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Employment and Financial Services Quarterly Update - February 2018

  • United Kingdom
  • Employment law
  • Financial institutions

13-02-2018

Welcome to our quarterly employment and financial services update, focusing on recent developments and changes in the pipeline for the financial services sector.

In early December, the FCA and the PRA published consultation papers on transitioning individuals to the extended senior managers and certification regime (SMCR). Read our briefing on these consultations.

Firms will be readying themselves for implementation of the extended SMCR (now expected to be mid to late 2019 for FSMA-authorised firms, 10 December 2018 for insurers) and reviewing all employment and compliance documentation. While doing so, it would be a good time to ensure that bonus award documentation is also compliant from both a legal and regulatory standpoint. Read our briefing on the legal and regulatory issues faced with bonus awards.

Read other employment news relevant to the financial services sector in the last quarter:

News update

Brexit

FCA statement on EU withdrawal

The FCA has published a statement on the UK’s withdrawal from the EU alongside a statement from HM Treasury setting out its plans to ensure continuity in financial services in the event of a no-deal scenario. The FCA reminds firms that at this time the UK remains a member state of the EU and therefore all rights and obligations derived from EU law continue to apply. Firms must abide by their obligations and continue with implementation plans for legislation that is still to come into effect.

Read the FCA statement 

Read HM treasury’s written statement

The PRA and Bank of England have separately set out details of their approach here

Senior managers and certification regime

Law Society response to consultation: view on legal function

The Law Society has focused its response to the FCA’s consultation on the extension of the SMCR on whether the legal function should be included. The Society strongly reiterates its view that the legal function should be excluded from the scope of the SMCR. It argues that retaining the legal function within the regime raises significant risks for clients and solicitors, including:

  • Erosion of legal professional privilege
  • In house lawyers being placed in positions of conflict with their employers; and
  • The prospect of dual regulation for some lawyers

Read The Law Society’s response

SMCR for insurers

The government has announced the extension of the SMCR to insurers and reinsurers will come into force on 10 December 2018.

The PRA has published policy statement PS1/18 together with updated supervisory statement SS35/15 proposing amendments to the senior insurance managers regime and a proposal to strengthen governance through requiring insurers to take steps to encourage board diversity. Read our briefing. The rules can be read here.

Conduct and Culture

Proposed changes to UK corporate governance code

Over the summer, following its earlier Green Paper, the Government announced changes to strengthen corporate governance (see our previous HR e-brief). A critical part of the proposals was for the Financial Reporting Council (FRC) to recommend revisions to the UK Corporate Governance Code in order that it remains fit for purpose and continues to promote improvement in the quality of governance. The FRC has now published a consultation regarding those proposed changes to the Code (read it here).

Key aspects of the revisions include: executive pay and pay ratios; workforce engagement; encouraging greater board diversity; other matters including whistleblowing and the role of senior personnel.

The Government invited the FRC to revise the Corporate Governance Code in relation to executive pay. Separately, the Government proposes to introduce secondary legislation to require listed companies to annually report the ratio of CEO pay to the average pay of the company’s UK workforce.

The proposed FRC revisions on remuneration in the Code and accompanying Guidance come hot on the heels of the Investment Association’s (IA) updated Principles of Remuneration, which were published in November (see below). Listed companies will have kept abreast of developments in this area and the Principles and the proposed revisions are unlikely to come as any surprise.

The FRC proposes:

  • Extending the recommended minimum vesting and post-vesting holding period for executive share awards from three to five years
  • An expanded remit for remuneration committees to engage with employees and oversee pay and incentives across the wider workforce
  • An expanded remit for the remuneration committee for oversight of company remuneration and wider workforce policies, taking these into account when setting remuneration policy for directors
  • A requirement that the remuneration committee chair should have served for at least 12 months on a remuneration committee before taking on the role
  • A requirement that remuneration committees demonstrate through improved reporting how company policies and practices incorporate the high level requirements of the relevant Principles (the more detailed Provisions are generally ‘comply or explain’). This includes the Government’s request that the Code includes a reporting requirement for companies to disclose what workforce engagement has taken place to explain how executive remuneration aligns with wider company pay policy
  • A requirement that boards should be able to override formulaic remuneration outcomes and the incorporation of a provision enabling the company to apply malus and clawback to share awards and specify the circumstances when it would be appropriate to do so
  • A requirement that when more than 20% of votes have been cast against a resolution the company should explain what actions it intends to take to consult with shareholders to understand the reasons. No later than six months after the vote, an update should be published

The IA has welcomed the Government’s proposal to require disclosure of pay ratios and has encouraged all companies to voluntarily disclose pay ratios in 2018. The updated IA Principles calls on companies to explain reporting obligations (such as on gender pay or employee pay ratios) in the context of the business and why these numbers are appropriate. The FRC will monitor the planned secondary legislation on pay ratios and will amend the remuneration section of the Code as appropriate.

In addition, at the Government’s request, in October 2017 the IA wrote to FTSE All-Share companies who received shareholder opposition to pay awards of 20% or more. These companies are being given an opportunity to provide a public explanation of what they are doing to address shareholder concerns before the Public Register of shareholder votes (to be run by the IA) goes live.

Remuneration

Investment Association Principles of Remuneration 2018

The Investment Association (IA) has published its revised principles of remuneration to apply to the 2018 performance year.

