The two main regulators of the UK financial sector have launched new rules designed to align pay more closely with the goal of preventing another financial crisis, they say.

The UK’s two main financial regulators have set out more stringent rules on pay for bankers and other senior professionals as part of moves they say are needed to curb behaviour blamed in part for the 2008 market crash.

The Prudential Regulation Authority and Financial Conduct Authority yesterday set out new remuneration rules which include changes to deferral and clawback of variable remuneration such as bonus payments.

“The new framework aims to further align risk and individual reward in the banking sector, to discourage irresponsible risk-taking and short-termism and to encourage more effective risk management,” the organisations said in a joint statement. The new rules apply to banks, building societies, and PRA-designated investment firms, including UK branches of non-European Economic Area headquartered firms, they said.

Since the 2008 financial crisis, remuneration of bankers and other figures in financial markets has been blamed for causing some of the excesses leading to the market turmoil. Already, UK regulators have moved to defer bonus payments.

“Today’s rules are part of a wider package that is being announced over the summer to embed an accountable culture in the City. Our rules will now mean that senior managers face clawback of bonuses for up to 10 years, if misconduct comes to light,” Martin Wheatley, chief executive of the FCA, said.

“This is a crucial step to rebuild public trust in financial services, and allows firms and regulators to build long term decision making and effective risk management into people’s pay packets.”

The main changes will see deferral of variable remuneration to seven years for senior managers, five years for risk managers with senior, managerial or supervisory roles at PRA-regulated firms, and three-to-five years for all other staff whose actions could materially affected a firm.
 
The FCA is introducing clawback rules (where staff members return part or all of variable remuneration that has already been paid) for periods of seven years from award of variable remuneration for all material risk takers, which were already applied by the PRA. Both the PRA and the FCA clawback rules will be strengthened by a requirement for a possible three additional years for senior managers (10 years in total) at the end of the seven year period where a firm or regulatory authorities have commenced inquiries into potential material failures.

Variable pay for non-executive directors will be banned.

Rules will explicitly state that no variable pay including all discretionary payments should be paid to the management of a firm in receipt of taxpayer support. The rules will also strengthen the PRA requirements on dual-regulated firms to apply more effective risk adjustment to variable remuneration.

The clawback and deferral rules will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016, while other requirements will apply from 1 July 2015, the organisations said.