18 October 2024
Yesterday, Sam Woods, the Deputy Governor for Prudential Regulation and Chief Executive Officer of the UK’s Prudential Regulation Authority, gave a speech titled ‘competing for growth’.
Here are the key points for remuneration professionals working within PRA-regulated credit institutions and investment firms:
- Sam affirmed the PRA’s commitment to their new secondary competitiveness and growth objective and stated that the PRA is taking “concrete steps” to improve the regulatory regime’s contribution to UK growth and competitiveness. To illustrate this, Sam reminded the audience that the PRA scrapped the bonus cap, giving more flexibility that many impacted firms have now taken advantage of.
- Sam identified that the UK has become an outlier when it comes to the length of deferral periods that PRA-regulated credit institutions and investment firms must apply to the variable remuneration paid to their material risk takers, and that this may be damaging for competitiveness. As a reminder, the current regime for these firms requires minimum deferral periods of: (a) for certain higher paid PRA senior managers, seven years (with no vesting until year three); (b) for certain other senior managers and other higher paid material risk takers, five years; and (c) for all other material risk takers, four years. Variable remuneration instruments are also currently subject to post-vesting retention periods of 6 – 12 months.
- Sam announced that the PRA will bring forward proposals to reduce the deferral periods for these PRA-regulated firms, moving to a five-year deferral period for all senior managers (also now allowing vesting on a pro-rated basis from year one) and to a four-year deferral for all other material risk takers. A footnote to the speech also suggests that the 6 – 12 month retention period will be abolished as part of this reform. The PRA published this chart to illustrate the impact of this change upon the deferred variable remuneration awarded to someone who currently has a seven-year deferral period:
Clients frequently tell me that deferral is the most troublesome and unattractive part of a remuneration package for staff, more so than malus, clawback and even the bonus cap (before it was removed), and so these developments are likely to welcomed by impacted firms.
The speech did not set out a specific time frame for bringing forward and then implementing these proposals. At the time of writing this alert, there is no related consultation paper on the PRA’s website. We will keep an eye out and publish a new alert once a consultation paper has been published.
Watch this space!
If you have any questions or comments in the meantime, please do contact us.
Matthew Hunter
Matthew Hunter