China – Latest CBIRC Guidance On Performance-Based Compensation Malus And Clawback Mechanisms.

22 July 2021
 

Background
 

On 5 February 2021, the China Banking and Insurance Regulatory Commission (the “CBIRC”) released the Guiding Opinions on Establishing and Improving Performance-based Compensation Malus and Clawback Mechanisms among Banks and Insurance Institutions (《关于建立完善银行保 险机构绩效追索扣回机制的指导意见》, the “Guiding Opinions”). The Guiding Opinions give specific guidance to banks and insurance institutions on the details of a performance-based compensation malus and clawback mechanism, including both repayment and cessation of performance-based compensation payments.
 

Previously, both the former China Banking Regulatory Commission (the “former CBRC”) and the former China Insurance Regulatory Commission (the “former CIRC”) had in place regulatory guidelines on this:
 

• In February 2010, the former CBRC issued the Regulatory Guidelines for Sound Remuneration of Commercial Banks (《商业银行稳健薪酬监管指 引》), requiring commercial banks to provide for malus and clawback of performance-based compensation mechanism, so as to entitle commercial banks to recover all performance-based compensation already paid within the corresponding period, and forfeit all unpaid compensation, from senior management personnel and relevant employees incurring undue risk in the performance of their duties during a prescribed period of time. Malus and clawback of performance-based compensation is also required to apply to banks’ ex-employees, and the information regarding malus and clawback, together with any deferred payment of cash and non-cash remuneration, should be included in reports of annual remuneration submitted by commercial banks to the banking regulator.
   
• In July 2012, the former CIRC issued the Guidelines on the Remuneration Management Regulations of Insurance Companies (Trial Implementation) (《保险公司薪酬管理规范指引（试行）》), which require insurance companies to trace and claw-back remuneration paid without authorisation or pursuant to fraudulent performance appraisals.  The Guidelines on the Corporate Governance of Commercial Banks (《商 业银行公司治理指引》), and the Guidelines on the Conduct Management of Practitioners in Banking Financial Institutions (《银行业金融机构从业 人员行为管理指引》) (issued by the former CBRC in 2013 and 2018), also require a performance-based compensation malus and clawback mechanism to be established.
   

These published guidelines, and other relevant regulations, only provide for an in-principle performance-based compensation malus and clawback mechanism. The Guiding Opinions provide more details of, amongst others, employee groups whose remuneration is liable to be clawed-back and the circumstances in which clawback can apply Banks and financial institutions need also to review and correct omissions and deficiencies in their internal rules on remuneration malus and clawback, to reduce the risk of labour disputes. 
 

We have set out below the main contents of the Guiding Opinions.
 

Scope of Application
 

Institutions: the Guiding Opinions apply to:
 

• banking institutions, (i.e. commercial banks, policy banks, rural cooperative banks and rural credit cooperatives established in mainland China);
   
• insurance institutions, (i.e. insurance group (or holding) companies, insurance companies, insurance asset management companies and mutual insurance agencies established in mainland China);
   
• financial asset management companies, trust companies, finance companies of enterprise groups, financial leasing companies, auto finance companies, consumer finance companies and currency brokerage companies established in mainland China; and
   
• other CBIRC-approved financial institutions, for which the Guiding Opinions function as reference guidance. 
   

It is worth noting that the Regulatory Guidelines for Sound Remuneration of Commercial Banks (2010) only specify that other types of banks and nonbanking financial institutions regulated by the banking regulatory authorities may “refer to” the Guidelines for implementation. The Guiding Opinions, for the first time, clearly require a performance-based compensation malus and clawback mechanism to be established and improved by domestic financial asset management companies, trust companies, finance companies of enterprise groups, financial leasing companies, auto finance companies, consumer finance companies and currency brokerage companies, whereas the 2010 guidelines only required these institutions to take the mechanism into account as a reference point. 
 

Individuals: the Guiding Opinions mainly apply to the following persons, including those who previously held the following positions:
 

• senior management personnel: these are not defined in the Guiding Opinions. The rules of the former CBRC and the former CIRC (summarised in the marginal table) can be used as a reference.
   
• persons holding key positions (i.e. those with direct or significant influence on the operating risks institution.) The institution determines who is a “person holding a key position” according to the institution’s type and organisational characteristics, market size, risk management, control capability and other factors, in the mechanism.
   
• other responsible persons see table below for details.
   
• The Guiding Opinions are also applicable, as a reference point, to directors and supervisors of an institution who receive performance-based compensation.
   

Performance-based Compensation Malus and Clawback Mechanism under the Guiding Opinions
 

The mechanism includes such details as applicable circumstances, proportion of malus and clawback, work procedures, responsible departments, dispute settlement, internal supervision and accountability, etc.
 

This section covers the provisions of the Guiding Opinions which require an institution to claw-back performance-based compensation (and the amount to be clawed-back). It also covers determination procedures, supervision, disclosure and sanctions. 
 

Consultation Process
 

The Guiding Opinions require institutions to determine reasonable standards of what constitutes extraordinary risk exposure and proportions of malus and clawback, taking into account such factors as status of operations, risk and delayed payment of performance-based compensation, and fully consult with their independent directors, supervisors and relevant staff.
 

Individuals Who Refuse to Cooperate
 

The Guiding Opinions enable institutions to warn, redeploy, sue or take other reasonable and effective measures against any senior management personnel or persons in key positions who refuse to cooperate with the performance-based compensation malus and clawback and to report this to the CBIRC or its branches.
 

Internal Supervisory Responsibilities
 

The Guiding Opinions expressly provide that human resources departments are responsible for implementing the specific matters under the performancebased compensation malus and clawback mechanism, with the risk control, compliance management, auditing, financial and other relevant departments actively participating and assisting. An institution’s board of directors is required to review its performance-based compensation malus and clawback mechanism at least once a year and bear ultimate responsibility for compensation management.
 

Information Disclosure
 

To strengthen information disclosure, the Guiding Opinions require institutions to disclose more information related to performance-based compensation malus and clawback, and to make and improve comprehensiveness and transparency of compensation information disclosure. Institutions are also encouraged to periodically report to the CBIRC or its branches and on the performance-based compensation malus and clawback mechanism. CBIRC and its branches may take the institution’s establishment and roll-out of the performance-based compensation malus and clawback mechanism into account in its regulatory rating and corporate governance evaluation.
 

Liabilities
 

Under the Regulatory Guidelines for the Sound Remuneration of Commercial Banks and the Remuneration Management Regulations of Insurance Companies (Trial Implementation), based on which the Guiding Opinions are formulated, CBIRC can investigate and prosecute a banking or insurance institution for non-compliance with compensation management rules (although there are no corresponding penalty provisions in the Guiding Opinions). In addition, it may be difficult for an institution to investigate the liability of relevant personnel in the absence of a sound malus and clawback mechanism, so it would run the risk of losing the case should a labour dispute arise. Institutions are thus advised to establish or improve their performancebased malus and compensation clawback mechanisms as soon as possible, as required by the Guiding Opinions.
 

• The scope of personnel. Institutions should clearly define the scope of “personnel in key positions” mentioned in the Guiding Opinions based on the various factors listed in the Guiding Opinions, and explicitly list them in their rules and policies;
   
• Disciplinary action for refusal to cooperate in recovering and clawingback performance-based compensation pursuant to rules and policies, and for other violations of such rules and policies, with reference to the institution’s own rules and policies (such as employee handbooks); and
   
• Termination of employment. Expressly providing for the right to recover and claw-back part or even all of the performance-based compensation of employees who leave the institution under certain circumstances (e.g. termination of employment contracts due to serious violation of relevant rules and policies).