18 August 2021

The European Commission has adopted regulatory technical standards (RTS), supplementing the remuneration provisions of the Investment Firms Directive (IFD).

The RTS are as follows:

1. RTS on the identification of material risk takers (MRT) - this RTS specifies the qualitative and quantitative criteria that firms subject to the IFD remuneration requirements will use to identify categories of staff whose professional activities have a material impact on the risk profile of the firm or of the assets that it manages.
2. RTS on instruments used for variable remuneration - this RTS specifies the classes of instruments that adequately reflect the credit quality of a firm that is subject to the IFD remuneration requirements as a going concern and also possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration.

The adopted RTS will now be reviewed by the Council of the EU and EU Parliament and, provided neither body objects, the RTS will enter into force from the fifth day following their publication in the Official Journal of the EU.

Tapestry Comment
The IFD and its counterpart regulation, the Investment Firms Regulation (IFR), introduced a new prudential regime for investment firms. The IFD had to be implemented by EU Member States by 26 June 2021 and the IFR applied directly from that date. Once these RTS take effect they will supplement the remuneration requirements set out under the IFD and IFR. Firms that are subject to the IFD and IFR should review the adopted RTS carefully and consider the impact that these may have on the firm’s remuneration structures.
 
Given that the Brexit transition period has ended, these adopted RTS will not automatically apply in the UK. The UK Financial Conduct Authority’s (FCA) approach to MRT identification and the use of instruments for variable remuneration in investment firms is set out in the recently published FCA Investment Firm Prudential Regime Policy Statement.

If you have any questions on this or anything else, please do get in touch. We would be delighted to help. 

Matthew Hunter and Lewis Dulley

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29 July 2021

Last week was a busy one for the financial services sector – with multiple updates from the PRA. We have summarised these for you below.  

1. PRA modifies MRT identification 

On 23 July 2021, the PRA published a direction for modification by consent to exclude from identification as material risk takers (MRTs) those employees who do not have a material impact on the firm’s risk profile but whose total remuneration exceeds the quantitative criteria set out in the Material Risk Takers Regulation (MRT Regulation).

In addition, the PRA published guidelines for the Direction and updated their webpage on waivers and modifications. 

Background
The Remuneration Part of the PRA Rulebook specifies that its rules apply in relation to (among others) employees identified as MRTs under Article 7 of the MRT Regulation. Article 7 contains a mechanism to exclude employees from being identified as MRTs who meet the pay-based criteria but are considered not to have a material impact on the firm's risk profile. This exclusion requires PRA advance approval in the form of a rule waiver or modification. 

What's changed? 

The PRA is offering a modification by consent for CRR firms to exclude employees from identification as MRTs pursuant to Article 7. Where granted, the modification has effect in respect of the relevant performance year. A new application is required for each performance year. 

Implementation

The application for this rule modification by consent should be supported by sufficient evidence that the employees meets the conditions set out in Article 7 (firms may use the appropriate Remuneration Policy Statement template. If the employee’s total remuneration is above EUR1 million, the firm should provide adequate information that describe the exceptionality of the circumstances.

If a firm wishes to use this facility, they should read the direction and contact their supervisory contacts and the PRA’s Authorisations division by email with a request for the modification. The PRA will then confirm in writing whether the request has been granted and will publish the approved modification direction on the Financial Services Register (this will not include personal details of the employees applicable).

2. PRA issue statement on definition of "higher paid material risk  taker"

On 21 July 2021, the PRA published a policy statement correcting an error in the definition of "higher paid material risk taker" in the PRA Rulebook. 

Background
The PRA published its final rules on the implementation of the CRD V Directive on 29 December 2020. These rules contained the error. 

The PRA noted the error in February 2021 and later published a consultation paper looking at how to correct the position (CP9/21) in April 2021. This has led us to the statement made on 21 July. 

What's changed?
In CP9/21, the PRA proposed a change to the definition of a 'higher paid material risk taker' so either limb of that definition could be satisfied. This means a higher paid material risk taker is an individual who is either a person: 

(a) whose annual variable remuneration exceeds 33% of their total remuneration; or
(b) whose total remuneration exceeds £500,000. 

The original (erroneous) version of the definition required both (a) and (b) to be met for a person to be a higher paid material risk taker. 

The purpose of this amendment is to align the ‘higher paid material risk taker’ definition with the PRA’s intentions and ensure that proportionality cannot be applied to material risk takers who also have material monetary incentives to take potentially excessive risk, in turn promoting the alignment of MRTs’ remuneration and prudent risk-taking. 

Implementation
The instrument and the revised supervisory statement came into force on 23 July 2021. Firms are not required to apply the corrected definition to remuneration that has been paid, vested or is subject to an obligation to pay or vest which was created before 23 July 2021 and in respect of the first performance year beginning on or after 29 December 2020.

3. PRA update self-assessment templates and tables

As reported on here the PRA announced it was going to review the templates that may be used by firms to communicate to the PRA information on their MRTs' identification and exclusion (known as the Remuneration Policy Statement (RPS) tables 1a, 2 and 8). 

The PRA have now amended and published their revised MRT exclusion template and RPS templates.

The updated RPS tables allow firms whose performance year started on or after Tuesday 29 December 2020 to keep a record of all MRTs identified for the current performance year. The remaining templates will be published in November 2021.

Those templates applicable to firms whose performance years started before Tuesday 29 December 2020 remain available.

All templates can be found here under the "Self-assessment templates and tables" heading. 
 

Tapestry comment

It has been a busy week for the PRA! These updates have come in thick and fast but firms were likely prepared for some of these updates. Earlier consultations outlined the PRA’s proposed changes to MRT identification and the consequential templates so these will not come as a surprise for most.

If applicable, firms should ensure they are using the most up-to-date RPS templates to record their remuneration policies, practices and procedures. Firms with a fiscal year-end of 31 December may take advantage of the late submission of some of the tables / templates by 30 September, allowing more time to submit the RPS tables on MRT Identification and Exclusion (tables 1a, 2 and 8) the RPS Questionnaires and Annex 1: malus, but should note this extension is not expected to be available next year. 

The introduction of a “modification by consent” process by the PRA to exclude certain employees from identification as MRTs will hopefully make this process easier, but firms should ensure they contact their supervisory contacts and the PRA’s Authorisations division with a “suitable request”.

If you would like to discuss these changes, or anything else, please do contact us. 
 
Chris Fallon and Emilie Sylvester

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9 July 2021

The European Banking Authority (EBA) has published their final report on the revised guidelines on sound remuneration policies under the Capital Requirements Directive (CRD), as recently amended. The publication follows a consultation process that ended on 29 January 2021. The consultation responses are summarised at the end of the final report document. The revised guidelines will take effect and replace the existing guidelines from 31 December 2021.  

Background

The EBA first published its guidelines on sound remuneration policies under the CRD in December 2015, in line with a mandate under the fourth iteration of the CRD, CRD IV. The guidelines apply to CRD firms and seek to harmonise the remuneration policies of CRD firms across Europe, in line with the CRD remuneration rules. The guidelines have now been updated to accommodate the changes to the CRD that were introduced by the latest iteration of the CRD, CRD V.

