October 31, 2014
Comments on the PRA and the FCA’s Consultation Paper“Strengthening the alignment of risk and reward: new remuneration rules”
Japanese Bankers Association
We, the Japanese Bankers Association, would like to express our gratitude for thisopportunity to comment on the consultation paper “Strengthening the alignment of risk
and reward: new remuneration rules” released on July 30, 2014 by the Prudential
Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
We hope that our comments below will be of assistance and offer an additional point ofreference as you work towards finalising the rules.
[General Comment]
It is understood that international discussions have been initiated on remuneration
arrangements that may incentivise excessive risk taking activities by financial
institutions as well as responsibilities of senior managers. In response, measures to betaken are being considered at a jurisdiction level.
While recognising the necessity of remuneration rules, the proposed rules may increase
the difficulty in attracting competent talent to the UK financial industry, which would
lead to an uncompetitive environment for the UK, both internationally and within theEU. The proposed rules, in combination with a cap on variable pays set out in the
Capital Requirements Directive IV (CRD IV), may result in a further increase in fixed
pay which is not subject to malus and clawback. This would eventually limit banks'
ability to recoup remuneration through clawback and malus. A substantial amount ofregulatory reforms have been undertaken for bankers’ remuneration; however
outcomes of these reforms have not yet been fully analysed. Given this, reforms,
including those rules proposed in this Consultation Paper, may entail a risk of
producing unintended consequences. Accordingly, it is respectfully requested topostpone a new reform, or to further review such reform, until the impact analysis iscompleted.
In implementing the proposed rules, it is also requested to exclude expatriates from thescope of these requirements taking into account double taxation and legal risks arisingfrom a difference in jurisdictions. Since, generally, the deferral and clawback periods
are longer than the durations of expatriate’s stay, cases where expatriates receive

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variable pay after transferring to other country would increase. Such situation may leadto an increase in risks discussed above. Consequently, imposing more enhanced
requirements than those set forth in the current Remuneration Code should be avoided.
On the other hand, we are in support of retaining the same level of minimum
thresholds that are specified in the current Remuneration Code in Appendix 4 Draft
supervisory statement on Remuneration. If these proposed rules would be implemented,
it is respectfully requested to ensure that these minimum thresholds are applied to bothsenior managers and material risk-takers at the same level as those defined in thecurrent Code.
The Specific Comment section below provides our responses to each question in theConsultation Paper.
[Specific Comment] (Our responses to the questions in the CP)
2. Deferral period of remuneration
Question 1:
Do you agree with the principle of introducing a two-level approach for deferral, withlonger deferral for senior managers?
(Our response)
We are basically in agreement with a proposed two-level approach. However, suchapproach should be introduced as guidance, as opposed to mandating through theregulation. Additionally, expatriates should be excluded from the scope of thisrequirement.
(Reason)We understand the necessity of applying a longer deferral period of remuneration forsenior managers, relative to material risk takers. Since, however, the application of a
two-level approach is not consistent with requirements in other jurisdictions, it isconsidered more acceptable to introduce such requirements in the form of guidance
rather than regulation.
Question 2:
Do you agree with extending the deferral period to seven years for senior managers?
(Our response)
Our view is that, essentially, firms should be allowed to determine the deferral period byaligning to their own risk horizon based on their risk profiles. Since ex-post risk
adjustment is sufficiently ensured by measures such as payments in the form of equity2

