The Supreme Court has quashed the employment tribunal fees order (SI 2013/1893) because it has the effect of preventing access to justice. It is unlawful under both domestic and EU law.

The judgment is available here.

Employment law practitioners will find much to agree with in the judgment. It will also be of interest to constitutional scholars on account of its exposition of the constitutional right of access to the courts as a right inherent in the rule of law. The Supreme Court’s conclusions were based in the first instance on the common law.

This blog now simply sets out selected highlights from the judgment. Read more »

Yesterday the ECJ released Advocate General Jääskinen’s opinion on the UK government’s challenge to the Bonus Cap.  The Bonus Cap provides by Articles 92 to 94 of the CRD IV Directive, and implemented by the UK regulators within SYSC 19A, that certain bankers’ bonuses may not be more half their total pay, or two-thirds with shareholder approval. Read more »

[This post originally appeared on 11KBW’s Education Blog].

In Davies v LB Haringey, a decision of Mr. Justice Supperstone handed down on today (17 October 2014), the claimant was a teacher who had been on full time release for trade union duties for 14 years.  At the time she went on release, she was working at a community school, so by section 35 of the Education Act 2002 her employer was the local authority rather than the governing body. Read more »

The Financial Reporting Council (FRC) has today released an updated version of the UK Corporate Governance Code, which will apply to accounting periods beginning on or after 1 October 2014.  As promised by the consultation, the new Code attempts to ensure that the financial interests of board members are aligned with the long-term interests of the company.  Companies should “comply or explain”, i.e., if they are not following the Code, they should explain why.

Section D concerns remuneration.  The key provision is D.1.1: “Schemes should include provisions that would enable the company to recover sums paid or withhold the payment of any sum, and specify the circumstances in which it would be appropriate to do so.”  In other words, directors’ contracts should include malus or clawback provisions – concepts which will be familiar to those working in the financial services sector (see SYSC 19A of the FCA Handbook).

As regards non-executive directors: “They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing executive directors, and in succession planning” (see A.4).  D.1.2 provides:  “Where a company releases an executive director to serve as a non-executive director elsewhere, the remuneration report should include a statement as to whether or not the director will retain such earnings and, if so, what the remuneration is.”  D.1.3 provides that non-executive members of the board should not normally receive share options or other performance-related elements.  They may do so with shareholder pre-approval, but there are dark warnings about independence, and the Code provides options should not be realised for at least a year after a non-executive director leaves his or her post.

On early termination, D.1.4 provides: “The aim should be to avoid rewarding poor performance. They [the remuneration committee] should take a robust line on reducing compensation to reflect departing directors’ obligations to mitigate loss.”  Finally, D.1.5 states that notice periods should be a year or less.  There are provisions in respect of the process for making remuneration decisions in section D.2.

Thomas Ogg

Introduction

On Wednesday 30 July 2014, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) released consultation papers relating to individual accountability and remuneration in the banking industry.  The changes apply, broadly speaking, to banks, building societies, credit unions and the nine investment firms designated by the PRA.

The proposed changes are detailed and wide-ranging.  This post concentrates on what is ‘new’: was revealed by the consultation paper, rather than setting out the framework that was set out in the Banking Reform Act and the Parliamentary Commission on Banking Standards.

The headlines are as follows:

Remuneration

• The regulators have proposed new deferral and vesting periods for variable remuneration.  The minimum deferral period for Code Staff is increased from three to five years, and for senior managers (see below) the minimum deferral period is increased to seven years.  In both cases vesting must be no faster than pro rata.  The first vesting event must be delayed by a year for Code Staff, and by three years for senior managers.

• Clawback, where a firm requires repayment back to the firm of remuneration already paid to employees, is proposed to be applied to the remuneration of both FCA and PRA-regulated firms currently within the Remuneration Code’s scope.  Clawback must be possible for a period of at least seven years from the date of the award of the remuneration.  For senior managers, firms must ensure that there is an option in employee contracts for the deferral period to be extended by three years (i.e. to ten years) where a firm has commenced an internal investigation (or a regulator has commenced an investigation) that could potentially lead to the application of clawback.

• Buy-outs.  The PRA and FCA are consulting on four potential approaches to controlling the impact of firms buying out the variable remuneration lost by employees when they move positions, on account of ‘bad leaver’ clauses.  The options include: (1) banning buy-outs; (2) banning bad leaver clauses, for the purpose of ensuring that malus rules would continue to apply; (3) in effect, the regulator applying malus to buy-out awards; (4) relying only on clawback to control buy-outs.

• Metrics.  The regulators are consulting on imposing a uniform rule for the calculation of profit, and for performance metrics, in relation to the calculation of bonus pools overall and for individual bonuses.