Key revisions

The key revisions to the guidelines impact the following topics:

• Gender neutral – many of the changes relate to the requirement under CRD V that remuneration policies and practices are ‘gender neutral’, meaning that there must be equal pay for male and female workers for equal work or work of equal value. These changes are wide-ranging. For example, the guidelines expect firms to be able to demonstrate that the remuneration policy is gender neutral and undertake specific additional record-keeping. The guidance also expects the supervisory function / remuneration committee review of the remuneration policy to include analysis of whether the policy is gender neutral and to monitor the development of the gender pay gap on a country-by-country basis separately for different categories of staff (in particular, see paras. 14, 23 – 27, 57(b), 63 – 65, 185(j), 198, 308 and 311(c)).
• Remuneration policy – alongside other existing requirements, a firm’s remuneration policy for all staff should also be consistent with the firm’s ‘risk strategy’, including with regard to environmental, social and governance (ESG) risk-related objectives, and ‘risk culture’ (in particular, see para. 16).
• Remuneration committee composition – the expectations as to the independence of the chair and majority of members of the remuneration committee have been amended, with the expectation for an independent chair and majority of members now only explicitly stated to apply to globally systemically important institutions and other systemically important institutions. For other significant firms, a sufficient number of members should be independent, as determined by competent authorities or national law (in particular, see para. 55).
• Material risk taker identification – extensive updates have been made to reflect the CRD V changes to the process of identifying material risk takers and also the new regulatory technical standards  on identifying material risk takers. Amongst other things, the updates reflect the removal of the requirement to notify regulators of material risk taker exclusions where regulatory approval is not being sought (in particular, see paras. 98 – 122, 314 and 315).
• Group consolidation – revisions have been made to the guidelines to clarify how CRD firms should apply the remuneration rules on a consolidated basis, including in relation to their non-CRD subsidiaries, such as investment firms and others financial institutions that are subject to a specific remuneration framework (such as UCITS and AIFMD firms) (in particular, see paras. 8 – 10, 75 – 84, 313 and 414).
• Proportionality – in connection with the material amendments to the concept of proportionality that were made under CRD V, the EBA has provided procedural expectations for the application of the new proportionality thresholds and waivers, including the method of calculating the firm’s assets when applying firm-level proportionality and calculating individual remuneration when applying individual-level proportionality (in particular, see paras. 85 – 97).
• Retention bonuses – the guidance on retention bonuses has been heavily revised and expanded. The revised guidance seeks to ensure that retention bonuses are only awarded where the firm can clearly demonstrate that the retention bonuses are justified and clarifies, amongst other points, that retention bonuses must comply with the relevant requirements on variable remuneration, including the ‘bonus cap’, with guidance specifying how the retention bonus should be included in the calculation of the ‘bonus cap’. The EBA noted in their consultation that these revisions are based on supervisory experience regarding cases of circumvention (in particular, see paras. 143 – 150).
• Severance payments – the guidance on severance payments has been revised, including to clarify which payments can properly be regarded as severance payments and those which should not, and to also clarify when severance payments can be excluded from the scope of the deferral, payment in instruments and ‘bonus cap’ remuneration rules. As with retention bonuses, the EBA noted in their consultation that these revisions are based on supervisory experience regarding cases of circumvention (in particular, see paras. 151 and 162 – 176).
• Disclosure – the guidance on the remuneration disclosure requirements that apply under the Capital Requirements Regulation has been removed as it has been superseded by the new implementing technical standards on disclosure, including remuneration disclosure (in particular, see the fact that there is no disclosure guidance anymore!).
• Clawback – the EBA has removed the statement that clawback should, in particular, be applied “when the identified staff member contributed significantly to the subdued or negative financial performance [of the firm]”. The EBA has, however, added an expectation that where the application of malus is not possible in connection with an award due to the deferral requirement being disapplied using proportionality, firms should ensure that clawback can be applied (in particular, see paras. 294 and 296).

Timing

The revised guidelines will take effect and replace the existing guidelines from 31 December 2021.  

The guidelines are addressed to both competent authorities and firms directly.

Competent authorities will be required to notify the EBA as to whether or not they comply or intend to comply with the guidelines and incorporate them into their practices or, if not, the reasons for non-compliance. The date by which this notification needs to be made has not yet been stated. 

Tapestry comment
The guidelines have been amended extensively. The majority of the changes reflect the amendments to the remuneration rules under CRD V, with a notable focus on the new requirement for remuneration policies and practices to be ‘gender neutral’. The changes relating to, in particular, retention bonuses, severance payments and clawback do not derive from CRD V and instead reflect a change in the EBA’s focus and expectations in relation to existing requirements.

Many firms will already consider their remuneration policies and practices to be ‘gender neutral’ but, although the EBA has taken steps to clarify their new expectations following the consultation process, the guidance sets out a number of more granular expectations, such as those relating to record-keeping and supervisory function / remuneration committee oversight. These new expectations will need to be administered and policies and processes may need to be amended to implement the expectations. Firms should work through the practicalities of doing so.

 Except as noted under the ‘key revisions’ section of our alert above, or where minor changes have been made to reflect CRD V (e.g. changing references from 3 to 5 year deferral periods to the 4 or 5 years required under CRD V; referring to listed firms being able to offer share-linked instruments), much of the substance of the existing guidance remains unaffected, particularly with regard to structural elements of remuneration, such as in relation to the award, pay-out and risk adjustment processes. This is generally positive news but firms should take this opportunity to remind themselves of the EBA’s existing expectations, as well as ensuring that the firm is familiar with the new expectations on topics such as retention and severance payments. Impacted firms should take the time to review the revised guidelines in detail, understand exactly how the changes will impact existing practice and, where appropriate, make changes to comply.

For UK regulated firms, it is important to remember that the UK’s Prudential Regulation Authority and Financial Conduct Authority are not required to incorporate the revised EBA guidance into their regulatory expectations. The UK regulators may decide to do this and, if so, should engage with firms on that basis ahead of any changes to their expectations. Staff members of UK firms may, however, become subject to the revised guidance where they fall within the scope of consolidation of an impacted firm, depending on the specific facts. This should be considered in detail.  

Please note that the revised guidelines will need to be considered alongside two other sets of revised EBA guidelines that the EBA has also published: (a) the revised joint ESMA and EBA guidelines on the assessment of the suitability of members of the management body and key function holders under CRD and the MiFID II Directive; and (b) the revised guidelines on internal governance under CRD.  Both sets of revised guidelines reflect the changes implemented by CRD V and the new Investment Firms Directive. The former specifies, amongst other points, that a gender-balanced composition of the management body is of particular importance. The latter sets out, amongst other points, expectations for remuneration committees and further expectations as to how firms should ensure that their policies, including remuneration, recruitment and succession policies and plans, are gender neutral. 

If you would like to discuss these changes, or anything else, please do contact us. 
 
