On 13 April 2023, the PRA confirmed its decision to fine TSB’s former Chief Information Officer £81,620 (reduced by 30% from £116,600 in settlement) under PRA Senior Manager Conduct Rule 2 for failing to take reasonable steps to supervise and ensure compliance with the PRA’s outsourcing rules relating to an IT migration in 2018. The Rule states that: “You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.” The fine represents an equivalent impact of approximately 15% of his relevant income for the 2017-18 tax year. So how do UK based firms address remuneration impact resulting from disciplinary or regulatory failings? Do organisations have a consistent approach through guidelines or otherwise to help determine materiality and severity of infraction and type of financial (or other) impact) and the appropriateness of any adjustment to be made, or are firms still applying a more discretionary approach?
In the US, on 3rd March 2023, the Department of Justice (DOJ) launched a pilot programme to reduce fines where organisations seek to clawback financial incentives from relevant executives, even if those attempts fail. It has also provided a route to reduce fines placed on firms where they can demonstrate a remuneration and disciplinary structure which provides for reducing executive remuneration or enforcing a clawback. This forms part of a wider push by the DOJ, in particular following debates surrounding employees’ use of instant messaging apps to circumvent certain compliance rules, to tie executive compensation to compliance. By way of example, the DOJ held Dankse Bank out as an example where it reduced a fine on the Bank because it showed that it would seek to recover compensation from executives involved.
In the US, having guidelines or a matrix setting out examples of conduct and a sliding scale of potential impact to be used to evidence a broadly consistent approach to sanctions related pay adjustment is more commonplace than in the UK. This also tends to be more formalised in the US due to the scale of the financial penalties which the US regulators can bring to bear on organisations but also due to the financial incentives offered to whistleblowers under SOX, which means that businesses can directly correlate the financial impact of corporate mistake / malfeasance.
In the UK, ensuring that executive remuneration is tied to performance, and specifically to risk and compliance, is also critical. The FCA and PRA have stated clearly in regulatory guidance their expectations for individuals to be accountable for the areas for which they have prescribed responsibility and for their variable remuneration outcomes to be aligned with that accountability. There has, however, been flexibility in how each firm implements the risk and performance adjustment requirements contained within the UK remuneration rules and the impact that this has on staff, whether via reducing in-year or previous year variable pay awards, deferring payment or vesting of awards pending the outcome of ongoing investigations, or through applying clawback. The range of remuneration impacts will vary depending on the nature of the disciplinary event – in some instances, this may be a 10-50% adjustment on variable remuneration with up to a 100% loss of variable remuneration in the most severe cases.
Clawback itself, while widely used in compensation plans, remains the most challenging of the disciplinary compensation impacts legally to implement being relatively untested and not legally allowed in some jurisdictions. Forfeiture of compensation not yet paid or awards not vested is much more readily justifiable in most jurisdictions. Recognising that clawback is hard to effect, the DOJ pilot provides for benefit to the organisation for demonstrating effort to tie compensation to compliance even if the organisation is not successful in recovery of the financial amounts. The DOJ has said: “At the outset of a criminal resolution, the resolving company will pay the applicable fine, minus a reserved credit equalling the amount of compensation the company is attempting to claw back from culpable executives and employees…. If the company succeeds and recoups compensation from a responsible employee, the company gets to keep that clawback money — and also doesn’t have to pay the amount it recovered...We heard from stakeholders about how challenging and how expensive the pursuit of clawbacks can be … so the pilot program will also ensure that those who pursue clawbacks in good faith but are unsuccessful are still eligible to receive a fine reduction.”
The PRA’s decision to fine TSB’s former CIO should remind firms (and senior executives) that the UK regulators will continue to scrutinise how UK regulated firms are ensuring a clear linkage between individual accountability and individual remuneration. Firms may wish to assess any existing internal risk and performance adjustment processes and guidelines to ensure that they are sufficient for meeting regulatory expectations in this area.
Julia Gorham - Partner, Employment Law, Deloitte Legal
Marian Bloodworth - Partner, Employment Law, Deloitte Legal
Clare Edwards - Partner, Executive Remuneration, Deloitte UK
Susannah Hill - Associate Director, Financial Services Reward, Deloitte UK
Rowena Gaukroger - Associate Director, Executive Compensation, Deloitte UK
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