The Bank of England (BoE) has published a speech by Anna Sweeney, Director, Insurance Supervision, on increasing diversity in the financial services sector, in which she expressed the importance of making impactful change on diversity across the sector as a whole, with the Prudential Regulation Authority (PRA) playing a crucial role in facilitating this. Anna emphasised the need for improved diversity, conduct and culture in the workplace, and supported and acknowledged efforts that have been made to aid such change so far.  

Key Points:

• The PRA is interested in how the quality of decision-making is impacted by “groupthink”. In light of the global financial crisis, the PRA understands that uniformity is a poor basis from which to challenge existing practices.
• PRA rules are hugely important for emphasising the need to promote diversity of skills and experience at board level. Since April 2018, the PRA has required insurers to have a policy in place that does this and considers a wide range of qualities and competencies in recruitment.
• Recent reports of sexual harassment and bullying allegations may impact the PRA’s perception of the fitness and propriety of individuals under the senior managers and certification regime (SM&CR).
• Cultural change needs to occur in firms to allow staff to express concerns where there are issues that could impact the financial soundness of the firm. Culture also acts as an indicator to the Financial Conduct Authority (FCA) as to how firms could treat customers.
• The PRA welcomes and supports initiatives by Lloyd’s of London and the training that they have provided to improve diversity, conduct and culture. Along with the FCA, the PRA will closely monitor progress and engage in talks with Lloyd’s to see demonstrable progress.

Tapestry comment

There is a growing awareness of the importance of diversity within the financial services sector and beyond. This speech by the BoE demonstrates their focus on improving diversity in the sector, as well as their support for the ways in which financial services firms are trying to achieve this. Lloyd’s of London are leading by example and we hope that they inspire other financial services companies to follow in their footsteps.

Tapestry has significant experience advising financial services firms on their remuneration compliance. If you would like to discuss your compliance with us, please do contact us.

As we reported here, the regulation of remuneration within EU-regulated banks is subject to significant change, probably the biggest change since the introduction of the bonus cap in 2014. On 7 June 2019, the Capital Requirements Directive V (CRD V) and Capital Requirements Regulation II (CRR II) were published in the Official Journal of the EU and will enter into force on 27 June 2019 (20 days following publication). 

The adopted texts can be accessed here: 

• Capital Requirements Directive V
• Capital Requirements Regulation II

Following entry into force:

• CRD V must be implemented into local law by EU member states by 28 December 2020 (and to apply those measures from 29 December 2020); and
• CRR II will apply directly (without local implementation) from 28 June 2021.

We will be hosting a webinar on 27 June 2019 to discuss the changes and how they may impact your remuneration policies and practices. If you would like to join, please use the registration button below. 

Tapestry comment

The implementation deadline for CRD V will fall into December 2020, earlier than some firms may have hoped. It may be that the application for the rules to  firms will be pushed back to the first performance year beginning on or after 1 January 2021. However, member states may choose to implement CRD V prior to the December 2020 deadline. The Investment Firms Directive and Investment Firms Regulation that will impact the regulation of investment firms (currently caught by CRD IV / CRR) has not yet been published and so there is a risk that the timing of implementation of those rules does not line up with CRD V / CRR II. 

We will update you when further clarity is available. In the interim, firms should be preparing for the implementation and application of the remuneration changes. 

Tapestry has significant experience advising financial services firms on their remuneration compliance, particularly in relation to remuneration regulations. If you would like to discuss your remuneration compliance, please do contact us.

The UK Prudential Regulation Authority (PRA) updated their Remuneration Policy Statement (RPS) template for reporting under Solvency II earlier this year. The RPS has a reporting deadline of 31 July, so firms caught should make sure to use the new template or comply with the level of detail required through alternate reporting.

Background

The Commission Delegated Regulation (EU) 2015/35 contains the remuneration rules applicable to insurance and re-insurance undertakings regulated in the EU.

On 1 January 2016 the remuneration requirements in the Delegated Regulation became directly applicable to Solvency II firms, with national authorities expected to ensure firms are compliant. In the UK, the PRA categorises firms into 5 categories depending on their impact of risk and likelihood to disrupt the interests of policyholders. The PRA's category 1 and 2 firms must be able to demonstrate compliance with the remuneration requirements. To assist firms in demonstrating compliance, the PRA designed a Remuneration Policy Statement (RPS) which has recently been updated. 

