Access to Employment

February 5th, 2015 by James Goudie QC

What proof of linguistic knowledge should be required in order to be able to access employment in the public service?  That was the issue before the CJEU in Case C-317/14, European Commission v Kingdom of Belgium, in which Judgment was given on 5 February 2015.

All the provisions of the TFEU relating to freedom of movement for persons are intended to facilitate the pursuit by nationals of the Member States of occupational activities of all kinds throughout the European Union, and preclude measures which might place nationals of Member States at a disadvantage if they wish to pursue an economic activity in another Member State.  Those provisions thus preclude any measure which, albeit applicable without discrimination on grounds of nationality, is liable to hinder or render less attractive the exercise by EU nationals of the fundamental freedoms guaranteed by the Treaty. However, Member States are entitled to lay down the conditions relating to the linguistic knowledge required by reason of the nature of the post to be filled.  Nonetheless, the right to require a certain level of knowledge of a language in view of the nature of the post must not encroach upon the free movement of workers. The requirements under measures intended to implement that right must not in any circumstances be disproportionate to the aim pursued and the manner in which they are applied must not bring about discrimination against nationals of other Member States. Read more »

 

Bankers’ remuneration: is fixed pay now to be regulated too?

November 21st, 2014 by Tom Ogg

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 »

 

Conduct and disability

November 20th, 2014 by James Goudie QC

Was there gross misconduct?  If there was, did it justify dismissal?  Those were issues before Judge Eady QC in Burdett v Aviva Employment Services Ltd, UKEAT/0439/13/JOJ, a case concerned with both unfair dismissal and discrimination arising from disability.  The employee had committed assaults in the workplace.  However, this was because of his disability.  He suffered from a paranoid schizophrenic illness.  The ET was judged to have been in error in finding gross misconduct.  They had failed to engage with the question of blameworthiness.  The ET was also found to have been in error in assuming that dismissal will necessarily fall within the range of reasonable responses in a gross misconduct case. Read more »

 

Local authority powers to suspend and dismiss teachers

October 17th, 2014 by Tom Ogg

[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 »

 

‘Wrotham Park’ on the march; Court awards 10 Million Euros in negotiating damages for breach of an equitable obligation of confidence

October 3rd, 2014 by Simon Devonshire QC

In CF Partners (UK) LLP –v- Barclays & Ors [2014] EWHC 3049 (Ch), the High Court (Hildyard J) awarded the Claimant 10 million Euros as ‘Wrotham Park’ damages for breach of an equitable obligation of confidence.   So far as the writer is aware, this is the largest award of its kind to date, and is indicative of the increasing judicial willingness to assess damages by reference to the release or licence fee that would have been agreed in a hypothetical negotiation; see my earlier post on the One Step case.    The CF Partners case gives some interesting guidance on the nature and basis of assessment, as well as on breach of confidence as a cause of action more generally. Read more »

 

Proprietary remedies, fiduciary bribes, and dishonest assistants: FHR and Novoship

October 2nd, 2014 by Rupert Paines

Directors and senior employees will often have wide-ranging managerial power over their companies: the ability to commit or disburse company assets, with significant autonomy and limited detailed oversight. Those in such positions will not always act responsibly, and will be attractive targets to others seeking a share of the potential spoils. In two important judgments from July, the Court of Appeal and Supreme Court significantly increased the remedies available against both bribed fiduciaries and those who bribe them. Read more »

 

Calculating Damages for a Lost Career: Sharan Griffin v Plymouth Hospital NHS Trust

September 25th, 2014 by Harini Iyengar

Harini Iyengar comments on the latest Court of Appeal case on the calculation of damages for a lost career

Summary

The Court of Appeal has conducted an interesting analysis of the proper approach towards calculating damages for a lost career, namely the assessment of future loss of earnings and of pension loss in a final salary scheme, in Griffin v Plymouth Hospital NHS Trust [2014] EWCA Civ 1240.  It rejected the challenge to the period of time for which future loss of earnings was compensated, but held that the failure to apply the substantial loss method of calculating pension losses had been an error of law in the circumstances of the case.

