The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have today published two joint consulation papers that aim to improve individual responsibility and accountability in the banking sector. The PRA has also published a policy statement to this effect. Below we provide a brief overview of all 3 papers, namely a:
- Policy Statement 7/14: Clawback (PRA PS7/14);
- Consultation Paper 14/14: Strengthening accountability in banking: a new regulatory framework for individuals (PRA CP14/14); and
- Consultation Paper 15/14: Strengthening the alignment of risk and reward: new remuneration rules (PRA CP15/14).
The proposals are designed to create a new approval regime for the most senior individuals whose behaviour and decisions have the potential to bring a bank to failure or to cause serious harm to customers but also to introduce new rules on remuneration to strengthen the alignment between long term risk and reward in the banking sector.
PRA PS7/14: Clawback
PRA PS7/14 has been published in response to feedback received from the earlier Clawback consultation paper (CP6/14). PRA PS7/14 covers ex-post risk adjustment where past awards of variable remuneration may be adjusted to reflect subsequent information about the underlying risks including emerging evidence of poor risk management.
Notably, the minimum period for clawback has been changed to seven years from award as opposed to six years from vesting and the grounds for applying clawback have been narrowed. There are also proposals, following on from recommendations from the Parliamentary Commission on Banking Standards, for a possible extension of the clawback period of up to three years for senior managers if there are outstanding investigations under way at the end of the seven years.
This rule will come into effect on 1 January 2015.
PRA CP14/14: Strengthening accountability in banking: a new regulatory framework for individuals
The purpose behind PRA CP14/14 is to encourage individuals to take greater responsibility for their actions and make it easier for both firms and regulators to hold individuals to account. The proposals contained within PRA CP14/14 are significant and include:
- a new Senior Managers Regime for individuals who are subject to regulatory approval, which will require firms to allocate a range of responsibilities to these individuals and to regularly vet their fitness and propriety using tools such as Statements of Responsibility;
- a Certification Regime which will require relevant firms that are subject to the Capital Requirements Regulation to assess the fitness and propriety of certain employees who are deemed to be material risk takers that could pose a risk of significant harm to the firm or any of its customers; and
- a new set of Conduct Rules that will apply to all individuals approved by the FCA or PRA as Senior Managers as well as individuals covered by the PRA’s Certification Regime, and which replace the existing Approved Persons rules in certain circumstances.
The regulators are seeking views on the implementation timetable for the introduction of the new regimes and expect to publish this along with their final policy statements and supporting guidance in Q4, 2014/Q1, 2015.
The deadline for comments on PRA CP14/14 is Friday 31 October 2014.
PRA CP15/14: Strengthening the alignment of risk and reward: new remuneration rules
PRA CP15/14, which complements PRA CP 14/14, sets out new remuneration rules proposed by the FCA and the PRA in an effort to strengthen the alignment between risk and reward and covers commentary on changes to rules including:
- deferral;
- clawback;
- bailed-out banks;
- buy-outs;
- risk adjustment (PRA only); and
- the remuneration of non-executive directors.
The rules will affect all banks and building societies as well as the nine PRA-designated firms which are dual regulated by the FCA and PRA.
Some of the more detailed proposals of PRA CP15/14, include:
- deferral periods should generally be longer than current minima to align the risk horizons of key individuals further with the longer-term safety and soundness of the firms for which they work i.e. for senior managers, the deferral period should be between five and seven years, depending on seniority, along with a phased approach to vesting;
- enhance firms’ abilities to recover variable remuneration should unfavourable facts come to light after the event;
- provide options that cater for avoiding reductions in unvested awards when individuals change firms; and
- make explicit in the remuneration rules that the presumption against payment or vesting extends to all discretionary payments, where banks have been bailed out, including payment for loss of office and discretionary pension benefits.
The deadline for comments on PRA CP15/14 is Friday 31 October 2014.
The PRA and FCA aim to publish final rules on CP14/14 and CP15/14 in early 2015.
View News Release – Prudential Regulation Authority and Financial Conduct Authority consult on proposals to improve responsibility and accountability in the banking sector, 30 July 2014
View Policy Statement 7/14: Clawback (PRA PS7/14), 30 July 2014
View Consultation Paper 14/14: Strengthening accountability in banking: a new regulatory framework for individuals (PRA CP14/14), 30 July 2014
View Consultation Paper 15/14: Strengthening the alignment of risk and reward: new remuneration rules (PRA CP15/14), 30 July 2014
