Freshfields Bruckhaus Deringer LLP An update on remuneration in the finance sector FIG client seminar Presentation by Caroline Stroud and Alice Greenwell 22 May 2014

Onscreen slide Agenda Update on various regulatory developments The “Bonus Cap” Malus and clawback 1

Freshfields Bruckhaus Deringer LLP Update on various regulatory developments

Onscreen slide Update on various regulatory developments Three Remuneration Codes SYSC 19A Banks, building societies, investment firms IFPRU investment firms regulated by FCA CRD 4 compliant Amended with effect from 1 January 2014 SYSC 19B Full-scope UK AIF managers AIFMD compliant Effective 22 July 2013 but transitional provisions for first year SYSC 19C BIPRU investment firms regulated by the FCA CRD 3 compliant 2

Onscreen slide Update on various regulatory developments (cont.) Other European Directives Solvency II UCITS V EBA Technical Standards Material Risk Takers Notional discount rate for variable remuneration UK Developments Senior Person’s Regime 3

Freshfields Bruckhaus Deringer LLP The “Bonus Cap”

Onscreen slide The “Bonus Cap” “A firm must set appropriate ratios between the fixed and variable components of total remuneration” An “appropriate balance” But not more than 1:1 unless: −Shareholder approval −Proportionality tier 3 Some common approaches 4

Onscreen slide The “Bonus Cap” (cont.) 5

Freshfields Bruckhaus Deringer LLP Malus and clawback

Onscreen slide Malus and clawback Ex-post performance adjustment CRD 4 – “up to 100% of the total variable remuneration shall be subject to malus or clawback arrangements” Remuneration Codes – “a firm must ensure that any of the total variable remuneration is subject to malus or clawback” PRA expectations regarding the application of malus (October 2013) PRA consultation on clawback (March 2014) 6

Onscreen slide Malus and clawback (cont.) PRA expectations regarding the application of malus Scope Should not be limited to those directly culpable of malfeasance Timing Should apply for so long as have variable remuneration capable of reduction Procedure Consistency, fairness and robustness Clear criteria for triggers Appropriate input from control functions Ability to make representations Quantum Transparency in determining bonus pools Can take into account culpability or proximity Value of adjustments should be clearly recorded 7

Onscreen slide Malus and clawback (cont.) PRA consultation on clawback Builds on the malus guidance Consultation closed 13 May 2014 Final rules to be published to come into force 1 January 2015 Firms to take all reasonable steps to amend existing variable remuneration 8

Onscreen slide Malus and clawback (cont.) PRA consultation on clawback Scope To be as wide as the grounds for malus? −Reasonable evidence of employee misbehaviour or material error −Firm or relevant business unit suffers a material downturn in its financial performance −Firm or relevant business unit suffers a material failure of risk management Could have been reasonably expected to be aware of the failure or misconduct at the time By virtue of their role or seniority could be deemed indirectly responsible or accountable… including senior staff in charge of setting the firm’s culture and strategy Timing To apply for at least six years from the vesting date? 9

Onscreen slide Malus and clawback (cont.) Common themes in responses to consultation Scope There should be a requirement for personal culpability Material downturn in financial performance is almost inevitable in the time frame for which clawback must apply Timing Up to 11 years from the initial performance is too long Procedure Consistency, fairness and robustness difficult to achieve if conflicts with local laws Requirement to amend existing awards – are there human rights arguments? Compatibility with civil procedure rules No ability to apply proportionality Quantum Value of non-cash instruments poses difficulties What about tax? 10

Onscreen slide Malus and clawback (cont.) Some thoughts on best practice and other considerations The law on exercising discretions Decision must not be irrational, perverse or capricious Must take into account only relevant factors Mutual trust and confidence The process What guidance / training should the decision makers be given? Do the decision makers need independent advice? Who is providing information to the decision makers and does that pose any conflicts? How should the decision be recorded? −What reasons will be given to employees? −What will any minutes say? What if the decision is subsequently challenged? What information will you have to provide to regulators? 11

Onscreen slide Malus and clawback (cont.) Some thoughts on best practice and other considerations The employee’s position Does the employee have a right of representation in front of the decision makers? Is clawback a disciplinary step? Is the employee entitled to written reasons for the decision? Does the employee have the right to legal advice paid for by the firm? What if the employee is on long term leave? 12

Onscreen slide Freshfields Bruckhaus Deringer LLP is a limited liability partnership registered in England and Wales with registered number OC It is authorised and regulated by the Solicitors Regulation Authority. For regulatory information please refer to This material is for general information only and is not intended to provide legal advice. © Freshfields Bruckhaus Deringer LLP 2014 Thank you LON