While interest in executive remuneration remains high, banking sector regulators are continuing to make significant changes. In the latest development, in June 2015, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) jointly issued a policy statement on new remuneration rules to strengthen the alignment of long-term risk and reward.

This follows their joint consultation in July 2014 (the consultation) and will see the UK having tougher requirements than elsewhere in the EU and internationally on deferral and clawback of bonuses, although it may resist new EU proposals to extend pay rules to more firms (www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp1514.pdf).

For larger banks, the Remuneration Code requires a certain amount of variable remuneration paid to key executives, which is typically bonus payments, to be deferred over a period of at least three years before being paid out (PRA Handbook REM1: FCA Handbook Senior Management Arrangements, Systems and Controls 19D).

During the deferral period, unpaid bonuses must be capable of being cancelled or reduced in the event of individual or collective misconduct, regulatory failings or severe financial crisis (malus). In the past, once bonuses were paid, they were not required to be paid back (clawback). However, in July 2014, the PRA implemented a regime where variable remuneration on or after 1 January 2015 can be recovered through malus or clawback for seven years after it is calculated (see Briefing "Clawback of bonuses: the claws are out"). These rules are considerably in excess of those required under banking regimes both in the EU and outside.

These rules have now been extended further so that with regard to remuneration awarded from 1 January 2016:

The consultation asked whether, and if so how, buy-outs were consistent with the PRA's regulatory principles on pay. Buy-outs compensate new hires for losing bonuses that they would have received had they remained with their former employer. The consultation offered four choices: banning buy-outs altogether; requiring former employers not to forfeit awards when people leave for new jobs, so removing the need for buy-outs; allowing the replacement awards to be accessed for financial recompense by the former employer; or simply relying on the original employer to claw back relevant amounts. The PRA has concluded that buy-outs can continue, but will consider whether any further rules should be brought forward to allow former employers to access replacement pay and to facilitate clawback.

CRD IV contains a controversial bonus cap: annual bonuses and other variable remuneration of senior bank employees cannot exceed one times (or, with shareholder approval, two times) fixed remuneration (www.practicallaw.com/2-549-7937).

In order to continue to pay high remuneration, banks have generally increased salaries to allow for corresponding bonuses. Some banks went further and also introduced fixed role-based allowances, which they argued technically counted as fixed remuneration and so had an additional necessary multiplier effect, but since they were limited to being payable while the role lasted, did not have the fixed-cost aspect of salaries.

In 2014, there were two setbacks for banks in the UK. Firstly, the government dropped its challenge to the validity of the bonus cap after the Advocate General delivered his opinion that the European Court of Justice should dismiss the action (C-507/13). The government was not defending high pay in itself, but argued that requiring a greater proportion of fixed pay and a lower bonus proportion reduced the ability to recover remuneration, because fixed pay is not recoverable. It saw the threat of loss after the event as a more effective weapon to induce better behaviour than bonus capping upfront.

Secondly, the European Banking Authority (EBA) issued an opinion that many of the role-based allowances it had reviewed had the character of variable pay and so did not count as fixed remuneration for bonus cap calculation purposes (www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-10+Opinion+on+remuneration+and+allowances.pdf). The PRA announced that it accepted the EBA's conclusion, although the implications of this would vary from bank to bank.

In March 2015, the EBA produced draft revised guidelines on CRD IV remuneration issues, which confirmed its approach to role-based allowances (www.eba.europa.eu/documents/10180/1002374/EBA-CP-2015-03+%28CP+on+GLs+on+Sound+Remuneration+Policies%29.pdf). The EBA also proposed three other main changes:

The Remuneration Code implements the EBA guidelines in the UK and so, in principle, needs to be amended to reflect the final revised version. The EBA has now finished its consultation. If the EBA does not continue, in the final revised guidelines, which are expected by the end of 2015, to allow proportionality exemptions in more or less the current form that operates in the UK, there is a real possibility that the UK regulatory authorities may not bring the existing Remuneration Code into line with the EBA guidelines on some points. This raises the possibility of court proceedings against the UK if the UK is not able to justify its departure from them.

These developments are also occurring outside the financial services sector. In 2014, the Financial Reporting Council amended the UK Corporate Governance Code (the Code) so that all listed companies now have to include malus and clawback provisions in their bonus arrangements for their main board executive directors, or else explain why they have not done so (www.practicallaw.com/3-584-9227). The previous Code requirement was merely to consider putting arrangements in place. This change, and investor disquiet at executive directors not being forced to pay back bonuses at some companies, has led to most listed companies and some AIM companies implementing these changes for future remuneration for executive directors, although generally with shorter recovery periods than those firms caught by the Remuneration Code.

Deferral periods are also increasing in listed companies generally. The receipt of a proportion of an annual bonus for executive directors is increasingly delayed for three years and some investors, such as Fidelity, have announced that they disapprove of any long-term incentive arrangements where an individual can sell shares more than five years after the award was made.

In many cases, the actual changes and proposals over the last 18 months have just been incrementally extending a regime that is already in place, with banks having little choice but to comply with them, even if they were opposed during consultation, and however unattractive they are internationally. However, some proposed changes, particularly the loss of proportionality for financial institutions which are not large banks, would be a very significant development for many City firms.

If any new trend can be detected in the UK-initiated developments, it is that they are moving beyond repairing severe damage to an institution, which was the regulatory defence imposed after the financial crisis, to a regime that focuses equally heavily on punishing collective and individual executive misconduct, and that, in the public eye, is more culpable and attributable. It remains to be seen whether this will produce the desired deterrent effect or sense of justice.