Matthew Hunter

2 July 2021

The European Banking Authority (EBA) has published a report and factsheet setting out its proposals to further align remuneration within credit institutions and investment firms to Environmental, Social and Governance (ESG) risks within those firms. This report follows a consultation process that ended in February 2021. EU legislators will now review the report and will consider whether to make any legislative changes. The EBA will also use the report as a basis for the development of guidelines on the management of ESG risks by firms and the supervision of ESG risks by regulators. The EBA invites firms to actively reflect on the content of the report and its recommendations.

In November 2020, the EBA launched a consultation in relation to the inclusion of ESG factors and risks into the regulatory and supervisory framework for credit institutions and investment firms. This report contains the results of that consultation and sets out recommendations relating to the definition and assessment of ESG risks, the management of ESG risks and the supervision and evaluation of ESG risks by regulators. The report also identifies weaknesses in how firms currently incorporate ESG risks into their governance practices.

Key remuneration-related observations

The key remuneration-related observations are as follows:

• There appears to be a general failure to integrate remuneration policies into the firm’s business strategy, core values and long-term interests in a way that accounts for ESG risks, ensures sound risk management and mitigates excessive risk taking in this area.
• A robust and appropriate incentive-based mechanism is important for achieving an appropriate risk culture. When designing their ESG risk strategy, firms should evaluate how to account for ESG risks in their remuneration policies. This is particularly relevant to the firm’s material risk takers.
• Aligning the firm’s remuneration policy with the firm’s ESG objectives, e.g. long-term resilience of the business strategy under ESG considerations and risk appetite, is important for avoiding conflicts of interest when business decisions are taken.
• Remuneration policies that give the right incentives for staff to favour decisions in line with the firm’s ESG risk-related strategy would facilitate the implementation of ESG risk-related objectives and/or limits, as the staff would benefit from meeting these targets. The impact of remuneration policies on the achievement of sound and effective long-term risk management objectives, with regard to ESG considerations, may be especially relevant when it comes to the variable remuneration of material risk takers, and in particular when they have responsibilities for defining and implementing ESG-related strategy.

Key remuneration-related recommendations

The EBA notes in the report that they see the need for firms to proportionately incorporate ESG risks into their internal governance arrangements, including by ensuring that remuneration policies are aligned with the firm’s long-term interests, business strategy, objectives and values. The EBA has issued recommendations for firms that are intended to help to achieve this.

The key remuneration-related recommendations are as follows:

• Firms should consider ESG indicators and ESG risk-related objectives and/or limits when taking into account the long-term interests of the firm in the design of remuneration policies and their application, including considering the implementation of a remuneration policy that links the variable remuneration of the firm’s material risk takers, taking into account their respective roles and responsibilities, to the successful achievement of those objectives, while ensuring that ‘green-washing’ and excessive risk-taking practices are avoided.
• Firms should establish a framework to mitigate and manage conflicts of interest which incentivise short-term-oriented undue ESG-related risk-taking, including ‘green-washing’ or mis-selling of products.
• The EBA recommends that EU legislators adapt legislation in directives and regulations applicable to the banking sector to incorporate ESG risk-related considerations and enable the implementation of the EBA’s recommendations set out above.
• The supervisory review of firms should proportionately incorporate ESG risk-specific considerations into the assessment of the firm’s internal governance and wide controls, including monitoring how ESG factors and risks will be incorporated into the firm’s remuneration policies and practices.

Tapestry comment
ESG is definitely the topic of the day and various EU bodies have been active in this space. This report is the latest in an increasingly long line of initiatives that seek to ensure the effective management and supervision of ESG risks and considerations, following the recently effective Taxonomy Regulation and Sustainable Finance Disclosure Regulation.

Although this report covers a much broader scope than just remuneration, the EBA’s focus on aligning remuneration to ESG risks is notable. Although the recommendations set out in the report do not result in an immediate change to any rules or guidelines, the EBA has said that they will use the report to develop further guidance for firms and they have encouraged EU legislators to seek to adapt legislation to enable the implementation of their recommendations, including certain of the remuneration recommendations noted above. This may mean that we will see more prescriptive expectations or requirements in relation to the incorporation of ESG risks into remuneration policies and practices in the future. We will monitor the position and will issue an alert if we see any such developments.

As a consequence of the UK leaving the EU, these recommendations will not directly apply to UK-regulated firms. That said, the UK is also active in the ESG space (for example, the Financial Conduct Authority are consulting on extending climate related disclosures to standard listed companies and on ESG integration in UK capital markets) and so we may see a similar focus on aligning remuneration to ESG risks from the UK regulators at some point.

In any event, the direction of travel is clear and the legal framework surrounding ESG is evolving worldwide and firms should explore how to tackle ESG risks and challenges, including by using their remuneration policies and practices as a tool to manage and mitigate risk. It is important to remember, however, that the link between remuneration and ESG, while important, is part of a larger risk management and mitigation puzzle that needs to be considered holistically by firms.

If you have any questions on this or anything else, please do get in touch. We would be delighted to help. 

Matthew Hunter

24 June 2021

The Financial Services Act 2021 is bringing in new changes to UK MAR which will take effect from next Tuesday, 29 June 2021. The key change is an extension to the deadline for companies to notify the market of transactions by their persons disclosing managerial responsibilities (PDMRs) or any persons closely associated (PCAs) with the PDMR.

Background
 
UK MAR is the UK’s post-Brexit implementation of the EU’s Market Abuse Regulation. It contains a number of restrictions on dealings in securities by PDMRs and those with inside information. In a share plans context, ‘dealings’ caught by UK MAR can be quite wide-ranging – including grants, vestings and exercises, as well as sales of shares.
 
UK MAR also contains notification requirements for dealings by PDMRs and their PCAs, which are 3-fold: 

1. The PDMR / PCA must notify the company of the dealing;
2. The PDMR / PCA must notify the regulator (the FCA) of the dealing; and
3. The company must notify the market of the dealing.

In each case, this notification currently has to be made within 3 business days of the dealing taking place.

New notification timing
 
The changes coming into effect in the UK next week relate to the deadline for companies to notify the dealing to the market. From 29 June, instead of having to notify the market within 3 days of the dealing itself, the company will have to make the notification within 2 working days of when the company itself is notified by the PDMR / PCA.
 
This does not change the timing for the PDMR / PCA notifications to the company and the FCA – these still need to be made within 3 working days of the dealing taking place (although there is a new definition of 'working days' as well).

Tapestry comment  
This is a positive change that will be welcomed by companies. There has been wide-spread criticism of the alignment of the deadlines for the 3 notifications since MAR was first introduced 5 years ago. This is due to the fact that companies may not be aware of PDMR / PCA dealings until notified by the individual themselves, and if they choose not to notify the company until towards the end of the deadline, the company may not have sufficient time to then notify the market within that same 3 day deadline.
 
It is for this reason that many companies have written shorter deadlines, for the individual to notify the company, into their internal dealing code and/or dealing policies. In preparation for next week’s change, companies may want to revisit these documents and consider whether they should be updated to reflect the new timing.
 
