COVID-19: PRA Guidance for Banks

Posted on 02 April 2020

On Monday evening the Prudential Regulation Authority ("PRA") wrote to the seven largest UK retail banks asking them to confirm that they will suspend the payment of dividends - and share buy backs – until the end of 2020.  Whilst the letter from the PRA is framed as a request, in practice it is an order from the Regulator and the Banks have all confirmed they will comply.  The point of the order is to ensure that the Banks keep as much cash as they can to lend to a UK economy that is facing perilous times.

In addition the letter states:

"The PRA also expects banks not to pay any cash bonuses to senior staff, including all material risk takers, and is confident that bank boards are already considering and will take any appropriate further actions with regard to the accrual, payment and vesting of variable remuneration over coming months."

The European Banking Authority has also sent a similar instruction, which means it is highly likely that the prohibition on paying cash bonuses will extend far beyond the large retail banks and will also be followed by all major financial institutions.  The sums involved may be relatively immaterial compared to the amounts payable by way of dividends, but the regulators clearly recall the public backlash against bankers receiving large bonuses despite the financial crash of 2008/2009.

Many banks have already paid the 2019 bonuses, but for those where the numbers have been declared, but not yet paid the employees, the cash element will now be suspended.  The declared amount of the bonus will now be a contractual entitlement of the employees, a bank will be in breach of contract if it seeks to reduce the amount, but the timing of that payment is entirely up in the air.  In addition, the PRA's letter does not address whether the usual Remuneration Code rules on deferred compensation ("malus") will apply to the suspended cash element.  Normally, deferred compensation is at risk of reduction if information subsequently comes to the Bank's attention.  Ordinarily, the cash element of a bonus is only at risk of reduction if it can be shown there was misconduct by an individual employee, or a major failure in risk management for which they bear some responsibility (known as "clawback").

Like so much of the response to the extraordinary circumstances of the COVID-19 pandemic, it is likely that we will be negotiating the consequences of this decision for months and years to come.

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