Flexible Deferred Compensation Plans Arising from Financial Services Regulation

Transcription

1 Flexible Deferred Compensation Plans Arising from Financial Services Regulation Juan Bonilla, Partner, Cuatrecasas, Gonçalves Pereira Lindsey Doud, Head of Development & Strategy, RBC cees Nicholas Greenacre, Partner, White & Case LLP

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3 Current developments regarding European regulatory controls on remuneration and their implications Remuneration provisions in CRD 4 set a cap on the amount of variable remuneration that can be received by bankers The UK government s abandoned legal challenge to the EU-wide cap on bankers' bonuses illustrates the tensions between the UK and EU on this issue CRD 4 also led to the use of role-based allowances which have risen in popularity since the inception of the bonus cap although proposed EBA Guidelines will clearly outlaw them There has been an extension of the remuneration controls to AIFMs and UCITS and MiFID creating potential sectorial issues in group companies that house different types of entity The introduction of 7 year deferral and clawback are unlikely to have an incentivising effect and create further difficulties It is generally not desirable to have CEOs in their role for more than 5-10 years Outside of the financial services sector, clawback periods of 5 years have been observed The proportionality principle means that the CRD does not cover all institutions which may lead to a movement of people to smaller firms attracted by the absence of the risk of clawback (although this is subject to change under the new EBA Guidelines) Under CRD 4 if a group company has an entity which meets the capital requirements to come under the CRD rules then that bank/investment firm must apply remuneration rules at group, parent company and subsidiary levels It is expected that we will hear more about the regulators approach to counter the problem of buy-outs during 2015

4 Market response to the regulations, approach of the UK regulators to malus and clawback and practical difficulties posed Most companies have responded to CRD 4 by tweaking their existing plan designs but it will also be interesting to see how the regulations impact on good governance in the future Regulation is likely to depress the quantum of bonuses Malus allows for unvested (i.e. not yet paid out/deferred) variable remuneration to be returned to the employer upon the discovery of a defect in performance The new rules go a step further than the situation for malus and allow for the clawback of vested (i.e. paid out/undeffered) variable remuneration based on employee conduct It is preferable to implement longer deferral periods to mitigate the issues posed by clawback From an administrative perspective, in terms of systems and processes, the principles of clawback should pose few problems The main consideration will be recordkeeping with the actual recovery being down to the employer The biggest challenge will be how to recover tax and NICs which employees have already paid in respect of their vested awards which is exacerbated by the lack of clear, operational guidelines from HMRC and the PRA/FCA One key issue for the plan design stage concerns FX and investment exposure to avoid associated currency risks There is no consensus amongst jurisdictions on how to deal with taxation issues, with great variation between EU countries

5 Global legal challenges associated with clawback The UK and US are potentially the least problematic jurisdictions and fit into the so-called easy category as contractual provisions can be drafted with the court construing them so as to give the actual meaning that the parties intended and documented France is an example of a medium category where some hurdles are faced with Denmark falling into the hard category due to the statutory constraints in place In the UK it has been possible to de-tier subsidiaries from that parent entity so that the subsidiary is not subject to the CRD rules In the US, clawback provisions historically only applied to those in the role of CFO or CEO For clawback to be used, one has to see evidence of a financial restatement caused by misconduct, that is conducted by someone in the office of CFO or CEO Under Dodd-Frank, the regime was extended to cover executive officers in public companies that were traded on an exchange but uncertainty regarding its application still remains Despite US companies incorporating clawback provisions, in practice they are rarely used being viewed as Un-American Despite the practical realities due to the existence of a 3 year look-back period, the theoretical consequences mean that a company could be delisted from the relevant stock exchange The FCA and PRA are consulting on a possible further extension of the clawback period to 7-10 years for senior management that may be under investigation

6 Thank You Juan Bonilla Cuatrecasas, Gonçalves Pereira Lindsey Doud RBC cees Nicholas Greenacre White & Case