FS: PRA statement on identification of material risk takers

Tapestry Newsletters

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

Matthew Hunter

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