The change brings UK MAR into line with EU MAR, which adopted this change from the beginning of this year. Following the end of the Brexit transition period, any changes to EU MAR are not automatically incorporated into UK MAR, but will require separate UK legislation to bring them into effect, as happened here. Whilst it is clear that the UK government will keep abreast of EU MAR developments and consider amending UK MAR to retain consistency, the UK could choose to deviate in future. To this end, Tapestry, working with the Share Plan Lawyers Group, is currently involved in detailed discussions with the FCA about the future of UK MAR and we hope that this will bring helpful clarifications and beneficial changes to UK MAR for the incentives industry. It will be interesting to see how these discussions develop and we will, as always, keep you up to date with matters as they progress.

If you have any questions about this alert, or we can help you with any queries you have about MAR, please do let us know.

Hannah Needle FGE

25 May 2021

The UK Prudential Regulation Authority (PRA) has today issued a statement setting out the PRA’s approach to updating the requirements for identifying ‘material risk takers’ (MRTs) and the PRA’s expectations in relation to MRT exclusions in the current performance year. This update will be relevant for firms that are subject to the Remuneration Part of the PRA Rulebook.

Background

Firms subject to the Remuneration Part of the PRA Rulebook are required to identify those members of staff that have a material impact on the firm’s risk profile, known as MRTs, and comply with certain requirements in connection with their remuneration.

To ensure the consistent identification of MRTs, the European Banking Authority (EBA) developed regulatory technical standards in 2014 for use in connection with the remuneration rules set out under the Capital Requirements Directive IV. These standards set out the quantitative and qualitative criteria that firms were required to use to identify their MRTs. These standards applied directly in the UK in accordance with EU law prior to the end of the EU-UK Brexit transition period and, following that period, were “onshored” into UK law.

In connection with the implementation of the Capital Requirements Directive V (CRD V), the EBA was tasked with revising those regulatory technical standards to reflect changes to the underlying rules. The revised standards will repeal and supersede the 2014 standards. As we reported here, the EBA published its final draft of the revised regulatory technical standards on 18 June 2020.  This final draft has been adopted by the EBA and has been submitted to the European Commission for publication.

The PRA implemented the CRD V remuneration requirements into the Remuneration Part of the PRA Rulebook from 29 December 2020. As the EBA’s revised standards had not been formally published at this stage, the PRA decided to incorporate the draft revised standards instead, anticipating that the final standards would be formally approved shortly after the implementation of CRD V, repealing and superseding the 2014 standards. This formal approval has not yet happened. As the revised standards were intended to replace the 2014 standards, there is currently a position whereby the 2014 standards continue to apply in law but the PRA has incorporated the framework set out in the draft revised standards into their regulatory requirements. Today’s statement is intended to address this.

Key points

The PRA is aware of the discrepancy that the current position creates between the 2014 standards, which continue to apply in UK law, and the draft revised standards, which apply to firms under the Remuneration Part of the PRA Rulebook. The PRA intends to consult on updating this position later in the year. The PRA’s statement sets out their views on the current position during the intervening period:

• The 2014 standards (as onshored into the UK) continue to apply, are binding in their entirety and must continue to be complied with. Firms must also apply the draft revised standards for the purposes of determining the individuals subject to the Remuneration Part of the PRA Rulebook.
• In general, the PRA expects that the application of the draft revised standards will cover a broader scope of individuals than the 2014 standards and that, by applying the former, firms will also meet the requirements of the latter, subject to the point below.
• Where the 2014 standards require firms to identify individuals who do not meet any of the criteria under the draft revised standards, the PRA considers that firms do not need to apply the requirements of the Remuneration Part of the PRA Rulebook in relation to those individuals solely on the basis that they meet the criteria of the 2014 standards if the firm does not consider that the professional activities of those individuals have a material impact on the firm’s risk profile.
• The PRA considers the draft revised standards to be a minimum standard and firms must assess whether an individual’s professional activities have a material impact on the firm’s risk profile, even if they do not fall within any of the mandatory criteria established under the applicable rules.
• The PRA is reviewing the templates that firms may voluntarily use to communicate information to the PRA on their MRTs’ identification and exclusion (known as ‘Remuneration Policy Statement (RPS) tables 1a, 2 and 8’). Amended templates for Stage 1 and 2 submissions will be published this summer, and the remaining templates by November this year.
• If a firm wishes to exclude an MRT under Rule 3.1 of the Remuneration Part of the PRA Rulebook and Article 7 of the draft revised standards, firms must apply to the PRA for a waiver. The PRA will provide more detail on how to apply for the waivers when it publishes the updated templates.
• The PRA recognises that firms with a fiscal year-end of 31 December may require additional time to submit the RPS tables on MRT Identification and Exclusion (tables 1a, 2 and 8), the RPS Questionnaires and Annex 1: malus. In this instance, firms may submit them by Thursday 30 September. This is only applicable for the 2021/22 remuneration round.
• If firms have further questions or concerns relating to this matter, they should contact their supervisors.

Tapestry comment
We know that many impacted firms have been working to identify their MRTs using the draft revised standards following the implementation of the CRD V remuneration rules into the Remuneration Part of the PRA Rulebook last year. The PRA’s indication that compliance with the draft revised standards is likely to be wide enough to result in compliance with the 2014 standards will give firms some comfort. The PRA is clear, however, that they expect firms to ensure that both the 2014 standards and the draft revised standards have been applied and so firms should undertake an assessment of both sets of standards to identify any discrepancies (if any). If there are any such discrepancies, firms should consider whether the exclusion identified in the list above would be available.

I expect that one of the most helpful parts of this statement is the clarification that companies with a fiscal year-end of 31 December may submit certain documents, including the RPS tables, to the PRA by Thursday 30 September. Although this is a helpful extension, September will come around fairly quickly and firms should take steps to ensure the documents are submitted before this new deadline.

The PRA has stated their intention to consult on updating the position later this year to deal with the issues considered in today’s statement. We will keep an eye out for this development and issue an alert as soon as we see this. In the meantime, if you have any questions on this alert or would like any assistance with your remuneration regulation compliance, please do let me know.
 
Matthew Hunter

26 April 2021

The UK Financial Conduct Authority (FCA) has published their second consultation paper on the new UK Investment Firm Prudential Regime (IFPR). This consultation paper sets out the FCA’s proposed remuneration requirements for FCA prudentially-regulated investment firms and can be accessed here. The FCA proposes that all FCA investment firms will be subject to a new remuneration code known as the ‘MIFIDPRU Remuneration Code’. The FCA is seeking feedback on this consultation by 28 May 2021.
 
This alert provides an overview of some of the key remuneration-related proposals set out in the consultation paper. 
 
Background
 
Currently, investment firms that are authorised under the Markets in Financial Instruments Directive (MiFID) are subject to the prudential requirements set out under the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD), alongside credit institutions. This position has attracted criticism, with investment firms arguing that the prudential rules applicable to credit institutions, including with regard to remuneration, are not properly suited to investment firms. In response, the EU published the IFD and IFR in late 2019 to establish a new prudential regime for investment firms, taking into account their level of risk and specific business requirements.
 
