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05 Jan 2017

The new regime for "buy-outs" – now in force


The new rules that apply to "buy-out" contracts concluded on or after 1 January 2017 are now in force. In Q4 of 2016, the Prudential Regulation Authority (PRA) published a policy paper which contained its final rules on the treatment of "buy-outs" of variable pay.

In our previous alert, we explained that, typically, employees lose any unvested equity awards and any unpaid cash bonuses when they resign.  Within the financial services sector, new employers often "buy-out" forfeited awards.  The PRA issued a consultation paper on "buy-outs" in January 2016.  The purpose of the consultation was to gather industry views on a mechanism to ensure that where awards are bought out, any malus and clawback provisions that related to the original award continued to apply to the bought out award.  The PRA considered that buy-outs put employees who leave an employer in a better position than those who stay.  Furthermore, even if the new employer subjects the buy-out award to its own malus and clawback provisions, the employee benefits from a clean slate in respect of any historic events (i.e. whilst the employee was with the previous employer).

So, now that we have the final rules, what do they mean in practice?

Who do the new rules apply to?

The rules apply to Material Risk Takers (MRTs) moving from one Level 1 or 2 PRA regulated firm to another. Under the proportionality framework, the buy-out rules do not need to be applied to Level 3 PRA regulated firms.

What now needs to happen?

First, a new employing firm has to get a remuneration statement from the employee before it can agree to provide the employee with a buy-out.  A remuneration statement must be provided by the employee's previous employing firm, on his request.  It will set out the periods during which the individual was an MRT, the amount of unvested variable remuneration that could be bought out for the period that the individual was an MRT, and the duration of any retention, deferral, performance and clawback arrangements applicable to any such remuneration.

Any buy-out cannot be greater than the amount of unvested variable remuneration set out in the remuneration statement.  The new employer has to give the previous employer certain details of the buy-out such as the duration of the retention, deferral, performance and clawback arrangements that apply to the bought out award. 

Once the buy-out award has been granted, if the previous employer determines that it would have operated malus/clawback had the employee remained in employment, he must notify the new employer and the employee of that decision within 14 working days of making it.  The employee will be able to make representations to his former employer as to why malus or clawback shouldn't apply and the former employer must take any representations made into account when determining whether to apply malus or clawback.

The new employer must, within specified time limits, reduce or make reasonable efforts to recover any amounts from the employee to reflect the previous employer's determination.

The new employer can apply for a waiver where it believes the former employer's decision to apply malus or clawback has been manifestly unfair or unreasonable.  However, the policy paper issued with the new rules makes it clear that whilst applications for a waiver will be considered, the steer from the PRA is that firms are unlikely to need to use the waiver process.

The rules apply to successive moves – so where a bought out award is again bought out, the regime continues to apply (as above).


Despite the PRA acknowledging the industry view that the new rules are going to be difficult to operate in practice it has pressed ahead. With the new rules now in force and with tight deadlines and strict processes to follow, it will be interesting to see if firms will be less inclined to offer buy-outs than they have previously. 

Please speak to your usual Stephenson Harwood contact if you have any queries.



Barbara Allen

Barbara Allen

T:  +44 20 7809 2231 M:  +44 7771 531 553 Email Barbara | Vcard Office:  London

Kiersten Lucas

Kiersten Lucas

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