Conduct Rules

• The FCA has stated that it intends to apply the Conduct Rules to all bank staff, except those in generic roles (such as receptionists or catering staff) “whose role would be fundamentally the same as it would be if they worked in a non-financial services firm”.  In other words, a far, far wider population of bank employees may now be disciplined by the FCA for misconduct.  The PRA has adopted a far narrower approach in accordance with its (prudential) objectives.  The rules under APER will continue to apply to non-banks.

• The content of the proposed Conduct Rules is much the same as under the current approved persons regime (APER).  However, there is one new proposed rule for SMFs that is of note: “You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversea the discharge of the delegated responsibility effectively”.

• Notification of disciplinary matters.  Firms are proposed to be required to report breaches or suspected breaches of the Conduct Rules by a SMF within seven days of the firm becoming aware of the matter.  In relation to other staff, firms will be required to produce a quarterly report only to the FCA.

• The PRA has elected not to provide detailed guidance as to the effect of the new Conduct rules.  The FCA, however, has produced guidance.  This accords with the regulators’ differing approaches to producing policy material.

Senior Managers Regime

• PRA-specified senior management functions (SMFs), who are the most senior individuals in a bank, are relatively small in number.  Only 11 specific positions are specified in the consultation paper.  The FCA-specified SMFs are far more numerous, including all non-PRA-specified board members, and certain functions currently specified under APER (e.g. the compliance and money laundering functions).

• Banks will be required to produce a ‘responsibilities map’ which sets out how management and governance arrangements are allocated throughout the firm.  The responsibilities map should designed so that there are no gaps in accountabilities, and the firm’s board will be required to confirm annually that the map has no such gaps.

• The PRA and FCA have taken slightly different approaches to the allocation of responsibilities amongst senior managers.  The PRA allocates specific responsibilities to each type of SMF – e.g. the chief finance function is responsible for finance.  In addition, the PRA has set out 18 ‘prescribed responsibilities’ that must be allocated to SMFs in the firm (whether PRA- or FCA-specified SMFs).

• By contrast, the FCA will require the first 8 of the PRA’s prescribed responsibilities to be allocated to SMFs, but otherwise has a more flexible regime of ‘key functions’ that the FCA expects ought in most circumstances to be allocated to an individual SMF.  However, the consultation paper is relatively curt as regards the expected approach to handover certificates, and the content of statements of responsibilities.

Certification regime

• The core of the certification regime is that banks rather than the regulators should assess the fitness and propriety of employees within the scope of the regime (which includes employees who could cause the bank ‘significant harm’, but are not SMFs).  However, the FCA does not propose to set out detailed rules for firms to apply.  Rather, it will amend the FIT section of the FCA Handbook “so that its application and relevance for firms’ assessments is readily apparent”.  By contrast, the PRA proposes to make general rules in due course.

• Although the regulators differ slightly on their approach to general guidance, both regulators will require firms to (1) undertake a criminal records check before appointing a person to a certification function or a SMF and (2) take up references covering the last five years of the individual’s employment history for the same purpose.  Firms providing references will be required to disclose whether an individual breached a Conduct Rule, the basis for the firm’s conclusions, and any disciplinary action taken as a result.  This is a further expansion in the importance of references for individuals applying for jobs in the financial service industry.

• The FCA’s proposed scope for individuals subject to the certification regime includes ‘material risk takers’ (i.e. individuals subject to the remuneration code); anyone who would have been a ‘significant influence function’ under APER but is not a SMF; customer-facing roles that have qualification requirements, as set out the Training and Competence Sourcebook section of the FCA Handbook; and anyone who supervises or manages another certified person.  However, only ‘material risk takers’ will be certified persons within the PRA certification regime, with certain exceptions.

• If a firm refuses to renew the certificate of an individual, it will be required to “take reasonable care to ensure the individual ceases to perform the certification function in question”.  Clearly, the reasonableness of the removal of the certification will be key for the purposes of any unfair dismissal claims arising.

Impact on non-banks

• Prior to the release of the consultation paper, the FCA had indicated that it was considering the changes that it would make to the approved persons regime for non-banks in the light of the changes for banks set out in the Banking Reform Act.  It would appear, at first sight, that those changes for non-banks are relatively limited.  Footnote 2 of the CP on accountability states: “Other regulated firms are not affected by the changes“.  As a result, the regulatory systems for individuals in respect of banks and non-banks will be quite different for the foreseeable future.

The deadline for responses to the two consultations is 31 October 2014.

Thomas Ogg

In recent days, two pieces of news related to the most controversial elements of the Remuneration Code have emerged: clawback, and the bonus cap.  The Remuneration Code applies to the variable remuneration (i.e. bonus) of certain employees of banks, building societies, investment firms, and some overseas firms of a similar nature.

