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.
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.
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.
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.
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.
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.
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.
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