • Building societies
  • PRA-designated investment firms (which are dual regulated) 
  • Branches of non-EEA banks or building societies

What are the key changes?

The main 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 PRA-designated risk managers with senior, managerial or supervisory roles, and three to five years for all other staff whose actions could have a material impact on a firm (material risk takers)
  • Introducing clawback (where a staff member returns part of their variable remuneration to the institution where this has already been paid, under certain circumstances) for periods of seven years from the award of variable remuneration for all Material Risk Takers, with a possible three additional years for Senior Managers (10 years in total) who are undergoing investigation at the end of the seven year period
  • Prohibiting variable pay for Non-Executive Directors

The FCA is also issuing new General Guidance on ex-post risk adjustment. This 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.

More information can be found in our Q&A Remuneration - revising the code.

What is the background to this?

The behaviour and culture within banks played a major role in the 2008-09 financial crisis and in conduct scandals such as PPI mis-selling and the attempted manipulation of LIBOR. One of the key drivers of this was reward incentives that drove excessive risk-taking and poor conduct in firms and which collectively gave rise to significant detriment.

In June 2012, the Government established the PCBS to consider and report on these issues. It concluded that public trust in banking was at an all-time low and recommended a series of measures to restore trust and improve culture. These recommendations proposed a new framework for approving and holding individuals to account alongside other measures, including recommendations regarding remuneration and whistleblowing. 

This policy statement introduces changes in the Remuneration Code to strengthen the alignment between risk and reward.

What are the next steps?

The new rules on deferral and clawback 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.

Please send any comments or enquiries to: [email protected].

Want to find out more?

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