Given that the EU’s IFD and IFR only takes effect after the end of the EU-UK ‘Brexit’ transition period, the UK is not required to implement the IFD and IFR. That said, as an EU member, the UK was heavily involved in the policy discussions on creating the regime and supports the aims of the IFD and IFR. The UK proposes that the IFPR will achieve the same overall prudential outcomes as the IFD and IFR, using the IFD and IFR as a baseline but with such changes that are appropriate to account for the specifics of the UK markets, amongst other factors.
 
This is the second in a programme of consultation papers and policy statements that the FCA will issue to introduce the regime. The first IFPR consultation paper focussed on other aspects of the IFPR that do not relate to remuneration, although certain proposals set out in the consultation paper will impact the remuneration outcomes for firms, including the proposals relating to the categorisation of investment firms.
 
MIFIDPRU Remuneration Code – impacted firms and the basic, standard and extended remuneration requirements
 
The FCA proposes to introduce a new remuneration code for all UK investment firms authorised under MiFID, including any MiFID investment firm authorised and regulated by the FCA that is currently subject to any part of the CRR and CRD, as well as Collective Portfolio Management Investment firms (CPMIs) in relation to their MiFID business. This remuneration code will replace the existing IFPRU Remuneration Code (SYSC 19A) and BIPRU Remuneration Code (SYSC 19C), as well as related non-Handbook guidance. The new remuneration code will be called the ‘MIFIDPRU Remuneration Code’ and it is proposed that the new code will be set out at SYSC 19G of the FCA Handbook.
 
The requirements of the MIFIDPRU Remuneration Code are separated into 3 categories. The extent to which the requirements apply to a firm depends on how that firm is categorised, as well as whether certain financial thresholds are exceeded. The FCA’s first IFPR consultation paper (subject to minor amendments under the second consultation) categorises investment firms as either: (a) ‘SNIs’ – small and non-interconnected firms that meet specific criteria; or (b) ‘non-SNIs’ – firms that do not meet the SNI criteria.
 
It is proposed that SNI firms will only be required to comply with a small number of remuneration rules, referred to as the ‘basic remuneration requirements’. The extent to which the MIFIDPRU Remuneration Code will apply to the remaining non-SNI firms will depend on whether certain financial thresholds have been exceeded. A non-SNI firm that does not exceed the financial thresholds will be subject to the basic remuneration requirements and additional requirements known as the ‘standard remuneration requirements’. If a non-SNI firm exceeds the financial thresholds then, in addition to the basic and standard remuneration requirements, that firm will also be subject to the rules on deferral of variable remuneration, payment in instruments, retention periods and certain rules relating to discretionary pension benefits. These additional rules are known as the ‘extended remuneration requirements’.
 
The financial thresholds and the impact of their application to non-SNI firms is summarised in the following flow chart provided by the FCA:

The types of rules and the impacted firms are summarised in the following overview provided by the FCA:

General 

• Impacted staff – the basic remuneration requirements apply to all staff in FCA investment firms whereas the additional rules to be applied by non-SNIs are applicable only to individuals identified as material risk takers (MRTs). It is proposed that all non-SNIs identify the MRTs in relation to their firm on an annual basis, identifying all those individuals whose professional activities can have a material impact on the risk profile of the firm or the assets it manages. The FCA has proposed a broad list of categories of staff that they consider should always be deemed to be MRTs due to the responsibilities inherent in the roles, as well as related definitions and guidance. The FCA also expects firms to develop their own additional criteria, where relevant. Notably, the FCA does not propose to require firms to identify individuals based solely on the level of their remuneration as they do not view this as a reliable indicator of the level of risk involved in a role. The FCA proposes to apply the remuneration rules only to the MRTs of group entities in third country who oversee or are responsible for business activities that take place in the UK.

• Individual proportionality – the FCA proposes to continue to allow MRTs who earn below a certain amount to be exempt from the rules on deferral of variable remuneration, payment in instruments, retention periods and certain rules relating to discretionary pension benefits. The FCA proposes to base the exemption on the current exemption contained in most of its remuneration codes with a few modifications. The FCA proposes that MRTs will be exempt from the relevant requirements where they have variable remuneration: (a) of £167,000 or less; and (b) which makes up one-third or less of their total remuneration. The consultation paper also clarifies how this exemption would be applied to part-year MRTs.

• Regulatory reporting – the FCA proposes to introduce a new MIFIDPRU Remuneration Report (MIF008) to facilitate regulatory reporting and retire the existing Remuneration Benchmarking Information Report (REP004) and High Earners Report (REP005). The remuneration regulatory reporting requirements that apply to a firm will depend on whether the firm is subject to the basic, standard or extended remuneration requirements, with SNI firms needing to report the least detailed information and non-SNI firms subject to the extended remuneration requirements needing to report the most detailed information. The FCA has also published proposed reporting templates and are consulting on draft instructions for completing the templates. It is proposed that the new report be submitted annually within 4 months of a firm’s accounting reference date. The FCA does not propose to require firms to report on diversity-related pay gaps but they will consider the potential use of reporting on diversity-related data as part of their broader work on diversity and inclusion later this year. The FCA intends to consult on the public disclosure of remuneration information in the third IFPR consultation paper that they intend to publish in Q3 2021.

• CPMIs – it is proposed that the MIFIDPRU Remuneration Code will apply to the MiFID business of CPMIs. This means that CPMIs will need to apply 2 different remuneration codes, as their non-MiFID business will already be subject to the FCA’s AIFM or UCITS Remuneration Codes. Where an MRT of a CPMI has responsibilities for just MiFID or just non-MiFID business, the firm should apply the relevant remuneration code. Where an MRT has responsibilities for both MiFID and non-MiFID business, it is proposed that the firm must apply the most stringent of the applicable remuneration requirements to the individual. 

• EBA guidelines – the final EBA guidelines on sound remuneration polices under the IFD will not apply to firms.

Basic remuneration requirements – applies to all FCA investment firms
 
The ‘basic remuneration requirements’ that apply to all FCA investment firms and in relation to all staff are summarised here:

• Remuneration policy – it is proposed that firms would need to have a remuneration policy for all staff covering all components of remuneration covered in the MIFIDPRU Remuneration Code. The proposals set out the key principles that apply to the firm’s remuneration policy. This includes a new requirement for a firm’s remuneration policies and practices to be gender neutral, although the FCA notes that, as this requirement is an equal pay requirement (as is already covered by the Equality Act 2010), it does not anticipate that this requirement would impose any additional burden on firms. There is also a requirement for firms to ensure that the remuneration policies and practices are in line with the business strategy, objectives and long-term interests of the firm. Proposed guidance clarifies that this should include, amongst other things, consideration of the firm’s risk appetite and strategy, including environmental, social and governance risk factors.

• Governance – the proposals set out the key principles relating to the governance and oversight of remuneration, including in relation to the remuneration of control functions. The FCA intends to review and amend the ‘Remuneration Policy Statements templates’ on their website that firms may use to record how their remuneration policies and practices comply with the applicable rules to align them with the final MIFIDPRU Remuneration Code.