Read the IA’s letter introducing the principles 

The main changes to the principles are:

  • Relocation benefits – IA members expect relocation benefits to be disclosed at the time of appointment, be in place for a limited time and fully detailed in the Remuneration Report
  • Annual bonus – the IA has updated this section to reflect members’ expectation that bonus targets are disclosed within twelve months of the bonus payment, and that deferral is expected for any bonus opportunity greater than 100% of salary
  • Long-term incentive schemes – the IA has re-organised this section to give a clearer picture of members’ attitudes to specific examples of schemes

PRA updates Solvency II remuneration policy

The PRA has published an updated remuneration policy statement reporting template for PRA category 1 and 2 firms. Access the updated template 

Diversity

EHRC consults on gender pay gap enforcement strategy

The Equality and Human Rights Commission (EHRC) has published a consultation on its proposals for enforcement against large private, voluntary and public sector employers who do not comply with the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017. The EHRC will first attempt to engage with employers in breach but will also be ready to use wider enforcement powers, including unlimited fines in appropriate cases. On publishing the consultation the Chief Executive of the EHRC commented ‘We will educate employers about their responsibilities and hope to see widespread compliance. If that doesn’t happen, we won’t hesitate to resort to our more stringent legal powers - including enforcing unlimited fines and convictions’.

Read the EHRC’s consultation 

Gender pay gap reports submitted by financial sector firms can be accessed on the government website

Gender pay gap toolkit

The Government Equalities Office and the Chartered Institute of Personnel and Development have produced an action toolkit for employers to assist them in understanding and addressing any pay gap.

The toolkit can be accessed here.

Other developments

Whistleblowing

Lord Cromwell, the chairman of the All-Party Parliamentary Group on Fair Business Banking, has stated that the UK should follow the US system of awarding to the whistleblower a share of the fine imposed upon an infringing institution. Lord Cromwell’s comments are set against reports that whistleblowers in the banking sector have been subject to intimidation and persecution despite reforms.

Read a report in The Week on treatment of whistleblowers in the banking industry.

There has been a recent spike in reported whistleblowing claims, some of which are highlighted in Cases below.

Enforcement

The Bank of England has published a consultation (closing date 2 February 2018) setting out how a new Enforcement Decision Making Committee will operate. It is proposed that the EDMC will strengthen the independence and robustness of the decision-making process by the Bank in any contested enforcement cases. Read the consultation

General Data Protection Regulation

The FCA and the Information Commissioner’s Office have jointly published a short update on the GDPR, which will apply in the UK from 25 May 2018. Read the statement 

Case update

Parsons v Airplus International Limited [2017] UKEAT 0111/17

This case concerns the ingredients that are necessary to constitute a qualifying disclosure in whistleblowing cases. In this case Ms Parsons, a legal and compliance officer, expressed various concerns about Airbus not having a current consumer credit licence and that it did not have a money laundering reporting officer. Prior to this she had raised concerns about her personal liability if Airbus was found to be in breach of its legal obligations.

Concerns were then raised about Ms Parsons’ poor performance and rude behaviour and she was dismissed after 5 weeks, the stated reason being ‘cultural misfit’. She claimed she had been dismissed for having made protected disclosures.

The EAT noted the tribunal had found as a fact that Ms Parsons had solely made her disclosures in her own self-interest and not in the public interest. The EAT accepted that in some cases a disclosure can be in both self interest and public interest but this was not the case here.

The EAT also upheld the tribunal’s finding that the reason for the dismissal was not the disclosure but Ms Parsons’ behaviour which was rude and confrontational.

The decision underlines the importance of making clear what the reasons for dismissal are, particularly in the case of an individual carrying out compliance functions who will raise compliance concerns in the course of their job.

Read the report.

Marsh v Ministry of Justice [2017] EWHC 1040

In this case, the High Court awarded over £286,000 in damages to an employee who was suspended on full pay for a prolonged period of time pending an investigation. The lengthy suspension exacerbated his depression, rendering him unfit to return to work. Read the case 

It is established law that suspension pending a disciplinary investigation should be kept as short as possible and under regular review but in the financial services sector, investigations are often very lengthy and detailed.

Suspension should not however be a kneejerk reaction (Agoreyo v London Borough of Lambeth) and firms should consider whether there is an alternative option, such as transferring the employee.

As a suspension will often prove to be career-ending, firms should regularly take stock of any suspension in force and consider whether, in all the circumstances, the suspension should continue.

Wilsons Solicitors LLP v Roberts [2018] EWCA Civ 52

The Court of Appeal in this case held that whilst the resignation of Mr Roberts, the managing partner of a limited liability partnership, was not effective under LLP law this did not determine what loss may be attributable to unlawful detriments suffered as a result of his having made protected disclosures in the context of a whistleblowing claim. If the unlawful victimisation of Mr Roberts made his position untenable and led him to withdraw his labour, thereby exposing him to the likelihood of expulsion this was a natural and likely consequence of the unlawful conduct.

Mr Roberts was able to proceed with his whistleblowing claim for £3.4 million (comprised mainly of future loss of earnings).

Read the case report 

Malik v Cenkos Securities plc [2018] UKEAT 0100/17

This whistleblowing EAT decision confirms that the knowledge and motivation of another party should not be attributed to the decision maker. The EAT thought that it was not clear how a decision maker, who did not have any personal knowledge of the protected disclosure, could be said to be materially influenced by it to make the decision.

Separately, the EAT also addressed the issue of suspension in Agoreyo (see Marsh, above). It rejected the argument that suspension was a kneejerk reaction in this case as there had been a measured escalation of an investigation over a period of days. The EAT accepted that in the financial services industry suspension has certain consequences, imposed by regulation. However the fact that there are these consequences does not mean that suspension can never be imposed. The question in each case will be whether there is a proper basis for suspending the employee.

Firms facing whistleblowing claims may be interested to note that the tribunal hearing in this case lasted 14 days with 350 pages of witness statements and a bundle running to several thousand pages.

Read the case report 

 

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