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24 Jul 2014

Double Jeopardy: Three-year time bar on regulatory enforcement proceedings increased to six years


Six years to clawback

In March we brought you news of the Prudential Regulation Authority's (PRA's) proposal to apply clawback to bonuses and other forms of variable remuneration for up to six years post-vesting (employment alert PRA issues Consultation on Clawback).

We highlighted numerous practical issues with the proposals, including how to manage its retrospective application and the requirement to amend employment contracts to allow for clawback.

One of the biggest stings in the clawback tail was that, in reality, given the lengthy vesting periods that apply to most variable pay awards - in some cases up to five years post-grant - clawback could be applied for up to 11 years after the date on which a bonus or other variable incentive was first awarded.

The PRA has yet to issue its response to the consultation feedback, but is expected to do so by August.

Six years to bring disciplinary proceedings

From today, the Regulators will further tighten the noose on badly behaved individuals by increasing the limitation period for the PRA, or the Financial Conduct Authority (FCA), to bring disciplinary proceedings.

The PRA/FCA will be able to take action against an individual in respect of any misconduct occurring on or after today for up to six years from the date on which the PRA/FCA:

(a) Knew of the misconduct, or

(b) Had information from which the misconduct can reasonably be inferred.

So what this means is that the time period runs from six years from the first date the PRA/FCA could have been aware of the misconduct, not the date of the misconduct itself.

Previously, the time limit was 3 years, or 2 years for misconduct prior to 20 June 2012.

Making accountability a reality or a practical nightmare?

The change is the latest in the Regulators' on-going campaign to "cut through the accountability firewall" and impose "tough penalties".

For individuals and employers alike, the spectre of regulatory action for individual misconduct will now be hanging over them for incredibly long periods of time, potentially indefinitely. This raises a number of potential issues:

  • The time pressure on Regulators to proceed is now significantly reduced, which is likely to lead to longer and more intricate investigations. This will inevitably have a substantial costs impact and prove a serious distraction for management teams.
  • Individuals may find themselves the subject of regulatory proceedings relating to conduct that occurred significantly earlier in their career. This will impact reputations and could make prospective employers wary of hiring anyone with the Sword of Damacles hanging over them for lengthy periods.
  • Obtaining evidence of (non)compliance is much harder if the allegations are very old - witnesses may have moved on, and documents lost. Most document retention policies allow for the destruction of data after six years, in line with the Information Commissioner's guidance - it may have to be kept for much longer now.
  • This will inevitably be yet another factor to take into account when amending employment contracts to allow for six years' worth of clawback (assuming the PRA's proposals go ahead).


Kiersten Lucas

Kiersten Lucas

T:  +971 4 407 3993 M:  +971 52 577 7731 Email Kiersten | Vcard Office:  Dubai

Paul Reeves

Paul Reeves
Head of employment

T:  +44 20 7809 2916 M:  +44 7919 694 135 Email Paul | Vcard Office:  London

Alan Ward

Alan Ward
Senior associate

T:  +44 20 7809 2295 M:  Email Alan | Vcard Office:  London