• Fixed and variable remuneration – the proposals require all firms to have remuneration policies which make a clear distinction between fixed and variable remuneration, providing comments on the composition of, and allocation between, the 2 components. It is proposed that all firms would need to ensure that the fixed and variable components of remuneration are appropriately balanced, with the FCA providing comments on what that means and requiring that firms be able to explain why it considers a particular split of fixed and variable remuneration to be appropriate. The proposals are supported by proposed guidance, including proposed guidance concerning co-investment and carried interest arrangements. Payments made under carried interest arrangements represent a share in the profits of a fund managed by the firm’s staff. They are received by the firm for the benefit of the relevant staff as compensation for the management of the fund. In the FCA’s view, these payments should be considered as remuneration. Returns made by staff on co-investment arrangements that constitute shares in the profits as a pro rata return on an investment will not usually be considered to be remuneration but where the investment made by the individual was made in the form of a loan from the firm, and not from the individual’s own funds, the FCA would expect the returns to be categorised as remuneration.

• Financial and non-financial criteria – the proposals require that all firms take into account both financial and non-financial criteria when assessing the individual performance of their staff and sets out guidance on the FCA’s expectations to help firms to identify and apply appropriate non-financial criteria, including examples of non-financial criteria such as achieving targets relating to environmental, governance and social factors and/or diversity and inclusion.

• Restrictions on variable remuneration – the proposals require that variable remuneration must not be awarded, paid out or allowed to vest if it would affect the ability of a firm to ensure a sound capital base. The proposals also impose some restrictions on variable remuneration within firms that benefit from extraordinary public financial support.

Standard remuneration requirements – applies to all non-SNI firms
 
The ‘standard remuneration requirements’ that apply to all non-SNI firms are summarised here: 

• Setting a ratio between variable and fixed remuneration – the FCA notes that they do not consider it to be appropriate to set a single maximum ratio between variable and fixed remuneration (a ‘bonus cap’). Instead, it is proposed that firms should set their own ‘appropriate’ ratios as part of their remuneration policies. The consultation paper sets out some high-level guidance in relation to this requirement.
   
• Performance assessment – the proposals state that firms should ensure that the total performance-related variable remuneration of an MRT is based on a combination of: the assessment of the performance of the individual, of the relevant business unit and the firm overall. The performance assessment must also be based on a multi-year period that takes into account the business cycle of the firm and its risks.
   
• Ex-ante risk adjustment – it is proposed that, when measuring performance to calculate pools of variable remuneration, firms must take into account all types of current and future risks as well as the cost of capital and liquidity required. It is also proposed that firms must ensure that the firm’s total variable remuneration is generally considerably contracted, including through malus or clawback arrangements, where the financial performance of the firm is subdued or negative. The variable remuneration awarded and allocated within the firm should also consider all types of current and future risks, including financial risks and non-financial risks. The FCA expects that a firm would be able to provide them with details of all adjustments made, including clear explanations of how they have been quantified or discretion exercise.
   
• Ex-post risk adjustment (including malus and clawback) – it is proposed that firms would be required to implement ex-post risk adjustment mechanisms into their remuneration policies to enable the adjusting of an individual’s variable remuneration to take account of a specific crystallised risk or adverse performance outcome, including those relating to misconduct. The ex-post risk adjustment mechanisms must at least include in-year adjustments, malus (where variable remuneration is deferred) and clawback, enabling an MRT’s variable remuneration to be reduced by up to 100%. It is proposed that firms must set malus and clawback periods that, at the minimum, ensure that malus can be applied until the award has vested in its entirety and ensure that the clawback period spans at least the combined length of the deferral and retention periods (where they exist). The proposals also set out minimum trigger events in which malus and/or clawback must be applied, although the FCA proposes that it is for a firm to determine the appropriate (additional) malus and clawback triggers for the firm. It is also proposed that the MIFIDPRU Remuneration Code will be supplemented by the FCA’s ‘General guidance on the application of ex post risk adjustment to variable remuneration’, the scope of which is proposed to be extended from only applying to the FCA’s Dual-regulated firms Remuneration Code (SYSC 19D) to also apply to FCA investment firms. The content of the guidance, which is set out at Appendix 2 of the consultation paper, would otherwise be unchanged.
   
• Non-performance related variable remuneration – in addition to specific comments on each, as set out below, the proposals state that a firm must ensure that all guaranteed variable remuneration, retention awards, severance pay and buy-out awards are subject to malus and clawback and, where the rules apply, the rules on deferral, payment in instruments and retention.
   
• Guaranteed variable remuneration (e.g. ‘sign-on bonus’ / ‘lost opportunity award’) – it is proposed that guaranteed variable remuneration must be awarded to MRTs only if: (a) it occurs in the context of hiring a new MRT; (b) it is limited to the first year of service; and (c) the firm has a strong capital base. The related guidance clarifies that the FCA expects that guaranteed variable remuneration will only be awarded rarely and not as common practice.
   
• Retention awards – the FCA proposes that retention awards to MRTs should only be awarded rarely and not as common practice. The FCA proposes that retention awards must only be paid to MRTs: (a) after a defined event; or (b) at a specified point in time.
   
• Buy-out awards – the FCA proposes that firms must ensure that any buy‑out award: (a) is aligned with the long‑term interests of the firm; and (b) remains subject to the same pay‑out terms required by the previous employer, for example by following the same deferral and vesting schedule, and being subject to the same ex post risk adjustment arrangements (malus and/or clawback), where relevant.
   
• Severance pay – the FCA proposes that: (a) the ability to make severance payments, and any maximum amount or criteria for determining the amount, must be set out in the firm’s remuneration policy; and (b) all payments to MRTs relating to the early termination of an employment contract reflect the individual’s performance over time and do not reward failure or misconduct.
   
• Annual review of remuneration policy by control functions – it is proposed that a firm should ensure that the design, implementation and effects of its remuneration policy are subject to an independent, internal review by staff engaged in control functions at least annually. The review should be conducted by the internal audit function, where one exists. The FCA would expect the results of the review and the actions taken to remedy any findings to be appropriately documented.
   
• Discretionary pension benefits – it is proposed that firms would be required to: (a) ensure that all discretionary pension benefits awarded to MRTs are in line with the business strategy, objectives, values and long‑term interests of the firm; (b) pay them only in shares or other permitted instruments; and (c) apply malus and clawback to discretionary pension benefits in the same way as to other elements of variable remuneration.
   
• Non-compliance – it is proposed that firms should take all reasonable steps to ensure that MRTs do not transfer the downside risks of variable remuneration to another party by using personal hedging strategies or remuneration‑ and liability‑related insurance. The guidance proposes that, for example, a firm might request an undertaking to this effect from its MRTs and implement dealing policies. It is also proposed that firms will be required to ensure variable remuneration is not paid through vehicles or methods that facilitate non‑compliance with the remuneration rules or the MIFIDPRU sourcebook. The consultation paper also emphasises that the FCA would expect all firms to comply not only with the letter but also the spirit of the proposed remuneration rules.

