No images? Click here ![]() PRA Consultation on CRD V: smaller firms’ exemption from the “bonus cap” to be removedThe 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:
Whilst directly relevant for banks and other CRD-firms, these proposed changes are also worth noting by other FS businesses regulated by the PRA as, in practice, there is a large degree of read-across in how the PRA approaches pay in other regulated sectors. For example, at present the PRA by concession allows Solvency II Regulated Insurers a de minimis exemption from the application of Solvency II remuneration requirements for MRTs on a basis that mirrors the current exemption in the PRA’s Remuneration Code for CRD firms – potentially that exemption for insurers could change to mirror the proposed new thresholds for CRD firms. 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derogation from the PRA Remuneration Code on malus and clawback and the reporting regime for buy-out awards is to be withdrawn.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:
The qualification test for this exemption has been revised to focus only on variable remuneration which must not be:
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).
Other material items Deferral – for those MRTs whose variable remuneration was subject to 3-year deferral (in the PRA’s 3 to 7 years tiered approach) the minimum period for deferral will become 4 years. Firm-wide performance adjustment – The PRA has clarified its existing position that it expects firms to have a policy of the application of these provisions (which can include malus and clawback) throughout the firm. Application to Groups – the PRA has clarified that where entities of different proportionality Tiers are within the same group, the rules to be applied on a group wide basis are those for the entity with the highest Tier. Consultation Timing and Parallel FCA consultation The PRA’s consultation will run until 30 September 2020. The FCA is running a parallel consultation for those firms which are Dual Regulated between it and the PRA and to which the FCA’s Remuneration Code in SYSC 19D applies. The proposed revisions to SYSC 19D mirror the proposed revisions to the PRA’s Remuneration Code. 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. Rory Cray Darrell Hare Matt Higgins John Lee Sahul Patel Iain Scott Katharine Turner 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. This email is confidential. If you are not the intended recipient, please delete the email and do not use it in any way. FIT Remuneration Consultants LLP (FIT) does not accept or assume responsibility for any use of or reliance on this email by anyone, other than the intended addressee to the extent agreed in the relevant contract for the matter to which this email relates (if any). Consistent with data protection regulations, if you would like to review our records relating to your contact details or to request their removal from our systems, please contact us at info@fit-rem.com. While all reasonable care has been taken to avoid the transmission of viruses, it is the responsibility of the recipient to ensure that the onward transmission, opening or use of this message and any attachments will not adversely affect its systems or data. No responsibility is accepted by FIT in this regard. FIT is a limited liability partnership registered in England under registered number OC364396, with its registered address at 1 Duke Street, London, W1U 3EA. |