Many UK banking groups and dual regulated investment firms are grappling with the impact of the remuneration provisions in Capital Requirements Directive V (CRD V). The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have provided guidance for impacted firms. New rules apply to the first performance period to start after 29 December 2020, which for many is already underway. We consider some of the key issues on which we are advising HR Reward professionals and in-house lawyers.
Some firms are facing into the requirements of malus and clawback for the first time. This involves ensuring that remuneration committees (RemCos) are empowered to make decisions to prevent bonuses (or other variable pay) from being paid, or reducing the amount due, to an employee; or to recover sums already paid to employees, or former employees. These are complex concepts that are understandably daunting for employees. Providing clear communication to impacted employees will be essential.
Routine bonus correspondence will require updating to ensure that consent is obtained to claw back sums, in the appropriate circumstances. Now is also an opportunity to revisit template contracts of employment, particularly for employees joining, or being promoted, into certified or senior manager positions. Employment contracts should give clarity on performance adjustment, as well as ensuring the ability to recover sums from salary, where possible. Consideration should also be given to updating RemCo terms of reference, the Remuneration Policy and creating a Performance Adjustment Policy.
Overall remuneration package
Many PRA/FCA authorised firms are concerned to ensure that their overall reward package remains competitive following CRD V. Taken together, the changes to deferral periods, requirements to defer a higher percentage of variable pay and to grant a higher percentage in equity instruments, together with the bonus cap and retention rules, can result in significant cash flow consequences for employees who are material risk takers (MRTs). Reimagining the MRT pay proposition may be underway and ongoing messaging with MRTs is likely to support those key staff to keep calm and carry on.
In some firms, making changes to the overall reward package may require engagement with trade unions or employee forums. All firms should ensure that people leaders are equipped to have pay-related one-to-one discussions with their direct reports.
How can we help?
Our regulatory and employment lawyers work together to provide solutions and support tailored to clients in the PRA- and FCA-regulated environment, ensuring a joined-up approach.