Extended remuneration requirements – applies to the largest non-SNI firms
 
The ‘extended remuneration requirements’ that apply to the largest non-SNI firms that exceed the financial thresholds summarised above are summarised here: 

• Pay-out in instruments – it is proposed that firms will be required to pay at least 50% of an MRT’s variable remuneration in shares or certain other permitted instruments, including share-linked instruments and non-cash instruments that reflect the instruments of the portfolios managed. There are also proposals for firms that do not issue any of the types of permitted instruments to be able to apply to the FCA for a modification of the rules to allow alternative arrangements to be used instead to satisfy the pay-out requirements. The consultation paper sets out further detail on the permitted instruments. 

• Deferral – it is proposed that firms must ensure: (a) at least 40% of the variable remuneration awarded to an MRT is deferred for at least 3 years; (b) where the variable remuneration is a particularly high amount, and in any case where it is £500,000 or more, at least 60% is deferred; and (c) the deferred variable remuneration does not vest faster than on a pro rata basis with the first deferred portion not vesting sooner than a year after the start of the deferral period. It is also proposed that firms will be required to pay out at least 50% of the deferred portion of the variable remuneration in shares and other permitted instruments. The proposals contain rules and guidance which set out the criteria that the FCA considers it may be useful for firms to consider when deciding how to structure the deferral schedule, as well as guidance on good practice relating to the composition of the deferred portion of variable remuneration. 

• Interest and dividends – any interest and dividends paid on shares or other permitted instruments during a deferral period are received and owned by the firm. It is proposed that such interest or dividends must not be paid to the MRT either during or after the deferral period.

• Retention – it is proposed that firms must ensure that all shares and other permitted instruments issued for variable remuneration are subject to an appropriate retention policy. This means that they cannot be sold or accessed by the MRT for an appropriate period of time after the date on which they vest. The appropriate retention depends on a number of factors and the FCA has proposed guidance that firms should consider. The FCA has not, however, specified a specific retention period that should be applied by all impacted firms.

• Discretionary pension benefits – in addition to the requirements on discretionary pension benefits noted above, it is proposed that: (a) where an MRT leaves the firm before retirement age, the firm must hold the pension benefits for 5 years in the form of shares or other permitted instruments; or (b) where an MRT leaves the firm upon reaching retirement age, the firm must pay out the pension benefits in shares or other permitted instruments to be retained by the MRT for 5 years.

• Remuneration committees – it is proposed that a firm must establish a remuneration committee. The committee would be established at an individual entity level but firms may apply to the FCA for a modification to allow a remuneration committee to be established at group level instead where certain conditions are satisfied, one of which is that the firm considers that setting up the committee at an individual entity level would be unduly burdensome. These requirements would replace the current requirement for ‘significant IFPRU firms’ to establish a remuneration committee. Other non-SNI firms that fall outside of this scope are encouraged to consider whether establishing a remuneration committee might benefit their internal governance. The proposals also set out details on the composition and role of a remuneration committee required under the rules, including that, where the legal structure of a firm permits the firm to have non-executive members of their management body, at least 50% of the members of the remuneration committee must be non-executive members of the management body, including the committee chair. A firm categorised as an ‘Enhanced firm’ under the FCA’s Senior Managers & Certification Regime, and that will need to implement a remuneration committee for the first time under these proposals, should note that the chair of that remuneration committee will occupy a senior management function (SMF12) and will need to be approved by the FCA accordingly.

Next steps
 
The FCA is seeking feedback on this consultation by 28 May 2021. If you would like to respond to this consultation, you can do so by following the relevant instructions that can be found here. Once the FCA has received feedback on this paper, it appears that the FCA intends to publish a policy statement in the summer that will set out the near-final version of the remuneration rules. The final rules will be published once all of the IFPR consultations are completed and the UK Financial Services Bill has passed through the UK Parliament. It is proposed that the MIFIDPRU Remuneration Code would enter into force on 1 January 2022. A firm would need to apply the new rules from the start of its first performance year that begins on or after 1 January 2022. Firms currently in scope of the IFPRU or BIPRU Remuneration Codes would continue to apply those rules until 1 January 2022, or the beginning of their next performance year after that date, whichever is later.

Tapestry comment
Firms (and this lawyer) have been eagerly awaiting the publication of the proposed IFPR remuneration rules for some time and I expect that many firms will be generally happy with the proposals set out in the consultation paper. I dare say that there were no major surprises against what we had been expecting following the FCA’s discussion paper that was published back in June 2020. For a number of firms, including many firms that are currently in the scope of the IFPRU or BIPRU Remuneration Code, the proportionate approach that has guided the proposals will mean that those firms will transition to less detailed and more principles-based requirements. This will give those firms greater discretion as to how their remuneration is structured.
 
The proportionate regime will mean that certain structural requirements, such as those requiring deferral and payment in instruments, will only apply to a very small percentage of firms, as shown in the following table:

The proposed regime, although generally more flexible than existing requirements, also contains useful guidance that will likely help firms to understand the FCA’s expectations in relation to a variety of topics. The guidance builds on familiar themes found in the FCA’s existing rules and guidelines but also provides new guidance on topics that were not previously addressed, as well as providing more specific guidance on some topics. For example, the new guidance that clarifies that a buy-out award could follow the same deferral and vesting schedule as the bought-out award is a helpful addition that just reflects general market practice. It is also notable that the FCA did not choose to replicate existing guidance relating to the length of a post-vesting retention period, instead leaving it to firms to decide on the appropriate retention period.
 
The FCA has, however, left the door open for further rules and guidance on topics such as remuneration committee diversity, given that, unlike under the IFD, there are no proposed rules relating to having a ‘gender balanced’ remuneration committee. The FCA has also not currently included any detailed guidance on the requirement for firms to set an ‘appropriate ratio’ between fixed and variable remuneration, despite some general uncertainty within firms as to how these ratios should be determined and what purpose they will actually serve in practice. We may see further rules or guidance following the consultation process or at a later date and, for a few topics, the FCA has explicitly mentioned that those topics will be considered further.
 
The proposal document is extensive and detailed (and has resulted in probably the longest newsletter I will ever write) but I would encourage reward and regulatory compliance professionals to take the time to work through the proposals in connection with the broader compliance function. Although the proposed regime is likely to be generally well received (as far as any change in remuneration regulations can be!), there will still be topics that may cause issues for firm in practice. For example, I expect that the requirement for certain firms to establish a remuneration committee on a local basis except where a modification is granted by the FCA will, for a small number of firms impacted, raise a number of practical issues. We have seen that the FCA has been receptive to constructive and considered feedback in the past and so firms are encouraged to participate in the consultation process, either directly or through an industry body, to ensure that the positive aspects are retained and the negative aspects are removed or amended. Firms have until 28 May 2021 to respond and a response can be submitted on the consultation webpage that is linked in the ‘Next steps’ section above.
 
There is a lot of detail in the proposals and I would be happy to talk it through with you. If you have any questions or comments on this, please do let me know.