Although the template is intended to help firms meet the PRA's expectation of the level of detail required, use of the template is voluntary and firms may document how their remuneration policies comply with the Solvency II remuneration requirements in a different way. 

Updates
On 9 May 2019, the PRA published updated versions of its: 

• Remuneration Policy Statement reporting template for PRA category 1 and 2 firms for the 2018 performance year - this template sets out the details required to demonstrate compliance; and 
• Identified Staff Table (RPS Table 1) - this table sets out information on those individuals whose activities may have a material impact on the risk profile of the Solvency II firm.  

Although there are no material changes against the previous RPS template, it is important to note that the PRA has asked firms in scope to submit their RPS (or equivalent method of compliance) to the Bank of England Electronic Data Submission (BEEDS) portal as an occasional submission by 31 July 2019. 

There are also no material changes to the Identified Staff Table. However, the table now refers to the Senior Managers & Certification Regime expansion which was applicable to insurers from December 2018 and will be relevant for 2019 performance year reporting. Firms must submit their completed Solvency II Identified Staff Table alongside the RPS. 

Tapestry comment

PRA-regulated Solvency II firms in scope have been asked to submit a copy of their RPS to BEEDS by 31 July 2019. Firms should prepare this information as soon as possible to meet the deadline. 

Any category 1 and 2 firms which do not intend to use the updated template should ensure the documentation submitted for recording remuneration policies, practices and procedures is in line with the Solvency II requirements. 

Tapestry has significant experience advising financial services firms on their remuneration compliance. If you would like to discuss your compliance with us, please do contact us.

The UK Senior Managers and Certification Regime (SM&CR) for UK banks, building societies, credit unions, PRA-designated investment firms and branches of foreign banks operating in the UK came into force in March 2016. The regime was extended to insurers in December 2018 and, from 9 December 2019, will be extended to apply to all firms authorised under the UK’s Financial Services and Markets Act 2000. The upcoming extension will focus on Financial Conduct Authority (FCA) 'solo-regulated' firms.

The SM&CR focusses on senior managers and individual responsibility, replacing the previous ‘approved persons regime’. The new regime seeks to reduce harm to consumers and to strengthen the integrity of the market by making individuals more accountable for their conduct and competence, ensuring there is a clear understanding of responsibilities within the firm, and developing a 'culture of accountability' and improving conduct at all levels.

The precise impact of the SM&CR will depend on how the relevant firm will be categorised under the new regime. A firm will either be a ‘core firm’ (this will be most firms), a ‘limited scope firm’ (subject to the fewest requirements) or an ‘enhanced firm’ (subject to the most requirements). Firms should establish which category is relevant and understand the applicable rules. 

The 3 key parts of the SM&CR which will apply to all firms are as follows:

• Senior Managers Regime - focussing on the most senior people in the firm. All senior managers will need to be FCA approved and there must be a clear statement of responsibilities, identifying what the senior manager is responsible and accountable for. All senior managers will be subject to a 'duty of responsibility'.
• Certification Regime - focussing on employees who are not senior managers, but whose jobs mean they can have a big impact on customers, markets or the firm. Firms will need to certify that such employees are fit and proper to perform their role (at least annually).
• Conduct Rules - new, high-level standards that apply to almost every person who works in the financial services industry.

You can find more information, including a guide summarising the FCA’s rules and guidance, here.

Tapestry comment

For those firms that are already caught by the SM&CR, the extension will not have an impact. The extension will, however, impact approximately 47,000 firms, including investment firms, asset managers, mortgage brokers and consumer credit firms. This extension is unlikely to be a surprise development for these firms and we expect that many of the impacted firms will already be working through the implementation process.

The extension of the SM&CR is indicative of the increasing interest and focus on individual accountability and responsibility by the FCA and the UK Prudential Regulation Authority (PRA). Both regulators have identified in their 2019/20 business plans that they will review and evaluate the effectiveness of the SM&CR over the next year.

This focus has already influenced the approach taken by the FCA and the PRA to the regulation of remuneration. For example, there is already an expectation that malus and clawback provisions (and similar remuneration adjustment mechanisms) are applied not only to individuals who are directly responsible for issues impacting the firm, but also to those individuals who have overarching responsibility. We expect that regulatory supervision and expectations in relation to remuneration will continue to focus on ensuring that individuals are held accountable, including through the remuneration that they receive.  