The Claimant was a specialist clinical technician in bone densitometry who had fallen ill with systemic lupus erythematosus in 2007 and had resigned in 2009 claiming that Plymouth Hospital NHS Trust had failed to make reasonable adjustments to facilitate her return to work.  She won her claims of constructive unfair dismissal and disability discrimination.  The Claimant’s salary had been £32,753 and, on the basis that she would now work a 25-hour week because of her disease, she was awarded compensation of £105,643.01, which increased on remission to £166,595, and which she appealed again.  The Claimant had very specialist skills for which the NHS provided the only real market in her local area.  Underhill LJ urged HMCTS and / or the Judicial College to give priority to producing an updated version of the 2003 Guidance “Compensation for Loss of Pension Rights – Employment Tribunals” (“the Pensions Guidance”) on the assessment of pension loss in the Employment Tribunal, to take account of important changes in pension law and practice.

The Appeals

The Claimant appealed to the Employment Appeal Tribunal arguing that the award of compensation by the Employment Tribunal (“the Tribunal”) was too low.  Supperstone J remitted the case to the Tribunal to make further findings and then reconsider its award.  The Tribunal increased the award on remission.  Again, the Claimant appealed that the compensation was too low.  HHJ McMullen dismissed that appeal.

Two findings of fact were critical to the Tribunal’s first assessment of financial loss: (1) with reasonable adjustments, Ms Griffin would have continued her employment indefinitely on a 25-hour week; (2) in the events which happened, her return to Plymouth Hospital was now impossible but she could find no other work because no other local employer needed her specialist skills.

The award of the entirety of her past loss of earnings until the date of the hearing on the basis of a 25-hour week was uncontroversial.  Future loss of earnings was more complex.  The original remedy judgment held that the Claimant was “likely” to obtain suitable alternative employment at 25 hours a week in a year’s time, and so awarded her £15,201.48.  It was just an estimate based on an assumption that she would continue to make reasonable efforts to mitigate her loss, and using a mid-point of the probabilities in accordance with Elias LJ’s remarks in Wardle v Credit Agricole Corporate and Investment Bank.  Nevertheless, the Tribunal was silent as to what sort of job it expected the Claimant to obtain and at what level of remuneration.  Supperstone J considered that that had been an error of law and remitted the case to the Tribunal to review its decision on continuing loss of earnings.

On remission, the Tribunal heard no further evidence but relied on the evidence and submissions which had been presented at the first hearing, supplemented by further written and oral submissions.  It noted that the Claimant had applied for positions with pro-rata salaries of £11,000-£22,000 and was satisfied that there were no other positions outside that range which were suitable for her.  She had transferable skills of administrative and clerical natures.  It went on to find that, despite the lack of any evidence as to how she could obtain promotion in an administrative role, she would impress a future employer with her intelligence, capability and determination, she would have obtained a job at £18,000 pro rata, but have progressed to management and earned £25,000 pro rata after five years and £30,000 pro rata after another five years, and after a further two years she would have achieved parity with her job for the Respondent.  This gave a total of £43,196.51 in loss of future earnings.

As for pension loss, the Claimant had been a member of the final salary NHS pension scheme.  At the first remedy hearing, both parties had relied on the Pensions Guidance although – as typically happens – the Claimant had contended for the substantial loss approach and the Respondent for the simplified approach.  Using the simplified approach, the Tribunal assessed pension loss at £32,827.69, based on a finding that the Claimant would be able to join a final salary pension scheme again after four years. On remission, the Tribunal again decided to adopt the simplified loss approach.

Therefore, the issues for the Court of Appeal were: (1) the lawfulness of the Tribunal’s decision to limit her period of future loss to 12 years; and (2) the use of the simplified approach to the assessment of pension loss.

The Period of Loss

The first issue pertaining to the period of loss was whether the Tribunal had been right, on remission, to exclude evidence of subsequent developments.  The second issue was the lawfulness of the finding that she would regain her previous level of earnings after 12 years.