or clawback, we are not in support of the proposal to excessively extend the current
deferral period of three to five years. As an alternative, the deferral period should be set
as five years, with a two-year retention period. Additionally, expatriates should beexcluded from the scope of this requirement.
(Reason)We agree that senior managers should be subject to a longer deferral period. However, aseven year deferral period does not necessarily be consistent with all firms’ risk horizon,and hence firms should be able to determine the deferral period in line with their risk
horizon based on their risk profile.
The extension of a deferral period for seven years should be reviewed in light ofbuy-outs proposed in the Consultation Paper. A deferral period which is longer thancurrently required would result in a greater number of, and larger amount of, buy-outs,
which would lead to loss of talent from the UK. Additionally, since the proposed longer
deferral period may result in time discounting of variable pay due to a potential future
reduction in the amount of remuneration, the payment of remuneration would be shifted
to fixed pay which are not subject to malus and clawback. These consequences may
result in malus and clawback not being substantially functioning, thereby undermining
the effectiveness of malus and clawback when material errors and other incidents may
occur.
On the other hand, ex-post risk adjustment is fully ensured through payments in a formof equities or newly introduced clawback and other measures. It is therefore consideredthat the current extension period is sufficient to allow firms to make risk adjustment,
and the seven-year extension of deferral period is excessive when compared to otherjurisdictions.
In view of these, if firms are not allowed to defer remuneration in alignment with theirrisk horizon, as an alternative, we propose to set a five-year deferral period, with thetwo-year retention period. Under this approach, remuneration for senior managers will
be vested within five year, during which banks can suspend payments, and hence malus
can be applied according to the banks’ internal process.
Expatriates should be excluded from the scope of this requirement as the extension ofdeferral period for seven years is considered to be excessive when compared to otherjurisdictions, thereby reducing incentive of competent talent to work in the UK.
Additionally, since, generally, the durations of expatriate’s stay is shorter than sevenyears, the double taxation risk may increase after senior managers being transferred toother country.

3Question 3
Do you agree with introducing an additional requirement that no deferred variable
remuneration should vest earlier than the third anniversary of award for seniormanagers?
(Our response)
We do not agree with the proposal. The period should be one year as prescribed in thecurrent Code, as opposed to three year. In particular, expatriates should be excluded
from the scope of this requirement.
(Reason)Consistent with the reason provided in Question 2, the requirement “the thirdanniversary” may not necessarily be in line with the risk horizon of all firms. Bonus
pools are conservatively set based on risk adjusted measures, and tail risk is alreadyfactored into bonus pools for each business-unit. The third anniversary may also resultin employees further discounting the total value of remuneration at the time of award,
and may result in a competitive disadvantage for attracting employees to the UK.
Awards for senior managers are already subject to the seven-year clawback period
newly introduced and hence firms can recover awards through this clawback. Therefore,
there is no substantial need for not vesting the deferred variable remuneration earlier
than the third anniversary of award.
Additionally, for the same reason as raised in Question 2, expatriates should beexcluded from this requirement.
Question 4
Do you agree that five years is an appropriate minimum requirement to apply to allother MRTs, bearing in mind the range of roles covered?
(Our response)
We do not agree with the minimum requirement of five years. Firms should be allowed
to determine the deferral period by aligning to their own risk horizon based on their risk
profiles. Additionally, expatriates should be excluded from this requirement.
(Reason)Consistent with the reason provided in Question 2, this requirement may not necessarily
be in line with the risk horizon of all firms. Consequently, firms should be able todetermine the deferral period in line with their risk horizon based on their risk profile.
The extension of the deferral period for five year at a minimum as opposed to current
three to five years would lead to higher buy-outs, resulting in loss of talent from the UK.

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This would undermine the effectiveness of malus applied by firms. Therefore, anextension period which is longer than the currently defined period should not be set.
Additionally, for the same reason as raised in Question 2, expatriates should beexcluded from this requirement.
3. Clawback
Question 6
Do you agree with the proposal to introduce a requirement to provide for a possible
extension of the clawback period of up to three years for Senior Managers if there areoutstanding investigations underway at the end of seven years?
(Our response)
We do not agree with the proposal to include this requirement in the Remuneration
Code. Rather, guidance should be provided with regard to this proposed possibleextension. Additionally, expatriates should be excluded from this requirement.
(Reason)
It is a market practice to suspend variable pay and deferral payments whilst an internalor external investigation is carried out. Firms therefore should be allowed to continue
with this approach through a market practice, and the three year extension of theclawback period should not be included in the Code. The reason for this is because of
the perceived time value discounting of remuneration by employees at the time of award.
It would also limit banks' ability to continue the suspension of remuneration should theinvestigation period exceed the three year time horizon.
Guidance has not been provided on how the use of the 10 year clawback would work if
the investigation is commenced after the seventh year from the date of grant. For
example, if an investigation were to commence eight years after the date of grant of anaward, the senior manager would have satisfied the seven year clawback limit per the
bank's policies. In such a case, it is unclear whether the PRA and FCA expect banks toretrospectively apply the extension of clawback. If the PRA and FCA expect suchextension, this would require further clarity in regards to how this requirement would beimplemented from an employment law perspective.
Given this, it is respectfully requested that guidance is provided by the PRA and FCA inregards to its expectations on applying the extension rather than including this as arequirement in the Code.
Additionally, expatriates should be excluded from the scope of this requirement for thefollowing reason. Given that expatriates relocate across multiple countries once inseveral years, if an expatriate moves outside of the UK and provides services in other5

