Bonus Clawback Proposals

In March the Prudential Regulation Authority ("PRA") issued a consultation paper on its proposals to extend the Remuneration Code so that PRA-authorised firms will be required to include clawback provisions in employment contracts. The PRA is proposing that all vested variable remuneration awarded on or after 1 January 2015 will be subject to clawback and that employment contracts are amended to enable this. Under the proposals clawback would apply in line with the requirements on malus, i.e. if there is reasonable evidence of employee misbehaviour or material error, or if the firm or business unit suffers a material downturn in its financial performance or if the firm or business unit suffers a material failure of risk management. As for malus, the PRA also does not want clawback to be restricted to those directly culpable of malfeasance. Therefore, where an employee is indirectly responsible by virtue of their seniority or where they could have been reasonably expected to be aware of a material failure of risk management or misconduct but didn't take steps to deal with it clawback should apply. We take a brief look at some of the legal issues arising from these proposals.

Proposal to amend employment contracts

The PRA expects firms to amend employment contracts firstly so that, from 1 January 2015, clawback will be applied to all vested awards up to six years after vesting. Secondly, more controversially all firms will be required to take "reasonable steps" to amend contracts to allow clawback of awards made prior to 1 January 2015 but which vest after that date, again up to six years after vesting.

Amending employment contracts is not a simple matter and it may also be the case that scheme rules need to be amended. Amendments either require individual employee consent or there must be an express power permitting unilateral variation by the employer in which case generally, even where a contract does contain such a power, the courts have found this only permits minor rather than fundamental changes. In addition, these proposals will only affect the contracts of current and future employees and therefore, those who have already left whose contracts do not contain any clawback provisions will be financially better off.

Although it may not prove problematic to obtain agreement in respect of future awards it is less likely that employees will agree to these changes in respect of awards already made. Where employees don't consent firms will be...