The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published two consultation papers aimed at improving individual responsibility in the banking sector by interfering with people's pay.

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published two consultation papers aimed at improving individual responsibility and accountability in the banking sector.

The changes they foresee include the long-awaited approval regime for the most senior individuals in banking, whose behaviour and decisions have the potential to bring a bank to failure, or to cause serious harm to customers; and new rules to govern remuneration in a bid to create at least some vague alignment between long-term risk and reward in the banking sector.
 
In June 2013, the Parliamentary Commission for Banking Standards (PCBS) published its report, entitled “Changing Banking for Good”, which set out recommendations for legislative and other action. It sought to improve professional standards and culture in the UK banking industry. This was followed by legislation in the Banking Reform Act 2013. The PRA and FCA are now consulting interested parties about their proposals which, they believe, incorporate and build on the Banking Reform Act and the recommendations made by the PCBS.

They propose to create a new Senior Managers' Regime to draw up clear lines of responsibility at the tops of banks, make it easier for themselves to hold senior individuals at banks to account and require banks to vet their senior managers for fitness and propriety regularly.

They want a Certification Regime to require firms to assess the fitness and propriety of staff who could pose significant harm to those firms or any of their customers; and


They also want a new set of 'conduct' rules in the form of vague statements of principle, setting out behaviour for bank employees.

In the accompanying joint consultation paper called ‘Strengthening the Alignment of Risk and Reward: New Remuneration Rules’, the PRA and FCA propose to do the following.
 
Come up with some kind of alignment - so far sadly lacking - between risk and reward over the longer term, by requiring firms to defer payment of variable remuneration (e.g. bonuses) for a minimum of five or seven years depending on seniority, with "a phased approach to vesting."

Make it easier for firms to recover variable remuneration, even if paid out or 'vested', from senior managers if risk management or conduct failings come to light at a later date.

Strengthening the existing presumption against discretionary payments where banks have been bailed out.

The PRA has also today published final rules on clawback (malus) which introduce a seven-year minimum period for clawback from the date of award. These rules will come into force on 1 January 2015.