Yesterday the Prudential Regulatory Authority (“PRA”), the regulatory and supervisory arm of the Bank of England, issued a press release proposing new rules that would call for employers providing “buy-outs” to bankers for compensation forfeited by their old employers to include clawback provisions in employment contracts, which allowed for compensation to be clawed back if a banker’s previous employer determines that the individual engaged in misconduct.
The PRA said “[t]he practice of buy-outs has the potential to undermine the effectiveness of the current remuneration rules. When a new employer buys-out an employee’s cancelled bonus, the individual becomes insulated against the possibility of their awards being subject to ex-post risk adjustments through the application of either malus (the withholding or reduction of unpaid awards) or clawback (the recouping of paid awards). Through the practice of buy-outs, individuals can therefore effectively evade accountability for their actions.”
The PRA recommends that buy-outs managed through employment contracts should include malus or clawback provisions which account for determinations that an employee is found guilty of misconduct arising out of their former employment. The proposed new rules, however, would still allow for the new employer to apply for a waiver to the extent they believe that the determination was unfair or unreasonable.