Matthew Hunter

20 April 2021

The FCA has published their second consultation paper on the new UK Investment Firm Prudential Regime (IFPR). This consultation paper sets out the FCA’s proposed remuneration requirements for FCA prudentially-regulated investment firms and can be accessed here. The FCA is seeking feedback on this consultation by 28 May 2021.

We will review the consultation paper and issue a more detailed alert shortly but if you have any questions or comments in the meantime, please do let me know.

Matthew Hunter

10 December 2020

The UK Prudential Regulation Authority (PRA) has published a Policy Statement which sets out their feedback to recent consultations on the UK implementation of the EU Capital Requirements Directive V (CRD V), including the remuneration rules, ahead of the 28 December 2020 implementation date. Appendices 13 and 19 to the Policy Statement provide links to the near-final remuneration rules instrument and updates to the SS2/17 ‘Remuneration’ Supervisory Statement, respectively. The Policy Statement is relevant to UK banks, building societies, and PRA-designated investment firms, and UK financial holding companies and UK mixed financial holding companies of certain PRA-authorised firms.
 
Background
 
CRD V, published back in June 2019, is the latest iteration of the EU’s Capital Requirements Directive. EU Member States are required to implement CRD V locally by 28 December 2020. As the Brexit transition period will not have ended by that date, the UK is required to implement CRD V locally. This implementation process will have a material impact on the way in which firms caught by the rules can operate their remuneration policies and practices. The PRA consulted on the implementation of the CRD V remuneration rules in July 2020. Further detail on the consultation paper can be found here.

Key points from the Policy Statement

The PRA’s proposed approach to implementing CRD V is largely unchanged against the earlier consultation, despite a number of consultation responses requesting otherwise. The PRA has, however, decided to change its approach on certain topics, including the following:

• The PRA intends to apply the minimum CRD V deferral and clawback requirements for those material risk takers (MRTs) whose variable remuneration is below £500,000 and does not exceed 33% of their total remuneration, rather than the PRA's stricter standards. The PRA has also clarified that firms may apply stricter deferral and clawback requirements, if they wish to do so.
• The PRA had provided for a 5-year minimum deferral period for individuals that meet requirements (in Remuneration 3.1(1)(c)) which identify MRTs on the basis of the size of their total remuneration. The PRA has clarified that such individuals should be subject to a 4-year minimum deferral period instead. The PRA has also made other minor amendments to improve the clarity of the minimum deferral provisions, including correcting a drafting error.
• The PRA has clarified the proportionate application of the deferral and clawback period requirements and has inserted a table into the supervisory statement which summarises how the minimum deferral and clawback periods should be applied to different categories of MRT and firm. In particular, the PRA has clarified that the minimum clawback periods for MRTs do not need to be extended if firms choose to exceed the minimum deferral and retention periods and that the minimum clawback period for higher paid MRTs is normally 7 years, removing requirements to extend the clawback period where a longer-than-minimum combined deferral and retention period is applied.
• The PRA had proposed that, when assessing if a part-year MRT could apply proportionality on an individual basis to disapply deferral and/or retained instruments requirements, a pro-rata approach would be taken based on the number of days in the performance year the individual spent as an MRT, including with regard to the €50,000 (£44,000) variable remuneration threshold. The PRA has decided to clarify that for assessing whether part-year MRTs fall within the individual proportionality threshold, it does not expect firms to apply the €50,000 (£44,000) threshold on a pro-rata basis.
• The remuneration thresholds used for assessing the availability of the CRD V proportionality provisions are denominated in euros. The PRA proposed to set these thresholds in sterling once the Brexit transition period has ended. Respondents had requested guidance on the appropriate methodology for converting non-sterling currencies into sterling for the purposes of complying with these thresholds. The PRA has amended the supervisory statement to clarify that it expects firms to use either the internal exchange rate, or the average daily 12-month exchange rate for the relevant performance year, based on the rates provided on the Bank of England’s website.
• The PRA had proposed to add wording to the supervisory statement to clarify that firm and group-wide policies on performance adjustment should also cover individuals who are not MRTs. The PRA agrees that performance adjustments under such a policy should be applied to non-MRTs, as appropriate, but has decided not to add further wording to this effect, as the PRA considers that this wording is not needed.
• The PRA has amended the definition of ‘average total assets’, which is used to determine whether firm-level proportionality can be applied, to adopt a more precise language that also aligns with the Financial Conduct Authority's definition.

The Policy Statement also included some other notable points, including: 

• The amended UK text refers to the EBA’s draft revised regulatory technical standards for identifying MRTs published on 18 June 2020. This is because the final version has not yet been adopted by the European Commission. If the European Commission adopts a final version in substantially the same form as the draft in time for the PRA finalising the UK text, the PRA will consider substituting a reference to the final standards, where appropriate. Otherwise, the PRA intends that the UK rules will refer to the EBA’s draft. If the existing regulatory technical standards remain in force and are ‘onshored’ into UK law following the Brexit transition period, the PRA envisages consulting on amendments to deal with any related issues. The PRA also notes that it intends to covert the €750,000 threshold used in the regulatory technical standards into sterling and will work in coordination with the Financial Conduct Authority to update this (and other items) as soon as possible after the Brexit transition period ends on 31 December 2020.
• The PRA intends to review and update their ‘Remuneration Policy Statement’ tables to reflect changes in remuneration rules in light of CRD V.
• The PRA will maintain its current approach to data collection for the purposes of the Remuneration Benchmarking and High Earners Reports, and will consider in due course whether collecting this data at a single country level is beneficial, given the aims of the policy and the data collection.
• The PRA has no plans at present to amend the existing approach on retention periods as set out in the EBA Guidelines on Sound Remuneration Policies.

The policy material is published as near-final and the PRA does not intend to change policy or make significant alterations before the publication of the final policy material. The policy material has been published now to maximise the time that firms have to prepare before the final rules apply. The final material will be published in a subsequent Policy Statement in time for the implementation deadline of 28 December 2020, once the relevant powers to do so have come into effect.

Tapestry comment
The PRA reiterates in the Policy Statement that the new rules and expectations will apply to any remuneration awarded in relation to the first performance year starting on or after 29 December 2020, and that remuneration awarded on or after that date in respect of earlier performance years will be subject to the rules as they applied immediately prior to the modifications.

Given that there is little time remaining until the implementation date, the publication of the near-final UK text will be particularly welcomed by those CRD V firms with performance years beginning shortly after the rules take effect on 29 December 2020. Although much of the PRA’s proposed approach remains unchanged, the consultation process appears to have delivered a few positive changes, including those which are summarised in the first list above. The changes to the minimum deferral and clawback provisions, and the clarification that the variable remuneration threshold for individual proportionality will not be applied on a pro-rata basis for part-year MRTs, are likely to be particularly welcomed.
 
The Policy Statement is a detailed document and this alert is only a high-level summary of the key topics covered. We recommend that firms take the time to review the Policy Statement and the relevant appendices as soon as practicable to ensure that they are prepared for the implementation. If we can be of any assistance with this process, please do let us know.

 If you have any questions about this alert, or if you would like to discuss your remuneration structures, please do let us know.

Matthew Hunter