PRA Consultation on CRD V: smaller firms’ exemption from the “bonus cap” to be removed

The PRA issued a consultation document on 31 July 2020 regarding its proposals to implement CRD V, the current iteration of the EU’s Capital Requirements Directive.  The PRA’s proposals will:

• see the “bankers’ bonus cap” required by EU rules applied to all CRD entities in the UK regulated by the PRA (banks; building societies; larger investment firms designated by the PRA) and the previous exemption for smaller firms will be removed;
• see the scope of the exemption from the application of the certain parts of the PRA Remuneration Code (including compulsory deferral) for individuals whose pay levels are regarded as de minimis severely reduced;
• be applied for financial years beginning on or after 28 December 2020 – this means that impacted entities will need to consider whether current remuneration structures in 2020 need to change for 2021.

Bonus Cap

The so-called bonus cap is the provision in the EU-wide remuneration rules for banks and other financial institutions which limits the total quantum of variable pay in a performance year for an individual to the individual’s level of fixed pay on a 1:1 basis (the ratio can be up to 2:1 with shareholders’ approval).  Since the bonus cap’s introduction, the PRA has allowed a derogation from its application to smaller CRD firms on the basis of “proportionality”; thus smaller (Tier 3 proportionality) firms in the UK have not been required to apply the bonus cap to date.

However, the EU’s position since as early as December 2015 has been that the bonus cap was not an appropriate matter for proportionality treatments at national level, and this point was included in CRD V.  The PRA has previously said that the proportionality exemption for Tier 3 firms was likely to be removed as part of its adoption of CRD V, and this has now been confirmed in the PRA’s consultation proposals.

It is possible that, as part of the arrangements for the UK exiting the EU, this new position for Tier 3 firms may alter, but within the consultation the PRA has said that it currently expects to apply CRD V on a continuing basis after the end of the EU exit transition period.

Also for Tier 3 firms, the previous proportionality guidance that allowed derogation from the PRA Remuneration Code on malus and clawback and the reporting regime for buy-out awards is to be withdrawn.  However, they may still apply the rules of proportionality to derogate from the Remuneration Code requirements on deferral and payment in instruments.

De Minimis exemption

The PRA’s policy on proportionality has previously allowed the Remuneration Code provisions on deferral and payment of 50% of variable pay in instruments to be dis-applied where an individual who would otherwise be an MRT has:

• total remuneration of £500,000 or lower, and
• variable remuneration which is not more than one-third of total remuneration.

The qualification test for this exemption has been revised to focus only on variable remuneration which must not be:

• greater than €50,000, and
• more than one-third of total remuneration

In effect the de minimis exemption can now only be available where a person’s total remuneration in a year is €150,000 or less (which the PRA will apply as £132,000).

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com.

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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