Shorter deferral, unchanged clawback

Minimum deferral for material risk takers in dual-regulated firms is now four years. The minimum clawback period is still seven. A year after the reforms took effect, firms designing the first awards under the new rules need to plan for the gap between the two.

The reforms (PRA PS21/25 and FCA PS25/15) came into force on 16 October 2025. They apply generally to performance years beginning on or after that date. Firms may also apply selected changes to a performance year already in progress and to awards made but not yet vested.

What changed

The deferral period. The tiered minimum periods of seven, five and four years have gone. There is now a single minimum of four years for every material risk taker outside the individual proportionality exclusion, including those performing senior management functions. Vesting must still be no faster than pro rata, and the period must still reflect the business cycle and the risks of the role.

The amount deferred. The proportion deferred is now calculated on a marginal basis: 40 per cent of the first £660,000 of variable remuneration, and 60 per cent of any amount above that figure. Before the reforms, the higher rate applied to the whole award once it reached £500,000.

Instruments. At least half of variable remuneration must still be delivered in instruments, but the requirement no longer applies separately to the upfront and deferred portions. The PRA regards a higher proportion of instruments in the deferred portion as good practice. It no longer expects a retention period on deferred instruments, and its one-year expectation now applies only to instruments awarded upfront.

Proportionality. A material risk taker whose variable remuneration is no more than 33 per cent of total remuneration, and whose total remuneration is no more than £660,000, falls outside the deferral, instrument and retention rules. The two £660,000 figures do different jobs. One caps total remuneration for the exclusion; the other marks the point at which the higher deferral rate begins.

What did not change

The clawback period did not move. For a material risk taker outside the individual exclusion, variable remuneration must remain subject to clawback for at least seven years from the date of award. For a senior manager, the firm must be able to extend the period to ten years where an investigation is under way.

More of the clawback period therefore falls after vesting. Before the reforms, a firm that discovered a problem in year five could often cancel an unvested award. It may now have to recover remuneration that has already been paid or delivered.

That is a different exercise, legally and practically. Recovery depends on the contractual machinery, the executive’s assets and the firm’s willingness to pursue a former employee.

Responsibility by role

The reforms also changed the adjustment rules. Firms must set specific criteria for adjusting remuneration before and after award, and those criteria must cover circumstances in which, by virtue of role or seniority, it is reasonable to hold a material risk taker responsible for a risk event. Where the criteria are met, the firm must consider an adjustment. Accountability for a failure does not stop with the individual closest to it.

Existing awards

Regulatory permission does not amend a contract. Applying the new rules to existing awards depends on the plan rules and any participant consent requirements. The reforms permit simplification but do not require it, and a firm may retain longer periods. Nor does compliance with the regulatory minimum make a clawback demand enforceable against a particular individual; that depends on the terms of the award.

The reforms were presented as simplification. For the firm that has to enforce them, however, they mean that clawback will more often involve recovery rather than cancellation. Recovery is the harder task.