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.
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.
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.