In a consultation paper the UK's Prudential Regulation Authority is proposing to introduce a new rule to govern buy-outs of variable remuneration, relating to the practice whereby firms recruiting staff ‘buy-out’ deferred bonus awards that have been cancelled by their previous employer.

The regulator, a wing of the Bank of England, is concerned that bankers are likely to sidestep 'malus and clawback' by moving to rival employers which then buy their bonuses out. Such buy-outs shield the bankers from having to hand back proportions of their old bonuses at some point in the future.

The proposed changes to the remuneration part of the PRA rulebook will apply to all so-called 'material risk-takers' at PRA-regulated banks, building societies and designated investment firms. However, in accordance with the PRA’s existing approach to proportionality, these rules are not to apply to firms that fall within 'level three' of the proportionality framework. The PRA proposes a model that allows for the possibility of malus and clawback to be applied to bought-out awards, based on a determination by the old employer. 

The principal mechanism would be a contract between the new employer and employee. It would involve the old employer notifying the new employer of the determination and saying that a certain amount should be applied to the employee’s deferred variable remuneration by way of malus and/or 'clawed back' in cases where the variable remuneration has already happened.

The PRA is also proposing to allow each new employer to apply for a waiver if it has reason to believe that an old employer’s decision to apply malus or clawback has been manifestly unfair or unreasonable. The consultation process ends on 13 April. Comments should go to CP2_16@bankofengland.co.uk