British bankers may still 
have their bonuses revoked or reduced even after they’ve moved employment as part of new rules proposed last week by the Prudential Regulation Authority (“PRA”), the regulatory arm of the Bank of England.
Last year, the PRA introduced an extremely stringent clawback regime, allowing UK banks to recover the value of bonuses for up to 10 years after payment; however, the PRA felt that these provisions remained too narrow, particularly given the increasingly common practice of “make whole payments” or “buy-outs” — when an organisation compensates a new employee for any forfeited bonus or award at their previous employer. Shareholder concerns over buy-outs have become more prominent over the past year; of the five UK companies that received the lowest levels of support for their remuneration reports in 2015, four had made significant awards to an incoming executive, largely behind the rationale of replacing forfeited awards at a previous employer.
The PRA states that the “practice of buy-outs undermines the effectiveness of malus and clawback. By moving employers and having their cancelled bonuses ’bought-out’, individuals are effectively able to insulate themselves against an ex-post risk adjustment of their past awards as risks crystallise or the consequences of poor risk management emerge at their old employer.” In formulating its latest proposal, the PRA considered four options: banning buyouts; requiring firms to maintain unvested awards when employees leave; applying malus to bought-out awards; and relying on the existing clawback rules. After consideration, the PRA has proposed a model that allows for the possibility of malus and clawback to be applied to bought-out awards, having reached the view that banning buyouts would place UK banks at a “competitive disadvantage”.
In order to facilitate the new scope of the recovery provisions, traders or bankers who are offered such buyout awards would be required to enter a contract with their new employer, allowing the pay to be recovered if they are found to have broken rules or taken excessive risks. In practice, it would involve the old employer notifying the new employer of the determination and that a certain amount should be applied to the employee’s deferred variable remuneration by way of malus and/or clawed back where the variable remuneration has already vested. The proposed rule would also provide scope for new employers to apply for a waiver where they have reason to believe an old employer’s decision to apply malus or clawback has been “manifestly unfair or unreasonable”.
The PRA’s proposals are currently out for consultation through April 13, 2016, with the finalised rules likely to be set out by the end of the year. It will be interesting to see if the Financial Reporting Council — the UK regulator responsible for promoting corporate governance and maintaining the UK Corporate Governance Code — follows the PRAs lead and the latest widening of clawback is rolled out to the wider population of UK firms. In recent years many new practices and rules originally intended for major financial institutions, such as bonus deferral and the initial clawback regime, have ‘trickled down’ to the wider marketplace before ultimately being enshrined in the Code.