The development with more immediate impact is that the European Council has at last agreed and published the final version of what has become known as CRD4 and its supporting regulation, which include key bonus capping measures. There appear no obvious last minute changes to what had previously been circulated and the Council has committed to publishing the final version in the Official Journal before 1 July 2013. This means that it can take effect from 1 January 2014 although the press release confirms that 2013 remuneration paid in 2014 (and presumably later) will not be affected. However, there is still no clarity on how firms with different year ends should operate the new rules in a bonus year where part is covered by the new rules and part is not.
There is also no clarity on whether all firms will be caught (whether banks or otherwise) or whether some degree of proportionality will operate to allow firms to disapply the rules or operate reduced levels of compliance. This is particularly important given the European Banking Authority’s proposals to extend the definition of Identified Staff (Code staff in the UK), which determines if someone is caught by the bonus cap (see our earlier Law-Now). Guidance is likely to emerge both from the European Banking Authority and the Prudential Regulation Authority, but there is still no timetable for any announcement here which makes relevant firms' planning very difficult.
Parliamentary Commission recommendations on pay
The Parliamentary Commission on Banking Standards last week (see here for our earlier Law-Now on the general banking implications of this) produced some of the toughest criticisms of pay in the sector of any official report over the last few years. A central point is that the current Remuneration Code, even as supplemented by the bonus cap above, is not sufficient to deal with the continuing problems with pay in this sector which it identifies. Without providing much by way of specifics the report wants:
- more people to be caught by the Code (it is not clear if the European Banking Authority’s proposals to extend the definition of Identified Staff will fully address these concerns);
- more deferral and for longer, with the ability for the regulator to require deferral of up to 10 years
- greater use of instruments which convert into capital able to absorb losses if capital inadequacy levels are hit; and
- deferred remuneration to be much more readily capable of complete clawback in more cases as well, including of remuneration which has been paid over.
Sales-based incentives in retail banking are also heavily criticised. The report also suggests that the regulator actively considers proposals for dealing with circumstances where an employee who leaves one firm (and so loses their unvested awards) but receives equivalent awards from their new employer (so-called buy-outs). Here the former employer cannot apply clawback/malus because of the change of employer. Proposals include letting leavers keep their awards, which would simply vest at the normal times and so could be clawed back or recovering amounts from the new employer, the intention being that the new employer would pass the cost of this onto the employee thereby effecting clawback by the original employer - this would be instigated by the original employer or the regulator. Greater individual pay disclosure should also be required.
Overall the proposals are for a much more active regulator in this area with a greater range of tools to combat perceived overpayment. The report itself admits that many of the remuneration practices that it deplores have changed or become less common (the buy-out proposals cited above being just one example of this). It is also too soon to say what will happen in response to these proposals and whether it will only be the larger banks that are affected or the broader banking or even financial services sector will be affected by this.
Once the headlines have died down, it will therefore be interesting to see how these proposals are taken forward by the Government/the Prudential Regulation Authority in the next year or so and how changes to the structure of pay that are undoubtedly occurring will be influenced by the threat of proposals before any are actually implemented. The Government is asked to set out a timetable for implementation and specify which recommendations will require primary legislation in its response to the report (which is expected before Parliament’s summer recess).