Rob Moulton, head of financial services regulation, and Julie Quinn, partner, Nabarro
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Bankers may have breathed a sigh of relief that the media’s focus moved away from City bonuses and on to scrutinising the expense claims of MPs recently. But last month the Treasury Select Committee tried to put some of the heat back on, saying the Financial Services Authority (FSA) needed to “sweep away the broken banking remuneration models of the past”.
The FSA’s new proposals, in the form of a code of practice, are bound to give rise to problems between HR (which is often concerned with the rights of individuals) and compliance (which the FSA expects to focus on bank-wide risk management).
The timeline is incredibly short. The code covers not just bonus decisions, but new hire arrangements and exit packages, and will be in place by November 2009 in time for bonus reviews. Many financial institutions are working towards new remuneration policies and setting up cross-bank committees appropriately staffed from compliance, audit and risk management to look at the issues raised by the FSA.
If an existing employment contract “allows the firm to amend it in a way that enables the firm to comply with the code”, the bank or institution must make such changes by 31 December 2009. Otherwise they have until 6 November 2010 to make their contracts compliant for existing staff.
The code expressly envisages that contracts that are not consistent with its principles at this long-stop date will be terminated. However, what the FSA considers easily changeable, such as ‘discretionary’ bonus schemes, may not be the same as what employment tribunals and the High Court considers capable of amendment, making it awkward for institutions.
Whether it is possible to vary or amend a discretionary bonus scheme is a complex question that will involve a case-by-case analysis. The Employment Appeal Tribunal recently reiterated that, even though a bonus scheme is described as ‘discretionary’, the employee effectively has a contractual right to such a bonus if their institution has consistently paid it. A tribunal will also scrutinise an institution’s bonus scheme to pick out which elements are absolute and which are truly discretionary.
The code requires a major structural overhaul of remuneration policies: by way of example, claw-back provisions or a deferral, in some circumstances, of the major part of the bonus award. This is way beyond exercising discretion about the amount of a bonus: it is highly likely that institutions will need to seek agreement in writing to some changes. At the very least, they will need to consult with individuals and possibly with employee representatives.
If employees do not agree to changes, such changes will need to be imposed unilaterally. This means dismissing employees and attempting to re-engage them on new terms of employment. This is arguably within the expanded definition of redundancy in the Trade Union and Labour Relations (Consolidation) Act 1992, under which a redundancy situation arises if employment is terminated for a reason unrelated to the individual.
If so, institutions need to consult collectively for a minimum of 30 days if at least 20 people are affected at one establishment (or 90 days if 100 people are affected) and allow employees to elect representatives for this consultation.
Many financial institutions have for the first time embraced collective consultation for redundancies - few are keen to embrace it again on the question of remuneration. As other countries may also bring in regulatory changes, institutions may even have to consult with European works councils if remuneration policies change in two or more European countries.
Institutions will need to produce a strategy with buy-in from both HR and compliance if they are to avoid a clash between employment law and the FSA’s code.