The Financial Conduct Authority’s and Prudential Regulation Authority’s new rules for remuneration for bankers have left the question of how financial sector employers should treat bonus “buy-outs” unresolved, according to GQ Employment Law, the specialist employment law firm.

An employer can use a buy-out to compensate a new employee for any unvested bonus that he is being forced to leave behind when he moves over from his previous firm. The regulators believe that buy-outs can undermine the use of deferred bonus payments as a buy-out prevents the former employer from adjusting the employee’s bonus award if problems are subsequently discovered.

However, GQ Employment Law warns that the solutions that the FCA and PRA are considering to ensure that buy-outs do not reduce individual accountability may lead to a substantial administrative burden for banks. For example, they are interested in exploring whether buy-out awards should be held in a form that allows them to be subject to penalties from the former employer.

Darren Isaacs, Partner at GQ said: “The good news is the PRA is not looking at banning buy-outs, but it does still want to have more control over how buy-outs work. If it follows what it sees as its preferred routes, then this would be a further ratcheting up of regulatory controls over how remuneration and recruitment in the City is undertaken. It is worth remembering that London is already becoming the most regulated financial centre when it comes to pay. The PRA has already acknowledged that trying to fix the use of buy-outs to their satisfaction presents many practical difficulties. The concern for banks is that “practical difficulties” will turn into costs and administrative burdens borne by the banks.

“One proposal they are considering further – where a former employer can interfere with a buy-out award granted by the new employer - is contentious. It will require a level of information-sharing between banks on proprietary and commercially sensitive information that banks are unused to doing and would be uncomfortable doing. Banks are going to, at best, reserve their judgment until they see how the PRA hopes such a scheme will work.”