UK: PRA proposes giving former employers power to reduce buy-outs granted by the new employer

The Prudential Regulation Authority has published a consultation paper setting out its proposal for a new approach to "buy-out" awards, with the stated aim of ensuring that employees cannot "avoid the proper consequences of their actions" by taking up new employment.

The consultation includes a radical proposal which would require Proportionality Level 1 and 2 PRA-regulated firms to seek the input of the former employer in determining whether buy-out awards should vest, with the former employer being given the power to determine whether any malus reduction is to be applied by reference to relevant risk or conduct issues relating to the former employer.

The proposal is directly relevant to PRA-regulated firms, but will be of wider interest as it may be indicative of future wider practice. The consultation closes on Wednesday 13 April 2016 and can be accessed here.

The consultation paper confirms that buy-out awards are required to be subject to retention, deferral, malus and clawback arrangements, but proposes that malus and clawback determinations should be made by the former (rather than the new) employer. This proposal would apply where a buy-out is granted by a Proportionality Level 1 or 2 PRA-regulated firm, where the former employer is also PRA-regulated. Under the proposal, the new employer would need to notify the former employer that it has granted a buy-out award, including in providing details of the value of the award. The former employer would then be required to consider whether, on the grounds of risk or conduct failings, it would have reduced (or clawed-back) any variable remuneration from the individual had they still been an employee of that former employer, and to provide that assessment, along with details of the basis of any reduction, to the new employer. The new employer would be required to operate malus or clawback to the extent determined by the former employer (subject only to the possibility of obtaining a waiver from the PRA where the new employer believes that the former employer's determination was manifestly unfair or unreasonable).

The consultation therefore proposes a significant degree of co-operation and information sharing between the new and the former employer. This gives rise to issues which firms may wish to carefully consider in responding to the consultation, in particular as the proposal would require the new employer to disclose to the former employer the amount of a buy-out award, and the former employer to disclose to the new employer details of the risk or conduct failings which are the basis for any application of malus.

The PRA also proposes to create a specific right of action for individuals against the former employer, where the former employer would be liable for any damages caused to the individual by the former employer not acting fairly and reasonably in making its determination.

The PRA's consultation comes against the backdrop of the EBA having published its final "Guidelines on sound remuneration policies" on 21 December 2015, which amongst other things discusses the interaction between buy-outs and the bonus cap. Our briefing on the EBA Guidelines is available here.