By the date of the remitted remedy hearing, several months had passed since the date on which the first remedy hearing had found that the Claimant would have found work, but she had not.  Instead, she had accepted advice from the Job Centre to take a National Vocational Qualification in Business Administration, which required a work or voluntary placement, and so she had begun a voluntary year-long placement.  She had been refused permission to present documentary evidence to establish these facts.

Before the Court of Appeal, the Claimant relied on Curwen v James and NCP Services Ltd v Topliss to argue that it had been an error of law for the Tribunal to speculate about that which it already knows.  The Respondent contended that Supperstone J had remitted only the issue of what level of earnings the Claimant should expect from the date at which she obtained paid employment, and not the settled finding as to when that date would be.

Admission of New Evidence as to Period of Loss

Underhill LJ distinguished between the situation in which a court or tribunal at first instance is conducting its primary assessment of compensation and the situation in which an appellate court is asked to admit evidence of events occurring subsequent to the primary assessment of compensation.  He said that the principle in Bwalfa and Merthyr Dare Steam Collieries (1891) v Pontypridd Waterworks Co – that in assessing compensation the decision maker must avail himself of all the information at hand, not listen to conjecture on a matter which has become established fact, and not guess when he can calculate – must apply just as much when a tribunal is reconsidering damages as a result of remittal.  The second situation was essentially different, however, as the appellate court approached a case in which a valid final award had been made.  The general approach is that because of the important interest in the finality of litigation, neither party should be able to re-open a final award simply because things had turned out differently from what had been expected.  Nevertheless, Underhill LJ pointed out, that approach was not applied with absolute rigour.  He said the best guidance was that provided by Lord Wilberforce in Mitchell v Mulholland, that “the matter is one of discretion and degree”.  New evidence was likely to be admissible where basic assumptions had been falsified by subsequent events, or where a refusal would affront common sense or a sense of justice, or on other grounds which “must be left to the Court of Appeal”.

The Finding as to the Date on which the Claimant would Obtain New Employment

The Court considered that it was clear from Supperstone J’s judgment that the remitted question pertained to the Claimant’s rate of remuneration in the employment which the Tribunal had found that she would obtain after a year, and that there had been no challenge before Supperstone J as to the date on which she would obtain it.  Whether the Claimant should be allowed to take advantage of the adventitious opportunity of the appeal to adduce fresh evidence was a matter for the discretion of the Tribunal in accordance with the guidance given in Mitchell v Mulholland.  Underhill LJ considered that the documents about the Claimant’s NVQ placement added nothing of significance in regard to the level of job she might in due course hope to obtain or her rate of pay, and the Tribunal had already had a wealth of information from the first hearing about the type of work she might do.  Further, the Claimant had never in fact tried to rely on the documents to challenge the finding as to the date on which she would obtain employment.  The Court of Appeal made clear, however, that even if the Claimant had sought to have the new evidence admitted in order to try and change the finding as to the date on which she would obtain new employment, the question of the date which had been found at the original remedy hearing was a good example of the type of matter falling within a field of uncertainty in which the trial judge’s estimate had been made, which should not be tampered afterwards, in the interests of finality.

The Finding that the Loss would End after Twelve Years

Before the Court of Appeal, the Claimant criticised the Tribunal’s approach to her medical evidence, in particular that it had found she would eventually take on a management role despite the greater stress which that would involve.  Underhill LJ, however, firmly stated that in fact there was nothing in any of the medical evidence which would justify a conclusion that the stress of a management role might mean that the Claimant was incapable of fulfilling such a role.  He accepted a criticism that the Tribunal, whilst refusing the Claimant permission to adduce documentary evidence, had commented on her submission that she was doing a voluntary placement which it inferred was in a stressful environment, but held that this error did not vitiate the Tribunal’s second remedy judgment as a whole.  The Court rejected a submission that the finding of a twelve-year period was perverse and /or inadequately reasoned, because the exercise was inherently based on speculation about the Claimant’s attitude and abilities and the local job market.  Underhill LJ condemned as “hopeless” a submission that the Tribunal had erred in placing too much reliance on the Claimant’s performance as a witness and as an advocate when assessing her abilities and attitudes.  Likewise, a point that the Tribunal had erred by failing to take account of the possibility that the Claimant might have been promoted had she remained at the Respondent failed because she had made no submission on those lines to the Tribunal.