country, cases where banks will apply clawback might increase if the clawback period
would be extended. In such a situation, laws governing such cases would not be limited
to laws of the UK. Moreover, depending on a jurisdiction to which an expatriate isrelocated, there may be a mandatory requirement that may not permit the application ofclawback.
4. Buy-outs
Question 8
What do you see as the advantages and disadvantages of the approaches identifiedabove?
(Our response)
We do not support the approaches Banning Buy-outs, Maintaining Unvested Rewards
and Applying Malus while support the approach Reliance on Clawback.
(Reason)Banning buy-outs
This would impair the competitiveness of attracting talent to the UK, leading to a UK
talent being attracted to poaching by other institutions outside of the UK. Therefore, wewould not recommend this approach. Additionally, since buy-outs by competitors are
established as a market practice in the labor market, this approach might in effect pose alimitation on job transfer within the UK financial market.
Maintaining unvested awards
As in the case of banning buy-outs, we do not recommend this approach since thiswould result in UK talent being attracted to poaching by other institutions outside of theUK as buy-outs would not be required on their part. There would also be conflicts ofinterests for the employee as they would have been vested interest in the performance of
their previous employer due to their unvested awards even after changing their job. If
the equity awards were converted to cash to limit this conflict, then the link to thelong-term interests of the bank's shareholders through the use of equity instruments
would be removed.
Applying malus
The application of malus by an employee’s previous employer would give rise to anumber of practical issues. For example, harmonization of conflicting interests between
the previous and current employers and exchange of employees’ information. These
efforts might necessitate the PRA and FCA to act as an arbitrator between the two6

institutions. It would also be difficult to apply malus in cases where the employee has
moved to a non-financial services institution which is not regulated by the PRA andFCA. Given this, it is considered impracticable for an employee’s previous employer toapply malus unless specific guidance or supervisory methodologies are established.
In relation to Question 6, in cases where the labor law of Japan is applied to expatriates,
since such law prohibits an employer from entering into a pre-indemnificationagreement with its employees, a legal framework needs to be established to apply malus
to remuneration paid by other institutions.
Reliance on clawback
We are supportive of this approach as this is already required under the recently released
clawback policy statement.
Question 9
What views do you have on the potential options for addressing the disadvantages ofparticular approaches?
(Our response)
For ban on buy-out and maintenance of unvested awards discussed in Question 8, we
have no view on a potential option that addresses the disadvantages noted in Question 8.
The application of malus requires clear guidance from regulatory and legal perspectives.
Question 10
What are the relative merits of pursuing the different approaches and any alternative
approaches that might be identified?
(Our response)
No further regulation is required as this is addressed through the recently released
clawback rules.
6. Risk adjustment
Question 11
Do you agree with the proposal to require firms to use the above approach to ensure thatthe measure of profit used for determining variable remuneration is based on prudent
valuation?
(Our response)
We are not in agreement with this proposal.

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(Reason)
The current Remuneration Code stresses the importance of risk adjustment in measuring
an institutions' performance. There are a number of risk-adjustment techniques, and weare supportive of the PRA's current stance on allowing banks to use the approach which
is most appropriate for them. We also support further guidance from the PRA and FCA
on the use of risk adjustment. However, we are opposed to regulation which limits
banks’ ability to use the approach which is most appropriate in light of their businessmodel, strategy and risk profile.
If the PRA and FCA, as their individual supervisory approach, require individual banks
the use of measures that are most suitable for them, we support such approach.
Question 12
Do you agree that there should be a rule that simple revenue or profit-based measures
may not be relied on to determine variable remuneration at aggregate or individuallevel, except as part of a balanced and risk-adjusted scorecard?
(Our response)
We do not agree with this proposal.
(Reason)Firms require flexibility in determining an approach for bonus pool calculations in amanner that is reflective of business model and strategic objectives. Accordingly, firms
should be allowed to proactively exercise business judgment, for example, on how to
combine multiple business indicators to measure performance.

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