The PRA is consulting on new rules governing the ‘buy-out’ of deferred bonus awards by new employers. The main proposals are:
 
- All buy-outs granted by a new employer are subject to malus and/or clawback in the same way as other types of variable remuneration;

- The new employer must operate malus and/or clawback on buy-outs if the former employer tells them to do so, because of misconduct or a failure of risk management at the former employer;

- The former employer must make a fair, reasonable and consistent determination about malus and/or clawback and give the employee and the new employer details and reasons for any proposed malus and/or clawback;

- Employees can make representations to the former employer which have to be considered before any determination. Employees will also be able to claim damages against the former employer for unfair, unreasonable or inconsistent determinations;

- New employers can ask the PRA for a waiver if they believe the former employer’s determination is unfair or unreasonable; 

- Firms will be required to report cases of malus and/or clawback against bought-out awards at least annually. 

These proposals will apply to all Material Risk Takers (MRTs) in Level 1 and Level 2 PRA-regulated firms, where the former employer is also PRA-regulated.

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* 1. Do you agree that the grounds for applying malus and/or clawback to buy-outs should be the same as those for clawback generally, i.e. misconduct and risk management, but not on the ground of material downturn in the former employer’s financial performance?

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* 2. The new employer must tell the former employer the buy-out amount and what retention, deferral, performance and clawback arrangements apply to the buy-out. What specific issues does this raise for your organisation? Please explain your views.

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* 3. Employees will be able to claim damages if the former employer makes an unfair or unreasonable determination about malus and/or clawback. Do you think this risk of litigation will discourage firms from making determinations against former employees?

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* 4. Former employers will have to report malus and/or clawback against bought-out awards to the PRA at least annually.  Do you consider this reporting requirement is workable?

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* 5. Implementing the proposals will require amending your existing employees’ employment contracts to include the new buyout malus and/or clawback provisions. This will involve consulting with your workforce and possibly collective consultation to terminate and re-engage on the new terms those who refuse to agree. 

Will this be a significant exercise for your organisation? 

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* 6. A new firm will be entitled to apply to the PRA for a waiver if it has reason to believe that the former employer’s decision to apply malus and/or clawback is manifestly unfair or unreasonable.  Do you envisage any difficulties with the regulator acting as arbiter in these situations? 

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* 7. Do you have any concerns that employers may use malus and/or clawback strategically and/or in bad faith to restrict staff moving to a rival firm?

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* 8. Is there anything else about the buy-out proposals that you would like to raise?

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