The extension of the SM&CR will see a new standard of conduct which the FCA hopes will strengthen market integrity by forcing individuals to take responsibility. It will be interesting to see how these changes impact risk-taking within firms and how this will be reflected in the remuneration policies and practices within those firms.

Tapestry has significant experience advising financial services firms on their remuneration compliance. If you would like to discuss your remuneration compliance with us, please do contact us.

The Capital Requirements Directive V (CRD V) / Capital Requirements Regulation II (CRR II) and the Investment Firms Directive (IFD) / Investment Firms Regulation (IFR) developments were adopted by the European Parliament at its first reading yesterday (16 April 2019). The developments will significantly impact the prudential regulation of credit institutions and investment firms, including with regard to remuneration. We will shortly issue an alert for each legislative package which considers the impact on remuneration in more detail. 

The adopted texts can be accessed using the following links:

• Capital Requirements Directive V
• Capital Requirements Regulation II
• Investment Firms Directive
• Investment Firms Regulation

Timing 
Following the date of entry into force, CRD V and IFD will be implemented into local law by EU member states within, and the IFR will apply directly (without local implementation) from 18 months following the entry into force of the relevant legislation. The CRR II remuneration disclosure provisions will apply directly (without local implementation) from 24 months following the entry into force. The date of entry into force for each piece of legislation is currently unknown. 

Tapestry has significant experience advising financial services firms on their remuneration compliance, particularly in relation to remuneration regulations. If you would like to discuss your remuneration compliance with us, please do contact us.

The UK Prudential Regulation Authority (PRA) has published its 2019/20 Business Plan, outlining the PRA's strategic goals and the workplan that they intend to implement over the coming year to achieve these goals. In addition to a range of strategic goals, including those relating to financial and operational resilience, competition and Brexit, the PRA will focus on robust prudential standards and supervision. 

This focus on robust prudential standards and supervision will impact the regulation and supervision of remuneration within banks and insurers. The PRA has stated that they will move from developing and implementing new policies to embedding and evaluating them, including embedding and evaluating effective governance regimes and accountability. As part of this change in focus, the PRA has stated that, in 2019/20, they will begin an evaluation of the effectiveness of the Senior Managers & Certification Regime and remuneration policies for banks and insurers. The PRA will also continue to review firms' governance arrangements in areas such as remuneration practices, diversity, and corporate governance at board level. 

Tapestry comment

Firms should read the Business Plan and each strategic goal identified to ensure they understand the PRA's area of focus for the coming year. It will be encouraging for firms to see that the PRA is not concentrating on developing and implementing new policies, especially given that banking firms will already need to take action in relation to the upcoming remuneration changes driven by the Capital Requirements Directive V / Regulation II and the Investment Firms Directive / Regulation. Firms should, however, be aware that the focus on evaluation and embedding of existing governance and accountability regimes may lead to increased scrutiny by the PRA, or at least an increased focus on remuneration disclosures. 

Tapestry has significant experience advising financial services firms on their remuneration compliance, particularly in relation to remuneration regulations. If you would like to discuss your remuneration compliance with us, please do contact us.

On 8 October 2018, the Financial Stability Board (FSB) hosted a workshop in London with 17 large internationally active banks to discuss their experiences of implementing the FSB’s Principles for Sound Compensation Practices and the related Implementation Standards. The FSB has now published a short note which summarises the issues discussed at the workshop and the key takeaways.

The workshop focussed on:

1. Big picture - a review of how compensation structures have changed since the crisis and thoughts on further changes in the coming years.
2. Implementation of the FSB’s Principles and Standards by banks - practical steps taken by international banks to implement compensation reform, including the designation of material risk takers.
3. Effectiveness - steps banks are taking to assess the effectiveness of current compensation policies and practices in terms of better aligning risk and reward.

Tapestry comment

The FSB uses these workshops to gather feedback which will inform their biennial progress report on compensation practices. This process forms part of the FSB’s consideration of the alignment of risk and reward within banks and provides a greater understanding of how international banks have implemented, and look to implement, the FSB’s Principles and Standards (and any related legislation) to align risk and reward. The short note provides some useful insights and we recommend that firms read it.

The FSB have asked for any feedback to be sent to them by Tuesday 7 May 2019 to fsb@fsb.org.
 
Tapestry has significant experience advising financial services firms on their remuneration compliance, particularly in relation to remuneration regulations. If you would like to discuss your remuneration compliance with us, please do contact us.

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