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Following Lloyds Bank’s announcement that it is clawing back 2010 bonuses after the PPI scandal, Tony Watts examines the FSA remuneration code and its impact on bonus structures.

Lloyds Bank to claw back 2010 bonuses

Lloyds Banking Group has announced that it will be clawing back bonuses awarded for 2010, and is a timely reminder of the impact of the FSA Remuneration Code on FSA-authorised firms.

The decision came in the wake of the scandal for mis-selling Payment Protection Insurance (PPI).

Following a judicial review case on PPI mis-selling, Lloyds has set aside £3.2 billion to cover PPI claims. Consequently, its profits and bonus pool for 2010 would have been less if the full extent of claims had been known.

Former CEO Eric Daniel, who left his post last year, lost £580,000 – 40% of his award for 2010, reducing his bonus from £1.45m to £870K.

Four other directors lost 25% of their awards and eight members of the senior management team lost 10% each.

FSA Remuneration Code

The FSA Remuneration Code has been part of the FSA Handbook since January 2010, though it originally only applied to a limited number of big firms. A new version came into effect on 1 January 2011 applying to banks, building societies and BIPRU investment firms (which will include, for example, stockbrokers and investment managers as well as some, but not all, investment advisers).

Where it applies, its impact can be group-wide and worldwide. It does not, however, apply with the same rigour to all firms; it is intended to apply proportionately to smaller firms. There is a complex system of tiers to help determine the extent to which it does apply in a particular case.

For example, some smaller firms will not be subject to rules on payment of "variable remuneration" (i.e. including bonuses) in non-cash form as well as the clawback rules described below. Some firms will also have an extended timetable for compliance, subject to their making reasonable efforts to comply. The precise application of the code to any firm is complex and legal advice should be taken.

The code is underpinned by the general requirement on FSA firms to ensure that policies, procedures and practices on staff pay are consistent with and promote, sound and effective risk management.

Subject to proportionality restrictions referred to above, there are specific requirements applying to however, to staff covered by the code – this includes senior managers, those in control functions such as compliance, higher-paid employees and risk-takers in a firm that is subject to the code.

Generally, certain provisions are carved out for staff covered by the code whose variable remuneration is less than 33% of their total remunerationandwhose total remuneration is less than £500,000. Known as the "minimum pay" exemption, both criteria must apply for these exemptions to be available and in some cases, the FSA state that they may look at lower awards..

Subject to the relaxation of the rules in certain cases as described above, the detailed requirements of the code relating to remuneration structures include:

• Deferral -40% (60% in the case of "significant" firms) of variable remuneration is to be deferred over a period of 3-5 years, however it is paid i.e. whether in cash, shares or other means.
• Non-cash form – at least 50% of variable awards are to to be in non-cash form, for example shares or bonds.
• Clawback -adjustment of deferred remuneration so that the amount received properly reflects the performance of the employee, of the firm and the particular area where the employee works. Downward adjustment will be necessary where there is evidence of employee misbehaviour, material error or business downturn.
• Retention periods – "appropriate" minimum retention periods for non-cash awards.
• Guaranteed bonuses- restrictions on guaranteed bonuses which are effectively restricted to new hires and their first year of service. Proportionality rules have a limited application here. The FSA state the "minimum pay" carve-out will generally apply but will not always do so).
• Severance -severance payments must also reflect performance and not reward failure.

Firms are required to review and (if possible) amend any remuneration structures in existence before 29 July 2010 and take reasonable steps to amend or terminate them. The FSA guidance is that this should not require them to "breach applicable requirements of contract or employment law". Certain structures in breach of the code are expressly made void and firms must take steps to recover anything paid or given under them.

Obviously, the FSA has a panoply of enforcement powers of which it continues to make extensive use.

Keystone lawyers in the Funds and Financial Services and Litigation teams have experience of FSA requirements, FSA investigations and enforcement proceedings and financial services litigation.

This article is for general information purposes only and does not constitute legal or professional advice. It should not used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date this article was published.