Finally, the Court of Appeal rejected an argument that the Tribunal had erred in law by omitting to use the Ogden Tables to calculate the Claimant’s future loss of earnings.  The point did not arise for determination, because the Court had already held that the Tribunal had lawfully found that she had not suffered a career-long loss.

Whilst expressing sympathy for the Claimant’s serious long-term debilitating disease, Underhill LJ said that the Tribunal was under no obligation to take a pessimistic if not indeed rather demeaning view that her disease prevented her, as a woman of ability and determination, from ever again undertaking a job with some degree of responsibility, particularly once she was freed from the toils of litigation.

Pension Loss

As to pension loss, the Court of Appeal was careful to state that the only issue for them was whether it had been an error of law to use the simplified approach to pension loss instead of the substantial loss approach, and that the judgment should not be treated as an attempt at a comprehensive summary of the Pensions Guidance nor used as a short-cut where different issues arise.  Underhill LJ then reminded himself that in a final salary scheme the employee’s entitlement is simply to the benefits and there is no entitlement to the employer’s pension contributions.  The loss takes the form of loss of enhancement to accrued pension rights and loss of acquisition of future rights.  For loss of enhancement, actuarial tables are provided in the Pensions Guidance.  Only the latter head of loss should be affected by the choice between the simplified and substantial loss approaches.  The essential difference between the two approaches is that when assessing pension losses arising in the period after termination of employment, the simplified approach measures loss by reference to the employer’s pension contributions, regardless of the fact that it was a final salary pension scheme.  The substantial loss approach requires the use of actuarial tables comparable to the Ogden Tables.  After using the tables, the Tribunal generally has to apply withdrawal factors to reflect the probability that the particular employee before it would have left employment before retirement age other than for the usual risks of mortality and disability.

Underhill LJ noted in passing that he respectfully agreed with Elias P’s criticism of the Pensions Guidance in Network Rail Infrastructure Ltd v Booth, that, where an employee had lost employment with a final salary pension scheme but obtained new employment with a money purchase pension scheme, it was unnatural to take account of the new employer’s pension contributions when assessing loss of earnings, but to disregard them when calculating pension loss, as the Pensions Guidance required.

For Underhill LJ, the tendency of the Pensions Guidance to limit the use of the substantial loss approach to cases, in which the employment had continued for a long time, the employment was very stable, and the employee had reached a certain age where she was less likely to move on, was explained by the fact that those three factors increased the likelihood of the employee still being an active member of the pension scheme at retirement – which would justify an assumption of “whole-career loss”.  Such an employee was to be contrasted with an employee who probably would have changed jobs anyway after a couple of years.

Pragmatically, the Court of Appeal pointed out that if the substantial loss approach were taken and then a massive, intuitive, withdrawal factor had to be applied, the level of uncertainty would beg the question whether there had been any point in attempting to assess whole-career loss in the first place.

Underhill LJ confessed to finding that section of the Pensions Guidance “a little opaque” but considered it clear that the substantial loss approach was recommended only where there was a sufficiently firm basis for the necessary assumptions, eg where the employee had already found new employment, or it had been determined that the employee would never find new employment, or a date had been found by which the employee would have found new employment.

Underhill LJ criticised the Tribunal for rejecting the substantial loss approach solely on the basis that, when considering whether the Claimant had been in the Respondent’s employment “for a considerable time” it said that that factor did not apply where the Claimant, aged 34, was still a long way from retirement.  The Tribunal had failed to address the question of how likely the Claimant had been to stay in that employment until retirement.  On the facts of the particular case, he pointed out, the Claimant was an employee with a specialist skill for which the principal, if not indeed the only, market was in the NHS, so she was likely to remain in the NHS for her entire career despite being 34.  Furthermore, her medical condition made her cautious about embarking on a major career change.

Noting that the Tribunal had applied a withdrawal factor of 20% to the calculation of loss of enhancement, the Court of Appeal said that that finding, even though made for a different purpose, was inconsistent with the finding that the uncertainties of the Claimant’s continued NHS employment were so great as to rule out the substantial loss approach to loss of future pension rights.  Underhill LJ relied on the Network Rail case to back up his views.

