The UK's financial conduct and prudential regulators have today presented new rules and guidance for the remuneration of banking staff, basing them on recommendations made by the Parliamentary Commission on Banking Standards.

The EU's Capital Requirements Directive (CRD, directive 2013/36/EU), which is part of the latest legislative package of measures known collectively as CRD IV) has already introduced a limit on the variable remuneration of 100% of the fixed remuneration (200% with shareholders’ approval). The new announcement, in the words of Anna McCaffrey of Taylor Wessing, adds an extra layer of complexity to the already labyrinthine remuneration landscape. Today's main changes are:

• extending deferral (the period during which variable remuneration - a European Union term - is withheld following the end of the accrual period) to 7 years for senior managers, 5 years for PRA-designated risk managers with senior, managerial or supervisory roles, and 3-5 years for all other staff whose actions could have a material impact on a firm (material risk takers)
• introducing clawback (where a staff member returns part of his variable remuneration to the institution where this has already been paid, under certain circumstances) for periods of 7 years from the award of variable remuneration for all material risk-takers, with a possible 3 additional years for senior managers (10 years in total) who are undergoing investigation at the end of the 7-year period; and
• prohibiting variable pay for non-executive directors.

Andrew Tyrie MP, chairman of the Treasury Committee and former chairman of the Parliamentary Commission on Banking Standards, said: “The PRA and FCA have decided to split the structure for material risk takers below senior manager positions, creating what looks like a two-tier structure. It is important that every reasonable step is taken to prevent this from resulting in more bureaucracy, an extra burden on business, ultimately at consumers’ expense. No doubt the Treasury Committee will want to raise this with the regulators at an early opportunity.”

He also thought that the reforms did not go far enough: “The regulators’ plans to lengthen deferral and clawback periods are a step forward but the regulators themselves [said] that attempts to manipulate the foreign exchange markets dated back to January 2008 – over seven years ago – when recently fining the banks. There remains a need in a minority of cases for even longer deferral."

Actually the Bank of England knew about 'Forex'-rigging (for which the first court prosecution began only this month) in 2007, possibly 2006. Early last year, it suspended an employee and released minutes of meetings showing that its officials knew of concerns the foreign-exchange market was being rigged almost eight years before.

Tyrie went on: "Firms should not only reward staff for success, but also penalise failure. Individuals should be fully rewarded only once it is clear that those rewards have been earned, that is by providing benefits to their customers, shareholders and the economy. That is why the Parliamentary Commission on Banking Standards concluded that long deferral may be required in some cases and, where there has been serious misconduct, clawback may also be required.

"Long deferral and clawback will in some cases be essential to ensuring that rewards are more closely aligned to the maturity of the risk. In the last crisis, many people walked away from the mess that they had created with huge rewards, well before the risks matured and it became clear that the rewards were not merited. These proposals will be judged by whether they can help prevent this happening again."

The slippery concept of 'variable pay' has been a problem for the EU's authorities. After the passage of CRD IV, a number of institutions all over the EU have changed their remuneration policies and introduced ‘allowances’ which they treated as part of staff's fixed remuneration. The introduction of allowances has led to a widening of the scope for granting variable remuneration, alongside an increase in the supposedly fixed remuneration. As part of its market monitoring and assessment tasks, and in response to a request made by the European Commission on 12 February 2014, the European Banking Authority launched an investigation into the nature of these allowances and their compliance with CRD IV provisions. For that purpose, the EBA collected information from all competent authorities to analyse the types and use of these allowances. Its long-awaited draft for guidelines on the subject came out in early March. The draft guidelines are open for public consultation for 3 months.