Final clawback proposals

The PRA’s earlier proposals prompted strong opposition. However, the PRA has only made major changes to three points:

Retrospective implementation

The PRA originally proposed that all remuneration which had been awarded, even before the proposals were suggested, was caught by the new proposals so long as it had not vested as at 1 January 2015. This led to concerns about the practicalities of applying clawback to remuneration which had already been awarded and which required the employer to approach employees and agree to rewrite arrangements retrospectively or, where agreement to change was not possible, to implement alternative but equally effective proposals. Aside from the uncertainty of what this all meant in practice, the complications of amending arrangements already in existence were significant.Fortunately, the PRA has now said that only remuneration awarded on or after 1 January 2015 will be caught by the new rules, which means that employee consent to implement the new changes should not in most cases be required.

Time for clawback

The PRA originally proposed that all remuneration should be subject to clawback for up to six years after vesting. This meant that awards could (taking into account pre-vesting periods) be at risk for 10 years or more. The PRA has now said that clawback should only apply to remuneration awarded in the previous 7 years – and so in most cases, the initial part of that period will be covered by a “malus” arrangement (when remuneration can be forfeited) and then, once an award has vested, the award would then be subject to clawback until the 7th anniversary of the date of award of the relevant remuneration. Separately, the PRA in its proposals for special rules for Senior Managers (see below) has also proposed that if any outstanding investigations are underway at the end of that period, then the clawback period is extended to 10 years.

When clawback must be applied

The PRA has removed material downturn in the business from being a reason for clawback (though it is still a reason for malus), allowing companies to require some form of personal culpability or fault before clawback applies. The PRA has also provided that firms can operated clawback with some degree of discretion, although how much discretion in practice it will allow remains to be seen.

Other initiatives

The European Banking Authority (EBA) is known to be publishing revised guidelines later this year.

A joint PRA/FCA paper on the Parliamentary Commission on Banking Standards’s remuneration proposals was published on the same day as the clawback proposals. There will be a further report on this paper.

Click here to read the PRA's final proposals on clawback.