Clawback

Following the conclusion of the PRA’s consultation on “clawback”, the final instrument amending SYSC 19A (the Remuneration Code section of the PRA and FCA Handbooks) has been published by the PRA.  It is available here.

Clawback is a contractual mechanism whereby a firm may require repayment of remuneration already paid to an employee.  Under the proposals, variable remuneration (only) must be subject to clawback for a period of at least seven years from the date on which it was awarded.

The rules will only apply to PRA-regulated firms, which is a smaller group that to which the Remuneration Code applies generally.  For example, although the Code applies to all investment firms, only nine of the biggest investment firms are PRA-regulated. 

The key rule will be SYSC 19A.3.51B R (see the instrument):

Clearly, firms will struggle with phrases such as ‘all reasonable efforts’, ‘reasonable evidence’, ‘all relevant factors’ and ‘to what extent it is reasonable’.  For an in-depth discussion of the issues relating to clawback (including some of those terms), see Richard Leiper’s excellent article in the ELA Briefing (£).   The PRA’s instrument comes into force from 1 January 2015, and applies only to remuneration awarded after that date.

The Bonus Cap

At present, employees subject to the Remuneration Code may only be awarded a bonus that is no more than 100% of salary: see SYSC 19A.3.44 R.  However, a firm may award bonuses of 200% of salary, so long as the shareholders of the firm consent in accordance with the procedure set out in SYSC 19A.3.44B R.  The procedure requires, among other things, that 66% of the shareholders agree to the higher cap, or 75% if less than 50% of the shareholders are represented at the vote (as measured by voting power, rather than the number of shareholders).  The procedure is transposed from article 94(1)(g)(ii) of CRD4.

The European Banking Authority has now issued a Q&A on the precise mechanisms to be adopted at such a shareholder meeting.  It should be stressed, however, that the Q&As do not have the force of law, nor do they have ‘comply or explain’ status.  However, they may be of persuasive value in any future proceedings, and the Commission has a role in the drafting of the Q&As.   Two issues are usefully fleshed out by the Q&As:

First, there are points as to the specific procedure to be adopted at a shareholder meeting:

…without prejudice to national law, it should be noted that to determine what proportion of the share/ownership rights is “represented” as required by CRD, a poll vote should actually take place at the relevant shareholder meeting (even if the outcome of such a vote may appear obvious from a show of hands and/or any proxies received). In line with the applicable company law, firms should make it clear to shareholders/owners how each form of conduct (voting for or against, sending a proxy, abstaining, attending but not voting etc.) will be treated for the purpose of being represented. The meaning of being “represented” is the same for the threshold test (i.e. the 50% test) as for the majority test (i.e. the 66% or 75% test).

Voting results should be duly documented and disclosed.

Second, the issue of what to do with the votes of employees whose remuneration is at stake in the vote is addressed.  CRD4 and SYSC 19A.3.44B R (4) make clear that those employees are not to be permitted to participate in the vote on the bonus cap.  Helpfully, the Q&A states that the voting rights of those employees should not be counted in relation to the denominator, either.  In other words, when calculating whether a 50%, 66% or 75% threshold has been reached, the voting rights of those employees should be ignored entirely. 

Thomas Ogg

The Equality and Human Rights Commission has today released guidance entitled Appointments to Boards and Equality Law, written to help companies and others understand what steps are permitted in order to increase the representation of women at board level.

The most important points to note:

• Companies may select on grounds of sex if two candidates for a position are assessed to be of equal merit and where only one has a protected characteristics (e.g. gender) which is underrepresented in the company: section 159 of the Equality Act 2010.  Otherwise, positive discrimination is unlawful.

• Companies may also take positive action to promote participation by women (and persons with other protected characteristics) if the (a) participation in a particular activity (such as holding a directorship in a particular company) is particularly low amongst persons sharing a certain protected characteristic, and (b) the aim of the positive action is to enable or encourage persons with that protected characteristic to take up that activity.

Examples of lawful positive action provided by the EHRC are (page 8 of the guidance):

The guidance should therefore be helpful to companies and other bodies who worry about falling foul of equalities legislation, which is easily done.  See, for example, the prominent political blogger Guido Fawkes, who it appears was diligent enough to read page 10 of the guidance, which notes that all-women shortlists are unlawful under equalities legislation – and excitedly wrote a post on the guidance.  He failed, however, to reach page 11 of the EHRC guidance, which outlines the special provisions for political parties (until 2030) which permit the use of all-women shortlists by registered political parties in relation to elections to government (see sections 104 and 105 of the Equality Act 2010).

Thomas Ogg

UPDATE:

Guido Fawkes has gamely updated his blog post to reflect the legal position set out above.  This blog was referred to as being written by  “people who seem to know what they are talking about“, which is as good an epithet for this blog as we could hope for.