The Court of Appeal further criticised the Tribunal for assessing the likelihood of the Claimant eventually regaining her pre-dismissal earnings after 12 years instead of doing its proper task of calculating her pension losses.

Underhill LJ observed that the Tribunal had found that the Claimant would have obtained employment with the benefit of a final salary pension scheme after four years, but had not relied on that factor when rejecting the substantial loss approach.  The Court of Appeal considered that the Tribunal had had no proper basis for rejecting the expert’s unchallenged evidence that it had been unlikely that any future employer would offer a final salary scheme as most of these are closed to new entrants.

The Court of Appeal held that the Tribunal misdirected itself in the reasons it gave for applying the simplified loss approach and that in the particular circumstances of the case and in the light of other findings, the only correct conclusion was to apply the substantial loss approach.

The Pensions Guidance

In conclusion, Underhill LJ pointed out that although the Pensions Guidance was extremely valuable, it had no statutory force and its recommendations are “not gospel”.  Further, there have been several important changes in pension law since 2003, other changes are forthcoming, and the current Pensions Guidance is out of date.  He urged HMCTS and the Judicial College to review and update the Pensions Guidance as a priority.

Commentary

As fewer and fewer new employees are able to join final salary pension schemes, public sector employees are becoming more and more aware of the very valuable pension rights which they enjoy, which they simply cannot replicate elsewhere.  Therefore, there are many incentives for public sector employees to litigate aggressively on pensions issues.

The current cap on compensation for unfair dismissal is £76,574, although, for dismissals after 29 July 2013, a Tribunal may not award a successful Claimant more than one year’s gross earnings.  This case, involving disability discrimination, illustrates the increasing discrepancy between compensation for unfair dismissal claims and compensation for discrimination or whistleblowing claims.

Nevertheless, in practice, the cap on unfair dismissal compensation has created a dangerous tendency for parties in employment litigation to start with a rough and ready, and rather short-term, approach towards the analysis of the future losses caused by a statutory tort.  Given the current high rate of settlement in employment disputes, it is unsurprising that parties are slow to expend time and costs on a very detailed schedule of loss at an early stage in proceedings.  Likewise, given the fact that many cases do settle in the period between the liability and the remedy hearing, parties, for good reasons, often dally in preparing and sharing their rigorous calculations of loss of future earnings and pension loss.

The assessment of future loss of earnings and of pension loss is a complicated and time-consuming matter, which requires the careful collection of relevant evidence, its analysis, an attempt to speculate about the future in a logical and rational manner, and a series of precise mathematical calculations.  It is refreshing to the see the Court of Appeal grappling with the outdated and awkward Pensions Guidance, which practitioners have found so difficult to apply in practice over the years.  As Underhill LJ points out, an updated version of the Pensions Guidance is overdue and will be very helpful to the Employment Tribunals, employers, employees, and their advisers.

As with any interesting appellate judgment, the implications of this case are limited by its specific facts, and other questions remain unanswered – in particular whether it would be an error of law not to use the Ogden Tables when assessing compensation in a case of lifetime career loss.

 

Updated UK Corporate Governance Code: Remuneration Changes

September 17th, 2014 by Tom Ogg

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

 

 

 

The new conduct and remuneration regime for bankers: “Making individual accountability a reality”

July 30th, 2014 by Tom 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

 

Remuneration Code: Clawback and the Bonus Cap

July 28th, 2014 by Tom 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):

A firm must make all reasonable efforts to recover an appropriate amount corresponding to some or all vested variable remuneration where either of the following circumstances arise during the period in which clawback applies:

(a)  there is reasonable evidence of employee misbehaviour or material error; or

(b)  the firm or the relevant business unit suffers a material failure of risk management.

A firm must take into account all relevant factors (including, where the circumstances described in (b) arise, the proximity of the employee to the failure of risk-management in question and the employee’s level of responsibility) in deciding whether and to what extent it is reasonable to seek recovery of any or all of their vested variable remuneration. 

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